-----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, Cf/cpgxmN3mHtYnNTyy/C6cNED6OGgph6skk5Lf5l1xk3r++Nzcj3VMvJvW2o46M F4PHwQGbhEQl4dmZtrM6DA== 0000899243-02-001579.txt : 20020514 0000899243-02-001579.hdr.sgml : 20020514 ACCESSION NUMBER: 0000899243-02-001579 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020514 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: 02647322 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 FOR THE PERIOD 3/31/2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission file number 333-76473 EQUISTAR CHEMICALS, LP (Exact name of registrant as specified in its charter) Delaware 76-0550481 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1221 McKinney Street, 77010 Suite 700, Houston, Texas (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (713) 652-7200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No [ ] PART I. FINANCIAL INFORMATION EQUISTAR CHEMICALS, LP ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME For the three months ended March 31, --------------------------- Millions of dollars 2002 2001 - ------------------- ------- ------- Sales and other operating revenues: Unrelated parties $ 895 $ 1,313 Related parties 241 460 ------- ------- 1,136 1,773 ------- ------- Operating costs and expenses: Cost of sales 1,162 1,723 Selling, general and administrative expenses 40 46 Research and development expense 9 10 Amortization of goodwill -- 8 Unusual charges -- 22 ------- ------- 1,211 1,809 ------- ------- Operating loss (75) (36) Interest expense (52) (46) Other income, net 1 5 ------- ------- Loss before cumulative effect of accounting change (126) (77) Cumulative effect of accounting change (1,053) -- ------- ------- Net loss $(1,179) $ (77) ======= ======= See Notes to Consolidated Financial Statements. 1 EQUISTAR CHEMICALS, LP CONSOLIDATED BALANCE SHEETS March 31, December 31, Millions of dollars 2002 2001 - ------------------- --------- ------------ ASSETS Current assets: Cash and cash equivalents $ 15 $ 202 Accounts receivable: Trade, net 458 440 Related parties 122 100 Inventories 421 448 Prepaid expenses and other current assets 31 36 ------- ------- Total current assets 1,047 1,226 Property, plant and equipment, net 3,660 3,705 Investment in PD Glycol 47 47 Goodwill, net -- 1,053 Other assets, net 294 277 ------- ------- Total assets $ 5,048 $ 6,308 ======= ======= LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable: Trade $ 368 $ 331 Related parties 44 29 Current maturities of long-term debt 4 104 Other accrued liabilities 111 197 ------- ------- Total current liabilities 527 661 Long-term debt 2,282 2,233 Other liabilities 181 177 Commitments and contingencies Partners' capital: Partners' accounts 2,078 3,257 Accumulated other comprehensive loss (20) (20) ------- ------- Total partners' capital 2,058 3,237 ------- ------- Total liabilities and partners' capital $ 5,048 $ 6,308 ======= ======= See Notes to Consolidated Financial Statements. 2 EQUISTAR CHEMICALS, LP CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, --------------------------- Millions of dollars 2002 2001 - ------------------- ------ ------ Cash flows from operating activities: Net loss $(1,179) $ (77) Adjustments to reconcile net loss to cash used in operating activities: Cumulative effect of accounting change 1,053 -- Depreciation and amortization 75 78 Net gain on disposition of assets -- (3) Changes in assets and liabilities that provided (used) cash: Accounts receivable (40) 47 Inventories 27 (74) Accounts payable 52 (35) Other assets and liabilities (107) (90) ------- ------- Cash used in operating activities (119) (154) ------- ------- Cash flows from investing activities: Expenditures for property, plant and equipment (15) (24) Proceeds from sales of assets -- 3 ------- ------- Cash used in investing activities (15) (21) ------- ------- Cash flows from financing activities: Net borrowing under lines of credit 50 166 Repayment of long-term debt (101) -- Payment of debt issuance costs (2) -- ------- ------- Cash provided by (used in) financing activities (53) 166 ------- ------- Decrease in cash and cash equivalents (187) (9) Cash and cash equivalents at beginning of period 202 18 ------- ------- Cash and cash equivalents at end of period $ 15 $ 9 ======= =======
