Exhibit 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Governance Committee
of Equistar Chemicals, LP
In our opinion, the accompanying consolidated balance sheets and the related
consolidated 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") and its subsidiaries at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. 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
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2002, the Partnership adopted Statement of Financial Accounting
Standards No. 142, "Accounting for Goodwill and Other Intangible Assets".
As discussed in Note 2 to the consolidated financial statements, the Partnership
adopted Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections".
/s/ PricewaterhouseCoopers LLP
- ------------------------------------
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 10, 2003, except for matters as discussed under the heading "Adoption of
SFAS No. 145" in Note 2, as to which the date is November 13, 2003
1
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31,
-------------------------------
Millions of dollars 2002 2001 2000
- ------------------- ------- ------ ------
Sales and other operating revenues:
Unrelated parties $ 4,295 $4,583 $5,770
Related parties 1,242 1,326 1,725
------- ------ ------
5,537 5,909 7,495
------- ------ ------
Operating costs and expenses:
Cost of sales 5,388 5,755 6,908
Selling, general and administrative expenses 155 181 182
Research and development expense 38 39 38
Amortization of goodwill -- 33 33
------- ------ ------
5,581 6,008 7,161
------- ------ ------
Operating income (loss) (44) (99) 334
Interest expense (205) (192) (185)
Interest income 1 3 4
Other income, net 2 5 --
------- ------ ------
Income (loss) before cumulative effect
of accounting change (246) (283) 153
Cumulative effect of accounting change (1,053) -- --
------- ------ ------
Net income (loss) $(1,299) $ (283) $ 153
======= ====== ======
See Notes to the Consolidated Financial Statements.
2
EQUISTAR CHEMICALS, LP
CONSOLIDATED BALANCE SHEETS
December 31,
---------------
Millions of dollars 2002 2001
- ------------------- ------ ------
ASSETS
Current assets:
Cash and cash equivalents $ 27 $ 202
Accounts receivable:
Trade, net 490 470
Related parties 135 100
Inventories 424 448
Prepaid expenses and other current assets 50 36
------ ------
Total current assets 1,126 1,256
Property, plant and equipment, net 3,565 3,705
Investment in PD Glycol 46 47
Goodwill, net -- 1,053
Other assets, net 315 277
------ ------
Total assets $5,052 $6,338
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade $ 421 $ 331
Related parties 38 29
Current maturities of long-term debt 32 104
Accrued liabilities 223 227
------ ------
Total current liabilities 714 691
Long-term debt 2,196 2,233
Other liabilities 221 177
Commitments and contingencies
Partners' capital:
Partners' accounts 1,958 3,257
Accumulated other comprehensive loss (37) (20)
------ ------
Total partners' capital 1,921 3,237
------ ------
Total liabilities and partners' capital $5,052 $6,338
====== ======
See Notes to the Consolidated Financial Statements.
3
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
-------------------------------
Millions of dollars 2002 2001 2000
- ------------------- ------- ----- -----
Cash flows from operating activities:
Net income (loss) $(1,299) $(283) $ 153
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Cumulative effect of accounting change 1,053 -- --
Depreciation and amortization 298 319 308
Net (gain) loss on disposition of assets -- (3) 5
Debt prepayment charges and fees -- 3 --
Changes in assets and liabilities that provided (used) cash:
Accounts receivable (54) 222 (50)
Inventories 24 61 14
Accounts payable 99 (129) 28
Other assets and liabilities, net (66) 40 (119)
------- ----- -----
Net cash provided by operating activities 55 230 339
------- ----- -----
Cash flows from investing activities:
Expenditures for property, plant and equipment (118) (110) (131)
Other (6) 3 4
------- ----- -----
Net cash used in investing activities (124) (107) (127)
------- ----- -----
Cash flows from financing activities:
Issuance of long-term debt -- 981 --
Repayment of long-term debt (104) (91) (42)
Net borrowing (repayment) under lines of credit -- (820) 20
Distributions to partners -- -- (280)
Other (2) (9) --
------- ----- -----
Net cash provided by (used in) financing activities (106) 61 (302)
------- ----- -----
Increase (decrease) in cash and cash equivalents (175) 184 (90)
Cash and cash equivalents at beginning of period 202 18 108
------- ----- -----
Cash and cash equivalents at end of period $ 27 $ 202 $ 18
======= ===== =====
See Notes to the Consolidated Financial Statements.
4
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
Accumulated
Partners' Accounts Other
-------------------------------------------- Comprehensive Comprehensive
Millions of dollars Lyondell Millennium Occidental Total Income (Loss) Income (Loss)
- ------------------- -------- ---------- ---------- ------- ------------- -------------
Balance at January 1, 2000 $ 522 $1,555 $ 1,585 $ 3,662 $ --
Net income 63 45 45 153 -- $ 153
Distributions to partners (114) (83) (83) (280) -- --
Other 5 -- -- 5 -- --
------ ------ ------- ------- ---- -------
Comprehensive income $ 153
=======
Balance at December 31, 2000 $ 476 $1,517 $ 1,547 $ 3,540 $ --
Net loss (115) (84) (84) (283) -- $ (283)
Other comprehensive income:
Unrealized loss on securities -- -- -- -- (1) (1)
Minimum pension liability -- -- -- -- (19) (19)
------ ------ ------- ------- ---- -------
Comprehensive loss $ (303)
=======
Balance at December 31, 2001 $ 361 $1,433 $ 1,463 $ 3,257 $(20)
Net loss (569) (383) (347) (1,299) -- $(1,299)
Lyondell purchase of
Occidental interest 1,116 -- (1,116) -- --
Other comprehensive income:
Minimum pension liability -- -- -- -- (17) (17)
------ ------ ------- ------- ---- -------
Comprehensive loss $(1,316)
=======
Balance at December 31, 2002 $ 908 $1,050 $ -- $ 1,958 $(37)
====== ====== ======= ======= ====
See Notes to the Consolidated Financial Statements.
5
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Formation of the Partnership and Operations
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.
On May 15, 1998, Equistar was expanded with the contribution of certain assets
from Occidental Petroleum Corporation ("Occidental"). Prior to August 2002,
Lyondell owned 41% of Equistar and Millennium and Occidental each owned 29.5%.
