-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mbkc+6GUBuSlnW8s50np4an5WEZAvycLIeBGyMHxU+6ncYMPv6gqQj5y+OTgiQwq ZzYKA1Yn9rcniqZ2Y2+sEw== 0000899243-01-501755.txt : 20020410 0000899243-01-501755.hdr.sgml : 20020410 ACCESSION NUMBER: 0000899243-01-501755 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUISTAR CHEMICALS LP CENTRAL INDEX KEY: 0001081158 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 76055048 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-76473 FILM NUMBER: 1784578 BUSINESS ADDRESS: STREET 1: ONE HOUSTON CENTER #700 STREET 2: 1221 MCKINNEY ST CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7136527300 MAIL ADDRESS: STREET 1: ONE HOUSTON CENTER #700 STREET 2: 1221 MCKINNEY ST CITY: HOUSTON STATE: TX ZIP: 77010 10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from . . . . . . . . . . to . . . . . . . . . . Commission file number 333-76473 ------------------ EQUISTAR CHEMICALS, LP (Exact name of registrant as specified in its charter) ------------------ Delaware 76-0550481 (State or other jurisdiction of (I.R.S. EMPLOYER incorporation or organization) IDENTIFICATION NO.) 1221 McKinney Street, 77010 Suite 700, Houston, Texas (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (713) 652-7200 ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] PART I. FINANCIAL INFORMATION EQUISTAR CHEMICALS, LP ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------------- ----------------------------------- MILLIONS OF DOLLARS 2001 2000 2001 2000 - ------------------- --------------- --------------- --------------- --------------- SALES AND OTHER OPERATING REVENUES: Unrelated parties $1,074 $1,493 $3,626 $4,355 Related parties 277 462 1,098 1,357 ------ ------ ------ ------ 1,351 1,955 4,724 5,712 OPERATING COSTS AND EXPENSES: Cost of sales: Unrelated parties 1,064 1,381 3,571 3,969 Related parties 264 398 1,002 1,142 Selling, general and administrative expenses 40 49 131 142 Research and development expense 9 9 29 28 Amortization of goodwill 8 9 25 25 Unusual charges - - - - 22 - - ------ ------ ------ ------ 1,385 1,846 4,780 5,306 ------ ------ ------ ------ Operating income (loss) (34) 109 (56) 406 Interest expense (48) (46) (139) (137) Interest income 2 1 2 3 Other income (expense), net 1 (1) 7 (1) ------ ------ ------ ------ Income (loss) before extraordinary item (79) 63 (186) 271 Extraordinary loss on extinguishment of debt (3) - - (3) - - ------ ------ ------ ------ NET INCOME (LOSS) $ (82) $ 63 $ (189) $ 271 ====== ====== ====== ======
See Notes to Consolidated Financial Statements. 1 EQUISTAR CHEMICALS, LP CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, MILLIONS OF DOLLARS 2001 2000 - ------------------- ------------------ ------------------ ASSETS Current assets: Cash and cash equivalents $ 113 $ 18 Accounts receivable: Trade, net 540 568 Related parties 122 190 Inventories 504 506 Prepaid expenses and other current assets 33 50 ------ ------ Total current assets 1,312 1,332 Property, plant and equipment, net 3,731 3,819 Investment in PD Glycol 50 53 Goodwill, net 1,061 1,086 Other assets 288 292 ------ ------ Total assets $6,442 $6,582 ====== ====== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable: Trade $ 414 $ 426 Related parties 37 61 Current maturities of long-term debt 104 90 Other accrued liabilities 146 166 ------ ------ Total current liabilities 701 743 Long-term debt, less current maturities 2,234 2,158 Other liabilities 150 141 Commitments and contingencies Partners' capital: Partners' accounts 3,351 3,540 Accumulated other comprehensive income 6 - - ------ ------ Total partners' capital 3,357 3,540 ------ ------ Total liabilities and partners' capital $6,442 $6,582 ====== ======
See Notes to Consolidated Financial Statements. 2 EQUISTAR CHEMICALS, LP CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------- MILLIONS OF DOLLARS 2001 2000 - ------------------- ------------------ --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (189) $ 271 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 239 230 Net loss (gain) on disposition of property, plant and equipment (3) 3 Extraordinary loss on extinguishment of debt 3 - - Decrease (increase) in accounts receivable 104 (86) Decrease (increase) in inventories 4 (36) (Decrease) increase in accounts payable (36) 32 Decrease in other accrued liabilities (20) (91) Net change in other working capital accounts 17 7 Other - - (17) ------ ----- Net cash provided by operating activities 119 313 ------ ----- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property, plant and equipment (85) (81) Purchase of business from AT Plastics, Inc. (7) - - Proceeds from sales of assets 4 4 ------ ----- Net cash used in investing activities (88) (77) ------ ----- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 1,000 - - Net (payments) borrowing under lines of credit (820) 20 Repayment of long-term debt (90) (42) Payment of debt-related costs (26) - - Distributions to partners - - (280) ------ ----- Net cash provided by (used in) financing activities 64 (302) ------ ----- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 95 (66) Cash and cash equivalents at beginning of period 18 108 ------ ----- Cash and cash equivalents at end of period $ 113 $ 42 ====== =====
See Notes to Consolidated Financial Statements. 3 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PREPARATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments considered necessary for a fair presentation, have been included. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2000 included in the Equistar Chemicals, LP ("Equistar" or "Partnership") 2000 Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Certain amounts from prior periods have been reclassified to conform to the current period presentation. 2. COMPANY OPERATIONS Equistar is a Delaware limited partnership, which commenced operations on December 1, 1997. Equistar is owned 41% by Lyondell Chemical Company ("Lyondell"), 29.5% by Millennium Chemicals Inc. ("Millennium"), and 29.5% by Occidental Petroleum Corporation ("Occidental"). Equistar owns and operates the petrochemicals and polymers businesses contributed by Lyondell, Millennium and Occidental ("Contributed Businesses") which consist of 18 manufacturing facilities primarily on the U.S. Gulf Coast and in the U.S. Midwest. The petrochemicals segment manufactures and markets olefins, oxygenated products, aromatics and specialty products. Olefins include ethylene, propylene and butadiene, and oxygenated products include ethylene oxide, ethylene glycol, ethanol and methyl tertiary butyl ether ("MTBE"). The petrochemicals segment also includes the production and sale of aromatics, including benzene and toluene. The polymers segment manufactures and markets polyolefins, including high-density polyethylene ("HDPE"), low-density polyethylene ("LDPE"), linear low-density polyethylene ("LLDPE"), polypropylene, and performance polymers, all of which are used in the production of a wide variety of consumer and industrial products. The performance polymers include enhanced grades of polyethylene, including wire and cable insulating resins, and polymeric powders. Effective June 1, 2001, Equistar expanded its wire and cable business through the acquisition of the low- and medium-voltage power cable materials business of AT Plastics, Inc. Equistar accounted for the acquisition as a purchase, allocating the $7 million purchase price to property, plant and equipment and inventory. 3. UNUSUAL CHARGES Equistar discontinued production at its Port Arthur, Texas polyethylene facility on February 28, 2001 and shut down the facility. The asset values of the Port Arthur production units were previously adjusted as part of a $96 million restructuring charge recognized in 1999. During the first quarter 2001, Equistar recorded a $22 million charge, which included environmental remediation liabilities of $7 million (see Note 10), severance benefits of $5 million, pension benefits of $2 million, and other exit costs of $3 million. The severance and pension benefits covered approximately 125 people employed at the Port Arthur facility. The remaining $5 million of the charge relates primarily to the write down of certain assets. Payments of $1 million, $4 million and $3 million for environmental, severance and exit costs, respectively, were made through September 30, 2001. 4 4. EXTRAORDINARY ITEM As part of the third quarter 2001 refinancing (see Note 8), Equistar wrote off unamortized debt issuance costs and amendment fees of $3 million related to the early repayment of the $1.25 billion bank credit facility and reported the charge as an extraordinary loss on extinguishment of debt. 5. ACCOUNTS RECEIVABLE As part of the third quarter 2001 refinancing (see Note 8), Equistar terminated a December 1998 agreement with an independent issuer of receivables-backed commercial paper. Under the terminated agreement, Equistar sold, on an ongoing basis and without recourse, designated accounts receivable, maintaining the balance of the accounts receivable sold by selling new receivables as existing receivables were collected. As of December 31, 2000, the balance of accounts receivable previously sold by Equistar was $130 million. 6. INVENTORIES The components of inventories consisted of the following: SEPTEMBER 30, DECEMBER 31, MILLIONS OF DOLLARS 2001 2000 - ------------------- ------------- ------------ Finished goods $ 251 $ 273 Work-in-process 18 16 Raw materials 141 123 Materials and supplies 94 94 ----- ----- Total inventories $ 504 $ 506 ===== ==== 7. PROPERTY, PLANT AND EQUIPMENT, NET The components of property, plant and equipment, at cost, and the related accumulated depreciation consisted of the following: SEPTEMBER 30, DECEMBER 31, MILLIONS OF DOLLARS 2001 2000 - ------------------- ------------- ------------ Land $ 79 $ 78 Manufacturing facilities and equipment 5,886 5,769 Construction in progress 102 134 ------ ------ Total property, plant and equipment 6,067 5,981 Less accumulated depreciation 2,336 2,162 ------ ------ Property, plant and equipment, net $3,731 $3,819 ====== ====== 8. LONG-TERM DEBT In August 2001, Equistar completed a $1.5 billion debt refinancing. The refinancing included an amended and restated bank credit facility consisting of a $500 million secured revolving credit facility maturing in August 2006 and a $300 million secured term loan maturing in August 2007. The revolving credit facility was undrawn at September 30, 2001. Borrowing under the revolving credit facility generally bears interest based on a margin over, at Equistar's option, LIBOR or a base rate. The sum of the applicable margin plus a facility fee varies between 1.5% and 2.5%, in the case of LIBOR loans, and 0.5% and 1.5%, in the case of base rate loans, depending on Equistar's ratio of debt to EBITDA, as provided in the amended and restated bank credit facility. The term loan generally bears interest at a rate equal to LIBOR plus 3% or the base rate plus 2%, at Equistar's option. Certain financial ratio requirements were modified in the amended and restated bank credit facility to make them less 5 restrictive. The bank credit facility is secured by a lien on Equistar's accounts receivable, inventory, other personal property and certain fixed assets. The refinancing also included the issuance of $700 million of new 10.125% unsecured senior notes ("Senior Notes") maturing in August 2008. The Senior Notes rank pari passu with existing Equistar notes. The refinancing replaced a $1.25 billion bank credit facility and all related guarantees have been terminated. A portion of the net proceeds were used to repay $90 million of Equistar's medium term notes that matured on August 30, 2001. The remaining net proceeds of the financing will be used for general business purposes. In addition, during the third quarter 2001, Equistar terminated a $130 million receivables securitization program (see Note 5). Long-term debt consisted of the following: SEPTEMBER 30, DECEMBER 31, MILLIONS OF DOLLARS 2001 2000 - ------------------- ------------- ------------ Bank credit facilities: Revolving credit facility due 2006 $ - - $ 820 Term loan due 2007 300 - - Other debt obligations: Medium-term notes (due 2002-2005) 31 121 9.125% Notes due 2002 100 100 8.50% Notes due 2004 300 300 6.50% Notes due 2006 150 150 10.125% Notes due 2008 700 - - 8.75% Notes due 2009 598 598 7.55% Debentures due 2026 150 150 Other 9 9 ------ ------ Total long-term debt 2,338 2,248 Less current maturities 104 90 ------ ------ Total long-term debt, net $2,234 $2,158 ====== ====== In March 2001, Equistar amended the previous $1.25 billion credit facility making certain financial ratio requirements less restrictive. As a result of the amendment, the interest rate on the previous credit facility was increased from LIBOR plus 5/8 of 1% to LIBOR plus 8/10 of 1%. Lyondell remains a guarantor of certain Equistar debt. The consolidated financial statements (unaudited) of Lyondell are filed as an exhibit to Equistar's Quarterly Report on Form 10-Q for the period ended September 30, 2001. 9. DERIVATIVE FINANCIAL INSTRUMENTS As of January 1, 2001, Equistar adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. Under SFAS No. 133, all derivative instruments are recorded on the balance sheet at fair value. Currently, Equistar uses only cash flow hedges. Gains or losses from changes in the fair value of the derivative used in a cash flow hedge are deferred in accumulated other comprehensive income, to the extent the hedge is effective, and subsequently reclassified to earnings to offset the impact of the related forecasted transaction. 6 Equistar's Partnership Governance Committee has authorized Equistar to enter into certain hedge transactions, but does not permit speculative positions. Equistar formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking the hedge. This process includes specific identification of the hedging instrument and the hedge transaction, the nature of the risk being hedged and the method for assessing the hedging instrument's effectiveness. Both at the inception of the hedge and on an ongoing quarterly basis, Equistar assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. Equistar enters into over-the-counter "derivatives", or price swap contracts, for crude oil with Occidental Energy Marketing, Inc., a subsidiary of Occidental, to help manage its exposure to commodity price risk with respect to crude-oil related raw material purchases. At December 31, 2000, price swap contracts covering 5.1 million barrels of crude oil were outstanding. The carrying value and fair market value of these derivative instruments at December 31, 2000 represented a liability of $13 million and was based on quoted market prices. The related loss was deferred on the consolidated balance sheet. On January 1, 2001, in accordance with the transition provisions of SFAS No. 133, Equistar reclassified the deferred loss of $13 million to accumulated other comprehensive income as a transition adjustment, representing the cumulative effect of an accounting change (see Note 11). The transition adjustment was reclassified to the consolidated statements of income during the period January through July 2001. In September 2001, the remaining price swap contracts, maturing from October 2001 through March 2002 and covering 4.1 million barrels of crude oil, were liquidated resulting in a realized gain of nearly $9 million, of which 97% was deemed effective and recognized in accumulated other comprehensive income. The ineffective portion, which was less than $1 million, was recorded as a component of cost of sales in the consolidated statements of income. The $8 million gain recorded in accumulated other comprehensive income will be reclassified to the consolidated statements of income from October 2001 through March 2002. During the second quarter 2001, Equistar entered into put options covering 1.9 million barrels of crude oil. The put options were not treated as hedges for financial reporting purposes, but are intended to reduce Equistar's crude oil- based raw material costs. As of September 30, 2001, the outstanding put option contracts, which mature from October 2001 through December 2001, covered 1.0 million barrels of crude oil. Based on quoted market prices, Equistar recorded a liability of $2 million at September 30, 2001 for these contracts. The following table summarizes activity included in accumulated other comprehensive income ("AOCI") related to the fair value of derivative instruments for the three and nine months ended September 30, 2001 (see Note 11):
FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED MILLIONS OF DOLLARS SEPTEMBER 30, 2001 SEPTEMBER 30, 2001 - ------------------- ------------------ -------------------- Gain (loss): Balance at beginning of period $(2) $- - --- ---- January 1, 2001 transition adjustment - reclassification of December 31, 2000 deferred loss - - (13) Unrealized gains on derivative instruments 13 31 Reclassification of realized gains on maturing derivative instruments to earnings (3) (10) --- ---- Net change included in AOCI for the period 10 8 --- ---- Unrealized gain on derivative instruments included in AOCI at September 30, 2001 $ 8 $ 8 === ====
7 10. COMMITMENTS AND CONTINGENCIES Commitments--Equistar has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business. In the aggregate, such commitments are not at prices in excess of current market. Indemnification Arrangements--Lyondell, Millennium Petrochemicals and certain subsidiaries of Occidental have each agreed to provide certain indemnifications to Equistar with respect to the petrochemicals and polymers businesses contributed by the partners. In addition, Equistar agreed to assume third party claims that are related to certain pre-closing contingent liabilities that are asserted prior to December 1, 2004 as to Lyondell and Millennium Petrochemicals, and May 15, 2005 as to certain Occidental subsidiaries, to the extent the aggregate thereof does not exceed $7 million to each partner, subject to certain terms of the respective asset contribution agreements. As of September 30, 2001, Equistar had incurred a total of $17 million for these uninsured claims and liabilities. Equistar also agreed to assume third party claims that are related to certain pre-closing contingent liabilities that are asserted for the first time after December 1, 2004 as to Lyondell and Millennium Petrochemicals, and for the first time after May 15, 2005 as to certain Occidental subsidiaries. As of September 30, 2001, Equistar, Lyondell, Millennium Petrochemicals and certain subsidiaries of Occidental amended the asset contribution agreements governing these indemnification obligations to clarify the treatment of, and procedures pertaining to the management of, certain claims arising under the asset contribution agreements. Equistar management believes that these amendments do not materially change the asset contribution agreements. Environmental--Equistar's policy is to be in compliance with all applicable environmental laws. Equistar is subject to extensive environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Some of these laws and regulations are subject to varying and conflicting interpretations. Equistar cannot accurately predict future developments, such as increasingly strict requirements of environmental laws, inspection and enforcement policies and compliance costs therefrom which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. Equistar's accrued liability for environmental matters as of September 30, 2001 was $6 million and related to the Port Arthur facility, which was permanently shut down on February 28, 2001. The eight-county Houston/Galveston region has been designated a severe non- attainment area for ozone by the U.S. Environmental Protection Agency ("EPA"). As a result, the Texas Natural Resource Conservation Commission ("TNRCC") has submitted a plan to the EPA to reach and demonstrate compliance with the ozone standard by November 2007. Ozone is a product of the reaction between volatile organic compounds ("VOCs") and nitrogen oxides ("NOx") in the presence of sunlight, and is a principal component of smog. The proposed plans for meeting the ozone standard focus on significant reductions in NOx emissions. NOx emission reduction controls must be installed at each of Equistar's six plants located in the Houston/Galveston region during the next several years, well in advance of the 2007 deadline. Compliance with the plan will result in increased capital investment, which could be between $150 million and $300 million before the 2007 deadline, as well as higher annual operating costs for Equistar. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. Equistar has been actively involved with a number of organizations to help solve the ozone problem in the most cost-effective manner and, in January 2001, Equistar and an organization composed of industry participants filed a lawsuit against the TNRCC to encourage adoption of their alternative plan to achieve the same air quality improvement with less negative economic impact on the region. In June 2001, the parties entered into a consent order with respect to the lawsuit. Pursuant to the consent order, the TNRCC agreed to review, by June 2002, the scientific data for ozone formation in the Houston/Galveston region. In October 2001, the EPA approved the TNRCC plan. However, if the TNRCC scientific review supports the industry group proposal, the TNRCC has agreed to revise the NOx emission reduction requirements set forth in its original plan. Any revisions will have to be approved by the EPA. Such revisions of the NOx emission reduction requirements would reduce Equistar's estimated capital investments required to comply with the plans for meeting the ozone standard. In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. However, while studies by federal and state agencies and other organizations have shown that MTBE is safe for use in gasoline, is not carcinogenic and is effective in reducing automotive emissions, the presence of MTBE in some water supplies in California and other 8 states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern that MTBE may, in certain limited circumstances, affect the taste and odor of drinking water supplies, and thereby lead to possible public concerns. Certain federal and state governmental initiatives have sought either to rescind the oxygenate requirement for reformulated gasoline or to restrict or ban the use of MTBE. Such actions, to be effective, would require (i) a waiver of the state's oxygenate mandate, (ii) Congressional action in the form of an amendment to the Clean Air Act or (iii) replacement of MTBE with another oxygenate such as ethanol, a more costly, untested, and less widely available additive. The initiatives mentioned above or other governmental actions could result in a significant reduction in Equistar's MTBE sales. Equistar has developed technologies to convert its process to produce alternate gasoline blending components should it be necessary to reduce MTBE production in the future. General-The Partnership is also subject to various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material adverse effect upon the financial position or liquidity of Equistar. In the opinion of management, any liability arising from the matters discussed in this Note is not expected to have a material adverse effect on the financial position or liquidity of Equistar. However, the adverse resolution in any reporting period of one or more of these matters discussed in this Note could have a material impact on Equistar's results of operations for that period without giving effect to contribution or indemnification obligations of co- defendants or others, or to the effect of any insurance coverage that may be available to offset the effects of any such award. 11. COMPREHENSIVE INCOME Comprehensive income (loss) consisted of the following:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------------- ----------------------------------- 2001 2000 2001 2000 --------------- --------------- --------------- --------------- Net income (loss) $ (82) $ 63 $(189) $ 271 ----- ----- ----- ----- Other comprehensive income: Unrealized net gains on derivative instruments 10 - - 8 - - Unrealized loss on securities (2) - - (2) - - ----- ----- ----- ----- Total other comprehensive income 8 - - 6 - - ----- ----- ----- ----- Comprehensive income (loss) $ (74) $ 63 $(183) $ 271 ===== ===== ===== =====
Equistar accounts for certain investments as "available-for-sale" securities in accordance with the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, changes in the fair value of the investments are recognized in the balance sheet and the unrealized holding gains and losses are recognized in other comprehensive income. 9 12. SEGMENT AND RELATED INFORMATION Equistar has two reportable segments in which it operates: (i) petrochemicals; and (ii) polymers. Summarized financial information concerning Equistar's reportable segments is shown in the following table:
MILLIONS OF DOLLARS PETROCHEMICALS POLYMERS UNALLOCATED ELIMINATIONS TOTAL - ------------------- -------------- -------- ----------- ------------ ----- FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001: Sales and other operating revenues: Customers $ 857 $ 494 $ - - $ - - $1,351 Intersegment 324 - - - - (324) - - ------ ------ ------ ------- ------ Total sales and operating revenues 1,181 494 - - (324) 1,351 Operating income (loss) 29 (26) (37) - - (34) Interest expense - - - - (48) - - (48) Interest income - - - - 2 - - 2 Other income, net - - - - 1 - - 1 Income (loss) before extraordinary item 29 (26) (82) - - (79) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000: Sales and other operating revenues: Customers $1,353 $ 602 $ - - $ - - $1,955 Intersegment 495 - - - - (495) - - ------ ------ ------ ------- ------ Total sales and operating revenues 1,848 602 - - (495) 1,955 Operating income (loss) 204 (46) (49) - - 109 Interest expense - - - - (46) - - (46) Interest income - - - - 1 - - 1 Other expense, net - - - - (1) - - (1) Net income (loss) 204 (46) (95) - - 63 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001: Sales and other operating revenues: Customers $3,172 $1,552 $ - - $ - - $4,724 Intersegment 1,173 - - - - (1,173) - - ------ ------ ------ ------- ------ Total sales and operating revenues 4,345 1,552 - - (1,173) 4,724 Operating income (loss) 225 (138) (143) - - (56) Interest expense - - - - (139) - - (139) Interest income - - - - 2 - - 2 Other income, net - - - - 7 - - 7 Income (loss) before extraordinary item 225 (138) (273) - - (186) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000: Sales and other operating revenues: Customers $3,899 $1,813 $ - - $ - - $5,712 Intersegment 1,435 - - - - (1,435) - - ------ ------ ------ ------- ------ Total sales and operating revenues 5,334 1,813 - - $(1,435) 5,712 Operating income (loss) 643 (100) (137) - - 406 Interest expense - - - - (137) - - (137) Interest income - - - - 3 - - 3 Other expense, net - - - - (1) - - (1) Net income (loss) 643 (100) (272) - - 271
10 The "Operating income (loss)" amounts presented above in the "Unallocated" column consist of expenses not allocated to the petrochemicals and polymers segments, principally general and administrative expenses. Additionally, for the nine months ended September 30, 2001, the $143 million includes $22 million of unusual charges related to the Port Arthur shutdown costs. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW GENERAL--Equistar's operating results for the first nine months of 2001 were negatively affected by a severe decrease in demand as a result of the slowing U.S. economy and lower exports. The decreased demand combined with increased industry capacity put downward pressure on product sales prices. Crude oil and natural gas prices, which affect raw material and energy costs in the production of chemicals, also decreased during 2001. However, product sales prices declined at a faster rate. These combined factors resulted in lower product margins for the industry and for Equistar during 2001 compared to 2000. The decrease in demand primarily reflected a weaker U.S. economy, which began to weaken in the third quarter 2000 as a result of a manufacturing recession that included the chemical sector. U.S. gross domestic product, or GDP, growth slowed from an annual rate of 3.1% for the first nine months of 2000 to an estimated 0.4% annual rate for the first nine months of 2001 as the manufacturing recession spread to other segments of the economy. The third quarter 2001 saw a contraction in GDP estimated at 0.4% on an annual basis. Crude oil prices, which affect the cost of Equistar's crude-oil based raw materials, trended downward during the first nine months of 2001. Natural gas costs, which affect energy costs and the cost of natural gas liquids ("NGL"), another major source of raw materials for Equistar, spiked to nearly $10 per million BTUs in January 2001. This compared to a price range of $1.50 to $2.50 per million BTUs in the period from 1991 to 1999. Since the January 2001 spike, natural gas prices have decreased steadily, averaging $2.96 in the third quarter 2001, a 31% decrease from third quarter 2000. The high NGL costs caused producers to switch to crude-oil based raw materials. This resulted in an increased supply of co-products such as propylene, butadiene and benzene, which put downward pressure on the prices of these co-products for most of 2001. The high NGL costs also had a significant impact in reducing the competitive position of North American polyethylene exports to other regions of the world. With the recent decreases in natural gas prices, North American exports have returned to their historical position. The significant increase in NGL costs and lower domestic demand led some producers, including Equistar, to idle plants that primarily use NGLs as raw materials. In the second quarter 2001, Equistar further reduced the state of readiness of its previously idled Lake Charles, Louisiana plant, which represents 7% of its ethylene capacity. Industry analysts estimate that U.S. producers curtailed more than 20% of U.S. ethylene production during 2001 due to weak demand. In addition, the ethylene industry is affected by significant capacity additions. The industry added annual ethylene capacity of 13.4 billion pounds globally in 2000 and is scheduled to add a record 14.1 billion pounds in 2001, or nearly 6% in each year. New domestic capacity in 2001 is adding 5% to existing domestic ethylene capacity during this period of weak demand growth. NET INCOME (LOSS)--In the third quarter 2001, Equistar had a net loss of $79 million, excluding a $3 million extraordinary loss due to early debt retirement, compared to net income of $63 million in the third quarter 2000. The $142 million decrease was primarily due to lower petrochemicals segment margins as well as lower volumes in both the petrochemicals and polymers segments. The lower margins and volumes reflected weaker demand in 2001. These were partly offset by higher polymers segment margins and lower general and administrative expenses. Polymers segment margins improved as raw material costs decreased more than sales prices. For the first nine months of 2001, Equistar had a net loss of $186 million, excluding the $3 million extraordinary loss, compared to net income of $271 million for the first nine months of 2000. The $457 million decrease primarily reflects lower margins and volumes in both the petrochemicals and polymers segments. The lower margins were due to lower sales prices and higher raw material costs in the first nine months of 2001 compared to the first nine months of 2000. The lower sales prices and volumes reflect weaker demand in 2001. Petrochemical margins were negatively affected by decreases in co-product prices during 2001. The first quarter 2001 also included $22 million of costs associated with the shutdown of the Port Arthur, Texas polyethylene facility. 12 THIRD QUARTER 2001 VERSUS SECOND QUARTER 2001 In the third quarter 2001, Equistar had a net loss of $79 million, excluding the $3 million extraordinary loss, compared to a net loss of $30 million in the second quarter 2001. The $49 million decrease was primarily due to declines in the profitability of the petrochemicals segment, which had operating income of $29 million in the third quarter 2001 compared to $81 million in the second quarter 2001. The $52 million decrease was due to lower ethylene and co-product prices, which were only partially offset by lower raw material, natural gas and energy costs. Third quarter 2001 benchmark prices for ethylene were 23.8 cents per pound, a 16% decrease compared to 28.4 cents per pound in the second quarter 2001. Benchmark prices for co-products such as propylene, butadiene and benzene decreased significantly during the third quarter 2001 due to excess supply early in the quarter. Equistar's ethylene volumes were relatively unchanged compared to the second quarter 2001, reflecting the end of industry inventory reductions in the second quarter 2001 offset by continued weak demand in the third quarter 2001. The polymers segment had an operating loss of $26 million in the third quarter 2001 compared to a loss of $23 million in the second quarter 2001. Polymers sales prices decreased more than raw material costs. Benchmark polymers sales prices decreased approximately 5.5 cents per pound compared to a 4.5 cents per pound decrease in benchmark ethylene prices. The resulting decrease in margins during the third quarter 2001 was substantially offset by a 12 percent increase in polymers sales volumes due to higher exports. Export sales activity increased due to a return to the historical U.S. competitive cost position compared to the rest of the world in the third quarter 2001, when natural gas prices declined compared to the high levels experienced earlier in 2001. 13 SEGMENT DATA The following tables reflect selected actual sales volume data, including intersegment sales volumes, and summarized financial information for Equistar's business segments.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------- ------------------------------------- IN MILLIONS 2001 2000 2001 2000 - ----------- --------------- --------------- --------------- --------------- SELECTED PETROCHEMICALS PRODUCTS: Olefins (pounds) 4,039 4,512 12,352 14,020 Aromatics (gallons) 86 101 274 312 POLYMERS PRODUCTS (pounds) 1,565 1,622 4,402 4,763 MILLIONS OF DOLLARS - ------------------- SALES AND OTHER OPERATING REVENUES: Petrochemicals segment $1,181 $1,848 $ 4,345 $ 5,334 Polymers segment 494 602 1,552 1,813 Intersegment eliminations (324) (495) (1,173) (1,435) ------ ------ ------- ------- Total $1,351 $1,955 $ 4,724 $ 5,712 ====== ====== ======= ======= COST OF SALES: Petrochemicals segment $1,152 $1,642 $ 4,113 $ 4,685 Polymers segment 500 632 1,633 1,861 Intersegment eliminations (324) (495) (1,173) (1,435) ------ ------ ------- ------- Total $1,328 $1,779 $ 4,573 $ 5,111 ====== ====== ======= ======= OTHER OPERATING EXPENSES: Petrochemicals segment $ - - $ 2 $ 7 $ 6 Polymers segment 20 16 57 52 Unallocated 37 49 121 137 Unusual charges - - - - 22 - - ------ ------ ------- ------- Total $ 57 $ 67 $ 207 $ 195 ====== ====== ======= ======= OPERATING INCOME (LOSS): Petrochemicals segment $ 29 $ 204 $ 225 $ 643 Polymers segment (26) (46) (138) (100) Unallocated (37) (49) (121) (137) Unusual charges - - - - (22) - - ------ ------ ------- ------- Total $ (34) $ 109 $ (56) $ 406 ====== ====== ======= =======