See Notes to Consolidated Financial Statements. 3 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Preparation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments considered necessary for a fair presentation, have been included. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2001 included in the Equistar Chemicals, LP ("Equistar" or "Partnership") 2001 Annual Report on Form 10-K. 2. Company Ownership Equistar is a Delaware limited partnership, which commenced operations on December 1, 1997. Equistar is owned 41% by Lyondell Chemical Company ("Lyondell"), 29.5% by Millennium Chemicals Inc. ("Millennium"), and 29.5% by Occidental Petroleum Corporation ("Occidental"). Early in 2002, Lyondell and Occidental agreed in principle to Lyondell's acquisition of Occidental's 29.5% share of Equistar and Occidental's purchase of an equity interest in Lyondell. Upon completion of these transactions, Lyondell's ownership interest in Equistar would increase to 70.5%. There can be no assurance that the proposed transactions will be completed. 3. Unusual Charges Equistar shut down its Port Arthur, Texas polyethylene facility in February 2001. The asset values of the Port Arthur production units were previously adjusted as part of a $96 million restructuring charge recognized in 1999. During the first quarter 2001, Equistar recorded an additional $22 million charge, which included environmental remediation liabilities of $7 million (see Note 10), severance benefits of $5 million, pension benefits of $2 million, and other exit costs of $3 million. The severance and pension benefits covered approximately 125 people employed at the Port Arthur facility. The remaining $5 million of the charge related primarily to the write down of certain assets. Payments of $4 million for severance, $3 million for exit costs and $2 million for environmental remediation were made through March 31, 2002. The pension benefits of $2 million will be paid from the assets of the pension plans. As of March 31, 2002, the remaining liability included $5 million for environmental remediation costs and $1 million for severance benefits. 4. Accounting Changes Effective January 1, 2002, Equistar implemented Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Implementation of SFAS No. 141 and SFAS No. 144 did not have a material effect on the consolidated financial statements of Equistar. Upon implementation of SFAS No. 142, Equistar reviewed goodwill for impairment and concluded that the entire balance of goodwill was impaired, resulting in a $1.1 billion charge that was reported as the cumulative effect of an accounting change as of January 1, 2002. The conclusion was based on a comparison to Equistar's indicated fair value, using multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) for comparable companies as the indicator of fair value. 4 In addition, as a result of implementing SFAS No. 142, earnings in 2002 and subsequent years will be favorably affected by $33 million annually because of the elimination of goodwill amortization. The following table presents Equistar's loss before cumulative effect of accounting change and net loss for all periods presented as adjusted for goodwill amortization expense.
For the three months ended March 31, -------------------------------- Millions of dollars 2002 2001 - ------------------- -------------- --------------- Reported loss before cumulative effect of accounting change $ (126) $ (77) Add back: Goodwill amortization -- 8 ------- ------- Adjusted loss before cumulative effect of accounting change $ (126) $ (69) ======= ======= Reported net loss $(1,179) $ (77) Add back: Goodwill amortization -- 8 ------- ------- Adjusted net loss $(1,179) $ (69) ======= =======
5. Inventories Inventories consisted of the following at: March 31, December 31, Millions of dollars 2002 2001 - ------------------- --------- ------------ Finished goods $220 $243 Work-in-process 11 12 Raw materials 104 104 Materials and supplies 86 89 ---- ---- Total inventories $421 $448 ==== ==== 6. Property, Plant and Equipment, Net The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows at: March 31, December 31, Millions of dollars 2002 2001 - ------------------- ------ ------ Land $ 79 $ 79 Manufacturing facilities and equipment 5,956 5,929 Construction in progress 80 92 ------ ------ Total property, plant and equipment 6,115 6,100 Less accumulated depreciation 2,455 2,395 ------ ------ Property, plant and equipment, net $3,660 $3,705 ====== ====== Depreciation and amortization is summarized as follows for the periods presented: March 31, March 31, Millions of dollars 2002 2001 - ------------------- --------- --------- Property, plant and equipment $60 $59 Goodwill -- 8 Turnaround expense 7 6 Software costs 4 3 Debt issuance costs 2 -- Other 2 2 --- --- $75 $78 === === 5 7. Long-Term Debt In late March 2002, Equistar amended its $800 million credit facility making certain financial ratio requirements less restrictive (see also Note 8). As a result of the amendment, the interest rate on the credit facility was increased by 0.5% per annum. If certain financial ratios are met, the interest rate will only increase by 0.25% per annum. Long-term debt consisted of the following at: March 31, December 31, Millions of dollars 2002 2001 - ------------------- ------ ------ Bank credit facility: Revolving credit facility due 2006 $ 50 $ -- Term loan due 2007 298 299 Other debt obligations: Medium-term notes due 2002-2005 31 31 9.125% Notes due 2002 -- 100 8.50% Notes due 2004 300 300 6.50% Notes due 2006 150 150 10.125% Senior Notes due 2008 700 700 8.75% Notes due 2009 599 598 7.55% Debentures due 2026 150 150 Other 8 9 ------ ------ Total long-term debt 2,286 2,337 Less current maturities 4 104 ------ ------ Total long-term debt, net $2,282 $2,233 ====== ====== Lyondell remains a guarantor of $300 million of Equistar debt and a co-obligor with Equistar for $31 million of debt. The consolidated financial statements (unaudited) of Lyondell are filed as an exhibit to Equistar's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002. 