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EXHIBIT 99.3
Equistar Chemicals, LP
Financial Statements
As of and for the one month ended December 31, 1997
2
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants 2
Financial Statements:
Statement of Income 3
Balance Sheet 4
Statement of Partners' Capital 5
Statement of Cash Flows 6
Notes to Financial Statements 7
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Governance Committee
of Equistar Chemicals, LP:
We have audited the accompanying balance sheet of Equistar Chemicals, LP (the
"Partnership") as of December 31, 1997, and the related statements of income,
partners' capital, and cash flows for the period from December 1, 1997
(inception) to December 31, 1997. 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 audit.
We conducted our audit 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 audit provides 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 Equistar Chemicals, LP as of
December 31, 1997, and the results of its operations and its cash flows for the
period from December 1, 1997 (inception) to December 31, 1997 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P. PRICE WATERHOUSE LLP
Houston, Texas Morristown, New Jersey
February 16, 1998 February 16, 1998
(Except as to the information (Except as to the information
presented in Note 18, for which presented in Note 18, for which
the date is March 20, 1998) the date is March 20, 1998)
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EQUISTAR CHEMICALS, LP
STATEMENT OF INCOME
FOR THE PERIOD FROM DECEMBER 1, 1997 (INCEPTION) TO
DECEMBER 31, 1997
MILLIONS OF DOLLARS
- -------------------
SALES AND OTHER OPERATING REVENUES:
Unrelated parties $338
Related parties 27
----
365
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties 261
Related parties 26
Selling, general and administrative expenses 21
Unusual charges 42
----
350
Operating income 15
Interest expense (10)
Interest income 2
----
NET INCOME $ 7
====
See notes to financial statements.
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EQUISTAR CHEMICALS, LP
BALANCE SHEET
DECEMBER 31, 1997
MILLIONS OF DOLLARS
- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 41
Accounts receivable:
Trade 445
Related parties 36
Receivable from partners 150
Inventories 513
Prepaid expenses and other current assets 24
-------
Total current assets 1,209
-------
Property, plant and equipment 3,678
Less accumulated depreciation and amortization (1,560)
-------
2,118
Goodwill, net 1,139
Deferred charges and other assets 151
------
Total assets $ 4,617
=======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade $ 171
Related parties 18
Payable to partners 63
Other accrued liabilities 65
Current maturities of long-term debt 36
-------
Total current liabilities 353
-------
Long-term debt 1,512
Other liabilities and deferred credits 34
Commitments and contingencies
Partners' capital:
Partners' capital 3,063
Note receivable from Lyondell LP (345)
-------
Total partners' capital 2,718
-------
Total liabilities and partners' capital $ 4,617
=======
See notes to financial statements.
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EQUISTAR CHEMICALS, LP
STATEMENT OF PARTNERS' CAPITAL
FOR THE PERIOD FROM DECEMBER 1, 1997 (INCEPTION) TO
DECEMBER 31, 1997
MILLIONS OF DOLLARS LYONDELL MILLENNIUM TOTAL
- ------------------- -------- ---------- -----
Balance at December 1, 1997 $ -- $ -- $ --
(inception)
Capital contributions at inception:
Net assets, at historical cost 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
====== ====== ======
See notes to financial statements.
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EQUISTAR CHEMICALS, LP
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 1, 1997 (INCEPTION) TO
DECEMBER 31, 1997
MILLIONS OF DOLLARS
- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19
Increase in accounts receivable (100)
Increase in receivable from partners (101)
Increase in inventories (5)
Increase in accounts payable 188
Increase in payable to partners 54
Increase in other accrued liabilities 48
Net change in other working capital accounts (15)
Other 7
-----
Net cash provided by operating activities 102
-----
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (12)
-----
Net cash used in investing activities (12)
-----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 50
Cash contributions from partners 1
Distributions to partners (100)
-----
Net cash used in financing activities (49)
-----
INCREASE IN CASH AND CASH EQUIVALENTS 41
Cash and cash equivalents at beginning of period --
-----
Cash and cash equivalents at end of period $ 41
=====
See notes to financial statements.