On August 22, 2002, Lyondell completed the purchase of Occidental's interest in
Equistar and, as a result, Lyondell's ownership interest in Equistar increased
to 70.5%.
Equistar owns and operates the petrochemicals and polymers businesses
contributed by Lyondell, Millennium and Occidental. The petrochemicals segment
manufactures and markets olefins, oxygenated products, aromatics and specialty
products. Olefins include ethylene, propylene and butadiene, and oxygenated
products include ethylene oxide, ethylene glycol, ethanol and methyl tertiary
butyl ether ("MTBE"). The petrochemicals segment also includes the production
and sale of aromatics, including benzene and toluene. The polymers segment
manufactures and markets polyolefins, including high-density polyethylene
("HDPE"), low-density polyethylene ("LDPE"), linear low-density polyethylene
("LLDPE"), polypropylene, and performance polymers, all of which are used in the
production of a wide variety of consumer and industrial products. The
performance polymers include enhanced grades of polyethylene, including wire and
cable insulating resins, and polymeric powders.
Equistar is governed by a Partnership Governance Committee consisting of six
representatives, three appointed by each general partner. Most of the
significant decisions of the Partnership Governance Committee require unanimous
consent, including approval of the Partnership's strategic plan, capital
expenditures and annual budget, issuance of additional debt and the appointment
of executive management of the partnership. Distributions are made to the
partners based upon their percentage ownership of Equistar. Additional cash
contributions required by the Partnership are also based upon the partners'
percentage ownership of Equistar.
2. Summary of Significant Accounting Policies
Basis of Presentation--The consolidated financial statements include the
accounts of Equistar and its wholly owned subsidiaries.
Revenue Recognition--Revenue from product sales is recognized as risk and title
to the product transfer to the customer, which usually occurs when shipment is
made.
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
6
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
fair value. Equistar's policy is to invest cash in conservative, highly rated
instruments and limit the amount of credit exposure to any one institution.
Equistar 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 Equistar's discretion. As a result, none of
Equistar's cash is restricted.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined using the last-in, first-out ("LIFO") basis, except for materials and
supplies, which are valued using the average cost method.
Inventory exchange transactions, which involve fungible commodities 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.
7
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. Depreciation is computed using the straight-line method over the estimated
useful asset lives, generally 25 years for major manufacturing equipment, 30
years for buildings, 10 to 15 years for light equipment and instrumentation, 15
years for office furniture and 3 to 5 years for information systems equipment.
Upon retirement or sale, Equistar removes the cost of the assets and the related
accumulated depreciation from the accounts and reflects any resulting gains or
losses in the Consolidated Statement of Income. Equistar's policy is to
capitalize interest cost incurred on debt during the construction of major
projects exceeding one year.
Long-Lived Asset Impairment--Equistar evaluates long-lived assets, including
identifiable intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When it is probable that undiscounted future cash flows will not be
sufficient to recover an asset's carrying amount, the asset is written down to
its estimated fair value. Long-lived assets to be disposed of are reported at
the lower of carrying amount or estimated fair value less costs to sell the
assets.
Investment in PD Glycol--Equistar holds a 50% interest in a joint venture that
owns an ethylene glycol facility in Beaumont, Texas ("PD Glycol"). The
investment in PD Glycol is accounted for using the equity method of accounting.
Turnaround Maintenance and Repair Costs--Costs of maintenance and repairs
exceeding $5 million incurred in connection with turnarounds of major units at
Equistar's manufacturing facilities are deferred and amortized using the
straight-line method over the period until the next planned turnaround,
generally four to six years. These costs are maintenance, repair and replacement
costs that are necessary to maintain, extend and improve the operating capacity
and efficiency rates of the production units.
Deferred Software Costs--Costs to purchase and to develop software for internal
use are deferred and amortized on a straight-line basis over periods of 3 to 10
years.
Environmental Remediation Costs--Anticipated 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.
Estimated expenditures have not been discounted to present value.
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
8
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Adoption of SFAS No. 145--In April 2002, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The
primary impact of the statement on Equistar is the classification of gains or
losses that result from the early extinguishment of debt in other income, net as
an element of income before extraordinary items. Previously, such gains and
losses were classified as extraordinary items. The Consolidated Statements of
Income reflect these changes for all periods presented. Equistar incurred a $3
million loss on early debt extinguishment in the year ended December 31, 2001.
9
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Accounting Changes--Effective January 1, 2002, Equistar implemented SFAS
No. 141, Business Combinations, SFAS No. 142, Goodwill and Other Intangible
Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Implementation of SFAS No. 141 and SFAS No. 144 did not have
a material effect on the consolidated financial statements of Equistar.
Upon implementation of SFAS No. 142, Equistar reviewed goodwill for impairment
and concluded that the entire balance of goodwill was impaired, resulting in a
$1.1 billion charge to earnings that was reported as the cumulative effect of an
accounting change as of January 1, 2002. The conclusion was based on a
comparison to Equistar's indicated fair value, using multiples of EBITDA
(earnings before interest, taxes, depreciation and amortization) for comparable
companies as an indicator of fair value.
As a result of implementing SFAS No. 142, income in 2002 and subsequent years is
favorably affected by $33 million annually because of the elimination of
goodwill amortization. The following table presents Equistar's results of
operations for all periods presented as adjusted to eliminate goodwill
amortization.
For the year ended December 31,
-------------------------------
Millions of dollars 2002 2001 2000
- ------------------- ------- ----- ----
Reported income (loss) before cumulative effect
of accounting change $ (246) $(283) $153
Add back: goodwill amortization -- 33 33
------- ----- ----
Adjusted income (loss) before cumulative effect
of accounting change $ (246) $(250) $186
======= ===== ====
Reported net income (loss) $(1,299) $(283) $153
Add back: goodwill amortization -- 33 33
------- ----- ----
Adjusted net income (loss) $(1,299) $(250) $186
======= ===== ====
Anticipated Accounting Changes--Equistar expects to implement two significant
accounting changes in 2003, as discussed below.
