As filed with the Securities and Exchange Commission on April 16, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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EQUISTAR CHEMICALS, LP
EQUISTAR FUNDING CORPORATION
(Exact name of each registrant as specified in its charter)
Delaware 2869 76-0550481
Delaware 2869 51-0388569
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
Gerald A. O'Brien
Vice President, Secretary
and General Counsel
1221 McKinney Street, Suite 700 1221 McKinney Street, Suite 700
Houston, Texas 77010 Houston, Texas 77010
(713) 652-4560 (713) 652-4560
(Address, including zip code, and (Name, address, including zip code, and
telephone number, telephone number,
including area code, of each including area code, of agent for service
registrants' principal executive for each registrant)
offices)
Copy to:
Darrell W. Taylor
Baker & Botts, L.L.P.
3000 One Shell Plaza
Houston, Texas 77002
(713) 229-1234
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable following the effectiveness of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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Calculation of Registration Fee
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Proposed
Title of each class of maximum offering Proposed
securities to be Amount to be price per share maximum aggregate Amount of
registered registered (1) offering price (1) registration fee
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8 1/2% Notes due 2004... $300,000,000 100% $300,000,000 $ 83,400
8 3/4% Notes due 2009... $600,000,000 100% $600,000,000 $166,800
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Total................. $900,000,000 $900,000,000 $250,200
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) under the Securities Act of 1933, as amended.
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS Subject to completion, dated April 16, 1999.
Equistar Chemicals, LP
Equistar Funding Corporation
$900,000,000
Offers to Exchange
All Outstanding Registered
8 1/2% Notes due 2004 for 8 1/2% Notes due 2004
for
8 3/4% Notes due 2009 8 3/4% Notes due 2009
The new notes
. will be freely tradeable
. are substantially identical to the outstanding notes
. will accrue interest at the same rate per annum as the outstanding notes
payable semiannually in arrears on each February 15 and August 15, beginning
August 15, 1999
. will be unsecured and will rank equally with outstanding notes that are not
exchanged and all other unsecured and unsubordinated indebtedness
. will not be listed on any securities exchange or on any automated dealer
quotation system
The exchange offers
. expire at 5:00 p.m., New York City time, on , 1999,
unless extended
. are not conditioned on any minimum aggregate principal amount of outstanding
notes being tendered
In addition, you should note that
. all outstanding notes that are validly tendered and not validly withdrawn
will be exchanged for an equal principal amount of new notes that are
registered under the Securities Act of 1933
. tenders of outstanding notes may be withdrawn any time before the expiration
of the exchange offers
. the exchange of outstanding notes for new notes in the exchange offers will
not be a taxable event for U.S. federal income tax purposes
You should consider carefully the risk factors beginning on page 7 of this
prospectus before participating in the exchange offers.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the new notes or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 1999.
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Each broker-dealer that receives new notes for its own account using the
registered exchange offers must acknowledge that it will deliver a prospectus
in connection with any resale of the new notes. The letter of transmittal
states that by acknowledging and delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of new notes
received in exchange for outstanding notes where the outstanding notes were
acquired by the broker-dealer as a result of market-making activities or other
trading activities. Equistar and Equistar Funding have agreed that, for a
period of 180 days after the exchange offers expire, they will make this
prospectus available to any broker-dealer for use in connection with any
resale. See "Plan of Distribution."
Prospectus Summary
This summary highlights information from this prospectus, but does not
contain all information that is important to you. This prospectus includes
specific terms of the exchange offers, information about our business and
detailed financial data. We encourage you to read the detailed information and
financial statements and the related notes appearing elsewhere in this
prospectus in their entirety.
About Equistar
Equistar is one of the largest chemical producers in the world with total
1998 pro forma revenues of $5 billion and $7 billion of assets at the end of
1998. It is the world's second-largest, and North America's largest, producer
of ethylene, the world's most widely used petrochemical. Equistar is also the
largest producer of polyethylene and propylene in North America.
Equistar's petrochemicals segment manufactures and markets olefins,
oxygenated chemicals, aromatics and speciality chemicals. Equistar's olefins
are ethylene, propylene and butadiene and its oxygenated chemicals include
ethylene oxide, ethylene glycol, ethanol and methyl tertiary butyl ether.
Equistar's aromatics are benzene and toluene. Equistar's polymers segment
manufactures and markets polyolefins, including high density polyethylene, low
density polyethylene, linear low density polyethylene, polypropylene and
performance polymers. Equistar's performance polymers include enhanced grades
of polyethylene such as wire and cable resins, and polymeric powders.
Equistar was formed in December 1997 as a Delaware limited partnership owned
by Lyondell Chemical Company and Millennium Chemicals Inc. Lyondell contributed
substantially all of the assets of its petrochemicals and polymers business
segments. Millennium contributed substantially all of the assets of its
polyethlene and related products, performance polymers and ethyl alcohol
businesses. In May 1998, Lyondell, Millennium, Equistar and Occidental
Petroleum Corporation consummated a series of transactions to expand Equistar
through the addition of Occidental petrochemical assets. Lyondell's aggregate
interest in Equistar is 41%. Millennium's aggregate interest is 29.5%.
Occidental's aggregate interest is 29.5%.
About Equistar Funding
Equistar Funding, a wholly owned subsidiary of Equistar, is a Delaware
corporation formed for the sole purpose of facilitating the financing
activities of Equistar. The outstanding notes were co-issued by Equistar and
Equistar Funding. Equistar and Equistar Funding are also co-issuers of the new
notes.
1
Summary of the Exchange Offers
On February 16, 1999, we completed the private offering of the outstanding
notes.
We entered into an exchange and registration rights agreement with the
initial purchasers in the private offering. We agreed to deliver this
prospectus to you and to use our best efforts to complete the exchange offers
within 180 days after the date we issued the outstanding notes. You are
entitled to exchange your outstanding notes for new notes with substantially
identical terms.
You should read the discussion under the headings "--Summary of Terms of the
New Notes" beginning on page 5 and "Description of the New Notes" beginning on
page 84 for further information regarding the new notes.
We summarize the terms of the exchange offers below. You should read the
discussion under the heading "The Exchange Offers" beginning on page 74 for
further information regarding the exchange offers and resale of the new notes.
The Exchange Offers......... We are offering to issue to you:
. new 8 1/2% notes due 2004 in exchange for your
outstanding 8 1/2% notes due 2004
. new 8 3/4% notes due 2009 in exchange for your
outstanding 8 3/4% notes due 2009
Expiration Date............. The exchange offers will expire at 5:00 p.m., New
York City time, on , 1999, or at a later
date and time to which we extend it. We may
choose to extend one of the exchange offers
without extending the other.
Withdrawal of Tenders....... You may withdraw your tender of outstanding notes
at any time before the expiration date.
Conditions to the Exchange We will not be required to accept outstanding
Offers..................... notes for exchange if the exchange offers would
violate applicable law or if any legal action has
been instituted or threatened that would impair
our ability to proceed with the exchange offers.
The exchange offers are not conditioned on each
other or on any minimum aggregate principal
amount of outstanding notes being tendered.
Please read the section "The Exchange Offers--
Conditions to the Exchange Offers" beginning on
page 76 for more information regarding the
conditions to the exchange offers.
Procedures for Tendering
Outstanding Notes..........
If your outstanding notes are held through The
Depository Trust Company and you wish to
participate in the exchange offers, you may do so
through the automated tender offer program of The
Depository Trust Company. If you tender under
this program, you will agree to be bound by the
letter of transmittal that we are providing with
this prospectus as though you had signed the
letter of transmittal. By signing or agreeing to
be bound by the letter of transmittal, you will
represent to us, among other things, that
. any new notes you receive will be acquired in
the ordinary course of your business
2
. you have no arrangement or understanding with
any person or entity to participate in the
distribution of the new notes
. if you are not a broker-dealer, you are not
engaged in and do not intend to engage in the
distribution of the new notes
. if you are a broker-dealer that will receive
new notes for your own account in exchange for
outstanding notes that were acquired as a
result of market-making activities, you will
deliver a prospectus, as required by law, in
connection with any resale of those new notes
. you are not our "affiliate," as defined in Rule
405 of the Securities Act of 1933, or, if you
are our affiliate, you will comply with any
applicable registration and prospectus delivery
requirements of the Securities Act of 1933
Guaranteed Delivery If you wish to tender your outstanding notes and
Procedures................. cannot comply, before the expiration date, with
the applicable procedures under the automated
tender offer program of The Depository Trust
Company, you must tender your outstanding notes
according to the guaranteed delivery procedures
described in "The Exchange Offers--Guaranteed
Delivery Procedures" on page 81.
U.S. Federal Income Tax
Considerations.............
The exchange of outstanding notes for new notes
in the exchange offers will not be a taxable
event for U.S. federal income tax purposes.
Please read "Federal Income Tax Considerations"
beginning on page 91.
Use of Proceeds............. We will not receive any cash proceeds from the
issuance of new notes.
3
The Exchange Agent
We have appointed The Bank of New York as exchange agent for the exchange
offers. You should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for the notice of guaranteed delivery to the exchange agent addressed
as follows:
For Delivery by Mail:
For Overnight Delivery Only or by Hand:
The Bank of New York The Bank of New York
101 Barclay St., floor 7E 101 Barclay St.
New York, NY 10286 Corporate Trust Services Window
Attn: Reorg. Dept. Ground Level
New York, NY 10286
Attn: Reorg. Dept.
By Facsimile Transmission (for eligible institutions only):
(212) 815-6339
Attn:
or
(212) 815-4699
Attn:
To Confirm Receipt:
or
4
Summary of Terms of the New Notes
The new notes will be freely tradeable and otherwise substantially identical
to the outstanding notes. The new notes will not have registration rights or
provisions for additional interest. The new notes will evidence the same debt
as the outstanding notes, and the outstanding notes and the new notes will be
governed by the same indenture.
Securities Offered.......... $300 million of 8 1/2% notes due 2004.
$600 million of 8 3/4% notes due 2009.
Co-Issuers.................. The new notes will be joint and several
obligations of Equistar and Equistar Funding.
Maturity Dates.............. The new 8 1/2% notes will mature on August 15,
2004.
The new 8 3/4% notes will mature on August 15,
2009.
Interest Payment Dates...... February 15 and August 15 of each year,
commencing August 15, 1999.
Limited Recourse............ None of Lyondell, Millennium, Occidental or any
of their subsidiaries or affiliates, other than
Equistar and Equistar Funding, are obligated to
pay the new notes.
Optional Redemption......... At any time, we may redeem any and all of the new
notes. We will pay a redemption price equal to
the greater of 100% of the principal amount of
the notes we redeem or a redemption price as
described under the heading "Description of New
Notes--Optional Redemption" on page 85. We will
also pay accrued and unpaid interest.
Sinking Fund................ None.
Ranking..................... The new notes:
. will be senior unsecured indebtedness of
Equistar and Equistar Funding
. will rank equal in right of payment with any
outstanding notes that are not exchanged and
with all of our existing and future unsecured
and unsubordinated indebtedness and senior to
any future subordinated indebtedness
Restrictive Covenants....... The outstanding notes have been and the new notes
will be issued under an indenture containing
restrictive covenants for your benefit. These
covenants restrict our ability to
. incur indebtedness secured by liens
. engage in sale and leaseback transactions
. sell all or substantially all of our assets or
merge with another entity
5
Form of New Notes........... The new notes will be represented by one or more
permanent global securities deposited with The
Depository Trust Company. You will not receive
certificates for your new notes unless one of the
events described under the heading "Book Entry;
Delivery and Form--Certificated Notes" on page 94
occurs. Instead, beneficial ownership interests
in the new notes will be shown on, and transfers
of beneficial ownership will be effected only
through, book-entry records maintained by The
Depository Trust Company.
Rights Under Exchange and
Registration Rights
Agreement..................
If we fail to complete the exchange offers as
required by the exchange and registration rights
agreement, we will be obligated to pay additional
interest to holders of the outstanding notes.
Risk Factors
Please read "Risk Factors" beginning on page 7 and carefully consider the
risk factors before participating in the exchange offers.
Principal Executive Offices
Our principal executive offices are located at 1221 McKinney Street, Suite
700, Houston, Texas 77010 and our telephone number is (713) 652-7200.
6
Risk Factors
You should carefully consider the risks below before participating in the
exchange offers. The risks and uncertainties described below are not the only
ones relating to the new notes or Equistar. Additional risks and uncertainties
not presently known to us or that we currently do not believe are material may
also impair our business operations.
If any of the following risks actually occurs, our business, financial
condition or results of operations, and your investment in the notes, could be
materially adversely affected.
Risk Factors Relating to the New Notes and the Exchange Offers
If you fail to exchange your outstanding notes, the existing transfer
restrictions will remain in effect; the market value of your outstanding notes
may be adversely affected because of a smaller float.
If you do not exchange your outstanding notes for new notes under the
exchange offers, then you will continue to be subject to the existing transfer
restrictions on the outstanding notes. In general, the outstanding notes may
not be offered or sold unless they are registered or exempt from registration
under the Securities Act of 1933 and applicable state securities laws. Except
as required by the exchange and registration rights agreement, we do not intend
to register resales of the outstanding notes.
The tender of outstanding notes under the exchange offers will reduce the
aggregate principal amount of the notes outstanding. This may have an adverse
effect upon, and increase the volatility of, the market price of any
outstanding notes that you continue to hold due to a reduction in liquidity.
There is no public market for the new notes, and we do not intend to list them
on any securities exchange or automated quotation system.
There is no existing public market for the new notes. We cannot provide any
assurance about
. the liquidity of any markets that may develop for the new notes
. your ability to sell your new notes
. the prices at which you will be able to sell your new notes
Future trading prices of the new notes will depend on many factors,
including prevailing interest rates, our operating results, ratings of the new
notes and the market for similar securities. The initial purchasers of the
outstanding notes have advised us that they presently intend to make a market
in the new notes after completion of the exchange offers. However, those
purchasers do not have any obligation to do so, and they may discontinue any
market-making activities at any time without any notice.
We do not intend to apply for listing of the new notes on any securities
exchange or for quotation of the new notes in any automated dealer quotation
system.
None of the partners of Equistar or their affiliates will have any liability
for payments of principal or interest on the new notes.
Our ability to make payments on the new notes is solely dependent upon
Equistar's ability to generate sufficient cash from operations. If we fail to
fulfill our obligations under the new notes or the indenture, you will not have
the right to recover against any of Equistar's partners, whether as a general
partner or limited partner or otherwise, or against the partners' respective
parents or other affiliates.
7
Risk Factors Relating to Equistar's Business
The petrochemical and polymer industries are highly cyclical, and Equistar's
results will be affected by external factors beyond our control.
External factors beyond our control, such as general economic conditions,
competitor action, international events and circumstances and governmental
regulation in the United States and abroad, can cause volatility in feedstock
prices. These external factors can also cause fluctuations in demand for our
products as well as our prices and margins. In addition, these external factors
can magnify the impact of economic cycles on our business.
Equistar and its predecessors' historical operating results reflect the
cyclical and volatile nature of the petrochemical and polymer industries. The
petrochemical and polymer industries are mature, and industry margins are
sensitive to cyclical petrochemical supply and demand balances. The
petrochemical and polymer industries historically experience alternating
periods of tight supply, causing prices and profit margins to increase,
followed by periods when substantial additional capacity is added resulting in
oversupply and declining prices and profit margins. A number of our products
are highly dependent on durable goods markets, such as housing and automotive,
that are themselves particularly cyclical.
Changes in commodities prices cannot be controlled and will affect Equistar's
results.
Due to the commodity nature of most of Equistar's products, we are not
necessarily able to protect our market position by product differentiation, or
pass on cost increases to our customers. Accordingly, increases in raw material
and other costs do not necessarily correlate with changes in product prices,
either in the direction of the price change or in magnitude.
There is overcapacity in the petrochemical and polymer industries which results
in lower operating rates and margins.
Currently, there is overcapacity in the petrochemical and polymer
industries. Moreover, a number of participants in various segments of the
petrochemical and polymer industries have announced plans for expansion of
plant capacity. There can be no assurance that future growth in product demand
will be sufficient to utilize this additional, or even current, capacity.
Excess industry capacity may lower our operating rates and margins.
External factors will cause quarter-to-quarter results to vary.
Equistar's quarterly results may vary significantly depending on various
factors, most of which are out of our control, including
. changes in the prices of and demand for our products
. changes in feedstock costs
. changes in supply arrangements
. developments in foreign markets
. unanticipated expenses
. unscheduled downtime and maintenance
Actions we take will cause quarter-to-quarter results to vary.
The actual mix of operating rates at our facilities will impact the
comparison of period-to-period results. We commonly take actions that are
intended to yield long-term benefits, but may increase the variance of results
from quarter to quarter or even from year to year. For example, Equistar
regularly adjusts the operating
8
rate of its facilities to optimize production costs and margins. Different
facilities may have differing operating rates from period to period depending
on many factors, such as feedstock costs, transportation costs and supply and
demand for the product produced at the facility during that period. As a
result, individual facilities may be operated below or above rated capacities
in any period.
We will incur costs of any temporary shut-downs of our facilities. Equistar
may idle a facility for an extended period of time because an oversupply of a
certain product and/or a lack of demand for that product makes production
uneconomical. These temporary shut-downs could last for several quarters, and
we will incur costs, including the expenses of the shut-down and restart of
these facilities that may affect quarterly results when shut-downs and start-
ups occur.
Equistar enters into exchange arrangements with other producers whereby
Equistar exchanges product in expectation of repayment in another period. If we
lend product to other producers, we will incur production costs, but will not
necessarily have corresponding increases in revenues and cash flow in the same
period. If we borrow product, we will see an increase in revenues and cash
flow, but will not necessarily incur the costs required to produce the product
in the same period. These exchange arrangements may also affect the comparison
of period to period results.
Equistar may be active in adding assets or in disposing of assets, which could
affect short-term results of operations.
The purchase or sale of assets may often affect the results of operations of
Equistar in the short term because of the costs associated with these
transactions. Equistar actively seeks opportunities to maximize the value of
its assets, including combining its assets with those of third parties to
operate more efficiently or create greater value. In many circumstances,
maximizing value will be achieved through the purchase or sale of assets or
through contractual arrangements or joint ventures.
We will require a significant amount of cash to service our indebtedness, and
our ability to generate cash depends on many factors beyond our control.
Our ability to make payments on and to refinance our indebtedness, including
the new notes, and to fund working capital and planned capital expenditures
will depend on our ability to generate cash in the future. Several factors
beyond our control will effect our ability to make these payments and
refinancings, including
. uncertainties associated with the United States and worldwide economies
. prices of feedstocks and products
. current and potential governmental actions
. operating interruptions including leaks, explosions, fires, mechanical
failure, transportation interruptions and spills, releases and other
environmental risks
Equistar's $1.25 billion five-year revolving credit facility requires that
Equistar maintain compliance with specified financial ratios and covenants. The
ability of Equistar to comply with these ratios and covenants may be affected
by events beyond its control. The failure of Equistar to comply with the
required covenants could permit the lenders to declare all borrowings
outstanding under the credit facility to be due and payable. If this were to
occur, Equistar cannot assure you that its assets would be sufficient to repay
the indebtedness under the credit facility. At the date of this prospectus, the
amount outstanding under the $1.25 billion revolving credit facility is $750
million.
We cannot assure you
. that Equistar's business will generate sufficient cash flow from
operations
. that further anticipated cost savings and operating improvements will be
realized
9
. that future borrowings will be available under the $1.25 billion
revolving credit facility in an amount sufficient to enable us to pay our
indebtedness, including the new notes on or before maturity
. that we will be able to refinance any of our indebtedness on commercially
reasonable terms, if at all
Environmental compliance, cleanup and other requirements can significantly
impact Equistar's operations.
Equistar is subject to stringent environmental, health and safety laws and
regulations addressing air emissions, water discharges, generation, handling
and disposal of waste, and other aspects of its operations. Typically, these
laws provide for substantial fines and potential criminal sanctions for
violations. Several of these laws, including the Superfund law, also impose
extensive requirements relating to investigation and cleanup of contamination.
In addition, Equistar may face liability for alleged personal injury or
property damage due to exposure to chemicals at its facilities or chemicals
which it otherwise manufactures, handles or owns.
Equistar incurs capital and operating costs to comply with environmental,
health and safety laws and regulations. Although we believe Equistar is in
material compliance with environmental, health and safety laws and regulations,
from time to time Equistar receives and addresses notices of violation.
Environmental costs also may arise from changes in laws and regulations and
from identification of additional areas of contamination requiring
investigation or cleanup. We cannot predict with certainty the extent of
Equistar's future liabilities and costs under environmental, health and safety
laws and regulations, but expect that it will continue to be significant.
Year 2000 disruptions in operations of Equistar or third parties could
adversely affect Equistar.
Systems that do not properly recognize and process date-sensitive
information could generate erroneous data, or even fail, as the year 2000
approaches. Equistar is conducting reviews of its key computer systems and has
identified a number of systems that could be affected by the year 2000 issue.
Equistar is upgrading these systems to allow them to function properly. If
these steps are not completed successfully in a timely manner, Equistar's
operations and financial performance could be adversely affected through
disruptions in operations.
Disruptions in the operations of third parties could potentially disrupt
Equistar's operations as well. Equistar relies on services, energy and raw
materials from third parties who may or may not be adversely affected by the
year 2000 issue.
A change in control or exit of one or more of Lyondell, Millennium or
Occidental could adversely affect Equistar.
Any one or more of Lyondell, Millennium or Occidental may transfer control
of their interests in Equistar. We cannot predict how the transfer of a
partnership interest, or of control of an owner, to a third party could affect
the operation or business of Equistar. A change in control of any of Lyondell,
Millennium or Occidental would also mean a change in control of Equistar. There
is no substantive restriction on the ability of Lyondell, Millennium or
Occidental to engage in business combination transactions, such as mergers or
sales of a majority of assets, that would result in a change in control of any
one of them.
The $1.25 billion revolving credit facility provides that an event of
default occurs if Lyondell, Millennium and Occidental, collectively, cease to
own at least a majority interest in Equistar. An event of default under the
$1.25 billion revolving credit facility would permit the lenders to declare
amounts outstanding under the credit facility immediately due and payable and
to terminate certain lending obligations.
10
Cautionary Statement
This prospectus is part of a registration statement we filed with the
Securities and Exchange Commission.
. You should rely on the information or representations provided in this
prospectus
. We have not authorized any person to provide information in this
prospectus other than that provided in this prospectus
. We have not authorized anyone to provide you with different information
. We are not making an offer of these securities in any jurisdiction where
the offer is not permitted
. You should not assume that the information in this prospectus is accurate
as of any date other than the date on the front of this document
Forward-Looking Information
Some of the statements contained in this prospectus, in particular under
the captions "Prospectus Summary," "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Description of Equistar's Business," are "forward-looking statements." We use
the terms "plan," "intend," "budget," "forecast," "will," "could" and "should"
and similar expressions to identify forward-looking statements. These
statements
. address activities, events or developments that we expect, believe,
anticipate or estimate will or may occur in the future
. are based on assumptions and analyses that we have made and that we
believe are reasonable
. are based on various risks and uncertainties, general economic and
business conditions, business opportunities that may be presented to and
pursued by us from time to time, changes in laws or regulations and other
factors, many of which are beyond our control
Any one of these factors, or a combination of these factors, could
materially affect our future results of operations and whether the forward-
looking statements ultimately prove to be accurate. Although we believe the
expectations reflected in these forward-looking statements are reasonable,
they do involve certain assumptions, risks and uncertainties, and we cannot
assure you that these expectations will prove to have been correct. These
forward-looking statements are not guarantees of our future performance, and
our actual results and future developments may differ materially from those
projected in the forward-looking statements. See "Risk Factors" beginning on
page 7.
We undertake no obligation to publically update or revise any forward-
looking statements, whether as a result of new information or otherwise. All
oral or written forward-looking statements attributable to us or persons
acting on our behalf are expressly qualified in their entirety by these
cautionary statements.
Use of Proceeds
We will not receive any cash proceeds from the issuance of the new notes.
In consideration for issuing the new notes, we will receive in exchange a like
principal amount of outstanding notes. The outstanding notes surrendered in
exchange for the new notes will be retired and canceled and cannot be re-
issued. Accordingly, issuance of the new notes will not result in any change
in our capitalization.
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Capitalization
The following table sets forth our capitalization as of December 31, 1998
. on a historical basis
. as adjusted to reflect the sale of the outstanding notes and the
application of the proceeds from that sale
We used the net proceeds to terminate the outstanding balance under the $500
million credit facility, to repay the $205 million of capital lease
obligations, repay indebtedness outstanding under the $1.25 billion revolving
credit facility and for partnership working capital. We will retire $150
million aggregate principal amount of 10.00% Notes upon their June 1999
maturity.
You should read this table in conjunction with "Selected Historical and Pro
Forma Financial and Operating Data of Equistar," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial statements and the related notes and other financial
and operating data included elsewhere in this prospectus.
December 31, 1998
----------------------
Historical As Adjusted
---------- -----------
(millions of dollars)
Cash and cash equivalents................................. $ 66 $ 66
====== ======
Long-term debt, including current maturities:
Capital lease obligations............................... $ 205 --
$1.25 billion revolving credit facility(a).............. 1,150 $ 765
$500 million facility(b)................................ 152 --
10.00% Notes due 1999................................... 150 --
9.125% Notes due 2002................................... 100 100
Medium-term notes (due 1999-2005)....................... 163 163
6.50% Notes due 2006.................................... 150 150
7.55% Debentures due 2026............................... 150 150
8 1/2% Notes due 2004................................... -- 300
8 3/4% Notes due 2009................................... -- 600
------ ------
Total long-term debt, including current maturities.... 2,220 2,228
------ ------
Partners' capital......................................... 3,885 3,885
------ ------
Total capitalization...................................... $6,105 $6,113
====== ======
Debt to total capitalization ratio........................ 36% 36%
====== ======
- --------
(a) The aggregate amount outstanding under the bank credit facility as of April
1, 1999 was $750 million.
(b) Terminated in February 1999 following repayment of the outstanding balance
with proceeds from the offering of the outstanding notes.
12
The Partners of Equistar
Lyondell
Lyondell is a global chemical company with leading market positions in all
of its major products, world-scale production capacity and low-cost operations.
Lyondell acquired its intermediate chemicals and derivatives business through
the acquisition of ARCO Chemical Company in July 1998. Lyondell had revenues on
a pro forma basis after the ARCO Chemical Company acquisition of $3.6 billion
for the year ended December 31, 1998, and $9.2 billion of assets at December
31, 1998. Lyondell is vertically integrated into its key raw materials through
its equity ownership in Equistar, LYONDELL-CITGO Refining LP and Lyondell
Methanol Company, L.P. Lyondell operates in four major businesses:
Intermediate Chemicals and Derivatives. Lyondell is the world's largest
producer of propylene oxide and a leading worldwide producer and marketer of
propylene oxide derivatives, including polyether polyols, propylene glycol,
propylene glycol ethers and butanediol. Propylene oxide is a key component in
the manufacture of urethanes and non-urethanes products. Lyondell also is the
world's second largest supplier of toluene diisocyanate, another key component
of urethanes. Lyondell is also a major producer of styrene monomer and tertiary
butyl alcohol, co-products of Lyondell's proprietary propylene oxide
technology. Lyondell utilizes most of its tertiary butyl alcohol to make methyl
tertiary butyl ether ("MTBE"), a gasoline blending component.
Petrochemicals and Polymers. Lyondell owns 41% of Equistar.
Refining (LCR). Lyondell owns 58.75 percent of LYONDELL-CITGO Refining,
which owns and operates North America's largest extra heavy crude coking
refinery, processing low cost 17(degrees) API crude oil. LYONDELL-CITGO
Refining processes large volumes of this extra heavy crude oil into premium
petroleum products such as reformulated gasoline, low sulfur diesel, jet fuel,
aromatics and lubricants. LYONDELL-CITGO Refining has a long-term crude oil
supply agreement with Petroleos de Venezuela, S.A., the national oil company of
Venezuela. LYONDELL-CITGO Refining was formed in 1993 as a joint venture with
CITGO Petroleum Corporation, an indirect wholly owned subsidiary of Petroleos
de Venezuela, S.A.
Methanol. Lyondell owns 75% of Lyondell Methanol, the third largest producer
of methanol in the United States. Lyondell Methanol was formed in December 1996
by Lyondell and MCN Investment Corporation, a major producer of natural gas,
the primary feedstock of methanol.
Millennium
Millennium is a major international chemical company, with leading market
positions in a broad range of commodity, industrial, performance and specialty
chemicals. Millennium had revenues of approximately $1.6 billion for the year
ended December 31, 1998, and approximately $4.1 billion of assets at December
31, 1998. Millennium's principal operations are grouped into four business
segments:
Titanium Dioxide and Related Products. Millennium is the second largest
producer of titanium dioxide ("TiO/2/") in the world, with manufacturing
facilities in the United States, the United Kingdom, France, Australia and
Brazil. TiO/2/ is a white pigment used for imparting whiteness, brightness and
opacity in a variety of consumer and industrial products, including paints and
coatings, plastics, paper and rubber. Millennium is also the largest merchant
producer of titanium tetrachloride in the United States and Europe.
Acetyls. Millennium is the second largest producer of acetic acid and vinyl
acetate monomer in the United States and a major producer of methanol in the
United States. Vinyl acetate monomer is used to produce adhesives, water-based
paints, textile coatings, paper coatings and a variety of polymer products.
Acetic acid is used to produce vinyl acetate monomer, terephthalic acid, which
is used to produce polyester for textiles and plastic bottles, and industrial
solvents.
13
Specialty Chemicals. Millennium is the world's largest producer of terpene
fragrance chemicals, which are components blended together to make fragrances
and flavors used in detergents, soaps, personal care items, perfumes and food
products. Millennium is the world's second largest manufacturer of cadmium-
based pigments, used in engineered plastics, artists' colors, ceramics, inks
and other coatings and finishes. Millennium is also a major producer of silica
gel, a chemically and biologically inert form of silica. Silica gel is used to
reduce gloss and control flow in coatings and is used to stabilize and extend
the shelf life of beer, plastic films, powdered food products and
pharmaceuticals.
Equistar. Millennium owns 29.5% of Equistar.
Occidental
Occidental explores for, develops, produces and markets crude oil and
natural gas. Occidental also manufactures and markets a variety of basic
chemicals, including chlorine, caustic soda, polyvinyl chloride ("PVC"), vinyl
chloride monomer and ethylene dichloride, as well as specialty chemicals.
Occidental also has an interest in petrochemicals through its 29.5% ownership
interest in Equistar. Occidental had net sales of approximately $6.6 billion
for the year ended December 31, 1998, and approximately $15.3 billion of assets
at December 31, 1998. Occidental's principal business consists of two industry
segments:
Oil and Gas Operations. Through its subsidiaries and its 29% equity interest
in Canadian Occidental Petroleum, Ltd., Occidental produces or participates in
the production of crude oil, condensate and natural gas in the United States,
Bangladesh, Canada, Colombia, Ecuador, Oman, Pakistan, Peru, Qatar, Russia and
Yemen. Approximately 90% of Occidental's oil and gas assets are located in the
United States, Qatar, Yemen, Colombia and Peru. Occidental is continuing its
development programs for some of its existing fields in several of these
countries. Occidental is also conducting exploration activities in several of
these countries. At December 31, 1998, Occidental had total reserves of 1,066
million barrels of oil and 2,149 billion cubic feet of natural gas.
Chemical Operations. Occidental's chemical operations manufactures and
markets a variety of basic chemicals, including chlorine, caustic soda, PVC,
vinyl chloride monomer, ethylene dichloride, as well as specialty chemicals.
Chlorine and vinyl chloride monomer are used to produce PVC resins. Occidental
believes, based on statistics in chemical industry publications, that during
1998 it was the largest United States merchant marketer of chlorine and caustic
soda and the largest North American producer of chrome chemicals, potassium
hydroxide, chlorinated isocyanurate products, ethylene dichloride and antimony
oxide. Occidental also believes, based on these statistics, that it was the
second largest United States producer of vinyl chloride monomer, including
production of a joint venture in which Occidental participates, phenolic
molding compounds, sodium silicates and mercaptan warning agents. Occidental
was the third largest producer of PVC resins in North America. Occidental's
specialty chemicals business is a leading producer of sodium silicates, chrome
chemicals, ACL pool chemicals (chlorinated isocyanurates), phenolic
resins/molding compounds, mercaptans, antimony oxide and resorcinol.
Equistar. Occidental owns 29.5% of Equistar.
14
Selected Pro Forma and Historical Financial and
Operating Data of Equistar
The table below shows selected pro forma and historical financial and
operating data for Equistar. The following selected historical income statement
and balance sheet data have been derived from financial statements of Equistar
which have been audited by PricewaterhouseCoopers LLP, independent accountants
(1) as of and for the year ended December 31, 1998 and (2) as of and for the
one month ended December 31, 1997. PricewaterhouseCoopers' report is included
elsewhere in this prospectus. The operating data have been derived from the
historical operating records of Equistar. Neither the historical financial data
nor the historical operating data are necessarily indicative of the future
results of operations of Equistar. The pro forma financial and operating data
are not necessarily indicative of the future results of operations of Equistar.
The selected pro forma and historical financial and operating data for
Equistar shown below highlight information found elsewhere in this prospectus.
They are not complete and may not contain all of the information that you
should consider. You should read the entire prospectus carefully, including the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the Equistar financial statements
and the related notes included elsewhere in this prospectus.
For the one For the year For the year
month ended ended ended
December 31, December 31, December 31,
1997 1998(a) 1998(b)
------------ ------------ ------------
(pro forma)
Income statement data (millions of
dollars):
Sales and other operating revenues...... $ 365 $4,363 $4,869
Cost of sales........................... 287 3,773 4,235
Selling, general and administrative
expenses............................... 21 273 279
Unusual charges......................... 42 35 35
------ ------ ------
Operating income........................ 15 282 320
Loss from equity investment............. -- -- 2
Interest expense, net................... 8 139 173
Other income............................ -- -- 5
------ ------ ------
Income before income taxes.............. 7 143 150
Provisions for income taxes............. -- -- --
------ ------ ------
Net income.............................. $ 7 $ 143 $ 150
====== ====== ======
Other operating data (millions of
dollars):
EBITDA(c)............................... $ 34 $ 550 $ 628
Cash flows from operating activities.... 102 846 N/A
Cash flows from investing activities.... (12) (212) N/A
Cash flows from financing activities.... (49) (609) N/A
Ratio of earnings to fixed charges(d)... 1.5x 1.7x 1.7x
Depreciation and amortization........... 19 268 305
Capital expenditures.................... 12 200 210
Balance sheet data (at end of period) (millions
of dollars):
Working capital, net.................... $ 856 $ 492 N/A
Total assets............................ 4,600 6,668 N/A
Total debt(e)........................... 1,548 2,220 N/A
Total partners' capital................. 2,718 3,885 N/A
Sales volumes (millions):
Selected petrochemical products:
Ethylene, propylene and other olefins
(lbs.)............................... 737 16,716 18,291
Aromatics (gallons)................... 17 271 281
Polymer products (lbs.)................. 167 6,488 6,488
15
- --------
(a) The Occidental contributed business was added to Equistar on May 15, 1998.
The actual amounts for the year ended December 31, 1998 include the
Occidental contributed business amounts from May 15, 1998 to December 31,
1998.
(b) The unaudited pro forma financial and operating data present the results of
Equistar as if the Occidental contributed business had been contributed as
of January 1, 1998.
(c) EBITDA is calculated as operating income plus depreciation and amortization
and other income. EBITDA should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flows from
operating activities, which are determined according to generally accepted
accounting principles. Management included EBITDA to provide additional
information with respect to the ability of Equistar to meet its future debt
service, capital expenditure and working capital requirements. EBITDA is
not necessarily a measure of Equistar's ability to fund its cash needs.
Management believes that certain investors find the calculation of EBITDA a
useful tool for measuring the ability to service debt.
(d) For purposes of calculating the ratio of earnings to fixed charges, fixed
charges include interest expense, plus capitalized interest, and that
portion of non-capitalized rental expense deemed to be the equivalent of
interest. Earnings represent net income plus fixed charges, excluding
capitalized interest.
(e) Total debt is defined as long-term debt, current maturities of long-term
debt and capital lease obligations.
16
Selected Historical Financial and Operating Data
of the Lyondell Contributed Business
The table below shows selected historical financial and operating data for
the Lyondell contributed business. The following selected historical income
statement and balance sheet data have been derived from financial statements of
the Lyondell contributed business which have been audited by
PricewaterhouseCoopers LLP, independent accountants (1) as of November 30, 1997
and for the eleven-month period then ended and (2) as of December 31, 1996 and
for the two years in the period then ended. PricewaterhouseCoopers' report is
included elsewhere in this prospectus. The selected historical income statement
data for the year ended December 31, 1994 and the balance sheet data as of
December 31, 1995 have been derived from financial statements of the Lyondell
contributed business, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The selected historical balance sheet data as of
December 31, 1994 have been derived from the historical financial records of
Lyondell. The operating data have been derived from the historical operating
records of Lyondell. Neither the historical financial data nor the historical
operating data are necessarily indicative of the future results of operations
of Equistar.
The selected historical financial and operating data shown below are not
complete. You should read the entire prospectus carefully, including the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the Lyondell contributed business
financial statements and the related notes included elsewhere in this
prospectus.
For the
For the year ended eleven months
December 31, ended
---------------------- November 30,
1994 1995 1996 1997
------ ------ ------ -------------
Income statement data (millions of
dollars):
Sales and other operating revenues...... $1,806 $2,509 $2,515 $2,715
Cost of sales........................... 1,449 1,869 2,135 2,153
Selling, general and administrative
expenses............................... 69 125 157 166
------ ------ ------ ------
Operating income........................ 288 515 223 396
Interest expense, net................... 73 76 65 50
------ ------ ------ ------
Income before income taxes.............. 215 439 158 346
Provision for income taxes.............. 78 162 56 127
------ ------ ------ ------
Net income.............................. $ 137 $ 277 $ 102 $ 219
====== ====== ====== ======
Other operating data (millions of
dollars):
EBITDA(a)............................... $ 323 $ 561 $ 290 $ 464
Cash flows from operating activities.... 11 318 79 156
Cash flows from investing activities.... (40) (476) (80) (49)
Cash flows from financing activities.... 29 158 1 (106)
Ratio of earnings to fixed charges(b)... 2.7x 4.1x 2.3x 4.4x
Depreciation and amortization........... 35 46 67 68
Capital expenditures.................... 40 476 80 49
Balance sheet data (at end of period)
(millions of dollars):
Working capital, net.................... $ 218 $ 69 $ 269 $ 352
Total assets............................ 834 1,306 1,494 1,532
Total debt(c)........................... 717 745 745 745
Total invested capital.................. (87) 320 423 536
Sales volumes (millions):
Selected petrochemical products:
Ethylene, propylene and other olefins
(lbs.)............................... 7,146 7,688 7,973 8,084
Aromatics (gallons)................... 178 175 188 176
Polymer products (lbs.)................. 616 1,598 2,136 1,985
17
- --------
(a) EBITDA is calculated as operating income plus depreciation and amortization
and other income. EBITDA should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flows from
operating activities, which are determined according to generally accepted
accounting principles. Management included EBITDA to provide additional
information with respect to the ability of Equistar to meet its future debt
service, capital expenditure and working capital requirements. EBITDA is
not necessarily a measure of Equistar's ability to fund its cash needs.
Management believes that some investors find the calculation of EBITDA a
useful tool for measuring the ability to service debt.
(b) For purposes of calculating the ratio of earnings to fixed charges, fixed
charges include interest expense, plus capitalized interest, and that
portion of noncapitalized rental expense deemed to be the equivalent of
interest. Earnings represent net income plus fixed charges, excluding
capitalized interest.
(c) Total debt is defined as long-term debt, current maturities of long-term
debt and capital lease obligations.
18
Selected Historical Financial and Operating Data
of the Millennium Contributed Business
The table below shows selected historical financial and operating data for
the Millennium contributed business. The following selected historical income
statement and balance sheet data have been derived from the financial
statements of the Millennium contributed business which have been audited by
PricewaterhouseCoopers LLP, independent accountants (1) as of November 30, 1997
and for the eleven-month period then ended and (2) as of December 31, 1996 and
for the two years in the period then ended. PricewaterhouseCoopers' report is
included elsewhere in this prospectus. The selected historical income statement
data for the year ended December 31, 1994 and the balance sheet data as of
December 31, 1995 have been derived from financial statements of the Millennium
contributed business, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The selected historical balance sheet data as of
December 31, 1994 have been derived from the historical financial records of
Millennium. The operating data have been derived from the historical operating
records of Millennium. Neither the historical financial data nor the historical
operating data are necessarily indicative of the future results of operations
of Equistar.
The selected historical financial and operating data shown below are not
complete. You should read the entire prospectus carefully, including the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the Millennium contributed business
financial statements and the related notes included elsewhere in this
prospectus.
For the
For the year ended eleven months
December 31, ended
---------------------- November 30,
1994 1995 1996 1997
------ ------ ------ -------------
Income statement data (millions of
dollars):
Sales................................... $1,645 $1,932 $1,860 $1,786
Cost of sales........................... 1,331 1,324 1,503 1,341
Selling, development and administrative
expenses............................... 104 113 109 136
------ ------ ------ ------
Operating income........................ 210 495 248 309
Interest expense, net................... 80 80 80 66
------ ------ ------ ------
Income before income taxes.............. 130 415 168 243
Provision for income taxes.............. 62 172 76 96
------ ------ ------ ------
Net income.............................. $ 68 $ 243 $ 92 $ 147
====== ====== ====== ======
Other operating data (millions of
dollars):
EBITDA(a)............................... $ 339 $ 627 $ 375 $ 434
Cash flows from operating activities.... 126 262 80 304
Cash flows from investing activities.... (38) (75) (127) (41)
Cash flows from financing activities.... (88) (187) 47 (263)
Ratio of earnings to fixed charges(b)... 1.7x 3.6x 2.0x 2.9x
Depreciation and amortization........... 129 132 127 125
Capital expenditures.................... 38 75 127 41
Balance sheet data (at end of period)
(millions of dollars):
Working capital, net.................... $ 247 $ 331 $ 363 $ 265
Total assets............................ 2,978 2,977 3,121 2,804
Total debt(c)........................... 1,016 1,013 1,009 4
Total invested capital.................. 1,633 1,692 1,835 2,724
Sales volumes (millions):
Selected petrochemical products:
Ethylene, propylene and other olefins
(lbs.)............................... 955 735 950 608
Aromatics (gallons)................... -- -- -- --
Polymer products (lbs.)................. 4,123 3,926 3,884 3,980
19
- --------
(a) EBITDA is calculated as operating income plus depreciation and amortization
and other income. EBITDA should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flows from
operating activities, which are determined according to generally accepted
accounting principles. Management included EBITDA to provide additional
information with respect to the ability of Equistar to meet its future debt
service, capital expenditure and working capital requirements. EBITDA is
not necessarily a measure of Equistar's ability to fund its cash needs.
Management believes that some investors find the calculation of EBITDA a
useful tool for measuring the ability to service debt.
(b) For purposes of calculating the ratio of earnings to fixed charges, fixed
charges include interest expense, plus capitalized interest, and that
portion of non capitalized rental expense deemed to be the equivalent of
interest. Earnings represent net income plus fixed charges.
(c) Total debt is defined as long-term debt, current maturities of long-term
debt and capital lease obligations.
20
Equistar Unaudited Pro Forma Income Statement Data
For the Year Ended December 31, 1998
The unaudited pro forma financial data shown below present the financial
results of Equistar as if
. the Occidental contributed business had been contributed as of January 1,
1998
. the change in interest expense resulting from Equistar's use of proceeds
from the issuance of the outstanding notes had occurred as of January 1,
1998
The unaudited pro forma financial data do not necessarily reflect the results
of operations of Equistar that would have resulted had these transactions
actually been consummated as of the dates indicated. The data shown below are
not necessarily indicative of the future results of operations of Equistar.
Occidental
Contributed Pro Forma Pro Forma
Equistar Business(a) Adjustments Combined
-------- ----------- ----------- ---------
Income statement data
(millions of dollars):
Sales and other operating
revenues..................... $4,363 $506 $4,869
Operating costs and expenses:
Cost of goods sold.......... 3,773 457 $ 5(b) 4,235
Selling, general and
administrative expenses.... 273 6 279
Unusual charges............. 35 -- 35
------ ---- --- ------
Operating income.............. 282 43 (5) 320
Loss from equity investment... -- 2 2
Interest expense, net......... 139 39 (5)(c)(d)(e) 173
Other income.................. -- 5 5
------ ---- --- ------
Net income.................... $ 143 $ 7(f) $-- $ 150
====== ==== === ======
- --------
(a) To reflect the results of the Occidental contributed business from January
1, 1998 to May 14, 1998, before its addition to Equistar.
(b) To reflect the additional depreciation expense for the period from January
1, 1998 to May 14, 1998 related to the increase in the fair value in excess
of the historical book basis of the Occidental contributed business over an
average useful life of 25 years.
(c) To reflect the elimination of $38 million of interest expense related to
debt not contributed to Equistar by Occidental.
(d) To reflect the interest expense of $16 million for the period from January
1, 1998 to May 14, 1998 related to the additional $700 million of debt that
was incurred upon consummation of the Occidental contribution.
(e) To reflect an interest expense increase related to the offering of the
outstanding notes offset by a decrease resulting from the use of proceeds,
which amounts to $17 million, net.
(f) Amount represents pretax income of the Occidental contributed business.
21
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following is not a complete description of Equistar's business affairs.
You should read it in conjunction with the historical financial statements and
the notes to those statements of Equistar and the Lyondell, Millennium and
Occidental contributed businesses, which are included in this prospectus.
Selected Pricing Information
The following graphs present industry pricing information for the periods
discussed below, based on published industry sources.
[Chart 1--Month-end average delivered-contract, monthly low price agreement
prices for Ethylene as reported by CMAI Monomers Market Report from January 1996
through December 1998. Chart indicates 1996 prices increased steadily, with an
annual average of the month-end prices of 23.33 cents per pound. 1997 prices
were relatively flat, although slightly decreasing, with an annual average of
the month-end prices of 27.42 cents per pound. 1998 prices declined steadily
with an annual average of the month-end prices of 21.17 cents per pound.
Selected month-end average prices are as follows: January 1996--19.75 cents per
pound, December 1996--26.25 cents per pound, December 1997--26.25 cents per
pound, December 1998--19.00 cents per pound.]
[Chart 2--Month-end average spot price WTS low prices for Crude Oil as
reported by Platts Oilgram Price Report from January 1996 through December 1998.
Chart indicates volatile, but increasing prices in 1996 with the chart's peak
occurring at $24.32 per barrel in December 1996. Annual average month-end prices
were $21.35 per barrel in 1996. Prices decreased in 1997 with an annual average
of the month-end prices of $19.35 per barrel. Prices declined steadily in 1998
with a low point of $10.02 per barrel in December 1998 and an annual average of
the month-end prices of $12.94 per barrel. Selected month-end average prices are
as follows: January 1996--$18.39 per barrel, December 1996--$24.32 per barrel,
December 1997--$17.13 per barrel, December 1998--$10.02 per barrel.]
For the Year Ended December 31, 1998 vs. the Year Ended December 31, 1997
The following discussion and analysis compares the historical results of
Equistar for the year ended December 31, 1998 with the combined historical
results of the Lyondell and Millennium contributed businesses for the eleven
months ended November 30, 1997 and Equistar for the one month ended December
31, 1997, which we refer to as the "Combined Businesses." These combined
results for the year ended December 31, 1997 are not intended to, and do not
represent, pro forma results of Equistar. In addition, they may not be
indicative of results that will be obtained in the future.
22
Selected financial and operating information for Equistar for the year ended
December 31, 1998, for the Lyondell contributed business and the Millennium
contributed business for the eleven months ended November 30, 1997 and Equistar
for the one month ended December 31, 1997 is as follows:
Lyondell Millennium
contributed contributed Combined
Equistar for business for business for Equistar for Businesses
the year the eleven the eleven the one for the year
ended months ended months ended month ended ended
December 31, November 30, November 30, December 31, December 31,
1998 1997 1997 1997 1997
------------ ------------ ------------ ------------ ------------
Income statement data
(millions of dollars):
Sales and other
operating revenues..... $4,363 $2,715 $1,786 $365 $4,866
Cost of sales........... 3,773 2,153 1,341 287 3,781
Selling, general and
administrative
expenses............... 273 166 136 21 323
Unusual charges......... 35 -- -- 42 42
------ ------ ------ ---- ------
Operating income....... 282 396 309 15 720
Interest expense, net... 139 50 66 8 124
------ ------ ------ ---- ------
Income before income
taxes................. 143 346 243 7 596
Provision for income
taxes.................. -- 127 96 -- 223
------ ------ ------ ---- ------
Net income............. $ 143 $ 219 $ 147 $ 7 $ 373
====== ====== ====== ==== ======
Sales volumes
(millions):
Selected petrochemical
products:
Ethylene, propylene and
other olefins
(lbs.)................ 16,716 8,084 608 737 9,429
Aromatics (gallons).... 271 176 -- 17 193
Polymers products
(lbs.)................. 6,488 1,985 3,980 167 6,132
Overview
Net income was $143 million for the year ended December 31, 1998 compared to
$373 million for 1997. The decline in net income from 1997 to 1998 was
primarily due to lower prices and margins in both the petrochemicals and
polymers segments. The decline in prices and margins began in the fourth
quarter of 1997 and continued throughout 1998. The decline was partially offset
by lower feedstock costs and increased sales volumes as a result of the
addition of the Occidental contributed business in May 1998.