8. Lease Commitments Equistar leases railcars, under operating leases, from unaffiliated entities established for the purpose of serving as lessors with respect to these leases. The leases include options for Equistar to purchase the railcars covered by the leases during a lease term. If Equistar does not exercise a purchase option, the affected railcars will be sold upon termination of the lease. In the event the sales proceeds are less than the lessor's unrecovered investment, Equistar will pay the difference to the lessor, but no more than the guaranteed residual value. The total guaranteed residual value under these leases was approximately $208 million at March 31, 2002. One of the railcar leases with a guaranteed residual value of $35 million terminates in December 2002. Equistar has not decided whether to exercise the purchase option under this lease, but does not currently anticipate payment of a material amount under the residual value guarantee provisions. Early in 2002, Equistar's credit rating was lowered by two major rating agencies. The credit rating downgrade permitted the early termination of one of Equistar's railcar leases by the lessor, which could have accelerated the payment of $126 million of minimum lease payments. Equistar renegotiated the lease during the first quarter 2002, resulting in a payment of additional fees and a prepayment of basic rent of $17 million, which reduced the guaranteed residual value to $87 million and which will be fully offset by a corresponding reduction in future cash lease payments. Certain of Equistar's railcar operating leases contain financial and other covenants that are substantially the same as those contained in the $800 million credit facility. A breach of these covenants could permit the early termination of these railcar leases by the lessors. Under one of the leases, the covenants were automatically updated with the March 2002 amendment to the credit facility (see Note 7). Equistar also amended the covenants under the remaining railcar lease to incorporate the March 2002 amendment to the $800 million credit facility. The amendment, which was completed in the second quarter 2002, required the payment of additional fees and a 6 payment of $16 million, which reduced the guaranteed residual value to $70 million. The $16 million payment will be partially offset by a corresponding reduction in future lease payments. In addition, the lessor has the option to terminate the lease under certain circumstances by December 31, 2002. 9. Derivative Financial Instruments The following table summarizes activity included in accumulated other comprehensive loss related to derivative financial instruments used as cash flow hedges for the three-month periods ended March 31: Millions of dollars 2002 2001 - ------------------- ------ ------ Gain (loss): Beginning balance $ -- $ -- January 1, 2001 transition adjustment - Reclassification of December 31, 2000 deferred loss -- (13) Net gains on derivative instruments -- 10 Reclassification of net losses on derivative instruments to earnings -- 1 ----- ---- Loss on derivative instruments at March 31 $ -- $ (2) ===== ==== The transition adjustment represents the cumulative effect of an accounting change, resulting from the adoption of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as of January 1, 2001. 10. Commitments and Contingencies Indemnification Arrangements--Lyondell, Millennium Petrochemicals and certain subsidiaries of Occidental have each agreed to provide certain indemnifications to Equistar with respect to the petrochemicals and polymers businesses contributed by the partners. In addition, Equistar agreed to assume third party claims that are related to certain pre-closing contingent liabilities that are asserted prior to December 1, 2004 as to Lyondell and Millennium Petrochemicals, and May 15, 2005 as to certain Occidental subsidiaries, to the extent the aggregate thereof does not exceed $7 million to each partner, subject to certain terms of the respective asset contribution agreements. As of March 31, 2002, Equistar had incurred a total of $19 million for these uninsured claims and liabilities. Equistar also agreed to assume third party claims that are related to certain pre-closing contingent liabilities that are asserted for the first time after December 1, 2004 as to Lyondell and Millennium Petrochemicals, and for the first time after May 15, 2005 as to certain Occidental subsidiaries. Environmental Remediation--Equistar's accrued liability