PETROCHEMICALS SEGMENT REVENUES--Revenues of $1.2 billion in the third quarter 2001 decreased 36% compared to third quarter 2000 revenues of $1.8 billion due to lower sales prices as well as 11% lower volumes. Benchmark ethylene prices averaged 23.8 cents per pound in the third quarter 2001, a 23% decrease compared to the third quarter 2000. The decrease in sales prices and volumes reflected lower demand due to weakness of the U.S. economy and excess industry capacity. Revenues of $4.3 billion in the first nine months of 2001 decreased 19% compared to revenues of $5.3 billion for the first nine months of 2000 on 12% lower sales volumes and lower average sales prices in 2001. Sales volumes decreased due to weaker business conditions in 2001. Benchmark ethylene prices averaged 8% lower in the first nine months of 2001 compared to the first nine months of 2000. COST OF SALES--Cost of sales of $1.2 billion in the third quarter 2001 decreased 30% compared to $1.6 billion in the third quarter 2000. The decrease was due to lower raw material costs and 11% lower volumes, partly offset by a significant decrease in co-product propylene prices, which resulted in a lower co-product credit to cost of sales. 14 Average benchmark prices of crude oil and natural gas, which affect the cost of Equistar's raw materials, decreased 16% and 31%, respectively, in the third quarter 2001 compared to the third quarter 2000. Benchmark propylene prices averaged 14.7 cents per pound in the third quarter 2001, a 39% decrease compared to the third quarter 2000. Cost of sales of $4.1 billion in the first nine months of 2001 decreased 12% compared to $4.7 billion in the first nine months of 2000. The effect of the 12% decrease in sales volumes and lower crude oil prices was partly offset by higher NGL-based raw material and energy costs as well as the decrease in co- product prices. Benchmark natural gas prices averaged 44% higher in the first nine months of 2001 compared to the first nine months of 2000 due to the significant first quarter 2001 increase in natural gas costs. OPERATING INCOME--Operating income of $29 million in the third quarter 2001 decreased $175 million from $204 million in the third quarter 2000. Operating income of $225 million in the first nine months of 2001 decreased $418 million from $643 million in the first nine months of 2000. The decreases were primarily due to lower margins and, to a lesser extent, lower sales volumes. The lower margins primarily reflected lower prices for ethylene and for co- products such as propylene and benzene in the 2001 periods compared to 2000. The lower prices and volumes were due to weaker demand in the 2001 periods compared to 2000. POLYMERS SEGMENT REVENUES--Revenues of $494 million in the third quarter 2001 decreased 18% compared to $602 million in the third quarter 2000 due to a decrease in average sales prices and a 4% decrease in volumes. The decrease in sales prices reflected weaker 2001 business conditions and pressure from decreasing raw material costs. Revenues of $1.6 billion in the first nine months of 2001 decreased 14% compared to $1.8 billion in the first nine months of 2000 due to an 8% decrease in sales volumes and a decrease in average sales prices. The decreases in sales volumes and sales prices were both due to the weaker demand in the first nine months of 2001. COST OF SALES--Cost of sales of $500 million in the third quarter 2001 decreased 21% compared to $632 million in the third quarter 2000. The decrease in 2001 reflected lower raw material costs, primarily ethylene and propylene, as well as the 4% decrease in volumes. Cost of sales of $1.6 billion in the first nine months of 2001 decreased 12% compared to $1.9 billion in the first nine months of 2000 primarily due to an 8% decrease in sales volumes in 2001. The decreases in raw material costs in the nine months comparison were not as significant as in the third quarter comparison. For example, the first quarter 2001 reflected the effects of high natural gas costs on both raw material and energy costs. In addition, during 2001, the price of ethylene peaked in February before trending steadily downwards. OPERATING INCOME--The polymers segment had an operating loss of $26 million in the third quarter 2001 compared to a loss of $46 million in the third quarter 2000. Although sales prices decreased in the third quarter 2001, raw material cost decreases more than offset the lower prices and the 4% lower sales volumes. For the first nine months of 2001, the operating loss was $138 million compared to an operating loss of $100 million in the first nine months of 2000. The increased operating loss was primarily due to the effect of lower polymers prices on margins as well as the effect of lower sales volumes, which were only partly offset by lower raw material costs. 15 UNALLOCATED ITEMS The following discusses expenses that were not allocated to the petrochemicals or polymers segments. OTHER OPERATING EXPENSES--These include unallocated general and administrative expense and goodwill amortization. Unallocated other operating expenses of $37 million in the third quarter 2001 decreased $12 million compared to $49 million in the third quarter 2000. Unallocated other operating expenses of $121 million in the first nine months of 2001 decreased $16 million compared to $137 million in the first nine months of 2000. The decreases were due to cost reduction efforts and a lower level of business activity in 2001. UNUSUAL CHARGES--Equistar discontinued production at its higher-cost Port Arthur, Texas polyethylene facility in February 2001 and shut down the facility. Closed production units included a 240 million pounds per year HDPE reactor and an LDPE reactor with annual capacity of 160 million pounds. These units and a 300 million pounds per year HDPE reactor mothballed in the fourth quarter of 1999 have been permanently shut down. The asset values of these production units were previously adjusted as part of a $96 million restructuring charge recognized in 1999. During the first quarter 2001, Equistar recorded a $22 million charge, which included environmental remediation liabilities of $7 million, other exit costs of $3 million and severance and pension benefits of $7 million for approximately 125 people employed at the Port Arthur facility. The remaining balance primarily related to the write down of certain assets. EXTRAORDINARY LOSS--As part of the third quarter 2001 refinancing, Equistar wrote off unamortized debt issuance costs and amendment fees of $3 million related to the early repayment of the $1.25 billion bank credit facility and reported the charge as an extraordinary loss on extinguishment of debt. FINANCIAL CONDITION OPERATING ACTIVITIES--Operating activities provided cash of $119 million in the first nine months of 2001 compared to $313 million in the first nine months of 2000. The $194 million decrease primarily reflected a $460 million decrease in income in the first nine months of 2001 compared to the 2000 period. This was partly offset by an improvement in the working capital position in 2001. In the first nine months of 2001, working capital was reduced $69 million. In the first nine months of 2000, working capital increased $174 million. The reduction in working capital in the first nine months of 2001 was primarily due to a $104 million net reduction in receivables, despite the termination of a $130 million receivables sales agreement in August 2001. The net reduction in receivables primarily reflected the effects of lower sales prices in 2001. INVESTING ACTIVITIES--Equistar's capital expenditures were $85 million in the first nine months of 2001 and $81 million in the first nine months of 2000. Equistar's capital spending for 2001 is currently projected at approximately $103 million and includes spending for cost reduction and yield improvement projects. The planned 2001 capital expenditures have been reduced by approximately 40% from amounts originally budgeted due to the poor current business environment. During the second quarter 2001, Equistar purchased the low- and medium-voltage power cable materials business of AT Plastics, Inc. for $7 million. FINANCING ACTIVITIES--In August 2001, Equistar completed a $1.5 billion debt refinancing. The refinancing included an amended and restated bank credit facility consisting of a $500 million secured revolving credit facility maturing in August 2006 and a $300 million secured term loan maturing in August 2007. The financing also included the issuance of $700 million of new unsecured 10.125% Senior Notes maturing in August 2008. The financing replaced a $1.25 billion bank credit facility, $820 million of which was outstanding. A portion of the net proceeds was also used to repay the $90 million of Equistar's medium- term notes that matured on August 30, 2001. 16 The remaining net proceeds will be used for general business purposes. The amended and restated bank credit facility also made certain financial ratio requirements less restrictive. Equistar had previously amended its credit facility in March 2001, easing certain financial ratio requirements. In addition, during the third quarter 2001, Equistar terminated a $130 million receivables securitization program. There were no distributions to partners in the first nine months of 2001 and Equistar does not currently anticipate making any distributions to partners for the remainder of 2001. LIQUIDITY AND CAPITAL RESOURCES--The August 2001 $1.5 billion debt refinancing significantly extended Equistar's debt maturity schedule and eased the financial ratio requirements in the bank credit facility. This provided Equistar with additional liquidity and financial flexibility. At September 30, 2001, Equistar had cash on hand of $113 million. The $500 million revolving credit facility, which extends until August 2006, was undrawn and available for borrowing at September 30, 2001. Current maturities of long-term debt at September 30, 2001 were $104 million. The amended and restated bank credit facility and the indenture governing Equistar's Senior Notes contain covenants that, subject to exceptions, restrict sale and leaseback transactions, lien incurrence, debt incurrence, sales of assets and mergers and consolidations. In addition, the amended and restated bank credit facility requires Equistar to maintain specified financial ratios, in all cases as provided in the credit facility. The breach of these covenants could permit the lenders under Equistar's credit facility and the indenture governing the Senior Notes to declare the loans immediately payable and could permit the lenders under Equistar's credit facility to terminate future lending commitments. Equistar was in compliance with all covenants under its debt instruments as of September 30, 2001. Management believes that conditions will be such that cash balances, cash flow from operations and funding under the credit facility will be adequate to meet anticipated future cash requirements, including scheduled debt repayments, necessary capital expenditures and ongoing operations. CURRENT BUSINESS OUTLOOK Although co-product prices have increased recently, Equistar expects continued trough conditions in the fourth quarter 2001 for the global chemical markets that it serves. Pricing pressures are expected to continue for the remainder of the year in Equistar's petrochemicals and polymers businesses. As trough conditions continue, management will continue to take appropriate and necessary steps not only to manage through the current difficult business environment, but also to position Equistar to take full advantage of improvements in the market when they occur. Equistar has aggressively controlled costs in the third quarter of 2001. Cash management strategies and fixed-cost reduction initiatives that were implemented have already generated results. Progress is expected to continue through 2002. ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. The statement will be effective for Equistar's calendar year 2002. Under SFAS No. 142, amortization of goodwill to earnings will be discontinued. However, goodwill will be reviewed for impairment at least annually and whenever events indicate impairment may have occurred. A benchmark assessment of potential impairment also must be completed within six months after adopting SFAS No. 142. Equistar currently carries $1.1 billion of goodwill on its balance sheet, which is amortized at an annual rate of $33 million. Equistar is currently evaluating the effect that implementation of SFAS No. 142 will have on its financial statements. 17 In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Adoption of SFAS No. 143 and SFAS No. 144 is not expected to have a material effect on the consolidated financial statements of Equistar. ITEM 3. DISCLOSURE OF MARKET AND REGULATORY RISK. Equistar's exposure to market risks is described in Item 7a of its Annual Report on Form 10-K for the year ended December 31, 2000. Equistar's exposure to market and regulatory risks has not changed materially in the quarter ended September 30, 2001, except as noted below. Equistar enters into over-the-counter "derivatives," or price swap contracts, for crude oil to help manage its exposure to commodity price risk with respect to crude oil-related raw material purchases. These hedging arrangements have the effect of locking in, at predetermined prices or ranges of prices and for a specified period of time, the prices that Equistar will pay for the volumes to which the hedge relates. As a result, while these hedging arrangements are structured to reduce its exposure to increases in price associated with the hedged commodity, they also limit the benefit Equistar might otherwise receive from any price decreases associated with the hedged commodity. In September 2001, the remaining price swap contracts, maturing from October 2001 through March 2002 and covering 4.1 million barrels of crude oil, were liquidated and none were outstanding as of September 30, 2001. During the second quarter 2001, Equistar entered into put options covering 1.9 million barrels of crude oil. The put options were not treated as hedges for financial reporting purposes, but are intended to reduce Equistar's crude oil- based raw material costs. As of September 30, 2001, the outstanding put option contracts, which mature from October 2001 through December 2001, covered 1.0 million barrels of crude oil. Based on quoted market prices, Equistar recorded a liability of $2 million at September 30, 2001 for those contracts. Assuming a hypothetical 25% decrease in crude oil prices from those in effect at September 30, 2001, Equistar's loss in earnings for the put option contracts would be approximately $9 million. Sensitivity analysis was used for purposes of the above analysis. The quantitative information about market risk is necessarily limited because it does not take into account the effects of the underlying operating transactions. Equistar does not engage in any derivatives trading activities. 