In January 2003, the FASB issued Interpretation No. 46 ("FIN No. 46"),
Consolidation of Variable Interest Entities. FIN No. 46 addresses situations in
which a company should include in its financial statements the assets,
liabilities and activities of another entity. FIN No. 46 applies immediately to
entities created after January 31, 2003 and, for Equistar, will apply to
existing entities beginning in the third quarter 2003. Equistar expects the
application of FIN No. 46 to result in the consolidation of the entity from
which it leases certain railcars. See Note 10. The consolidation of this entity
as of December 31, 2002 would have resulted in a net increase in property, plant
and equipment of $116 million, a decrease in prepaid expense of approximately
$13 million, a $103 million increase in debt and an immaterial charge to be
reported as the cumulative effect of an accounting change.
10
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Recent Accounting Pronouncements--In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses obligations associated with the retirement of
tangible long-lived assets. In July 2002, the FASB issued SFAS No. 146,
Accounting for Exit or Disposal Activities. SFAS No. 146 addresses the
recognition, measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities and facility closings.
SFAS No. 146 will be effective for activities initiated after December 31, 2002.
Equistar does not expect adoption of SFAS No. 143 or SFAS No. 146 to have a
material impact on its consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN No. 45"),
Guarantor's Accounting and Disclosure Requirements. FIN No. 45 expands required
disclosures for certain types of guarantees for the period ended December 31,
2002 and requires recognition of a liability at fair value for guarantees
granted after December 31, 2002. Equistar has provided the required disclosure
with respect to guarantees in Notes 10 and 11.
Reclassifications--Certain previously reported amounts have been reclassified to
conform to classifications adopted in 2002.
3. Facility Closing Costs
Equistar shut down its Port Arthur, Texas polyethylene facility in February
2001. The asset values of the Port Arthur production units were previously
adjusted as part of a $96 million restructuring charge recognized in 1999.
During the first quarter 2001, Equistar recorded an additional $22 million
charge, which is included in cost of sales. The charge included environmental
remediation liabilities of $7 million, severance benefits of $5 million, pension
benefits of $2 million, and other exit costs of $3 million. The severance and
pension benefits covered approximately 125 people employed at the Port Arthur
facility. The remaining $5 million of the charge related primarily to the write
down of certain assets. Payments of $5 million for severance, $3 million for
exit costs and $5 million for environmental remediation were made through
December 31, 2002. The pension benefits of $2 million will be paid from the
assets of the pension plans. As of December 31, 2002, the remaining liability
included $2 million for environmental remediation costs. See Note 13.
11
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Related Party Transactions
Prior to August 22, 2002, Equistar was owned 41% by Lyondell, 29.5% by
Millennium and 29.5% by Occidental. On August 22, 2002, Lyondell completed the
purchase of Occidental's interest in Equistar, increasing its ownership interest
in Equistar to 70.5%. As a result of this transaction, Occidental has two
representatives on Lyondell's board of directors and, as of December 31, 2002,
Occidental owned approximately 22% of Lyondell. In view of Occidental's
ownership position with Lyondell, which owns 70.5% of Equistar, Occidental's
transactions with Equistar subsequent to August 22, 2002 will continue to be
reported as related party transactions in Equistar's Consolidated Statements of
Income and Consolidated Balance Sheets.
Product Transactions with Lyondell--Lyondell purchases ethylene, propylene and
benzene at market-related prices from Equistar under various agreements expiring
in 2013 and 2014. With the exception of one pre-existing supply agreement for a
product, expiring in 2015, Lyondell is required, under the agreements, to
purchase 100% of its ethylene, propylene and benzene requirements for its
Channelview and Bayport, Texas facilities from Equistar. Lyondell licenses MTBE
technology to Equistar, and purchases a significant portion of the MTBE produced
by Equistar at one of its two Channelview units at market-related prices.
Equistar acts as sales agent for the methanol products of Lyondell Methanol
Company, L.P. ("LMC"), which was wholly owned by Lyondell effective May 1, 2002.
The natural gas for LMC's plant is purchased by Equistar as agent for LMC under
Equistar master agreements with various third party suppliers. Equistar provides
operating and other services for LMC under the terms of existing agreements that
were assumed by Equistar from Lyondell, including the lease to LMC by Equistar
of the real property on which LMC's methanol plant is located. Pursuant to the
terms of those agreements, LMC pays Equistar a management fee and reimburses
certain expenses of Equistar at cost.
Product Transactions with Millennium--Equistar 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% of its ethylene requirements for its LaPorte, Texas facility from
Equistar. The contract expired December 1, 2002 and is renewed annually. The
contract was renewed through December 31, 2003. Also, under an agreement entered
into in connection with the formation of Equistar, Equistar is required to
purchase 100% of its vinyl acetate monomer raw material requirements at
market-related prices from Millennium for its LaPorte, Texas, Clinton, Iowa and
Morris, Illinois plants for the production of ethylene vinyl acetate products at
those locations. This contract also expired December 31, 2002 and was renewed
through December 31, 2003.
12
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Product Transactions with Occidental--In connection with the contribution of
Occidental assets to Equistar, Equistar and Occidental entered into a long-term
agreement for Equistar to supply 100% of the ethylene requirements for
Occidental's U.S. manufacturing plants at market-related prices. The ethylene is
exclusively for internal use in production at these plants, less any quantities
up to 250 million pounds per year tolled in accordance with the provisions of
the agreement. Upon three years notice from either party, sales may be "phased
down" over a period not less than five years. No phase down may commence before
January 1, 2009. Therefore, the annual required minimum cannot decline to zero
prior to December 31, 2013, unless certain specified force majeure events occur.
In addition to ethylene, Equistar sells methanol, ethers and glycols to
Occidental. Also, from time to time, Equistar has entered into over-the-counter
derivatives, primarily price swap contracts, for crude oil with Occidental to
help manage its exposure to commodity price risk with respect to crude
oil-related raw material purchases. See Note 11. Equistar also purchases various
other products from Occidental at market-related prices.
Product Transactions with Oxy Vinyls, LP--Occidental owns 76% of Oxy Vinyls, LP
("Oxy Vinyls"), a joint venture partnership. Equistar sells ethylene to Oxy
Vinyls for Oxy Vinyls' LaPorte, Texas facility at market-related prices pursuant
to an agreement that expires December 31, 2003.