The following tables for the petrochemicals and polymers segments show
selected income statement and operating data. Revenues include intersegment
sales. Cost of sales include intersegment purchases.
Petrochemicals Segment
Lyondell Millennium
contributed contributed Combined
Equistar for business for business for Equistar for businesses
the year the eleven the eleven the one for the year
ended months ended months ended month ended ended
December 31, November 30, November 30, December 31, December 31,
1998 1997 1997 1997 1997
------------ ------------ ------------ ------------ ------------
Income statement data
(millions of dollars):
Sales revenues.......... $3,463 $2,369 $1,213 $284 $3,866
Cost of sales........... 3,130 1,965 950 236 3,151
Selling expenses........ 14 26 4 1 31
------ ------ ------ ---- ------
Operating income........ $ 319 $ 378 $ 259 $ 47 $ 684
====== ====== ====== ==== ======
Sales volumes
(millions):
Selected petrochemical
products:
Ethylene, propylene and
other olefins (lbs.).. 16,716 8,084 608 737 9,429
Aromatics (gallons).... 271 176 -- 17 193
23
Revenues
Sales revenues for the petrochemicals segment decreased from $3,866 million
for 1997 to $3,463 million for 1998. The decrease of $403 million was due to
declines in industry sales prices. Sales prices are primarily driven by the
following three factors:
. the demand for products as a result of economic conditions in end-use
markets such as the auto industry, housing construction and consumer
durable and nondurable goods
. the operating rate of the installed capacity to produce olefins products
. the underlying cost of feedstocks
For olefins products, the decrease in sales prices was primarily
attributable to increased industry capacity and downward pressure on sales
prices as a result of lower feedstock costs. The sales price decreases were
partially offset by increased sales volumes as a result of the addition of the
Occidental contributed business in May 1998.
Cost of Sales
Cost of sales decreased from $3,151 million in 1997 to $3,130 million in
1998. The decrease was primarily due to declines in feedstock costs, which were
partially offset by slightly higher fixed costs and the addition of the
Occidental contributed business in May 1998.
Equistar's olefins feedstocks tend to follow the cost trends of crude oil
and natural gas. Crude oil prices began dropping in 1997 and continued to fall
throughout 1998, which resulted in lower feedstock costs for the petrochemicals
segment. Natural gas prices also dropped in early 1998 and remained at that
level throughout 1998.
Selling Expenses
Selling expenses decreased from $31 million in 1997 to $14 million in 1998.
The decrease was primarily due to lower personnel costs as a result of the
consolidation of operations.
Operating Income
Operating income decreased from $684 million in 1997 to $319 million in
1998. The decrease of $365 million primarily reflected lower product margins as
a result of declines in sales prices and slightly higher fixed costs. The
decrease was partially offset by lower feedstock costs and the addition of the
Occidental contributed business in May 1998.
Polymers Segment
Lyondell Millennium
contributed contributed Combined
Equistar for business for business for Equistar for businesses
the year the eleven the eleven the one for the year
ended months ended months ended month ended ended
December 31, November 30, November 30, December 31, December 31,
1998 1997 1997 1997 1997
------------ ------------ ------------ ------------ ------------
Income statement data
(millions of dollars):
Sales revenues.......... $2,058 $ 770 $1,557 $186 $2,513
Cost of sales........... 1,799 612 1,375 156 2,143
Selling expenses........ 82 76 53 8 137
------ ----- ------ ---- ------
Operating income ....... $ 177 $ 82 $ 129 $ 22 $ 233
====== ===== ====== ==== ======
Sales volumes
(millions):
Polymer products........ 6,488 1,985 3,980 167 6,132
24
Revenues
Sales revenues for the polymers segment decreased from $2,513 million for
1997 to $2,058 million for 1998. The decrease of $455 million is a result of
decreases in industry sales prices. Sales prices are primarily driven by the
following three factors:
. the demand for products as a result of economic conditions in end-use
markets such as the auto industry, housing construction and consumer
durable and nondurable goods
. the operating rate of the installed capacity to produce polymer products
. the underlying cost of feedstocks
For polymer products, the sales price decreases were a result of excess
industry supply and lower feedstock costs. The excess industry supply and
related sales price decreases began in the fourth quarter of 1997 and continued
throughout 1998. The decrease in sales prices was partially offset by an
increase in sales volumes.
Cost of Sales
Cost of sales was $1,799 million for 1998 as compared to $2,143 million for
1997. The primary feedstocks for the polymers segment are olefins, primarily
ethylene and propylene. During 1998, the industry sales price of ethylene and
propylene decreased steadily, which resulted in lower feedstock costs for the
polymers segment. This decrease was partially offset by an increase in sales
volumes.
Selling Expenses
Selling expenses were $82 million for 1998 as compared to $137 million for
1997. The decrease of $55 million was primarily due to lower personnel costs as
a result of the consolidation of operations.
Operating Income
Operating income decreased from $233 million in 1997 to $177 million in
1998. The decrease of $56 million is a result of lower product margins in 1998.
Polymer sales prices decreased throughout 1998, but were partially offset by
lower feedstock costs, resulting in lower margins.
Unallocated--Unusual Charges
Unusual charges were $35 million for 1998 and $42 million in 1997. The
amounts for 1997 include costs associated with the formation of Equistar in
December 1997 and consolidation of operations. The amounts for 1998 also
include costs associated with the formation of Equistar as well as costs
associated with the addition of the Occidental contributed business in 1998.
These costs were paid by Equistar and allocated to each partner according to
their ownership percentages.
Fourth Quarter 1998 vs. Third Quarter 1998
Net loss for the fourth quarter of 1998 was $51 million as compared to net
income for the third quarter of 1998 of $29 million. This decrease was
attributable to earnings declines in both the petrochemicals and polymers
businesses. In the petrochemicals segment, decreased ethylene and co-product
sales prices were only partially offset by lower feedstock prices. Also
contributing to the petrochemicals segment earnings decrease in the fourth
quarter was the turnaround of Equistar's LaPorte, Texas facility. Due to
current market conditions, Equistar elected to accelerate the timing and extend
the length of this turnaround to occur from November 13, 1998 to February 15,
1999, rather than as originally scheduled in the third quarter of 1999.
Earnings also decreased in polymers, primarily as a result of sales price
declines, which exceeded the price decrease of the ethylene feedstock. In
addition, the scheduled turnaround and expansion of Equistar's Victoria, Texas
facility had a negative impact on fourth quarter polymers earnings. The project
was completed during the fourth quarter of 1998 and increased the plant's
annual high density polyethylene ("HDPE") capacity by approximately 125 million
pounds.
25
Financial Condition--Equistar
Operating Activities
Cash provided by operating activities totaled $846 million for the year
ended December 31, 1998. This was primarily attributable to income before
depreciation and reimbursements from Equistar's owners for payment of their
retained accounts payable balances. This amount also includes $130 million in
proceeds from the sale of accounts receivable primarily related to the
petrochemicals segment. See "Liquidity and Capital Resources--Accounts
Receivable."
Investing Activities
Equistar's capital expenditures were $200 million during the year ended
December 31, 1998. The most significant capital expenditures in 1998 related to
the following:
. the 480-million-pound HDPE resin expansion project at the Matagorda,
Texas facility, which has a targeted start-up in the third quarter of
1999
. the scheduled turnaround and expansion of the Victoria, Texas facility,
which was completed during the fourth quarter of 1998 and increased the
plant's annual HDPE capacity by approximately 125 million pounds
Financing Activities
Cash used in financing activities during the year ended December 31, 1998
consisted primarily of distributions to owners of $1.4 billion, offset by net
borrowings of $467 million and the repayment of the $345 million note
receivable from Lyondell. The distributions to owners consisted of $495 million
in distributions to Millennium and Occidental in the aggregate, as part of the
addition of Occidental to Equistar, which were funded by additional borrowings
of long-term debt, $345 million in distributions to Lyondell and Millennium in
the aggregate, related to the repayment of the note receivable from Lyondell,
$327 million in distributions to Lyondell and Millennium in the aggregate, for
payment of their retained accounts payable balances and the remaining amount
was distributions of available net operating cash. The borrowings were
primarily related to the acquisition of the Occidental contributed business.
Liquidity and Capital Resources
Cash Flows. Management believes business conditions will be such that cash
balances, cash flow from operations and existing lines of credit will be
adequate to meet future cash requirements for scheduled debt repayments.
Capital Expenditures. Equistar's capital expenditures for the one month
ended December 31, 1997 were $12 million. Capital expenditures for the year
ended December 31, 1998 were $200 million. Pro forma capital expenditures in
1998, including the Occidental contributed business, were $222 million.
Management plans to fund capital expenditures in 1999 from cash flow from
operations. The capital program for 1999 plans for the spending of $195
million, of which $106 million relates to projects which were started before
1999.
As part of ongoing operations, maintenance turnarounds are periodically
conducted on facilities. Although turnarounds on principal facilities are
usually scheduled well in advance, the timing of these turnarounds can be
accelerated or delayed because of numerous factors, some of which are beyond
Equistar's control.
Debt. In connection with its formation on December 1, 1997, Equistar entered
into a $1.25 billion revolving credit facility expiring November 2002 with a
group of banks. On June 12, 1998, Equistar entered into a $500 million credit
facility consisting of a $250 million revolving credit facility and a $250
million one-year term facility. Borrowings under the $1.25 billion revolving
credit facility currently bear interest depending on the type of borrowing made
by Equistar, at its option, at
. LIBOR, generally the London interbank market rate, or NIBOR, generally
the New York interbank market rate, plus, in each case, an applicable
margin and facility fee based on Equistar's long-term debt ratings as
established by Standard & Poor's Ratings Group and Moody's Investors
Service, Inc.
26
. a base rate of either the Federal Funds rate plus 0.5% or a fixed rate of
interest offered by a lender
. a rate established by competitive bids submitted by the sponsoring banks
through a competitive auction feature
The $1.25 billion revolving credit facility is available for working capital
and general purposes as needed.
Millennium America Inc., a subsidiary of Millennium, provided limited
guarantees with respect to the payment of principal and interest on a total of
$750 million principal amount of indebtedness under the $1.25 billion revolving
credit facility. However, the lenders may not proceed against Millennium
America Inc. until they have exhausted their remedies against Equistar. The
guarantee will remain in effect indefinitely, but at any time after December 1,
2004, Millennium America Inc. may elect to terminate the guarantee if certain
events occur. In connection with the contribution of the Occidental contributed
business, an affiliate of Occidental agreed with Equistar to provide similar
limited guarantees to Equistar of $419.7 million principal amount of
indebtedness under the $1.25 billion revolving credit facility or any
refinancing. Equistar holds the Occidental guarantee.
The principal amounts outstanding, current interest rates and maturity dates
of the debt obligations of Equistar as of December 31, 1998 are as follows:
Principal
Amount
Outstanding
Debt (in millions) Interest Rate Maturity
---- ------------- ------------------------ ------------------
Capital lease
obligations(a)......... $ 205 6.34% March 2000
Bank Credit Facilities:
$500 million credit
facility(b).......... 152 LIBOR plus 0.625%(b) November 2002
$1.25 billion
revolving credit
facility(c).......... 1,150 LIBOR plus 0.5%(d)
Other Debt Obligations:
10.00% notes due
1999(e)(f)........... 150 10.00% June 1999
9.125% notes due
2002(e).............. 100 9.125% March 2002
Medium-term notes(e).. 163 Fixed rates ranging from Various dates from
9.50% to 11.30% February 2000 to
March 2005
6.50% notes due
2006(e).............. 150 6.50% February 2006
7.55% debentures due
2026(e).............. 150 7.55% February 2026
------
Total................. $2,220
======
- --------
(a) Equistar repaid the capital lease obligations with proceeds from the
offering of the outstanding notes in February 1999.
(b) At December 31, 1998, the average interest rate for borrowings under the
$500 million credit facility was 6.1%. Equistar repaid the outstanding
balance under the $500 million credit facility of approximately $152
million in February 1999. Subsequently, the $500 million credit facility
was terminated.
(c) Equistar had net repayments of $400 million on this facility during the
first quarter of 1999. The aggregate amount outstanding under the bank
credit facility as of April 1, 1999 was $750 million.
(d) At December 31, 1998, the average interest rate under the $1.25 billion
revolving credit facility was 5.8%.
(e) Lyondell remains liable on these debt obligations assumed by Equistar in
connection with its formation.
(f) Equistar will retire $150 million aggregate principal amount of these notes
upon their June 1999 maturity.
Covenants. Under the covenant provisions of the bank credit facilities,
Equistar has agreed to, among other things
. maintain specified financial ratios, such as leverage and interest
coverage ratios
. refrain from creating some types of liens on its property or assets
27
. refrain from entering into some types of sale and lease-back transactions
. refrain from allowing its subsidiaries to incur some types of debt or
issue certain types of preferred stock
. refrain from using the proceeds of the bank credit facilities for
purposes not permitted by the facilities
Equistar is in compliance with each of its financial covenants. The ability
of Equistar to meet its debt service obligations and to comply with the
covenants and financial requirements in the $1.25 billion revolving credit
facility will largely depend on
. the future performance of Equistar
. the availability of additional financing to repay and refinance bank debt
Both of these circumstances will be influenced by prevailing economic and
competitive conditions and to other factors beyond Equistar's control. The
breach of any of the covenants or financial requirements in the credit facility
could result in a default, which would permit the lenders to declare the loans
immediately payable and to terminate future lending commitments.
Accounts Receivable. In December 1998, Equistar entered into an accounts
receivable sales facility providing for the ongoing sale of accounts
receivable. The facility provided $130 million in proceeds in 1998. The
facility expires in December 1999. Equistar used the proceeds to reduce
outstanding debt under the $500 million credit facility. Fees associated with
the sale of accounts receivable totaled $0.4 million in 1998 and are included
as general and administrative expenses.
For the Eleven Months Ended November 30, 1997 vs. the Year Ended December 31,
1996
The following discussion and analysis compares the historical results of the
Lyondell contributed business and the Millennium contributed business for the
eleven months ended November 30, 1997 with the historical results of those
businesses for the year ended December 31, 1996.
Selected financial and operating information for the Lyondell contributed
business and the Millennium contributed business for the eleven months ended
November 30, 1997 and for the year ended December 31, 1996 is as follows:
Lyondell Lyondell Millennium Millennium
contributed contributed contributed contributed
business for business for business for business for
the eleven the year the eleven the year
months ended ended months ended ended
November 30, December 31, November 30, December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Income statement data
(millions of dollars):
Sales and other operating
revenues.................. $2,715 $2,515 $1,786 $1,860
Cost of sales.............. 2,153 2,135 1,341 1,503
Selling, general and
administrative expenses... 166 157 136 109
------ ------ ------ ------
Operating income......... 396 223 309 248
Interest expense, net...... 50 65 66 80
------ ------ ------ ------
Income before income
taxes................... 346 158 243 168
Provision for income
taxes..................... 127 56 96 76
------ ------ ------ ------
Net income............... $ 219 $ 102 $ 147 $ 92
====== ====== ====== ======
Sales volumes (millions)
Selected petrochemical
products:
Ethylene, propylene and
other olefins (lbs.).... 8,084 7,973 608 950
Aromatics (gallons)...... 176 188 -- --
Polymers products (lbs.)... 1,985 2,136 3,980 3,884
28
Lyondell Contributed Business
Revenues
Sales and other operating revenues were $2.7 billion for the eleven months
ended November 30, 1997, compared to $2.5 billion in 1996. On an annualized
basis, sales and operating revenues increased 18%. This increase was due
primarily to increases in industry sales prices for ethylene and co-products.
Sales prices in the 1997 period showed significant increases over 1996 as
strong demand from the polymers markets resulted in a tighter balance of supply
and demand for olefins. Further, cost increases for olefins feedstocks over the
course of 1996 were reflected in olefins product prices in the 1997 period. In
addition, olefins sales volumes increased due to strong demand in the
downstream markets as well as planned and unscheduled industry turnarounds. On
an annualized basis, polymers revenues increased 7% due to higher industry
sales prices for polyethylene. These were partially offset by decreased
industry sales prices for polypropylene.
Cost of Sales
Cost of sales was $2.1 billion in both the 1997 period and in 1996. On an
annualized basis, cost of sales increased 10% due primarily to higher
production levels to meet demand for olefins and to increased polymers
feedstock costs caused by tight supply and demand in the olefins markets. These
increases were slightly offset by lower feedstock costs for olefins generally
due to lower crude oil prices.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from $157 million in
1996 to $166 million in the 1997 period. This increase of 15% on an annualized
basis was primarily due to
. higher employee compensation due to headcount increases
. increased computer support costs related to software implementation
In addition, employee incentive compensation increased in 1997.
Operating Income
Operating income increased from $223 million in 1996 to $396 million in the
1997 period. On an annualized basis, the increase of 94% was due to higher
sales margins and sales volumes for olefins. Sales margins improved due to
higher olefins sales prices, resulting from strong demand in the downstream
markets for polyethylene and polypropylene, which also resulted in increased
sales volumes. Sales margins also benefited from lower petrochemical feedstock
costs. These increases were slightly offset by lower sales prices for
polypropylene due to additional industry capacity in 1997. There were also
higher polymers feedstock costs in 1997 due to tighter supply and demand in the
olefins markets.
Interest Expense, Net
Interest expense, net, decreased 15% on an annualized basis from 1996 to the
1997 period, primarily due to lower interest rates in 1997.
Income Taxes
The effective income tax rate during the 1997 period was 37.3% compared to
35.7% for 1996. The effective income tax rate increased in the 1997 period due
to the nondeductibility of executive compensation. State income tax was the
primary difference between the effective tax rate and the 35% federal statutory
rate during both years.
29
Millennium Contributed Business
Revenues
Sales and other operating revenues were $1,860 million in 1996 compared to
$1,786 million in the 1997 period. On an annualized basis, sales increased 5%.
This increase was attributable to strong demand, both domestically and in the
export markets, coupled with tight supply, resulting in prices rising through
the third quarter. Prices began to slowly weaken in the fourth quarter of 1997
as expectations of new industry capacity coming on-stream and normal seasonal
slowdowns reduced demand and put pressure on prices.
Cost of Sales
Cost of sales was $1,503 million in 1996 compared to $1,341 million in the
1997 period. On an annualized basis, cost of sales decreased 3%. This decrease
was due to lower feedstock costs, which declined from peak 1996 levels, offset
by higher production levels resulting from strong demand in 1997. Feedstock
costs were on average 31% lower than the historical highs in 1996 as warmer-
than-normal winter weather reduced demand for natural gas and natural gas
liquids. These costs continued their decline in late 1997 as winter
temperatures remained above normal and crude oil inventories began building due
to decreased demand from Asian markets.
Operating Income
Operating income increased from $248 million in 1996 to $309 million in the
1997 period. On an annualized basis, the increase of 36% was primarily due to
an increase in average selling prices during the 1997 period coupled with lower
feedstock costs.
Interest Expense, Net
Interest expense decreased from $80 million in 1996 to $66 million in the
1997 period. This annualized decrease of 10% was a result of a decrease in
outstanding debt.
Income Taxes
The effective income tax rate during the 1997 period was 39.5% compared to
45.2% for 1996. Differences between the effective income tax rates arise from
the different levels of income along with the effect of goodwill amortization
and state income tax, which are not deductible for federal tax purposes.
Environmental, Health and Safety Matters
Equistar is subject to stringent environmental, health and safety laws and
regulations addressing air emissions, water discharges, generation, handling
and disposal of waste and other aspects of Equistar's operations. Equistar
devotes considerable efforts to comply with these laws and regulations, and in
so doing, it incurs significant capital expenditures and operating expenses.
It is difficult to predict the future development of these laws and
regulations or their impact on Equistar's operations and products. In
particular, the future effect of the Clean Air Act may be significant. However,
future effects of the Clean Air Act are dependent upon the development of
future regulations and interpretations as well as other factors, such as the
development of environmental control technologies. Equistar's MTBE sales may
also be materially adversely affected by pending or future changes in laws or
regulations. 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 watercraft has led to public concern that MTBE
may contaminate drinking water supplies, and thereby result in a possible
health risk. The Governor of California has announced an intention to eliminate
MTBE from gasoline sold in California by December 31, 2002. California is the
largest market for MTBE and if such intent were to be effected, sales prices of
MTBE would be adversely impacted. There have been claims that MTBE
. travels more rapidly through soil
30
. is more soluble in water than most other gasoline components
. is more difficult and more costly to remediate
Heightened public awareness about MTBE has resulted in certain state and
federal legislative initiatives that have sought either to rescind the
oxygenate requirement for reformulated gasoline sold in California and other
states or restrict the use of MTBE. There is ongoing review of this issue and
the ultimate resolution of the appropriateness of using MTBE could result in a
significant reduction in Equistar's MTBE sales.
Equistar is also subject to liabilities and costs under Superfund and other
laws relating to investigation, cleanup or closure of former waste disposal
units or other areas of contamination. Investigation, cleanup and closure
responsibilities include both Equistar's facilities and third-party waste
facilities. Some Equistar facilities are currently undergoing assessment and
remedial actions under the Resource Conservation and Recovery Act. It is
difficult to predict how these liabilities and costs might be affected by
future changes, including more stringent cleanup standards and the discovery of
additional areas of contamination.
Under indemnification arrangements in the asset contribution agreements with
Lyondell, Millennium Petrochemicals Inc., a subsidiary of Millennium and the
contributing subsidiaries of Occidental, each of Lyondell, Millennium
Petrochemicals and the Occidental subsidiaries agreed to assume, and to
indemnify and defend Equistar against, some types of third-party claims and
liabilities which Equistar may incur relating to the pre-closing operation of
the contributed businesses. This obligation includes liabilities exceeding $7
million per contributed business asserted within the first seven years after
the date of the respective asset contributions.
In its financial statements, Equistar reserves for contingencies that are
probable and reasonably estimable, including those based upon unasserted
claims. Based on current matters described above, Equistar has not established
any reserves for potential environmental issues and does not anticipate any
material adverse effect upon its earnings, operations or competitive position
resulting therefrom. However, the amount or timing of future environmental
liabilities and costs cannot be predicted with certainty, and liabilities and
costs could be material in future quarterly or annual results of Equistar's
operations for that period.
Equistar spent $5 million in 1998 on environmental matters. Equistar
anticipates expenditures for environmental matters of $5 million in 1999 and $5
million in 2000.
Year 2000
Equistar uses many information technology or "IT" systems as well as non-IT
systems, such as manufacturing support and other systems, that could be
impacted by the "Year 2000 problem." The Year 2000 problem arises from computer
programs that have been written using two digits rather than four to designate
the year. Date-sensitive computer software may recognize a date using "00" as
the year 1900 rather than the year 2000, resulting in system failures or
miscalculations, potentially causing operational disruptions.
Equistar has a Year 2000 Steering Committee and has appointed
representatives, along with Lyondell and LYONDELL-CITGO Refining, to Lyondell's
Year 2000 Executive Sponsor Team. The Executive Sponsor Team provides oversight
to each member's steering committee. Equistar's steering committee is in the
process of completing an assessment of the state of readiness of the IT and
non-IT systems. The steering committee's assessments cover
. manufacturing systems, including laboratory information systems and field
instrumentation
. significant third-party vendor and supplier systems, including employee
compensation and benefit plan maintenance related systems
The steering committee is also beginning to assess the readiness of significant
customers and suppliers.
In May 1997, before the formation of Equistar, Lyondell commenced the first
major use of new software for business information systems it contributed to
Equistar. The new systems, based on enterprise software from SAP America, Inc.,
replaced older business systems and allowed employees at different locations to
share
31
financial and operating information more effectively. Equistar is in the
process of replacing the business information systems for the operations
contributed by Millennium and Occidental with the same systems. In November
1998, Equistar completed a system-wide implementation of SAP America business
information systems for its polymers business and a portion of its
petrochemicals business. Full business information systems conversion will be
completed in the first half of 1999. The new systems and software are Year
2000-compatible, thus addressing the majority of Equistar's Year 2000 business
system requirements.
Equistar's Year 2000 assessment process consists of an inventory of Year
2000-sensitive equipment, an assessment of the impact of possible failures, a
determination of the required remediation actions and testing and
implementation of the solutions. The inventory, assessment and remediation
phases should be completed in 1999. The majority of the testing and final
implementation is scheduled to take place in 1999. The progress of these phases
as of December 31, 1998 is summarized as follows:
[Bar chart appears here disclosing the percentage completion of each of
inventory (99%), assessment (98%), remediation (89%), testing (39%)
and implementation (28%)]
As of December 31, 1998, Year 2000 spending and estimated spending by
Equistar is summarized as follows:
(Millions of dollars)
Spending through December 31, 1998................................... $ 1
Estimated additional spending........................................ 12
---
Total estimated spending(a)........................................ $13
===
Replacement of IT systems............................................ $ 2
Replacement of non-IT systems........................................ --
---
All other costs...................................................... 11
---
Total estimated spending(a)........................................ $13
===
- --------
(a) Does not include amounts incurred in connection with implementation of the
SAP America related software, which addresses Year 2000 readiness in
Equistar's business information systems, and internal costs.
32
The total estimated spending of $13 million represents the midpoint of the
estimated range between $11 million and $15 million. These spending estimates
will be refined as phases of the process are completed. Spending is funded by
cash generated from operations.
Management believes that all significant systems controlled by Equistar will
be Year 2000 ready in the last half of 1999. Equistar's operations are
dependent on a continuous supply of key services from raw material suppliers
and utility and transportation providers. While the steering committee is
assessing the readiness of third-party customers and suppliers, there can be no
assurance that third parties with whom we have a significant business
relationship will successfully test, reprogram and replace all of their IT and
non-IT systems on a timely basis. Equistar is developing contingency plans with
the assistance of an outside consultant. The final plans, when implemented, are
intended to avoid material interruption of core business operations through the
year 2000 and beyond, while ensuring safe operations and optimal financial
performance. The contingency planning will involve an analysis of critical
business processes and an identification of the most likely threats to these
processes. Solutions and alternatives will be developed for these internal or
external threats. Equistar expects to complete its analysis and plan
development by mid-year 1999 with implementation to be completed in the last
half of the year.
There is inherent uncertainty in the Year 2000 problem due to the
possibility of unanticipated failures by third-party customers and suppliers.
Accordingly, Equistar is unable, at this time, to assess the extent and
resulting materiality of the impact of possible Year 2000 failures on its
operations, liquidity or financial position. In a worst case scenario,
controlled plant shutdowns using Equistar's standard shutdown procedures might
be necessitated by failure of utility providers or suppliers or by internal
conditions affecting plant operability. Such events could have a material
adverse effect on Equistar's operations, liquidity or financial position. The
Year 2000 assessment process is expected to provide information that will
significantly reduce the level of uncertainty regarding the Year 2000 impact.
Management believes that the completion of the assessment and remediation plan
as scheduled will help minimize the possibility of any significant disruptions
of Equistar's operations.
Disclosure of Market Risk
Commodity Price Risk
A substantial portion of Equistar's products and feedstocks are commodities
whose prices fluctuate as market supply and demand fundamentals change.
Accordingly, product margins and the level of Equistar's profitability tend to
fluctuate with changes in the business cycle. Equistar tries to protect against
such instability through various business strategies. These strategies include
increasing the olefins plants' feedstock flexibility, entering into multi-year
processing and sales agreements and moving downstream into derivatives products
whose pricing is more stable. Equistar has not used derivative instruments for
commodity hedging purposes.
33
Description of Equistar's Business
Equistar is one of the largest chemical producers in the world with total
1998 pro forma revenues of $5 billion and $7 billion of assets at the end of
1998. It is the world's second largest, and North America's largest, producer
of ethylene, the world's most widely used petrochemical. Equistar is also the
largest producer of polyethylene and propylene in North America.
Olefins, the generic name for ethylene and propylene, and their co-products
are basic building blocks used to create a wide variety of products. Ethylene
is used to produce polyethylene, ethylene oxide and its primary derivative,
ethylene glycol, ethylene dichloride and ethylbenzene. Polyethylene is used to
produce packaging film, trash bags and lightweight, high-strength plastic
bottles for milk, juices, shampoos and detergents. Propylene is used to produce
polypropylene, which is used in products such as plastic caps and other
closures, rigid packaging and carpet facing and backing. Substantially all of
Equistar's revenues are derived from sales in North America.
Equistar was formed to maximize the long-term cash flow and economic value
creation potential of its contributed businesses. Management believes that
Equistar's operations to date have provided and will continue to provide
opportunities for significant cost savings and expanded business opportunities,
leading to improved earnings and cash flow. The strengths inherent in the
combined businesses, including the multiple locations and feedstock flexibility
of its facilities, provide Equistar with competitive advantages that exceed
those which were available to Lyondell, Millennium and Occidental,
individually.
Equistar's Business Strategies
Equistar's business strategies include
. Achieving savings or "synergy" targets in earnings and cash flow by
operating the Lyondell Millennium and Occidental contributed businesses
as a single entity and continuing to reduce costs by focusing on
--aligning and optimizing processing units for improved on-stream time
and increased throughput capability
--maximizing the value of feedstock flexibility and olefins co-products
produced in the olefins operations
--lowering distribution costs through volume leverage
--reducing raw materials and other procurement costs
. Realizing maximum value from the strategic flexibility and optimization
potential inherent in Equistar's large number of plant sites, feedstock
flexibility and a broad selection of polymer products
. Focusing on capital projects designed to increase reliability and
undertaking cost efficient expansions of value-added product lines by
--realizing the benefits of its recently completed 125-million-pound
HDPE expansion at its Victoria facility by continuing to develop its
established sales base in high value products
--completing a 480 million pound HDPE resin expansion project at its
Matagorda facility for late 1999 start-up to support high molecular
weight HDPE film growth
. Pursuing a market strategy of expanding value-added businesses using
minimal capital by increasing production and sales volumes in key
markets, such as high and medium molecular weight HDPE film resins, value
and specialty injection molding resins and wire and cable resins
. Leveraging technology by
--pursuing research on alternative olefins feedstock technology as a
method to lower costs and gain competitive advantages
34
--integrating Lyondell-contributed single-site catalyst proprietary
technology with Millennium-contributed process technologies, enabling
Equistar to produce higher margin, value-added polymer products
The following chart illustrates the feedstock flexibility of our olefins
plants, commonly referred to as "crackers," for ethylene production and the
breakdown of ethylene consumption.
[Flowchart showing the production path of feedstocks at Equistar's olefins
plants or "crackers," the plants' products and the downstream customers and
end-uses of the products appears here. Equistar's NGL crackers refine ethane,
propane and butane to produce ethylene. Equistar's Petroleum Liquid Crackers
refine condensate, naphtha, kerosene and diesel to produce ethylene.
Equistar's ethylene production is used as a feedstock by Equistar's ethylene
oxide and derivatives plants and its polymers operations, and by plants
operated by Lyondell, Millennium and Occidental. A portion of Equistar's
ethylene production is sold to unrelated third parties. Equistar uses ethylene
for the production of ethylene oxide and derivatives, the enduses of which
include detergents, industrial cleaners, polyester fiber, antifreeze and brake
fluid. Equistar's polymers operations use the ethylene to produce polyethylene
(LDPE, LLDPE and HDPE), which is used in grocery and trash bags, food
packaging films, plastics caps and closures, milk and water bottles, drink
cups and toys. Occidental uses ethylene to produce ethylene dichloride, which
is used in the manufacture of PVC drain pipe, vinyl flooring and siding.
Millennium uses ethylene in its vinyl acetate operations; vinyl acetate is
used in household adhesives, paint and ice bags. Lyondell uses ethylene for
the production of styrene, enduses of which include polystyrene cups, packages
and cutlery.
Equistar's petroleum liquid crackers also produce butadiene, aromatics,
gasoline, fuel oil and propylene. A portion of the propylene produced by
Equistar is used by Equistar's polymers operations and by Lyondell; the
balance is sold to unrelated third parties. Equistar's polymers operations use
the propylene to produce polypropylene which in turn is used in carpet fibers,
housewares and auto bumpers. Lyondell uses the propylene to produce propylene
oxide, which is used in polyurethane foam for furniture and insulation.]
For additional segment information, see Note 18 of Notes to the Audited
Financial Statements of Equistar Chemicals, LP.
Petrochemicals Segment
Overview
Petrochemicals are fundamental to many segments of the economy, including
the production of consumer products, housing components, automotive products
and other durable and nondurable goods. We produce petrochemicals, including
olefins, aromatics and oxygenated chemicals, at twelve facilities located in
six states. Olefins include ethylene, propylene and butadiene. Aromatics
include benzene and toluene. Oxygenated chemicals include ethylene oxide,
ethylene glycol, ethanol and MTBE. Our petrochemical products are used to
manufacture polymers and intermediate chemicals, which are used in a variety
of consumer and industrial products. Ethylene is the most significant
petrochemical in terms of worldwide production volume. Ethylene is also the
key building block for polyethylene and a large number of other chemicals,
plastics and synthetics.
35
With the strong growth of end-use products derived from ethylene during the
past several decades, especially as plastics have developed into low-cost,
high-performance substitutes for a wide range of materials such as metals,
paper and glass, U.S. ethylene consumption has grown by an average annual rate
of approximately 4%.
The Chocolate Bayou, Corpus Christi and two Channelview, Texas olefins
plants use petroleum liquid feedstocks, including naphtha, condensates and gas
oils (collectively "Petroleum Liquids"), to produce ethylene. The cost of
ethylene production from Petroleum Liquids feedstocks has historically been
less than the cost of producing ethylene from natural gas liquids feedstocks,
including ethane, propane and butane (collectively "NGLs"). The use of
Petroleum Liquids results in the production of a significant amount of co-
products such as propylene, butadiene, benzene and toluene, and specialty
products such as dicyclopentadiene, isoprene, resin oil, piperylenes, hydrogen
and alkylate. Based upon independent third-party surveys, we believe our
Channelview facility is the lowest production cost olefins facility in North
America. Our Morris, Illinois, Clinton, Iowa, Lake Charles, Louisiana and
LaPorte, Texas plants are designed to use NGLs, which primarily produce
ethylene with some co-products such as propylene. In addition, we are currently
modifying the LaPorte plant to run certain Petroleum Liquids feedstocks. A
comprehensive pipeline system connects our plants along the Gulf Coast with
major olefins customers. Feedstocks are sourced both internationally and
domestically and are shipped via vessel and pipeline.
We produce ethylene oxide and its primary derivative, ethylene glycol, at
facilities located in Pasadena, Texas and through PD Glycol, a 50% joint
venture with DuPont de Nemours and Company, in Beaumont, Texas. The Pasadena
facility also produces other derivatives of ethylene oxide, principally ethers
and ethanolamine. Ethylene glycol is used in antifreeze and in polyester
fibers, resins and films. The other ethylene oxide derivatives are used in many
consumer and industrial end uses, such as detergents and surfactants, brake
fluids and polyurethane foams for seating and bedding.
We produce synthetic ethyl alcohol at the Tuscola, Illinois plant by a
direct hydration process that combines water and ethylene. Equistar also owns
and operates facilities in Newark, New Jersey and Anaheim, California for
denaturing ethyl alcohol. In addition, it produces small volumes of diethyl
ether, a byproduct of its ethyl alcohol production, at Tuscola. These ethyl
alcohol products are ingredients in various consumer and industrial products,
as described more fully in the table below.
The following table outlines our petrochemical products, annual rated
capacity and the primary uses for these products.
PRODUCT RATED CAPACITY(a) PRIMARY USES
- ---------------------------------------------------------------------------
OLEFINS
- ---------------------------------------------------------------------------
Ethylene 11.5 billion pounds Ethylene is used as a feedstock to
manufacture polyethylene, ethylene
oxide, ethylene dichloride and ethyl
benzene. Polyethylene is used for films
for food packaging and trash bags and
for blow-molded plastic bottles for
milk, juices, shampoos and detergents.
Ethylene oxide is used to produce
ethylene glycol, which in turn is used
to produce antifreeze and polyester.
Ethylene dichloride is used to produce
polyvinyl chloride for pipe and other
vinyl products. Ethyl benzene is used to
produce styrene, which in turn is used
to produce polystyrene for food
packaging and drinking cups.
36
PRODUCT RATED CAPACITY(a) PRIMARY USES
- --------------------------------------------------------------------------------------
Propylene 5.0 billion pounds(b) Propylene is used to produce
polypropylene, acrylonitrile and
propylene oxide. Polypropylene is used
in products such as plastic caps,
closures, rigid packaging and carpet
facing and backing. Acrylonitrile is
used in clothing (acrylic fibers)
and high impact plastics (computers,
auto parts). Propylene oxide is used in
polyurethane foams for furniture and
insulation.
- --------------------------------------------------------------------------------------
Butadiene 1.2 billion pounds Butadiene is used to manufacture
styrene, butadiene, rubber and
polybutadiene rubber, which are used in
the manufacture of tires, hoses, gaskets
and other rubber products. Butadiene is
also used in the production of paints,
adhesives, nylon clothing, carpets and
engineered plastics.
- --------------------------------------------------------------------------------------
OXYGENATED PRODUCTS
- --------------------------------------------------------------------------------------
Ethylene Oxide and 1.1 billion pounds Ethylene oxide is used to produce
Equivalents ethylene oxide surfactants, industrial cleaners,
equivalents; 400 cosmetics, emulsifiers, paint, heat
million pounds as transfer fluids and ethylene glycol
pure ethylene oxide (polyester fibers and film, polyethylene
terephthalate ("PET") resin and
antifreeze).
- --------------------------------------------------------------------------------------
Ethylene Glycol 1 billion pounds Ethylene glycol is used to produce
polyester fibers and film, PET resin,
heat transfer fluids, paint and
automobile antifreeze.
- --------------------------------------------------------------------------------------
Ethylene Oxide 225 million pounds Ethylene oxide derivatives are used to
Derivatives produce paint and coatings, polishes,
solvents and chemical intermediates.
- --------------------------------------------------------------------------------------
MTBE 284 million MTBE is an octane enhancer and clean
gallons(c) fuel additive in reformulated gasoline.
- --------------------------------------------------------------------------------------
AROMATICS
- --------------------------------------------------------------------------------------
Benzene 301 million gallons Benzene is used to produce styrene,
phenol and cyclohexane. These products
are used in the production of nylon,
plastics, rubber and polystyrene.
Polystyrene is used in insulation,
packaging and drink cups.
- --------------------------------------------------------------------------------------
Toluene 66 million gallons Toluene is used as an octane enhancer in
gasoline, as a chemical feedstock for
benzene production and a core ingredient
in toluene diisocyanate, a compound in
urethane production.
- --------------------------------------------------------------------------------------
SPECIALTY PRODUCTS
- --------------------------------------------------------------------------------------
Dicyclopentadiene 80 million pounds DCPD is a component of inks, adhesives
("DCPD") and polyester resins for molded parts
such as tub and shower stalls and boat
hulls.
- --------------------------------------------------------------------------------------
Isoprene 105 million pounds Isoprene is a component of premium
tires, adhesive sealants and other
rubber products.
- --------------------------------------------------------------------------------------
Resin Oil 120 million pounds Resin oil is used in the production of
hot-melt adhesives, inks, sealants,
paints and varnishes.
37
PRODUCT RATED CAPACITY(a) PRIMARY USES
- --------------------------------------------------------------------------------
Piperylenes 100 million pounds Piperylenes are used in the production
of adhesives, inks and sealants.
- --------------------------------------------------------------------------------
Hydrogen 44 billion cubic feet Hydrogen is used by refineries to remove
sulfur from process gas in heavy crude
oil.
- --------------------------------------------------------------------------------
Alkylate 337 million Alkylate is a premium blending component
gallons(d) used by refiners to meet Clean Air Act
standards for reformulated gasoline.
- --------------------------------------------------------------------------------
Ethyl Alcohol 50 million gallons Ethyl alcohol is used in the production
of solvents as well as household,
medicinal and personal care products.
- --------------------------------------------------------------------------------
Diethyl Ether 5 million gallons Diethyl ether is used in laboratory
reagents, gasoline and diesel engine
starting fluid, liniments, analgesics
and smokeless gun powder.
- --------
(a) Unless otherwise specified, represents rated capacity at January 1, 1999.
We calculated the term "rated capacity," as used in this table, by
estimating the number of days in a typical year that a production unit of a
plant is expected to operate, after allowing for downtime for regular
maintenance, and multiplying that number by an amount equal to the unit's
optimal daily output based on the design feedstock mix. Because the rated
capacity of a production unit is an estimated amount, the actual production
volumes may be more or less than the rated capacity.
(b) Does not include refinery-grade material or production from the product
flexibility unit at Equistar's Channelview facility, which can convert
ethylene and other light petrochemicals into propylene. This facility has a
current rated capacity of one billion pounds per year of propylene.
(c) Includes up to 44 million gallons/year of capacity, which is operated for
the benefit of LYONDELL-CITGO Refining.
(d) Includes up to 172 million gallons/year of capacity, which is operated for
the benefit of LYONDELL-CITGO Refining.
Feedstocks and Ethylene Purchases
Olefins feedstock cost is generally the largest component of total cost for
the petrochemicals business. Olefins plants with the flexibility to consume a
wide range of feedstocks are better able to maintain higher levels of
profitability during periods of changing energy and petrochemicals prices than
olefins plants that are restricted in their feedstock processing capability.
The primary feedstocks used in the production of olefins are Petroleum Liquids,
also referred to as "heavy feedstocks," and NGLs, also referred to as "light
feedstocks." As of January 1, 1999, approximately 44% of domestic ethylene
industry capacity was limited to NGL feedstocks. As of January 1, 1999,
approximately 56% of domestic capacity processed to some extent both NGLs and
Petroleum Liquids.
Petroleum Liquids have had a historical variable margin advantage over NGLs
such as ethane and propane. For example, using Petroleum Liquid feedstocks
typically generates between one and four cents additional margin per pound of
ethylene produced compared to using ethane. We have the capability to realize
this margin advantage at the Channelview, Corpus Christi and Chocolate Bayou
facilities. This variable margin advantage is expected to continue due to the
significantly higher capital cost for plants with the capability to process
both heavy feedstocks, or Petroleum Liquids, and their resulting co-products in
contrast to processing light feedstocks, or NGLs.
38
The following chart illustrates, for the fourth quarter of 1998, our
percentage usage of heavy feedstocks and light feedstocks as compared with
industry usage, based on industry sources.
Pie chart appears here showing, for the fourth quarter of 1998, Equistar's
percentage usage of heavy feedstocks and light feedstocks as compared to
industry usage of heavy feedstocks and light feedstocks as shown below.
Heavy Feedstocks Light Feedstocks
-------------------------------------
Industry Crackers 29% 71%
Equistar Crackers 58% 42%
The Channelview facility is unusually flexible in that it can process 100%
Petroleum Liquids or up to 80% NGL feedstocks. The Corpus Christi plant can
process up to 70% Petroleum Liquids or up to 70% NGLs. The Chocolate Bayou
facility processes 100% Petroleum Liquids. Equistar's four other olefins
facilities currently process only NGLs. We are currently upgrading the LaPorte
facility to integrate the operations of the LaPorte and Channelview facilities.
The upgrade will permit the LaPorte facility to process 25% to 30% Petroleum
Liquids and the Channelview facility to process the co-products resulting from
the processing of Petroleum Liquids.
The majority of our Petroleum Liquids requirements are obtained under
contracts or on-the-spot market from a variety of third-party domestic and
foreign sources. We also purchase NGLs from a wide variety of domestic sources.
We obtain a portion of our olefins feedstock requirements from LYONDELL-CITGO
Refining at market-related prices.
In addition to producing our own ethylene, we assumed some agreements of an
affiliate of Millennium for the purchase of ethylene from Gulf Coast producers
at market prices. Ethylene purchase obligations under these contracts will
decline to zero at the end of 2000.
Marketing, Sales and Distribution
Ethylene produced by the LaPorte, Morris and Clinton facilities is generally
consumed as feedstock by the polymers operations at those sites. Ethylene and
propylene produced at the Channelview, Corpus Christi, Chocolate Bayou and Lake
Charles olefins plants are generally distributed by pipeline or via exchange
agreements to our Gulf Coast polymer and ethylene oxide facilities as well as
to other third parties. As of January 1, 1999 approximately 75% of the ethylene
we produced was consumed internally or sold to our affiliates based on current
market prices. See "Related Transactions."
39
With respect to sales to third parties, we sell a majority of olefins
products to customers with whom Lyondell and Occidental have had long-standing
relationships. Sales to third parties generally are made under written
agreements. These written agreements typically provide for
. monthly negotiation of price
. customer purchase of a specified minimum quantity
. three- to six-year terms with automatic one- or two-year term extension
provisions
Some contracts may be terminated early if deliveries have been suspended for
several months
Ethylene oxide and ethylene glycol are sold under long-term contracts of
three to five years' duration to third-party customers, with pricing negotiated
on a quarterly basis to reflect market conditions.
Glycol ethers are sold primarily into the solvent and distributor markets
under one-year contracts at market prices, as are ethanolamines and brake
fluids.
Ethanol and ethers are sold to third-party customers under one-year
contracts at market prices.
We license MTBE technology under a license from an affiliate of Lyondell and
sell a significant portion of MTBE produced at one of our two Channelview units
to Lyondell at market-related prices. The production from the second unit is
consumed by LYONDELL-CITGO Refining for gasoline blending. MTBE produced at
Chocolate Bayou is sold to third parties at market-related prices.
We sell most of our aromatics production under contracts that have initial
terms ranging from two to three years and that typically contain automatic one-
year term extension provisions. These contracts generally provide for monthly
or quarterly price adjustments based upon current market prices. Aromatics
produced by LYONDELL-CITGO Refining, with the exception of benzene, are
marketed by Equistar for LYONDELL-CITGO Refining under contracts with similar
terms to its own. Benzene produced by LYONDELL-CITGO Refining is sold directly
to Equistar at market-related prices.
Most of the ethylene and propylene production of the Channelview, Chocolate
Bayou, Corpus Christi and Lake Charles facilities are shipped via a 1,430-mile
pipeline system which has connections to numerous Gulf Coast ethylene and
propylene consumers. This pipeline system, some of which we own and some of
which we lease, extends from Corpus Christi to Mont Belvieu to Port Arthur,
Texas as well as around the Lake Charles area. In addition, exchange agreements
with other olefins producers allow access to customers who are not directly
connected to our pipeline system. Some propylene is shipped by ocean-going
vessel. Ethylene oxide and its derivatives are shipped by rail car. Butadiene,
aromatics and other petrochemicals are distributed by pipeline, railcar, truck,
barge or ocean-going vessel.
Competition and Industry Conditions
The basis for competition in our petrochemicals products is price, product
quality, product deliverability and customer service. We compete with other
large domestic producers of petrochemicals, including
.BP Amoco Chemical Company
.Chevron Chemical Company
.Dow Chemical Company
.Exxon Chemical Company
.Huntsman Chemical Company
.Mobil Chemical Company
40
.Phillips Petroleum Company
.Shell Chemical Company
.Union Carbide Corporation
The combined rated capacity of our olefins units at January 1, 1999 was
approximately 11.5 billion pounds of ethylene per year or approximately 18% of
total North American production capacity. Based on published rated production
capacities, we believe we are the largest producer of ethylene in North
America. North American ethylene rated capacity at January 1, 1999 was
approximately 62 billion pounds per year. Of the total ethylene production
capacity in the United States, approximately 95% is located along the Gulf
Coast. Approximately 80% of U.S. production capacity is owned by nine
manufacturers.
The following chart illustrates our production capacity position for
ethylene both in North America and worldwide as of January 1, 1998, based on
industry sources.
Bar chart appears here showing Equistar's production capacity position for
ethylene in North America and world wide as of January 1, 1998 as compared with
other producers as set forth below.
Ethylene Production Capacity
Billions Lbs./Year
North America
Producer Production Capacity
-------- -------------------
Equistar 11.5
Dow 7.1
Exxon 6.5
Shell 5.0
Nova 4.9
Phillips 4.6
Union Carbide 4.2
Chevron 3.3
Pemex 3.1
BP Amoco 3.0
Worldwide
Producer Production Capacity
-------- -------------------
Dow 11.9
Equistar 11.5
Shell 10.7
Exxon 9.8
Union Carbide 5.8
BP Amoco 5.6
SABIC 5.2
Nova 4.9
BASH 4.6
Phillips 4.6
Petrochemicals profitability is affected by the level of demand for
petrochemicals and derivatives along with vigorous price competition among
producers which may intensify due to, among other things, the addition of new
capacity. In general, weak economic conditions, either in the United States or
in the world and higher feedstock costs tend to reduce demand and/or put
pressure on margins. Capacity additions in excess of annual growth also put
pressure on margins. In addition, in recent years, industry consolidation has
occurred, a trend which we expect will continue. It is not possible to predict
accurately the changes in feedstock costs, market conditions and other factors
which will affect petrochemical industry margins in the future.
The petrochemicals industry has historically experienced significant
volatility in capacity utilization and profitability. Producers of olefins
primarily for merchant supply to unaffiliated customers typically experience
greater variations in their sales volumes and profitability in comparison to
more integrated competitors when industry supply and demand relationships are
at extremes. This is due primarily to a higher proportion of captive demand for
olefins derivatives production experienced by the more integrated competitors.
We currently consume or sell approximately 75% of our ethylene production to
downstream derivatives facilities owned by us or one of our partners, which has
the effect of reducing volatility.
41
Our other major commodity chemical products also experience cyclical market
conditions similar to, although not necessarily coincident with, those of
ethylene.