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EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS
1. FORMATION OF THE COMPANY AND OPERATIONS
Pursuant to a partnership agreement (the "Partnership Agreement") Lyondell
Petrochemical 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 (See note 11
for related discussion). The Partnership is 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").
The Partnership owns and operates the petrochemicals and polymers businesses
contributed by Lyondell and Millennium (the "Contributed Businesses") which
consist of 15 manufacturing facilities on the US Gulf Coast and in the US
Midwest. The petrochemicals segment produces products including ethylene,
propylene, ethyl alcohol, butadiene, aromatics and methyl tertiary butyl ether
("MTBE"). These products are used primarily in the production of other chemicals
and products, including polymers. The petrochemicals segment also includes sales
of methanol produced by Lyondell Methanol LP ("Lyondell Methanol"), which is
owned 75 percent by Lyondell. The Partnership operates the Lyondell Methanol
facility. 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.
The Partnership Agreement provides that Equistar is governed by a Partnership
Governance Committee consisting of six 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 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
shipment 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.
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EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Management determines the appropriate classification of investments in debt
securities as trading, available-for-sale or held-to-maturity at the time of
purchase and reevaluates such designation as of each balance sheet date.
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.
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,
generally 5 to 25 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 income. The Partnership's policy is to capitalize interest
cost incurred on debt during the construction of major projects exceeding one
year.
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 four to six
years.
Goodwill -- Goodwill, which was contributed by Millennium, 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, 1997. The Partnership
amortized $3 million of goodwill during the period from December 1, 1997
(inception) to December 31, 1997.
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.
In October 1996 the American Institute of Certified Public Accountants issued
Statement of Position 96-1 ("SOP 96-1"), "Environmental Remediation
Liabilities," which establishes new accounting and reporting standards for the
recognition and disclosure of environmental remediation liabilities. The effect
of adoption of SOP 96-1 in 1997 did not have a material impact on the
Partnership's financial position or results of 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 -- 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.
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EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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.
3. 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
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 $1.506 billion at December 31,
1997.
At December 31, 1997, the Partnership had issued letters of credit totaling $4
million.
4. RELATED PARTY TRANSACTIONS
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. The Partnership provides certain
general and administrative services to Lyondell, including computer, office
lease and employee benefits services. During the period from December 1, 1997
(inception) to December 31, 1997, billings for these services were less than $1
million.
The Partnership also provides certain general and administrative services to
Millennium, including materials management, certain utilities, office space,
health, safety and environmental services and computer services. Millennium
provides the Partnership with certain operational services, including waste
water treatment and barge dock access. During the period from December 1, 1997
(inception) to December 31, 1997, billings for these services were less than $1
million.
The Partnership has several feedstock and product sales agreements with
Lyondell-CITGO Refining Company Ltd. ("LCR"), a joint venture investment of
Lyondell. Sales to LCR were $27 million and cost of sales to LCR were $26
million for the period from December 1, 1997 (inception) to December 31, 1997.
The Partnership has a feedstock, product sales and other services agreement with
Lyondell Methanol. Lyondell Methanol sells all of its products to Equistar.
Purchases from Lyondell Methanol were $15 million for the period from December
1, 1997 (inception) to December 31, 1997. Lyondell Methanol purchased $4 million
of natural gas feedstock from the Partnership during the period from December 1,
1997 (inception) to December 31, 1997. Lyondell Methanol also pays a business
management fee to Equistar which was less than $1 million during the period from
December 1, 1997 (inception) to December 31, 1997.
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EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
5. INVENTORIES
The categories of inventory and their book values at December 31, 1997 were as
follows:
MILLIONS OF DOLLARS
-------------------
Petrochemicals $ 183
Polymers 264
Materials and supplies 66
-----
Total inventories $ 513
=====
For the period from December 1, 1997 (inception) to December 31, 1997, the
Partnership increased cost of sales 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.
6. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment and their gross value at
December 31, 1997 were as follows:
MILLIONS OF DOLLARS
-------------------
Manufacturing facilities and $ 3,477
equipment
Construction projects in progress 127
Land 74
-------
Total property, plant and
equipment $ 3,678
=======
7. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets at December 31, 1997 were as follows:
MILLIONS OF DOLLARS
-------------------
Deferred turnaround costs, net $ 66
Deferred software costs, net 44
Deferred pension asset 23
Other 18
-----
Total deferred charges and
other assets $ 151
=====
8. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1997 were as follows:
MILLIONS OF DOLLARS
-------------------
Accrued severance and other costs related
to formation of the Partnership $ 27
Accrued interest 10
Other 28
----
Total other accrued liabilities $ 65
====
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EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
9. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt at December 31, 1997 was comprised of the following:
MILLIONS OF DOLLARS
-------------------
10.00% Notes due in 1999 $ 150
9.125% Notes due in 2002 100
5-year term credit facility 800
Medium-term notes (1998-2005) 194
6.5% Notes due in 2006 150
7.55% Debentures due in 2026 150
Other 4
-------
1,548
Less current portion 36
-------
Total long-term debt $ 1,512
=======
Aggregate maturities of long-term debt during the five years subsequent to
December 31, 1997 are as follows: 1998--$36 million; 1999--$150 million;
2000--$42 million; 2001--$90 million; 2002--$901 million. All of the above debt
is guaranteed by the Partners.
The medium-term notes mature at various dates from 1998 to 2005 and have a
weighted average interest rate at December 31, 1997 of 9.83 percent.
The Partnership has a five-year, $1.25 billion credit facility ("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, which
was 5.7 percent at December 31, 1997, a fixed rate offered by one of the
sponsoring banks or 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. The Facility is available for working capital and general purposes as
needed and contains covenants relating to liens, sale and leaseback
transactions, debt incurrence, leverage and interest coverage ratios, sales of
assets and mergers and consolidations. As of December 31, 1997, the Partnership
was in compliance with the covenants of the Facility.
10. NOTE RECEIVABLE FROM LYONDELL LP
Upon formation of the Partnership, Lyondell LP also 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 Lyondell
Note will be repaid to the Partnership at the earlier of 3 years from the date
the Partnership commenced operations or 30 days after a financing at LCR, a
joint venture investment of Lyondell, which results in the repayment of LCR's
existing $450 million 5-year term loan and a distribution to Lyondell of at
least $345 million. During the period from December 1, 1997 (inception) to
December 31, 1997, the Partnership accrued $1.75 million of interest income
related to the Lyondell Note.
11. 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 are included in other accrued liabilities in the
accompanying balance sheet and will be paid during 1998.
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EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
12. SUPPLEMENTAL CASH FLOW INFORMATION
The historical cost of the net assets contributed to the Partnership at
inception are summarized as follows (in millions of dollars):
AMOUNT
-------
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
=======
13. LEASES
At December 31, 1997, future minimum rental payments for operating leases with
noncancelable lease terms in excess of one year were as follows:
MILLIONS OF DOLLARS AMOUNT
------------------- ------------
1998 $ 128
1999 111
2000 80
2001 56
2002 42
Thereafter 369
-----
Total minimum lease payments $ 786
=====
Operating lease net rental expense was $11 million for the period from December
1, 1997 (inception) to December 31, 1997.
The Partnership is party to various unconditional purchase obligation contracts
as a purchaser for product and services. At December 31, 1997, future minimum
payments under these contracts with noncancelable contract terms in excess of
one year were as follows:
MILLIONS OF DOLLARS AMOUNT
------------------- ------
1998 $ 30
1999 29
2000 29
2001 26
2002 26
Thereafter 189
----
Total minimum contract payments $329
====
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EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Partnership's total purchases under these agreements were $3 million during
the period from December 1, 1997 (inception) to December 31, 1997.
14. 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, whose plans were
contributed to the Partnership at formation. 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. 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.