18 FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report are "forward-looking statements" within the meaning of the federal securities laws. Although Equistar believes the expectations reflected in such forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and Equistar can give no assurance that such expectations will prove to have been correct. Equistar's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including: . the cyclical nature of the chemical industry, . uncertainties associated with the economy, . substantial chemical industry capacity additions resulting in oversupply and declining prices and margins, . the availability and cost of raw materials, . the availability of capital markets, . technological developments, . current and potential governmental regulatory actions, . potential terrorist acts, . operating interruptions (including leaks, explosions, fires, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, spills and releases and other environmental risks), and . Equistar's ability to implement its business strategies, including cost reductions. Many of such factors are beyond Equistar's ability to control or predict. Any of the factors, or a combination of these factors, could materially affect Equistar's future results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of Equistar's future performance, and Equistar's actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward- looking statements or projecting any future results based on such statements or present or prior earnings levels. All forward-looking statements in this Form 10-Q are qualified in their entirety by the cautionary statements contained in this section and in Equistar's Annual Report on Form 10-K for the year ended December 31, 2000. 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material developments with respect to Equistar's legal proceedings previously reported in the Annual Report on Form 10-K for the year ended December 31, 2000 and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2001 and June 30, 2001, except as described below. The eight-county Houston/Galveston region has been designated a severe non- attainment area for ozone by the EPA. As a result, the TNRCC has submitted a plan to the EPA to reach and demonstrate compliance with the ozone standard by November 2007. On January 19, 2001, Equistar and LCR, individually, and Lyondell, individually and as part of the BCCA Appeal Group (a group of industry participants), filed a lawsuit against the TNRCC in State District Court in Travis County, Texas to encourage the adoption of the plaintiffs' alternative plan to achieve the same air quality improvement as the TNRCC plan, with less negative economic impact on the region. In June 2001, the parties entered into a consent order with respect to the lawsuit. Pursuant to the consent order, the TNRCC agreed to review, by June 2002, the scientific data for ozone formation in the Houston/Galveston region. In October 2001, the EPA approved the TNRCC plan. However, if the TNRCC scientific review supports the industry group proposal, the TNRCC has agreed to revise the NOx emission reduction requirements set forth in its original plan. Any revisions will have to be approved by the EPA. Lyondell, Millennium Petrochemicals and certain subsidiaries of Occidental have each agreed to provide certain indemnifications to Equistar with respect to the petrochemicals and polymers businesses contributed by the partners. In addition, Equistar agreed to assume third party claims that are related to certain pre- closing contingent liabilities that are asserted prior to December 1, 2004 as to Lyondell and Millennium Petrochemicals, and May 15, 2005 as to certain Occidental subsidiaries, to the extent the aggregate thereof does not exceed $7 million to each partner, subject to certain terms of the respective asset contribution agreements. Equistar also agreed to assume third party claims that are related to certain pre-closing contingent liabilities that are asserted for the first time after December 1, 2004 as to Lyondell and Millennium Petrochemicals, and for the first time after May 15, 2005 as to certain Occidental subsidiaries. As of September 30, 2001, Equistar, Lyondell, Millennium Petrochemicals and certain subsidiaries of Occidental amended the asset contribution agreements governing these indemnification obligations to clarify the treatment of, and procedures pertaining to the management of, certain claims arising under the asset contribution agreements. Equistar believes that these amendments do not materially change the asset contribution agreements. 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.10(b) Second Amendment to Lyondell Asset Contribution Agreement, dated as of September 30, 2001, among Lyondell Chemical Company, Lyondell Petrochemical LP Inc. and Equistar Chemicals, LP. 10.11(b) Second Amendment to Millennium Asset Contribution Agreement, dated as of September 30, 2001, among Millennium Petrochemicals Inc., Millennium Petrochemicals LP LLC and Equistar Chemicals, LP. 10.13(a) First Amendment to Occidental Asset Contribution Agreement, dated as of September 30, 2001, among Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner 2, Inc., PDG Chemical Inc., Occidental Petrochem Partner GP, Inc. and Equistar Chemicals, LP. 99 Consolidated Financial Statements (Unaudited) of Lyondell Chemical Company (b) Reports on Form 8-K The following Current Reports on Form 8-K were filed during the quarter ended September 30, 2001 and through the date hereof: Date of Report Item Nos. Financial Statements - -------------- --------- -------------------- July 26, 2001 5, 7 No August 01, 2001 5, 7 No August 15, 2001 9 No August 28, 2001 5, 7 No 21 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Equistar Chemicals, LP Dated: November 13, 2001 /s/ CHARLES L. HALL -------------------------------- Charles L. Hall Vice President and Controller (Duly Authorized Officer and Principal Accounting Officer) 22 EX-10.10(B) 3 dex1010b.txt 2ND AMENDMENT TO LYONDELL ASSET CONTRIBUTION AGMT EXHIBIT 10.10(b) SECOND AMENDMENT TO LYONDELL ASSET CONTRIBUTION AGREEMENT --------------------------------------------------------- This Second Amendment to Lyondell Asset Contribution Agreement (this "Second Amendment"), dated as of September 30, 2001, is entered into by and among Lyondell Chemical Company, a Delaware corporation (the "Contributor"), Lyondell Petrochemical LP Inc., a Delaware corporation (the "Contributing Partner") and Equistar Chemicals, LP, a Delaware limited partnership (the "Partnership"). RECITALS: -------- A. The Contributor (as successor to Lyondell Petrochemical Company), the Contributing Partner and the Partnership are parties to that certain Asset Contribution Agreement, dated as of December 1, 1997, as amended by that certain First Amendment to Lyondell Asset Contribution Agreement, dated as of May 15, 1998 (such agreement, as amended by the First Amendment, herein called the "Asset Contribution Agreement"). B. Following execution of the Asset Contribution Agreement, the Contributor, the Contributing Partner and the Partnership (the "Parties" and each individually, a "Party") have agreed to certain amendments clarifying the treatment of, and procedures pertaining to the management of, certain claims arising under the Asset Contribution Agreement. C. Simultaneously, and as an integral part of the resolution of the matters referenced herein, (i) the Partnership and certain affiliates of Occidental Petroleum Corporation have agreed to make certain amendments pursuant to that certain First Amendment to Occidental Asset Contribution Agreement dated as of September 30, 2001 (the "Occidental First Amendment") and (ii) the Partnership and certain affiliates of Millennium Petrochemicals, Inc. have agreed to settle certain claims and make certain amendments pursuant to that certain Second Amendment to Millennium Asset Contribution Agreement dated as of September 30, 2001 (the "Millennium Second Amendment"). D. Accordingly, the Parties desire to amend the Asset Contribution Agreement on the terms set forth herein. Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Asset Contribution Agreement. All section references in this Second Amendment are intended to refer to provisions contained in the Asset Contribution Agreement. NOW THEREFORE, in consideration of the premises and of the mutual covenants of the Parties hereto, it is hereby agreed that the Asset Contribution Agreement is hereby amended as follows: 1 Section 1. Assumption of Liabilities. ------------------------- (a) Section 2.5(a)(vi) is hereby amended and restated as follows: (vi) Third Party Claims (including De Minimis Claims) that are related to Pre-Closing Contingent Liabilities and that are first asserted seven years or more after the Closing Date. (b) The word "and" is hereby deleted from the end of Section 2.5(a)(x) and added to the end of Section 2.5(a)(xi). (c) A new Section 2.5(a)(xii) is hereby added as follows: (xii) Pre-Closing Contingent Liabilities that do not involve a Third Party Claim and De Minimis Claims first asserted against the Partnership (and not the Contributor) within seven years after the Closing Date. Section 2. Excluded Liabilities. Section 2.6(i) is hereby amended and -------------------- restated as follows: (i) Any Pre-Closing Contingent Liability that is not an Assumed Liability, including any De Minimis Claim that is first asserted against Contributor and the Partnership, jointly, within seven years after the Closing Date. Section 3. Lowest Cost Response. The definition of "Lowest Cost -------------------- Response" is hereby amended to delete the phrase "Chemical Substances" in the first sentence and replace it with the word "condition." Section 4. Effectiveness of this Second Amendment. This Second -------------------------------------- Amendment shall be effective from and after the date hereof except as expressly provided with respect to certain disputes described in the Millennium Second Amendment; provided, however, that the execution and delivery of the Occidental First Amendment and the Millennium Second Amendment shall be conditions to the effectiveness of this Second Amendment. Except as amended by this Second Amendment, all of the terms and provisions of the Asset Contribution Agreement shall remain in full force and effect among the Parties from and after the date hereof. Section 5. Counterparts. This Second Amendment may be executed in any ------------ number of counterparts, each of which shall be deemed an original and all of which together shall be deemed one and the same instrument. Section 6. APPLICABLE LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY, -------------- AND CONTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE EXCLUDING CONFLICTS OF LAW PRINCIPLES OF SUCH JURISDICTION, EXCEPT TO THE EXTENT SUCH MATTERS ARE MANDATORILY 2 SUBJECT TO THE LAWS OF ANOTHER JURISDICTION PURSUANT TO THE LAWS OF SUCH OTHER JURISDICTION. [Remainder of Page Intentionally Left Blank] 3 IN WITNESS WHEREOF, the Parties have executed and delivered this Second Amendment as of the date first above written. LYONDELL CHEMICAL COMPANY, a Delaware corporation. By: /s/ Dan F. Smith ------------------------------- Name: Dan F. Smith Title: President & Chief Executive Officer LYONDELL PETROCHEMICAL LP INC., a Delaware corporation By: /s/ Gerald A. O'Brien ------------------------------- Name: Gerald A. O'Brien Title: Vice President & General Counsel EQUISTAR CHEMICALS, LP, a Delaware limited partnership By: /s/ Eugene R. Allspach ------------------------------- Name: Eugene R. Allspach Title: President & Chief Operating Officer [Signature Page to Second Amendment To Lyondell Asset Contribution Agreement] 4 EX-10.11(B) 4 dex1011b.txt 2ND AMDMT TO MILLENIUM ASSET CONTRIBUTION AGMT EXHIBIT 10.11(b) SECOND AMENDMENT TO MILLENNIUM ASSET CONTRIBUTION AGREEMENT ----------------------------------------------------------- This Second Amendment to Millennium Asset Contribution Agreement (this "Second Amendment"), dated as of September 30, 2001, is entered into by and among Millennium Petrochemicals Inc., a Virginia corporation (the "Contributor"), Millennium Petrochemicals LP LLC, a Delaware limited liability company (the "Contributing Partner") and Equistar Chemicals, LP, a Delaware limited partnership (the "Partnership"). RECITALS: -------- A. The Contributor, the Contributing Partner and the Partnership are parties to that certain Asset Contribution Agreement, dated as of December 1, 1997, as amended by that certain First Amendment to Millennium Asset Contribution Agreement, dated as of May 15, 1998 (such agreement, as amended by the First Amendment, herein called the "Asset Contribution Agreement"). B. Following execution of the Asset Contribution Agreement, the Contributor, the Contributing Partner and the Partnership (the "Parties" and each individually, a "Party") have agreed to certain amendments clarifying the treatment of, and procedures pertaining to the management of, certain claims arising under the Asset Contribution Agreement. C. Simultaneously, and as an integral part of the resolution of the matters referenced herein, (i) the Partnership and certain affiliates of Occidental Petroleum Corporation have agreed to make certain amendments pursuant to that certain First Amendment to Occidental Asset Contribution Agreement dated as of September 30, 2001 (the "Occidental First Amendment") and (ii) the Partnership and certain affiliates of Lyondell Chemical Company have agreed to settle certain claims and make certain amendments pursuant to that certain Second Amendment to Lyondell Asset Contribution Agreement dated as of September 30, 2001 (the "Lyondell Second Amendment"). D. Accordingly, the Parties desire to amend the Asset Contribution Agreement on the terms set forth herein. Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Asset Contribution Agreement. All section references in this Second Amendment are intended to refer to provisions contained in the Asset Contribution Agreement. NOW THEREFORE, in consideration of the premises and of the mutual covenants of the Parties hereto, it is hereby agreed that the Asset Contribution Agreement is hereby amended as follows: Section 1. Seven Year PCCL Claims. In settlement of a dispute --------------------------------- concerning treatment of certain claims under the Asset Contribution Agreement, the Parties hereby agree that the liabilities set forth on Exhibit A, in the --------- amounts specified therein, shall be deemed to be Seven Year PCCL Claims and such claims shall thereby be fully and finally resolved. 