Polymers Segment
Overview
Through twelve facilities located in four states, our polymers segment
manufactures a wide variety of polyolefins, including polyethylene,
polypropylene and various performance polymers.
We currently manufacture polyethylene using a variety of technologies at six
facilities in Texas and at our Morris and Clinton facilities. The Morris and
Clinton facilities are the only polyethylene facilities located in the Midwest.
These facilities enjoy a freight cost advantage over Gulf Coast producers in
delivering products to customers in the Midwest and on the East Coast of the
United States. Polyethylene is used in a wide variety of consumer products,
packaging materials and industrial applications.
Our Morris, Illinois and Pasadena, Texas facilities manufacture
polypropylene using propylene produced as a co-product of our ethylene
production and propylene purchased from third parties. Polypropylene is sold
for various applications in the automotive, housewares and appliance
industries. We also produce performance polymer products, which include
enhanced grades of polyethylene and polypropylene, at several of our polymers
facilities. We believe that, over a business cycle, average selling prices and
profit margins for performance polymers tend to be higher than average selling
prices and profit margins for higher volume commodity polyethylenes.
A letter of intent for the sale of our concentrates and compounds business
at our Crockett, Texas and Heath, Ohio facilities was announced on March 1,
1999. Concentrates and compounds are polyethylene compounds impregnated with
additives and/or pigments and sold to converters. The converters mix the
compounds with larger volumes of polymers, including polyethylene, to produce
various products.
We produce wire and cable resins and compounds at Morris, Illinois, La
Porte, Texas, Tuscola, Illinois, Crockett, Texas and Fairport Harbor, Ohio.
Wire and cable resins and compounds are used to insulate copper and fiber optic
wiring in power, telecommunication, computer and automobile applications.
42
The following table outlines our polymers and performance polymers products,
annual rated capacity, the primary uses for these products and our brand names.
RATED
PRODUCT CAPACITY(a) PRIMARY USES BRAND NAMES
- -------------------------------------------------------------------------------------------------
POLYETHYLENE AND
POLYPROPYLENE
- -------------------------------------------------------------------------------------------------
High density 3.4 billion HDPE is used to manufacture grocery, ALATHON(R)
polyethylene ("HDPE") pounds(b) merchandise and trash bags; food Petrothene(R)
containers for items from frozen
desserts to margarine; plastic caps and
closures; liners for boxes of cereal and
crackers; plastic drink cups and toys;
dairy crates; bread trays and pails for
items from paint to fresh fruits and
vegetables; safety equipment such as
hard hats; house wrap for insulation;
bottles for household/industrial
chemicals and motor oil;
milk/water/juice bottles; and large
(rotomolded)
tanks for storing liquids like
agricultural and lawn care chemicals.
- -------------------------------------------------------------------------------------------------
Low density polyethylene 1.7 billion LDPE is used to manufacture food Petrothene(R)
("LDPE") pounds packaging films; plastic bottles for Acrythene(R)
packaging food and personal care items; (EMA)
dry cleaning bags; ice bags; pallet Ultrathene(R)
shrink wrap; heavy-duty bags for mulch (EVA)
and potting soil; boil-in-bag bags;
coatings on flexible packaging products;
and coating on paper board such as milk
cartons. Specialized forms of LDPE are
Ethyl Methyl Acrylate ("EMA"), which
provides adhesion in a variety of
applications, and Ethylene Vinyl Acetate
("EVA"), which is used in foamed sheets,
bag-in-box bags, vacuum cleaner hoses,
medical tubing, clear sheet protectors
and flexible binders.
- -------------------------------------------------------------------------------------------------
Linear low density 1.1 billion LLDPE is used to manufacture garbage and Petrothene(R)
polyethylene ("LLDPE") pounds lawn/leaf bags; housewares; lids for
coffee cans and margarine tubs; and
large (rotomolded) toys like outdoor gym
sets.
- -------------------------------------------------------------------------------------------------
Polypropylene 680 million Polypropylene is used to manufacture KromaLon(R)
pounds fibers for carpets, rugs and upholstery; Petrofil(R)
housewares; automotive battery cases; Petrothene(R)
automotive fascia, running boards and KromaLux(R)
bumpers; grid-type flooring for sports KromaTex(R)
facilities; fishing tackle boxes; and Flexathene(R)
bottle caps and closures.
- -------------------------------------------------------------------------------------------------
PERFORMANCE POLYMERS
- -------------------------------------------------------------------------------------------------
Wire and Cable Resins (c) Wire and cable resins and compounds are Petrothene(R)
and Compounds(d) used to insulate copper and fiber optic
wiring in power, telecommunication,
computer and automobile applications.
- -------------------------------------------------------------------------------------------------
Polymeric Powders (c) Polymeric powders are component products Microthene(R)
in structural and bulk molding
compounds; and parting agents and
filters for appliance, automotive and
plastics processing industries.
- -------------------------------------------------------------------------------------------------
Concentrates and 150 million Concentrates and compounds provide color Spectratech(R)
Compounds(d) pounds in film, bottles and foam sheets; the
"slip" that keeps film from sticking
together; flame retardancy; resistance
to UV radiation; and the "gas bubbles"
to make foamed plastic products.
43
RATED
PRODUCT CAPACITY(a) PRIMARY USES BRAND NAMES
- -----------------------------------------------------------------------------------------------
Polymers for Adhesives, (c) Polymers are components in hot-metal- Petrothene(R)
Sealants and Coatings adhesive formulations for case, carton Ultrathene(R)
and beverage package sealing; glue
sticks; automotive sealants; carpet
backing; and adhesive labels.
- -----------------------------------------------------------------------------------------------
Reactive Polyolefins (c) Reactive polyolefins are functionalized Plexar(R)
polymers used to bond nonpolar and polar
substrates in barrier food packaging;
wire and cable insulation and jacketing;
automotive gas tanks; and metal coating
applications.
- -----------------------------------------------------------------------------------------------
Liquid Polyolefins (c) Liquid polyolefins are a diesel fuel Vynathene(R)
additive to inhibit freezing.
- --------
(a) Unless otherwise specified, represents rated capacity at January 1, 1999.
We calculate "rated capacity," as used in this table, by estimating the
number of days in a typical year that a production unit of a plant is
expected to operate, after allowing for downtime for regular maintenance,
and multiplying that number by an amount equal to the unit's optimal daily
output based on the design feedstock mix. Because the rated capacity of a
production unit is an estimated amount, the actual production volumes may
be more or less than the rated capacity.
(b) We increased our HDPE capacity by approximately 125 million pounds in 1998.
A 480-million-pound HDPE resin expansion project at the Matagorda facility
has a targeted start-up in the third quarter of 1999. The idling of a
portion of the Port Arthur facility effective March 31, 1999 resulted in a
decrease in capacity of 300 million pounds at the end of the first quarter
of 1999.
(c) These are enhanced grades of polyethylene and are included in the capacity
figures for HDPE, LDPE and LLDPE above, as appropriate.
(d) A letter of intent for the sale of our concentrates and compounds business
at our Crockett, Texas and Heath, Ohio facilities has been entered into.
Research and development for our polymers segment is conducted in
laboratories at our Cincinnati, Ohio facility and at pilot plants in Matagorda,
Texas and Morris, Illinois. These facilities provide product and process
technology support for the polymers segment and its customers. See "--Research
and Technology; Patents and Trademarks."
Feedstocks
With the exception of the Chocolate Bayou polyethylene plant, our
polyethylene and polypropylene production facilities can receive their ethylene
and propylene directly from our petrochemical facilities. The feedstock is sent
via our olefins pipeline system at our own production at the site. The
polyethylene plants at Chocolate Bayou, LaPorte, Port Arthur and Pasadena are
pipeline-connected to third parties and can receive ethylene via exchanges or
purchases. The polypropylene facility at Morris also receives propylene from a
third party.
Marketing, Sales and Distribution
Our polymers products are primarily sold to an extensive base of established
customers, many under term contracts typically having a duration of one to
three years. The remainder is generally sold without contractual term
commitments. In either case, in most of the continuous supply relationships
prices may be changed upon mutual agreement with our customers.
Polymers are primarily distributed via railcar. We own or lease, under long-
term lease arrangements, approximately 10,000 railcars for use in our polymers
business. We sell our polymers products in the United States primarily through
our own sales organization. The sales organization generally engages sales
agents to market its products in the rest of the world.
44
Competition and Industry Conditions
The basis for competition in our polymers products is
. product performance
. product quality
. product deliverability
. customer service
. price
We compete with other large producers of polymers, including Chevron
Chemical Corporation, Dow Chemical Company, Eastman Chemical Company, Exxon
Chemical Company, Formosa Plastics, Huntsman Chemical Company, NOVA
Corporation, Phillips Petroleum Company, Solvay Polymers, Total Fina, Union
Carbide Corporation and Westlake Polymers. Polymers profitability is affected
by the worldwide level of demand for polymers along with vigorous price
competition, which may intensify due to, among other things, new domestic and
foreign industry capacity. In general, weak economic conditions either in the
United States or elsewhere in the world tend to reduce demand and put pressure
on margins. It is not possible to predict accurately the changes in feedstock
costs, market conditions and other factors that will affect polymers industry
margins in the future.
Based on published rated industry capacities, we are the largest producer of
polyethylene in North America and a leading domestic producer of polyolefins
powders, compounds, wire and cable resins, and polymers for adhesives. The
combined rated capacity of our polyethylene units as of January 1, 1999 was
approximately 6.2 billion pounds per year or approximately 18% of total
industry capacity in North America. There are 19 other North American producers
of polyethylene, including Chevron Chemical Company, Dow Chemical Company,
Exxon Chemical Company, Phillips Petroleum Company, Solvay Polymers and Union
Carbide Corporation. Our polypropylene capacity, 680 million pounds per year as
of January 1, 1999, represents just under 5% of the total North American
polypropylene capacity. There are 14 other North American competitors in the
polypropylene business, including BP Amoco Chemical Company, Exxon Chemical
Company, Montell Polyolefins BV and Total Fina.
The following chart illustrates our production capacity position for
polyethylene and polypropylene, or "polyolefins" for 1998, based on industry
sources.
Bar chart appears here showing Equistar's production capacity position for
polyethylene and polypropylene, or "polyolefins" for 1998 as compared with other
leading North American producers as set forth below.
Leading North America Polyolefins Producers
Millions Lbs./Year
Producer Production Capacity
Equistar 6,845
Exxon 6,844
Union Carbide 4,450
Dow 4,380
Montell 3,550
Phillips 2,927
Chevron 2,635
Solvay 2,490
Nova 2,284
Fina 2,143
Huntsman 1,985
Mobile 1,941
BP Amoco 1,820
Formosa 1,739
Eastman 1,067
Westlake 1,018
45
Properties
Our principal manufacturing facilities and principal products are detailed
below. All of these facilities are wholly owned by Equistar unless otherwise
noted.
Location Principal Products
-------- ------------------
Beaumont, Texas(a)...... Ethylene Glycol
Channelview, Texas(b)... Ethylene, Propylene, Butadiene, Benzene,
Toluene, DCPD, Isoprene, Resin Oil, Piperylenes,
Alkylate and MTBE
Corpus Christi, Texas... Ethylene, Propylene, Butadiene and Benzene
Chocolate Bayou, HDPE
Texas(c)...............
Chocolate Bayou, Ethylene, Propylene, Butadiene, Benzene,
Texas(c)(d)............ Toluene, DCPD, Isoprene, Resin Oil and MTBE
Crockett, Texas(e)...... Wire and Cable Resins and Compounds,
Concentrates and Compounds
LaPorte, Texas.......... Ethylene, Propylene, LDPE, LLDPE, HDPE and
Liquid Polyolefins
Matagorda, Texas........ HDPE
Pasadena, Texas(f)...... Ethylene Oxide and Ethylene Glycol and other EO
derivatives
Pasadena, Texas(f)...... Polypropylene and LDPE
Port Arthur, Texas(g)... LDPE and HDPE
Victoria, Texas(d)...... HDPE
Lake Charles, Ethylene and Propylene
Louisiana(h)...........
Morris, Illinois........ Ethylene, LDPE, LLDPE and Polypropylene
Tuscola, Illinois....... Ethyl Alcohol, Diethyl Ether, Wire and Cable
Resins and Compounds and Polymeric Powders
Clinton, Iowa........... Ethylene, LDPE and HDPE
Fairport Harbor, Wire and Cable Resins and Compounds
Ohio(h)................
Heath, Ohio(e).......... Wire and Cable Resins and Compounds,
Concentrates and Compounds
Anaheim, California..... Denatured Alcohol
Newark, New Jersey...... Denatured Alcohol
- --------
(a) The Beaumont facility is owned by PD Glycol, a partnership owned 50% by
Equistar and 50% by DuPont de Nemours and Company.
(b) The Channelview facility has two ethylene processing units. Lyondell
Methanol owns a methanol plant located within the Channelview facility on
property leased from Equistar. A third party owns and operates a facility
on land leased from Equistar that is used to purify hydrogen from Lyondell
Methanol's methanol plant. We also operate a styrene maleic anhydride unit
and a polybutadiene unit which are owned by a third party and are located
on property leased from Equistar within the Channelview facility.
(c) Millennium and Occidental each contributed a facility located in Chocolate
Bayou. These facilities are not on contiguous property.
(d) The land is leased. The facility is owned.
(e) A letter of intent for the sale of the concentrates and compounds business
at these facilities has been entered into.
(f) Occidental and Lyondell each contributed facilities located in Pasadena.
These facilities are primarily on contiguous property, and we plan to
operate them as one site to the extent practicable. These facilities are
operated in conjunction with the LaPorte facility.
(g) A substantial portion of the HDPE capacity was idled on March 31, 1999, and
could be restarted when market conditions warrant.
(h) The facilities and land are leased.
46
We also own a storage facility, a brine pond and a tract of vacant land in
Mont Belvieu, Texas, located approximately 15 miles east of the Channelview
facility. Storage capacity for up to approximately 13 million barrels of NGL
feedstocks, ethylene, propylene and other hydrocarbons is provided in salt
domes at the Mont Belvieu facility. We operate an additional 3 million barrels
of ethylene and propylene storage on leased property in Markham, Texas.
We use an extensive olefins pipeline system, some of which we own and some
of which we lease, extending from Corpus Christi to Mont Belvieu to Port Arthur
and around the Lake Charles area. We own other pipelines in connection with our
Morris, Clinton, Tuscola, Chocolate Bayou, Matagorda, Victoria, Corpus Christi
and LaPorte facilities. We own and lease several pipelines connecting the
Channelview facility, the refinery owned by LYONDELL-CITGO Refining and the
Mont Belvieu storage facility; these pipelines are used to transport
feedstocks, butylenes, hydrogen, butane, MTBE and unfinished gasolines. We also
own a barge docking facility near the Channelview facility capable of berthing
eight barges and related terminal equipment for loading and unloading
feedstocks and products. We own or lease, under long-term lease arrangements,
approximately 10,000 railcars for use in our business.
We sublease our executive offices and corporate headquarters from Lyondell
in downtown Houston, Texas. In addition, we own facilities which house the
Morris and Cincinnati research operations. We also lease sales facilities and
storage facilities, primarily in the Gulf Coast area, from various third
parties for the handling of products.
Research and Technology; Patents and Trademarks
We maintain a significant research and development facility in Cincinnati,
Ohio. The Cincinnati facility features more than 30 plastics processing lines,
all of commercial or semi-commercial size, allowing our engineers and
technicians to evaluate polyolefins products under conditions similar to a
customer's plant. We also have additional research facilities in Morris,
Illinois, Matagorda, Texas and Plano, Texas. Product development efforts are
aimed at tailoring products to meet specific customer needs.
The Channelview facility employs proprietary technology owned by Lyondell to
convert ethylene and other light petrochemical streams into propylene. We are
conducting a research project to investigate alternative feedstocks for use at
the Channelview, Chocolate Bayou and/or Corpus Christi facilities. These
alternative feedstocks could significantly lower costs and provide an
additional competitive advantage at these facilities.
Recent polymers industry announcements relate to the development of single-
site catalysts. Successful development and commercialization of these catalysts
are expected to result in enhanced polymer properties. We are conducting a
broad search to evaluate outside technology and are concentrating in-house
research in an effort to identify and develop single-site catalysts for use in
the production of polyolefins resins. We hold several United States patents and
the rights to certain patents pending in connection with research and
development efforts in this area. We are not dependent upon obtaining or
retaining any particular patent, and believe the failure to receive or retain
any individual patent would not have a material effect on operations.
We use numerous technologies in our operations, many of which are licensed
from third parties. Significant licenses we hold include
. BP Amoco fluid bed polyethylene process for the production of both
LLDPE and HDPE
. Unipol process for the production of LLDPE
. other licenses for the production of polyethylene and polypropylene
We are not dependent on the retention of any particular license and believe
that the loss of any individual license would not have a material adverse
effect on operations.
47
We acquired rights to numerous recognized brand names from Lyondell and
Millennium Petrochemicals Inc., a wholly owned subsidiary of Millennium, in
connection with the formation of Equistar. The brand names are ALATHON(R),
KromaLon(R), Petrothene(R), Ultrathene(R), Vynathene(R) and Microthene(R). Our
rights to use these trademarks are perpetual as long as we actively use the
trademarks. We are not dependent upon any particular trademark and believe the
loss of any individual trademark would not have a material adverse effect on
operations.
Employee Relations
As of December 31, 1998, we employed approximately 5,000 full-time
employees. We also use the services of independent contractors in the routine
conduct of our business. Approximately 365 hourly workers are covered by
collective bargaining agreements. We believe that our relations with our
employees are good.
Management
Members of the Partnership Governance Committee, Executive Officers of Equistar
and Directors and Executive Officers of Equistar Funding
All of Equistar management's functions are the responsibility of the
partnership governance committee. The partnership governance committee is
comprised of nine members. Each general partner may appoint three members to
the partnership governance committee. The partnership governance committee has
delegated responsibility of day-to-day operations to the executive officers of
Equistar.
The current members of the partnership governance committee are
. Dan F. Smith, President and Chief Executive Officer of Lyondell and
Equistar and co-chairman of the partnership governance committee
. William M. Landuyt, Chairman and Chief Executive Officer of Millennium
and co-chairman of the partnership governance committee
. Dr. Ray R. Irani, Chairman and Chief Executive Officer of Occidental
Petroleum and co-chairman of the partnership governance committee
. John E. Lushefski, Senior Vice President and Chief Financial Officer of
Millennium
. Jeffrey R. Pendergraft, Executive Vice President and Chief Administrative
Officer of Lyondell
. Kevin DeNicola, Vice President, Corporate Development of Lyondell
. George Robbins, President and Chief Executive Officer of Millennium
Specialty Chemicals
. Stephen I. Chazen, Executive Vice President of Occidental
. J. Roger Hirl, President and Chief Executive Officer of Occidental
Chemical Corporation.
48
The following table sets forth the names and ages of the executive officers
of Equistar and the executive officers and directors of Equistar Funding.
Officers of Equistar are chosen from time to time by vote of the partnership
governance committee. Directors of Equistar Funding are elected annually and
hold office until a successor is elected. Officers of Equistar Funding are
chosen from time to time by vote of its board of directors.
Name Age Partnership Position
---- --- --------------------
Dan F. Smith.............. 52 Chief Executive Officer of Equistar and Equistar
Funding; Director of Equistar Funding
Eugene R. Allspach........ 51 President and Chief Operating Officer of
Equistar and Equistar Funding; Director of
Equistar Funding
John R. Beard............. 46 Senior Vice President, Manufacturing of Equistar
Kelvin R. Collard......... 41 Vice President and Controller of Equistar and
Equistar Funding; Director of Equistar Funding
Clifton B. Currin, Jr..... 44 Vice President, Supply and Optimization of
Equistar
J. R. Fontenot............ 46 Vice President, Research and Engineering of
Equistar
Brian A. Gittings......... 52 Senior Vice President, Petrochemicals of
Equistar
Jeffrey L. Hemmer......... 40 Vice President, Information Systems and Business
Process Improvement of Equistar
Alan Houlton.............. 52 Vice President, Customer Supply Chain of
Equistar
Gerald A. O'Brien......... 46 Vice President, General Counsel and Secretary of
Equistar and Equistar Funding
Myra J. Perkinson......... 47 Vice President, Human Resources of Equistar
W. Norman Phillips, Jr.... 43 Senior Vice President, Polymers of Equistar
Mr. Smith has been Chief Executive Officer of Equistar since December 1997.
Mr. Smith has been a Director of Lyondell since 1988, President and Chief
Executive Officer since December 1996 and a member of the LYONDELL-CITGO
Refining partnership governance committee since July 1993. Mr. Smith was
President and Chief Operating Officer of Lyondell from 1994 to December 1996.
Before 1994, Mr. Smith held various senior executive positions with Lyondell
and Atlantic Richfield Company, including Executive Vice President and Chief
Financial Officer of Lyondell, Vice President, Corporate Planning of ARCO and
Senior Vice President in the areas of management, manufacturing, control and
administration for Lyondell and the Lyondell Division of ARCO.
Mr. Allspach has been President and Chief Operating Officer of Equistar
since December 1997. Mr. Allspach served as Group Vice President, Manufacturing
and Technology for Millennium Petrochemicals from 1993 to 1997. Before 1993,
Mr. Allspach held various senior executive positions with Millennium, including
Group Vice President, Manufacturing and Manufacturing Services and Vice
President, Specialty Polymers and Business Development.
Mr. Beard has been Senior Vice President, Manufacturing of Equistar since
May 1998. He was Vice President, Manufacturing of Equistar from December 1997
to May 1998. Mr. Beard previously served as Vice President, Petrochemical
Manufacturing of Lyondell from May 1995 to December 1997. Mr. Beard served as
Vice President in the areas of quality, supply, planning and evaluations of
Lyondell from 1992 to May 1995.
Mr. Collard has been a Vice President of Equistar since July 1998. Mr.
Collard has been the Controller of Equistar since December 1997. From May 1989
to December 1997, Mr. Collard held various senior manager positions with
Lyondell and ARCO, including Controller of ARCO Coal Company, manager of
accounting policy of ARCO and manager of financial reporting and internal
control of Lyondell. Before May 1989, Mr. Collard was an audit manager for
Coopers & Lybrand.
Mr. Currin has been Vice President, Supply and Optimization of Equistar
since May 1998. Mr. Currin previously served as Vice President, Corporate
Development of Lyondell from December 1997 to May 1998.
49
Before May 1998, Mr. Currin served as Vice President of Lyondell with
responsibilities in the areas of strategic development, petrochemicals business
management and olefins.
Mr. Fontenot has been Vice President, Research and Development and
Engineering of Equistar since September 1998. Mr. Fontenot previously served as
Vice President, Engineering of Lyondell from December 1997 to September 1998.
Mr. Fontenot served as Vice President, Technology of Lyondell from January 1997
to December 1997 and as Director of Technology of Lyondell from 1995 to January
1997. Before 1995, Mr. Fontenot held various positions in operations,
evaluation and technology for Lyondell.
Mr. Gittings has been Senior Vice President, Petrochemicals of Equistar
since August 1998 and was Vice President, Oxygenated Chemicals of Equistar from
May 1998 to August 1998. Before that, he was Vice President and General
Manager, Isocyanurates for Occidental Chemicals, where he had previously served
as Vice President and General Manager, Ethylene Oxide and Derivatives.
Mr. Hemmer has been Vice President, Information Systems and Business Process
Development of Equistar since August 1998. He was Director of Business Process
Improvement of Equistar from December 1997 to August 1998. Mr. Hemmer also had
been Director, Engineering and Licensing for Millennium Petrochemicals from
October 1996 to December 1997. Before October 1996, he was manager of
polyethylene process and engineering technology for Exxon Chemical.
Mr. Houlton has been Vice President, Customer Supply Chain of Equistar since
December 1997. He previously served as Vice President, Manufacturing for
Millennium Petrochemicals, with responsibility for Millennium Petrochemicals'
11 manufacturing and compounding operations, beginning in October 1993.
Mr. O'Brien has been Vice President, General Counsel and Secretary of
Equistar since December 1997. Mr. O'Brien previously served as associate
general counsel of Lyondell, where his responsibilities included joint
responsibility for the management of the legal department and responsibility
for a variety of legal department functions, including mergers and
acquisitions, general corporate, finance and securities.
Ms. Perkinson has been Vice President, Human Resources of Equistar since
December 1997. Ms. Perkinson served as Vice President, Human
Resources/Communications of Millennium Petrochemicals beginning in November
1991, in which position she was responsible for all human resources, employee
labor relations functions and the administration of all of Millennium
Petrochemicals' compensation, benefits and communications programs.
Mr. Phillips has been Senior Vice President, Polymers of Equistar since
August 1998. He was previously Vice President, Petrochemicals of Equistar from
December 1997 to August 1998. Mr. Phillips previously served as Vice President,
Polymers of Lyondell from January 1997 to December 1997. Mr. Phillips
previously served as Vice President of Lyondell with responsibilities in the
areas of marketing and operations from 1993 to January 1997.
50
Compensation
Summary Compensation Table
The table below provides information regarding the compensation awarded to
or earned by Equistar's Chief Executive Officer and the next four most highly
compensated executive officers, each of whom earned $100,000 or more in
combined salary and bonus during the fiscal year ended December 31, 1998.
Other Annual All Other
Name and Principal Salary Bonus Compensation Compensation
Position ($) ($) ($)(a) ($)(b)
------------------ -------- -------- ------------ ------------
Dan F. Smith(c)......... (c) (c) (c) (c)
Chief Executive Officer
Eugene R. Allspach...... $335,531 $321,600 $11,344 $48,641
President & Chief
Operating Officer
W. Norman Phillips,
Jr..................... $256,188 $185,640 $ 9,845 $39,039
Senior Vice President
John R. Beard........... $237,128 $161,800 $ 5,491 $31,347
Senior Vice President
J. R. Fontenot.......... $213,496 $111,200 $ 8,988 $40,251
Vice President
- --------
(a) Includes imputed income in respect of the Long-Term Disability Plan and tax
gross-ups in respect of financial counseling reimbursements. Actual
reimbursement for financial counseling in 1998 is included in the "All
Other Compensation" column above. "Tax gross-ups" refers to the additional
reimbursement paid to a recipient to cover the federal income tax
obligations associated with the underlying benefit, including an additional
amount based on maximum applicable income tax rates.
(b) Includes contributions to the Executive Supplementary Savings Plan,
incremental executive medical plan premiums, financial counseling
reimbursements and certain amounts in respect of the Executive Life
Insurance Plan, as follows:
Mr. Mr. Mr. Mr.
Allspach Phillips Beard Fontenot
-------- -------- ------- --------
Executive Supplementary Savings Plan....... $27,103 $20,495 $18,970 $17,080
Incremental Medical Plan Premiums.......... $ 8,441 $ 8,441 $ 8,441 $ 8,441
Financial Counseling Reimbursement......... $11,742 $ 7,107 $ 0 $12,525
Executive Life Insurance Plan.............. $ 1,355 $ 2,996 $ 3,936 $ 2,205
(c) Mr. Smith serves as the Chief Executive Officer of both Lyondell and
Equistar. Mr. Smith does not receive any compensation from Equistar.
Equistar pays a fee to Lyondell in recognition of Mr. Smith's services. See
"Related Transactions--Agreement Regarding Services of Chief Executive
Officer."
Long-Term Incentive Plan
In 1998 Equistar adopted a performance-driven, long-term incentive plan, or
LTIP, for selected key employees. Awards are based on whether Equistar reaches
its performance and financial goals in two critical areas: economic value added
and the achievement of synergies. Economic value added measures Equistar's cash
flow performance in excess of a capital charge, which is calculated by
multiplying the capital invested in Equistar by Equistar's weighted average
cost of capital. Synergies include both one-time and ongoing potential savings
from operating the Lyondell, Millennium and Occidental contributed businesses
together. Synergy targets include
. aligning and optimizing processing units for improved on-stream time and
increased throughput capability
. maximizing the value of feedstock and olefins co-products
51
. lowering distribution costs
. reducing feedstocks and other procurement costs
. reducing the amount of staffing services required by each contributed
business
The partnership governance committee approves all awards based on its
assessment of Equistar's operating performance in the preceding year in the
areas of synergy attainment and economic value added.
Equistar assigns each LTIP participant a target award percentage for the
year based on that participant's salary, position and any other factors
Equistar deems appropriate. Each LTIP participant's award for the year is
determined by multiplying his/her target award percentage by an award multiple
determined by the partnership governance committee, the product of which is
multiplied by his/her base pay. The award multiple for 1998 was based on the
achievement of a four-year rolling average economic value added of $160 million
and the achievement of net synergies of $50 million.
Awards will be paid only to LTIP participants who are actually employed at
year-end. Those LTIP participants whose employment terminates due to death,
disability or retirement before the end of the year will be paid a pro rata
portion of their award based on the number of full months completed while
actively employed. LTIP participants hired after the first of the year are
eligible to receive a pro rata award based on the number of full months
completed during the year.
Awards consist of a combination of annual or current cash and deferred cash
compensation. The relative percentages of current cash and deferred cash
components are based on the LTIP participant's salary range. The percentage of
deferred cash compensation as compared with current cash compensation increases
as the LTIP participant's salary increases. The current portion of the award is
disclosed under the "Expected Bonus" column of the Summary Compensation Table
above. The deferred cash portion of the award is paid out over three
consecutive years, one-third each year, beginning approximately one year from
the payment of the related annual cash component. The payout amounts for the
deferred compensation component may be adjusted upward, with no cap, or
downward, capped at 20%, based on Equistar's ongoing results with respect to
synergies over that three-year period. Awards are adjusted one percentage point
for every percentage point of synergy gained or lost during the award period.
The following table details the amount of the deferred compensation
component of the 1998 award to the four most highly paid executive officers as
well as their estimated future payouts resulting from such award under the
LTIP.
Long-Term Incentive Plan--Awards In Last Fiscal Year
Performance
or Other Estimated Future Payouts under
Number of Period Non-Stock Price-Based Plans
Shares, Units Until ------------------------------
or Other Maturation Threshold Target(b) Maximum(c)
Name Rights ($)(a) or Payout ($) ($) ($)
---- ------------- ----------- --------- --------- ----------
Dan F. Smith............ (d) (d) (d) (d) (d)
Eugene R. Allspach...... $462,384 (e) $369,907 $462,384 --
W. Norman Phillips,
Jr..................... $265,221 (e) $212,177 $189,810 --
John R. Beard........... $245,419 (e) $196,335 $245,419 --
J. R. Fontenot.......... $189,810 (e) $151,848 $189,810 --
- --------
(a) Award is denominated in dollars. Amounts represent deferred compensation
component of 1998 award. Current portion is disclosed under the "Bonus"
column of the Summary Compensation Table above.
(b) Assumes current 1999 target of achievement of synergies of $200 million.
The partnership governance committee may revise targets for 1999 upward or
downward.
(c) Award is not capped.
(d) Mr. Smith does not receive any compensation from Equistar. Equistar pays a
fee to Lyondell in recognition of Mr. Smith's services. See "Related
Transactions--Agreement Regarding Services of Chief Executive Officer."
(e) Long-term compensation awards with respect to 1998 will be paid in annual
increments of one-third beginning in March 2000.
52
Annual Pension Benefits
Pension Plan
In 1998, Equistar adopted a pension plan available to all full-time or
regular part-time Equistar employees and those employees on an approved long-
term disability leave of absence. The pension plan is fully funded by Equistar.
Employees are not required, nor are they allowed, to contribute to the pension
plan. Participation began for former Lyondell, Millennium and Occidental
employees on their first day of service with Equistar. All other employees are
eligible on the first day following 12 months of service with Equistar or any
predecessor company. Participation in the pension plan ends on the earliest of
the day the employee
. quits, retires, is discharged or dies
. is absent from work more than 12 consecutive months
. is no longer eligible for benefits
Benefits are not reduced for social security or other amounts.
Annual retirement benefit under the pension plan is calculated by
multiplying
. the pension plan participant's years of service to Equistar after January
1, 1998, by
. Final Average Earnings as defined below, by
. the Benefit Percentage as shown below
"Final Average Earnings" is the pension plan participant's highest average
monthly base pay received for any 36 consecutive months during the last 120
months of continuous service with Equistar or Lyondell, Millennium or
Occidental. For pension plan participants with less than 36 months of
continuous service with Equistar or Lyondell, Millennium or Occidental, Final
Average Earnings is the average of all monthly base pay, including salary
earned with Equistar, Lyondell, Millennium or Occidental.
The Benefit Percentage applicable to each pension plan participant is based
on the participant's age when he begins to receive benefits, as shown in the
following table:
Benefit
Beginning Benefits Age Percentage
---------------------- ----------
Under 35....................................................... 3%
35-39.......................................................... 4%
40-44.......................................................... 5%
45-49.......................................................... 6%
50-54.......................................................... 9%
55-59.......................................................... 13%
60 and over.................................................... 15%
The estimated annual benefit payable upon retirement at age 65, normal
retirement age under the pension plan, for the four most highly compensated
officers is as follows:
Estimated
Annual
Benefit
Name at Age 65
---- ---------
Eugene R. Allspach.............................................. $31,182
W. Norman Phillips, Jr.......................................... $49,079
John R. Beard................................................... $42,621
J. R. Fontenot.................................................. $43,360
53
Supplemental Executive Retirement Plan
Equistar offers a Supplemental Executive Retirement Plan ("SERP") to senior
managers and executive officers who receive a retirement benefit under the
pension plan and have had the amount of that benefit reduced due to required
limitations under the Internal Revenue Code of 1986, as amended, or under the
Employee Retirement Income Security Act, as amended ("ERISA"). Calculation of
benefits under the SERP is based on all of the following:
. base wage
. salary deferrals
. annual incentive awards
Equistar bears all costs of the SERP, including administration of the SERP.
SERP participants are not allowed to contribute to the SERP. The SERP provides
for two types of supplementary benefits: deferral/incentive supplements and
qualification limitation supplements.
Deferral/Incentive Supplements. Participants are eligible for a
deferral/incentive supplement under the SERP if their Excess Retirement
Benefit, as defined below, is a positive amount. The monthly amount of
supplemental benefits is calculated by multiplying the SERP participant's
Excess Retirement Benefit by a fraction based on his/her years of service. For
purposes of this paragraph, Excess Retirement Benefit is
. the amount the SERP participant would have received at retirement as a
basic allowance from the pension plan if it included the SERP
participant's awards and deferred compensation, minus
. the amount of monthly retirement allowance the SERP participant is
actually entitled to receive at retirement under the pension plan
The total annual benefit payable to each SERP participant, including payment
under the pension plan, shall not exceed 65% of the greater of
. the SERP participant's final base pay, exclusive of deferrals, and most
recent annual incentive pay, or
. the highest average base pay plus annual incentive pay during a 36-month
consecutive period out of 120 months of service with Equistar or
Lyondell, Millennium or Occidental
Qualification Limitation Supplements. SERP participants are eligible for a
qualification limitation supplement if their Excess Retirement Benefit, as
defined below, is a positive amount. The monthly amount of qualification
limitation supplement benefit is calculated by multiplying the SERP
participant's Excess Retirement Benefit by a fraction based on the SERP
participant's years of service. For purposes of this paragraph, Excess
Retirement Benefit is
. the amount of monthly allowance the SERP participant would have received
as a base allowance under the pension plan had the amount not been
limited or reduced due to requirements under the Internal Revenue Code of
1986, as amended, or ERISA, minus
. the amount of monthly allowance the SERP participant is actually entitled
to receive at retirement
SERP participants may elect to receive their SERP benefit in any form
available for payment of their normal retirement benefit, provided that the
same form of payment is elected for all supplementary benefits. If the SERP
participant elects a form of annuity for these supplementary benefits, the SERP
participant must elect the same form of annuity under the pension plan.
Benefits are not reduced for social security or other amounts.
54
The estimated annual benefit payable upon retirement at age 65, normal
retirement age under the SERP, for each of the four most highly compensated
officers is as follows:
Estimated
Annual
Benefit
Name at Age 65
---- ---------
Eugene R. Allspach.............................................. $94,958
W. Norman Phillips, Jr.......................................... $84,449
John R. Beard................................................... $64,695
J. R. Fontenot.................................................. $51,105
Executive Severance Arrangements
In connection with the formation of Equistar and to ensure the continued
dedication of executive officers, Equistar assumed obligations under severance
agreements executed by Lyondell and Millennium with their executives who agreed
to join Equistar.
The severance agreement between Equistar and Eugene Allspach, which was
assumed by Equistar from Millennium, provides for Mr. Allspach's receipt of
payments and benefits described below in the event of his termination before
January 1, 2001. Benefits under Mr. Allspach's severance agreement apply if he
is terminated
. by Equistar without cause
. as a result of a Constructive Termination for Good Reason
Notice of Constructive Termination for Good Reason, as defined in Mr.
Allspach's severance agreement, can be given by Mr. Allspach if Equistar does
any of the following:
. assigns him to any duties or responsibilities not comparable to his
duties or responsibilities when he joined Equistar or reduces his
responsibilities or position
. relocates Equistar's principal executive offices outside a 25-mile radius
of its current location or requests Mr. Allspach's transfer, in writing,
to a new location
. reduces Mr. Allspach's annual base salary or comparable benefits to a
level below the annual base salary or benefits he received when joining
Equistar
. fails to continue any bonus plan, program or arrangement in which Mr.
Allspach participates or changes Mr. Allspach's status under any bonus
plan, program or arrangement
. fails to comply with any material provision of Mr. Allspach's severance
agreement
In the event Mr. Allspach is entitled to receive benefits under his
severance agreement, Equistar agrees to provide the following rights and
benefits:
. a lump-sum payment in cash equal to three times his annual earnings plus
any unreimbursed business expenses and any base salary, bonus, vacation
pay or other deferred compensation accrued or earned under law or
according to Equistar's policies
. additional pension benefits by crediting Mr. Allspach with three
additional years of age and service
. an amount equal to three years of the maximum employer contribution to a
qualified or nonqualified 401(k) plan, assuming the executive deferred
the maximum amount and continued to earn his then current salary
. continuation of insurance and other benefits for 36 months following
termination
. financial counseling for a period of one year
. out-placement services and assistance, not to exceed $40,000
55
. any other amounts or benefits due under then applicable employee benefit
incentive or equity plans of Equistar applicable to him
Mr. Allspach would also receive an additional payment equal to the amount of
excise tax imposed under the Internal Revenue Code of 1986, as amended, plus
any federal, state or local taxes incurred as a result of the payment. As a
result, he would be in the same position after payment of the excise tax as he
would have been if he were not subject to the excise tax at all.
The severance agreements between Equistar and each of Messrs. Phillips,
Beard and Fontenot were assumed by Equistar from Lyondell. These severance
agreements provide for Messrs. Phillips, Beard and Fontenot's receipt of
payments and benefits described below in the event of their termination before
January 1, 2000. Benefits under their severance agreements apply if any one of
Messrs. Phillips, Beard or Fontenot is terminated
. by Equistar without cause
. as a result of Constructive Termination for Good Reason
Notice of Constructive Termination for Good Reason can be given by Messrs.
Phillips, Beard or Fontenot if Equistar does any of the following:
. assigns him to any duties or responsibilities not comparable to his
duties or responsibilities when he joined Equistar or reduces his
responsibilities or position
. reduces the level of benefits or compensation provided to him below the
comparable level of benefits or compensation payable to similarly
situated executives at Equistar
. relocates his principal office outside a 50-mile radius of its current
location over his written complaint
In the event Messrs. Phillips, Beard or Fontenot is entitled to receive
benefits under his severance agreement, Equistar agrees to provide the
following rights and benefits:
. all nonvested stock options provided under Lyondell's long-term incentive
plan becomes 100% vested and fully exercisable, notwithstanding any
agreement to the contrary
. a lump-sum payment in cash equal to three times his annual earnings,
provided that if he is within 24 months of normal retirement, the payment
he is entitled to receive shall be multiplied by the number of months
remaining and divided by 24
. additional pension benefits by crediting him with five additional years
of age and service
. the full amount of contributions and earnings accrued or credited his
account balance under Lyondell's Executive Deferral Plan
. continuation of insurance and other benefits for 24 months following
termination
. financial counseling for a period of one year
. out-placement services and assistance, not to exceed $40,000
. any other amounts or benefits due under employee benefit incentive or
equity plans of Equistar to which he is are entitled
Compensation of Partnership Governance Committee Members
Members of the partnership governance committee do not receive any
compensation from Equistar for their service.
Indemnification Arrangements
The partnership governance committee has provided for the indemnification of
Equistar's executive officers. Executives are entitled to indemnification with
respect to all matters to which Section 145 of the
56
General Corporation Law of the State of Delaware may relate, as if Section 145
were applicable to a partnership. The right to indemnification and payment of
expenses incurred in defending a proceeding in advance of its final disposition
is not exclusive of any other right which the executive may have or hereafter
acquire under any statute, agreement or otherwise, both as to action in that
executive's official capacity and as to action in any other capacity by holding
this office. The indemnification right continues after the executive ceases to
serve as an Equistar officer or to serve another entity at the request of
Equistar. Equistar may elect to enter into indemnification agreements with each
of its executive officers and with any other persons as the partnership
governance committee may designate. In addition, Equistar may elect to maintain
liability insurance to protect itself and any executive officer of Equistar or
another partnership, corporation, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not Equistar would have the
power to indemnify this person against expense, liability or loss under the
laws of the State of Delaware.
Ownership
Equistar
Equistar is a limited partnership wholly owned by Lyondell Petrochemical
L.P. Inc. ("Lyondell LP"), Millennium Petrochemicals LP LLC ("Millennium LP"),
Occidental Petrochem Partner 1, Inc. ("Occidental LP1") and Occidental
Petrochem Partner 2, Inc. ("Occidental LP2"), as the limited partners, and
Lyondell Petrochemical G.P. Inc. ("Lyondell GP"), Millennium Petrochemicals GP
LLC ("Millennium GP") and Occidental Petrochem Partner GP, Inc. ("Occidental
GP"), as the general partners. The following information is given with respect
to the partners' interests in Equistar as of the date of this prospectus.
Nature of Percentage
Beneficial Partnership
Name and Address of Beneficial Owner Ownership Interest
------------------------------------ --------------- -----------
Lyondell LP................................... Limited Partner 40.180%
300 Delaware Ave.
Wilmington, DE 19801
Millennium LP................................. Limited Partner 28.910%
230 Half Mile Road
Red Banks, NJ 00770
Occidental LP1................................ Limited Partner 6.623%
10889 Wilshire Blvd.
Los Angeles, CA 90004
Occidental LP2................................ Limited Partner 22.876%
10889 Wilshire Blvd.
Los Angeles, CA 90004
Lyondell GP................................... General Partner 0.820%
1221 McKinney Street
Houston, TX 77010
Millennium GP................................. General Partner 0.590%
230 Half Mile Road
Red Banks, NJ 00770
Occidental GP................................. General Partner 0.001%
10889 Wilshire Blvd.
Los Angeles, CA 90004
Lyondell owns 100% of the outstanding capital stock of each of Lyondell LP
and Lyondell GP. Lyondell has pledged its interests in each Equistar partner
under its bank credit facility. Millennium owns 100% of the outstanding capital
stock of each of Millennium LP and Millennium GP. Occidental owns 100% of the
outstanding capital stock of each of Occidental LP1, Occidental LP2 and
Occidental GP.
Equistar Funding
All of the outstanding capital stock of Equistar Funding is owned by
Equistar.
57
Description of the Partnership Agreement
The partnership agreement of Equistar governs, among other things,
ownership, cash distributions, capital contributions and management of
Equistar. The following is a summary of the material provisions of the
partnership agreement. This summary is qualified in its entirety by reference
to the full and complete text of the partnership agreement, which is available
upon written request as provided under "Available Information."
General
Lyondell GP, Lyondell LP, Millennium GP and Millennium LP entered into the
partnership agreement as of October 10, 1997. PDG Chemical Inc., Occidental LP1
and Occidental LP2 became parties to the partnership agreement as of May 15,
1998. PDG Chemical Inc. withdrew from Equistar as of June 30, 1998, and
Occidental GP became a general partner on the same date. Equistar will continue
in existence until its dissolution as provided in the partnership agreement.
The three general partners of Equistar are Lyondell GP, Millennium GP and
Occidental GP. Lyondell GP is a direct, wholly owned subsidiary of Lyondell.
Millennium GP is an indirect, wholly owned subsidiary of Millennium. Occidental
GP is an indirect, wholly owned subsidiary of Occidental.
Governance
A partnership governance committee manages and controls the business,
property and affairs of Equistar, including the determination and
implementation of Equistar's strategic direction. The general partners exercise
their authority to manage and control Equistar only through the partnership
governance committee. The partnership governance committee consists of nine
members, called representatives, three of whom are representatives of Lyondell
GP, three of whom are representatives of Millennium GP and three of whom are
representatives of Occidental GP.
In general, the approval of two or more representatives acting for Lyondell
GP will be necessary and sufficient for the partnership governance committee to
take any action. This means, in effect, that Lyondell's representatives have
the ability to control the partnership governance committee and, as a result,
Equistar, except where the approval of Millennium's and Occidental's
representatives is required. See "--Unanimous Voting Requirements." Even though
ordinary actions by the partnership governance committee may be approved by two
representatives of Lyondell GP, the partnership governance committee may not
take any action at a meeting with respect to any matter that was not reflected
on an agenda that was properly delivered to all of the representatives in
advance, unless at least one of each of Millennium GP's and Occidental GP's
representatives is present. The participation rights of any general partner's
representatives may be curtailed to the extent that the general partner or its
affiliates cause a default under the partnership agreement.
Unanimous Voting Requirements
Unless approved by two or more representatives of each of Lyondell GP,
Millennium GP and Occidental GP, the partnership governance committee may not
directly or indirectly take, or commit to take, the actions described below.
Equistar, any subsidiary of Equistar or any person acting in the name of or on
behalf of any of them, directly or indirectly, may not take or commit to take,
whether in a single transaction or a series of related transactions
. to cause Equistar, directly or indirectly, to engage, participate or
invest in any business outside the scope of its business as described in
the partnership agreement
. to approve any strategic plan, as well as any amendments or updates to
the strategic plan, including the annual update described under "--
Strategic Plans and Annual Budgets; Deadlock Provisions" below
. to authorize any disposition of assets having a fair market value
exceeding $30 million in any one transaction or a series of related
transactions not contemplated in an approved strategic plan
58
. to authorize any acquisition of assets or any capital expenditure
exceeding $30 million that is not contemplated in an approved strategic
plan
. to require capital contributions to Equistar within any fiscal year if
the total of contributions required from the partners within that year
would exceed $100 million or the total of contributions required from the
partners within that year and the immediately preceding four years would
exceed $300 million. This does not apply to
--contributions contemplated by the asset contribution agreements
--the Lyondell, Millennium and Occidental contributed businesses
--an approved strategic plan
--requirements made to achieve or maintain compliance with certain laws
. to authorize the incurrence of debt for borrowed money, unless
--the debt is to refinance all or a portion of Equistar's credit
facilities as contemplated below
--after giving effect to the incurrence of the debt, and any related
transactions, Equistar would be expected to have an "investment grade"
debt rating by Moody's and S&P, or
--the debt is incurred to refinance the public or bank debt assumed or
incurred by Equistar as contemplated by documents relating to the
formation of Equistar and the contribution of the Occidental
contributed business or to refinance any such refinancing debt
and in the case of each of the three exceptions above, the agreement
relating to the debt does not provide that the transfer by a partner of
its partnership interests, or a change of control with respect to any
partner or any of its affiliates, would
--constitute a default under the debt instruments
--otherwise accelerate the maturity of the debt
--give the lender or holder any "put rights" or similar rights with
respect to the debt instrument
. to authorize a refinancing that would not satisfy provisions relating to
the Millennium guaranteed debt and the Occidental guaranteed debt
. to make borrowings under one or more of Equistar's bank credit
facilities, uncommitted lines of credit or any credit facility, or debt
instruments that refinances all or any portion of Equistar's credit
facility or facilities, at any time, if as a result of any borrowing, the
aggregate principal amount of all borrowings outstanding at the time
would exceed the sum of $1.75 billion
. to enter into interest rate protection or other hedging agreements, other
than hydrocarbon hedging agreements in the ordinary course of business
. to enter into any capitalized lease or off-balance sheet financing
arrangements involving payments, individually or in the aggregate, by it
in excess of $30 million in any fiscal year
. to cause Equistar or any subsidiary of Equistar to issue, sell, redeem or
acquire any partnership interests in Equistar or other equity securities,
or any rights to acquire, or any securities convertible into or
exchangeable for, partnership interests or other equity securities
59
. to make cash distributions from Equistar in excess of Available Net
Operating Cash, as defined below, or make noncash distributions, except
as provided in the partnership agreement in respect of a dissolution or
liquidation
. to appoint or discharge executive officers based on the recommendation of
the Chief Executive Officer
. to approve material compensation and benefit plans and policies, material
employee policies and material collective bargaining agreements for
Equistar's employees
. to initiate or settle any litigation or governmental proceedings if the
effect would be material to the financial condition of Equistar
. to change the independent accountants for Equistar
. to change Equistar's method of accounting as adopted in the partnership
agreement or to make certain tax elections referred to in the partnership
agreement
. to create or change the authority of any auxiliary committee
. to merge, consolidate or convert Equistar or any of its subsidiaries with
or into any other entity, other than a wholly owned subsidiary of
Equistar
. to engage in bankruptcy and reorganization actions such as
--filing a petition in bankruptcy or seeking any reorganization,
liquidation or similar relief on behalf of Equistar or any subsidiary
--consenting to the filing of a petition in bankruptcy against Equistar
or any subsidiary
--consenting to the appointment of a receiver, custodian, liquidator or
trustee for Equistar or any subsidiary or for all or any substantial
portion of its property
. to exercise any of the powers or rights described below with respect to a
business conflict involving
--LYONDELL-CITGO Refining, its successors or assigns
--Lyondell Methanol, its successors or assigns
--any other affiliate of either Lyondell GP, Millennium GP or
Occidental GP, if the affiliate's actions with respect to the conflict
circumstance are not controlled by Lyondell, Millennium or Occidental,
other than a business conflict involving the exercise of any rights
and remedies with respect to a default under any agreement that is the
subject of the conflict
. to repay any of the indebtedness that is guaranteed by the Millennium
America Guarantee before December 1, 2004, or refinance any Millennium
guaranteed debt before December 1, 2004, if any of the principal amount
of debt refinancing the guaranteed debt would be due and payable after
December 1, 2004; provided, however, that if the Millennium guaranteed
debt continues to be guaranteed by Millennium America or its successors
after December 1, 2004, then the term of the debt shall not exceed 365
days
. to repay any of the indebtedness that is guaranteed by the Occidental
guarantee before June 14, 2005, other than through refinancing, or
refinance any Occidental guaranteed debt before June 14, 2005, if any of
the principal of the debt refinancing the Occidental guaranteed debt
would be due and payable after June 14, 2005; provided, however, that if
the Occidental guaranteed debt continues to be guaranteed by an affiliate
of Occidental or its successors after June 14, 2005, then the term of the
debt shall not exceed 365 days
Although unanimous approval by all nine members of the partnership
governance committee is never required, the requirements described above are
referred to as "unanimous voting requirements" because two representatives of
each of the general partners must agree on any action taken in respect of the
enumerated matters.