Transactions with LYONDELL-CITGO Refining LP--Substantially all of Lyondell's
rights and obligations under the terms of its product sales and raw material
purchase agreements with LYONDELL-CITGO Refining LP ("LCR"), a joint venture
investment of Lyondell, have been assigned to Equistar. Accordingly, certain
olefins by-products are sold by Equistar to LCR for processing into gasoline and
certain refinery products are sold by LCR to Equistar as raw materials. Equistar
also has assumed certain processing arrangements as well as storage obligations
between Lyondell and LCR and provides certain marketing services for LCR. All of
the agreements between LCR and Equistar are on terms generally representative of
prevailing market prices.
Shared Services Agreement with Lyondell--Under a shared services agreement,
Lyondell provides office space and various services to Equistar including
information technology, human resources, sales and marketing, raw material
supply, supply chain, health, safety and environmental, engineering, research
and development, facility services, legal, accounting, treasury, internal audit
and tax. Lyondell charges Equistar for its share of the cost of such services.
Direct costs, incurred exclusively for Equistar, also are charged to Equistar.
Costs related to a limited number of shared services, primarily engineering,
continue to be incurred by Equistar. In such cases, Equistar charges Lyondell
for its share of such costs.
13
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Shared Services and Shared-Site Agreements with Millennium
Petrochemicals--Equistar and Millennium Petrochemicals have agreements under
which Equistar provides utilities, fuel streams and office space to Millennium
Petrochemicals. In addition, Millennium Petrochemicals provides Equistar with
certain operational services, including utilities, as well as barge dock access
and related services.
Related party transactions are summarized as follows:
For the year ended December 31,
-------------------------------
Millions of dollars 2002 2001 2000
- ------------------- ---- ---- ----
Equistar billed related parties for:
Sales of products and processing services:
Lyondell $459 $405 $572
Occidental Chemical 358 441 558
LCR 340 377 438
Millennium Petrochemicals 43 55 90
Oxy Vinyls 42 48 67
Shared services and shared site agreements:
LCR 4 3 2
Lyondell/LMC 16 18 26
Millennium Petrochemicals 9 17 24
Gas purchased for Lyondell/LMC 76 86 85
Related parties billed Equistar for:
Purchases of products:
LCR $218 $203 $264
Millennium Petrochemicals 10 15 16
Lyondell 1 4 2
Occidental Chemical 1 1 2
Shared services, transition and lease agreements:
Lyondell 134 135 111
Millennium Petrochemicals 16 19 22
Occidental Chemical 7 6 6
LCR 1 2 --
14
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Accounts Receivable
Equistar sells its products primarily to other chemical manufacturers in the
petrochemicals and polymers industries. Equistar 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 Consolidated Balance Sheets as
a reduction of accounts receivable, totaled $16 million and $14 million at
December 31, 2002 and 2001, respectively.
During October 2002, Equistar entered into an agreement with an unaffiliated
issuer of receivables-backed commercial paper under which Equistar sold accounts
receivable and received cash proceeds of $100 million. Under the terms of the
agreement, Equistar agreed to sell, on an ongoing basis and without recourse,
designated new accounts receivable as existing receivables are collected. The
agreement has annual renewal provisions for up to three years and is subject to
maintaining at least a specified debt rating. Equistar is seeking an amendment
to reduce the minimum required debt ratings and expects the amendment to be
effective prior to March 31, 2003. Upon entering into the agreement, the
commitment under the revolving credit facility was reduced by $50 million. See
Note 9.
At December 31, 2002, the balance of Equistar's accounts receivable sold under
this arrangement was $81 million. Increases and decreases in the amount sold are
reflected in operating cash flows in the Consolidated Statements of Cash Flows.
Fees related to the sales are included in "Other income, net" in the
Consolidated Statements of Income. During 2001, Equistar terminated a similar
agreement.
6. Inventories
Inventories consisted of the following components at December 31:
Millions of dollars 2002 2001
- ------------------- ---- ----
Finished goods $233 $243
Work-in-process 12 12
Raw materials 95 104
Materials and supplies 84 89
---- ----
Total inventories $424 $448
==== ====
The excess of the current cost of inventories over book value was approximately
$55 million at December 31, 2002.
15
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Property, Plant and Equipment and Other Assets
The components of property, plant and equipment, at cost, and the related
accumulated depreciation were as follows at December 31:
Millions of dollars 2002 2001
- ------------------- ------ ------
Land $ 80 $ 79
Manufacturing facilities and equipment 6,037 5,929
Construction in progress 60 92
------ ------
Total property, plant and equipment 6,177 6,100
Less accumulated depreciation (2,612) (2,395)
------ ------
Property, plant and equipment, net $3,565 $3,705
====== ======
Equistar did not capitalize any interest during 2002, 2001 and 2000 with respect
to construction projects.
The components of other assets, at cost, and the related accumulated
amortization were as follows at December 31:
2002 2001
-------------------------- --------------------------
Accumulated Accumulated
Millions of dollars Cost Amortization Net Cost Amortization Net
- ------------------- ---- ------------ ---- ---- ------------ ----
Intangible assets:
Turnaround costs $193 $ (94) $ 99 $151 $ (81) $ 70
Software costs 150 (66) 84 152 (55) 97
Debt issuance costs 43 (13) 30 41 (7) 34
Catalyst costs 23 (11) 12 11 (4) 7
Other 58 (17) 41 37 (9) 28
---- ----- ---- ---- ----- ----
Total intangible assets $467 $(201) 266 $392 $(156) 236
==== ===== ==== =====
Pension asset 21 22
Other 28 19
---- ----
Total other assets $315 $277
==== ====
Scheduled amortization of these intangible assets for the next five years is
estimated at $56 million in 2003, $56 million in 2004, $57 million in 2005, $57
million in 2006 and $57 million in 2007.
16
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Depreciation and amortization expense is summarized as follows:
For the year ended December 31,
-------------------------------
Millions of dollars 2002 2001 2000
- ------------------- ---- ---- ----
Property, plant and equipment $242 $237 $229
Goodwill -- 33 33
Turnaround costs 24 20 24
Software costs 15 12 13
Other 17 17 9
---- ---- ----
Total depreciation and amortization $298 $319 $308
==== ==== ====
In addition, amortization of debt issuance costs of $7 million, $2 million and
$2 million in 2002, 2001 and 2000, respectively, is included in interest expense
in the Consolidated Statements of Income.