1 Section 2. Assumption of Liabilities. ------------------------- (a) Section 2.5(a)(vi) is hereby amended and restated as follows: (vi) Third Party Claims (including De Minimis Claims) that are related to Pre-Closing Contingent Liabilities and that are first asserted seven years or more after the Closing Date. (b) The word "and" is hereby deleted from the end of Section 2.5(a)(x) and added to the end of Section 2.5(a)(xi). (c) A new Section 2.5(a)(xii) is hereby added as follows: (xii) Pre-Closing Contingent Liabilities that do not involve a Third Party Claim and De Minimis Claims first asserted against the Partnership (and not the Contributor) within seven years after the Closing Date. Section 3. Excluded Liabilities. Section 2.6(i) is hereby amended -------------------- and restated as follows: (i) Any Pre-Closing Contingent Liability that is not an Assumed Liability, including any De Minimis Claim that is first asserted against Contributor and the Partnership, jointly, within seven years after the Closing Date. Section 4. Lowest Cost Response. The definition of "Lowest Cost -------------------- Response" is hereby amended to delete the phrase "Chemical Substances" in the first sentence and replace it with the word "condition." Section 5. Effectiveness of this Second Amendment. This Second -------------------------------------- Amendment shall be effective from and after the date hereof except as specifically provided in Section 1 hereof; provided, however, that the execution and delivery of the Occidental First Amendment and the Lyondell Second Amendment shall be conditions to the effectiveness of this Second Amendment. Except as amended by this Second Amendment, all of the terms and provisions of the Asset Contribution Agreement shall remain in full force and effect among the Parties from and after the date hereof. Section 6. Counterparts. This Second Amendment may be executed in ------------ any number of counterparts, each of which shall be deemed an original and all of which together shall be deemed one and the same instrument. Section 7. APPLICABLE LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY, -------------- AND CONTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE EXCLUDING CONFLICTS OF LAW PRINCIPLES OF SUCH 2 JURISDICTION, EXCEPT TO THE EXTENT SUCH MATTERS ARE MANDATORILY SUBJECT TO THE LAWS OF ANOTHER JURISDICTION PURSUANT TO THE LAWS OF SUCH OTHER JURISDICTION. [Remainder of Page Intentionally Left Blank] 3 IN WITNESS WHEREOF, the Parties have executed and delivered this Second Amendment as of the date first above written. MILLENNIUM PETROCHEMICALS INC., a Virginia corporation. By: /s/ C. William Carmean ----------------------------------- Name: C. William Carmean Title: Vice President-Legal MILLENNIUM PETROCHEMICALS LP LLC, a Delaware limited liability company By: /s/ C. William Carmean --------------------------------- Name: C. William Carmean Title: Vice President-Legal EQUISTAR CHEMICALS, LP, a Delaware limited partnership By: /s/ Eugene R. Allspach --------------------------------- Name: Eugene R. Allspach Title: President and Chief Operating Officer [Signature Page to Second Amendment To Millennium Asset Contribution Agreement] 4 EXHIBIT A --------- Seven Year PCCL Claims The following Claims made by Equistar against Millennium shall be included as Seven Year PCCL Claims for an aggregate amount of $1,757,131: 1. Due diligence items from asset sale at Heath. 2. Old waste oil sump at Heath. 3. Due diligence items from asset sale at Crockett. 4. Pellet and powder controls at La Porte. 5. AB compressor controls at La Porte. 6. Self-closing gates at La Porte. 7. Quench tower relief project at La Porte. 8. AB2/AB3 compliance projects at La Porte. 9. Complex-wide emergency alarm and radio at La Porte. 10. S-1 feed alternative heat (Petro FBO modifications) at La Porte. 11. Plant alarm replacement at La Porte. 12. VOM emission controls and Ohio permits at Fairport Harbor. 5 EX-10.13(A) 5 dex1013a.txt 1ST AMDMT TO OCCIDENTAL ASSET CONTRIBUTION AGMT EXHIBIT 10.13 (a) FIRST AMENDMENT TO OCCIDENTAL ASSET CONTRIBUTION AGREEMENT ---------------------------------------------------------- This First Amendment to Occidental Asset Contribution Agreement (this "First Amendment"), dated as of September 30, 2001, is entered into by and among Occidental Petrochem Partner 1, Inc., a Delaware corporation, Occidental Petrochem Partner 2, Inc., a Delaware corporation, PDG Chemical Inc., a Delaware corporation, Occidental Petrochem Partner GP, Inc., a Delaware corporation ("New GP"; collectively, with the other preceding entities the "Oxy Partners"), and Equistar Chemicals, LP, a Delaware limited partnership (the "Partnership"). RECITALS: -------- A. Certain of the Oxy Partners and the Partnership were among the parties to that certain Agreement and Plan of Merger and Asset Contribution, dated as of May 15, 1998, (the "Asset Contribution Agreement"), together with Oxy Petrochemicals Inc., a Delaware corporation ("OPI"), also an affiliate of Occidental Petroleum Corporation ("Occidental"). Pursuant to the terms of the Asset Contribution Agreement, OPI merged into the Partnership on the Closing Date and ceased to exist thereafter. B. Concurrently with the execution and delivery of the Asset Contribution Agreement, certain affiliates of Occidental, Lyondell Chemical Company ("Lyondell") and Millennium Petrochemicals Inc. ("Millennium") entered into that certain Amended and Restated Partnership Agreement of Equistar Chemicals, LP dated May 15, 1998 (the "Partnership Agreement"). Subsequently, the partners of the Partnership agreed to enter into that certain First Amendment to Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP, dated as of June 30, 1998 (the "Amendment"), to the Partnership Agreement. Pursuant to the Amendment, Occidental effected a reorganization of its interests in the Partnership, including, among other things, a transfer of the remaining GP interest of PDG to New GP, which is a successor to PDG and any interest of PDG in and to the Partnership. C. Recently, the Oxy Partners and the Partnership (collectively, the "Parties" and each individually, a "Party") have agreed to certain amendments clarifying the treatment of, and procedures pertaining to the management of, certain claims that may arise under the Asset Contribution Agreement. Simultaneously, and as an integral part of the resolution of the matters referenced herein, (i) the Partnership and certain affiliates of Millennium have agreed to settle certain claims and make certain amendments pursuant to that certain Second Amendment to Millennium Asset Contribution Agreement dated as of September 30, 2001 (the "Millennium Second Amendment") and (ii) the Partnership and certain affiliates of Lyondell have agreed to settle certain claims and make certain amendments pursuant to that certain Second Amendment to Lyondell Asset Contribution Agreement dated as of September 30, 2001 (the "Lyondell Second Amendment"). D. Accordingly, the Parties desire to amend the Asset Contribution Agreement on the terms set forth herein. Capitalized terms used and not otherwise defined herein shall have the 1 meanings given such terms in the Asset Contribution Agreement. All section references in this First Amendment are intended to refer to provisions contained in the Asset Contribution Agreement. NOW THEREFORE, in consideration of the premises and of the mutual covenants of the Parties hereto, it is hereby agreed that the Asset Contribution Agreement is hereby amended as follows: Section 1. Assumption of Liabilities. ------------------------- (a) Section 2.5(a)(vi) is hereby amended and restated as follows: (vi) Third Party Claims (including De Minimis Claims) that are related to Pre-Closing Contingent Liabilities and that are first asserted seven years or more after the Closing Date. (b) The word "and" is hereby deleted from the end of Section 2.5(a)(x) and added to the end of Section 2.5(a)(xi). (c) A new Section 2.5(a)(xii) is hereby added as follows: (xii) Pre-Closing Contingent Liabilities that do not involve a Third Party Claim and De Minimis Claims first asserted against the Partnership (and not the Contributor) within seven years after the Closing Date. Section 2. Excluded Liabilities. Section 2.6(i) is hereby amended and -------------------- restated as follows: (i) Any Pre-Closing Contingent Liability that is not an Assumed Liability, including any De Minimis Claim that is first asserted against Contributor and the Partnership, jointly, within seven years after the Closing Date. Section 3. Lowest Cost Response. The definition of "Lowest Cost -------------------- Response" is hereby amended to delete the phrase "Chemical Substances" in the first sentence and replace it with the word "condition." Section 4. Effectiveness of this First Amendment. This First Amendment ------------------------------------- shall be effective from and after the date hereof, except as expressly provided with respect to certain disputes described in the Millennium Second Amendment; provided, however, that the execution and delivery of the Millennium Second Amendment and the Lyondell Second Amendment shall be conditions to the effectiveness of this First Amendment. Except as expressly amended by this First Amendment, all of the terms and provisions of the Asset Contribution Agreement shall remain in full force and effect among the Parties from and after the date hereof. 2 Section 5. Counterparts. This First Amendment may be executed in any ------------ number of counterparts, each of which shall be deemed an original and all of which together shall be deemed one and the same instrument. Section 6. APPLICABLE LAW. THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND -------------- CONTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE EXCLUDING CONFLICTS OF LAW PRINCIPLES OF SUCH JURISDICTION, EXCEPT TO THE EXTENT SUCH MATTERS ARE MANDATORILY SUBJECT TO THE LAWS OF ANOTHER JURISDICTION PURSUANT TO THE LAWS OF SUCH OTHER JURISDICTION. [Remainder of Page Intentionally Left Blank] 3 IN WITNESS WHEREOF, the Parties have executed and delivered this First Amendment as of the date first above written. OCCIDENTAL PETROCHEM PARTNER 1, INC., a Delaware corporation By: /s/ Linda S. Peterson --------------------------------------- Name: Linda S. Peterson Title: Vice President and Secretary OCCIDENTAL PETROCHEM PARTNER 2, INC., a Delaware corporation By: /s/ Linda S. Peterson --------------------------------------- Name: Linda S. Peterson Title: Vice President and Secretary OCCIDENTAL PETROCHEM PARTNER GP, INC., a Delaware corporation By: /s/ Linda S. Peterson --------------------------------------- Name: Linda S. Peterson Title: Vice President and Assistant Secretary PDG CHEMICAL INC., a Delaware corporation By: /s/ Linda S. Peterson --------------------------------------- Name: Linda S. Peterson Title: Vice President and Assistant Secretary 4 EQUISTAR CHEMICALS, LP, a Delaware limited partnership By: /s/ Eugene R. Allspach ------------------------------------------ Name: Eugene R. Allspach Title: President & Chief Operating Officer [Signature Page to First Amendment To Occidental Asset Contribution Agreement] 5 EX-99 6 dex99.txt CONSOLID FINAN STMTS (UNAUDITED) OF LYONDELL CHEM CO EXHIBIT 99 LYONDELL CHEMICAL COMPANY CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- -------------------------- MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA 2001 2000 2001 2000 - ------------------------------------------ ------ ------ ------ ------ SALES AND OTHER OPERATING REVENUES $ 750 $ 975 $2,509 $3,087 OPERATING COSTS AND EXPENSES: Cost of sales 633 793 2,149 2,514 Selling, general and administrative expenses 32 51 112 139 Research and development expense 8 6 24 27 Amortization of goodwill and other intangible assets 25 28 75 81 Unusual charges 78 - - 78 - - ----- ----- ------ ------ 776 878 2,438 2,761 ----- ----- ------ ------ Operating income (loss) (26) 97 71 326 Interest expense (95) (114) (292) (403) Interest income 4 10 15 39 Other income (expense), net (4) 14 (2) 8 Gain on sale of assets - - 46 - - 590 ----- ----- ------ ------ Income (loss) before equity investments, income taxes and extraordinary items (121) 53 (208) 560 ----- ----- ------ ------ INCOME (LOSS) FROM EQUITY INVESTMENTS: Equistar Chemicals, LP (24) 35 (48) 140 LYONDELL-CITGO Refining LP 48 42 116 48 Other (7) 6 (7) 11 ----- ----- ------ ------ 17 83 61 199 ----- ----- ------ ------ Income (loss) before income taxes and extraordinary items (104) 136 (147) 759 Provision for (benefit from) income taxes (37) 3 (50) 244 ----- ----- ------ ------ Income (loss) before extraordinary items (67) 133 (97) 515 Extraordinary loss on extinguishment of debt, net of income taxes - - - - - - (30) ----- ----- ------ ------ NET INCOME (LOSS) $ (67) $ 133 $ (97) $ 485 ===== ===== ====== ====== BASIC EARNINGS PER SHARE: Income (loss) before extraordinary items $(.57) $1.13 $ (.82) $ 4.38 ===== ===== ====== ====== Net income (loss) $(.57) $1.13 $ (.82) $ 4.13 ===== ===== ====== ====== DILUTED EARNINGS PER SHARE: Income (loss) before extraordinary items $(.57) $1.13 $ (.82) $ 4.37 ===== ===== ====== ====== Net income (loss) $(.57) $1.13 $ (.82) $ 4.12 ===== ===== ====== ======
See Notes to Consolidated Financial Statements. 1 LYONDELL CHEMICAL COMPANY CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, MILLIONS OF DOLLARS, EXCEPT PAR VALUE DATA 2001 2000 - ------------------------------------------ ------ ------ ASSETS Current assets: Cash and cash equivalents $ 222 $ 260 Accounts receivable, net 386 508 Inventories 368 392 Prepaid expenses and other current assets 96 49 Deferred tax assets 232 136 ------ ------ Total current assets 1,304 1,345 ------ ------ Property, plant and equipment, net 2,374 2,429 Investments and long-term receivables: Investment in PO joint ventures 690 621 Investment in Equistar Chemicals, LP 550 599 Receivable from LYONDELL-CITGO Refining LP 229 229 Investment in LYONDELL-CITGO Refining LP 33 20 Other investments and long-term receivables 123 137 Goodwill, net 1,115 1,152 Other assets 529 515 ------ ------ Total assets $6,947 $7,047 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 296 $ 401 Current maturities of long-term debt 10 10 Other accrued liabilities 398 323 ------ ------ Total current liabilities 704 734 ------ ------ Long-term debt, less current maturities 3,836 3,844 Other liabilities 498 441 Deferred income taxes 784 702 Commitments and contingencies Minority interest 170 181 Stockholders' equity: Preferred stock, $.01 par value, 80,000,000 shares authorized, none outstanding - - - - Common stock, $1.00 par value, 250,000,000 shares authorized, 120,250,000 shares issued 120 120 Additional paid-in capital 854 854 Retained earnings 328 504 Accumulated other comprehensive loss (272) (258) Treasury stock, at cost, 2,687,080 and 2,689,667 shares, respectively (75) (75) ------ ------ Total stockholders' equity 955 1,145 ------ ------ Total liabilities and stockholders' equity $6,947 $7,047 ====== ======
See Notes to Consolidated Financial Statements. 2 LYONDELL CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- MILLIONS OF DOLLARS 2001 2000 - ------------------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (97) $ 485 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gain on sale of assets - - (590) Depreciation and amortization 199 219 Deferred income taxes (15) 75 Unusual charges 78 - - Extraordinary items - - 30 Equity in loss of affiliated companies 55 - - Decrease (increase) in accounts receivable 127 (134) Decrease (increase) in inventories 22 (28) (Decrease) increase in accounts payable (101) 44 Net change in other working capital accounts (34) (2) Other, net (48) (62) ------- ------- Net cash provided by operating activities 186 37 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets, net of cash sold - - 2,445 Contributions and advances to affiliates (108) (28) Expenditures for property, plant and equipment (52) (78) Distributions from affiliates in excess of earnings 30 - - ------- ------- Net cash (used in) provided by investing activities (130) 2,339 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (8) (2,064) Dividends paid (79) (79) Other (7) (18) ------- ------- Net cash used in financing activities (94) (2,161) ------- ------- Effect of exchange rate changes on cash - - (6) ------- ------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (38) 209 Cash and cash equivalents at beginning of period 260 307 ------- ------- Cash and cash equivalents at end of period $ 222 $ 516 ======= =======