60
Transactions with Affiliates
Except as described above under "Unanimous Voting Requirements," if a
business conflict caused by any transaction or dealing between Equistar, or any
of its subsidiaries, and one or more of Equistar's general partners, or any of
their affiliates occurs, the other general partners will have sole and
exclusive power, at the expense of Equistar,
. to control all decisions, elections, notifications, actions, exercises or
nonexercises and waivers of all rights, privileges and remedies provided
to, or possessed by, Equistar with respect to the conflict, and
. if any potential, threatened or asserted claim, dispute or action about a
conflict occurs, to retain and direct legal counsel and to control,
assert, enforce, defend, litigate, mediate, arbitrate, settle, compromise
or waive any and all claims, disputes and actions
Accordingly, any action by the partnership governance committee with respect to
a conflict, except as described above, will require the approval of at least
two representatives of the uninvolved general partners.
Officers
The executive officers of Equistar consist of a Chief Executive Officer, a
President and Chief Operating Officer and others as determined from time to
time by the partnership governance committee. See "Management." Except for the
Chief Executive Officer, the approval of at least two representatives of each
of Lyondell GP, Millennium GP and Occidental GP is required to appoint or
discharge executive officers, based upon the recommendation of the Chief
Executive Officer. However, any of Lyondell GP, Millennium GP or Occidental GP
may, by action of two or more of its representatives, remove from office any
executive officer of Equistar, including the Chief Executive Officer, who
takes, or causes Equistar to take, any action described above under "--
Unanimous Voting Requirements" without the required approval of two or more
representatives of each of Lyondell GP, Millennium GP and Occidental GP.
The Chief Executive Officer holds office for a five-year term, assuming he
does not resign or die and is not removed. Upon the expiration of his term or
earlier vacancy, Lyondell GP will designate the Chief Executive Officer,
provided that this person shall be reasonably acceptable to Millennium GP and
Occidental GP. The Chief Executive Officer will not be required to be an
employee of Equistar. The Chief Executive Officer may be removed at any time by
action of the partnership governance committee, meaning that the approval of
two representatives of Lyondell GP is required to effect a removal.
The Chief Executive Officer of Equistar has general authority and
discretion, comparable to that of a chief executive officer of a publicly held
Delaware corporation of similar size, to direct and control the business and
affairs of Equistar, including, without limitation, its day-to-day operations
in a manner consistent with the annual budget and the most recently approved
strategic plan. The Chief Executive Officer takes steps to implement all orders
and resolutions of the partnership governance committee. The Chief Executive
Officer also establishes salaries or other compensation for the other executive
officers of Equistar consistent with plans approved by the partnership
governance committee.
Strategic Plans and Annual Budgets
Equistar is managed under a five-year strategic plan which is updated
annually under the direction of the Chief Executive Officer and presented for
approval by the partnership governance committee no later than 90 days before
the start of the first fiscal year covered by the updated plan. The strategic
plan must be approved each year by at least two representatives of each of
Lyondell GP, Millennium GP and Occidental GP. The strategic plan establishes
the strategic direction of Equistar, including
. plans relating to capital maintenance and enhancement
. geographic expansion, acquisitions and dispositions
61
. new product lines
. technology
. long-term supply and customer arrangements
. internal and external financing
. environmental and legal compliance
. plans, programs and policies relating to compensation and industrial
relations
In addition, the executive officers of Equistar prepare an annual budget for
each fiscal year. Each annual budget includes an operating budget and capital
expenditure budget. Each annual budget must be consistent with the information
for its fiscal year included in the most recently approved strategic plan.
Unless otherwise provided in the most recently approved strategic plan, each
annual budget utilizes a format and provides a level of detail consistent with
Equistar's previous annual budget.
If for any fiscal year the partnership governance committee fails to approve
an updated strategic plan, for that year and each subsequent year before the
approval of an updated strategic plan, the executive officers of Equistar will
prepare an annual budget consistent with the projections and other information
for that year included in the strategic plan most recently approved. The Chief
Executive Officer, acting in good faith, shall be entitled to modify any annual
budget
. to satisfy current contractual and compliance obligations
. to account for other changes in circumstances resulting from the passage
of time or the occurrence of events beyond Equistar's control
The Chief Executive Officer is not authorized to cause Equistar to proceed with
capital expenditures to accomplish capital enhancement projects except to the
extent that the expenditures would enable Equistar to continue or complete any
capital project reflected in the last strategic plan that was approved by the
partnership governance committee.
Deadlock Provisions
After a strategic plan and an annual budget have been approved by the
partnership governance committee, or an annual budget has been developed as
described above in cases where an updated strategic plan has not yet been
approved, the Chief Executive Officer is authorized, without further action by
the partnership governance committee, to cause Equistar to make expenditures
consistent with the updated strategic plan and annual budget, provided that all
internal control policies and procedures, including those regarding the
required authority for certain expenditures, shall have been followed.
If the partnership governance committee has not agreed upon and approved an
updated strategic plan by 12 months after the beginning of the first fiscal
year that would have been covered by the plan, then Lyondell GP, Millennium GP
and Occidental GP are required to submit to a nonbinding dispute resolution
process. The partners are required to continue the dispute resolution process
until
. agreement is reached by the general partners, acting through their
representatives on an updated strategic plan, or
. at least 24 months have elapsed since the beginning of the first fiscal
year that was to be covered by the first updated strategic plan for which
agreement was not reached
Once 24 months have elapsed, one general partner will determine and notify
the other general partners in writing that no agreement resolving the dispute
is likely to be reached. Following receipt of notice, any general partner may
elect to dissolve Equistar.
62
Distribution of Available Net Operating Cash
Equistar shall distribute to the partners, as soon as practicable following
the end of each month, all Available Net Operating Cash, as defined below. On a
cumulative basis
. distributions are to be made to the extent of cumulative profits to the
partners in the ratio of the percentage interest owned by each partner
. the remaining distributions are to be made to Equistar's limited partners
in the ratio of their percentage interest
See "Ownership."
"Available Net Operating Cash" is defined in Equistar's partnership
agreement, at the relevant time of determination, as
. all cash and cash equivalents on hand at Equistar as of the most recent
month's end, plus the excess, if any, of Equistar's targeted level of
indebtedness over Equistar's actual indebtedness as of that month's end,
less
. the Projected Cash Requirements, if any, of Equistar as of that month's
end, as determined by Equistar's executive officers
Equistar's targeted level of indebtedness is shown in the most recently
updated strategic plan. Equistar's actual indebtedness is determined according
to generally accepted accounting principles and represents all short term and
long term debt.
"Projected Cash Requirements" means, for the 12-month period following any
month's end, the excess, if any, of the sum of
. forecast capital expenditures, plus
. forecast cash payments for taxes, debt service, including principal and
interest payment requirements and other noncash credits to income, plus
. forecast cash reserves for future operations or other requirements over
the sum of
. forecast net income of Equistar, plus
. the sum of forecast depreciation, amortization, other noncash charges to
income, interest expense and tax expenses, in each case to the extent
deducted in determining net income, plus
. forecast decreases in working capital or minus forecast increases in
working capital, plus
. the forecast cash proceeds of disposition of assets, net of expenses,
plus
. an amount equal to the forecast net proceeds of debt financings and
capital contributions
Projected Cash Requirements for Equistar shall be calculated consistently
with the most recently updated strategic plan, except to the extent Equistar's
executive officers determine that changes in Equistar's financial condition,
results of operations, assets, business or prospects make a change advisable,
in which case Equistar shall promptly advise the general partners regarding the
basis for the change.
Distributions to the partners of cash or property arising from a liquidation
of Equistar will be made according to the capital account balances of the
partners.
Any amount otherwise distributable to a partner as described above will be
applied by Equistar to satisfy any of the following obligations that are owed
by a partner or its affiliate to Equistar and that are not paid when due,
unless otherwise agreed by the general partners not involved with a business
conflict as described under "--Transactions with Affiliates" above
. for a partner's failure to pay any interest or principal when due on any
indebtedness for borrowed money of the partner or its affiliate to
Equistar
63
. for a partner's failure or the failure of its affiliate to make any
indemnification payment required by its asset contribution agreement that
has been finally determined to be due
. for a partner's failure to make any capital contribution required by the
partnership agreement, other than as required by its asset contribution
agreement
Indemnification
Equistar has agreed, to the fullest extent permitted by applicable law, to
indemnify, defend and hold harmless each partner, its affiliates and its
respective officers, directors and employees. This indemnification is from,
against and in respect of any liability which that person may sustain, incur or
assume as a result of, or relative to, any third-party claim arising out of or
in connection with the business, property or affairs of Equistar. This
indemnification does not apply to the extent that it is finally determined that
the third-party claim arose out of or was related to actions or omissions of
the indemnified partner, its affiliates or any of their respective officers,
directors or employees acting in those capacities constituting a breach of
Equistar's partnership agreement or any related agreement. This indemnification
obligation is not intended to, nor will it, affect or take precedence over the
indemnity provisions contained in any related agreement.
Transfers and Pledges
Without the consent of the partnership governance committee, no partner may
transfer less than all of its interest in Equistar. If an Equistar limited
partner and its affiliated general partner desire to transfer, via a cash sale,
all of their units, they must give written notice to Equistar and the other
partners stating
. their desire to transfer their partnership interests
. the cash purchase price
. all other terms on which they are willing to sell
Delivery of this initial notice will constitute the irrevocable offer by the
selling partners to sell their partnership interest. The nonselling partners
shall have the option, exercisable by delivering written acceptance notice of
the exercise to the selling partners within 45 days after receiving notice of
the sale, to elect to purchase all of the partnership interests of the selling
partners on the terms described in the initial notice. If all of the other
nonselling partners deliver notice of acceptance, then all of the partnership
interests shall be transferred in proportion to the partners' current
percentage interest unless otherwise agreed. If less than all of the nonselling
partners deliver notice of acceptance, the partner who delivers notice of
acceptance will have the option of purchasing all of the partnership interests
up for sale. The notice of acceptance will set a date for closing the purchase
which is not less than 30 nor more than 90 days after delivery of the notice of
acceptance, subject to extension. The purchase price for the selling partners'
partnership interests will be paid in cash. The cash shall be delivered at the
closing.
If the nonselling partners do not elect to purchase the selling partners'
partnership interests within 45 days after the receipt of initial notice of
sale, the selling partners will have a further 180 days during which they may
consummate the sale of their units to a third-party purchaser. The sale to a
third-party purchaser must be at a purchase price and on other terms that are
no more favorable to the purchaser than the terms offered to the Equistar
partners. If the sale is not completed within the 180-day period, the initial
notice will be deemed to have expired, and a new notice and offer shall be
required before the selling partners may make any transfer of their partnership
interests.
Before the selling partners may consummate a transfer of their partnership
interests to a third party under the partnership agreement, the selling
partners will demonstrate the suitability of the proposed purchaser as an
Equistar partner. The person willing to serve as the proposed purchaser's
guarantor must have outstanding indebtedness that is rated investment grade by
Moody's Investors Service, Inc. and Standard & Poor's Corporation. If the
proposed guarantor has no rated indebtedness outstanding, it shall provide an
opinion from a
64
nationally recognized investment banking firm that it could be reasonably
expected to obtain suitable ratings. In addition, a partner may transfer its
partnership interests only if
. the transferee executes an appropriate agreement to be bound by the
partnership agreement
. the transferor and/or the transferee bears all reasonable costs incurred
by Equistar in connection with the transfer
. the guarantor of the transferee delivers an agreement to the ultimate
parent entity of the nonselling partners and to Equistar substantially in
the form of the parent agreement
A partner will not in any transaction or series of actions, directly or
indirectly, pledge all or any part of its partnership interest. However, a
partner may at any time assign its right to receive distributions from Equistar
so long as the assignment does not purport to assign any
. right of the partner to participate in or manage the affairs of Equistar
. right of the partner to receive any information or accounting of the
affairs of Equistar
. right of the partner to inspect the books or records of Equistar
. any other right of a partner under the partnership agreement or the
Delaware Revised Uniform Limited Partnership Act
In addition, except for any restrictions imposed by the parent agreement,
nothing in Equistar's partnership agreement will prevent the transfer or pledge
by the owner of any capital stock, equity ownership interests or other security
of the partner or any affiliate of a partner.
Business Opportunities
Except as described below, each partner's affiliates are free to engage in
or possess an interest in any other business of any type and to avail
themselves of any business opportunity available to it without having to offer
Equistar or any partner the opportunity to participate in that business. If a
partner's affiliate desires to initiate or pursue an opportunity to undertake,
engage in, acquire or invest in a "related business," that partner or its
affiliate will offer Equistar the business opportunity.
When a proposing partner offers a business opportunity to Equistar, Equistar
will elect to do one of the following within a reasonably prompt period:
. acquire or undertake the business opportunity for the benefit of Equistar
as a whole, at the cost, expense and benefit of Equistar
. permit the proposing partner to acquire or undertake the business
opportunity for its own benefit and account without any duty to Equistar
or the other partners
If the business opportunity is in direct competition with the then-existing
business of Equistar, then the proposing partner and Equistar shall, if either
so elects, seek to negotiate and implement an arrangement whereby Equistar
would either
. acquire or undertake the competing opportunity at the sole cost, expense
and benefit of the proposing partner under a mutually acceptable
arrangement. Under the arrangement, the competing opportunity will be
treated as a separate business within Equistar. The proposing partner
bears costs, expenses and benefits of the separate business
65
or
. enter into a management agreement with the proposing partner to manage
the competing opportunity on behalf of the proposing partner. The
management agreement will be on terms and conditions mutually acceptable
to the proposing partner and Equistar.
If Equistar and the proposing partner do not reach agreement as to an
arrangement, the proposing partner may acquire or undertake the competing
opportunity for its own benefit and account without any duty to Equistar or the
other partners.
In addition, if the business opportunity constitutes less than 25% of an
acquisition of or investment in assets, activities, operations or businesses
that is not otherwise a related business, then a proposing partner may acquire
or invest in a business opportunity without first offering it to Equistar. The
25% figure is based on annual revenues for the most recently completed fiscal
year. After completion of the above acquisition or investment, the proposing
partner must offer the business opportunity to Equistar under the terms
described above. If Equistar elects to pursue the business opportunity, it will
be acquired by Equistar at its fair market value as of the date of the
acquisition.
Equistar will permit the first general partner and its affiliates to acquire
or undertake a Business Opportunity, and the business opportunity shall be
treated in the same manner as if the general partners and its affiliates were a
proposing partner with respect to the business opportunity if
. Equistar is presented with an opportunity to acquire or undertake a
business opportunity that it determines not to acquire or undertake
. the representatives of one general partner, but not the other general
partners, desire that Equistar acquire or undertake the business
opportunity
Description of the Parent Agreement
Lyondell, Millennium, Occidental, Occidental Chemical Corporation, Oxy CH
Corporation and Equistar are parties to an amended and restated parent
agreement and, along with Occidental Chemical Holding Corporation, an
assignment and assumption agreement. The parent agreement, as modified by the
assignment and assumption agreement, provides for, among other things, a
guarantee of the obligations of their respective subsidiaries by each of
Lyondell, Millennium and Occidental Chemical Holding (the "Guarantor Parents"),
transfer restrictions with respect to the stock of the subsidiaries that hold
the direct interests in Equistar (the "Partner Sub Stock") and a requirement to
present specified business opportunities to Equistar. The following is a
summary of the material provisions of the parent agreement as modified by the
assignment and assumption agreement, which is available upon written request as
provided under "Available Information."
Guarantee of Obligations Under the Partnership Agreement and Related Party
Agreements
Each of the Guarantor Parents has guaranteed, undertaken and promised to
cause the due and punctual payment and the full and prompt performance of all
of the amounts to be paid and all of the terms and provisions to be performed
or observed by or on the part of its Affiliated Obligors, as defined below,
under various agreements, including, without limitation, the partnership
agreement and the asset contribution agreements, by its respective
subsidiaries. The subsidiaries are as follows:
. Lyondell GP and Lyondell LP in the case of Lyondell (the "Lyondell
Partner Subs")
. Millennium GP and Millennium LP in the case of Millennium (the
"Millennium Partner Subs")
. Occidental GP, Occidental LP1 and Occidental LP2 in the case of
Occidental Chemical Holding (the "Occidental Partner Subs")
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The Occidental Partner Subs, Lyondell Partner Subs and Millennium Partner Subs,
and any other direct or indirect subsidiary of any of the Guarantor Parents
that are parties to the other agreements defined below are collectively
referred to as the "Affiliated Obligors." The guarantee extends, according to
the terms of the other agreements, as follows:
. in the event that its Affiliated Obligors fail in any manner whatsoever
to timely pay, perform or observe any of the terms and provisions of
other agreements, the Guarantor Parent will
--itself duly and punctually pay, or fully and promptly perform or
observe, as the case may be, the terms and provisions, or
--cause the same to be duly and punctually paid, or fully and promptly
performed or observed
. in each of the above, the Guarantor Parent will act as if the Guarantor
Parent were itself the obligor with respect to the terms and provisions
under other agreements
Insofar as the foregoing relates to the obligations of an Affiliated Obligor
under Equistar's partnership agreement, no Guarantor Parent will be required to
make, or cause a Partner Sub to make, any contribution to Equistar that the
Partner Sub is not otherwise required to make under terms of Equistar's
partnership agreement concerning required capital contributions. Insofar as
this paragraph applies to agreements other than the partnership agreement and
the parent agreement, the term "Affiliated Obligors" will not include Equistar
nor any partner of Equistar in its capacity as a partner. The provisions of
this and the foregoing paragraphs will not apply to terms and provisions of
other agreements that are within the scope of the following paragraph.
Equistar's partnership agreement sets forth definitions of "Conflicted
General Partner" and "Nonconflicted General Partner," and provides that the
Nonconflicted General Partners have certain exclusive rights to control
Equistar with respect to any Conflict Circumstance. Without limiting the rights
of its Partner Sub under the partnership agreement, and without prejudice to
any rights, remedies or defenses Equistar may have in any other agreement or
Conflict Circumstance, each of Lyondell, Millennium and Occidental Chemical
Holding has agreed to cause its Partner Sub
. to cause Equistar to pay, perform and observe all of the terms and
provisions of other agreements to be paid, performed or observed by or on
the part of Equistar under the agreements, according to their terms to
the extent that the Partner Sub is a Nonconflicted General Partner and is
thereby entitled to cause the payment, performance and observance of the
terms and provisions
. except to the extent inconsistent with its obligations above, to abide by
its obligations as a Nonconflicted General Partner with respect to any
conflict circumstance arising in connection with any other agreement
according to the terms of the partnership agreement that apply; each of
Lyondell's, Millennium's or Occidental Chemical Holding's responsibility
for a failure of Equistar to pay, perform or observe its obligations
under the other agreements shall be limited to the circumstances in which
Equistar's failure to so pay, perform or observe its obligations under
the other agreements was directly caused by an act or failure to act by
its Partner Sub
Nothing in this paragraph shall require Lyondell, Millennium or Occidental
Chemical Holding to make or cause the Partner Sub
. to cure or mitigate any inability of Equistar to make any payment or to
perform or observe any terms and provisions under any other agreements
. to cause Equistar to require from the Partner Subs any cash contributions
in respect of any payment, performance or observance involving a conflict
circumstance
. to make any contribution to Equistar that the Partner Sub is not
otherwise required to make under terms of the partnership agreement
concerning required capital contributions
See "Description of the Partnership Agreement--Transactions with Affiliates."
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Restrictions on Transfer of Partner Sub Stock
Without the consent of each of Lyondell, Millennium, Oxy CH and Occidental
Chemical (the "Ownership Parents"), none of Lyondell, Millennium, Occidental
Chemical or Oxy CH may transfer less than all of its Partner Sub Stock. Unless
such transfer is otherwise permitted under the parent agreement, no Ownership
Parent may transfer its Partner Sub Stock for consideration other than cash.
However, each of Lyondell, Millennium, Oxy CH or Occidental Chemical may
transfer all, but not less than all, of its Partner Sub Stock, if the transfer
is in connection with
. a merger, consolidation, conversion or share exchange of the Ownership
Parent, or
. a sale or other disposition of
--the Partner Sub Stock, plus
--other assets representing at least 50% of the book value of the
Ownership Parent's assets excluding the Partner Sub Stock, as
reflected on its most recent audited consolidated or combined
financial statements.
Following the consummation of any transaction involving Oxy CH or Occidental
Chemical, the Partner Sub Stock held directly or indirectly by Oxy CH and
Occidental Chemical on the date of the parent agreement shall be held by the
same transferee or one or more transferees that are wholly owned affiliates of
each other or of a common parent entity.
Any transfer of Partner Sub Stock by any Ownership Parent is only permitted
if the acquiring, succeeding or surviving entity, if any,
. succeeds to and is substituted for the transferring Ownership Parent with
the same effect as if it had been named in the parent agreement
. executes an instrument agreeing to be bound by the obligations of the
transferring Ownership Parent under the parent agreement, with the same
effect as if it had been named in the instrument
The transferring Ownership Parent may be released from its guarantee
obligations under the parent agreement after the successor parent agrees to be
bound by the Ownership Parent's obligations.
Unless a transfer is permitted under the provisions described above, any
Ownership Parent desiring to transfer all of its Partner Sub Stock to any
person, including another Ownership Parent or any affiliate of an Ownership
Parent, will give written notice to Equistar and each of the other Ownership
Parents. The notice will state
. the selling parent's desire to transfer its Partner Sub Stock
. the cash purchase price
. all other terms on which it is willing to sell
Each offeree parent will have the option to elect to purchase all of its
proportional share, in the case of both of the limited partner and general
partner, of all of the Partner Sub Stock of the selling parent. The option to
purchase is on the terms described in the initial notice of sale. If one of the
selling parents, but not the other, elects to so purchase, the selling parent
shall give written notice thereof to the offeree parent electing to purchase,
and that parent shall have the option to purchase all of the Parent Sub Stock
held by the selling parent, including the Partner Sub Stock it has not
previously elected to purchase. Any election by an offeree parent not to
purchase all of the Partner Sub Stock shall be deemed a rescission of the
parent's original notice of acceptance and an election not to purchase any of
the Partner Sub Stock of that selling parent. If one or both of the offeree
parents do not elect to purchase all of the selling parent's Partner Sub Stock
within 45 days after the receipt of the initial notice or within 15 days after
the receipt of the notice to an offeree parent electing to purchase, if
applicable, the selling parent will have a further 180 days during which it
may, subject to the
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provisions of the following paragraph, consummate the sale of its Partner Sub
Stock to a third-party purchaser. The sale to a third-party purchaser may be at
a purchase price and on other terms that are no more favorable to the purchaser
than the initial terms offered to the offeree parents. If the sale is not
completed within the further 180-day period, the initial notice of sale will be
deemed to have expired and a new notice and offer shall be required before the
selling parent may make any transfer of its Partner Sub Stock.
Before the selling parent may consummate a transfer of its Partner Sub Stock
to a third party under the parent agreement, the selling parent shall
demonstrate to the other Ownership Parents that the proposed purchaser, or the
person willing to serve as its guarantor as contemplated by the terms of the
parent agreement, has outstanding indebtedness that is rated investment grade
by either Moody's or S&P. If such proposed purchaser or the other person has no
rated indebtedness outstanding, that person shall provide an opinion from
Moody's, S&P or from a nationally recognized investment banking firm that it
could be reasonably expected to obtain a suitable rating. Moreover, an
Ownership Parent may transfer its Partner Sub Stock, under the previous
paragraph, only if all of the following occur:
. the transfer is accomplished in a nonpublic offering in compliance with,
and exempt from, the registration and qualification requirements of all
federal and state securities laws and regulations
. the transfer does not cause a default under any material contract which
has been approved unanimously by the partnership governance committee and
to which Equistar is a party or by which Equistar or any of its
properties is bound
. the transferee executes an appropriate agreement to be bound by the
parent agreement
. the transferor and/or transferee bears all reasonable costs incurred by
Equistar in connection with the transfer
. the transferee, or the guarantor of the obligations of the transferee,
delivers an agreement to each of the other Ownership Parents and Equistar
substantially in the form of the parent agreement
. the proposed transferor is not in default in the timely performance of
any of its material obligations to Equistar
In no event may any Ownership Parent transfer the Partner Sub Stock of any
of its Partners Subs to any person unless the Ownership Parent simultaneously
transfers the Partner Sub Stock of its other Partner Sub or Subs to the person
or a wholly owned affiliate of the person or a common parent.
Competing Business
If any of Lyondell, Millennium or Occidental Chemical, Oxy CH or Occidental
Chemical Holding or any of their affiliates desires to initiate or pursue any
opportunity to undertake, engage in, acquire or invest in a business
opportunity, it shall agree to offer that business opportunity to Equistar
under the terms and conditions in the partnership agreement as if it were the
"proposing partner," as described above in "Description of The Partnership
Agreement--Business Opportunities." Equistar will have the rights and
obligations arising from the offer of the Business Opportunity granted by the
partnership agreement. See "Description of the Partnership Agreement--Business
Opportunities."
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Related Transactions
Asset Contributions by Lyondell and Affiliates of Millennium and Occidental
Both Lyondell and Millennium Petrochemicals entered into separate asset
contribution agreements on December 1, 1997, providing for the contribution of
the Lyondell and Millennium contributed businesses. Wholly owned subsidiaries
of Occidental (the "Occidental Subsidiaries") entered into an asset
contribution agreement with Equistar on May 15, 1998, with respect to the
transfer of the Occidental contributed business, a portion of which transfer
was accomplished through a merger of an Occidental Subsidiary with and into
Equistar. Among other things, the asset contribution agreements required
representations and warranties by the contributor regarding the transferred
assets and indemnification of Equistar by the contributor. These agreements
also provide for the assumption by Equistar of, among other things
. third-party claims that are related to preclosing contingent liabilities
that are asserted before December 1, 2004, as to Lyondell and Millennium
Petrochemicals or May 15, 2005, as to the Occidental Subsidiaries, to the
extent the aggregate amount does not exceed, in the case of each of
Lyondell, Millennium and the Occidental Subsidiaries, $7 million
. third-party claims related to preclosing contingent liabilities that are
asserted for the first time after December 1, 2004, as to Lyondell and
Millennium Petrochemicals or May 15, 2005, as to the Occidental
Subsidiaries
. some obligations for indebtedness
. liabilities for products sold after December 1, 1997, as to Lyondell and
Millennium Petrochemicals or May 15, 1998, as to the Occidental
Subsidiaries, regardless of when manufactured
. some long-term liabilities
Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries entered
into Master Intellectual Property Agreements and other related agreements with
respect to intellectual property with Equistar. These agreements provide for
. the transfer of intellectual property of Lyondell, Millennium
Petrochemicals and the Occidental Subsidiaries related to the businesses
each contributed to Equistar
. rights and licenses to Equistar with respect to intellectual property
retained by Lyondell, Millennium Petrochemicals or the Occidental
Subsidiaries that was not solely related to the business of Equistar but
is useful in that business
. rights and licenses from Equistar to Lyondell, Millennium Petrochemicals
and the Occidental Subsidiaries with respect to intellectual property
transferred to Equistar that Lyondell, Millennium Petrochemicals and the
Occidental Subsidiaries may use in connection with their other businesses
Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries each
entered into various other conveyance documents with Equistar to effect their
asset contributions as provided for in their respective contribution
agreements.
Loans by Millennium and Occidental
In May 1998, in connection with Occidental's entry into Equistar, Equistar
executed promissory notes to Millennium in the principal amount of $75.0
million and to Occidental in the principal amount of $419.7 million. Each of
the notes provided for the annual accrual of interest based on a year of 360
days and actual days elapsed at an interest rate equal to LIBOR plus 0.6%.
These notes were paid in full in June 1998 with borrowings under Equistar's
bank $500 million credit facility and $1.25 billion revolving credit facility.
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Loan by Equistar to Lyondell
In December 1997, Lyondell's subsidiary that is a limited partner in
Equistar executed a promissory note to Equistar in the principal amount of $345
million as part of its capital contribution to Equistar. The note provided for
the annual accrual of interest based on a year of 360 days at a rate of LIBOR
plus 0.5%. Lyondell had the right to prepay any portion of the principal and
interest due without penalty or premium. This note was repaid in full in July
1998, and the proceeds were distributed to Lyondell and Millennium.
Transactions with Lyondell Methanol
Equistar provides operating and other services for Lyondell Methanol under
the terms of existing agreements that were assumed by Equistar from Lyondell,
including the lease to Lyondell Methanol by Equistar of the real property on
which its methanol plant is located. Under the terms of those agreements,
Lyondell Methanol pays Equistar a management fee of $6 million per year and
will reimburse some expenses of Equistar at cost. Equistar sells natural gas to
Lyondell Methanol at prices generally representative of Equistar's cost.
Lyondell Methanol purchased natural gas in the amounts of $44 million for 1998
and $4 million for December 1997. All of the foregoing agreements with Lyondell
Methanol are expected to continue on terms similar to those described above.
Transactions with LYONDELL-CITGO Refining
In connection with the formation of Equistar, Lyondell's rights and
obligations under the terms of its product sales and feedstock purchase
agreements with LYONDELL-CITGO Refining were assigned to Equistar. Accordingly,
refinery products, including propane, butane, naphthas, heating oils and gas
oils, are sold by LYONDELL-CITGO Refining to Equistar as feedstocks, and some
olefins by-products are sold by Equistar to LYONDELL-CITGO Refining for
processing into gasoline. Net payments from LYONDELL-CITGO Refining to Equistar
in connection with these product sales and feedstock purchase agreements was
$92 million for 1998 and $1 million for December 1997.
Equistar and LCR are also parties to
. tolling arrangements under which some of LYONDELL-CITGO Refining's
coproducts are transmitted to Equistar and processed by Equistar, with
the resulting product being returned to LYONDELL-CITGO Refining
. terminalling and storage obligations
. agreements for Equistar to perform some marketing services for LYONDELL-
CITGO Refining
Aggregate payments under these various services agreements of $15 million
were made by LYONDELL-CITGO Refining to Equistar with respect to 1998. No
payments were made for December 1997.
All of the agreements between LYONDELL-CITGO Refining and Equistar are on
terms generally representative of prevailing market prices. All of the
foregoing agreements with LYONDELL-CITGO Refining are expected to continue on
terms similar to those described above.
Services and Shared-Site Agreements with Lyondell, Millennium and Occidental
Lyondell has agreed to provide some types of corporate, general and
administrative services to Equistar, including legal, treasury, risk
management, tax services and employee benefit plan administration. Equistar has
also agreed to provide services to Lyondell, including health, safety and
environmental services, human resource services, information services and legal
services. Depending on the nature of the services, a fixed price may be paid or
costs reimbursed. As a consequence of services being provided by Equistar to
Lyondell and by Lyondell to Equistar, a net payment is made by Equistar to
Lyondell of approximately $90,000 per month. These service agreements are
expected to continue on terms substantially similar to those described above.
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Equistar and Millennium Petrochemicals have entered into a variety of
operating, manufacturing and technical service agreements related to the
business of Equistar and the vinyl acetate monomer, acetic acid, synthesis gas
and methanol businesses retained by Millennium Petrochemicals. These agreements
include the provision by Equistar to Millennium Petrochemicals of materials
management, utilities, fuelstreams, office space, health, safety and
environmental services and computer services. These agreements also include the
provision by Millennium Petrochemicals to Equistar of operational services,
including waste water treatment, fuelstreams and barge dock access and
services. As a consequence of services being provided by Equistar to Millennium
Petrochemicals and by Millennium Petrochemicals to Equistar, net payments were
made by Millennium Petrochemicals to Equistar of $5 million with respect to
1998. No payments were made for December 1997. In the case of product sales,
prices are generally market-related. In the case of services, prices are
usually based on an allocation of costs according to anticipated relative
usage. Equistar also purchases relatively small amounts of vinyl acetate
monomer from Millennium Petrochemicals. Millennium Petrochemicals purchases
relatively small amounts of hydrogen and natural gas from Equistar. Except for
modifications resulting from Millennium's recent sale of its synthesis gas and
methanol businesses, these service and product sales agreements are expected to
continue on terms similar to those described above.
On May 15, 1998, Occidental Chemical and Equistar entered into an operating
agreement under which Occidental Chemical agreed to operate and maintain the
Occidental contributed business and to cause third parties to continue to
provide equipment, products and commodities in connection with the Occidental
contributed business upon substantially the same terms and conditions as
provided before the transfer of the Occidental contributed business. Under the
terms of the operating agreement, Equistar agreed to reimburse Occidental
Chemical for its costs in connection with the services provided to Equistar and
to pay Occidental Chemical an administrative fee. The operating agreement
terminated according to its terms on June 1, 1998. During the term of the
operating agreement, Equistar paid Occidental Chemical an administrative fee of
$1 million in connection with the services Occidental Chemical rendered to
Equistar under the agreement.
On June 1, 1998, Occidental Chemical and Equistar entered into a transition
services agreement. Under the terms of the transition services agreement,
Occidental Chemical agreed to provide to Equistar services in connection with
the transferred businesses, including services related to accounting, payroll,
office administration, marketing, transportation, purchasing and procurement,
management, human resources, customer service and technical services. In
consideration for the services provided by Occidental Chemical under the
agreement, depending on the service, Equistar is required to either
. pay Occidental Chemical a fixed fee for their services according to the
terms of the transition services agreement, or
. reimburse Occidental Chemical for all reasonable, direct, out-of-pocket
costs that are incurred by Occidental Chemical in connection with
providing their services
The transition services agreement provides that the parties must mutually agree
as to which payment option they wish to use. Between June 1, 1998 and December
31, 1998, Equistar paid Occidental Chemical $6 million in connection with
services provided under the agreement. The transition services agreement
expires by its terms on June 1, 1999.
Equistar and Occidental Chemical have entered into a toll processing
agreement, dated as of May 15, 1998, whereby Equistar has retained the services
of Occidental Chemicals's facilities in Ashtabula, Ohio, for the processing of
Glycol Ether TM into Glycol Ether TM Borate Ester material for brake or clutch
fluid. Under the terms of the agreement, Equistar procures from Occidental
Chemical its total requirements of Glycol Ether TM Borate Ester, up to a
maximum of 1 million pounds in any calendar quarter. The agreement requires
Occidental Chemical to process Glycol Ether TM into Glycol Ether TM Borate
Ester exclusively for Equistar. The fee for the processing is $0.35 per pound
of Glycol Ether TM Borate Ester until April 30, 1999. After April 30, 1999, the
fee may be adjusted based on a price index according to the terms of the
agreement. Between May 15, 1998 and December 31, 1998, Equistar paid Occidental
Chemical $124,000 under the
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agreement. The initial term of the agreement ends on December 31, 2001, but
will continue from year to year unless terminated effective December 31 of the
relevant year by either party upon at least 12 months' written notice.
Occidental Ethylene Sales Agreement
Equistar and Occidental Chemical entered into an ethylene sales agreement,
dated May 15, 1998. Under the terms of the ethylene sales agreement, Occidental
Chemical has agreed to purchase an annual minimum amount of ethylene from
Equistar equal to 100% of the ethylene feedstock requirements of Occidental
Chemical's United States plants. The ethylene feedstock is exclusively for
internal use in production at these plants less any quantities up to 250
million pounds tolled according to the provisions of the agreement. Internal
use in production is estimated to be 2 billion pounds per year at the time of
signing the agreement.
Equistar's maximum supply obligation in any calender year under the ethylene
sales agreement is 2.55 billion pounds. Upon three years' notice from either
party to the other, the ethylene sales agreement may be "phased down." No phase
down may commence before January 1, 2009. According to the phase down
provisions of the agreement, the annual minimum requirements specified in the
agreement must be phased down over at least a five-year period. As a result,
the annual required minimum cannot decline to zero before December 31, 2013,
unless specified force majeure events occur.
The ethylene sales agreement provides that each month Occidental Chemical
will pay a price approximately equal to Equistar's quarterly quantity weighted
average net ethylene final transaction price for sales to third parties.
Fifteen percent of the purchased quantity of ethylene within each month, up to
25 million pounds, will be priced at the lower of a reference publication spot
price, the "low spot price" (United States) in the Monomers Market Report for
the month of deliveries or the quarterly quantity weighted average price above.
Between May 15, 1998 and December 31, 1998, Equistar received aggregate
payments from Occidental Chemical of $171 million under the ethylene sales
agreement.
Other Product Sales to Related Parties
Equistar sells ethylene to Millennium at market-related prices under an
agreement entered into in connection with the formation of Equistar. Under this
agreement, Millennium is required to purchase 100% of its ethylene requirements
for its La Porte, Texas facility, estimated at 300 million pounds per year, up
to a maximum of 330 million pounds per year. Millennium has the option to
increase the amount purchased up to 400 million pounds per year beginning
January 1, 2001. The initial term of the contract expires December 1, 2000. The
contract automatically renews annually. Either party may terminate on one
year's notice. If Millennium elects to increase its purchases under the
contract, however, a party must provide two years' notice of termination. The
pricing terms under this agreement are similar to the ethylene sales agreement.
Millennium paid $40 million to Equistar for ethylene for 1998. Millennium paid
$5 million to Equistar for ethylene for December 1997.
Lyondell has purchased ethylene and propylene from Equistar since its
formation on price terms comparable to those of the ethylene sales agreement.
Lyondell paid $21 million to Equistar for ethylene for 1998. Lyondell paid $3
million to Equistar for ethylene for December 1997. Lyondell paid $29 million
to Equistar for propylene for 1998 and $4 million to Equistar for propylene for
December 1997. Lyondell and Equistar contemplate entering into agreements
concerning sales by Equistar to Lyondell of ethylene, propylene, benzene,
ethylene oxide and methanol. In the case of ethylene, propylene, benzene and
ethylene oxide, the contracts are expected to be requirements contracts, less
amounts Lyondell is required to purchase under outstanding agreements, at
market-related prices. A wholly owned subsidiary of Lyondell licenses MTBE
technology to Equistar. This subsidiary also purchases a significant portion of
the MTBE produced by Equistar at one of its two Channelview units at market-
related prices.
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Related Party Leases
Equistar subleases office space for its headquarters and administrative
functions from Lyondell, under which Equistar paid $5 million for the office
space for 1998. Equistar paid $234,000 for the office space for December 1997.
Millennium subleases administrative office space from Equistar. Millennium paid
$504,000 for 1998 and $42,000 for December 1997 under the sublease agreement.
Agreement Regarding Services of Chief Executive Officer
Dan F. Smith serves as the Chief Executive Officer of both of Lyondell and
Equistar and is a director of Lyondell. Mr. Smith receives no compensation from
Equistar. Under an agreement between Equistar and Lyondell, Equistar pays
Lyondell a monthly amount in respect of Mr. Smith's services. In 1998, Equistar
paid Lyondell $1.2 million. In December 1997, Equistar paid Lyondell $100,000.
After December 31, 1998, Equistar will pay an amount equal to 125% of Eugene
Allspach's estimated cash compensation as compensation to Lyondell for the
services rendered by Mr. Smith. See "Management--Members of the Partnership
Governance Committee, Executive Officers of Equistar and Directors and
Executive Officers of Equistar Funding" and "Compensation."
The Exchange Offers
Purpose and Effect of the Exchange Offers
We entered into an exchange and registration rights agreement with the
initial purchasers of the outstanding notes in which we agreed to file a
registration statement relating to our offers to exchange the outstanding notes
for new notes. We also agreed to use our reasonable best efforts to complete
the offers within 180 days after February 16, 1999. We are offering the new
notes under this prospectus to satisfy those obligations under the exchange and
registration rights agreement.
However, the SEC has recently proposed the repeal of its interpretations
permitting the use of a registration statement in connection with exchange
offers such as ours. We cannot predict whether the SEC will act on this
proposal prior to completion of the exchange offers. If those interpretations
are repealed before the exchange offers are completed, holders of outstanding
notes will not be able to receive new notes pursuant to the exchange offers.
Rather, we will be required to register the outstanding notes under a shelf
registration statement, in connection with resales by the holders. Holders will
be required to deliver a prospectus to the purchasers and will be subject to
certain of the civil liability provisions under the Securities Act in
connection with such resales.
We will file with the SEC a shelf registration statement to cover resales of
outstanding notes if
. any changes in law or applicable interpretations by the staff of the SEC
do not permit us to effect the exchange offers as contemplated by the
exchange and registration rights agreement
. any outstanding notes validly tendered under the exchange offers are not
exchanged for new notes within 180 days after February 16, 1999
. any initial purchaser so requests with respect to the outstanding notes
not eligible to be exchanged for new notes in the exchange offers
. any applicable law or interpretations do not permit any holder of
outstanding notes to participate in the exchange offers
. any holder of outstanding notes that participates in the exchange offers
does not receive freely transferable new notes in exchange for tendered
outstanding notes
. we so elect
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If we are required to file a shelf registration statement, we will use our
reasonable best efforts to cause the SEC to declare effective the shelf
registration statement. We will also use our reasonable best efforts to keep
the shelf registration statement effective for up to two years after February
16, 1999. We will have the ability to suspend the shelf registration statement
for no more than (a) 45 days during the first 12-month period after February
16, 1999, and (b) 90 days during any subsequent 12-month period (a "Suspension
Period"), if we determine, in our reasonable best judgment upon written advice
of counsel, that continued effectiveness would require disclosure of
confidential information or interfere with any financing, acquisition,
reorganization or other material transaction involving Equistar.
If we fail to comply with deadlines for completion of the exchange offers,
we will be required to pay additional interest to holders of the outstanding
notes. Please read the section captioned "The Exchange and Registration Rights
Agreement" for more details regarding the exchange and registration rights
agreement.
To exchange an outstanding note for transferable new notes in the exchange
offers, the holder of that outstanding note will be required to make the
following representations:
. any new note the holder receives will be acquired in the ordinary course
of business
. the holder has no arrangements or understandings with any person to
participate in the distribution of the outstanding notes or the new notes
within the meaning of the Securities Act
. if the holder is not a broker-dealer, that holder is not engaged in and
does not intend to engage in the distribution of the new notes
. if the holder is a broker-dealer that will receive new notes in exchange
for outstanding notes acquired for its own account as a result of market-
making activities or other trading activities, that holder will deliver a
prospectus, as required by law, in connection with any resale of the new
notes
. the holder is not our "affiliate," as defined in Rule 405 of the
Securities Act, or, if it is an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act
to the extent applicable
Resale of New Notes
Based on interpretations of the SEC staff in "no action letters" issued to
third parties, we believe that each new note issued under the exchange offers
may be offered for resale, resold and otherwise transferred by the holder of
that new note without compliance with the registration and prospectus delivery
provisions of the Securities Act if
. the holder is not our "affiliate" within the meaning of Rule 405 under
the Securities Act
. the new note is acquired in the ordinary course of the holder's business
. the holder does not intend to participate in the distribution of new
notes
If a holder of outstanding notes tenders in the exchange offers with the
intention of participating in any manner in a distribution of the new notes,
that holder
. cannot rely on these interpretations by the SEC staff
. must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction
Unless an exemption from registration is otherwise available, any security
holder intending to distribute new notes should be covered by an effective
registration statement under the Securities Act containing the selling security
holder's information required by Item 507 of Regulation S-K under the
Securities Act. This prospectus may be used for an offer to resell, resale or
other retransfer of new notes only as specifically described in this
prospectus. Only broker-dealers that acquired the outstanding notes as a result
of market-making activities or other trading activities may participate in the
exchange offers. Please read the section captioned "Plan of Distribution" for
more details regarding the transfer of new notes.
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Terms of the Exchange Offers
Upon the terms and subject to the conditions described in this prospectus
and in the letter of transmittal, we will accept for exchange any outstanding
notes properly tendered and not withdrawn before the expiration date. We will
issue $1,000 principal amount of new notes in exchange for each $1,000
principal amount of outstanding notes surrendered under the exchange offers.
Outstanding notes may be tendered only in integral multiples of $1,000. The
exchange offers are not conditioned upon any minimum aggregate principal amount
of outstanding notes being tendered for exchange.
As of the date of this prospectus, $300 million aggregate principal amount
of 8 1/2% notes due 2004 and $600 million aggregate principal amount of 8 3/4%
notes due 2009 are outstanding. This prospectus and the letter of transmittal
are being sent to all registered holders of outstanding notes. There will be no
fixed record date for determining registered holders of outstanding notes
entitled to participate in the exchange offers.
We intend to conduct the exchange offers according to the provisions of the
exchange and registration rights agreement, the applicable requirements of the
Securities Act and the Securities Exchange Act of 1934 and the rules and
regulations of the SEC. Outstanding notes that are not tendered for exchange in
the exchange offers will remain outstanding and continue to accrue interest and
will be entitled to the rights and benefits the holders have under the
indenture relating to the notes and the exchange and registration rights
agreement.
We will be deemed to have accepted for exchange properly tendered
outstanding notes when we have given oral or written notice of the acceptance
to the exchange agent and complied with the applicable provisions of the
exchange and registration rights agreement. The exchange agent will act as
agent for the tendering holders for the purposes of receiving the new notes.
Holders tendering outstanding notes in the exchange offers will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the letter of transmittal, transfer taxes with respect to the exchange of
outstanding notes. We will pay all charges and expenses, other than some
applicable taxes as described below, in connection with the exchange offers. It
is important for holders to read the section labeled "--Fees and Expenses" for
more details regarding fees and expenses incurred in the exchange offers.
We will return any outstanding notes that we do not accept for exchange for
any reason without expense to the tendering holder as promptly as practicable
after the expiration or termination of the exchange offers.
Expiration Date
The exchange offers will expire at 5:00 p.m., New York City time on
, 1999, unless, in our sole discretion, we extend one or both of
the exchange offers.
Extensions, Delay in Acceptance, Termination or Amendment
We expressly reserve the right, at any time or at various times, to extend
the period of time during which an exchange offer is open. During any
extensions, all outstanding notes previously tendered will remain subject to
the exchange offer, and we may accept them for exchange.
To extend an exchange offer, we will notify the exchange agent orally or in
writing of any extension. We will also make a public announcement of the
extension no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
If any of the conditions described below under "--Conditions to the Exchange
Offers" have not been satisfied, we reserve the right, in our sole discretion
. to delay accepting for exchange any outstanding notes
. to extend either or both of the exchange offers
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. to terminate either or both of the exchange offers
by giving oral or written notice of a delay, extension or termination to the
exchange agent. Subject to the terms of the exchange and registration rights
agreement, we also reserve the right to amend the terms of the exchange offers
in any manner.
Any delay in acceptance, extension, termination or amendment will be
followed, as promptly as practicable, by oral or written notice to the
registered holders of the outstanding notes. If we amend an exchange offer in a
manner we determine to constitute a material change, we will promptly disclose
the amendment by means of a prospectus supplement. The supplement will be
distributed to the registered holders of the outstanding notes. Depending upon
the significance of the amendment and the manner of disclosure to the
registered holders, we will extend an exchange offer if the exchange offer
would otherwise expire during that period.
Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of either or both of the exchange offers, we will have no obligation to
publish, advertise or otherwise communicate any public announcement, other than
by making a timely release to the Dow Jones News Service.
Conditions to the Exchange Offers
Despite any other term of the exchange offers, if in our reasonable judgment
either of the exchange offers, or the making of any exchange by a holder of
outstanding notes, would violate applicable law or any applicable
interpretation of the staff of the SEC
. we will not be required to accept for exchange, or exchange any new notes
for, any outstanding notes
. we may terminate either or both of the exchange offers as provided in
this prospectus before accepting any outstanding notes for exchange
In addition, we will not be obligated to accept for exchange the outstanding
notes of any holder that has not made
. the representations described under "--Purpose and Effect of the Exchange
Offers," "--Procedures for Tendering" and "Plan of Distribution"
. other representations as may be reasonably necessary under applicable SEC
rules, regulations or interpretations to make available to us an
appropriate form for registration of the new notes under the Securities
Act
We expressly reserve the right to amend or terminate either or both of the
exchange offers, and to reject for exchange any outstanding notes not
previously accepted for exchange, upon the occurrence of any of the conditions
to the exchange offers specified above. We will give oral or written notice of
any extension, amendment, nonacceptance or termination to the holders of the
outstanding notes as promptly as practicable. These conditions are for our sole
benefit, and we may assert them or waive them in whole or in part at any time
or at various times in our sole discretion. If we fail at any time to exercise
any of these rights, this failure will not mean that we have waived our rights.