The following table sets forth the funded status of the union represented plans
at December 31, 1997 (the other plans are unfunded as of December 31, 1997):
PLANS WITH
ASSETS IN
EXCESS OF
ABO
-----------
MILLIONS OF DOLLARS
- -------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ 19
====
Accumulated benefit obligation ("ABO") $ 20
====
Projected benefit obligation $ 21
Plan assets at fair value, primarily stocks
and bonds $ 40
Plan assets in excess of projected benefit
obligation 19
Unrecognized net loss 4
----
Net pension asset $ 23
====
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.
The assumptions used at December 31, 1997 in determining the net pension
liability shown above were as follows:
PERCENT
-------
Discount rate 7.25
Rate of salary progression 4.75
Long-term rate of return on assets 9.00
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.
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EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. 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, the Partners contributed $31
million of accrued postretirement benefit liabilities for employees that
transferred to the Partnership.
The following table sets forth the plans' separate postretirement benefit
liabilities at December 31, 1997:
MILLIONS OF DOLLARS MEDICAL LIFE
- ------------------- ------- ----
Accumulated postretirement benefit
obligation:
Retirees $ -- $ --
Fully eligible active plan
participants (11) (3)
Other active plan participants (25) (11)
---- ----
(36) (14)
Unrecognized prior service cost -- --
Unrecognized net loss 14 5
==== ====
Accrued postretirement benefit liability $(22) $ (9)
==== ====
The accrued postretirement benefit liabilities 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, 1997 was 7 percent for
1998-2001 and 5 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, 1997 by less than $1 million.
The accumulated postretirement benefit obligation was calculated utilizing a
weighted-average discount rate of 7.25 percent at December 31, 1997 and an
average rate of salary progression of 4.75 percent. The Partnership's current
policy is to fund the postretirement health care and life insurance plans on a
pay-as-you-go basis.
16. 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.
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EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
17. SEGMENT INFORMATION
The petrochemicals segment consists of olefins, including ethylene, propylene,
butadiene, butylenes and specialty products; aromatics, including benzene and
toluene; and MTBE. The polymers segment consists of polyolefins including
polypropylene, high-density polyethylene, low-density polyethylene and linear
low-density polyethylene.
Summarized below is the segment data for the Partnership. Intersegment sales
between the petrochemicals and polymers segments were made at prices based on
current market values.
PETROCHEMICALS POLYMERS
MILLIONS OF DOLLARS SEGMENT SEGMENT UNALLOCATED ELIMINATIONS CONSOLIDATED
- ------------------- -------------- -------- ----------- ------------ ------------
Sales and other
operating revenues:
Customers $ 179 $ 186 $ 365
Intersegment 105 -- $ (105) --
------- ------- ------- -------
284 186 (105) 365
Cost of sales 236 156 (105) 287
Selling, general and
administrative
expenses 1 8 $ 12 -- 21
Unusual charges -- -- 42 -- 42
------- ------- ------- ------- -------
Operating income $ 47 $ 22 $ (54) -- $ 15
======= ======= ======= ======= =======
Depreciation and
amortization expense $ 7 $ 7 $ 5 -- $ 19
======= ======= ======= ======= =======
Capital expenditures $ 7 $ 4 $ 1 -- $ 12
======= ======= ======= ======= =======
Identifiable assets $ 1,679 $ 1,510 $ 1,428 $ -- $ 4,617
======= ======= ======= ======= =======
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EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
18. SUBSEQUENT EVENT
On March 20, 1998, Lyondell and Millennium announced an agreement to expand
Equistar with the addition of the ethylene, propylene, ethylene oxide and
derivatives businesses of Occidental Chemical Corporation ("Occidental"), a
subsidiary of Occidental Petroleum Corporation. The transaction, which is
subject to regulatory approval, is expected to close by mid-year 1998. After the
close of the transaction, Lyondell will have 41 percent ownership interest of
the Partnership and Millennium and Occidental will each have 29.5 percent
ownership interests.
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