See Notes to Consolidated Financial Statements. 3 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PREPARATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments considered necessary for a fair presentation, have been included. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2000 included in the Lyondell Chemical Company ("Lyondell") 2000 Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Certain amounts from prior periods have been reclassified to conform to the current period presentation. 2. UNUSUAL CHARGES During the third quarter 2001, Lyondell recorded a charge of $78 million associated with its decision to exit the aliphatic diisocyanates ("ADI") business. The decision reflected the limited ongoing strategic value of the ADI business and its poor competitive position. The decision involves the shutdown of Lyondell's ADI manufacturing unit at the Lake Charles, Louisiana facility, which also produces toluene diisocyanate ("TDI"). The action includes a 20% reduction of the Lake Charles workforce, including all ADI positions and some TDI positions at the site as well as ADI-related research and sales positions at other locations. The $78 million charge included $51 million to adjust the carrying values of the ADI assets to their net realizable value, and accrued liabilities of $23 million for exit costs and $4 million for severance and other employee-related costs for nearly 100 employee positions that are being eliminated. Through September 30, 2001, there were no payments against the accrued liabilities. 3. GAIN ON SALE OF ASSETS On March 31, 2000, Lyondell completed the sale of the polyols business and ownership interests in its U.S. propylene oxide ("PO") manufacturing operations to Bayer AG and Bayer Corporation (collectively "Bayer") for approximately $2.45 billion. Lyondell recorded a pretax gain on the sale of $544 million during the first quarter 2000. In the third quarter 2000, the final settlement of working capital with Bayer and resolution of certain estimated liabilities resulted in the recording of an additional pretax gain on the sale of $46 million. As part of the asset sale, Lyondell accrued liabilities of $53 million for employee severance, relocation and other employee benefits, covering approximately 850 employees. The affected employees were generally terminated on or about April 1, 2000, with a limited number providing transition services through mid-2001. During the third quarter 2000, Lyondell reduced the accrued liability by $25 million due to a reduction in the number of affected employees and significantly lower than expected payments of severance and other benefits. Payments of $27 million for severance, relocation and other employee benefits were made through September 30, 2001. Lyondell expects to settle the remainder of the liability of less than $1 million by the end of 2001. 4 4. EQUITY INTEREST IN EQUISTAR CHEMICALS, LP Lyondell has a 41% joint venture ownership interest in Equistar Chemicals, LP ("Equistar"), while Millennium Chemicals Inc. ("Millennium") and Occidental Petroleum Corporation ("Occidental") each have a 29.5% joint venture ownership interest. As a partnership, Equistar is not subject to federal income taxes. Summarized financial information for Equistar follows:
SEPTEMBER 30, DECEMBER 31, MILLIONS OF DOLLARS 2001 2000 - ------------------- ------------- ------------ BALANCE SHEETS Total current assets $1,312 $1,332 Property, plant and equipment, net 3,731 3,819 Goodwill, net 1,061 1,086 Other assets 338 345 ------ ------ Total assets $6,442 $6,582 ====== ====== Current maturities of long-term debt $ 104 $ 90 Other current liabilities 597 653 Long-term debt, less current maturities 2,234 2,158 Other liabilities 150 141 Partners' capital 3,357 3,540 ------ ------ Total liabilities and partners' capital $6,442 $6,582 ====== ======
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------------- --------------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- STATEMENTS OF INCOME Sales and other operating revenues $1,351 $1,955 $4,724 $5,712 Cost of sales 1,328 1,779 4,573 5,111 Other operating costs and expenses 57 67 207 195 ------ ------ ------ ------ Operating income (loss) (34) 109 (56) 406 Interest expense, net (46) (45) (137) (134) Other income (expense), net 1 (1) 7 (1) ------ ------ ------ ------ Income (loss) before extraordinary item (79) 63 (186) 271 Extraordinary loss on extinguishment of debt (3) - - (3) - - ------ ------ ------ ------ Net income (loss) $ (82) $ 63 $ (189) $ 271 ====== ====== ====== ====== SELECTED CASH FLOW INFORMATION Depreciation and amortization $80 $78 $239 $230 Expenditures for property, plant and equipment 32 33 85 81
Lyondell's "Income (loss) from equity investments" in Equistar as presented in the consolidated statements of income consists of Lyondell's share of Equistar's net income (loss) plus the accretion of the difference between Lyondell's investment and its underlying equity in Equistar's net assets. 5 5. EQUITY INTEREST IN LYONDELL-CITGO REFINING LP Lyondell has a 58.75% participation interest in LYONDELL-CITGO Refining LP ("LCR"), while CITGO Petroleum Corporation ("CITGO") has a 41.25% participation interest. As a partnership, LCR is not subject to federal income taxes. Net income before depreciation expense for the period is allocated to the partners based upon participation interests. Depreciation expense is allocated to the partners based upon contributed assets. Summarized financial information for LCR follows:
SEPTEMBER 30, DECEMBER 31, MILLIONS OF DOLLARS 2001 2000 - ------------------- ------ ------ BALANCE SHEETS Total current assets $ 292 $ 310 Property, plant and equipment, net 1,321 1,319 Other assets 64 67 ------ ------ Total assets $1,677 $1,696 ====== ====== Notes payable $ - - $ 450 Other current liabilities 434 417 Long-term debt 450 - - Loans payable to partners 264 264 Other liabilities 62 57 Partners' capital 467 508 ------ ------ Total liabilities and partners' capital $1,677 $1,696 ====== ======
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------ -------------------------- 2001 2000 2001 2000 ------ ------ ------ ------ STATEMENTS OF INCOME Sales and other operating revenues $ 850 $1,177 $2,692 $2,937 Cost of sales 744 1,077 2,419 2,781 Selling, general and administrative expenses 16 18 44 46 ----- ------ ------ ------ Operating income 90 82 229 110 Interest expense, net (10) (16) (41) (44) ----- ------ ------ ------ Income before extraordinary item 80 66 188 66 Extraordinary loss on extinguishment of debt (2) - - (2) - - ----- ------ ------ ------ Net income $ 78 $ 66 $ 186 $ 66 ===== ====== ====== ====== SELECTED CASH FLOW INFORMATION Depreciation and amortization $ 26 $ 28 $ 81 $ 84 Expenditures for property, plant and equipment 30 11 59 46
6. EXTRAORDINARY ITEMS During the first and second quarters of 2000, Lyondell retired debt in the principal amount of $999 million and $1.05 billion, respectively, prior to maturity. During the first quarter 2000, unamortized debt issuance costs and amendment fees of $17 million, less a tax benefit of $6 million, were written off and reported as an extraordinary loss on extinguishment of debt. During the second quarter 2000, Lyondell wrote off $21 million of unamortized debt issuance costs and amendment fees and paid call premiums of $8 million. The total of $29 million, less a tax benefit of $10 million, was reported as an extraordinary loss on extinguishment of debt in the second quarter 2000. 6 7. INVENTORIES The components of inventories consisted of the following: SEPTEMBER 30, DECEMBER 31, MILLIONS OF DOLLARS 2001 2000 - ------------------- ------------- ------------ Finished goods $ 292 $ 301 Work-in-process 8 7 Raw materials 34 51 Materials and supplies 34 33 ----- ----- Total inventories $ 368 $ 392 ===== ===== 8. PROPERTY, PLANT AND EQUIPMENT, NET The components of property, plant and equipment, at cost, and the related accumulated depreciation consisted of the following: SEPTEMBER 30, DECEMBER 31, MILLIONS OF DOLLARS 2001 2000 - ------------------- ------ ------ Land $ 10 $ 10 Manufacturing facilities and equipment 2,593 2,580 Construction in progress 113 95 ------ ------ Total property, plant and equipment 2,716 2,685 Less accumulated depreciation 342 256 ------ ------ Property, plant and equipment, net $2,374 $2,429 ====== ====== 9. LONG-TERM DEBT In September 2001, Lyondell amended its credit facility making certain financial ratio requirements less restrictive. As a result of the September 2001 amendment, the margin used to calculate the variable interest rate increased by 0.50% per annum. Lyondell had previously obtained an amendment to the credit facility and the financial ratio requirements in March 2001. Long-term debt consisted of the following:
SEPTEMBER 30, DECEMBER 31, MILLIONS OF DOLLARS 2001 2000 - ------------------- ------------- ------------ Term Loan B $ 192 $ 193 Term Loan E 828 835 Senior Secured Notes, Series A due 2007, 9.625% 900 900 Senior Secured Notes, Series B due 2007, 9.875% 1,000 1,000 Senior Subordinated Notes due 2009, 10.875% 500 500 Debentures - due 2005, 9.375% 100 100 Debentures - due 2010, 10.25% 100 100 Debentures - due 2020, 9.8% 224 224 Other 2 2 ------ ------ Total long-term debt 3,846 3,854 Less current maturities 10 10 ------ ------ Long-term debt, net $3,836 $3,844 ====== ======
Lyondell's credit facility required Lyondell to issue $470 million of subordinated notes, or more junior securities, by June 2002. The requirement was eliminated in May 2001 as a result of Lyondell achieving a specified total debt to adjusted EBITDA ratio, as provided in the credit facility, as of December 31, 2000. 7 10. DERIVATIVE FINANCIAL INSTRUMENTS As of January 1, 2001, Lyondell adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. Under SFAS No. 133, all derivative instruments are recorded on the balance sheet at fair value. Currently, Lyondell uses only cash flow hedges. Gains or losses from changes in the fair value of the derivative used in a cash flow hedge are deferred in accumulated other comprehensive income, to the extent the hedge is effective, and subsequently reclassified to earnings to offset the impact of the forecasted transaction. Lyondell's Board of Directors has authorized Lyondell to enter into certain hedge transactions, but does not permit speculative positions. Lyondell formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking the hedge. This process includes specific identification of the hedging instrument and the hedge transaction, the nature of the risk being hedged and the method for assessing the hedging instrument's effectiveness. Both at the inception of the hedge and on an ongoing quarterly basis, Lyondell assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. During 2000, Lyondell entered into foreign currency forward contracts to hedge foreign exchange exposures related to euro-denominated capital commitments on the PO-11 construction project. At December 31, 2000, forward contracts in the notional amount of 134 million euros, or approximately $125 million, were outstanding. Based on quoted market prices, the fair market value of these derivative instruments at December 31, 2000 represented an asset of nearly $1 million. On January 1, 2001, in accordance with the transition provisions of SFAS No. 133, Lyondell recorded an after-tax gain of less than $1 million as a transition adjustment in accumulated other comprehensive income, representing the cumulative effect of an accounting change (see Note 12). During the second quarter 2001, Lyondell entered into additional foreign currency forward contracts in the notional amount of 86 million euros to hedge foreign exchange exposures related to euro-denominated capital commitments on the PO-11 construction project for the year 2002 (see Note 11). In addition, Lyondell entered into price swap contracts with Occidental Energy Marketing, Inc., a subsidiary of Occidental Petroleum Corporation, covering 37.8 million gallons of unleaded gasoline to hedge the cost of butane, a key raw material of MTBE. As of September 30, 2001, the notional amounts of outstanding foreign currency forward contracts, which mature from October 2001 through December 2002, totaled 136 million euros, or approximately $124 million at September 30, 2001 exchange rates. The contracts were recognized at their fair value on September 30, 2001, resulting in an unrealized pretax gain of $4 million, all of which was deemed effective and, therefore, a $3 million after tax gain was recognized in accumulated other comprehensive income. The $3 million gain recorded in accumulated other comprehensive income is expected to be reclassified from October 2001 through December 2002 and included in plant construction costs. As of September 30, 2001, price swap contracts covering 42 million gallons of unleaded gasoline, which mature from October 2001 through December 2001, were outstanding. The contracts were recognized at their fair value on September 30, 2001, resulting in an unrealized pretax gain of $4 million of which 90% was deemed effective and recognized in accumulated other comprehensive income. The ineffective portion, which was less than $1 million, was recorded as a component of cost of sales in the consolidated statements of income. The $2 million after-tax gain related to the effective portion of the $4 million pretax gain was recorded in accumulated other comprehensive income and is expected to be reclassified to the consolidated statements of income from October 2001 through December 2001. 8 The following table summarizes activity included in accumulated other comprehensive income ("AOCI") related to the after-tax impact of the effective portion of the fair value of derivative instruments for the three and nine months ended September 30, 2001:
FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, MILLIONS OF DOLLARS 2001 2001 - ------------------- --------------- ------------ Gain (loss): Balance at beginning of period $(4) $- - --- ---- January 1, 2001 transition adjustment, recognition of December 31, 2000 gain - - - - Unrealized gains on derivative instruments 8 3 Reclassification of realized losses on maturing derivative instruments: To plant construction cost 1 2 To earnings - - - - --- ---- Net change in AOCI for the period 9 5 --- ---- Unrealized gain on derivative instruments included in AOCI at September 30, 2001 $ 5 $ 5 === ====
11. COMMITMENTS AND CONTINGENCIES Bayer Claim--In June 2001, Bayer AG delivered a notice of claim to Lyondell in relation to its March 2000 purchase of Lyondell's polyols business, asserting various claims relating to alleged breaches of representations and warranties related to condition of the business and assets. The notice of claim seeks damages in excess of $100 million. Lyondell will vigorously contest the claims and does not expect the resolution of the claims to result in any material adverse effect on its business, financial condition, results of operations or liquidity. The agreement governing the transaction with Bayer provides a formal dispute resolution process, the final step of which would be binding arbitration in Houston, Texas. Capital Commitments--Lyondell has commitments, including those related to capital expenditures, all made in the normal course of business. At September 30, 2001, major capital commitments included Lyondell's 50% share of those related to the construction of a world-scale PO facility, known as PO-11, in The Netherlands and a major expansion of a TDI facility in France. Lyondell's outstanding commitments on these two projects totaled approximately $151 million as of September 30, 2001. Leases--During the third quarter 2000, construction began on a new butanediol ("BDO") facility in Europe known as BDO-2. Construction is being financed by a third party lessor. Upon completion in the second quarter of 2002, a subsidiary of Lyondell will lease the facility under an operating lease for a term of five years. Lyondell may, at its option, purchase the facility at any time up to the end of the lease term for an amount equal to the unrecovered construction costs of the lessor, as provided in the transaction documents. If Lyondell does not exercise the purchase option, the facility will be sold and Lyondell will pay the lessor a termination fee to the extent the sales price is less than the residual value of the facility, as provided in the transaction documents. The residual value at the end of the lease term is estimated at approximately 206 million euros, or $188 million using September 30, 2001 exchange rates. In the transaction documents for BDO-2, Lyondell agreed to comply with certain financial and other covenants that are substantially the same as those contained in the credit facility. A breach of those covenants could result in, among other things, Lyondell having to pay the project costs incurred to date. In September 2001 and March 2001, Lyondell amended the transaction documents consistent with the related amendments to its credit facility. See Note 9 for a discussion of the amendments to the credit facility. 