Each right will be deemed an ongoing right that we may assert at any time or at
various times. In addition, we will not accept for exchange any outstanding
notes tendered and will not issue new notes in exchange for any outstanding
notes if, at that time, any stop order has been threatened or is in effect with
respect to (1) the registration statement of which this prospectus is a part or
(2) the qualification of the indenture relating to the notes under the Trust
Indenture Act of 1939.
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Procedures for Tendering
How to Tender Generally
Only a holder of outstanding notes may tender their outstanding notes in the
exchange offers. To tender in the exchange offers, a holder must
. complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal
. have the signature on the letter of transmittal guaranteed if the letter
of transmittal so requires
. mail or deliver the letter of transmittal or a facsimile of the letter of
transmittal to the exchange agent before the expiration date
. comply with the automated tender offer program procedures of DTC
described below
In addition, one of the following must occur:
. the exchange agent must receive outstanding notes along with the letter
of transmittal
. the exchange agent must receive, before the expiration date, a timely
confirmation of book-entry transfer of the outstanding notes into the
exchange agent's account at DTC according to the procedure for book-entry
transfer described below or a properly transmitted agent's message
. the holder must comply with the guaranteed delivery procedures described
below
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at its
address provided above under "Prospectus Summary--The Exchange Agent" before
the expiration date. The tender by a holder that is not withdrawn before the
expiration date will constitute an agreement between the holder and us
according to the terms and subject to the conditions described in this
prospectus and in the letter of transmittal.
The method of delivery of outstanding notes, the letter of transmittal and
all other required documents to the exchange agent is at the holder's election
and risk. Rather than mail these items, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. Holders should not send the letter of transmittal or outstanding notes to
us. Holders may request their brokers, dealers, commercial banks, trust
companies or other nominees to effect the above transactions on their behalf.
Tendering Through DTC's Automated Tender Offer Program
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's automated tender offer
program to tender. Participants in the program may, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, transmit their acceptance of the exchange offers
electronically. They may do so by causing DTC to transfer the outstanding notes
to the exchange agent according to its procedures for transfer. DTC will then
send an agent's message to the exchange agent.
The term "agent's message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, stating
that
. DTC has received an express acknowledgment from a participant in its
automated tender offer program that is tendering outstanding notes that
are the subject of book-entry confirmation
. the participant has received and agrees to be bound by the terms of the
letter of transmittal or, in the case of an agent's message relating to
guaranteed delivery, that the participant has received and agrees to be
bound by the applicable notice of guaranteed delivery
. the agreement may be enforced against the participant
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How to Tender if You Are a Beneficial Owner
If you beneficially own outstanding notes that are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and you wish
to tender those notes, you should contact the registered holder promptly and
instruct it to tender on your behalf. If you are a beneficial owner and wish to
tender on your own behalf, you must, before completing and executing the letter
of transmittal and delivering your outstanding notes, either
. make appropriate arrangements to register ownership of the outstanding
notes in your name
. obtain a properly completed bond power from the registered holder of
outstanding notes
The transfer of registered ownership may take considerable time and may not be
completed before the expiration date.
Signatures and Signature Guarantees
You must have signatures on a letter of transmittal or a notice of
withdrawal described below guaranteed by
. a member firm of a registered national securities exchange
. a member of the National Association of Securities Dealers, Inc.
. a commercial bank or trust company having an office or correspondent in
the United States
. an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Securities Exchange Act of 1934
The above must be a member of one of the recognized signature guarantee
programs identified in the letter of transmittal, unless the outstanding notes
are tendered
. by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal and the new notes are being issued directly to the
registered holder of the outstanding notes tendered in the exchange for
those new notes
. for the account of a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States, or an eligible guarantor institution
When Endorsements or Bond Powers are Needed
If the letter of transmittal is signed by a person other than the registered
holder of any outstanding notes, the outstanding notes must be endorsed or
accompanied by a properly completed bond power. The bond power must be signed
by the registered holder as the registered holder's name appears on the
outstanding notes and a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States, or an eligible guarantor institution must guarantee the
signature on the bond power.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, those persons should so indicate when signing. They should also
submit evidence of their authority to deliver the letter of transmittal
satisfactory to us unless we waive this requirement.
Determinations Under the Exchange Offers
We will determine in our sole discretion all questions as to the validity,
form, eligibility, time of receipt, acceptance of tendered outstanding notes
and withdrawal of tendered outstanding notes. Our determination will
79
be final and binding. We reserve the absolute right to reject any outstanding
notes not properly tendered or any outstanding notes our acceptance of which
would, in the opinion of our counsel, be unlawful. We also reserve the right
to waive any defects, irregularities or conditions of tender as to particular
outstanding notes. Our interpretation of the terms and conditions of the
exchange offers, including the instructions in the letter of transmittal, will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of outstanding notes must be cured
within the time we shall determine. Neither we, the exchange agent nor any
other person will be under any duty to give notification of defects or
irregularities with respect to tenders of outstanding notes, and none of the
aforementioned will incur liability for failure to give notification. Tenders
of outstanding notes will not be deemed made until any defects or
irregularities have been cured or waived. Any outstanding notes received by
the exchange agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned to the
tendering holder, unless otherwise provided in the letter of transmittal, as
soon as practicable following the expiration date.
When We Will Issue New Notes
In all cases, we will issue new notes for outstanding notes that we have
accepted for exchange under the exchange offers only after the exchange agent
timely receives
. outstanding notes or a timely book-entry confirmation of the outstanding
notes into the exchange agent's account at DTC
. a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message
Return of Outstanding Notes Not Accepted or Exchanged
If we do not accept any tendered outstanding notes for exchange for any
reason described in the terms and conditions of the exchange offers or if
outstanding notes are submitted for a greater principal amount than the holder
desires to exchange, the unaccepted or nonexchanged outstanding notes will be
returned without expense to their tendering holder. In the case of outstanding
notes tendered by book-entry transfer into the exchange agent's account at DTC
according to the procedures described below, the nonexchanged outstanding
notes will be credited to an account maintained with DTC. These actions will
occur as promptly as practicable after the expiration or termination of the
exchange offers.
Your Representations to Us
By signing or agreeing to be bound by the letter of transmittal, you will
represent that, among other things
. any new notes that the holder receives will be acquired in the ordinary
course of its business
. the holder has no arrangement or understanding with any person or entity
to participate in the distribution of the new notes
. if the holder is not a broker-dealer, the holder is not engaged in and
does not intend to engage in the distribution of the new notes
. if the holder is a broker-dealer that will receive new notes for its own
account in exchange for outstanding notes that were acquired as a result
of market-making activities, the holder will deliver a prospectus, as
required by law, in connection with any resale of the new notes
. that holder is not our "affiliate," as defined in Rule 405 of the
Securities Act, or, if the holder is an affiliate, that holder will
comply with any applicable registration and prospectus delivery
requirements of the Securities Act
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Book-Entry Transfer
The exchange agent will make a request to establish an account with respect
to the outstanding notes at DTC for purposes of the exchange offers promptly
after the date of this prospectus. Any financial institution participating in
DTC's system may make book-entry delivery of outstanding notes by causing DTC
to transfer the outstanding notes into the exchange agent's account at DTC
according to DTC's procedures for transfer. Holders of outstanding notes who
are unable to deliver confirmation of the book-entry tender of their
outstanding notes into the exchange agent's account at DTC or all other
documents required by the letter of transmittal to the exchange agent on or
before the expiration date must tender their outstanding notes according to the
guaranteed delivery procedures described below.
Guaranteed Delivery Procedures
Any holder wishing to tender its outstanding notes but whose outstanding
notes are not immediately available or who cannot deliver its outstanding
notes, the letter of transmittal or any other required documents to the
exchange agent or comply with the applicable procedures under DTC's automated
tender offer program before the expiration date may tender if
. the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or
correspondent in the United States or an eligible guarantor institution
. before the expiration date, the exchange agent receives from the member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., commercial bank or trust company
having an office or correspondent in the United States, or eligible
guarantor institution, either a properly completed and duly executed
notice of guaranteed delivery by facsimile transmission, mail or hand
delivery or a properly transmitted agent's message and notice of
guaranteed delivery
--stating the holder's name and address, the registered number(s) of
the holder's outstanding notes and the principal amount of outstanding
notes tendered
--stating that the tender is being made
--guaranteeing that, within five business days after the expiration
date, the letter of transmittal or a facsimile of the letter of
transmittal, together with the outstanding notes or a book-entry
confirmation, and any other documents required by the letter of
transmittal will be deposited by the eligible guarantor institution
with the exchange agent
. the exchange agent receives the properly completed and executed letter of
transmittal or a facsimile of the letter of transmittal, as well as all
tendered outstanding notes in proper form for transfer or a book-entry
confirmation, and all other documents required by the letter of
transmittal, within five business days after the expiration date
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to a holder if it wishes to tender its outstanding notes according to the
guaranteed delivery procedures described above.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, any holder may withdraw its
tender at any time before 5:00 p.m., New York City time, on the expiration date
unless previously accepted for exchange. For a withdrawal to be effective
. the exchange agent must receive a written notice of withdrawal at one of
the addresses listed above under "Prospectus Summary--The Exchange Agent"
. the withdrawing holder must comply with the appropriate procedures of
DTC's automated tender offer program system
81
Any notice of withdrawal must
. specify the name of the person who tendered the outstanding notes to be
withdrawn (the "Depositor")
. identify the outstanding notes to be withdrawn, including the
registration number or numbers and the principal amount of the
outstanding notes
. be signed by the Depositor in the same manner as the original signature
on the letter of transmittal used to deposit those outstanding notes or
be accompanied by documents of transfer sufficient to permit the trustee
for the outstanding notes to register the transfer into the name of the
Depositor withdrawing the tender
. specify the name in which the outstanding notes are to be registered, if
different from that of the Depositor
If outstanding notes have been tendered under the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn outstanding
notes and otherwise comply with the procedures of DTC.
Equistar will determine all questions as to the validity, form, eligibility
and time of receipt of notice of withdrawal, and Equistar's determination shall
be final and binding on all parties. Equistar will deem any outstanding notes
so withdrawn not to have been validly tendered for exchange for purposes of the
exchange offers.
Any outstanding notes that have been tendered for exchange but are not
exchanged for any reason will be returned to their holder without cost to the
holder, or, in the case of outstanding notes tendered by book-entry transfer
into the exchange agent's account at DTC according to the procedures described
above, the outstanding notes will be credited to an account maintained with DTC
for the outstanding notes. This return or crediting will take place as soon as
practicable after withdrawal, rejection of tender or termination of the
exchange offers. Holders may retender properly withdrawn outstanding notes by
following one of the procedures described under "--Procedures for Tendering"
above at any time on or before the expiration date.
Fees and Expenses
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitation by
telegraph, telephone or in person by our officers and regular employees and the
officers and regular employees of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offers and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offers. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses. We may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this prospectus, letter of transmittal
and related documents to the beneficial owners of the outstanding notes and in
handling or forwarding tenders for exchange.
We will pay the cash expenses to be incurred in connection with the exchange
offers, including
. SEC registration fees
. fees and expenses of the exchange agent and trustee
. accounting and legal fees and printing costs
. related fees and expenses
82
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes under the exchange offers. The tendering holder, however,
will be required to pay any transfer taxes, whether imposed on the registered
holder or any other person, if
. certificates representing outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding notes tendered
. tendered outstanding notes are registered in the name of any person other
than the person signing the letter of transmittal
. a transfer tax is imposed for any reason other than the exchange of
outstanding notes under the exchange offers.
If satisfactory evidence of payment of any transfer taxes payable by a note
holder is not submitted with the letter of transmittal, the amount of the
transfer taxes will be billed directly to that tendering holder.
Transfer Taxes
If a holder tenders its outstanding notes for exchange, it will not be
required to pay any transfer taxes. However, if a holder instructs us to
register new notes in the name of, or requests that outstanding notes not
tendered or not accepted in the exchange offers be returned to, a person other
than that holder, in that holder's capacity as the registered tendering holder,
that holder will be required to pay any applicable transfer tax.
Consequences of Failure to Exchange
Holders who do not exchange their outstanding notes for new notes under the
exchange offers will remain subject to the existing restrictions on transfer of
the outstanding notes. In general, a holder may not offer or sell the
outstanding notes unless they are registered under the Securities Act or if the
offer or sale is exempt from registration under the Securities Act and
applicable state securities laws. Except as required by the exchange and
registration rights agreement, we do not intend to register resales of the
outstanding notes under the Securities Act. Based on interpretations of the SEC
staff, holders may offer for resale, resell or otherwise transfer new notes
issued in the exchange offers without compliance with the registration and
prospectus delivery provisions of the Securities Act, if
. they are not our "affiliate" within the meaning of Rule 405 under the
Securities Act
. they acquired the new notes in the ordinary course of their business
. they have no arrangement or understanding with respect to the
distribution of the new notes to be acquired in the exchange offers
If a holder tenders in the exchange offers for the purpose of participating
in a distribution of the new notes, it
. cannot rely on the applicable interpretations of the SEC
. must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction
Accounting Treatment
We will not recognize a gain or loss for accounting purposes upon the
consummation of the exchange offers. We will amortize expenses of the exchange
offers over the term of the new notes under generally accepted accounting
principles.
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Other
Participation in the exchange offers is voluntary, and holders of
outstanding notes should carefully consider whether to accept. Those holders
are urged to consult their financial and tax advisors in making their own
decision on what action to take.
We may, in the future, seek to acquire untendered outstanding notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. We have no present plans to acquire any outstanding notes that
are not tendered in the exchange offers or to file a registration statement to
permit resales of any untendered outstanding notes.
Description of the New Notes
General
The new notes will be issued, and the outstanding notes were issued, under
an indenture dated January 15, 1999, that we entered into with The Bank of New
York, as trustee. We supplemented the indenture to establish the terms of the
notes. The terms of the notes include those stated in the indenture, the
supplemental indentures and those made part of the indenture by the Trust
Indenture Act of 1939, as amended. The Indenture does not limit the aggregate
principal amount of securities that can be issued thereunder and does not limit
our right to issue additional notes of either series at either time.
We have summarized below selected provisions of the notes and the indenture,
as supplemented. The summary is not complete. For a complete description, you
should refer to the indenture and the notes filed as exhibits to this
registration statement which includes this prospectus. See "Available
Information." Capitalized terms used in this summary are defined below under
"--Definitions."
The outstanding 8 1/2% notes and the new 8 1/2% notes will constitute a
single class of debt securities under the indenture. The outstanding 8 3/4%
notes and the new 8 3/4% notes will constitute a separate single class of debt
securities under the indenture. If the exchange offers contemplated by this
prospectus are consummated, holders of the applicable series of outstanding
notes who do not exchange those notes for new notes in the exchange offers will
vote together with holders of new notes for all relevant purposes under the
indenture. Accordingly, when determining whether the required holders have
given any notice, consent or waiver or taken any other action permitted under
the indenture, any outstanding notes that remain outstanding after the exchange
offers will be aggregated with the applicable series of new notes. All
references herein to specified percentages in aggregate principal amount of a
series of notes outstanding shall be deemed to mean, at any time after the
exchange offers are consummated, percentages in aggregate principal amount of a
series of outstanding notes and the applicable series of new notes then
outstanding.
The form and term of the new notes are the same as the form and term of the
outstanding notes they will replace, except that
. we will register the new notes under the Securities Act
. the new notes, once registered, will not bear legends restricting
transfer
. holders of the new notes will not be entitled to some rights under the
exchange and registration rights agreement, including our payment of
additional interest for failure to meet specified deadlines, which
terminate when the exchange offers are consummated
The new notes will be issued solely in exchange for an equal principal amount
of outstanding notes. As of the date of this prospectus, $300 million aggregate
principal amount of 8 1/2% notes and $600 million aggregate principal amount of
8 3/4% notes are outstanding. See "The Exchange Offers."
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Ranking
The outstanding notes are, and the new notes
. will be senior unsecured indebtedness of Equistar and Equistar Funding
. will rank equal in right of payment with any outstanding notes that are
not exchanged and with all of our existing and future unsecured and
unsubordinated indebtedness and senior to any future subordinated
indebtedness
Maturity and Interest
The 8 1/2% notes will mature on February 15, 2004. The 8 3/4% notes will
mature on February 15, 2009. Interest on both the 8 1/2% notes and the 8 3/4%
notes began to accrue on February 16, 1999. We
. will pay interest semiannually on February 15 and August 15 of each year,
beginning August 15, 1999
. will pay interest to the person registered as owner of the notes on the
February 1 or August 1 preceding the interest payment date
. will compute interest based on a 360-day year consisting of twelve 30-day
months
Optional Redemption
At any time, we may redeem any or all of either series of new notes. We will
pay a redemption price equal to the greater of the principal amount of the
series of notes being redeemed or, as determined by a Quotation Agent, the sum
of the present values of the remaining scheduled payments of principal and
interest on the series of notes to be redeemed discounted to the date of
redemption on a semiannual basis, assuming a 360-day year consisting of twelve
30-day months at the Adjusted Treasury Rate. We will also pay accrued but
unpaid interest.
Notice of redemption will be mailed between 30 and 60 days before the
redemption date to each holder of the new notes to be redeemed. Interest will
cease to accrue on the new notes or the portions of the new notes called for
redemption on and after the redemption date unless we default in payment of the
redemption price.
Restrictive Covenants
We have agreed to two principal restrictions on our activities for the
benefit of the holders of the outstanding notes and the new notes. In the
description of these covenants, all references to "us" or "our" mean Equistar
Chemicals, LP and any of its Subsidiaries, unless the context clearly indicates
otherwise.
Limitation on Liens
We have agreed that Equistar will not, and will not permit any Restricted
Subsidiary to, issue, assume or guarantee any indebtedness for borrowed money
secured by any liens upon any Restricted Subsidiary unless we secure the notes
equally and ratably with or prior to the other indebtedness secured by the
lien. This covenant has exceptions that permit
. liens affecting property of a corporation existing at the time it becomes
a Subsidiary or at the time it is merged into or consolidated with
Equistar
. liens on property existing at the time of its acquisition or incurred to
secure payment of all or part of its purchase price or to secure debt
incurred before, at the time of or within 24 months after its acquisition
for the purpose of financing all or part of the purchase price
. liens on our property existing on the date of the indenture
85
. liens on any property to secure all or part of the cost of construction
or improvements on that property or debt incurred to provide funds for
any such liens in a principal amount not exceeding the cost of the
construction or improvements
. liens which secure only an indebtedness owed to us by a Subsidiary
. liens in favor of the United States or any state within the United
States, or any department, agency, instrumentality, or political
subdivision of any U.S. jurisdiction, to secure partial progress, advance
or other payments under any contract or statute or to secure any
indebtedness incurred for the purpose of financing all or any part of the
purchase price or cost of constructing or improving the property subject
thereto, including, without limitation, liens to secure debt of the
pollution control or industrial revenue bond type
. liens required by any contract or statute to permit our performance of
any contract or subcontract made by us with or at the request of the
United States of America, any state or any department, agency or
instrumentality or political subdivision of either the United States or
any state
. any extension, renewal or replacement, or successive extensions, renewals
or replacements, in whole or in part, of any lien referred to in the
foregoing exceptions or of any debt secured thereby, provided that the
principal amount of debt secured thereby shall not exceed the greater of
the following:
-- the principal amount of debt so secured
-- the fair market value of the underlying property or assets to which
that lien relates at the time of the extension, renewal or replacement
and that the extension, renewal or replacement lien shall be limited to
all or part of substantially the same property which secured the lien
extended, renewed or replaced, including improvements on the property
If Equistar so determines, it may also equally and ratably secure any other
indebtedness or other obligation then existing and any other indebtedness or
obligation created after that time.
Notwithstanding the foregoing provisions of "--Limitation on Liens,"
Equistar and any one or more Restricted Subsidiaries may issue, assume or
guarantee debt secured by liens, that would otherwise be subject to the
foregoing restrictions if
. the aggregate principal amount of such secured debt, plus
. the aggregate outstanding principal amount of all of other debt of
Equistar and the Restricted Subsidiaries which would otherwise, not
including debt permitted to be secured under the exceptions described
above, be subject to the foregoing restrictions, plus
. the aggregate Value of the Sale and Lease-Back Transactions in existence
at that time, not including Sale and Lease-Back Transactions as to which
Equistar has complied with (b) of "--Limitation of Sale and Lease-Back
Transactions,"
does not at any one time exceed 15% of the Consolidated Net Tangible Assets of
Equistar and its consolidated Subsidiaries.
Limitation on Sale and Lease-Back Transactions
We have agreed that Equistar will not, and will not permit any Restricted
Subsidiary to, enter into any Sale and Lease-Back Transactions with any person
unless at least one of the following applies:
(a) Equistar or the Restricted Subsidiary would be entitled, under "--
Limitation on Liens," to incur debt in a principal amount equal to or
exceeding the Value of the Sale and Lease-Back Transaction, secured by
a lien on the property to be leased, without equally and ratably
securing the notes
(b) Within four months after the effective date of the Sale and Lease-Back
Transaction, whether made by Equistar or a Restricted Subsidiary,
Equistar applies to the voluntary retirement of Funded Debt an
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amount equal to the Value of the Sale and Lease-Back Transaction, less
the principal amount of notes delivered, within four months after the
effective date of the arrangements, to the trustee for retirement and
cancellation and the principal amount of other Funded Debt voluntarily
retired within that four-month period, excluding retirements of notes
and other Funded Debt as a result of conversions or under mandatory
sinking fund or prepayment provisions or by payment at maturity
Events of Default
The following are events of default with respect to the notes:
. our failure to pay interest on the notes for 30 days
. our failure to pay principal or premium on the notes
. our failure to observe or perform any other covenant or agreement in the
indenture for 60 days after written notice by the trustee or by the
holders of at least 25% in aggregate principal amount of the outstanding
debt securities under the indenture affected thereby
. bankruptcy, insolvency or reorganization events
If an event of default with respect to notes occurs and is continuing,
either the trustee or the holders of at least 25% in aggregate principal
amount of the outstanding notes or, if applicable, 25% in aggregate principal
amount of the outstanding debt securities affected thereby, may declare the
principal of and the accrued but unpaid interest immediately due and payable.
At any time after a declaration of acceleration with respect to notes has been
made, but before a judgment or decree for payment of money has been obtained
by the trustee, the holders of a majority in aggregate principal amount of the
notes may rescind the acceleration and its consequences if they comply with
specified conditions.
The holders of a majority in aggregate principal amount of the outstanding
debt securities under the indenture have the right to waive certain existing
or past defaults under the indenture.
The indenture provides that, subject to the duty of the trustee during
default to act with the required standard of care, the trustee is under no
obligation to exercise any of its rights or powers under the indenture at the
request or direction of any holders, unless such holders offer reasonable
indemnity to the trustee. As long as the requirements concerning
indemnification are satisfied, the holders of a majority in aggregate
principal amount of the outstanding affected debt securities under the
indenture have the right in most cases to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee under the
indenture or exercising any trust or power conferred on the trustee.
We are required to give the trustee a certificate stating whether or not we
are in default under the indenture and, if so, specifying all defaults and the
nature of all defaults every year.
Consolidation, Merger and Sale of Assets
We have agreed that each of Equistar and Equistar Funding will not
consolidate with or merge into, or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its assets, to anyone unless
each of the following conditions is satisfied:
. immediately after giving effect to the transaction, no default or event
of default will have happened and be continuing, and
. either Equistar or Equistar Funding shall be the continuing partnership
or corporation, as applicable, or the successor is
--organized under the laws of the United States, one of the states of
the United States or the District of Columbia and
--assumes by supplemental indenture all our obligations under the
indenture and the notes, and
. we deliver to the trustee an officers' certificate and opinion of counsel
stating that the transaction complies with these conditions
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Modification and Waiver
We and the trustee may amend or supplement the indenture, with the consent
of the holders of not less than a majority in aggregate principal amount of all
series of outstanding debt securities that are issued under the indenture and
affected by the amendment or supplement. Without the consent of the holder of
each outstanding note, we may not
. reduce the principal or premium or change the stated maturity of the
principal or premium of any note
. reduce the amount of debt securities under the indenture whose holders
must consent to an amendment or supplement to the indenture
. make any change in the percentage of principal amount of debt securities
under the indenture necessary to modify or waive any default
. reduce the rate of or change the time for payment of interest on any note
. impair the right to institute suit for the enforcement of any payment on
any note
The holders of a majority in aggregate principal amount of outstanding notes
affected by a covenant have the right to waive Equistar's compliance with some
of the covenants contained in the indenture.
We and the trustee may modify and amend the indenture without the consent of
any holder of notes
. to evidence a successor obligor under the indenture
. to add covenants or events of default for the benefit of the holders
. to secure the debt securities under the indenture
. to establish the form or terms of debt securities under the indenture
. to provide for the acceptance of appointment by a successor trustee or
facilitate the administration of the trusts under the indenture by more
than one trustee
. to cure any ambiguity or inconsistency in the indenture, provided such
modification or amendment does not adversely affect in any material
respect the interests of the holders of the notes
. to supplement any of the provisions of the indenture to the extent
necessary to permit or facilitate defeasance and discharge of any series
of notes, provided such modification or amendment does not adversely
affect in any material respect the interests of the holders of the notes
. to make any other change that does not adversely affect the rights of any
holder
Defeasance and Covenant Defeasance
The indenture provides that we may elect either
. to defease and be discharged from any and all obligations with respect to
all or a portion of the notes of any series (legal defeasance) except for
the obligations
--to register the transfer or exchange of notes
--to replace temporary, mutilated, destroyed, lost or stolen notes of
the series
--to maintain an office or agency in respect of the series of notes
--to hold moneys for payment in trust
or
. to be released from our obligations with respect to restrictive and other
covenants, and any omission to comply with these obligations will not
constitute a default or an event of default with respect to the notes
(covenant defeasance)
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In either case, upon our irrevocable deposit with the trustee, or other
qualifying trustee, in trust, of
. an amount in cash
. government obligations that, through the payment of principal and
interest according to their terms, will provide money in an amount, or
. a combination of the above
The amount deposited must be sufficient to pay the principal of and premium,
if any, on, and interest, if any, to stated maturity, or redemption, on the
notes, on the scheduled due dates.
We are required to deliver to the trustee an opinion of counsel stating
that the holders of these notes proposed to be defeased will not recognize
income, gain or loss for United States federal income tax purposes as a result
of legal defeasance or covenant defeasance. The opinion must also state that
holders will be subject to United States federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if legal defeasance or covenant defeasance had not occurred. The opinion, in
the case of legal defeasance, must refer to and be based upon a ruling of the
Internal Revenue Service or a change in applicable United States federal
income tax law occurring after the date of the indenture.
Payment
We are required to maintain an office or agency in each payment location
for the notes and may from time to time designate additional offices or
agencies, at which the principal of and premium, if any, on and interest, if
any, on the notes will be payable. Payments will be made in New York City, and
we will initially designate the office of the agent of the trustee in New York
City as an office where the principal, premium and interest will be payable.
We reserve the option to pay interest, if any, on the notes by
. check mailed to the registered holder at their address
. wire transfer to an account located inside the United States maintained
by the registered holder.
We may designate additional offices or agencies, approve a change in the
location of any office or agency and, except as provided above, rescind the
designation of any office or agency at any time.
Moneys we pay to the trustee or a paying agent for the payment of
principal, premium, if any, or interest, if any, on any note that remains
unclaimed for two years after the principal, premium or interest becomes due
and payable will be repaid to us. After that time, the holder of the note,
subject to applicable abandoned property or similar laws, will be an unsecured
general creditor and may look only to us for payment.
Transfer and Exchange
Subject to the terms of the indenture, notes may be presented for
registration of transfer and for exchange
. at each office or agency required to be maintained by us for payment of
each series, as described under "--Payment"
. at each other office or agency that we may designate from time to time
Registration of transfers and exchanges will be effected if the transfer agent
is satisfied with the evidence of ownership and identity of the holder making
the request and if the transfer form is duly executed. No service charge will
be made for any registration of transfer or exchange of notes, but we may
require you to pay any tax or other governmental charge incurred in connection
with the transfer or exchange.
In the event of any redemption in whole or in part, we will not be required
. to register the transfer of or exchange new notes of any series during a
period beginning at the opening of business 15 days before any selection
of notes of that series to be redeemed and ending at the close of
business on the date the relevant notice of redemption is mailed
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. to register the transfer of or exchange of any note or portion of any
note called for redemption, except the unredeemed portion, if any, of a
note being redeemed in part
. to register the transfer of or exchange of any note that has been
surrendered for repayment at the option of the holder, except the
portion, if any, of the note not to be so repaid
Definitions
We have provided below a summary of capitalized terms used in this summary
description of the notes. The indenture contains the full definition of all
these terms.
"Adjusted Treasury Rate" means, with respect to any redemption date, the
rate per annum equal to the semiannual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue,
expressed as a percentage of its principal amount equal to the Comparable
Treasury Price for the redemption date, plus 0.25%, in the case of each of the
8 1/2% notes and the 8 3/4% notes.
"Comparable Treasury Issue" means the United States Treasury security
selected by a Quotation Agent as having a maturity comparable to the remaining
term of the notes to be redeemed that would be utilized, at the time of
selection and according to customary financial practice, in pricing new issues
of corporate notes of comparable maturity to the remaining term of the notes.
"Comparable Treasury Price" is calculated with respect to any redemption
date as follows:
. the average of the bid and asked prices for the Comparable Treasury
Issue, expressed in each case as a percentage of its principal amount, on
the third business day preceding the redemption date, as shown in the
daily statistical release, or any successor release, published by the
Federal Reserve Bank of New York and designated "Composite 3:30 p.m.
Quotations for U.S. Government Securities"
. if the release, or any successor release, is not published or does not
contain prices on the business day,
--the average of the Reference Treasury Dealer Quotations for the
Redemption Date, or
--if we obtain only one Reference Treasury Dealer Quotation, the
Reference Treasury Dealer Quotation
"Consolidated Net Tangible Assets" means the total amount of assets, less
applicable reserves and other properly deductible items, after deducting the
following:
. all current liabilities excluding any which are by their terms extendible
or renewable at the option of the obligor to a time more than 12 months
after the time as of which the amount is being computed
. all goodwill, trade names, trademarks, patents, purchased technology,
unamortized debt discount and other like intangible assets, all as
specified on the most recent quarterly balance sheet of Equistar and
computed according to generally accepted accounting principles
"Funded Debt" means indebtedness of either Equistar or Equistar Funding,
including notes, provided that notes may only be redeemed according to "--
Optional Redemption," maturing by their terms thereof more than one year after
their original creation and ranking at least pari passu with the notes.
"Quotation Agent" means one of the Reference Treasury Dealers appointed and
certified to the trustee.
"Reference Treasury Dealer" means each of Chase Securities Inc.,
NationsBanc Montgomery Securities LLC, ABN AMRO Incorporated, BNY Capital
Markets, Inc., First Chicago Capital Markets, Inc. and J.P. Morgan Securities
Inc. and their respective successors. If any of the foregoing cease to be a
primary U.S. Government Securities dealer in New York City, we will substitute
another Government Securities dealer and certify to the trustee.
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"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as we
determine and certify to the trustee, of the bid and asked prices for the
Comparable Treasury Issue, expressed in each case as a percentage of its
principal amount, quoted in writing to us by the Reference Treasury Dealer at
5:00 p.m. on the third Business Day preceding the redemption date.
"Restricted Property" means
. any plant for the production of petrochemicals owned by Equistar or a
Subsidiary, except
--related facilities which in the opinion of the partnership governance
committee are transportation or marketing facilities
--any plant for the production of petrochemicals which in the opinion of
the partnership governance committee is not a principal plant of
Equistar and its Subsidiaries
. any shares of capital stock or indebtedness of a Restricted Subsidiary
owned by Equistar or a Subsidiary
"Restricted Subsidiary" means any Subsidiary which owns any Restricted
Property.
"Sale and Lease-Back Transaction" means any arrangement with any person,
other than Equistar or a Subsidiary, or to which any such person is a party,
providing for the leasing to Equistar or a Restricted Subsidiary for a period
of more than five years of any Restricted Property which has been or is to be
sold or transferred by Equistar or such Restricted Subsidiary to such person
or to any other person, other than Equistar or a Subsidiary, to which funds
have been or are to be advanced by such Person on the security of the leased
property.
"Subsidiary" means any corporation that at least a majority of the
outstanding securities of which having ordinary voting power to elect a
majority of the board of directors of such corporation, whether or not any
other class of securities has or might have voting power by reason of the
happening of a contingency, is at the time owned or controlled directly or
indirectly by Equistar and/or one or more Subsidiaries.
"Value" means, with respect to a Sale and Lease-Back Transaction, the
amount equal to the greater of
. the net proceeds of the sale or transfer of the property leased under a
Sale and Lease-Back Transaction, or
. the fair value, in the opinion of the partnership governance committee,
of the property at the time of entering into a Sale and Lease-Back
Transaction, in either case divided first by the number of full years of
the term of the lease and then multiplied by the number of full years of
the term remaining at the time of determination, without regard to any
renewal or extension options contained in the lease
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Federal Income Tax Considerations
The following summary fairly describes the material United States federal
income tax consequences expected to apply to the exchange of outstanding notes
for new notes. This summary is based upon the provisions of the Internal
Revenue Code of 1986, as amended, the final, temporary and proposed regulations
promulgated under the Internal Revenue Code, and administrative rulings and
judicial decisions now in effect. All of the above are subject to change or
different interpretations, possibly with retroactive effect. This discussion is
for general information only and does not purport to address all of the
possible federal income tax consequences or any other federal, or any state,
local or foreign, tax consequences of the acquisition, ownership and
disposition of the outstanding notes or new notes. It is limited to investors
who hold the outstanding notes and the new notes as capital assets and does not
address the federal income tax consequences that may be relevant to particular
investors in light of their unique circumstances or to certain types of
investors, such as dealers in securities, insurance companies, financial
institutions, foreign corporations, partnerships or trusts, nonresident alien
individuals, and tax-exempt entities, who may be subject to special treatment
under the federal income tax law.
An exchange of the outstanding notes for the new notes under the exchange
offers will not constitute a taxable event for federal income tax purposes. As
a result, holders who exchange their outstanding notes for new notes will not
recognize in income any accrued and unpaid interest on the new notes by reason
of the exchange. An exchanging holder will have the same adjusted basis and
holding period in the new notes as it had in the outstanding notes immediately
before the exchange.
Holders should consult their own tax advisor as to the particular tax
consequences to them of exchanging outstanding notes for new notes in the
exchange offers, including the applicability and effect of any state, local, or
foreign tax laws and or recent or possible future changes in the tax laws.
The Exchange and Registration Rights Agreement
In connection with the issuance of the outstanding notes, we entered into an
exchange and registration rights agreement. Under the exchange and registration
rights agreement, we agreed to
. file a registration statement with the SEC on or before 60 days after
February 16, 1999
. use our reasonable best efforts to cause the registration statement to be
declared effective under the Securities Act within 150 days after
February 16, 1999
. use our reasonable best efforts to cause the exchange offers to be
consummated within 180 days following February 16, 1999
. keep the exchange offers open for acceptance for a period of not less
than 30 calendar days after the date notice of the exchange offer is
mailed to holders of the outstanding notes
. accept for exchange all outstanding notes duly tendered and not validly
withdrawn under the exchange offers according to the terms of the
registration statement and letter of transmittal
As soon as practicable after the exchange offers registration statement
becomes effective, we will offer the holders of outstanding notes who are not
prohibited by any law or policy of the SEC from participating in these exchange
offers the opportunity to exchange their outstanding notes for exchange notes
registered under the Securities Act that are substantially identical to the
outstanding notes, except that the exchange notes will not contain terms with
respect to transfer restrictions, registration rights and additional interest.
The exchange and registration rights agreement also provides that we
. shall make available for a period of 180 days after the consummation of
the exchange offers a prospectus meeting the requirements of the
Securities Act to any broker-dealer for use in connection with any resale
of any new notes
92
. shall pay all expenses incident to the exchange offers, including the
expense of one counsel to the holders of the notes, and will indemnify
certain holders of the notes, including any broker-dealer, against
certain liabilities, including liabilities under the Securities Act
A broker-dealer which delivers a prospectus to purchasers in connection with
resales will be subject to various civil liability provisions under the
Securities Act and will be bound by the provisions of the exchange and
registration rights agreement, including some of the indemnification rights and
obligations.
We will use our reasonable best efforts to file with the SEC a shelf
registration statement to cover resales of the outstanding notes by those
holders who provide required information in connection with that shelf
registration statement under the following circumstances:
. if any changes in law, SEC rules or regulations or applicable
interpretations of these laws, rules or regulations by the staff of the
SEC do not permit us to effect the exchange offers as contemplated by the
exchange and registration rights agreement
. if the exchange offers are not consummated within 180 days after February
16, 1999
. if any initial purchaser of the outstanding notes so requests but only
with respect to any outstanding notes acquired directly by them
. if any holder of the outstanding notes notifies us that it is not
permitted to participate in the exchange offers or would not receive
fully tradeable new notes in the exchange offers
We will use our reasonable best efforts to keep the shelf registration
statement, if filed, effective for a period of two years after February 16,
1999. We have the ability to suspend the shelf registration statement for no
more than
. 45 days during the first 12-month period after February 16, 1999, and
. 90 days during any subsequent 12-month period
if we determine, in our reasonable best judgment upon the written advice of
counsel, that continued effectiveness would require disclosure of confidential
information or interfere with any financing, acquisition, reorganization or
other material transaction involving Equistar.
If a registration default occurs, we will be obligated to pay additional
interest to each holder of outstanding notes at a rate equal to 0.25% per
annum. If this registration default is not cured within 90 days, the interest
rate increases to 0.50% per annum. A registration defaults occurs if
. the registration statement is not filed with the SEC within 60 days of
February 16, 1999
. the registration statement or shelf registration statement is not
declared effective within 150 days of February 16, 1999
. the exchange offers are not consummated within 180 days of February 16,
1999
. the shelf registration statement is filed and declared effective within
180 days of February 16, 1999, but ceases to be effective
Following the cure of a registration default, additional interest will cease to
accrue. Additional interest does not accrue during a suspension period.
If you desire to tender your outstanding notes, you will be required to make
to us the representations described under "The Exchange Offers--Purpose and
Effect of the Exchange Offers" and "--Procedures for Tendering" to participate
in the exchange offers. In addition, we may require you to deliver information
to be used in connection with the shelf registration statement to have your
notes included in the shelf registration statement and benefit from the
provisions regarding additional interest described in the preceding paragraphs.
A
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holder who sells outstanding notes under the shelf registration statement
generally will be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to purchasers. A holder will
also be subject to the civil liability provisions under the Securities Act in
connection with the sales and will be bound by the provisions of the exchange
and registration rights agreement that are applicable to a holder, including
indemnification obligations.
The description of the exchange and registration rights agreement contained
in this section is a summary only, does not purport to be complete, and is
qualified in its entirety by reference to all provisions of the exchange and
registration rights agreement. The exchange and registration statement is filed
as an exhibit to the registration statement of which this prospectus is a part.
Book-Entry; Delivery and Form
The new notes will initially be represented by one or more permanent global
notes in definitive, fully registered book-entry form (the "Global Notes") that
will be registered in the name of Cede & Co., as nominee of DTC. The Global
Notes will be deposited, on behalf of the acquirors of the new notes
represented thereby, with a custodian for DTC for credit to the respective
accounts of the acquirors or to such other accounts as they may direct at DTC.
See "The Exchange Offers--Book-Entry Transfer."
The Global Notes
We expect that under procedures established by DTC
. upon deposit of the Global Notes with DTC or its custodian, DTC will
credit on its internal system a portion of the Global Notes that shall be
comprised of the corresponding respective amounts of the Global Notes to
the respective accounts of persons who have accounts with the depository
. ownership of the notes will be shown on, and the transfer or ownership
will be effected only through, records maintained by DTC or its nominee,
with respect to interests and records of participants and with respect to
interests of persons other than participants
So long as DTC or its nominee is the registered owner of the Global Notes,
DTC or its nominee, as the case may be, will be considered the sole owner or
holder of the notes represented by the Global Notes for all purposes under the
indenture. Except as provided below, owners of beneficial interests in Global
Notes
. will not be entitled to have notes represented by Global Notes registered
in their names
. will not receive or be entitled to receive physical delivery of
certificated notes
. will not be considered the owners or holders of the Global Notes under
the indenture for any purpose, including with respect to the giving of
any direction, instruction or approval to the trustee
Payments of the notes represented by Global Notes will be made to DTC, or
its nominee, as the registered owner. None of Equistar, Equistar Funding, the
trustee or the paying agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interest in the Global Notes or for maintaining, supervising or
reviewing any records relating to beneficial ownership interest under the
indenture.
We expect that DTC or its nominees, upon receipt of any payment on the notes
represented by the Global Notes, will credit participants' accounts with
payments in amounts proportionate to their respective beneficial interest in
the Global Notes as shown in the records of DTC or its nominee. We also expect
that participants will be governed by standing instructions and customary
practice as is now the case with securities held for the accounts of customers
registered in the names of nominees for the customers. Payment will be the
responsibility of the participants.
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Transfers between participants in DTC will be effected according to DTC's
procedures and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel will be effected in the ordinary way
according to their respective rules and operating procedures. If a holder
requires physical delivery of a certificated security for any reason, including
to sell notes to persons in states that require physical delivery of the
security or to pledge the security, a holder must transfer its interest in the
Global Notes according to the normal procedures of DTC, Euroclear or Cedel and
the procedures in the indenture.
Subject to compliance with the transfer restrictions applicable to the
notes, cross-market transfers between the participants in DTC, on the one hand,
and Euroclear or Cedel participants, on the other hand, will be effected
through DTC according to DTC's rules on behalf of Euroclear or Cedel, as the
case may be, by its respective depositary. Cross-market transactions will
require delivery of instructions to Euroclear or Cedel, as the case may be, by
the counter party in that system according to the rules and procedures and
within the established deadlines, in Brussels time, of such system if the
transaction meets its settlement requirements. Euroclear or Cedel, as the case
may be, will deliver instructions to its respective depositary to take action
to effect final settlement on its behalf by delivering or receiving interests
in the relevant Global Notes in DTC and making or receiving payment according
to normal procedures for same-day funds settlement applicable to DTC. Euroclear
participants and Cedel participants may not deliver instructions directly to
the depositaries for Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participants purchasing an interest in a Global Note from a participant
in DTC will be credited, and any crediting will be reported to the relevant
Euroclear or Cedel participant during the note settlement processing day
immediately following the settlement date of DTC. The note settlement day must
be a business day for Euroclear and Cedel. Cash received in Euroclear or Cedel
as a result of sales of interest in a Global Note by or through a Euroclear or
Cedel participant to a participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or Cedel
cash account only as of the business day for Euroclear or Cedel following DTC's
settlement date.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Notes among participants in
DTC, Euroclear and Cedel, they are under no obligation to perform or to
continue to perform procedures, and procedures may be discontinued at any time.
Neither we nor the trustee will have any responsibility for the performance by
DTC, Euroclear or Cedel or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Description of DTC
The description of the operations and procedures of DTC, Euroclear and Cedel
is provided below solely as a matter of convenience. These operations and
procedures are solely within the control of the respective settlement systems
and are subject to change by them from time to time. Neither we nor the initial
purchasers takes any responsibility for these operations or procedures, and
investors are urged to contact the relevant system or its participants directly
to discuss these matters.
DTC has advised that it is
. a limited purpose trust company organized under the laws of the State of
New York
. a "banking organization" within the meaning of the New York Banking Law
. a member of the Federal Reserve System
. a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended
. a "clearing agency" registered under Section 17A of the Securities
Exchange Act of 1934, as amended
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DTC was created to hold securities for its participants and facilitates the
clearance and settlement of securities transactions between participants
through electronic book-entry changes to the accounts of its participants,
thereby eliminating the need for physical transfer and delivery of
certificates.
DTC's participants include securities brokers and dealers, including the
initial purchasers, banks and trust companies, clearing corporations and
certain other organizations. Indirect access to DTC's system is also available
to other entities such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly. Investors who are not participants may beneficially own
securities held by or on behalf of DTC only through participants or indirect
participants.
Certificated Notes
Interest in the Global Notes may be exchanged for certificated securities if
. we notify the trustee in writing that DTC is no longer willing or able to
act as a depositary or DTC ceases to be registered as a clearing agency
under the Exchange Act and a successor depositary is not appointed within
90 days of notice or cessation
. we, at our option, notify the trustee in writing that we elect to cause
the issuance of notes in certificated form under the indenture
. other events occur as provided in the indenture
Upon the occurrence of any of the events described in the preceding sentence,
we will cause the appropriate certificated securities to be delivered.
Neither Equistar, Equistar Funding nor the trustee shall be liable for any
delay by DTC or any participant or indirect participant in identifying the
beneficial owners of the related notes, and each person may conclusively rely
on, and shall be protected in relying on, instructions from DTC for all
purposes, including with respect to the registration and delivery, and the
respective principal amounts, of the notes to be issued.
Plan of Distribution
Based on interpretations by the staff of the SEC in no action letters issued
to third parties, we believe that you may transfer new notes issued under the
exchange offers in exchange for the outstanding notes if
. you acquire the new notes in the ordinary course of your business
. you are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a
distribution of new notes
Broker-dealers receiving new notes in the exchange offers will be subject to a
prospectus delivery requirement with respect to resales of the new notes.
We believe that you may not transfer new notes issued under the exchange
offers in exchange for the outstanding notes if you are
. our "affiliate" within the meaning of Rule 405 under the Securities Act
. a broker-dealer that acquired outstanding notes directly from us
. a broker-dealer that acquired outstanding notes as a result of market-
making or other trading activities without compliance with the
registration and prospectus delivery provisions of the Securities Act
To date, the staff of the SEC has taken the position that participating
broker-dealers may fulfill their prospectus delivery requirements with respect
to transactions involving an exchange of securities such as this exchange
offers, other than a resale of an unsold allotment from the original sale of
the outstanding notes, with
96
the prospectus contained in the exchange offers registration statement. In the
exchange and registration rights agreement, we have agreed to permit
participating broker-dealers use of this prospectus in connection with the
resale of new notes. We have agreed that, for a period up to 180 days after the
expiration of the exchange offers, we will make this prospectus, and any
amendment or supplement to this prospectus, available to any broker-dealer that
requests these documents in the letter of transmittal. In addition, until
, 1999, all dealers effecting transactions in the new notes may be
required to deliver a prospectus.
If you wish to exchange your outstanding notes for new notes in the exchange
offers, you will be required to make representations to us as described in "The
Exchange Offers--Purpose and Effect of the exchange Offer" and "--Procedures
for Tendering--Your Representations to Us" of this prospectus and in the letter
of transmittal. In addition, if you are a broker-dealer who receives new notes
for your own account in exchange for outstanding notes that were acquired by
you as a result of market-making activities or other trading activities, you
will be required to acknowledge that you will deliver a prospectus in
connection with any resale by you of new notes.
We will not receive any proceeds from any sale of new notes by broker-
dealers. Broker-dealers who receive new notes for their own account in the
exchange offers may sell them from time to time in one or more transactions
. in the over-the-counter market
. in negotiated transactions
. through the writing of options on the new notes or a combination of
methods of resale
. at market prices prevailing at the time of resale
. at prices related to prevailing market prices or negotiated prices
Any resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any broker-dealer or the purchasers of any new notes. Any broker-dealer
that resells new notes it received for its own account in the exchange offers
and any broker or dealer that participates in a distribution of new notes may
be deemed to be an "underwriter" within the meaning of the Securities Act. Any
profit on any resale of new notes and any commissions or concessions received
by any persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that, by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incidental to the exchange offers other
than commissions and concessions of any brokers or dealers. We will indemnify
holders of the outstanding notes, including any broker-dealers, against some
liabilities, including liabilities under the Securities Act, as provided in the
exchange and registration rights agreement.
Legal Matters
Baker & Botts, L.L.P., Houston, Texas, counsel for Equistar and Equistar
Funding, has issued an opinion about the legality of the new notes.