8. Accrued Liabilities
Accrued liabilities consisted of the following components at December 31:
Millions of dollars 2002 2001
- ------------------- ---- ----
Taxes other than income $ 65 $ 67
Interest 65 68
Payroll and benefits 42 49
Contractual obligations 34 30
Other 17 13
---- ----
Total accrued liabilities $223 $227
==== ====
17
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Long-Term Debt
During October 2002, Equistar entered into an agreement to sell certain accounts
receivable and received cash proceeds of $100 million. See Note 5. As a result,
the commitment under its revolving credit facility was reduced by $50 million,
to $450 million, in accordance with the terms of the revolving credit facility
and would not be restored if the receivables agreement were terminated. Equistar
used the $100 million proceeds to reduce borrowing under the revolving credit
facility and for general corporate purposes. The revolving credit facility was
undrawn at December 31, 2002. Amounts available under the revolving credit
facility are reduced to the extent of certain outstanding letters of credit
provided under the credit facility, which totaled $16 million as of December 31,
2002.
In March 2002, Equistar obtained amendments to its credit facility making
certain financial ratio requirements less restrictive, making the covenant
limiting acquisitions more restrictive and adding a covenant limiting certain
non-regulatory capital expenditures. As a result of the amendment, the interest
rate on the credit facility was increased by 0.5% per annum.
In August 2001, Equistar completed a $1.5 billion debt refinancing. The
refinancing included a credit facility consisting of a $500 million secured
revolving credit facility maturing in August 2006 and a $300 million secured
term loan, maturing in August 2007, with scheduled quarterly amortization
payments, beginning December 31, 2001. The refinancing also included the
issuance of $700 million of new unsecured 10.125% senior notes maturing in
August 2008. The 10.125% senior notes rank pari passu with existing Equistar
notes. Certain financial ratio requirements were modified in the refinancing to
make them less restrictive.
Borrowing under the revolving credit facility generally bears interest based on
a margin over, at Equistar's option, LIBOR or a base rate. The sum of the
applicable margin plus a facility fee varies between 1.5% and 2.5%, in the case
of LIBOR loans, and 0.5% and 1.5%, in the case of base rate loans, depending on
Equistar's ratio of debt to EBITDA, as defined in the credit facility. The
credit facility is secured by a lien on substantially all of Equistar's personal
property, including accounts receivable, inventory, other personal property as
well as a portion of its real property.
The August 2001 refinancing replaced a five-year, $1.25 billion credit facility
that would have expired November 2002. Borrowing under the facility was $820
million at December 31, 2000. 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. As a result of the refinancing, the
related guarantees have been terminated.
18
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The credit facility and the indenture governing Equistar's 10.125% senior notes
contain covenants that, subject to certain exceptions, restrict sale and
leaseback transactions, lien incurrence, debt incurrence, sales of assets,
investments, non-regulatory capital expenditures, certain payments, and mergers.
In addition, the bank credit facility requires Equistar to maintain specified
financial ratios. The breach of these covenants could permit the lenders to
declare the loans immediately payable and could permit the lenders under
Equistar's credit facility to terminate future lending commitments.
As a result of continuing adverse conditions in the industry, in March 2003,
Equistar obtained amendments to its credit facility to provide additional
financial flexibility by easing certain financial ratio requirements.
Long-term debt consisted of the following at December 31:
Millions of dollars 2002 2001
- ------------------- ------ ------
Bank credit facility:
Revolving credit facility due 2006 $ -- $ --
Term loan due 2007 296 299
Other debt obligations:
Medium-term notes due 2003-2005 30 31
9.125% Notes due 2002 -- 100
8.50% Notes due 2004 300 300
6.50% Notes due 2006 150 150
10.125% Senior Notes due 2008 700 700
8.75% Notes due 2009 599 598
7.55% Debentures due 2026 150 150
Other 3 9
------ ------
Total long-term debt 2,228 2,337
Less current maturities 32 104
------ ------
Total long-term debt, net $2,196 $2,233
====== ======
The term loan due 2007 generally bears interest at a rate equal to LIBOR plus 3%
or the base rate plus 2%, at Equistar's option. Borrowing under the term loan
had a weighted average interest rate of 5.25% and 6.26% during 2002 and 2001,
respectively. The medium-term notes had a weighted average interest rate of
9.75% and 9.75% at December 31, 2002 and 2001, respectively. The 8.75% notes
have a face amount of $600 million and are shown net of unamortized discount.
19
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The medium-term notes, the 9.125% notes, the 6.5% notes and the 7.55% debentures
were assumed by Equistar from Lyondell when Equistar was formed in 1997. As
between Equistar and Lyondell, Equistar is primarily liable for this debt.
Lyondell remains a co-obligor for the medium-term notes and certain events
involving only Lyondell could give rise to events of default under those notes,
permitting the obligations to be accelerated. Under certain limited
circumstances, the holders of the medium-term notes have the right to require
repurchase of the notes. Following amendments to the indentures for the 6.5%
notes and the 7.55% debentures in November 2000, Lyondell remains a guarantor of
that debt. The 9.125% notes were repaid in 2002. The consolidated financial
statements of Lyondell are filed as an exhibit to Equistar's Annual Report on
Form 10-K for the year ended December 31, 2002.
Aggregate maturities of long-term debt during the next five years are $32
million in 2003; $303 million in 2004; $4 million in 2005; $153 million in 2006;
$284 million in 2007 and $1.5 billion thereafter.
10. Lease Commitments
Equistar leases various facilities and equipment under noncancelable lease
arrangements for various periods. Operating leases include leases of railcars
used in the distribution of products in Equistar's business. During 2002,
Equistar leased certain of these railcars, under three operating leases, from
unaffiliated entities established for the purpose of serving as lessors with
respect to these leases.
One of these three leases remains outstanding at December 31, 2002. This lease
includes an option for Equistar to purchase the railcars during the lease term.
If Equistar does not exercise the purchase option, the affected railcars will be
sold upon termination of the lease. In the event the sales proceeds are less
than the related guaranteed residual value, Equistar will pay the difference to
the lessor. The guaranteed residual value, which is not included in future
minimum lease payments in the table below, was $83 million at December 31, 2002.