9 TDI Agreements--In January 1995, ARCO Chemical Company ("ARCO Chemical") entered into a tolling agreement and a resale agreement with Rhodia covering the entire TDI output of Rhodia's two plants in France, which have a combined average annual capacity of approximately 264 million pounds. Lyondell is currently required to purchase an average minimum of 212 million pounds of TDI per year under the agreements. The aggregate purchase price is a combination based on plant cost and market price. In the second quarter 2000, Lyondell entered into a series of arrangements with Rhodia to expand the capacity at the Pont de Claix plant, which provides TDI to Lyondell under the tolling agreement. The expansion will add approximately 105 million pounds of average annual capacity at the Pont de Claix plant, resulting in a total average annual capacity of approximately 269 million pounds, which is scheduled to be available in December 2001. After the completion of the expansion, all of the TDI that Lyondell receives from Rhodia will come from the Pont de Claix plant, which is designed to have a more efficient cost structure. Lyondell's average minimum TDI purchase commitment under the revised tolling agreement will be 197 million pounds of TDI per year and will be extended through 2016. The resale agreement, covering output at the Lille plant, will expire December 31, 2001. Crude Supply Agreement--Under the Crude Supply Agreement, PDVSA Petroleo, S.A. ("PDVSA Oil"), an affiliate of CITGO and of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company of the Republic of Venezuela, is required to sell, and LCR is required to purchase, 230,000 barrels per day of extra heavy crude oil. This constitutes approximately 86% of the refinery's refining capacity of 268,000 barrels per day of crude oil. By letter dated April 16, 1998, PDVSA Oil informed LCR that the Venezuelan government, through the Ministry of Energy and Mines, had instructed that production of certain grades of crude oil be reduced. The letter stated that PDVSA Oil declared itself in a force majeure situation and that PDVSA Oil would reduce deliveries of crude oil. Such reductions in deliveries were purportedly based on announced OPEC production cuts. LCR began receiving reduced deliveries of crude oil from PDVSA Oil in August 1998, amounting to 195,000 barrels per day in that month. LCR was advised by PDVSA Oil in May 1999 of a further reduction in the deliveries of crude oil supplied under the Crude Supply Agreement to 184,000 barrels per day, effective May 1999. On several occasions since then, PDVSA Oil has further reduced crude oil deliveries, although it made payments under a different provision of the Crude Supply Agreement in partial compensation for such reductions. Subsequently, PDVSA Oil unilaterally increased deliveries of crude oil to LCR to 195,000 barrels per day effective April 2000, to 200,000 barrels per day effective July 2000 and to 230,000 barrels per day effective October 2000. By letter dated February 9, 2001, PDVSA Oil informed LCR that the Venezuelan government, through the Ministry of Energy and Mines, had instructed that production of certain grades of crude oil be reduced effective February 1, 2001. The letter stated that PDVSA Oil declared itself in a force majeure situation, but did not announce any reduction in crude oil deliveries to LCR. Although some reduction in crude oil delivery may be forthcoming, it is unclear as to the level of reduction, if any, which may be anticipated. LCR has consistently contested the validity of PDVSA Oil's and PDVSA's reductions in deliveries under the Crude Supply Agreement and, specifically, Lyondell, on behalf of LCR, has disputed the existence and validity of the purported force majeure situation declared by the February 9, 2001 letter. PDVSA has announced that it intends to renegotiate the Crude Supply Agreements that it has with all third parties, including LCR. However, they have confirmed that they expect to honor their commitments if a mutually acceptable restructuring of the Crude Supply Agreement is not achieved. The breach or termination of the Crude Supply Agreement would require LCR to purchase all or a portion of its crude oil feedstocks in the merchant market, would subject LCR to significant volatility and price fluctuations and could adversely affect LCR and, therefore, Lyondell. LCR Debt--On July 20, 2001, LCR obtained new credit facilities consisting of a $450 million term loan and a $70 million revolving credit facility, both of which mature in January 2003. These new facilities replaced similar facilities, which matured September 15, 2001, and will be used for working capital and general business purposes. 10 Cross Indemnity Agreement--In connection with the 1988 transfer of assets and liabilities to Lyondell from Atlantic Richfield Company ("ARCO"), now wholly owned by BP p.l.c., Lyondell agreed to assume certain liabilities arising out of the operation of Lyondell's integrated petrochemicals and refining business prior to July 1, 1988. In connection with the transfer of such liabilities, Lyondell and ARCO entered into an agreement, updated in 1997 ("Revised Cross- Indemnity Agreement"), whereby Lyondell agreed to defend and indemnify ARCO against certain uninsured claims and liabilities which ARCO may incur relating to the operation of Lyondell prior to July 1, 1988, including certain liabilities which may arise out of pending and future lawsuits. For current and future cases related to Lyondell's products and operations, ARCO and Lyondell bear a proportionate share of judgment and settlement costs according to a formula that allocates responsibility based upon years of ownership during the relevant time period. Under the Revised Cross-Indemnity Agreement, Lyondell will assume responsibility for its proportionate share of future costs for waste site matters not covered by ARCO insurance. In connection with the acquisition of ARCO Chemical, Lyondell succeeded, indirectly, to a cross indemnity agreement with ARCO whereby ARCO Chemical indemnified ARCO against certain claims or liabilities that ARCO may incur relating to ARCO's former ownership and operation of the businesses of ARCO Chemical, including liabilities under laws relating to the protection of the environment and the workplace, and liabilities arising out of certain litigation. As part of the agreement, ARCO indemnified ARCO Chemical with respect to claims or liabilities and other matters of litigation not related to the ARCO Chemical business. Indemnification Arrangements Relating to Equistar--Lyondell, Millennium Petrochemicals and certain subsidiaries of Occidental have each agreed to provide certain indemnifications to Equistar with respect to the petrochemicals and polymers businesses contributed by the partners. In addition, Equistar agreed to assume third party claims that are related to certain pre-closing contingent liabilities that are asserted prior to December 1, 2004 as to Lyondell and Millennium Petrochemicals, and May 15, 2005 as to certain Occidental subsidiaries, to the extent the aggregate thereof does not exceed $7 million to each partner, subject to certain terms of the respective asset contribution agreements. As of September 30, 2001, Equistar had incurred approximately $5 million under the $7 million indemnification basket with respect to the business contributed by Lyondell. Equistar also agreed to assume third party claims that are related to certain pre-closing contingent liabilities that are asserted for the first time after December 1, 2004 as to Lyondell and Millennium Petrochemicals, and for the first time after May 15, 2005 as to certain Occidental subsidiaries. As of September 30, 2001, Equistar, Lyondell, Millennium Petrochemicals and certain subsidiaries of Occidental amended the asset contribution agreements governing these indemnification obligations to clarify the treatment of, and procedures pertaining to the management of, certain claims arising under the asset contribution agreements. Lyondell believes that these amendments do not materially change the asset contribution agreements. Environmental--Lyondell's policy is to be in compliance with all applicable environmental laws. Lyondell 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. Lyondell cannot accurately predict future developments, such as increasingly strict environmental laws and inspection and enforcement policies, as well as higher compliance costs arising therefrom, which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. Lyondell is also subject to certain assessment and remedial actions at the LCR refinery under the Resource Conservation and Recovery Act ("RCRA"). In addition, Lyondell has negotiated an order with the Texas Natural Resource Conservation Commission ("TNRCC") for assessment and remediation of groundwater and soil contamination at the LCR refinery. Lyondell also has liabilities under RCRA and various state and foreign government regulations related to five current plant sites and three former plant sites. Lyondell is currently contributing funds to the clean up of two waste sites located near Houston, Texas under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), as amended, and the Superfund Amendments and Reauthorization Act of 1986. Lyondell has also been named, along with several other companies, as a potentially responsible party for a third CERCLA site near Houston, Texas. In addition, Lyondell is involved in administrative proceedings or lawsuits relating to a minimal number of other CERCLA sites. Lyondell estimates, based upon currently available information, that potential loss contingencies associated with the latter CERCLA sites, individually and in the aggregate, are not significant. 11 As of September 30, 2001, Lyondell's environmental liability for future assessment and remediation costs at the above-mentioned sites totaled $26 million. The liabilities per site range from less than $1 million to $12 million and are expected to be incurred over the next two to seven years. In the opinion of management, there is currently no material estimable range of loss in excess of the amount recorded for these sites. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in other CERCLA, RCRA, TNRCC or other comparable state or foreign law investigations, could require Lyondell to reassess its potential exposure related to environmental matters. The eight-county Houston/Galveston region has been designated a severe non- attainment area for ozone by the U.S. Environmental Protection Agency ("EPA"). As a result, the TNRCC has submitted a plan to the EPA to reach and demonstrate compliance with the ozone standard by November 2007. Ozone is a product of the reaction between volatile organic compounds ("VOCs") and nitrogen oxides ("NOx") in the presence of sunlight, and is a principal component of smog. The proposed plans for meeting the ozone standard focus on significant reductions in NOx emissions. NOx emission reduction controls must be installed at LCR's refinery and each of Lyondell's two facilities and Equistar's six facilities in the Houston/Galveston region during the next several years, well in advance of the 2007 deadline. Compliance with the provisions of the plan will result in increased capital investment during the next several years and higher annual operating costs for Equistar, Lyondell and LCR. Lyondell estimates that aggregate related capital expenditures could total between $400 million and $500 million for Lyondell, Equistar and LCR before the 2007 deadline. Lyondell's share of such expenditures could total between $65 million and $80 million, and Lyondell's proportionate share of Equistar's and LCR's expenditures could total between $160 million and $195 million. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. Lyondell has been actively involved with a number of organizations to help solve the ozone problem in the most cost-effective manner and, in January 2001, Lyondell and an organization composed of industry participants filed a lawsuit against the TNRCC to encourage adoption of their alternative plan to achieve the same air quality improvement with less negative economic impact on the region. In June 2001, the parties entered into a consent order with respect to the lawsuit. Pursuant to the consent order, the TNRCC agreed to review, by June 2002, the scientific data for ozone formation in the Houston/Galveston region. In October 2001, the EPA approved the TNRCC plan. However, if the TNRCC scientific review supports the industry group proposal, the TNRCC has agreed to revise the NOx emission reduction requirements set forth in its original plan. Any revisions will have to be approved by the EPA. Such revisions of the NOx emission reduction requirements would reduce the estimated capital investments required by Lyondell, Equistar and LCR to comply with the plans for meeting the ozone standard. In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as methyl tertiary butyl ether ("MTBE"), in gasoline sold in areas not meeting specified air quality standards. However, while studies by federal and state agencies and other organizations have shown that MTBE is safe for use in gasoline, is not carcinogenic and is effective in reducing automotive emissions, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern that MTBE may, in certain limited circumstances, affect the taste and odor of drinking water supplies, and thereby lead to possible public concerns. Certain federal and state governmental initiatives have sought either to rescind the oxygenate requirement for reformulated gasoline or to restrict or ban the use of MTBE. Such actions, to be effective, would require (i) a waiver of the state's oxygenate mandate, (ii) Congressional action in the form of an amendment to the Clean Air Act or (iii) replacement of MTBE with another oxygenate such as ethanol, a more costly, untested and less widely available additive. California has twice sought a waiver of its oxygenate mandate. California's request was denied by both the Clinton Administration and the Bush Administration. California is challenging the denial in court. At the federal level, a blue ribbon panel appointed by the EPA issued its report on July 27, 1999. That report recommended, among other things, reducing the use of MTBE in gasoline. During 2000, the EPA announced its intent to seek legislative changes from Congress to give the EPA authority to ban MTBE over a three-year period. Such action would only be granted through amendments to the Clean Air Act. Additionally, the EPA is seeking a ban of MTBE utilizing rulemaking authority contained in the Toxic Substance Control Act. It would take at least three years for such a rule to issue. In January 2001, however, senior policy analysts at the U.S. Department of Energy presented a study stating that banning MTBE would create significant economic risk. The study did not identify any benefits from banning MTBE. Additionally, in early 2001, after a thorough evaluation of MTBE 12 conducted in connection with proposed amendments to the 1998 European Council directive on gasoline and diesel fuel specifications, the European Union concluded that the use of MTBE in gasoline does not present a health risk to the community or a risk to the environment, and decided not to restrict the use of MTBE in the European Union. The EPA initiatives mentioned above or other governmental actions could result in a significant reduction in Lyondell's MTBE sales. Lyondell has developed technologies to convert tertiary butyl alcohol ("TBA") into alternate gasoline blending components should it be necessary to reduce MTBE production in the future. The Clean Air Act specified certain emissions standards for vehicles beginning in the 1994 model year and required the EPA to study whether further emissions reductions from vehicles were necessary starting no earlier than the 2004 model year. In 1998, the EPA concluded that more stringent vehicle emission standards were needed and that additional controls on gasoline and diesel were necessary to meet these emission standards. New standards for gasoline were finalized in 1999 and will require refiners to produce a low sulfur gasoline by 2004, with final compliance by 2006. A new "on-road" diesel standard was adopted in January 2001 and will require refiners to produce ultra low sulfur diesel by June 2006, with some allowance for a conditional phase-in period that could extend final compliance until 2009. Lyondell estimates that these standards will result in increased capital investment for LCR, totaling between $175 million to $225 million for the new gasoline standards and $250 million to $300 million for the new diesel standard, between now and the implementation dates. Lyondell's share of LCR's capital expenditures would be between $250 million and $300 million. In addition, these standards could result in higher operating costs for LCR. Equistar's olefins fuel business may also be impacted if these standards increase the cost for processing fuel components. General--Lyondell is involved in various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material adverse effect upon the financial position or liquidity of Lyondell. In the opinion of management, any liability arising from the matters discussed in this note is not expected to have a material adverse effect on the financial position or liquidity of Lyondell. 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 Lyondell'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. 13 12. STOCKHOLDERS' EQUITY Basic and Diluted Earnings Per Share--Basic earnings per share ("EPS") for income (loss) before extraordinary items for the periods presented are computed based upon the weighted average number of shares outstanding for the periods. Diluted earnings per share for income (loss) before extraordinary items include the effect of outstanding stock options issued under the 1999 Long-Term Incentive Plan and the Executive Long-Term Incentive Plan.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------- 2001 2000 -------------------------------- ------------------------------- THOUSANDS OF SHARES SHARES EPS SHARES EPS - ------------------- -------------- ------------ ------------- ------------- Basic 117,563 $(.57) 117,556 $1.13 Dilutive effect of options - - - - 165 - - ------- ----- ------- ----- Diluted 117,563 $(.57) 117,721 $1.13 ======= ===== ======= ===== FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------- 2001 2000 -------------------------------- ------------------------------- THOUSANDS OF SHARES SHARES EPS SHARES EPS - ------------------- -------------- ------------ ------------- ------------- Basic 117,563 $(.82) 117,556 $4.38 Dilutive effect of options - - - - 252 (.01) ------- ----- ------- ----- Diluted 117,563 $(.82) 117,808 $4.37 ======= ===== ======= =====