97
Experts
The following financial statements included in this prospectus have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting
. of Equistar as of and for the year ended December 31, 1998, and as of
December 31, 1997, and for the one month then ended
. of the Lyondell contributed business
--as of November 30, 1997
--as of December 31, 1996
--for the eleven-month period ended November 30, 1997
--for each of the two years in the period ended December 31, 1996
. of the Millennium contributed business
--as of November 30, 1997
--as of December 31, 1996
--for the eleven-month period ended November 30, 1997
--for each of the two years in the period ended December 31, 1996
The financial statements included in this prospectus and elsewhere in the
registration statement, to the extent and for the periods indicated in their
report appearing on page F-55, have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
Available Information
Neither Equistar nor Equistar Funding currently files reports with the SEC
or delivers annual reports to security holders under the Exchange Act. We will
provide without charge, upon written request, a copy of any information that is
required to enable resales of the notes to be made under Rule 144A under the
Securities Act, a copy of the exchange and registration rights agreement as
described under "Exchange Offers" and "The Exchange and Registration Rights
Agreement" and copies of other documents as described under "Description of the
Partnership Agreement" and "Description of the Parent Agreement." Written
requests for this information should be addressed to Equistar Chemicals, LP at
1221 McKinney Street, Houston, Texas 77010, Attention: Gerald A. O'Brien.
98
INDEX TO FINANCIAL STATEMENTS
Equistar Chemicals, LP:
Audited Financial Statements
Report of Independent Accountants..................................... F-2
Balance Sheets as of December 31, 1998 and 1997....................... F-3
Statements of Income for the year ended December 31, 1998 and the one
month ended December 31, 1997........................................ F-4
Statements of Partners' Capital for the year ended December 31, 1998
and the one month ended December 31, 1997............................ F-5
Statements of Cash Flows for the year ended December 31, 1998 and the
one month ended December 31, 1997.................................... F-6
Notes to Financial Statements......................................... F-7
Lyondell Contributed Business:
Audited Financial Statements
Report of Independent Accountants..................................... F-24
Balance Sheets as of November 30, 1997 and December 31, 1996.......... F-25
Statements of Income and Invested Capital for the eleven months ended
November 30, 1997 and years ended December 31, 1996 and 1995......... F-26
Statements of Cash Flows for the eleven months ended November 30, 1997
and years ended December 31, 1996 and 1995........................... F-27
Notes to Financial Statements......................................... F-28
Millennium Contributed Business:
Audited Financial Statements
Report of Independent Accountants..................................... F-36
Balance Sheets as of November 30, 1997 and December 31, 1996.......... F-37
Statements of Income for the eleven months ended November 30, 1997 and
years ended December 31, 1996 and 1995............................... F-38
Statements of Changes in Invested Capital for the eleven months ended
November 30, 1997 and year ended December 31, 1996................... F-39
Statements of Cash Flows for the eleven months ended November 30, 1997
and years ended December 31, 1996 and 1995........................... F-40
Notes to Financial Statements......................................... F-41
Occidental Contributed Business:
Unaudited Financial Statements
Balance Sheet as of March 31, 1998.................................... F-46
Statement of Operations and Invested Capital for the three months
ended March 31, 1998................................................. F-47
Statement of Cash Flows for the three months ended March 31, 1998..... F-48
Notes to Financial Statements......................................... F-49
Audited Financial Statements
Report of Independent Accountants..................................... F-55
Balance Sheets as of December 31, 1997 and 1996....................... F-56
Statements of Operations and Invested Capital for the years ended
December 31, 1997, 1996 and 1995..................................... F-57
Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995............................................................. F-58
Notes to Financial Statements......................................... F-59
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Governance Committee
of Equistar Chemicals, LP:
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of Equistar Chemicals, LP (the
"Partnership") at December 31, 1998 and 1997, and the results of its operations
and its cash flows for the year ended December 31, 1998 and for the period from
December 1, 1997 (inception) to December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
February 26, 1999
F-2
EQUISTAR CHEMICALS, LP
BALANCE SHEETS
Millions of dollars
December 31
----------------
1998 1997
------- -------
ASSETS
------
Current assets:
Cash and cash equivalents................................... $ 66 $ 41
Accounts receivable:
Trade, net................................................ 376 428
Related parties........................................... 111 36
Receivables from partners................................... 3 150
Inventories................................................. 549 513
Prepaid expenses and other current assets................... 25 24
------- -------
Total current assets.................................... 1,130 1,192
------- -------
Property, plant and equipment................................. 5,847 3,690
Less accumulated depreciation and amortization................ (1,772) (1,572)
------- -------
4,075 2,118
Investment in PD Glycol....................................... 55 --
Goodwill, net................................................. 1,151 1,139
Deferred charges and other assets............................. 257 151
------- -------
Total assets.................................................. $ 6,668 $ 4,600
======= =======
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Current liabilities:
Accounts payable:
Trade..................................................... $ 264 $ 154
Related parties........................................... 15 18
Payables to partners........................................ 9 63
Current maturities of long-term debt........................ 150 36
Other accrued liabilities................................... 200 65
------- -------
Total current liabilities............................... 638 336
------- -------
Obligations under capital leases.............................. 205 --
Long-term debt................................................ 1,865 1,512
Other liabilities and deferred credits........................ 75 34
Commitments and contingencies
Partners' capital:
Partners' capital........................................... 3,885 3,063
Note receivable from Lyondell LP............................ -- (345)
------- -------
Total partners' capital................................. 3,885 2,718
------- -------
Total liabilities and partners' capital....................... $ 6,668 $ 4,600
======= =======
See notes to financial statements.
F-3
EQUISTAR CHEMICALS, LP
STATEMENTS OF INCOME
Millions of dollars
For the period
For the from December 1,
year ended 1997 (inception)
December 31, to December 31,
1998 1997
------------ ----------------
Sales and other operating revenues:
Unrelated parties............................... $3,818 $338
Related parties................................. 545 27
------ ----
4,363 365
------ ----
Operating costs and expenses:
Cost of sales:
Unrelated parties............................. 3,313 261
Related parties............................... 460 26
Selling, general and administrative expenses.... 273 21
Unusual charges................................. 35 42
------ ----
4,081 350
------ ----
Operating income................................ 282 15
Interest expense.................................. (156) (10)
Interest income................................... 17 2
------ ----
Net income........................................ $ 143 $ 7
====== ====
See notes to financial statements.
F-4
EQUISTAR CHEMICALS, LP
STATEMENTS OF PARTNERS' CAPITAL
For the year ended December 31, 1998 and for the period from December 1, 1997
(inception) to
December 31, 1997
Millions of dollars
Lyondell Millennium Occidental Total
-------- ---------- ---------- -------
Balance at December 1, 1997
(inception).......................... $ -- $ -- $ -- $ --
Capital contributions at inception:
Net assets.......................... 763 2,048 -- 2,811
Note receivable from Lyondell LP.... 345 -- -- 345
Net income............................ 4 3 -- 7
Distributions to partners............. (57) (43) -- (100)
------ ------ ------ -------
Balance at December 31, 1997.......... 1,055 2,008 -- 3,063
------ ------ ------ -------
Capital contributions:
Net assets.......................... -- -- 2,097 2,097
Other............................... (14) 9 8 3
Net income (loss)..................... 84 64 (5) 143
Distributions to partners............. (512) (460) (449) (1,421)
------ ------ ------ -------
Balance at December 31, 1998.......... $ 613 $1,621 $1,651 $ 3,885
====== ====== ====== =======
See notes to financial statements.
F-5
EQUISTAR CHEMICALS, LP
STATEMENTS OF CASH FLOWS
Millions of dollars
For the period
For the year from December 1,
ended 1997 (inception)
December 31, to
1998 December 31, 1997
------------ -----------------
Cash flows from operating activities:
Net income..................................... $ 143 $ 7
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 268 19
Loss on disposition of property, plant and
equipment.................................... 8 --
Equity in losses of investment in PD Glycol... 3 --
Changes in assets and liabilities, net of the
effects of assets contributed:
Decrease (increase) in accounts receivable... 105 (100)
Decrease (increase) in receivables from
partners.................................... 147 (101)
Decrease (increase) in inventories........... 133 (5)
Increase in accounts payable................. 40 188
(Decrease) increase in payables to partners.. (63) 54
Increase in other accrued liabilities........ 122 48
Net change in other working capital
accounts.................................... 2 (15)
Other........................................ (62) 7
------- -----
Net cash provided by operating activities... 846 102
------- -----
Cash flows from investing activities:
Additions to property, plant and equipment..... (200) (12)
Proceeds from disposition of property, plant
and equipment................................. 3 --
Contributions and advances to affiliates....... (15) --
------- -----
Net cash used in investing activities....... (212) (12)
------- -----
Cash flows from financing activities:
Borrowings of long-term debt................... 757 50
Repayments of long-term debt................... (290) --
Proceeds from payment of note receivable by
Lyondell...................................... 345 --
Cash contributions from partners............... -- 1
Distributions to partners...................... (1,421) (100)
------- -----
Net cash used in financing activities....... (609) (49)
------- -----
Increase in cash and cash equivalents........... 25 41
Cash and cash equivalents at beginning of
period......................................... 41 --
------- -----
Cash and cash equivalents at end of period...... $ 66 $ 41
======= =====
See notes to financial statements.
F-6
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS
1. Formation of the Company and Operations
Pursuant to a partnership agreement (the "Partnership Agreement") Lyondell
Chemical Company ("Lyondell") and Millennium Chemicals, Inc. ("Millennium")
formed Equistar Chemicals, LP ("Equistar" or the "Partnership"), a Delaware
limited partnership, which commenced operations on December 1, 1997. From
December 1, 1997 to May 15, 1998, the Partnership was owned 57 percent by
Lyondell and 43 percent by Millennium. Lyondell owns its interest in the
Partnership through two wholly-owned subsidiaries, Lyondell Petrochemical G.P.
Inc. ("Lyondell GP") and Lyondell Petrochemical L.P. Inc. ("Lyondell LP").
Millennium also owns its interest in the Partnership through two wholly-owned
subsidiaries, Millennium Petrochemicals GP LLC ("Millennium GP") and Millennium
Petrochemicals LP LLC ("Millennium LP").
On May 15, 1998, the Partnership was expanded with the contribution of
certain assets from Occidental Petroleum Corporation ("Occidental") (see Note
3). These assets include the ethylene, propylene and ethylene oxide ("EO") and
EO derivatives businesses and certain pipeline assets held by Oxy
Petrochemicals Inc. ("Oxy Petrochemicals"), a 50 percent interest in a joint
venture between PDG Chemical Inc. ("PDG Chemical") and Du Pont de Nemours and
Company ("PD Glycol"), and a lease to the Partnership of the Lake Charles,
Louisiana olefins plant and related pipelines held by Occidental Chemical
Corporation ("Occidental Chemical") (collectively, the "Occidental Contributed
Business"). Occidental Chemical, Oxy Petrochemicals and PDG Chemical are
wholly-owned, indirect subsidiaries of Occidental. The Occidental Contributed
Business included olefins plants at Corpus Christi and Chocolate Bayou, Texas,
EO/ethylene glycol and EO derivatives businesses located at Bayport, Texas,
Occidental's 50 percent ownership of PD Glycol, which operates a polyglycol
plant at Beaumont, Texas, 1,430 miles of owned and leased ethylene/propylene
pipelines, and the lease to the Partnership of the Lake Charles, Louisiana
olefins plant and related pipelines.
In exchange for the Occidental Contributed Business, two subsidiaries of
Occidental were admitted as limited partners and a third subsidiary was
admitted as a general partner in the Partnership for an aggregate partnership
interest of 29.5 percent. In addition, the Partnership assumed approximately
$205 million of Occidental indebtedness and the Partnership issued a promissory
note to an Occidental subsidiary in the amount of $419.7 million, which was
subsequently paid in cash in June 1998. In connection with the contribution of
the Occidental Contributed Business and the reduction of Millennium's and
Lyondell's ownership interests in the Partnership, the Partnership also issued
a promissory note to Millennium LP in the amount of $75 million, which was
subsequently paid in June 1998. These payments are included in distributions to
partners in the accompanying statements of partners' capital and of cash flows.
The consideration paid for the Occidental Contributed Business was determined
based upon arms-length negotiations between Lyondell, Millennium, and
Occidental. In connection with the transaction, the Partnership and Occidental
also entered into a long-term agreement for the Partnership to supply the
ethylene requirements for Occidental Chemical's U.S. manufacturing plants.
After completion of this transaction, the Partnership is owned 41 percent by
Lyondell, 29.5 percent by Millennium and 29.5 percent by Occidental, through
its wholly-owned subsidiaries Occidental Petrochem Partner GP Inc. ("Occidental
GP"), Occidental Petrochem Partner 1, Inc. ("Occidental LP1") and Occidental
Petrochem Partner 2, Inc. ("Occidental LP2").
The Partnership owns and operates the petrochemicals and polymers businesses
contributed by Lyondell, Millennium, and Occidental (the "Contributed
Businesses") which consist of 20 manufacturing facilities on the U.S. Gulf
Coast and in the U.S. Midwest. The petrochemicals segment manufactures and
markets olefins, oxygenated chemicals, aromatics and specialty chemicals.
Olefins include ethylene, propylene and butadiene, and oxygenated chemicals
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
F-7
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
("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 resins, concentrates and compounds, and polymeric powders.
The Partnership Agreement provides that Equistar is governed by a
Partnership Governance Committee consisting of nine representatives, three
appointed by each partner. Most of the significant decisions of the Partnership
Governance Committee require unanimous consent, including approval of the
Partnership's Strategic Plan and annual updates thereof.
Pursuant to the Partnership Agreement, net income is allocated among the
partners on a pro rata basis based on their percentage ownership of the
Partnership. Distributions are made to the partners based on their percentage
ownership of the Partnership. Additional cash contributions required by the
Partnership will also be based on the partners' percentage ownership of the
Partnership.
2. Summary of Significant Accounting Policies
Revenue Recognition--Revenue from product sales is generally recognized upon
delivery of products to the customer.
Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. The
Partnership's policy is to invest cash in conservative, highly rated
instruments and limit the amount of credit exposure to any one institution. The
Partnership performs periodic evaluations of the relative credit standing of
these financial institutions which are considered in the Partnership's
investment strategy.
The Partnership has no requirements for compensating balances in a specific
amount at a specific point in time. The Partnership does maintain compensating
balances for some of its banking services and products. Such balances are
maintained on an average basis and are solely at the Partnership's discretion.
As a result, none of the Partnership's cash is restricted.
Accounts Receivable--The Partnership sells its products primarily to
companies in the petrochemicals and polymers industries. The Partnership
performs ongoing credit evaluations of its customers' financial condition and,
in certain circumstances, requires letters of credit from them. The
Partnership's allowance for doubtful accounts, which is reflected in the
accompanying balance sheet as a reduction of accounts receivable, totaled $3
million at December 31, 1998. The Partnership had no allowance for doubtful
accounts recorded at December 31, 1997.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined on the last-in, first-out ("LIFO") basis except for materials and
supplies, which are valued at average cost.
Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. Depreciation of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the related assets,
ranging from 5 to 30 years.
Upon retirement or sale, the Partnership removes the cost of the assets and
the related accumulated depreciation from the accounts and reflects any
resulting gains or losses in the statement of income. The Partnership's policy
is to capitalize interest cost incurred on debt during the construction of
major projects exceeding one year.
F-8
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Turnaround Maintenance and Repair Expenses--Cost of major repairs and
maintenance incurred in connection with turnarounds of units at the
Partnership's manufacturing facilities are deferred and amortized on a
straight-line basis until the next planned turnaround, generally five to seven
years.
Deferred Software Costs - Costs to purchase and develop software for
internal use are deferred and amortized on a straight-line basis over 10 years.
The Partnership amortized $6 million and less than $1 million of deferred
software costs for the year ended December 31, 1998 and during the period from
December 1, 1997 (inception) to December 31, 1997, respectively.
Goodwill--Goodwill includes goodwill contributed by Millennium and goodwill
recorded in connection with the contribution of Occidental's assets. Goodwill
is being amortized using the straight-line method over forty years. Management
periodically evaluates goodwill for impairment based on the anticipated future
cash flows attributable to the related operations. Such expected cash flows, on
an undiscounted basis, are compared to the carrying value of the tangible and
intangible assets, and if impairment is indicated, the carrying value of
goodwill, and if necessary other related assets, is adjusted. Management
believes that no impairment exists at December 31, 1998. The Partnership
amortized $31 million and $3 million of goodwill for the year ended December
31, 1998 and during the period from December 1, 1997 (inception) to December
31, 1997, respectively. Accumulated amortization of goodwill was $166 million
and $135 million at December 31, 1998 and 1997, respectively.
Investment in PD Glycol--Equistar holds a 50 percent interest in a joint
venture with Du Pont de Nemours and Company that owns an ethylene glycol
facility in Beaumont, Texas. This investment was contributed by Occidental in
1998. The investment in PD Glycol is accounted for under the equity method.
Environmental Remediation Costs--Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Estimates have not
been discounted to present value. Environmental remediation costs are expensed
or capitalized in accordance with generally accepted accounting principles.
Pension and Other Postretirement Benefit Plans--During 1998, the Partnership
adopted Statement of Financial Accounting Standards ("SFAS") No. 132,
Employers' Disclosures about Pensions and Other Retirement Benefits. The
provisions of SFAS No. 132 revise employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of these plans. SFAS No. 132 standardizes the disclosure
requirements for these plans, to the extent practicable.
Exchanges--Finished product exchange transactions, which involve homogeneous
commodities in the same line of business and do not involve the payment or
receipt of cash, are not accounted for as purchases and sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance with
the normal LIFO valuation policy. Exchanges settled through payment and receipt
of cash are accounted for as purchases and sales.
Income Taxes--The Partnership is not subject to federal income taxes as
income is reportable directly by the individual partners; therefore, there is
no provision for income taxes in the accompanying financial statements.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Segment and Related Information - In 1998, the Partnership adopted SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 supercedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Partnership's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect the results of operations or the
financial position of the Partnership (see Note 18).
Reclassifications--Certain 1997 amounts have been restated to conform to
classifications adopted in 1998.
3. Addition of Occidental Contributed Business
On May 15, 1998, the Partnership was expanded with the contribution of
certain assets from Occidental. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the results of operations for
these assets are included in the accompanying statement of income prospectively
from May 15, 1998. The consideration paid for the Occidental Contributed
Business was approximately $2.1 billion and was allocated to the assets
contributed and liabilities assumed based on the estimated fair values of such
assets and liabilities at the date of the contribution. The fair value of the
assets contributed and liabilities assumed by the Partnership on May 15, 1998
is as follows:
Millions of dollars
-------------------
Total current assets.............................................. $ 281
Property, plant and equipment..................................... 1,964
Investment in PD Glycol........................................... 58
Goodwill.......................................................... 43
Deferred charges and other assets................................. 49
------
Total assets.................................................... $2,395
======
Other current liabilities......................................... $ 79
Long-term debt.................................................... 205
Other liabilities and deferred credits............................ 14
Partners' capital................................................. 2,097
------
Total liabilities and partners' capital......................... $2,395
======
The unaudited pro forma combined historical results of the Partnership as if
the Occidental Contributed Business had been contributed on January 1, 1998 is
as follows:
For the year
ended
December 31,
Millions of dollars 1998
------------------- ------------
Sales and other operating revenues........................... $4,869
Unusual charges.............................................. 35
Operating income............................................. 320
Net income................................................... 154
The unaudited pro forma data presented above is not necessarily indicative
of the results of operations of the Partnership that would have occurred had
such transaction actually been consummated as of January 1, 1998, nor are they
necessarily indicative of future results.
F-10
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Supplemental Cash Flow Information
Millions of dollars 1998 1997
------------------- ---- ----
Cash paid for interest.......................................... $154 $--
==== ===
Noncash investing and financing activities:
Noncash adjustments to contributed capital.................... $ 3 $--
Inventory transfer from PD Glycol............................. 15 --
==== ===
Historical cost of assets contributed and liabilities assumed by the
Partnership in December 1997 (inception):
Total current assets.............................................. $ 948
Property, plant and equipment, net................................ 2,121
Goodwill, net..................................................... 1,142
Deferred charges and other assets................................. 158
------
Total assets.................................................... $4,369
======
Current maturities of long-term debt.............................. $ 36
Other current liabilities......................................... 17
Long-term debt.................................................... 1,462
Other liabilities and deferred credits............................ 43
Partners' capital................................................. 3,156
Note receivable from Lyondell LP.................................. (345)
------
Total liabilities and partners' capital......................... $4,369
======
5. Financial Instruments
The fair value of all financial instruments included in current assets and
current liabilities, including cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities approximated their carrying value due
to their short maturity. Based on the borrowing rates currently available to
the Partnership for debt with terms and average maturities similar to the
Partnership's debt portfolio, the fair value of the Partnership's long-term
debt, including amounts due within one year, was approximately $2.3 billion and
$1.5 billion at December 31, 1998 and 1997, respectively.
The Partnership had issued letters of credit totaling $2.6 million and $4
million at December 31, 1998 and 1997, respectively.
6. Related Party Transactions
Loans to Millennium and Occidental--In connection with Occidental's entry
into Equistar in May 1998, Equistar executed promissory notes to Millennium and
Occidental in the principal amounts of $75.0 million and $419.7 million,
respectively. Each of the notes provides for the annual accrual of interest
(based on a year of 360 days and actual days elapsed) at a rate equal to LIBOR
plus .6 percent. These notes were paid in full in June 1998. Interest expense
incurred on these notes during 1998 was $3 million.
Note Receivable from Lyondell LP--Upon formation of the Partnership,
Lyondell LP contributed capital to the Partnership in the form of a $345
million promissory note (the "Lyondell Note"). The Lyondell Note bears interest
at LIBOR plus a market spread. The note was repaid in full by Lyondell in July
1998. Interest income accrued on the Lyondell note totaled $12.8 million and
$1.75 million during 1998 and during the period from December 1, 1997
(inception) to December 31, 1997, respectively.
F-11
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Shared Services Agreement with Lyondell--Lyondell provides certain
corporate, general and administrative services to the Partnership, including
legal, tax, treasury, risk management and other services pursuant to a shared
services agreement. During the year ended December 31, 1998, Lyondell charged
the Partnership $3 million for these services. During the period December 1,
1997 (inception) to December 31, 1997, charges from Lyondell were less than $1
million. As part of the shared services agreement, the Partnership provides
certain general and administrative services to Lyondell, such as health, safety
and environmental services, human resource services, information services and
legal services. During the year ended December 31, 1998 and during the period
December 1, 1997 (inception) to December 31, 1997, the Partnership charged
Lyondell less than $1 million for these services.
Shared Services and Shared-Site Agreements with Millennium--The Partnership
and Millennium have entered into a variety of operating, manufacturing and
technical service agreements related to the business of Equistar and the vinyl
acetate monomers, acetic acid, synthesis gas and methanol businesses retained
by Millennium Petrochemicals. These agreements include the provision by the
Partnership to Millennium Petrochemicals of materials management, certain
utilities, administrative office space, health, safety and environmental
services and computer services. During the year ended December 31, 1998, the
Partnership charged Millennium Petrochemicals $5 million for these services.
During the period from December 1, 1997 (inception) to December 31, 1997,
charges to Millennium Petrochemicals were less than $1 million. These
agreements also include the provision by Millennium Petrochemicals to the
Partnership of certain operational services, including waste water treatment
and barge dock access. During the year ended December 31, 1998 and during the
period December 1, 1997 (inception) to December 31, 1997, Millennium
Petrochemicals charged the Partnership less than $1 million for these services.
Operating Agreement with Occidental Chemical Corporation--On May 15, 1998,
Occidental Chemical and the Partnership entered into an Operating Agreement
(the "Operating Agreement") whereby Occidental Chemical agreed to operate and
maintain the Occidental Contributed Business and to cause third-parties to
continue to provide equipment, products and commodities to those businesses
upon substantially the same terms and conditions as provided prior to the
transfer. Under the terms of the Operating Agreement, the Partnership agreed to
reimburse Occidental Chemical for its cost in connection with the services
provided to the Partnership, and the Partnership agreed to pay Occidental
Chemical an administrative fee. The Operating Agreement terminated in
accordance with its terms on June 1, 1998. During the term of the Operating
Agreement, the Partnership paid Occidental Chemical an administrative fee of $1
million.
Transition Services Agreement with Occidental Chemical--On June 1, 1998,
Occidental Chemical and the Partnership entered into a Transition Services
Agreement (the "TSA"). Under the terms of the TSA, Occidental Chemical agreed
to provide the Partnership certain services in connection with the Occidental
Contributed Business, including services related to accounting, payroll, office
administration, marketing, transportation, purchasing and procurement,
management, human resources, customer service, technical services and others.
Between June 1, 1998 and December 31, 1998, the Partnership expensed $6 million
in connection with services provided pursuant to the TSA. The TSA expires by
its terms on June 1, 1999.
Occidental Chemical Ethylene Sales Agreement--The Partnership and Occidental
Chemical entered into a Sales Agreement, dated May 15, 1998 (the "Ethylene
Sales Agreement"). Under the terms of the Ethylene Sales Agreement, Occidental
Chemical has agreed to purchase an annual minimum amount of ethylene from the
Partnership equal to 100 percent of the ethylene feedstock requirements of
Occidental Chemical's United States plants (estimated to be 2 billion pounds
per year at the time of the signing of the agreement) less any quantities up to
250 million pounds tolled in accordance with the provisions of such agreement.
The Partnership's maximum supply obligation in any calendar year under the
Ethylene Sales Agreement is 2.55 billion pounds. Upon three years notice from
either party to the other, the Partnership's maximum supply
F-12
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
obligation in any calendar year under the Ethylene Sales Agreement may be
"phased down" as set forth in the agreement, provided that no phase down may
occur prior to January 1, 2009. In accordance with the phase down provisions of
the agreement, the annual minimum requirements set forth in the agreement must
be phased down over at least a five year period so that the annual required
minimum can not decline to zero prior to December 31, 2013 unless certain
specified force majeure events occur. The Ethylene Sales Agreement provides for
an ethylene sales price that is generally reflective of market prices and will
be determined pursuant to a formula using the Partnership's sales price to
third parties and several published market price indices. During the period
from May 15, 1998 to December 31, 1998, the Partnership charged Occidental
Chemical $171 million under the Ethylene Sales Agreement.
Product Sales to Millennium--The Partnership sells ethylene to Millennium at
market-related prices pursuant to an agreement entered into in connection with
the formation of Equistar. Under this agreement, Millennium is required to
purchase 100 percent of its ethylene requirements for its LaPorte, Texas
facility (estimated to be 300 million pounds per year), up to a maximum of 330
million pounds per year. Millennium has the option to increase the amount
purchased to up to 400 million pounds per year beginning January 1, 2001. The
initial term of the contract expires December 1, 2000 and thereafter, the
contract automatically renews annually. Either party may terminate on one
year's notice, except that if Millennium elects to increase its purchases under
the contract, a party must provide two year's notice of termination. The
pricing terms of this agreement are similar to the Ethylene Sales Agreement
with Occidental Chemical. The Partnership charged Millennium $41 million and $4
million for ethylene for 1998 and December 1997, respectively.
Product Sales to Lyondell--Lyondell acquired its intermediate chemicals and
derivatives business through the acquisition of ARCO Chemical Company effective
August 1, 1998. Sales to Lyondell, primarily for ethylene, propylene, MTBE,
benzene and alkylate, totaled $97 million for the period from August 1, 1998 to
December 31, 1998, and were based on price terms generally reflective of
market.
Transactions with LCR.--Lyondell's rights and obligations under the terms of
its product sales and feedstock purchase agreements with LYONDELL-CITGO
Refining LP ("LCR"), a joint venture investment of Lyondell, were assigned to
the Partnership. Accordingly, certain refinery products are sold to the
Partnership as feedstocks, and certain olefins by-products are sold to LCR for
processing into gasoline. Sales to LCR were $236 million and $27 million and
purchases from LCR were $131 million and $10 million for the year ended
December 31, 1998 and for the period from December 1, 1997 (inception) to
December 31, 1997, respectively. The Partnership also assumed certain tolling
arrangements as well as terminalling and storage obligations between Lyondell
and LCR and performs certain marketing services for LCR. Aggregate charges
under these various service agreements of $15 million were made to LCR by the
Partnership with respect to 1998. No charges were made during December 1997.
All of the agreements between LCR and the Partnership are on terms generally
representative of prevailing market prices. The Partnership also has a shared
services agreement with LCR to provide LCR with information services, including
mainframe processing and maintenance. Net charges to LCR by the Partnership for
the shared services agreement were less than $1 million during 1998. No charges
were made during December 1997.
Transactions with Lyondell Methanol--The Partnership provides operating and
other services for Lyondell Methanol Company, L.P. ("Lyondell Methanol") under
the terms of existing agreements that were assumed by Equistar from Lyondell,
including the lease to Lyondell Methanol by the Partnership of the real
property on which its methanol plant is located. Pursuant to the terms of those
agreements, Lyondell Methanol pays the Partnership a management fee and will
reimburse certain expenses of the Partnership at cost. Management fees charged
by the Partnership to Lyondell Methanol totaled $6 million for the year ending
December 31, 1998 and less than $1 million during the period from December 1,
1997 (inception) to December 31, 1997. The Partnership sells natural gas to
Lyondell Methanol at prices generally representative of its cost. Purchases by
F-13
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Lyondell Methanol of natural gas feedstock from the Partnership totaled $44
million and $4 million for the year ended December 31, 1998 and during the
period from December 1, 1997 (inception) to December 31, 1997, respectively.
Lyondell Methanol sells all of its products to Equistar. For the year ending
December 31, 1998 and during the period from December 1, 1997 (inception) to
December 31, 1997, purchases from Lyondell Methanol were $103 million and $15
million, respectively.
Related Party Leases--As part of their shared services agreement with the
Partnership, Millennium subleases from the Partnership certain administrative
office space at a monthly rent of $42,000.
7. Accounts Receivable
In December 1998, the Partnership entered into a purchase agreement with an
independent issuer of receivables-backed commercial paper. Under the terms of
the agreement, the Partnership agreed to sell on an ongoing basis and without
recourse, designated accounts receivable. To maintain the balance of the
accounts receivable sold, the Partnership is obligated to sell new receivables
as existing receivables are collected. The agreement expires in December 1999.
At December 31, 1998, the Partnership's gross accounts receivable that had
been sold to the purchasers aggregated $130 million. This amount has been
reported as operating cash flows in the statement of cash flows. Costs related
to the sale are included in selling, general and administrative expenses in the
statement of income.
8. Inventories
Inventories at December 31, 1998 and 1997 consisted of the following:
Millions of dollars 1998 1997
------------------- ---- ----
Raw materials.................................................. $149 $160
Work-in-process................................................ 11 5
Finished goods................................................. 301 282
Materials and supplies......................................... 88 66
---- ----
$549 $513
==== ====
For the year ending December 31, 1998, cost of sales increased by less than
$1 million associated with the reduction of LIFO inventories. For the period
from December 1, 1997 (inception) to December 31, 1997, cost of sales increased
by approximately $1 million associated with the reduction in LIFO inventories.
The excess of the current cost of inventories over book value was approximately
$103 million at December 31, 1997.
9. Property, Plant and Equipment, Net
The components of property, plant and equipment, at cost, and the related
accumulated depreciation at December 31, 1998 and 1997 were as follows:
Millions of dollars 1998 1997
------------------- ------ ------
Manufacturing facilities and equipment..................... $5,344 $3,489
Manufacturing equipment acquired under capital leases...... 236 --
Construction projects in progress.......................... 189 127
Land....................................................... 78 74
------ ------
Total property, plant and equipment...................... 5,847 3,690
Less accumulated depreciation.............................. 1,772 1,572
------ ------
Property, plant and equipment, net....................... $4,075 $2,118
====== ======
F-14
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Depreciation expense for the year ending December 31, 1998 and for the
period from December 1, 1997 (inception) to December 31, 1997 was $200 million
and $15 million, respectively. At December 31, 1998, $10 million of the
accumulated depreciation reported in the accompanying balance sheet related to
the manufacturing equipment acquired under capital leases that was contributed
by Occidental in 1998.
In July 1998, the depreciable lives of certain assets were increased from a
range of 5 to 25 years to a range of 5 to 30 years. This change was accounted
for as a change in accounting estimate and resulted in a $33 million decrease
in depreciation expense for 1998.
10. Deferred Charges and Other Assets
Deferred charges and other assets at December 31, 1998 and 1997 were as
follows:
Millions of dollars 1998 1997
------------------- ---- ----
Deferred turnaround costs, net.................................. $ 84 $ 66
Deferred software costs, net.................................... 70 44
Deferred pension asset.......................................... 30 23
Other........................................................... 73 18
---- ----
Total deferred charges and other assets....................... $257 $151
==== ====
11. Other Accrued Liabilities
Other accrued liabilities at December 31, 1998 and 1997 were as follows:
Millions of dollars 1998 1997
------------------- ---- ----
Accrued property taxes......................................... $ 76 $ 4
Accrued freight................................................ 22 8
Accrued payroll costs.......................................... 44 19
Accrued interest............................................... 18 --
Accrued severance and other costs related to formation of the
Partnership................................................... 3 27
Other.......................................................... 37 7
---- ---
Total other accrued liabilities.............................. $200 $65
==== ===
F-15
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. Long-Term Debt and Financing Arrangements
Long-term debt at December 31, 1998 and 1997 was comprised of the following:
Millions of dollars 1998 1997
------------------- ------ ------
Bank credit facilities:
5-year term credit facility.............................. $1,150 $ 800
$500 million credit agreement............................ 152 --
Other debt obligations:
Medium-term notes (2000-2005)............................ 163 194
10.00% Notes due in 1999................................. 150 150
9.125% Notes due in 2002................................. 100 100
6.5% Notes due in 2006................................... 150 150
7.55% Debentures due in 2026............................. 150 150
Other.................................................... -- 4
------ ------
Total long-term debt................................... 2,015 1,548
Less current maturities.................................... 150 36
------ ------
Long-term debt, net.................................... 1,865 1,512
Capital lease obligations (5.89% due in 2000).............. 205 --
------ ------
Total long-term debt and lease obligations............. $2,070 $1,512
====== ======
Aggregate maturities of long-term debt during the five years subsequent to
December 31, 1998 are as follows: 1999-$302 million; 2000-$247 million; 2001-
$90 million; 2002-$1.251 billion; 2003-$29 million. All of the above debt is
guaranteed by the partners.
The medium-term notes mature at various dates from 2000 to 2005 and have a
weighted average interest rate of 9.87 percent and 9.83 percent at December 31,
1998 and 1997, respectively.
The Partnership has a five-year, $1.25 billion credit facility (the
"Facility") with a group of banks expiring November 2002. Borrowings under the
Facility bear interest at either the Federal Funds rate plus 1/2 of 1 percent,
LIBOR plus 1/2 of 1 percent, a fixed rate offered by one of the sponsoring
banks or interest rates that are based on a competitive auction feature wherein
the interest rate can be established by competitive bids submitted by the
sponsoring banks, depending on the type of borrowing made under the Facility.
Borrowings under the Facility had a weighted average interest rate of 5.8
percent and 5.7 percent at December 31, 1998 and 1997, respectively.
On June 12, 1998, the Partnership entered into a $500 million credit
agreement consisting of a $250 million revolving credit facility and a $250
million one-year term facility. Borrowings under the $500 million credit
agreement bear interest at either the Federal Funds rate plus 1/2 of 1 percent,
LIBOR plus 0.625 percent, a fixed rate offered by one of the sponsoring banks
or interest rates that are based on a competitive auction feature wherein the
interest rate can be established by competitive bids submitted by the
sponsoring banks. At December 31, 1998, the weighted average interest rate for
borrowings under the $500 million credit agreement was 6.1 percent.
The Facility and the $500 million credit agreement (the "Bank Credit
Facilities") are available for working capital and general purposes as needed
and contain covenants relating to liens, sale and leaseback transactions, debt
incurrence, leverage and interest coverage ratios, sales of assets and mergers
and consolidations.
F-16
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
In February 1999, the Partnership issued $900 million of debt securities.
The debt securities include $300 million of 8.50 percent Notes, which will
mature on February 15, 2004, and $600 million of 8.75 percent Notes, which will
mature on February 15, 2009. The Partnership intends to use the net proceeds
from this offering (i) to repay the $205 million outstanding under a
capitalized lease obligation relating to the Partnership's Corpus Christi
facility, (ii) to repay the outstanding balance under the $500 million credit
agreement, after which the $500 million credit agreement will be terminated,
(iii) to repay the outstanding $150 million, 10.0 percent Notes due in June
1999, upon maturity and (iv) to the extent of the remaining net proceeds,
reduce outstanding borrowings under the Facility and for Partnership working
capital. Outstanding borrowings under the Partnership's $500 million credit
agreement that are payable in 1999 are included as long-term obligations of the
Partnership in the accompanying balance sheet at December 31, 1998 based on the
expectation that these borrowings will be refinanced as described above.
13. Unusual Charges
In December 1997, the Partnership recorded $42 million of unusual charges
related to the formation of the Partnership. These charges included severance
and other costs related to a workforce reduction (approximately 430 employees)
that resulted from the consolidation of the businesses contributed to the
Partnership ($30 million), various closing costs ($6 million), and various
other charges ($6 million). Approximately $15 million of these charges were
paid in 1997 and $27 million were included in other accrued liabilities at
December 31, 1997. During the year ended December 31, 1998, approximately $24
million of these charges were paid and $3 million were included in other
accrued liabilities at December 31, 1998.
During 1998, the Partnership recorded and paid $35 million of unusual
charges related to its initial formation and the addition of Occidental to the
Partnership. These charges included transition personnel costs ($14 million),
costs associated with the consolidation of certain operations and facilities
($11 million), operating and transition services provided by Occidental
Chemical ($7 million), various closing costs ($2 million), and other
miscellaneous charges ($1 million).
14. Leases
At December 31, 1998, future minimum lease payments for capital and
operating leases with noncancelable lease terms in excess of one year were as
follows:
Millions of dollars Capital Operating
------------------- ------- ---------
1999.................................................. $ 13 $101
2000.................................................. 208 74
2001.................................................. -- 58
2002.................................................. -- 44
2003.................................................. -- 38
Thereafter............................................ -- 336
---- ----
Total minimum lease payments........................ 221 $651
====
Imputed interest...................................... (16)
----
Present value of minimum lease payments............... $205
====
Operating lease net rental expense was $110 million for the year ending
December 31, 1998 and $11 million for the period from December 1, 1997
(inception) to December 31, 1997.
F-17
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Partnership is party to various unconditional purchase obligation
contracts as a purchaser for product and services. At December 31, 1998, future
minimum payments under these contracts with noncancelable contract terms in
excess of one year were as follows:
Millions of dollars Amount
------------------- ------
1999............................................................. $ 29
2000............................................................. 28
2001............................................................. 24
2002............................................................. 23
2003............................................................. 23
Thereafter....................................................... 142
----
Total minimum contract payments................................ $269
====
The Partnership's total purchases under these agreements were $33 million
for the year ending December 31, 1998 and $3 million during the period from
December 1, 1997 (inception) to December 31, 1997.
15. Retirement Plans
All full-time regular employees of the Partnership are covered by defined
benefit pension plans sponsored by the Partnership. The plans became effective
on January 1, 1998, except for union represented employees formerly employed by
Millennium, whose plans were contributed to the Partnership on December 1,
1997, and union represented employees formerly employed by Occidental, whose
plans were contributed to the Partnership on May 15, 1998. In connection with
the formation of the Partnership, there were no pension assets or obligations
contributed to the Partnership, except for the union represented plans
described above. Retirement benefits are based on years of service and the
employee's highest three consecutive years of compensation during the last ten
years of service. The funding policy for these plans is to make periodic
contributions as required by applicable law. The Partnership accrues pension
costs based on an actuarial valuation and funds the plans through contributions
to pension trust funds. The Partnership also has unfunded supplemental
nonqualified retirement plans which provide pension benefits for certain
employees in excess of the tax qualified plans' limits.
F-18
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the retirement plans at December 31, 1998 and 1997:
Millions of dollars 1998 1997
------------------- ---- ----
Change in benefit obligation:
Benefit obligation, January 1............................. $ 21 $ --
Benefit obligation contributed at inception of
Partnership.............................................. -- 21
Benefit obligation contributed by Occidental.............. 46 --
Service cost.............................................. 16 --
Interest cost............................................. 5 --
Actuarial loss (gain)..................................... 5 --
Benefits paid............................................. (5) --
---- ----
Benefit obligation, December 31........................... $ 88 $ 21
==== ====
Change in plan assets:
Fair value of plan assets, January 1...................... $ 40 $ --
Fair value of plan assets contributed at inception of
Partnership.............................................. -- 40
Fair value of plan assets contributed by Occidental....... 51 --
Actual return of plan assets.............................. 1 --
Partnership contributions................................. 1 --
Benefits paid............................................. (5) --
---- ----
Fair value of plan assets, December 31.................... $ 88 $ 40
==== ====
Funded status............................................... $ -- $ 19
Unrecognized actuarial loss (gain).......................... 13 4
---- ----
Net amount recognized....................................... $ 13 $ 23
==== ====
Amounts recognized in the Balance Sheets consist of:
Prepaid benefit cost...................................... $ 30 $ 23
Accrued benefit liability................................. (17) --
---- ----
Net amount recognized....................................... $ 13 $ 23
==== ====
Weighted-average assumptions as of December 31:
Discount rate............................................. 6.75% 7.25%
Expected return on plan assets............................ 9.50% 9.00%
Rate of compensation increase............................. 4.75% 4.75%
As of December 31, 1998, Equistar had defined benefit pension plans where
the accumulated benefit obligation exceeded the fair value of plan assets. The
accumulated benefit obligation exceeded the fair value of plan assets by $19
million for these plans as of December 31, 1998. As of December 31, 1998 and
1997, Equistar had defined benefit pension plans where the fair value of plan
assets exceeded the accumulated benefit obligation. The fair value of plan
assets exceeded the accumulated benefit obligation by $19 million for these
plans as of December 31, 1998 and 1997.
The Partnership's net periodic pension cost for 1998 included the following
components:
Millions of dollars 1998
------------------- ----
Components of net periodic benefit cost:
Service cost...................................................... $16
Interest cost..................................................... 5
Expected return on plan assets.................................... (6)
---
Net periodic benefit cost......................................... $15
===
F-19
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
As the non-union plans became effective on January 1, 1998, the Partnership
did not recognize any net periodic pension cost during the period from December
1, 1997 (inception) to December 31, 1997.
Effective January 1, 1998, the Partnership also maintains voluntary defined
contribution savings plans for eligible employees. Under provisions of the
plans, the Partnership contributes an amount equal to 160 percent of employee
contributions up to a maximum matching contribution of eight percent of the
employee's base salary. Contributions to the plans by the Partnership were $7
million and less than $1 million for the year ended December 31, 1998 and
during the period from December 1, 1997 (inception) to December 31, 1997,
respectively.
16. Postretirement Benefits Other Than Pensions
The Partnership sponsors unfunded postretirement benefit plans other than
pensions ("OPEB") for both salaried and non-salaried employees, which provide
medical and life insurance benefits. The postretirement health care plans are
contributory while the life insurance plans are non-contributory. Currently,
the Partnership pays approximately 80 percent of the cost of the health care
plans, but reserves the right to modify the cost-sharing provisions at any
time. In connection with the formation of the Partnership on December 1, 1997,
Lyondell and Millennium contributed $31 million of accrued postretirement
benefit liabilities for employees that transferred to the Partnership. Upon
joining the Partnership in May 1998, Occidental contributed $14 million of
accrued postretirement benefit liabilities for employees that transferred to
the Partnership
The following table provides a reconciliation of benefit obligations and
funded status of the OPEB plans at December 31, 1998 and 1997:
Millions of dollars 1998 1997
- ------------------- ---- ----
Change in benefit obligation:
Benefit obligation, January 1.................................... $ 50 $ --
Benefit obligation contributed at inception of Partnership....... -- 50
Benefit obligation contributed by Occidental..................... 14 --
Service cost..................................................... 3 --
Interest cost.................................................... 4 --
Actuarial loss (gain)............................................ (2) --
---- ----
Benefit obligation, December 31.................................. $ 69 $ 50
==== ====
Funded status...................................................... $(69) $(50)
Unrecognized actuarial loss (gain)................................. 16 19
---- ----
Net amount recognized.............................................. $(53) $(31)
==== ====
Amounts recognized in the Balance Sheets consist of:
Prepaid benefit cost............................................. $ -- $ --
Accrued benefit liability........................................ (53) (31)
---- ----
Net amount recognized............................................ $(53) $(31)
==== ====
Weighted-average assumptions as of December 31:
Discount rate.................................................... 6.75% 7.25%
Rate of compensation increase.................................... 4.75% 4.75%
Because the OPEB plans are unfunded, there was no change in the plan assets
during the year ended December 31, 1998 and for the period from December 1,
1997 (inception) to December 31, 1997.
F-20
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Partnership's postretirement benefit costs for 1998 included the
following components:
Millions of dollars 1998
------------------- ----
Components of net periodic benefit cost:
Service cost...................................................... $ 3
Interest cost..................................................... 4
Expected return of plan assets.................................... --
===
Net periodic benefit cost......................................... $ 7
===
The accrued postretirement benefit liabilities at December 31, 1997 were
calculated and contributed as of December 31, 1997; therefore, there was no net
periodic postretirement benefit costs for the period from December 1, 1997
(inception) to December 31, 1997.
For measurement purposes, the assumed annual rate of increase in the per
capita cost of covered health care benefits as of December 31, 1998 was 7.0
percent for 1999-2001 and 5.0 percent thereafter. The health care cost trend
rate assumption does not have a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit liability as of December 31, 1998 by less than $1 million and would not
have a material effect on the aggregate service and interest cost components of
the net periodic postretirement benefit cost for the year then ended.
Decreasing the assumed health care cost trend rates by one percentage point in
each year would decrease the accumulated postretirement benefit liability as of
December 31, 1998 by $1 million and would not have a material effect on the
aggregate service and interest cost components of the net periodic
postretirement benefit cost for the year then ended.
17. Commitments and Contingencies
The Partnership 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.
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 statements or liquidity of the Partnership.
Equistar has agreed to indemnify and defend Lyondell and Millennium,
individually, against certain uninsured claims and liabilities which Equistar
may incur relating to the operation of the Contributed Business prior to
December 1, 1997 up to $7 million each within the first seven years of the
Partnership, subject to certain terms of the Asset Contribution Agreements.
Equistar has also agreed to indemnify Occidental up to $7 million on a similar
basis relating to the operation of the Occidental Contributed Business prior to
May 15, 1998. During the year ended December 31, 1998, the Partnership incurred
$5 million in expenses for these uninsured claims and liabilities. No expenses
were incurred for these uninsured claims and liabilities during the period
December 1, 1997 (inception) to December 31, 1997.
The Partnership's policy is to be in compliance with all applicable
environmental laws. The Partnership 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. In addition, the
Partnership 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.
F-21
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 statements or liquidity of the Partnership. 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 the Partnership'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.
18. Segment Information
Using the guidelines set forth in SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, the Partnership has identified two
segments in which it operates. The reportable segments are petrochemicals and
polymers. The petrochemicals segment includes olefins, oxygenated chemicals,
aromatics and specialty chemicals. Olefins include ethylene, propylene and
butadiene, and the oxygenated chemicals include ethylene oxide, ethylene
glycol, ethanol and MTBE. The petrochemicals segment also includes the
production and sale of aromatics including benzene and toluene. The polymers
segment consists of polyolefins including high-density polyethylene, low-
density polyethylene, linear low-density polyethylene, polypropylene, and
performance polymers. The performance polymers include enhanced grades of
polyethylene, including wire and cable resins, concentrates and compounds, and
polymeric powders.
No customer accounted for 10 percent or more of sales.
The accounting policies of the segments are the same as those described in
"Summary of Significant Accounting Policies" (see Note 2).
F-22
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Summarized financial information concerning the Partnership's reportable
segments is shown in the following table. Intersegment sales between the
petrochemicals and polymers segments were made at prices based on current
market values.
For the year ended December 31, 1998:
Petrochemicals Polymers
Millions of dollars Segment Segment Unallocated Eliminations Consolidated
- ------------------- -------------- -------- ----------- ------------ ------------
Sales and other
operating revenues:
Customers............. $ 2,351 $2,012 $ -- $ -- $4,363
Intersegment.......... 1,112 46 -- (1,158) --
------- ------ ------ ------- ------
$ 3,463 $2,058 $ -- $(1,158) $4,363
======= ====== ====== ======= ======
Unusual charges......... $ -- $ -- $ 35 $ -- $ 35
======= ====== ====== ======= ======
Operating income........ $ 319 $ 177 $ (214) $ -- $ 282
======= ====== ====== ======= ======
Depreciation and
amortization expense... $ 152 $ 65 $ 51 $ -- $ 268
======= ====== ====== ======= ======
Capital expenditures.... $ 71 $ 116 $ 13 $ -- $ 200
======= ====== ====== ======= ======
Total assets............ $ 2,997 $2,035 $1,636 $ -- $6,668
======= ====== ====== ======= ======
For the period from December 1, 1997 (inception) to December 31, 1997:
Petrochemicals Polymers
Millions of dollars Segment Segment Unallocated Eliminations Consolidated
- ------------------- -------------- -------- ----------- ------------ ------------
Sales and operating
revenues:
Customers............. $ 179 $ 186 $ -- $ -- $ 365
Intersegment.......... 105 -- -- (105) --
------ ------ ------ ----- ------
$ 284 $ 186 $ -- $(105) $ 365
====== ====== ====== ===== ======
Unusual charges......... $ -- $ -- $ 42 $ -- $ 42
====== ====== ====== ===== ======
Operating income........ $ 47 $ 22 $ (54) $ -- $ 15
====== ====== ====== ===== ======
Depreciation and
amortization expense... $ 7 $ 7 $ 5 $ -- $ 19
====== ====== ====== ===== ======
Capital expenditures.... $ 7 $ 4 $ 1 $ -- $ 12
====== ====== ====== ===== ======
Total assets............ $1,668 $1,504 $1,428 $ -- $4,600
====== ====== ====== ===== ======
19. Subsequent Events
In January 1999, the Partnership announced that it was going to shut down
and "mothball" its gas phase HDPE reactor at Port Arthur, Texas, on March 31,
1999, as part of its long-term strategy to maximize value. The shutdown will
reduce the Partnership's HDPE capacity by 300 million pounds per year and
reduce employment at the unit from 200 to approximately 125. Customers for
products from the mothballed unit will be supplied with comparable products
produced at the Partnership's Matagorda, Victoria, and LaPorte, Texas,
facilities.