The second of these three leases terminated in December 2002, and Equistar
entered into a new lease arrangement with another lessor. The new lease covered
a substantial portion of the subject railcars, and Equistar purchased the
remaining railcars for $10 million. The third of these leases terminated in
November 2002, and Equistar purchased the subject railcars for $37 million.
20
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, 2002, future minimum lease payments relating to noncancelable
operating leases, including railcar leases, with lease terms in excess of one
year were as follows:
Minimum
Lease
Millions of dollars Payments
- ------------------- --------
2003 $ 73
2004 65
2005 53
2006 41
2007 35
Thereafter 287
--------
Total minimum lease payments $554
========
Operating lease net rental expense was $125 million, $110 million and $115
million for the years ending December 31, 2002, 2001 and 2000, respectively. Net
rental expense in 2002 included the amortization of $34 million of prepayments,
related to the first and second railcar leases described above, over the
remaining lease terms.
11. Financial Instruments and Derivatives
During 2000, Equistar entered into over-the-counter derivatives, primarily price
swap contracts, related to crude oil with Occidental Energy Marketing, Inc., a
subsidiary of Occidental Chemical, to help manage its exposure to commodity
price risk with respect to crude oil-related raw material purchases. At December
31, 2000, price swap contracts covering 5.1 million barrels of crude oil were
outstanding. The carrying value and fair market value of these derivative
instruments at December 31, 2000 represented a liability of $13 million, which
was based on quoted market prices. The resulting loss from these hedges of
anticipated raw material purchases was deferred on the consolidated balance
sheet. On January 1, 2001, in accordance with the transition provisions of SFAS
No. 133, Equistar reclassified the deferred loss of $13 million to accumulated
other comprehensive income as a transition adjustment, representing the
cumulative effect of a change in accounting principle. The transition adjustment
was reclassified to the Consolidated Statement of Income during the period
January through July 2001 as the related raw material purchases occurred.
21
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During 2001, Equistar entered into additional price swap contracts covering 7.2
million barrels of crude oil that primarily matured from July 2001 through
December 2001. In the third quarter 2001, outstanding price swap contracts,
covering 4.1 million barrels of crude oil that primarily matured from October
2001 through December 2001, were effectively terminated. The termination
resulted in realization of a gain of nearly $9 million, which was recognized in
the fourth quarter 2001 as the related forecasted transactions occurred. There
were no outstanding price swap contracts at December 31, 2002 and December 31,
2001.
The following table summarizes activity included in accumulated other
comprehensive income ("AOCI") related to the fair value of derivative
instruments for the year ended December 31, 2001:
Millions of dollars 2001
- ------------------- ----
Gain (loss):
Balance at beginning of period $ --
----
January 1, 2001 transition adjustment -
reclassification of December 31, 2000 deferred loss (13)
Net gains on derivative instruments 35
Reclassification of gains on
derivative instruments to earnings (22)
----
Net change included in AOCI for the period --
----
Net gain on derivative instruments
included in AOCI at December 31, 2001 $ --
====
The fair value of all nonderivative 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 Equistar for debt with terms and average maturities
similar to Equistar's debt portfolio, the fair value of Equistar's long-term
debt, including amounts due within one year, was approximately $2.0 billion and
$2.3 billion at December 31, 2002 and 2001, respectively. Equistar estimates the
fair value of its residual value guarantee under a railcar lease (see Note 10)
is not significant due to the low probability of future payments under the
guarantee provisions.
Equistar is exposed to credit risk related to its financial instruments in the
event of nonperformance by the counterparties. Equistar does not generally
require collateral or other security to support these financial instruments. The
counterparties to these transactions are major institutions deemed creditworthy
by Equistar. Equistar does not anticipate nonperformance by the counterparties.
22
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Pension and Other Postretirement Benefits
All full-time regular employees are covered by defined benefit pension plans
sponsored by Equistar. In connection with the formation of Equistar, no pension
assets or obligations were contributed to Equistar, with the exception of union
represented plans contributed by Occidental and Millennium.
Retirement benefits are based upon years of service and the employee's highest
three consecutive years of compensation during the last ten years of service.
Equistar accrues pension costs based upon an actuarial valuation of the
liabilities and funds the plans through periodic contributions to pension trust
funds. Equistar also has unfunded supplemental nonqualified retirement plans,
which provide pension benefits for certain employees in excess of the tax
qualified plans' limits. In addition, Equistar sponsors unfunded postretirement
benefit plans other than pensions, which provide medical and life insurance
benefits. The postretirement medical plans are contributory while the life
insurance plans are, generally, noncontributory. The life insurance benefits
will no longer be provided to employees retiring after July 1, 2002.
23
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table provides a reconciliation of benefit obligations, plan
assets and the funded status of these plans:
Other
Pension Benefits Postretirement Benefits
---------------- -----------------------
Millions of dollars 2002 2001 2002 2001
- ------------------- ---- ---- ----- -----
Change in benefit obligation:
Benefit obligation, January 1 $147 $120 $ 112 $ 92
Service cost 16 16 2 2
Interest cost 11 10 7 6
Plan amendments (2) -- (13) 29
Actuarial loss (gain) 8 12 2 (14)
Benefits paid (10) (11) (2) (3)
---- ---- ----- -----
Benefit obligation, December 31 170 147 108 112
---- ---- ----- -----
Change in plan assets:
Fair value of plan assets, January 1 107 117 -- --
Actual return on plan assets (13) (6) -- --
Partnership contributions 18 7 2 3
Benefits paid (10) (11) (2) (3)
---- ---- ----- -----
Fair value of plan assets, December 31 102 107 -- --
---- ---- ----- -----
Funded status (68) (40) (108) (112)
Unrecognized actuarial and investment loss 76 48 7 5
Unrecognized prior service cost (2) -- 14 29
---- ---- ----- -----
Net amount recognized $ 6 $ 8 $ (87) $ (78)
==== ==== ===== =====
Amounts recognized in the
Consolidated Balance Sheet consist of:
Prepaid benefit cost $ 21 $ 22 $ -- $ --
Accrued benefit liability (51) (33) (87) (78)
Accumulated other comprehensive income 36 19 -- --
---- ---- ----- -----
Net amount recognized $ 6 $ 8 $ (87) $ (78)
==== ==== ===== =====
The decrease in other postretirement benefit obligations due to plan amendments
in 2002 primarily resulted from discontinuing life insurance benefits for
employees retiring after July 1, 2002. The increase in other postretirement
benefit obligations due to plan amendments in 2001 resulted from a change in the
medical plan that increased Equistar's minimum contribution level per employee
by 25%.