Comprehensive Income--Comprehensive income (loss) consisted of the following:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ---------------------------- MILLIONS OF DOLLARS 2001 2000 2001 2000 - ------------------- -------- -------- -------- -------- Net income (loss) $ (67) $ 133 $ (97) $ 485 ----- ----- ----- ----- Other comprehensive income (loss): Unrealized gains on derivative instruments 9 - - 5 - - Foreign currency translation gain (loss) 79 (97) (19) (236) ----- ----- ----- ----- Total other comprehensive income (loss) 88 (97) (14) (236) ----- ----- ----- ----- Comprehensive income (loss) $ 21 $ 36 $(111) $ 249 ===== ===== ===== =====
14 13. SEGMENT AND RELATED INFORMATION Lyondell has four reportable segments in which it operates: (i) intermediate chemicals and derivatives; (ii) petrochemicals; (iii) polymers; and (iv) refining. Lyondell's methanol business is not a reportable segment and is included in "Other" below. Summarized financial information concerning reportable segments is shown in the following table:
INTERMEDIATE CHEMICALS AND MILLIONS OF DOLLARS DERIVATIVES PETROCHEMICALS POLYMERS REFINING OTHER TOTAL - ------------------- ------------- -------------- --------- -------- ------ -------- FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001: Sales and other operating revenues $ 750 $ - - $ - - $ - - $ - - $ 750 Operating income (loss) (26) (26) Interest expense (95) (95) Interest income 4 4 Other expense, net (4) (4) Income (loss) from equity investments (1) 12 (11) 48 (31) 17 Income (loss) before income taxes and extraordinary items (104) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000: Sales and other operating revenues $ 975 $ - - $ - - $ - - $ - - $ 975 Operating income 97 97 Interest expense (114) (114) Interest income 10 10 Other income, net 14 14 Gain on sale of assets 46 46 Income (loss) from equity investments 2 84 (19) 42 (26) 83 Income before income taxes and extraordinary items 136 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001: Sales and other operating revenues $2,509 $ - - $ - - $ - - $ - - $2,509 Operating income 71 71 Interest expense (292) (292) Interest income 15 15 Other expense, net (2) (2) Income (loss) from equity investments - - 92 (57) 116 (90) 61 Income (loss) before income taxes and extraordinary items (147) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000: Sales and other operating revenues $3,087 $ - - $ - - $ - - $ - - $3,087 Operating income 326 326 Interest expense (403) (403) Interest income 39 39 Other income, net 8 8 Gain on sale of assets 590 590 Income (loss) from equity investments 8 264 (41) 48 (80) 199 Income before income taxes and extraordinary items 759
15 The following table presents the details of "Income (loss) from equity investments" as presented above in the "Other" column for the periods indicated:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- MILLIONS OF DOLLARS 2001 2000 2001 2000 - ------------------- ------ ------ ------ ------ Equistar items not allocated to petrochemicals and polymers: Principally general and administrative expenses and interest expense, net $ (25) $ (30) $ (74) $ (83) Unusual charges - Port Arthur shutdown - - - - (9) - - Income (loss) from equity investment in Lyondell Methanol Company, L.P. (6) 4 (7) 3 ----- ----- ----- ----- Total--Other $ (31) $ (26) $ (90) $ (80) ===== ===== ===== =====
14. PURCHASE OF ARCO CHEMICAL COMPANY In connection with the July 28, 1998 acquisition of ARCO Chemical, Lyondell accrued liabilities for costs associated with the delay of construction of the PO-11 plant, vesting of certain key manager benefits pursuant to a change of control provision, severance costs for the involuntary termination of certain headquarters employees and relocation costs for moving personnel to Lyondell's Houston headquarters. The total accrued liability for these items was approximately $255 million at the date of acquisition. Lyondell subsequently revised the portion of the estimated liabilities for penalties and cancellation charges related to the PO-11 lump-sum construction contract and related commitments. Based on the final negotiated terms, Lyondell reduced the accrued liability by $13 million in 1999 and by $8 million in 2000. In addition, during 2000 Lyondell finalized the portion of the accrued liability related to employee costs and reduced the liability by $10 million. The benefit in 2000 from the accrual reversal was substantially offset by other acquisition-related costs. Through September 30, 2001, Lyondell had paid and charged approximately $214 million against the accrued liability. The remaining $10 million of the accrued liability relates to PO-11 commitments and will be paid periodically through the first quarter 2003. 15. SUPPLEMENTAL GUARANTOR INFORMATION ARCO Chemical Technology Inc. ("ACTI"), ARCO Chemical Technology L.P. ("ACTLP") and Lyondell Chemical Nederland, Ltd. ("LCNL") are guarantors (collectively "Guarantors") of the $500 million senior subordinated notes and $1.9 billion senior secured notes issued by Lyondell in May 1999. LCNL, a Delaware corporation, is a wholly owned subsidiary of Lyondell that operates, through wholly owned foreign subsidiaries, a chemical production facility in Rotterdam, The Netherlands. ACTI is a Delaware corporation, which holds the investment in ACTLP. ACTLP is a Delaware limited partnership, which holds and licenses technology to other Lyondell affiliates and to third parties. Separate financial statements of the Guarantors are not considered to be material to the holders of the senior subordinated notes and senior secured notes. The following condensed consolidating financial information present supplemental information for the Guarantors as of September 30, 2001 and December 31, 2000 and for the three and nine months ended September 30, 2001 and 2000. 16 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) BALANCE SHEET AS OF SEPTEMBER 30, 2001
NON- CONSOLIDATED MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL - ------------------- -------- ---------- ---------- ------------ ------------ Total current assets $1,071 $ 233 $ - - $ - - $1,304 Property, plant and equipment, net 1,832 542 - - - - 2,374 Investments and long-term receivables 3,863 422 882 (3,542) 1,625 Goodwill, net 714 401 - - - - 1,115 Other assets 462 67 - - - - 529 ------ ------- ---- ------- ------ Total assets $7,942 $ 1,665 $882 $(3,542) $6,947 ====== ======= ==== ======= ====== Current maturities of long-term debt $ 10 $ - - $- - $ - - $ 10 Other current liabilities 454 241 (1) - - 694 Long-term debt, less current maturities 3,836 - - - - - - 3,836 Other liabilities 441 57 - - - - 498 Deferred income taxes 650 134 - - - - 784 Intercompany liabilities (assets) 1,426 (1,363) (63) - - - - Minority interest 170 - - - - - - 170 Stockholders' equity 955 2,596 946 (3,542) 955 ------ ------- ---- ------- ------ Total liabilities and stockholders' equity $7,942 $ 1,665 $882 $(3,542) $6,947 ====== ======= ==== ======= ======
BALANCE SHEET AS OF DECEMBER 31, 2000
NON- CONSOLIDATED MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL - ------------------- -------- ---------- ---------- ------------ ------------ Total current assets $1,103 $ 242 $ - - $ - - $1,345 Property, plant and equipment, net 1,863 566 - - - - 2,429 Investments and long-term receivables 3,644 413 920 (3,371) 1,606 Goodwill, net 738 414 - - - - 1,152 Other assets 450 61 - - 4 515 ------ ------- ---- ------- ------ Total assets $7,798 $ 1,696 $920 $(3,367) $7,047 ====== ======= ==== ======= ====== Current maturities of long-term debt $ 10 $ - - $- - $ - - $ 10 Other current liabilities 501 223 - - - - 724 Long-term debt, less current maturities 3,844 - - - - - - 3,844 Other liabilities 382 59 - - - - 441 Deferred income taxes 562 140 - - - - 702 Intercompany liabilities (assets) 1,173 (1,245) 68 4 - - Minority interest 181 - - - - - - 181 Stockholders' equity 1,145 2,519 852 (3,371) 1,145 ------ ------- ---- ------- ------ Total liabilities and stockholders' equity $7,798 $ 1,696 $920 $(3,367) $7,047 ====== ======= ==== ======= ======
17 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED) STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
NON- CONSOLIDATED MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL - ------------------- -------- ---------- ---------- ------------ ------------ Sales and other operating revenues $612 $195 $ - - $(57) $750 Cost of sales 558 132 - - (57) 633 Selling, general and administrative expenses 30 2 - - - - 32 Research and development expense 8 - - - - - - 8 Amortization of goodwill and other intangible assets 20 5 - - - - 25 Unusual charges 78 - - - - - - 78 ---- ---- ---- ---- ---- Operating income (loss) (82) 56 - - - - (26) Interest income (expense), net (94) 1 2 - - (91) Other income (expense), net (21) 17 - - - - (4) Income (loss) from equity investments 68 (1) 19 (69) 17 Intercompany income (expense) (15) 18 (2) (1) - - Provision for (benefit from) income taxes (51) 33 8 (27) (37) ---- ---- ---- ---- ---- Net income (loss) $(93) $ 58 $ 11 $(43) $(67) ==== ==== ==== ==== ====
STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
NON- CONSOLIDATED MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL - ------------------- -------- ---------- ---------- ------------ ------------ Sales and other operating revenues $ 812 $232 $ - - $ (69) $ 975 Cost of sales 699 163 - - (69) 793 Selling, general and administrative expenses 50 2 (1) - - 51 Research and development expense 6 - - - - - - 6 Amortization of goodwill and other intangible assets 21 7 - - - - 28 ----- ---- ----- ----- ----- Operating income 36 60 1 - - 97 Interest income (expense), net (108) 1 3 - - (104) Other income (expense), net 37 (23) - - - - 14 Gain on sale of assets 46 - - - - - - 46 Income from equity investments 118 - - 81 (116) 83 Intercompany income (expense) (21) 27 (4) (2) - - Provision for income taxes (1) 11 19 (26) 3 ----- ---- ----- ----- ----- Net income $ 109 $ 54 $ 62 $ (92) $ 133 ===== ==== ===== ===== =====
18 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED) STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
NON- CONSOLIDATED MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL - ------------------- -------- ---------- ---------- ------------ ------------ Sales and other operating revenues $2,104 $633 $ - - $(228) $2,509 Cost of sales 1,959 418 - - (228) 2,149 Selling, general and administrative expenses 103 9 - - - - 112 Research and development expense 24 - - - - - - 24 Amortization of goodwill and other intangible assets 61 14 - - - - 75 Unusual charges 78 - - - - - - 78 ------ ---- ----- ----- ------ Operating income (loss) (121) 192 - - - - 71 Interest income (expense), net (288) 2 9 - - (277) Other income (expense), net 86 (88) - - - - (2) Income (loss) from equity investments 152 (1) 61 (151) 61 Intercompany income (expense) (53) 62 (8) (1) - - Provision for (benefit from) income taxes (76) 57 21 (52) (50) ------ ---- ----- ----- ------ Net income (loss) $ (148) $110 $ 41 $(100) $ (97) ====== ==== ===== ===== ======
STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
NON- CONSOLIDATED MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL - ------------------- -------- ---------- ---------- ------------ ------------ Sales and other operating revenues $2,645 $ 701 $ - - $(259) $3,087 Cost of sales 2,252 521 - - (259) 2,514 Selling, general and administrative expenses 134 5 - - - - 139 Research and development expense 27 - - - - - - 27 Amortization of goodwill and other intangible assets 59 22 - - - - 81 ------ ----- ---- ----- ------ Operating income 173 153 - - - - 326 Interest income (expense), net (376) 1 11 - - (364) Other income (expense), net 110 (102) - - - - 8 Gain on sale of assets 599 (9) - - - - 590 Income from equity investments 271 - - 191 (263) 199 Intercompany income (expense) (140) 153 (11) (2) - - Provision for income taxes 204 62 62 (84) 244 ------ ----- ---- ----- ------ Income before extraordinary item 433 134 129 (181) 515 Extraordinary item, net of taxes (30) - - - - - - (30) ------ ----- ---- ----- ------ Net income $ 403 $ 134 $129 $(181) $ 485 ====== ===== ==== ===== ======
19 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED) STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
NON- CONSOLIDATED MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL - ------------------- -------- ---------- ---------- ------------ ------------ Net income (loss) $(148) $110 $ 41 $(100) $ (97) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 166 33 - - - - 199 Unusual charges 78 - - - - - - 78 Net changes in working capital and other (23) (70) (1) 100 6 ----- ---- ---- ----- ----- Net cash provided by operating activities 73 73 40 - - 186 ----- ---- ---- ----- ----- Contributions and advances to affiliates 38 (71) (75) - - (108) Expenditures for property, plant and equipment (46) (6) - - - - (52) Distributions from affiliates in excess of earnings (5) - - 35 - - 30 ----- ---- ---- ----- ----- Net cash used in investing activities (13) (77) (40) - - (130) ----- ---- ---- ----- ----- Repayments of long-term debt (8) - - - - - - (8) Dividends paid (79) - - - - - - (79) Other (7) - - - - - - (7) ----- ---- ---- ----- ----- Net cash used in financing activities (94) - - - - - - (94) ----- ---- ---- ----- ----- Effect of exchange rate changes on cash (4) 4 - - - - - - ----- ---- ---- ----- ----- Decrease in cash and cash equivalents $ (38) $- - $- - $ - - $ (38) ===== ==== ==== ===== =====
20 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED) STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
NON- CONSOLIDATED MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL - ------------------- -------- ---------- ---------- ------------ ------------ Net income $ 403 $ 134 $ 129 $(181) $ 485 Adjustments to reconcile net income to net cash provided by (used in) operating activities: (Gain) loss on sale of assets (599) 9 - - - - (590) Depreciation and amortization 175 44 - - - - 219 Extraordinary item 30 - - - - - - 30 Net changes in working capital and other 193 (372) (109) 181 (107) ------- ----- ----- ----- ------- Net cash provided by (used in) operating activities 202 (185) 20 - - 37 ------- ----- ----- ----- ------- Proceeds from sale of assets, net of cash sold 2,281 164 - - - - 2,445 Contributions and advances to affiliates 3 (11) (20) - - (28) Expenditures for property, plant and equipment (59) (19) - - - - (78) ------- ----- ----- ----- ------- Net cash provided by investing activities 2,225 134 (20) - - 2,339 ------- ----- ----- ----- ------- Repayments of long-term debt (2,064) - - - - - - (2,064) Dividends paid (79) - - - - - - (79) Other (18) - - - - - - (18) ------- ----- ----- ----- ------- Net cash used in financing activities (2,161) - - - - - - (2,161) ------- ----- ----- ----- ------- Effect of exchange rate changes on cash (51) 45 - - - - (6) ------- ----- ----- ----- ------- Increase (decrease) in cash and cash equivalents $ 215 $ (6) $ - - $ - - $ 209 ======= ===== ===== ===== =======
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