F-23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Lyondell Petrochemical Company:
In our opinion, the accompanying balance sheets and the related statements
of income and invested capital and of cash flows present fairly, in all
material respects, the financial position of the contributed petrochemicals and
polymers businesses of Lyondell Petrochemical Company ("Lyondell Contributed
Business") at November 30, 1997 and December 31, 1996, and the results of
operations, and cash flows for the eleven month period ended November 30, 1997
and each of the two years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Lyondell Contributed Business's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
July 7, 1998
F-24
LYONDELL CONTRIBUTED BUSINESS
BALANCE SHEETS
(in millions)
November 30, December 31,
ASSETS 1997 1996
------ ------------ ------------
Current assets:
Cash and cash equivalents.......................... $ 1 $ --
Accounts receivable:
Trade............................................ 350 259
Related parties.................................. 31 96
Inventories........................................ 233 196
Prepaid expenses and other current assets.......... 7 10
------ ------
Total current assets........................... 622 561
------ ------
Property, plant and equipment........................ 1,974 1,969
Less accumulated depreciation and amortization....... (1,148) (1,129)
------ ------
826 840
Deferred charges and other assets.................... 84 93
------ ------
Total assets......................................... $1,532 $1,494
====== ======
LIABILITIES AND INVESTED CAPITAL
--------------------------------
Current liabilities:
Accounts payable:
Trade............................................ $ 153 $ 200
Related parties.................................. 7 30
Current maturities of long-term debt............... 32 --
Other accrued liabilities.......................... 78 62
------ ------
Total current liabilities...................... 270 292
Long-term debt....................................... 713 745
Other liabilities and deferred credits............... 13 34
Commitments and contingencies (Note 9)
Total invested capital............................... 536 423
------ ------
Total liabilities and invested capital............... $1,532 $1,494
====== ======
See notes to financial statements.
F-25
LYONDELL CONTRIBUTED BUSINESS
STATEMENTS OF INCOME AND INVESTED CAPITAL
(in millions)
For the eleven For the year
months ended ended December 31,
November 30, -------------------
1997 1996 1995
-------------- --------- ---------
Sales and other operating revenues:
Unrelated parties........................ $2,183 $ 2,002 $ 2,025
Related parties.......................... 532 513 484
------ --------- ---------
2,715 2,515 2,509
Operating costs and expenses:
Cost of sales:
Unrelated parties...................... 1,662 1,659 1,491
Related parties........................ 423 409 332
Depreciation and amortization............ 68 67 46
Selling, general and administrative
expenses................................ 166 157 125
------ --------- ---------
2,319 2,292 1,994
------ --------- ---------
Operating income......................... 396 223 515
Interest expense, net...................... 50 65 76
------ --------- ---------
Income before income taxes............... 346 158 439
Provision for income taxes................. 127 56 162
------ --------- ---------
Net income............................... 219 102 277
Invested capital at beginning of period.... 423 320 (87)
Net transactions with Lyondell............. (106) 1 130
------ --------- ---------
Invested capital at end of period.......... $ 536 $ 423 $ 320
====== ========= =========
See notes to financial statements.
F-26
LYONDELL CONTRIBUTED BUSINESS
STATEMENTS OF CASH FLOWS
(in millions)
For the eleven For the year
months ended ended December 31,
November 30, --------------------
1997 1996 1995
-------------- --------- ---------
Cash flows from operating activities:
Net income................................ $ 219 $ 102 $ 277
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 68 67 46
Decrease (increase) in accounts
receivable............................. (26) (95) 26
Increase in inventories................. (37) (37) (40)
Increase (decrease) in accounts
payable................................ (70) 83 13
Net change in other working capital
accounts............................... 19 (1) 10
Other................................... (17) (40) (14)
----- --------- ---------
Net cash provided by operating
activities........................... 156 79 318
Cash flows from investing activities:
Additions to property, plant and
equipment................................ (49) (80) (476)
----- --------- ---------
Net cash used in investing
activities........................... (49) (80) (476)
Cash flows from financing activities:
Net transactions with parent.............. (106) 1 130
Borrowings of long-term debt.............. -- 300 38
Repayments of long-term debt.............. -- (300) (10)
----- --------- ---------
Net cash provided by (used in)
financing activities................. (106) 1 158
Net change in cash and cash equivalents... 1 -- --
Cash and cash equivalents, beginning of
period................................... -- -- --
----- --------- ---------
Cash and cash equivalents, end of period.. $ 1 $ -- $ --
===== ========= =========
See notes to financial statements.
F-27
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS
(In millions)
Note 1. Basis of Presentation and Description of the Contributed Business
As of December 1, 1997, Lyondell Petrochemical Company ("Lyondell" or the
"Company") and Millennium Chemicals Inc. ("Millennium") formed a now joint
venture company named Equistar Chemicals, LP (the "Partnership") which is being
operated as a partnership. The Partnership, which is owned 57% by the Company
and 43% by Millennium, owns and operates the existing olefins and polymers
businesses contributed by the two companies. The assets of the Partnership
consist of 15 manufacturing facilities on the US Gulf Coast and in the US
Midwest, producing ethylene, propylene, polyethylene (high-density, low-density
and linear low-density), polypropylene, ethyl alcohol, butadiene, aromatics,
methyl butyl tertiary ether ("MTBE") and other products for sale to customers
throughout the US. The Partnership has $1,745 of debt including $745 face value
of debt assumed from Lyondell and $750 under a new credit facility, the
proceeds of which will be used to repay debt assumed from Millennium upon
completion of the transaction, and a note receivable from Lyondell of $345.
On March 20, 1998, Lyondell and Millennium announced an agreement to expand
the Partnership with the addition of the ethylene, propylene, and ethylene
oxide and derivative businesses of Occidental Chemical Corporation ("OxyChem"),
a subsidiary of Occidental Petroleum. Following the closing of the agreement on
May 15, 1998, Lyondell's percentage ownership in the Partnership decreased to
41 percent from 57 percent, with Millennium and OxyChem each owning a 29.5
percent share.
Lyondell contributed to the Partnership substantially all of the net assets
and operations comprising its petrochemicals and polymers segments. Lyondell
retained ownership of its 58.75% interest in LYONDELL-CITGO Refining Company
Ltd. ("LYONDELL-CITGO Refining") and its 75% interest in Lyondell Methanol
Company, L.P. ("Lyondell Methanol").
The accompanying financial statements include the results of operations,
assets and liabilities of the petrochemicals and polymers businesses currently
owned by Lyondell that will be contributed to the Partnership ("Contributed
Business"). These financial statements are presented on a going concern basis
and include only the historical net assets and results of operations that are
directly related to the Contributed Business. Consequently, the financial
position, results of operations and cash flows may not be indicative of what
would have been reported if the Contributed Business had been a separate,
stand-alone entity or had been operated as a part of the Partnership.
Lyondell provided certain corporate, general and administrative services to
the Contributed Business, including legal, tax, treasury, risk management and
other services. The Contributed Business provided certain general and
administrative services to Lyondell, including computer, office lease and
employee benefits services. Charges for the services are believed to be
reasonable and substantially offset each other for the periods presented. In
addition, Lyondell has controlled, on a centralized basis, all cash receipts
and disbursements received or made by the Contributed Business. The net results
of such transactions are included in the balance sheets as invested capital.
Note 2. Significant Accounting Policies
Revenue Recognition. Revenue from product sales is generally recognized upon
delivery of product to the customer.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets
F-28
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In millions)
and liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Cash and Cash Equivalents. Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less.
Accounts Receivable. The Contributed Business sells its products primarily
to companies in the petrochemicals and polymers industries. The Contributed
Business performs ongoing credit evaluations of its customers' financial
condition and in certain circumstances requires letters of credit from them.
The Contributed Business's allowance for doubtful accounts, which is reflected
in the balance sheet as a reduction of accounts receivable, totaled $3 at
November 30, 1997 and December 31, 1996.
Inventories. Inventories are stated at the lower of cost or market value.
Cost is determined on the last-in, first-out ("LIFO") basis, except for
materials and supplies, which are valued at average cost. Inventories valued on
a LIFO basis were approximately $44 and $46 less than the amount of such
inventories valued at current cost at November 30, 1997 and December 31, 1996,
respectively.
Inventories consist of the following:
November 30 December 31
1997 1996
----------- -----------
Petrochemicals................................... $ 136 $ 98
Polymers......................................... 74 74
Materials and supplies........................... 23 24
----- ----
$ 233 $196
===== ====
Property, Plant and Equipment. Property, plant and equipment are recorded at
cost. Depreciation of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the assets, generally 5
to 30 years for manufacturing facilities and equipment. Interest cost incurred
on debt during the construction of major projects that exceed one year is
capitalized. No interest was capitalized during the periods presented.
Property, plant and equipment consists of the following:
November 30 December 31
1997 1996
----------- -----------
Manufacturing facilities and equipment............ $ 1,868 $1,822
Construction projects in progress................. 79 120
Land.............................................. 27 27
------- ------
$ 1,974 $1,969
======= ======
Turnaround Maintenance and Repair Expenses. The cost of repairs and
maintenance incurred in connection with turnarounds of major units at the
Contributed Business's manufacturing facilities exceeding $5 are deferred as
incurred and amortized on a straight-line basis until the next planned
turnaround, which is generally four to six years.
F-29
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In millions)
Other Accrued Liabilities. Other accrued liabilities consist of the
following:
November 30 December 31
1997 1996
----------- -----------
Payroll........................................... $24 $20
Interest.......................................... 19 15
Taxes other than income........................... 24 20
Other............................................. 11 7
--- ---
$78 $62
=== ===
Accounts payable and certain accrued expenses were not contributed to the
Partnership at its formation.
Environmental Remediation Costs. Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and
waste disposal sites, are accrued when it is probable a liability has been
incurred and the amount of the liability can reasonably be estimated. Accrued
liabilities are exclusive of claims against third parties (except where
payment has been received or the amount of liability or contribution by such
other parties, including insurance companies, has been agreed) and are not
discounted. In general, costs related to environmental remediation are charged
to expense. Environmental costs are capitalized if the costs increase the
value of the property and/or mitigate or prevent contamination from future
operations.
Exchanges. Finished product exchange transactions, which are of a
homogeneous nature of commodities in the same line of business and do not
involve the payment or receipt of cash, are not accounted for as purchases and
sales. Any resulting volumetric exchange balances are accounted for as
inventory in accordance with the normal LIFO valuation policy. Exchanges
settled through payment and receipt of cash are accounted for as purchases and
sales.
Income Taxes. Earnings of the Contributed Business have been included in
the consolidated federal income tax return filed by Lyondell. Pursuant to an
informal tax allocation agreement, income taxes have been allocated to the
Contributed Business based on applicable statutory tax rates applied to the
taxable earnings generated by such business. The effective income tax rates
were 36.6%, 35.7%, and 36.8% for the eleven months ended November 30, 1997 and
the years ended December 31, 1996, and 1995, respectively. State income tax
was the primary difference between the effective income tax rates and the 35%
federal statutory rate. Liabilities for currently and/or deferred income taxes
have been and remain the responsibility of Lyondell, and accordingly, have
been included in the balance sheet as invested capital.
As part of the transactions to consummate the Partnership, Lyondell entered
into tax sharing and indemnification agreements with the Partnership in which
Lyondell generally agreed to indemnify the Partnership for income tax
liabilities attributable to periods when the operations of the Contributed
Business were included in the consolidated tax return of Lyondell.
Research and Development. The cost of research and development efforts is
expensed as incurred. Such costs aggregated $12, $13, and $5 for the eleven
months ended November 30, 1997 and the years ended December 31, 1996, and
1995, respectively.
Note 3. Acquisition of Alathon(R) High-Density Polyethylene Business
In May 1995, the Company acquired Occidental Chemical Corporation's
Alathon(R) high-density polyethylene ("HDPE") business ("ALATHON Business")
for $356 including certain direct costs, plus
F-30
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In millions)
approximately $64 for inventory. Assets involved in the purchased included
resin production facilities at Victoria and Matagorda, Texas, associated
research and development activities and the rights to the Alathon(R) trademark.
These facilities have a combined annual production capacity of approximately
1.5 billion pounds of HDPE. The Company financed the acquisition from internal
cash and $230 of short-term borrowings from its existing financing
arrangements.
The following unaudited pro forma information combines the results of
operations of the Contributed Business and the ALATHON Business for the year
ended December 31, 1995 and assumes the acquisition of the ALATHON Business
occurred on January 1, 1995. This unaudited pro forma information may not be
indicative of results that would have actually resulted if this transaction had
occurred on January 1, 1995 or which may be obtained in the future.
Millions of dollars 1995
------------------- ------
Sales and other operating revenues................................ $2,703
Net income........................................................ 297
Note 4. Financial Instruments
The fair value of all financial instruments included in current assets and
current liabilities, including cash and cash equivalents, accounts receivable,
accounts payable and notes payable, approximated their carrying value due to
their short maturity. Based on the borrowing rates currently available to the
Contributed Business for debt with terms and average maturities similar to the
Contributed Business's debt portfolio, the fair value of the Contributed
Business's long-term debt, including amounts due within one year, was $701 and
$661 at November 30, 1997 and December 31, 1996, respectively.
The Contributed Business is party to various unconditional purchase
obligation contracts as a purchaser for product and services. At November 30,
1997, future minimum payments under these contracts with noncancelable contract
terms in excess of one year were as follows.
Amount
------
1998............................................................... $ 14
1999............................................................... 14
2000............................................................... 13
2001............................................................... 11
2002............................................................... 10
Thereafter......................................................... 54
----
Total minimum contract payments.................................. $116
====
The Contributed Business's total purchases under these agreements were $15,
$17 and $13 for the eleven months ended November 30, 1997 and the years ended
December 31, 1996 and 1995, respectively.
F-31
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In millions)
Note 5. Related Party Transactions
Related party transactions with Atlantic Richfield Company ("ARCO") for the
nine months ended September 30, 1997 excluding sales to ARCO Chemical Company,
and LYONDELL-CITGO Refining for the eleven months ended November 30, 1997 are
as follows:
For the twelve
For the eleven months ended
months ended December 31
November 30 ----------------
1997 1996 1995
-------------- ------- -------
Sales:
Products..................................... $ 319 $ 198 $ 162
Other........................................ 7 12 16
Business interruption recovery............... -- 25 --
----- ------- -------
$ 326 $ 235 $ 178
===== ======= =======
Costs:
Product purchases............................ $ 409 $ 182 $ 283
Transportation fees.......................... 19 23 21
Other, net................................... (5) (9) (7)
Business interruption recovery............... -- (3) --
----- ------- -------
$ 423 $ 193 $ 297
===== ======= =======
The Company purchased 383,312 shares of common stock held by ARCO after the
conversion of the Exchangeable Notes on September 15, 1997 at a price of $25.66
per share, eliminating ARCO's ownership interest in the Contributed Business.
Therefore, as of September 30, 1997 ARCO is no longer considered a related
party of the Contributed Business.
Sales to ARCO Chemical Company, an ARCO affiliate, consisting primarily of
product sales, were $206, $278, and $306 for the nine months ended September
30, 1997 and the years ended December 31, 1996 and 1995, respectively.
In July of 1996 a fire occurred at the ARCO PipeLine Company meter station
located within the Channelview, Texas petrochemicals facility ("Channelview
Facility"). The fire forced the shutdown of the entire Channelview Facility for
several days and more than two weeks for some units. The Contributed Business
recovered lost profits from ARCO PipeLine Company for this shutdown. The
recovery was included in 1996 reported results.
F-32
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In millions)
6. Long-term Debt
Long-term debt consists of the following:
November 30 December 31 December 31
1997 1996 1995
----------- ----------- -----------
10.00% Notes due in 1999.................... $150 $150 $150
9.125% Notes due in 2002.................... 100 100 100
6.5% Notes due in 2006...................... 150 150 --
7.55% Debentures due in 2026................ 150 150 --
9.95% Notes due in 1996..................... -- -- 150
Medium-term notes........................... 195 195 207
Other....................................... -- -- 138
---- ---- ----
745 745 745
Less current portion........................ 32 -- 150
---- ---- ----
$713 $745 $595
==== ==== ====
Aggregate maturities of long-term debt during the five years subsequent to
November 30, 1997 are as follows: 1998-$32; 1999-$150, 2000-$42; 2001-$90;
2002-$101. After contribution to the Partnership, Lyondell will continue to be
liable on the above debt until its maturity.
The Notes due in 1999 and the medium-term notes contain provisions that
would allow the holders to require the Company to repurchase the debt upon the
occurrence of certain events together with specified declines in public ratings
on the Notes due in 1999. Certain events include acquisitions by persons other
than ARCO or the Company of more than 20% of the Company's common stock, any
merger or transfer of substantially all of the Company's assets, in connection
with which the Company's common stock is changed into or exchanged for cash,
securities or other property and payment of certain "special" dividends.
The medium-term notes mature at various dates from 1998 to 2005 and have a
weighted average interest rate at November 30, 1997, December 31, 1996 and 1995
of 9.8%, 9.8% and 9.9%, respectively.
Interest paid was $59, $61, and $75 for the eleven months ended November 30,
1997 and the years ended December 31, 1996, and 1995, respectively.
7. Pension and Other Postretirement Benefits
Defined Benefit Pension Plans--All full-time regular employees of the
Contributed Business are covered by defined benefit pension plans sponsored by
Lyondell. Retirement benefits are based on years of service and the employee's
highest three consecutive years of compensation during the last ten years of
service. The funding policy for these plans is to make periodic contributions
as required by applicable law. The Contributed Business accrues pension costs
based on an actuarial valuation and funds the plans through contributions to
the Company, reflected in invested capital, who then contributes to pension
trust funds separate from Lyondell funds. The Contributed Business also has
unfunded supplemental nonqualified retirement plans which provide pension
benefits for certain employees in excess of the tax qualified plans' limits.
The Contributed Business recorded expense related to participation in these
plans of $7, $7 and $4 for the eleven months ended November 30, 1997 and the
years ended December 31, 1996, and 1995, respectively.
Defined Contribution Plans--Effective July 1, 1995, Lyondell also maintains
voluntary defined contribution savings plans for eligible employees, including
those employed by the Contributed Business.
F-33
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In millions)
Under provisions of the plans, Lyondell contributes an amount equal to 160% of
employee contributions up to a maximum matching contribution of eight percent
of the employee's base salary. Prior to July 1, 1995, Lyondell had similar
voluntary defined contribution plans. The Contributed Business recorded expense
related to participation in these voluntary defined contribution savings plans
totaled $6, $6, and $5 for the eleven months ended November 30, 1997 and the
years ended December 31, 1996, and 1995, respectively.
Other Postretirement Benefit Plans--Lyondell sponsors unfunded
postretirement benefit plans other than pensions ("OPEB") for both salaried and
non-salaried employees, including those employed by the Contributed Business,
which provide medical and life insurance benefits. The postretirement health
care plans are contributory while the life insurance plans are non-
contributory. Currently, Lyondell pays approximately 80% of the cost of the
health care plans, but reserves the right to modify the cost-sharing provisions
at any time. The Contributed Business recorded expense related to participation
in these plans of approximately $4, $4, and $2 for the eleven months ended
November 30, 1997 and the years ended December 31, 1996, and 1995,
respectively. The actuarially determined liability associated with the
currently active employees of the Contributed Business based on current plan
provisions at November 30, 1997 and December 31, 1996 was $25 and $22,
respectively.
Note 8. Leases
At November 30, 1997, future minimum rental payments for operating leases
with noncancelable lease terms in excess of one year were as follows:
1998................................................................ $ 85
1999................................................................ 69
2000................................................................ 54
2001................................................................ 39
2002................................................................ 29
Thereafter.......................................................... 351
----
Total minimum contract payments................................... $627
====
Operating lease net rental expenses were $42, $44, and $39 for the eleven
months ended November 30, 1997 and the years ended December 31, 1996, and 1995,
respectively.
Note 9. Commitments and Contingencies
The Contributed Business 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.
In connection with the transfer of assets and liabilities from ARCO to the
Company, the Company and ARCO entered into an agreement ("Cross-Indemnity
Agreement") whereby the Company agreed to defend and indemnify ARCO against
certain uninsured claims and liabilities which ARCO may incur relating to the
operation of the Company's integrated petrochemicals and petroleum processing
business prior to July 1, 1988, including certain liabilities which may arise
out of pending and future lawsuits. ARCO indemnified the Company under the
Cross-Indemnity Agreement with respect to other claims or liabilities and other
matters of litigation not related to the assets or business included in the
Company's consolidated financial statements. The Company has reached an
agreement-in-principle with ARCO to update the Cross-Indemnity Agreement
("Revised Cross-Indemnity Agreement"). The Cross-Indemnity Agreement and the
Revised Cross-Indemnity
F-34
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In millions)
Agreement cover operations of the Company included in the Contributed Business.
Subject to the uncertainty inherent in all litigation, management believes the
resolution of the matters pursuant to the Revised Cross-Indemnity Agreement
will not have a material adverse effect upon the financial statements or
liquidity of the Contributed Business.
In addition to lawsuits for which the Company has indemnified ARCO, the
Company is also subject to various lawsuits and proceedings which may involve
the operations of the Contributed Business. Subject to the uncertainty inherent
in all litigation, management believes the resolution of these proceedings will
not have a material adverse effect upon the consolidated financial statements
or liquidity of the Contributed Business.
As part of the transactions to consummate the Partnership, Lyondell will
agree to indemnify the Partnership for any present or future liabilities
arising within a seven year period after the consummation of the partnership
which are attributable to the Contributed Business operations prior to the
Partnership's formation in excess of $7.
The Contributed Business's policy is to be in compliance with all applicable
environmental laws. The Contributed Business 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. In
addition, the Contributed Business 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.
As of November 30, 1997 and December 31, 1996, the Contributed Business has
accrued $2 and $3, respectively, related to future regulatory agency assessment
and remediation costs, of which $1 is included in current liabilities at
November 30, 1997 while the remaining amounts are expected to be incurred over
the next two to seven years. In the opinion of management, there is currently
no material range of loss in excess of the amount recorded. However, it is
possible that new information about the sites for which the reserve has been
established, new technology or future developments such as involvement in other
regulatory agency or other comparable state law investigations, could require
the Contributed Business to reassess its potential exposure related to
environmental matters.
In the opinion of management, any liability arising from the matters
discussed in this Note will not have a material adverse effect on the
consolidated financial statements or liquidity of the Contributed Business.
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 the Contributed
Business'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.
F-35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Millennium Chemicals Inc.:
In our opinion, the accompanying balance sheets and the related statements
of income and invested capital and of cash flows present fairly, in all
material respects, the financial position of the contributed business of
Millennium Chemicals Inc. ("Millennium Contributed Business") at November 30,
1997 and December 31, 1996, and the results of operations, and cash flows for
the eleven month period ended November 30, 1997 and each of the two years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Millennium Contributed Business's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Cincinnati, Ohio
July 9, 1998
F-36
MILLENNIUM CONTRIBUTED BUSINESS
BALANCE SHEETS
November 30, December 31,
1997 1996
------------ ------------
(In millions)
ASSETS
------
Current assets:
Accounts receivable--net............................ $ 49 $ 269
Inventories......................................... 275 294
Prepaid expenses and other current assets -- 25
------ ------
Total current assets.............................. 324 588
Property, plant and equipment, net.................... 1,305 1,335
Other non-current assets:
Deferred charges and other assets................... 33 27
Goodwill............................................ 1,142 1,171
------ ------
Total assets...................................... $2,804 $3,121
====== ======
LIABILITIES AND INVESTED CAPITAL
--------------------------------
Current liabilities:
Current maturities of long-term debt................ $ 4 $ 4
Accounts payable.................................... -- 53
Accrued expenses and other liabilities.............. 55 168
------ ------
Total current liabilities......................... 59 225
Non-current liabilities:
Long-term debt...................................... -- 5
Indebtedness to Millennium.......................... -- 1,000
Other liabilities................................... 21 56
------ ------
Total liabilities................................. 80 1,286
Commitments and contingencies (Note 7)
Invested capital...................................... 2,724 1,835
------ ------
Total liabilities and invested capital............ $2,804 $3,121
====== ======
See notes to financial statements.
F-37
MILLENNIUM CONTRIBUTED BUSINESS
STATEMENTS OF INCOME
Eleven Months Year
Ended Ended
November 30, December 31,
------------- -------------
1997 1996 1995
------------- ------ ------
(In Millions)
Sales.............................................. $1,786 $1,860 $1,932
Cost of Sales...................................... 1,341 1,503 1,324
Selling, development and administrative expenses... 136 109 113
------ ------ ------
Operating income................................. 309 248 495
Interest expense, net.............................. 66 80 80
------ ------ ------
Income before income taxes......................... 243 168 415
Provision for income taxes......................... 96 76 172
------ ------ ------
Net income......................................... $ 147 $ 92 $ 243
====== ====== ======
See notes to financial statements.
F-38
MILLENNIUM CONTRIBUTED BUSINESS
STATEMENTS OF CHANGES IN INVESTED CAPITAL
(In millions)
-------------
Balance at December 31, 1995...................................... $1,692
Net income........................................................ 92
Net transactions with Millennium.................................. 51
------
Balance at December 31, 1996...................................... 1,835
Net income........................................................ 147
Net transactions with Millennium.................................. 742
------
Balance at November 30, 1997...................................... $2,724
======
See notes to financial statements.
F-39
MILLENNIUM CONTRIBUTED BUSINESS
STATEMENTS OF CASH FLOWS
Eleven Months Year Ended
Ended November 30, December 31,
------------------ --------------
1997 1996 1995
------------------ ------ ------
(In millions)
Cash flows from operating activities:
Net income................................ $ 147 $ 92 $ 243
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 125 127 132
(Increase) decrease in accounts
receivable............................. 220 (53) 32
Decrease (increase) in inventories...... 19 (15) (42)
Decrease (increase) in prepaid expenses
and other current assets............... 25 (6) (8)
Increase in other assets................ (31) (70) (39)
Increase (decrease) in trade accounts
payable................................ (53) (7) 7
(Decrease) increase in accrued expenses
and other liabilities.................. (113) 49 (73)
(Decrease) increase in other
liabilities............................ (35) (37) 10
----- ------ ------
Net cash provided by operating
activities........................... 304 80 262
Cash flows from investing activities:
Capital expenditures...................... (41) (127) (75)
----- ------ ------
Net cash used in investing
activities........................... (41) (127) (75)
----- ------ ------
Cash flows from financing activities:
Net transactions with Millennium.......... (258) 51 (184)
Repayment of long term debt............... (5) (4) (3)
----- ------ ------
Net cash (used in) provided by financing
activities............................... (263) 47 (187)
----- ------ ------
Net change in cash and cash equivalents... $ -- $ -- $ --
===== ====== ======
See notes to financial statements.
F-40
MILLENNIUM CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS
(amounts in millions)
NOTE 1--DESCRIPTION OF THE CONTRIBUTED BUSINESS AND OPERATIONS
Pursuant to a partnership agreement (the "Partnership Agreement"),
Millennium Chemicals Inc. ("Millennium") and Lyondell Petrochemical Company
("Lyondell") formed Equistar Chemicals, LP ("Equistar" or the "Partnership"), a
Delaware limited partnership, which commenced operations on December 1, 1997.
Equistar is 57% owned by Lyondell and 43% owned by Millennium. The Lyondell
interest is owned through two wholly owned subsidiaries, Lyondell Petrochemical
G.P. Inc. ("Lyondell GP") and Lyondell Petrochemical L.P. Inc. ("Lyondell LP").
Millennium also owns its interest in the Partnership through two wholly owned
subsidiaries, Millennium Petrochemicals GP LLC ("Millennium GP") and Millennium
Petrochemicals LP LLC ("Millennium LP").
The Partnership owns and operates the petrochemical and polymer businesses
contributed by Millennium and Lyondell (the "Contributed Business"). The assets
of the Partnership consist of 15 manufacturing facilities on the U.S. Gulf
Coast and in the U.S. Midwest. The petrochemical segment produces products
including ethylene, propylene, ethyl alcohol, butadiene, aromatics and methyl
tertiary butyl ether ("MTBE"). The products are used primarily in the
production of other chemicals and products, including polymers, for sales to
customers throughout the U.S. The petrochemicals segment also includes sales of
methanol produced by Lyondell Methanol LP ("Lyondell Methanol"), which is owned
75% by Lyondell and is operated by the Partnership. The polymers segment
produces products that include polyethylene (high-density, low-density and
linear low-density), and polypropylene, which are used in the production of a
wide variety of consumer and industrial products.
In May 1998, Equistar announced that Occidental Petroleum Corporation joined
the Partnership with a contribution of assets and liabilities (the "Occidental
Contributed Business"). The ownership percentages of Equistar after the
inclusion of the Occidental Contributed Business are Lyondell (41%), Millennium
(29.5%) and Occidental (29.5%).
Millennium contributed to the Partnership substantially all of the net
assets and operations comprising its petrochemicals and polymers segments.
Millennium retained $250 of the accounts receivable of the Contributed
Business.
The accompanying financial statements include the results of operations,
assets and liabilities of the petrochemicals and polymers businesses owned by
Millennium that were contributed to the Partnership ("Contributed Business").
The financial statements are presented on a going concern basis and include
only the historical net assets and results of operations that are directly
related to the Contributed Business. Consequently, the financial position,
results of operations and the cash flows may not be indicative of what may have
been reported had the Contributed Business been a separate, stand-alone entity
or operated as a part of the Partnership.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition. Revenue from product sales is generally recognized upon
shipment of product to the customer.
F-41
MILLENNIUM CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(amounts in millions)
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Trade Receivables. Trade receivables consist of the following:
November 30, December 31,
1997 1996
------------ ------------
Trade receivables.................................. $49 $270
Allowance for doubtful accounts.................... -- (1)
--- ----
$49 $269
=== ====
Inventories. Inventories are stated at the lower of cost or market value.
Cost is determined for the various categories of inventory using first-in,
first-out ("FIFO"); last-in, first-out ("LIFO") basis or average cost method as
deemed appropriate. Inventories valued on a LIFO basis were approximately $2
and $13 less than the amount of such inventories valued at current cost at
November 30, 1997 and December 31, 1996, respectively.
November 30, December 31,
1997 1996
------------ ------------
Finished products.................................. $169 $154
In-process products................................ 2 2
Raw materials...................................... 62 105
Other inventories.................................. 42 33
---- ----
$275 $294
==== ====
Property, Plant and Equipment. Property, plant and equipment is stated on
the basis of cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets, generally 20 to 40 years for
buildings and 10 to 25 years for machinery and equipment.
Property, plant and equipment consists of the following:
November 30, December 31,
1997 1996
------------ ------------
Land and buildings................................. $ 129 $ 125
Machinery and equipment............................ 1,569 1,516
Leasehold improvements............................. 4 4
------ ------
1,702 1,645
Allowance for depreciation and amortization........ 397 310
------ ------
$1,305 $1,335
====== ======
Turnaround Maintenance. Costs relating to future major maintenance projects
are estimated and expensed ratably from the date a turnaround is completed
until the next planned turnaround, generally 4 to 6 years.
Goodwill. The net assets of the Contributed Business include goodwill of
$1,142 at November 30, 1997, which is being amortized using the straight line
method over forty years. Such goodwill arose from Millennium's 1993 acquisition
of Quantum Chemical Corporation of which the Contributed Business was a
F-42
MILLENNIUM CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(amounts in millions)
part. The value of the purchase consideration was allocated to the acquired
assets and liabilities based on their fair values, resulting in $1,272 of
goodwill being allocated to the Contributed Business. Management periodically
evaluates goodwill for impairment based on the anticipated future cash flows
attributable to the operation. Such expected cash flows, on an undiscounted
basis, are compared to the carrying value of the tangible and intangible
assets, and if impairment is indicated, the carrying value of goodwill is
adjusted. Management believes that no impairment exists at November 30, 1997.
Accumulated amortization aggregated $130 and $101 at November 30, 1997 and
December 31, 1996, respectively. Amortization of goodwill amounted to $29 for
the eleven months ended November 30, 1997 and $31 each for the years ended
December 31, 1996 and 1995, respectively.
Accrued Expenses and Other Liabilities. Accrued expenses and other
liabilities consist of the following:
November 30, December 31,
1997 1996
------------ ------------
Major maintenance............................... $44 $ 56
Feedstock accruals.............................. -- 65
All other....................................... 11 47
--- ----
$55 $168
=== ====
Accounts payable, feedstock accruals and certain other accrued expenses are
not being contributed to the Partnership at its formation.
Environmental Remediation Cost. Environmental remediation costs are
expensed or capitalized in accordance with generally accepted accounting
principles. In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP 96-1"), "Environmental
Remediation Liabilities," which establishes new accounting and reporting
standards for the recognition and disclosure of environmental remediation
liabilities. The adoption of SOP 96-1 in 1997 did not have a material impact
on the results of operations.
Research and Development. The cost of research and development efforts is
expensed as incurred. Such costs aggregated $28 for the eleven month period
ended November 30, 1997 and $33 and $32 for the years ended December 31, 1996
and 1995, respectively.
Exchanges. Finished product exchange transactions, which do not require
payment or receipt of cash, are not accounted for as purchases or sales. Any
resulting volumetric exchange balances are accounted for as inventory in
accordance with the normal LIFO valuation policy. Exchanges settled through
payment and receipt of cash are accounted for as purchases and sales.
Federal Income Taxes. Earnings of the Contributed Business have been
included in a consolidated income tax return filed by its ultimate U.S.
parent, Millennium America Holdings Inc. ("MAHI"), a subsidiary of Millennium.
Pursuant to an informal tax allocation agreement, income taxes have been
allocated to the Contributed Business based on applicable statutory tax rates
applied to the taxable earnings generated by such business. Effective income
tax rates for the periods as of and at November 30, 1997 and December 31, 1996
and 1995 were 39.5%, 45.2% and 41.4%, respectively. Differences between the
effective income tax rates and the statutory federal income tax rates arise
primarily from goodwill amortization and state income taxes. Liabilities for
current and/or deferred income taxes have been and remain the responsibility
of MAHI, and accordingly, have been included in the balance sheet as invested
capital.
F-43
MILLENNIUM CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(amounts in millions)
As part of the transactions to consummate the Partnership, Millennium
entered into tax sharing and indemnification agreements with the Partnership in
which Millennium generally agreed to indemnify the partnership for income tax
liabilities attributable to periods when the operations of the Contributed
Business were included in the consolidated tax return of Millennium. The
Partnership is not subject to federal income taxes as income is reportable
directly by the individual partners; therefore, going forward there will be no
provision for income taxes in the partnership's financial statements.
Fair Value of Financial Instruments. The fair values of all short-term
financial instruments are estimated to approximate their carrying value because
of their short maturity.
Earnings Per Share. Historical earnings per share are not presented because
there is no separate identifiable pool of capital for the periods prior to
incorporation upon which a per share calculation could be based.
Reclassifications. Certain previously reported amounts have been restated to
conform to classifications currently adopted.
NOTE 3--LONG-TERM DEBT AND INDEBTEDNESS TO MILLENNIUM
The debt included in the balance sheets reflects the obligations directly
related to the Contributed Business including allocated debt from Millennium.
November 30, December 31,
1997 1996
------------ ------------
Note payable to Millennium bearing interest at
8% due 2006.................................... -- $ 750
Other indebtedness to Millennium................ -- 250
Industrial revenue bonds bearing interest at
5.5% due 1998.................................. $ 4 9
Less current maturities......................... (4) (4)
------ ------
$ -- $1,005
====== ======
Interest paid for the eleven months ended November 30, 1997 and the years
ended December 31, 1996 and 1995 was $66, $80 and $80, respectively.
NOTE 4--PENSION AND OTHER POSTRETIREMENT BENEFITS
All full-time employees of the Contributed Business are covered by defined
benefit pension plans sponsored by Millennium. Retirement benefits are based on
years of service and average compensation as defined under the respective
plans' provisions. The funding policy is to contribute amounts to the plans
sufficient to meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974. The Contributed Business accrues
pension costs based on actuarial valuations and funds the plan through
contributions to Millennium who then contributes the funds to a master trust
sponsored by Millennium. Such contributions are reflected in invested capital.
Pension income related to participation in these plans was $2, $5 and $4 for
the eleven months ended November 30, 1997 and the years ended December 31, 1996
and 1995, respectively. One such plan covers benefits for union-represented
employees of the Contributed Business. Such plan will be assumed by the
Partnership upon its consummation.
Millennium also provides unfunded health care and life insurance benefits to
certain groups of retirees. Expenses related to the employees of the
Contributed Business were $3, $2 and $2 for the eleven months ended November
30, 1997 and the years ended December 31, 1996 and 1995, respectively.
F-44
MILLENNIUM CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(amounts in millions)
NOTE 5--RELATED PARTY TRANSACTIONS
Millennium provided certain corporate, general and administrative services
to the Contributed Business, including legal, financial, tax, risk management
and employee benefits services. Charges for these services are included in
selling and administration expenses and are believed to be reasonable. In
addition, a subsidiary of Millennium has controlled, on a centralized basis,
all cash receipts and disbursements received or made by the Contributed
Business. The net results of such transactions are included in the balance
sheets as invested capital. The Contributed Business also sells ethylene to an
affiliated business unit of Millennium for the manufacture of vinyl acetate
monomer. Vinyl acetate monomer is sold by Millennium to the Partnership. These
sales are reflected at market price and have been included in the accompanying
income statement. All significant intercompany accounts and transactions within
the Contributed Business have been eliminated. Millennium provides the
Partnership with certain operational services, including waste water treatment
and barge dock access. The Partnership provides certain general and
administrative services to Millennium, including materials management, certain
utilities, office space, health, safety and environmental services and computer
services. The Partnership has also controlled certain cash receipts and
disbursements received or made on behalf of Millennium.
NOTE 6--LEASES
Rental expense for operating leases was $38, $45 and $43 for the eleven
months ended November 30, 1997 and the years ended December 31, 1996 and 1995,
respectively.
Minimum Rentals
Future minimum rental commitments under noncancellable operating leases with
terms in excess of one year as of November 30, 1997 are as follows:
1998.................................... $43
1999.................................... 42
2000.................................... 26
2001.................................... 17
2002.................................... 13
Thereafter.............................. 18
----
$159
====
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Contributed Business is subject, among other things, to several
proceedings under the Federal Comprehensive Environmental Response Compensation
and Liability Act and other federal and state statutes. These proceedings are
in various stages ranging from initial investigation to active settlement
negotiations to implementation of clean-up remediation of sites. Additionally,
Millennium and/or its subsidiaries are defendants or plaintiffs in lawsuits
that have arisen in the normal course of business including those relating to
commercial transactions and product liability with respect to the Contributed
Business.
As part of the transactions to consummate the Partnership, Millennium agreed
to indemnify the partnership for any present or future liabilities arising
within a seven-year period after the consummation of the Partnership which are
attributable to the Contributed Business's operations prior to the
Partnership's formation in excess of $7.
The Contributed Business has various contractual obligations to purchase raw
materials used in its production of polyethylene. Commitments to purchase
ethylene used in the production of polyethylene are based on market prices and
expire from 1997 to 2001.
F-45
OCCIDENTAL CONTRIBUTED BUSINESS
BALANCE SHEET
March 31, 1998
(amounts in thousands)
(Unaudited)
CURRENT ASSETS:
Cash............................................................... $ 13
Trade receivables.................................................. 13,492
Other receivables.................................................. 9,264
Inventories........................................................ 159,420
Prepaid expenses................................................... 8,315
----------
Total current assets.............................................. 190,504
EQUITY INVESTMENT................................................... 86,155
PROPERTY, PLANT AND EQUIPMENT, net.................................. 1,807,605
OTHER ASSETS........................................................ 28,685
----------
TOTAL ASSETS...................................................... $2,112,949
==========
CURRENT LIABILITIES:
Accounts payable................................................... $ 74,547
Accrued liabilities................................................ 33,879
----------
Total current liabilities......................................... 108,426
CAPITAL LEASE LIABILITIES........................................... 205,000
NOTES PAYABLE TO AFFILIATES......................................... 1,222,674
DEFERRED CREDITS AND OTHER LIABILITIES.............................. 72,733
INVESTED CAPITAL.................................................... 504,116
----------
TOTAL LIABILITIES AND INVESTED CAPITAL............................ $2,112,949
==========
The accompanying notes are an integral part of these financial statements.
F-46
OCCIDENTAL CONTRIBUTED BUSINESS
STATEMENT OF OPERATIONS AND INVESTED CAPITAL
For the three months ended March 31, 1998
(amounts in thousands)
(Unaudited)
NET SALES AND OPERATING REVENUES...................................... $355,442
OPERATING COSTS AND EXPENSES:
Cost of sales....................................................... 320,067
Selling, general and administrative and other operating expenses.... 4,206
--------
OPERATING INCOME...................................................... 31,169
Loss from equity investment......................................... (1,490)
Interest expense, affiliates and other.............................. (25,991)
Other income, net................................................... 888
--------
INCOME BEFORE TAXES................................................... 4,576
Provision for income taxes.......................................... 2,255
--------
NET INCOME............................................................ 2,321
PENSION LIABILITY ADJUSTMENT.......................................... --
INCREASE IN INVESTED CAPITAL.......................................... 11,586
INVESTED CAPITAL, beginning of period................................. 490,209
--------
INVESTED CAPITAL, end of period....................................... $504,116
========
The accompanying notes are an integral part of these financial statements.
F-47
OCCIDENTAL CONTRIBUTED BUSINESS
STATEMENT OF CASH FLOWS
For the three months ended March 31, 1998
(amounts in thousands)
(Unaudited)
CASH FLOW OPERATING ACTIVITIES:
Net income......................................................... $ 2,321
Adjustment to reconcile net income to net cash used by operating
activities:
Depreciation and amortization of assets.......................... 30,966
Loss from equity investment...................................... 1,490
Other noncash charges to income.................................. 202
Changes in operating assets and liabilities:
Decrease in receivables.......................................... 4,996
Increase in inventories.......................................... (16,364)
Decrease in prepaid expenses..................................... 1,979
Decrease in accounts payable and accrued liabilities............. (33,800)
Other operating, net............................................... 1,126
--------
Net cash used by operating activities................................ (7,084)
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures............................................... (6,121)
Other investing, net............................................... 730
--------
Net cash used by investing activities................................ (5,391)
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in invested capital....................................... 11,586
--------
Net cash provided by financing activities............................ 11,586
--------
Change in cash....................................................... (889)
Cash--beginning of period............................................ 902
--------
Cash--end of period.................................................. $ 13
========
The accompanying notes are an integral part of these financial statements.
F-48
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
(1) BASIS OF PRESENTATION AND DESCRIPTION OF THE CONTRIBUTED BUSINESS--
On May 15, 1998, Occidental Petroleum Corporation (Occidental) signed an
agreement with Lyondell Petrochemical Company and Millenium Chemicals Inc. to
effect the proposed contribution of its ethylene, propylene, ethylene oxide and
ethylene glycol derivatives businesses (collectively, the Occidental
Contributed Business) to a joint venture limited partnership called Equistar
Chemicals, LP (Equistar) in return for a 29.5% interest in Equistar, the
receipt of approximately $420 million in cash and the assumption by Equistar of
approximately $205 million of Occidental capital lease liabilities.
Under terms of the agreement, on May 15, 1998, Occidental contributed to
Equistar substantially all of the net assets and operations of the Occidental
Contributed Business. The accompanying financial statements include the results
of operations, assets and liabilities of the Occidental Contributed Business
represented by Oxy Petrochemicals Inc., PDG Chemical Inc. and a plant owned by
Occidental Chemical Corporation, which are all indirect subsidiaries of
Occidental Chemical Holding Corporation (OCHC). OCHC is an indirect subsidiary
of Occidental. These financial statements include only the historical results
of operations and net assets that are directly related to the Occidental
Contributed Business. Consequently, the financial position, results of
operations, and cash flows may not be indicative of what would have been
reported if the Occidental Contributed Business had been a separate, stand-
alone entity or had been operated as a part of Equistar during the period
presented. Additionally, certain assets and liabilities of the Occidental
Contributed Business were retained by Occidental. The retained assets will be
leased to Equistar under terms of the agreement.
Certain information and disclosures normally included in the notes to
financial statements have been condensed or omitted pursuant to Securities and
Exchange Commission (SEC) rules and regulations, but resultant disclosures are
in accordance with generally accepted accounting principles as they apply to
interim reporting. These interim financial statements should be read in
conjunction with the Occidental Contributed Business audited financial
statements as of December 31, 1997 (1997 Financial Statements).
The accompanying financial statements as of March 31, 1998 are unaudited.
All references made to amounts for the period then ended have been prepared in
accordance with the rules and regulations of the SEC. They include all
adjustments which are considered necessary for a fair statement of the results
of operations and financial position of the Occidental Contributed Business for
the interim period presented. Such adjustments consisted only of normal
recurring items.
Occidental provided certain corporate, general and administrative services
to the Occidental Contributed Business, including legal, financial, marketing
and executive services. Charges for these services were allocated based on the
estimated costs of specific functions performed by Occidental and affiliates
for the Occidental Contributed Business. Management believes the charges, which
amounted to $2.6 million for the three months ended March 31, 1998, are
reasonable. Such amounts are included in selling, general and administrative
expenses.
The Occidental Contributed Business sells ethylene to affiliated businesses
of Occidental. These sales, reflected at market prices and included in the
accompanying Statement of Operations, were $49 million for the three months
ended March 31, 1998.
Occidental utilizes a centralized cash management system for its operations,
including the Occidental Contributed Business. Cash distributed to or advanced
from Occidental has been reflected in invested capital in the accompanying
balance sheets. In addition, settlement of transactions with other Occidental
affiliates are recorded through invested capital.
F-49
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
(2) SIGNIFICANT ACCOUNTING POLICIES--
Risks and uncertainties--
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts, generally not by material amounts. Management
believes that these estimates and assumptions provide a reasonable basis for
the fair presentation of the Occidental Contributed Business' financial
position and results of operations.
Since the Occidental Contributed Business' major products are commodities,
significant changes in the prices of chemical products could have a significant
impact on the Occidental Contributed Business' results of operations for any
particular period.
Environmental liabilities and costs--
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Reserves for estimated costs that relate to
existing conditions caused by past operations and that do not contribute to
current or future revenue generation are recorded when environmental remedial
efforts are probable and the costs can be reasonably estimated. In determining
the reserves, Occidental uses the most current information available, including
similar past experiences, available technology, regulations in effect, the
timing of remediation and cost-sharing arrangements. The environmental reserves
are based on management's estimate of the most likely cost to be incurred and
are reviewed periodically and adjusted as additional or new information becomes
available. The environmental reserves are included in other noncurrent
liabilities and amounted to $7.8 million at March 31, 1998.
Income taxes--
The Occidental Contributed Business has been included in the consolidated
U.S. federal income tax return and in certain unitary state income tax returns
of Occidental. A portion of the income tax provision for these returns is
allocated to the Occidental Contributed Business using the same method as a tax
sharing arrangement between OCHC and Occidental. The Occidental Contributed
Business also records state income tax provisions for operations required to be
reported in separate tax returns. The difference between the provision for
income taxes at the U.S. federal statutory rate and the effective tax rate is
primarily due to state income taxes. Liabilities for current and/or deferred
income taxes have been and remain the responsibility of Occidental and,
accordingly, have been included in the Balance Sheet as invested capital.
Fair value of financial instruments--
The fair value of on-balance sheet financial instruments approximates
carrying value. However, the fair value of notes payable to affiliates cannot
be practicably determined due to the related party nature of the balances.
Change in accounting principle--
Effective January 1, 1998, the Occidental Contributed Business adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of
F-50
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
general purpose financial statements. The implementation of SFAS No. 130 did
not have an impact on the Occidental Contributed Business' results of
operations. The Occidental Contributed Business' comprehensive income was $2.3
million for the three months ended March 31, 1998.
(3) RECEIVABLES--
As of March 31, 1998, the Occidental Contributed Business transferred, with
limited recourse, to an Occidental affiliate net domestic trade receivables
under a revolving sale program in connection with the ultimate sale for cash of
an undivided ownership interest in such receivables by the affiliate. The net
trade receivables transferred amounted to $113.7 million as of March 31, 1998.
The Occidental Contributed Business transferred the receivables to the
affiliate in a noncash transaction that was reflected as a reduction in
invested capital. Occidental retained collection responsibility with respect to
the receivables sold. An interest in newly created receivables is transferred
monthly, net of collections made from customers. Fees related to the sales of
receivables under this program, which are allocated from Occidental, were $1.6
million for the three months ended March 31, 1998, and are included in other
income, net.
Under the terms of the Equistar agreement, Occidental repurchased the net
domestic trade receivables of $114.8 million of the Occidental Contributed
Business as of May 15, 1998 and contributed $100.3 million to Equistar.
Other receivables include $3.2 million as of March 31, 1998, from the equity
investee.
(4) INVENTORIES--
Inventories are stated at the lower of cost or market value determined using
the first-in, first-out (FIFO) or weighted-average-cost methods. Inventories
consist of the following as of March 31, 1998 (in thousands):
Raw materials................................................... $ 60,494
Materials and supplies.......................................... 17,250
Work in process................................................. 9,956
Finished goods.................................................. 71,720
--------
$159,420
========
(5) EQUITY INVESTMENT--
The Occidental Contributed Business has a fifty percent interest in PD
Glycol, a partnership which manufactures ethylene oxide and ethylene glycol
derivatives at its plant in Beaumont, Texas. The investment, which is accounted
for on the equity method, exceeded the historical underlying equity in net
assets by approximately $43 million at March 31, 1998. The excess is being
amortized into income over the estimated total productive life of the plant.