24
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Pension plans with projected benefit obligations in excess of the fair value of
assets are summarized as follows at December 31:
2002 2001
---- ----
Projected benefit obligation $170 $129
Fair value of assets 102 81
Pension plans with accumulated benefit obligations in excess of the fair value
of assets are summarized as follows at December 31:
2002 2001
---- ----
Accumulated benefit obligation $123 $106
Fair value of assets 81 81
Net periodic pension and other post retirement benefit costs included the
following components:
Pension Benefits Other Postretirement Benefits
------------------ -----------------------------
Millions of dollars 2002 2001 2000 2002 2001 2000
- ------------------- ---- ---- ---- ---- ---- ----
Components of net periodic
benefit cost:
Service cost $ 16 $ 16 $ 17 $ 2 $ 2 $ 2
Interest cost 11 10 9 7 6 6
Actual loss on plan assets 13 6 3 -- -- --
Less-unrecognized loss (24) (17) (11) -- -- --
---- ---- ---- --- --- ---
Recognized gain on plan assets (11) (11) (8) -- -- --
Amortization of actuarial and
investment loss 4 2 -- -- -- 1
Prior service cost -- -- -- 2 -- --
Net effect of curtailments, settlements
and special termination benefits -- 3 (1) -- 2 1
---- ---- ---- --- --- ---
Net periodic benefit cost $ 20 $ 20 $ 17 $11 $10 $10
==== ==== ==== === === ===
25
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The assumptions used in determining the net pension cost and the net pension
liability were as follows at December 31:
Pension Benefits Other Postretirement Benefits
------------------ -----------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Weighted-average assumptions
as of December 31:
Discount rate 6.50% 7.00% 7.50% 6.50% 7.00% 7.50%
Expected return on plan assets 9.50% 9.50% 9.50% -- -- --
Rate of compensation increase 4.50% 4.50% 4.50% -- 4.50% 4.50%
The assumed annual rate of increase in the per capita cost of covered health
care benefits as of December 31, 2002 was 10.0% for 2003 through 2004, 7.0% for
2005 through 2007 and 5.0% thereafter. The health care cost trend rate
assumption does not have a significant effect on the amounts reported due to
limits on Equistar's maximum contribution level under the medical plan. To
illustrate, increasing or decreasing the assumed health care cost trend rates by
one percentage point in each year would change the accumulated postretirement
benefit liability as of December 31, 2002 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. Equistar
also maintains voluntary defined contribution savings plans for eligible
employees. Contributions to the plans by Equistar were $13 million, $16 million
and $17 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
13. Commitments and Contingencies
Commitments--Equistar has various purchase commitments for materials, supplies
and services incident to the ordinary conduct of business, generally for
quantities required for Equistar's businesses and at prevailing market prices.
See also Note 4, describing related party commitments.
26
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Equistar is party to various unconditional purchase obligation contracts as a
purchaser for products and services, principally for steam and power. At
December 31, 2002, future minimum payments under those contracts with
noncancelable contract terms in excess of one year and fixed minimum payments
were as follows:
Millions of dollars
- -------------------
2003 $ 164
2004 168
2005 169
2006 157
2007 151
Thereafter through 2023 1,749
------
Total minimum contract payments $2,558
======
Equistar's total purchases under these agreements were $230 million for the year
ended December 31, 2002
Leased Facility--The Lake Charles facility has been idled since the first
quarter of 2001. The facility and land, which are included in property, plant
and equipment, at a net book value of $160 million, are leased from an affiliate
of Occidental under a lease that expires in May 2003. The parties are
investigating alternatives related to the facility and land. Management believes
that the resolution of these alternatives will not have a material adverse
effect on the financial position, liquidity or results of operations of
Equistar.
Indemnification Arrangements--Lyondell, Millennium Petrochemicals and
Occidental and certain of its subsidiaries have each agreed to provide certain
indemnifications to Equistar with respect to the petrochemicals and polymers
businesses they each contributed. In addition, Equistar has agreed to assume
third party claims that are related to certain contingent liabilities arising
prior to the contribution transactions that are asserted prior to December 1,
2004 as to Lyondell and Millennium Petrochemicals, and May 15, 2005 as to
Occidental, to the extent the aggregate thereof does not exceed $7 million for
each entity, subject to certain terms of the respective asset contribution
agreements. From formation through December 31, 2002, Equistar had incurred a
total of $20 million for these uninsured claims and liabilities. Lyondell,
Millennium and Occidental each remain liable under these indemnification
arrangements to the same extent following Lyondell's acquisition of Occidental's
interest in Equistar as they were before.
27
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Environmental Remediation--Equistar's accrued liability for environmental
matters as of December 31, 2002 was $2 million and related to the Port Arthur
facility, which was permanently shut down in February 2001. In the opinion of
management, there is currently no material estimable range of loss in excess of
the amounts recorded for environmental remediation.
Clean Air Act--The eight-county Houston/Galveston region has been designated a
severe non-attainment area for ozone by the U.S. Environmental Protection Agency
("EPA"). Emission reduction controls for nitrogen oxides ("NOx") must be
installed at each of Equistar's six plants located in the Houston/Galveston
region during the next several years. Recently adopted revisions by the
regulatory agencies changed the required NOx reduction levels from 90% to 80%.
Compliance with the previously proposed 90% reduction standards would have
resulted in increased capital investment, estimated at between $200 million and
$260 million, before the 2007 deadline, as well as higher annual operating costs
for Equistar. Under the revised 80% standard, Equistar estimates that capital
expenditures would decrease to between $165 million and $200 million. However,
the savings from this revision could be offset by the costs of stricter proposed
controls over highly reactive, volatile organic compounds, or HRVOCs. Equistar
is still assessing the impact of the proposed HRVOC regulations and there can be
no guarantee as to the ultimate capital cost of implementing any final plan
developed to ensure ozone attainment by the 2007 deadline. The timing and amount
of these expenditures are also subject to regulatory and other uncertainties, as
well as obtaining the necessary permits and approvals.