F-51
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
(6) PROPERTY, PLANT AND EQUIPMENT--
Property additions and major renewals and improvements are capitalized at
cost. Property acquired under a capital lease has been capitalized at the
present value of future minimum lease payments. Depreciation is primarily
provided using the units-of-production method based on estimated total
productive life.
Interest costs incurred in connection with major capital expenditures are
capitalized and amortized over the lives of the related assets. Capitalized
interest is calculated based on the average borrowing rate of Occidental. The
amount of interest capitalized was $39,000 for the three months ended March 31,
1998.
Property, plant and equipment consists of the following as of March 31, 1998
(in thousands):
Land and land improvements................................... $ 81,950
Buildings.................................................... 38,061
Machinery and equipment...................................... 2,421,068
Property acquired under capital lease........................ 350,000
Construction in progress..................................... 50,263
-----------
2,941,342
Accumulated depreciation and amortization.................... (1,133,737)
-----------
Property, plant and equipment, net........................... $ 1,807,605
===========
Included above is $103.4 million of net property, plant and equipment that
was retained by Occidental and will be leased to Equistar under the terms of
the agreement dated May 15, 1998.
(7) OTHER ASSETS--
Other assets consist of the following as of March 31, 1998 (in thousands):
Catalyst......................................................... $ 7,600
Deferred start-up costs.......................................... 6,287
Prepaid pension costs............................................ 6,493
Other............................................................ 8,305
-------
$28,685
=======
Catalyst is amortized over estimated lives ranging from 18 months to 3
years. Deferred start-up costs are amortized over a period of 20 years. Other
amortizable assets are written off to income over the estimated periods to be
benefited.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
(SOP 98-5), which requires that costs of start-up activities, including
organizational costs, be expensed as incurred. The initial application of the
statement will result in a charge to income for any costs of start-up
activities that have not yet been fully amortized. Occidental will implement
SOP 98-5 effective January 1, 1999.
F-52
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
(8) ACCRUED LIABILITIES--
Accrued liabilities consist of the following as of March 31, 1998 (in
thousands):
Turnaround maintenance........................................... $15,362
Property taxes and insurance..................................... 9,481
Other............................................................ 9,036
-------
$33,879
=======
Maintenance turnarounds are generally performed every 2 to 5 years.
Occidental utilizes an accrual methodology under which it estimates the
projected cost of a turnaround and accrues the cost equally over the years
between turnarounds. Total accruals relating to these future major maintenance
projects were $42.3 million as of March 31, 1998, and were included in accrued
liabilities as noted above and deferred credits and other liabilities in the
accompanying Balance Sheet.
(9) NOTES PAYABLE TO AFFILIATES--
The financial statements of the Occidental Contributed Business include
several notes payable to Occidental and an affiliate. Accrued interest on these
notes is settled annually through and is included in invested capital at rates
ranging between 6 and 11 percent. Interest expense on notes payable to
affiliates was $22.8 million for the three months ended March 31, 1998.
Principal amounts of the notes payable to an affiliate totaling $63.9
million are due on December 31, 1998. As the amounts will be settled either
through invested capital or another note payable to the affiliate, no notes
payable to affiliates have been classified as current in the accompanying
Balance Sheet.
(10) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS--
Reference is made to Note 10 of the 1997 Financial Statements regarding
retirement plans and postretirement benefits.
(11) LEASE COMMITMENTS--
At March 31, 1998, future net minimum lease payments for capital and
operating leases are as follows (in thousands):
Capital Operating
-------- ---------
1998.................................................. $ 9,884 $12,086
1999.................................................. 13,179 5,986
2000.................................................. 208,286 5,339
2001.................................................. -- 4,886
2002.................................................. -- 3,765
Thereafter............................................ -- 22,535
-------- -------
Total minimum lease payments.......................... 231,349 $54,597
-------- =======
Imputed interest...................................... (26,349)
--------
Present value of net minimum lease payments........... $205,000
========
Rental expense for operating leases, excluding leases with terms of one year
or less, was approximately $4 million for the three months ended March 31,
1998.
F-53
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
(12) COMMITMENTS AND CONTINGENCIES--
OCHC has been named as defendant or as potentially responsible party with
regard to the Occidental Contributed Business in a number of lawsuits, claims
and proceedings, including governmental proceedings under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) and
corresponding state acts. These governmental proceedings seek funding,
remediation and, in some cases, compensation for alleged property damage,
punitive damages and civil penalties, aggregating substantial amounts. OCHC is
usually one of many companies in these proceedings, and has to date been
successful in sharing response costs with other financially sound companies.
OCHC has accrued reserves with regard to the Occidental Contributed Business at
the most likely cost to be incurred in those proceedings where it is probable
that OCHC will incur remediation costs which can be reasonably estimated.
It is impossible at this time to determine the ultimate liabilities that
OCHC may incur with regard to the Occidental Contributed Business resulting
from the foregoing lawsuits, claims and proceedings. Certain of these matters
may involve substantial amounts, and if these were to be ultimately resolved
unfavorably to the full amount of their maximum potential exposure, an event
not currently anticipated, it is possible that such an event could have a
material adverse effect upon the financial position or results of operations of
the Occidental Contributed Business. However, in management's opinion, after
taking into account reserves and indemnities, it is unlikely that any of the
foregoing matters will have a material adverse effect upon the financial
position or results of operations of the Occidental Contributed Business.
Under the terms of the agreement with Equistar, Occidental has agreed to
indemnify Equistar for any present or future contingent liabilities arising
within a seven year period after May 15, 1998 which are attributable to the
Occidental Contributed Business's operations prior to May 15, 1998 in excess of
$7 million.
The Occidental Contributed Business has certain other commitments to
purchase electrical power, raw materials and other potential obligations, all
in the ordinary course of business.
(13) SUBSEQUENT EVENT--
On January 11, 1999, CITGO Petroleum Corporation (CITGO) initiated a legal
action against Occidental Chemical Corporation (OCC) in the United States
District Court for the Northern District of Oklahoma seeking compensatory and
exemplary damages in an unspecified amount. It alleges that OCC breached the
provisions of a Plant Site Right of First Refusal Agreement pertaining to the
Lake Charles plant (Right of First Refusal) dated August 31, 1983, between
CITGO and Cities Service Oil and Gas Corporation, predecessor in interest in
OCC. It is impossible at this time to determine the ultimate legal liabilities,
if any, that may arise from this lawsuit. The CITGO compliant was not filed
against Equistar and seeks only money damages from OCC. However, in
management's opinion, the lawsuit is not likely to have a material adverse
effect upon the financial position of the Occidental Contributed Business.
F-54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
Occidental Chemical Holding Corporation:
We have audited the accompanying balance sheets of the Occidental Contributed
Business as of December 31, 1997 and 1996, and the related statements of
operations and invested capital, and cash flows for each of the three years in
the period ended December 31, 1997. The Occidental Contributed Business is the
ethylene, propylene, ethylene oxide and ethylene glycol derivatives businesses
of Occidental Chemical Holding Corporation included in its indirect
subsidiaries Oxy Petrochemicals Inc., PDG Chemical Inc. and a plant owned by
Occidental Chemical Corporation. These financial statements are the
responsibility of Occidental Chemical Holding Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Occidental Contributed
Business as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas,
July 10, 1998 (except with
respect to the matter
discussed in Note 13, as to
which the date is January
26, 1999)
F-55
OCCIDENTAL CONTRIBUTED BUSINESS
BALANCE SHEETS
December 31, 1997 and 1996
(amounts in thousands)
December 31
1997 1996
---------- ----------
CURRENT ASSETS:
Cash................................................... $ 902 $ 13
Trade receivables...................................... 17,235 13,841
Other receivables...................................... 10,517 2,263
Inventories............................................ 143,056 175,667
Prepaid expenses....................................... 10,294 12,100
---------- ----------
Total current assets................................. 182,004 203,884
EQUITY INVESTMENT........................................ 88,375 94,044
PROPERTY, PLANT AND EQUIPMENT, net....................... 1,830,446 1,913,834
OTHER ASSETS............................................. 30,636 26,539
---------- ----------
TOTAL ASSETS......................................... $2,131,461 $2,238,301
========== ==========
CURRENT LIABILITIES:
Current portion of capital lease liabilities........... -- $ 6,905
Accounts payable....................................... $ 89,309 125,129
Accrued liabilities.................................... 53,981 62,796
---------- ----------
Total current liabilities............................ 143,290 194,830
CAPITAL LEASE LIABILITIES................................ 205,000 205,000
NOTES PAYABLE TO AFFILIATES.............................. 1,222,674 1,209,269
DEFERRED CREDITS AND OTHER LIABILITIES................... 70,288 41,883
INVESTED CAPITAL......................................... 490,209 587,319
---------- ----------
TOTAL LIABILITIES AND INVESTED CAPITAL .............. $2,131,461 $2,238,301
========== ==========
The accompanying notes are an integral part of these financial statements.
F-56
OCCIDENTAL CONTRIBUTED BUSINESS
STATEMENTS OF OPERATIONS AND INVESTED CAPITAL
For the years ended December 31, 1997, 1996 and 1995
(amounts in thousands)
1997 1996 1995
---------- ---------- ----------
NET SALES AND OPERATING REVENUES........... $1,802,854 $1,671,158 $1,899,191
OPERATING COSTS AND EXPENSES:
Cost of sales............................ 1,530,521 1,506,399 1,437,155
Selling, general and administrative and
other operating expenses................ 21,666 22,212 20,397
---------- ---------- ----------
OPERATING INCOME........................... 250,667 142,547 441,639
Loss from equity investment.............. (6,052) (5,859) (5,566)
Interest expense, affiliates and other... (105,960) (119,811) (136,298)
Other expense, net....................... (6,881) (2,190) (3,549)
---------- ---------- ----------
INCOME BEFORE TAXES........................ 131,774 14,687 296,226
Provisions for income taxes.............. 50,482 8,254 111,624
---------- ---------- ----------
NET INCOME................................. 81,292 6,433 184,602
PENSION LIABILITY ADJUSTMENT............... 4,191 963 1,334
DECREASE IN INVESTED CAPITAL............... (182,593) (127,916) (142,929)
INVESTED CAPITAL, beginning of year........ 587,319 707,839 664,832
---------- ---------- ----------
INVESTED CAPITAL, end of year.............. $ 490,209 $ 587,319 $ 707,839
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-57
OCCIDENTAL CONTRIBUTED BUSINESS
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
(amounts in thousands)
1997 1996 1995
-------- -------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income..................................... $ 81,292 $ 6,433 $184,602
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of assets...... 121,209 111,519 117,912
Loss from equity investment.................. 6,052 5,859 5,566
Other noncash charges to income.............. 14,380 8,159 2,197
Changes in operating assets and liabilities:
Decrease (increase) in receivables........... (11,648) 3,282 271
Decrease (increase) in inventories........... 32,611 (17,504) 10,673
Decrease (increase) in prepaid expenses...... 1,806 (1,421) 493
Increase (decrease) in accounts payable and
accrued liabilities......................... (23,710) 6,541 (11,223)
Other operating, net........................... (8,210) (12,621) (9,007)
-------- -------- --------
Net cash provided by operating activities........ 213,782 110,247 301,484
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................... (40,608) (40,933) (43,372)
Other investing, net........................... (383) (643) (6,549)
-------- -------- --------
Net cash used by investing activities............ (40,991) (41,576) (49,921)
CASH FLOW FROM FINANCING ACTIVITIES:
Principal payments on capital lease
liabilities................................... (6,905) (27,619) (27,619)
Increase (decrease) in notes payable to
affiliates.................................... 13,405 85,820 (82,739)
Decrease in invested capital................... (178,402) (126,953) (141,595)
-------- -------- --------
Net cash used by financing activities............ (171,902) (68,752) (251,953)
-------- -------- --------
Change in cash................................... 889 (81) (390)
Cash--beginning of year.......................... 13 94 484
-------- -------- --------
Cash--end of year................................ $ 902 $ 13 $ 94
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-58
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(1) BASIS OF PRESENTATION AND DESCRIPTION OF THE CONTRIBUTED BUSINESS--
On May 15, 1998, Occidental Petroleum Corporation (Occidental) signed an
agreement with Lyondell Petrochemical Company and Millennium Chemicals Inc. to
effect the proposed contribution of its ethylene, propylene, ethylene oxide and
ethylene glycol derivatives businesses (collectively, the Occidental
Contributed Business) to a joint venture limited partnership called Equistar
Chemicals, LP (Equistar) in return for a 29.5% interest in Equistar, receipt of
approximately $420 million in cash and the assumption by Equistar of
approximately $205 million of Occidental capital lease liabilities.
Under terms of the agreement, on May 15, 1998, Occidental contributed to
Equistar substantially all of the net assets and operations of the Occidental
Contributed Business. The accompanying financial statements include the results
of operations, assets and liabilities of the Occidental Contributed Business
represented by Oxy Petrochemicals Inc., PDG Chemical Inc. and a plant owned by
Occidental Chemical Corporation, which are all indirect subsidiaries of
Occidental Chemical Holding Corporation (OCHC). OCHC is an indirect subsidiary
of Occidental. These financial statements include only the historical results
of operations and net assets that are directly related to the Occidental
Contributed Business. Consequently, the financial position, results of
operations, and cash flows may not be indicative of what would have been
reported if the Occidental Contributed Business had been a separate, stand-
alone entity or had been operated as a part of Equistar during the periods
presented. Additionally, certain assets and liabilities of the Occidental
Contributed Business were retained by Occidental. The retained assets will be
leased to Equistar under terms of the agreement.
Occidental provided certain corporate, general and administrative services
to the Occidental Contributed Business, including legal, financial, marketing
and executive services. Charges for these services were allocated based on the
estimated costs of specific functions performed by Occidental and affiliates
for the Occidental Contributed Business. Management believes the charges, which
amounted to $10.4 million in each of the years 1997, 1996 and 1995, are
reasonable. Such amounts are included in selling, general and administrative
expenses.
The Occidental Contributed Business sells ethylene to affiliated businesses
of Occidental. These sales, reflected at market prices and included in the
accompanying Statements of Operations, were $242 million, $227 million and $474
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Occidental utilizes a centralized cash management system for its operations,
including the Occidental Contributed Business. Cash distributed to or advanced
from Occidental has been reflected in invested capital in the accompanying
balance sheets. In addition, settlement of transactions with other Occidental
affiliates are recorded through invested capital.
(2) SIGNIFICANT ACCOUNTING POLICIES--
Risks and uncertainties--
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial
F-59
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
statements. Accordingly, upon settlement, actual results may differ from
estimated amounts, generally not by material amounts. Management believes that
these estimates and assumptions provide a reasonable basis for the fair
presentation of the Occidental Contributed Business' financial position and
results of operations.
Since the Occidental Contributed Business' major products are commodities,
significant changes in the prices of chemical products could have a significant
impact on the Occidental Contributed Business' results of operations for any
particular period.
Environmental liabilities and costs--
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Reserves for estimated costs that relate to
existing conditions caused by past operations and that do not contribute to
current or future revenue generation are recorded when environmental remedial
efforts are probable and the costs can be reasonably estimated. In determining
the reserves, Occidental uses the most current information available, including
similar past experiences, available technology, regulations in effect, the
timing of remediation and cost-sharing arrangements. The environmental reserves
are based on management's estimate of the most likely cost to be incurred and
are reviewed periodically and adjusted as additional or new information becomes
available. The environmental reserves are included in other noncurrent
liabilities and amounted to $7.9 million and $8.2 million at December 31, 1997
and 1996, respectively.
Income taxes--
The Occidental Contributed Business has been included in the consolidated
U.S. federal income tax return and in certain unitary state income tax returns
of Occidental. A portion of the income tax provision for these returns is
allocated to the Occidental Contributed Business using the same method as a tax
sharing arrangement between OCHC and Occidental. The Occidental Contributed
Business also records state income tax provisions for operations required to be
reported in separate tax returns. The difference between the provision for
income taxes at the U.S. federal statutory rate and the effective tax rate is
primarily due to state income taxes. Liabilities for current and/or deferred
income taxes have been and remain the responsibility of Occidental and,
accordingly, have been included in the Balance Sheets as invested capital.
Fair value of financial instruments--
The fair value of on-balance sheet financial instruments approximates
carrying value. However, the fair value of notes payable to affiliates cannot
be practicably determined due to the related party nature of the balances.
Change in accounting principle--
Effective January 1, 1998, the Occidental Contributed Business adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The implementation of SFAS No. 130 did
not have an impact on the Occidental Contributed Business' results of
operations. The Occidental Contributed Business' comprehensive income was $85.4
million for 1997, $5.9 million for 1996 and $185.7 million for 1995.
F-60
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
(3) RECEIVABLES--
As of December 31, 1997, 1996, and 1995, the Occidental Contributed Business
transferred, with limited recourse, to an Occidental affiliate net domestic
trade receivables under a revolving sale program in connection with the
ultimate sale for cash of an undivided ownership interest in such receivables
by the affiliate. The net trade receivables transferred amounted to $136.4
million and $164.3 million as of December 31, 1997 and 1996, respectively. The
Occidental Contributed Business transferred the receivables to the affiliate to
a noncash transaction that was reflected as a reduction in invested capital.
Occidental retained collection responsibility with respect to the receivables
sold. An interest in newly created receivables is transferred monthly, net of
collections made from customers. Fees related to the sales of receivables under
this program, which are allocated from Occidental, were $8.4 million, $6.8
million and $8.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively, and are included in other expense, net.
Under the terms of the Equistar agreement, Occidental repurchased net
domestic trade receivables of $114.8 million of the Occidental Contributed
Business as of May 15, 1998 and contributed $100.3 million to Equistar.
Other receivables include $3.9 million and $1.7 million as of December 31,
1997 and 1996, respectively, from the equity investee.
(4) INVENTORIES--
Inventories are stated at the lower of cost or market value determined using
the first-in, first-out (FIFO) or weighted-average-cost methods. Inventories
consist of the following (in thousands):
December 31, December 31,
1997 1996
------------ ------------
Raw materials........................................ $ 55,954 $ 91,824
Materials and supplies............................... 17,666 16,667
Work in process...................................... 9,729 7,635
Finished goods....................................... 59,707 59,541
-------- --------
$143,056 $175,667
======== ========
(5) EQUITY INVESTMENT--
The Occidental Contributed Business has a fifty percent interest in PD
Glycol, a partnership which manufactures ethylene oxide and ethylene glycol
derivatives at its plant in Beaumont, Texas. The investment, which is accounted
for on the equity method, exceeded the historical underlying equity in net
assets by approximately $43 million at December 31, 1997 and $44 million at
December 31, 1996. The excess is being amortized into income over the estimated
total productive life of the plant.
(6) PROPERTY, PLANT AND EQUIPMENT--
Property additions and major renewals and improvements are capitalized at
cost. Property acquired under a capital lease has been capitalized at the
present value of future minimum lease payments. Depreciation is primarily
provided using the units-of-production method based on estimated total
productive life.
F-61
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
Interest costs incurred in connection with major capital expenditures are
capitalized and amortized over the lives of the related assets. Capitalized
interest is calculated based on the average borrowing rate of Occidental. The
amount of interest capitalized was $637,000 and $639,000 for the years ended
December 31, 1997 and 1996, respectively.
Property, plant and equipment consists of the following (in thousands):
December 31, December 31,
1997 1996
------------ ------------
Land and land improvements........................... $ 81,752 $ 82,164
Buildings............................................ 37,906 37,870
Machinery and equipment.............................. 2,420,446 2,400,202
Property acquired under capital lease................ 350,000 350,000
Construction in progress............................. 46,273 39,561
----------- ----------
2,936,377 2,909,797
Accumulated depreciation and amortization............ (1,105,931) (995,963)
----------- ----------
Property, plant and equipment, net................... $ 1,830,446 $1,913,834
=========== ==========
Included above is $103.9 million and $106.4 million as of December 31, 1997
and 1996, respectively, of net property, plant and equipment that was retained
by Occidental and will be leased to Equistar under the terms of the agreement
dated May 15, 1998.
(7) OTHER ASSETS--
Other assets consist of the following (in thousands):
December 31, December 31,
1997 1996
------------ ------------
Catalyst.............................................. $10,502 $10,923
Deferred start-up costs............................... 6,479 7,249
Prepaid pension costs................................. 6,558 --
Other................................................. 7,097 8,367
------- -------
$30,636 $26,539
======= =======
Catalyst is amortized over estimated lives ranging from 18 months to 3
years. Deferred start-up costs are amortized over a period of 20 years. Other
amortizable assets are written off to income over the estimated periods to be
benefited.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
(SOP 98-5), which requires that costs of start-up activities, including
organizational costs, be expensed as incurred. The initial application of the
statement will result in a charge to income for any costs of start-up
activities that have not yet been fully amortized. Occidental will implement
SOP 98-5 effective January 1, 1999.
F-62
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
(8) ACCRUED LIABILITIES--
Accrued liabilities consist of the following (in thousands):
December 31, December 31,
1997 1996
------------ ------------
Turnaround maintenance................................ $15,356 $17,557
Property taxes and insurance.......................... 25,396 24,206
Capital and purchase reserves......................... 4,319 5,517
Other................................................. 8,910 15,516
------- -------
$53,981 $62,796
======= =======
Maintenance turnarounds are generally performed every 2 to 5 years.
Occidental utilizes an accrual methodology under which it estimates the project
cost of a turnaround and accrues the cost equally over the years between
turnarounds. Total accruals relating to these future major maintenance projects
were $41.2 million and $22.1 million as of December 31, 1997 and 1996,
respectively, and were included in accrued liabilities as noted above and
deferred credits and other liabilities in the accompanying Balance Sheets.
(9) NOTES PAYABLE TO AFFILIATES--
The financial statements of the Occidental Contributed Business include
several notes payable to Occidental and an affiliate. Accrued interest on these
notes is settled annually through and is included in invested capital at rates
ranging between 6 and 11 percent. Interest expense on notes payable to
affiliates was $93.4 million, $105.8 million and $137.1 million for the years
ended December 31, 1997, 1996 and 1995.
Principal amounts of the notes payable to an affiliate totaling $63.9
million are due on December 31, 1998. As the amounts will be settled either
through invested capital or another note payable to the affiliate, no notes
payable to affiliates have been classified as current in the accompanying
Balance Sheets.
(10) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS--
The Occidental Contributed Business participates in various defined
contribution retirement plans sponsored by Occidental for its salaried,
domestic union and nonunion hourly employees that provide for periodic
contributions by the Occidental Contributed Business based on plan-specific
criteria, such as base pay, age level, and/or employee contributions. The
Occidental Contributed Business contributed and expensed approximately $6
million under the provisions of these plans in each of the years 1997, 1996 and
1995.
Occidental provides medical and dental benefits and life insurance coverage
for certain active, retired and disabled employees and their eligible
dependents. Beginning in 1993, certain salaried participants pay for all
medical cost increases in excess of increases in the Consumer Price Index
(CPI). The benefits generally are funded by Occidental as the benefits are paid
during the year. The cost of providing these benefits is based on claims filed
and insurance premiums paid for the period.
The Occidental Contributed Business' retirement and postretirement defined
benefit plans are accrued based on various assumptions and discount rates, as
described below. The actuarial assumptions used could change in the near term
as a result of changes in expected future trends and other factors which,
depending on the nature of the changes, could cause increases or decreases in
the liabilities accrued.
Retirement plans--
Pension costs for the Occidental Contributed Business' defined benefit
pension plans, determined by independent actuarial valuations, are funded by
payments to trust funds, which are administered by independent
F-63
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
trustees. The components of net pension cost for employees of the Occidental
Contributed Business for the years ended December 31 were as follows (in
thousands):
1997 1996 1995
------- ------- -------
Service cost--benefits earned during the period..... $ 135 $ 140 $ 121
Interest cost on projected benefit obligation....... 3,154 3,037 2,647
Actual return on plan assets........................ (8,243) (5,116) (5,066)
Net amortization and deferral....................... 5,889 3,251 3,746
------- ------- -------
Net pension cost.................................. $ 935 $ 1,312 $ 1,448
======= ======= =======
In 1997 and 1996, the Occidental Contributed Business recorded an adjustment
to invested capital of $4.2 million and $1.0 million, respectively, to reflect
the net-of-tax difference between the additional liability required under
pension accounting provisions and the corresponding intangible asset.
The following table sets forth the defined benefit plans funded status and
amounts recognized in the Occidental Contributed Business Balance Sheets at
December 31 (in thousands):
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
---------------- ---------------
1997 1996 1997 1996
------- ------- ------ -------
Present value of the estimated pension
benefits to be paid in the future:
Vested benefits........................... $33,309 $ -- $5,109 $36,583
Nonvested benefits........................ 5,459 -- 334 6,096
------- ------- ------ -------
Total projected benefit obligations......... 38,768 -- 5,443 42,679
Plan assets at fair value................... 41,769 -- 5,067 37,635
------- ------- ------ -------
Projected benefit obligation in excess of
(less than) plan assets.................... $(3,001) $ -- $ 376 $ 5,044
======= ======= ====== =======
Projected benefit obligation in excess of
(less than) plan assets.................... $(3,001) $ -- $ 376 $ 5,044
Unrecognized prior service cost............. -- -- (489) (767)
Unrecognized net loss....................... (2,324) -- (519) (7,098)
Additional minimum liability(a)............. -- -- 1,008 7,865
------- ------- ------ -------
Pension liability (asset)................. $(5,325) $ -- $ 376 $ 5,044
======= ======= ====== =======
- --------
(a) A related amount up to the limit allowable under SFAS No. 87 "Employers'
Accounting for Pensions" has been included in other assets. Amounts
exceeding such limits have been charged to invested capital.
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.5 percent in 1997 and 1996. The rate of
increase in future compensation levels used in determining the actuarial
present value of the projected benefit obligations was between 4.5 and 5.5
percent in 1997 and 1996. The expected long-term rate of return on assets was 8
percent in 1997 and 1996.
Postretirement benefits--
To reflect the Occidental Contributed Business' participation in the
Occidental plan, the net periodic postretirement benefit costs and the
postretirement benefit obligations are based on an allocation of the Occidental
actuarial study using participant counts and demographic information for the
Occidental Contributed Business for each of the years presented in the tables
below.
The postretirement benefit obligation as of December 31, 1997 was determined
by application of the terms of medical and dental benefits and life insurance
coverage, including the effect of established maximums on
F-64
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
covered costs, together with relevant actuarial assumptions and health care
cost trend rates projected at a CPI increase of 3 percent in 1997 (except for
union employees). For union employees, the health care cost trend rates were
projected at annual rates ranging ratably from 8.5 percent in 1997 to 5 percent
through the year 2004 and level thereafter. The effect of a one percent annual
increase in these assumed cost trend rates would increase the accumulated
postretirement benefit obligation by approximately $800,000 and the annual
service and interest costs by approximately $100,000 in 1997. The weighted
average discount rate used in determining the accumulated postretirement
benefit obligation as of December 31, 1997 was 7.5 percent. The plans are
unfunded.
The following table sets forth the postretirement plans' combined status,
reconciled with the amounts included in the accompanying Balance Sheets in
deferred credits and other liabilities at December 31 (in thousands):
1997 1996
------- -------
Accumulated postretirement benefit obligation:
Retirees...................................................... $ 5,751 $ 6,377
Fully eligible active plan participants....................... 4,970 5,012
Other active plan participants................................ 7,658 7,516
------- -------
Total accumulated postretirement benefit obligation............. 18,379 18,905
Unrecognized net gain (loss).................................. 1,725 (202)
------- -------
Allocated accrued postretirement benefit cost............... $20,104 $18,703
======= =======
Allocated net periodic postretirement benefit cost for the employees of the
Occidental Contributed Business for the years ended December 31, 1997, 1996 and
1995 included the following components (in thousands):
1997 1996 1995
------ ------ ------
Service cost-benefits attributed to service during the
period................................................... $ 741 $ 697 $ 678
Interest cost on accumulated postretirement benefit
obligation............................................... 1,391 1,422 1,396
Net amortization and deferral............................. -- -- 39
------ ------ ------
Allocated net periodic postretirement benefit cost...... $2,132 $2,119 $2,113
====== ====== ======
Under terms of the Equistar agreement, Occidental will retain liabilities
related to retirees as of May 15, 1998.
(11) LEASE COMMITMENTS--
At December 31, 1997, future net minimum lease payments for capital and
operating leases are as follows (in thousands):
Capital Operating
-------- ---------
1998........................................................ $ 13,179 $16,115
1999........................................................ 13,179 5,986
2000........................................................ 208,286 5,339
2001........................................................ -- 4,886
2002........................................................ -- 3,765
Thereafter.................................................. -- 22,535
-------- -------
Total minimum lease payments................................ 234,644 $58,626
=======
Imputed interest............................................ (29,644)
--------
Present value of net minimum lease payments................. $205,000
========
F-65
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
Rental expense for operating leases, excluding leases with terms of one year
or less, was approximately $17 million, $17 million and $18 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
(12) COMMITMENTS AND CONTINGENCIES--
OCHC has been named as defendant or as potentially responsible party with
regard to the Occidental Contributed Business in a number of lawsuits, claims
and proceedings, including governmental proceedings under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) and
corresponding state acts. These governmental proceedings seek funding,
remediation and, in some cases, compensation for alleged property damage,
punitive damages and civil penalties, aggregating substantial amounts. OCHC is
usually one of many companies in these proceedings, and has to date been
successful in sharing response costs with other financially sound companies.
OCHC has accrued reserves with regard to the Occidental Contributed Business at
the most likely cost to be incurred in those proceedings where it is probable
that OCHC will incur remediation costs which can be reasonably estimated.
It is impossible at this time to determine the ultimate liabilities that
OCHC may incur with regard to the Occidental Contributed Business resulting
from the foregoing lawsuits, claims and proceedings. Certain of these matters
may involve substantial amounts, and if these were to be ultimately resolved
unfavorably to the full amount of their maximum potential exposure, an event
not currently anticipated, it is possible that such an event could have a
material adverse effect upon the financial position or results of operations of
the Occidental Contributed Business. However, in management's opinion, after
taking into account reserves and indemnities, it is unlikely that any of the
foregoing matters will have a material adverse effect upon the financial
position or results of operations of the Occidental Contributed Business.
Under the terms of the agreement with Equistar, Occidental has agreed to
indemnify Equistar for any present or future contingent liabilities arising
within a seven year period after May 15, 1998 which are attributable to the
Occidental Contributed Business's operations prior to May 15, 1998 in excess of
$7 million.
The Occidental Contributed Business has certain other commitments to
purchase electrical power, raw materials and other potential obligations, all
in the ordinary course of business.
(13) SUBSEQUENT EVENT--
On January 11, 1999, CITGO Petroleum Corporation (CITGO) initiated a legal
action against Occidental Chemical Corporation (OCC) in the United States
District Court for the Northern District of Oklahoma seeking compensatory and
exemplary damages in an unspecified amount. It alleges that OCC breached the
provisions of a Plant Site Right of First Refusal Agreement pertaining to the
Lake Charles plant dated August 31, 1983, between CITGO and Cities Service Oil
and Gas Corporation, predecessor in interest to OCC. It is impossible at this
time to determine any ultimate legal liabilities that may arise from this
lawsuit. The CITGO complaint was not filed against Equistar and seeks only
money damages from OCC. In management's opinion, the lawsuit is not likely to
have a material adverse effect upon the financial position of the Occidental
Contributed Business.
F-66
- -------------------------------------------------------------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you
with different information.
We are not offering to exchange notes in any jurisdiction where the offer
is not permitted.
We do not claim the accuracy of the information in this prospectus as of
any date other than the date stated on the cover.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 7
Cautionary Statements..................................................... 11
Forward Looking Statements................................................ 11
Use of Proceeds........................................................... 11
Capitalization............................................................ 12
The Partners of Equistar.................................................. 13
Selected Historical and Pro Forma Financial and Operating Data of
Equistar................................................................. 15
Selected Historical Financial and Operating Data of the Lyondell
Contributed Business..................................................... 17
Selected Historical Financial and Operating Data of the Millennium
Contributed Business..................................................... 19
Equistar Unaudited Pro Forma Income Statement Data for the Year Ended
December 31, 1998........................................................ 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Disclosure of Market Risk................................................. 33
Description of Equistar's Business........................................ 34
Management................................................................ 48
Compensation.............................................................. 51
Ownership................................................................. 57
Description of the Partnership Agreement.................................. 58
Description of the Parent Agreement....................................... 66
Related Transactions...................................................... 70
The Exchange Offers....................................................... 74
Description of the New Notes.............................................. 84
Federal Income Tax Considerations......................................... 92
The Exchange and Registration Rights Agreement............................ 92
Book-Entry; Delivery and Form............................................. 94
Plan of Distribution...................................................... 96
Legal Matters............................................................. 97
Independent Accountants................................................... 98
Available Information..................................................... 98
Index to Financial Statements............................................. F-1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PROSPECTUS
Equistar Chemicals, LP
Equistar Funding Corporation
$900,000,000
Offers to Exchange
ALL OUTSTANDING
8 1/2% Notes due 2004
8 3/4% Notes due 2009
for
REGISTERED
8 1/2% Notes due 2004
8 3/4% Notes due 2009
- -------------------------------------------------------------------------------
PART II
Information Not Required in Prospectus
ITEM 20. Indemnification of Directors and Officers
The partnership governance committee has provided for the indemnification of
Equistar's executive officers. Executives are entitled to indemnification with
respect to all matters to which Section 145 of the General Corporation Law of
the State of Delaware may relate, as if Section 145 were applicable to a
partnership. The right to indemnification and payment of expenses incurred in
defending a proceeding in advance of its final disposition is not exclusive of
any other right which the executives may have or hereafter acquire under any
statute, any agreement or otherwise, both as to action in that executive's
official capacity and as to action in any other capacity by holding office. The
indemnification right continues after the executive ceases to serve as an
Equistar officer or to serve another entity at the request of Equistar.
Section 145 of the General Corporation Law of the State of Delaware provides
as follows:
(a) A corporation shall have power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the
person in connection with such action, suit or proceeding if the person
acted in good faith and in a manner the person reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe
the person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the person's conduct was
unlawful.
(b) A corporation shall have power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in
a manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.
II-1
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the present or former director, officer, employee or agent is proper in
the circumstances because the person has met the applicable standard of
conduct set forth in subsections (a) and (b) of this section. Such
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) by a committee of such directors
designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so
direct, by independent legal counsel in a written opinion, or (4) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative, or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in this
section. Such expenses (including attorneys' fees) incurred by former
directors and officers and other employees and agents may be so paid upon
such terms and conditions, if any, as the corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action
in such person's official capacity and as to action in another capacity
while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not
the corporation would have the power to indemnify such person against such
liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers,
and employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is or was
serving at the request of such constituent corporation as director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to an employee benefit
plan; and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner such person reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
II-2
(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any bylaw, agreement,
vote of stockholders or disinterested directors, or otherwise. The Court of
Chancery may summarily determine a corporation's obligation to advance
expenses (including attorneys' fees).
Equistar may elect to enter into indemnification agreements with each of its
executive officers and with other persons as the partnership governance
committee may designate.
In addition, Equistar may elect to maintain liability insurance to protect
itself and any executive officer of Equistar or another partnership,
corporation, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not Equistar would have the power to indemnify
that person against any expense, liability or loss under the laws of the State
of Delaware.
ITEM 21. Exhibits
Exhibit No. Exhibit
3.1 Certificate of Limited Partnership of Equistar Chemicals, LP dated
as of October 17, 1997
3.2 Certificates of Amendment to the Certificate of Limited
Partnership of Equistar Chemicals, LP dated as of May 15, 1998
3.3 Amended and Restated Limited Partnership Agreement of Equistar
Chemicals, LP dated as of May 15, 1998, as amended
3.3(a) First Amendment to Amended and Restated Limited Partnership
Agreement of Equistar Chemicals, LP dated as of June 30, 1998
3.4 Certificate of Incorporation of Equistar Funding Corporation dated
as of January 22, 1999
3.5 By-Laws of Equistar Funding Corporation dated as of January 22,
1999
4.1 Exchange and Registration Rights Agreement among Equistar
Chemicals, LP, Equistar Funding Corporation, Chase Securities
Inc., for themselves and the other Initial Purchasers (except
NationsBanc Montgomery Securities LLC) and NationsBanc Montgomery
Securities LLC, for themselves and the other Initial Purchasers
(except Chase Securities Inc.) dated as of February 9, 1999
4.2 Indenture among Equistar Chemicals, LP, Equistar Funding
Corporation and The Bank of New York, as Trustee, dated as of
January 15, 1999
4.2(a) First Supplemental Indenture dated as of February 16, 1999 among
Equistar Chemicals, LP, Equistar Funding Corporation and The Bank
of New York, Trustee
4.2(b) Form of Note (attached as Exhibit A to the First Supplemental
Indenture dated as of February 16, 1999 among Equistar Chemicals,
LP, Equistar Funding Corporation and The Bank of New York,
Trustee)
*4.2(c) Form of Second Supplemental Indenture among Equistar Chemicals,
LP, Equistar Funding Corporation and The Bank of New York, as
Trustee
*4.2(d) Form of Note (attached as Exhibit A to the Form of Second
Supplemental Indenture among Equistar Chemicals, LP, Equistar
Funding Corporation and The Bank of New York, as Trustee, filed
herewith as Exhibit 4.2(c))
4.3 $1.25 billion Revolving Credit Agreement among Equistar Chemicals,
LP, as Borrower, Millennium America Inc., as Guarantor, and the
Lenders party thereto dated November 25, 1997
4.3(a) Amended and Restated Credit Agreement dated as of November 25,
1997, as amended and restated February 5, 1999, among Equistar
Chemicals, LP, as Borrower, Millennium America Inc., as Guarantor
and the Lenders party thereto
4.4 Indenture between Lyondell Petrochemical Company and Texas
Commerce Bank National Association, as Trustee, dated as of May
31, 1989
II-3
4.4(a) First Supplemental Indenture dated as of May 31, 1989 between
Lyondell Petrochemical Company and Texas Commerce Bank National
Association, Trustee, to the Indenture dated as of May 31, 1989
4.4(b) Second Supplemental Indenture dated as of December 1, 1997 among
Lyondell Petrochemical Company, Equistar Chemicals, LP and Texas
Commerce Bank National Association, Trustee, to the Indenture dated
as of May 31, 1989
4.5 Indenture between Lyondell Petrochemical Company and Continental
Bank, National Association, as Trustee, dated as of March 10, 1992
4.5(a) First Supplemental Indenture dated as of March 10, 1992 between
Lyondell Petrochemical Company and Continental Bank, National
Association, as Trustee, to the Indenture dated as of March 10, 1992
4.5(b) Second Supplemental Indenture dated as of December 1, 1997 among
Lyondell Petrochemical Company, Equistar Chemicals, LP and First
Trust National Association, Trustee, to the Indenture dated as of
March 10, 1992
4.6 Indenture between Lyondell Petrochemical Company and Texas Commerce
Bank National Association, as Trustee, dated as of January 29, 1996
4.6(a) First Supplemental Indenture dated as of February 15, 1996 between
Lyondell Petrochemical Company and Texas Commerce Bank National
Association, Trustee, to the Indenture dated as of January 29, 1996
4.6(b) Second Supplemental Indenture dated as of December 1, 1997 among
Lyondell Petrochemical Company, Equistar Chemicals, LP and Texas
Commerce Bank National Association, Trustee, to the Indenture dated
as of January 29, 1996
Equistar is a party to several debt instruments under which the total amount of
securities authorized does not exceed 10% of the total assets of Equistar and
its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of
Item 601(b) of Registration S-K, Equistar agrees to furnish a copy of such
instruments to the Commission upon request.
*5 Exhibit 5 Opinion of Baker & Botts, L.L.P. with respect to the
legality of the new notes
EXECUTIVE COMPENSATION:
10.1 Form of Severance Agreement between Lyondell Petrochemical Company
and Former Lyondell Executives
10.2 Form of Severance Agreement between Millennium Petrochemicals Inc.
and Former Millennium Executives
*10.3 Equistar Chemicals, LP Bonus Plan
*10.4 Equistar Chemicals, LP Supplemental Executive Retirement Plan
*10.5 Equistar Chemicals, LP Long-Term Incentive Plan
10.6 Summary Description of Equistar Chemicals, LP Executive
Supplementary Savings Plan
10.7 Summary Description of Equistar Chemicals, LP Executive Medical Plan
10.8 Summary Description of Equistar Chemicals, LP Salary Deferral Plan
10.9 Summary Description of Equistar Chemicals, LP Executive Disability
Plan
10.10 Summary Description of Equistar Chemicals, LP Executive Life
Insurance Plan
II-4
OTHER MATERIAL CONTRACTS:
10.11 Asset Contribution Agreement among Lyondell Chemical Company,
Lyondell Petrochemical LP and Equistar Chemicals, LP dated as of
December 1, 1997
10.11(a) First Amendment dated as of May 15, 1998 to the Asset Contribution
Agreement among Lyondell Chemicals Company, Lyondell Petrochemicals
LP and Equistar Chemicals, LP dated as of December 1, 1997
10.12 Asset Contribution Agreement among Millennium Petrochemicals Inc.,
Millennium LP and Equistar Chemicals, LP dated as of December 1,
1997
10.12(a) First Amendment dated as of May 15, 1998 to the Asset Contribution
Agreement among Millennium Petrochemicals Inc., Millennium LP and
Equistar Chemicals, LP dated as of December 1, 1997
10.13 Master Transaction Agreement among Equistar Chemicals, LP,
Occidental Petroleum Corporation, Lyondell Chemical Company and
Millennium Chemicals Inc. dated as of May 15, 1998
10.14 Agreement and Plan of Merger and Asset Contribution among
Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner
2, Inc., Oxy Petrochemicals Inc., PDG Chemical Inc. and Equistar
Chemicals, LP dated as of May 15, 1998
10.15 Amended and Restated Parent Agreement among Occidental Chemical
Corporation, Oxy CH Corporation, Occidental Petroleum Corporation,
Lyondell Petrochemical Company, Millennium Chemicals Inc. and
Equistar Chemicals, LP dated as of May 15, 1998
10.15(a) First Amendment dated as of June 30, 1998 to the Amended and
Restated Parent Agreement among Occidental Chemical Corporation,
Oxy CH Corporation, Occidental Petroleum Corporation, Lyondell
Petrochemical Company, Millennium Chemicals Inc. and Equistar
Chemicals, LP dated as of May 15, 1998
10.15(b) Assignment and Assumption Agreement with respect to the Amended and
Restated Parent Agreement executed as of June 19, 1998
10.16 Ethylene Sales Agreement between Equistar Chemicals, LP and
Occidental Chemical Corporation dated as of May 15, 1998
11 Statement Concerning Computation of Ratios
21 Subsidiaries of Equistar Chemicals, LP
23.1 Consent of Arthur Andersen LLP
23.2 Consents of PricewaterhouseCoopers LLP
*23.3 Consent of Baker & Botts, L.L.P. (included in Exhibit 5 Opinion)
24.1 Power of Attorney for Equistar Chemicals, LP
24.2 Power of Attorney for Equistar Funding Corporation
24.3 Power of Attorney for Lyondell Petrochemical GP Inc.
24.4 Power of Attorney for Millennium Petrochemicals Inc.
24.5 Power of Attorney for Occidental Petrochem Partner GP, Inc.
25.1 T-1 Statement of Eligibility of Trustee for the 8 1/2% notes
25.2 T-1 Statement of Eligibility of Trustee for the 8 3/4% notes
27 Financial Data Schedule
*99.1 Form of Instruction to Registered Holder and/or Book Entry Transfer
Participant from Beneficial Owner for Tender of Notes
*99.2 Form of Letter to The Depository Trust Company Participants for
Tender of Notes
*99.3 Form of Notice of Guaranteed Delivery
*99.4 Form of Transmittal Letter for Tender of Notes
- --------
* To be filed by amendment.
II-5
ITEM 22. Undertakings
1. The undersigned registrant hereby undertakes
. to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to
--include any prospectus required by section 10(a)(3) of the
Securities Act of 1933
--include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to information in the registration statement
--reflect in the prospectus any facts or events arising after the
effective date of the registration statement or its most recent post-
effective amendment which, individually or in the aggregate,
represent a fundamental change in the information shown in the
registration statement
Any increase or decrease in volume of securities offered if the total
dollar value of securities offered would not exceed that which was
registered and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus
filed with the SEC under Rule 424(b) of the Securities Act if, in the
aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price stated in the
"Calculation of Registration Fee" table in the effective registration
statement
. that, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of securities at that time shall be deemed
to be the initial bona fide offering
. to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering
2. The undersigned registrant hereby undertakes to provide to the
underwriter at the closing, specified in the underwriting agreement,
certificates in such denominations and registered in such names as
required by the underwriters to permit prompt delivery to each
purchaser.
3. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
4. The undersigned registrant hereby undertakes
. to respond to requests for information that is incorporated by
reference into the prospectus under items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of a request, and to send
the incorporated documents by first-class mail or other equally
prompt means. This undertaking includes information contained in
documents filed after the effective date of the registration
statement through the date of responding to the request
5. The undersigned registrant hereby undertakes to supply by means of a
posteffective amendment all information concerning a transaction, and
the company being acquired therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
SIGNATURES
Under the requirements of the Securities Act of 1933, the registrants have
duly caused this Registration Statement or amendment thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on April 16, 1999.
EQUISTAR CHEMICALS, LP, by its General
Partner
LYONDELL PETROCHEMICAL G.P. INC.
By: /s/ Dan F. Smith
--------------------------------------
Name: Dan F. Smith
------------------------------------
Title: President and Chief Executive
Officer
------------------------------------
Under the requirements of the Securities Act of 1933, this Registration
Statement or amendment thereto has been signed by the following persons, in the
capacities indicated on April 16, 1999.
Name Title
/s/ Dan F. Smith President and Chief Executive
- ------------------------------------- Officer and Director
Name: Dan F. Smith
* Executive Vice President and
- ------------------------------------- Director
Name: Jeffrey R. Pendergraft
* Executive Vice President and
- ------------------------------------- Director
Name: T. Kevin DeNicola
/s/ Dan F. Smith
*By:_________________________________
(Dan F. Smith, as Attorney-in-fact)
II-7
SIGNATURES
Under the requirements of the Securities Act of 1933, the registrants have
duly caused this Registration Statement or amendment thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on April 16, 1999.
EQUISTAR CHEMICALS, LP, by its General
Partner
MILLENNIUM PETROCHEMICALS GP LLC
By:Millennium Petrochemicals Inc.
By: /s/ C. William Carmean
---------------------------------
Name: C. William Carmean
---------------------------------
Title: Vice President
---------------------------------
Under the requirements of the Securities Act of 1933, this Registration
Statement or amendment thereto has been signed by the following persons, in the
capacities indicated on April 16, 1999.
Name Title
* Director
- -------------------------------------
William M. Landuyt
* Director
- -------------------------------------
George H. Hempstead, III
* Director, President and Chief
- ------------------------------------- Executive Officer
Peter P. Hanik
* Vice President, Principal Accounting
_____________________________________ Officer and Principal Financial
Charles A. Daly Officer
/s/ C. William Carmean
*By: ________________________________
(C. William Carmean, as Attorney-in-
fact)
II-8
SIGNATURES
Under the requirements of the Securities Act of 1933, the registrants have
duly caused this Registration Statement or amendment thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on April 16, 1999.
EQUISTAR CHEMICALS, LP, by its General
Partner
OCCIDENTAL PETROCHEM PARTNER GP, INC.
By: /s/ Linda S. Peterson
--------------------------------------
Name: Linda S. Peterson
------------------------------------
Title: Vice President and Assistant
Secretary
------------------------------------
Under the requirements of the Securities Act of 1933, this Registration
Statement or amendment thereto has been signed by the following persons, in the
capacities indicated on April 16, 1999.
Name Title
* Executive Vice President, Chief
- ------------------------------------- Financial Officer and Director
Richard A. Lorraine (Principal Accounting Officer)
* President and Director
- -------------------------------------
J. Roger Hirl
* Secretary, Senior Vice President and
- ------------------------------------- Director
Keith McDole
*By: /s/ Scott A. King
-----------------------------------
(Scott A. King, as Attorney-in-fact)
II-9
SIGNATURES
Under the requirements of the Securities Act of 1933, this Registration
Statement or amendment thereto has been signed by the following persons in the
capacities indicated on April 16, 1999.
Name Title
/s/ Dan F. Smith Chief Executive Officer, Equistar
- ------------------------------------- Chemicals, LP
Dan F. Smith
(Chief Executive Officer)
/s/ Kelvin R. Collard Vice President and Controller,
- ------------------------------------- Equistar Chemicals, LP
Kelvin R. Collard
(Principal Financial and Accounting Officer)
II-10
SIGNATURES
Under the requirements of the Securities Act of 1933, the registrants have
duly caused this Registration Statement or amendment thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on April 16, 1999.
EQUISTAR FUNDING CORPORATION
By: /s/ Kelvin R. Collard
--------------------------------------
Name: Kelvin R. Collard
------------------------------------
Title: Vice President and Controller
------------------------------------
Under the requirements of the Securities Act of 1933, this Registration
Statement or amendment thereto has been signed by the following persons, in the
capacities indicated on April 16, 1999.
Name Title
/s/ Dan F. Smith Chief Executive Officer and Director
- -------------------------------------
Dan F. Smith
(Chief Executive Officer)
/s/ Eugene R. Allspach President and Chief Operating
- ------------------------------------- Officer and Director
Eugene R. Allspach
/s/ Kelvin R. Collard Vice President and Controller and
- ------------------------------------- Director
Kelvin R. Collard
(Principal Financial and Accounting Officer)
II-11