In the United States, the Clean Air Act Amendments of 1990 set minimum levels
for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified
air quality standards. However, the presence of MTBE in some water supplies in
California and other states due to gasoline leaking from underground storage
tanks and in surface water from recreational water craft has led to public
concern about the use of MTBE. Certain federal and state governmental
initiatives in the U.S. have sought either to rescind the oxygen requirement for
reformulated gasoline or to restrict or ban the use of MTBE. Equistar's MTBE
sales represented approximately 3% of its total 2002 revenues. The U.S. House of
Representatives and the U.S. Senate each passed versions of an omnibus energy
bill during 2001 and 2002, respectively. The Senate version of the energy bill
would have resulted in a ban on the use of MTBE. The two energy bills were not
reconciled during the conference process and an omnibus energy bill was not
passed during 2002.
Both the U.S. House of Representatives and the U.S. Senate are expected to
pursue an energy bill during the 2003/2004 legislative cycle. If this happens,
it is likely that fuel content, including MTBE use, will be a subject of
legislative debate. Factors which could be considered in this debate include the
impact on gasoline price and supply and the potential for degradation of air
quality.
28
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At the state level, a number of states have legislated future MTBE bans. Of
these, a number are mid-West states that use ethanol as the oxygenate of choice.
Bans in these states should not have an impact on MTBE demand. However,
Connecticut, California and New York have bans of MTBE in place effective
October 1, 2003, January 1, 2004, and January 1, 2004, respectively. Equistar
estimates that California represents 34% of the U.S. MTBE industry demand and
20% of the worldwide MTBE industry demand, while Connecticut and New York
combined represent 12% of the U.S. MTBE industry demand and 7% of the worldwide
MTBE industry demand.
At this time, Equistar cannot predict the impact that these initiatives will
have on MTBE margins or volumes during 2003. However, several major oil
companies have announced plans, beginning in 2003, to discontinue the use of
MTBE in gasoline produced for California markets. Equistar estimates that the
California-market MTBE volumes of these companies account for an estimated 18%
of U.S. MTBE industry demand and 10% of worldwide MTBE industry demand. Equistar
intends to continue marketing MTBE in the U.S. However, should it become
necessary or desirable to reduce MTBE production, Equistar would need to convert
raw materials used in MTBE to production of other products. It may be desirable
to make capital expenditures to add the flexibility to produce alternative
gasoline blending components. The profit margins on these alternatives are
likely to be lower than those historically realized on MTBE.
General--Equistar is involved in various lawsuits and proceedings. Subject to
the uncertainty inherent in all litigation, management believes the resolution
of these proceedings, or any liability arising from the matters discussed in
this note, will not have a material adverse effect on the financial position,
liquidity or results of operations of Equistar.
14. Supplemental Cash Flow Information
Supplemental cash flow information is summarized as follows for the periods
presented:
For the year ended December 31,
-------------------------------
Millions of dollars 2002 2001 2000
- ------------------- ---- ---- ----
Cash paid for interest $200 $171 $180
==== ==== ====
15. Segment Information and Related Information
Equistar operates in two reportable segments, petrochemicals and polymers (see
Note 1). The accounting policies of the segments are the same as those described
in "Summary of Significant Accounting Policies" (see Note 2). No unaffiliated
customer accounted for 10% or more of sales during any year in the three-year
period ended December 31, 2002.
29
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summarized financial information concerning Equistar's reportable segments is
shown in the following table. Intersegment sales between the petrochemicals and
polymers segments were based on current market prices.
Millions of dollars Petrochemicals Polymers Unallocated Eliminations Consolidated
- ------------------- -------------- -------- ----------- ------------ ------------
For the year ended December 31, 2002:
Sales and other operating revenues:
Customers $3,669 $1,868 $ -- $ -- $5,537
Intersegment 1,288 -- -- (1,288) --
------ ------ ------ ------- ------
4,957 1,868 -- (1,288) 5,537
Operating income (loss) 146 (74) (116) -- (44)
Total assets 3,410 1,438 204 -- 5,052
Capital expenditures 58 59 1 -- 118
Depreciation and
amortization expense 217 58 23 -- 298
For the year ended December 31, 2001:
Sales and other
Operating revenues:
Customers $3,929 $1,980 $ -- $ -- $5,909
Intersegment 1,455 -- -- (1,455) --
------ ------ ------ ------- ------
5,384 1,980 -- (1,455) 5,909
Operating income (loss) 275 (186) (188) -- (99)
Total assets 3,474 1,400 1,464 -- 6,338
Capital expenditures 84 24 2 -- 110
Depreciation and
Amortization expense 204 58 57 -- 319
For the year ended December 31, 2000:
Sales and other
Operating revenues:
Customers $5,144 $2,351 $ -- $ -- $7,495
Intersegment 1,887 -- -- (1,887) --
------ ------ ------ ------- ------
7,031 2,351 -- (1,887) 7,495
Operating income (loss) 694 (185) (175) -- 334
Total assets 3,705 1,575 1,334 -- 6,614
Capital expenditures 79 46 6 -- 131
Depreciation and
amortization expense 199 55 54 -- 308
30
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents the details of "Operating income (loss)" as
presented above in the "Unallocated" column for the years ended December 31,
2002, 2001 and 2000.
Millions of dollars 2002 2001 2000
- ------------------- ----- ----- -----
Items not allocated to petrochemicals and polymers:
Principally general and administrative expenses $(116) $(166) $(175)
Facility closing costs -- (22) --
----- ----- -----
Operating income (loss) $(116) $(188) $(175)
===== ===== =====
The following table presents the details of "Total assets" as presented above in
the "Unallocated" column as of December 31, for the years indicated:
Millions of dollars 2002 2001 2000
- ------------------- ---- ------ ------
Cash and cash equivalents $ 27 $ 202 $ 18
Accounts receivable--trade and related parties -- 17 16
Prepaid expenses and other current assets 22 20 17
Property, plant and equipment, net 18 23 35
Goodwill, net -- 1,053 1,086
Other assets, net 137 149 162
---- ------ ------
Total assets $204 $1,464 $1,334
==== ====== ======
31