for environmental matters as of March 31, 2002 was $5 million and primarily related to the Port Arthur facility, which was permanently shut down on February 28, 2001. In the opinion of management, there is currently no material estimable range of loss in excess of the amounts recorded for environmental remediation. Clean Air Act--The eight-county Houston/Galveston region has been designated a severe non-attainment area for ozone by the U.S. Environmental Protection Agency ("EPA"). Emission reduction controls for nitrogen oxides ("NOx") must be installed at each of Equistar's six plants located in the Houston/Galveston region during the next several years. Compliance with the plan will result in increased capital investment, which could be between $200 million and $260 million, before the 2007 deadline, as well as higher annual operating costs for Equistar. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. In January 2001, Equistar and an organization composed of industry participants filed a lawsuit against the Texas Natural Resource Conservation Commission ("TNRCC") to encourage adoption of their alternative plan to achieve the same air quality improvement with less negative economic impact on the region. Adoption of the alternative plan, as sought by the lawsuit, is expected to reduce Equistar's estimated capital investments for NOx reductions required to comply with the standards. However, there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. 7 In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. The presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain federal and state governmental initiatives in the U.S. have sought either to rescind the oxygenate requirement for reformulated gasoline or to restrict or ban the use of MTBE. On April 25, 2002, the U.S. Senate passed its version of an omnibus energy bill, which, among other things, would ban the use of MTBE as a fuel oxygenate. The Senate bill is not law and needs to be reconciled with the U.S. House of Representatives' omnibus energy bill, which was passed in July 2001. Equistar's MTBE sales represented approximately 4% of its total 2001 revenues. Equistar does not expect these initiatives to have a significant impact on MTBE margins and volumes in 2002. Should it become necessary to reduce MTBE production, Equistar would need to make capital expenditures to convert its MTBE plants to production of alternate gasoline blending components. The profit margins on such alternate gasoline blending components could differ from those historically realized on MTBE. General--Equistar is involved in various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material adverse effect on the financial position, liquidity or results of operations of Equistar. In the opinion of management, any liability arising from the matters discussed in this note is not expected to have a material adverse effect on the financial position or liquidity of Equistar. However, the adverse resolution in any reporting period of one or more of the matters discussed in this note could have a material impact on Equistar's results of operations for that period without giving effect to contribution or indemnification obligations of co-defendants or others, or to the effect of any insurance coverage that may be available to offset the effects of any such award. 11. Comprehensive Loss The components of the comprehensive loss were as follows: For the three months ended March 31, -------------------------- 2002 2001 ------ ------ Net loss $(1,179) $ (77) ------- ------- Other comprehensive loss: Net loss on derivative instruments -- (2) Unrealized loss on securities -- (1) ------- ------- Total other comprehensive loss -- (3) ------- ------- Comprehensive loss $(1,179) $ (80) ======= ======= 8 12. Segment and Related Information Equistar operates in two reportable segments, petrochemicals and polymers. Summarized financial information concerning Equistar's reportable segments is shown in the following table. Intersegment sales between the petrochemicals and polymers segments were based on current market prices.
Millions of dollars Petrochemicals Polymers Unallocated Eliminations Total - ------------------- -------------- -------- ----------- ------------ ----- For the three months ended March 31, 2002: Sales and other operating revenues: Customers $ 726 $ 410 $ -- $ -- $ 1,136 Intersegment 267 -- -- (267) -- ------------------------------------------------------------ Total sales and other operating revenues 993 410 -- (267) 1,136 Operating loss (24) (21) (30) -- (75) Interest expense -- -- (52) -- (52) Other income, net -- -- 1 -- 1 Loss before cumulative effect of accounting change (24) (21) (81) -- (126) For the three months ended March 31, 2001: Sales and other operating revenues: Customers $ 1,231 $ 542 $ -- $ -- $ 1,773 Intersegment 458 -- -- (458) -- ------------------------------------------------------------ Total sales and other operating revenues 1,689 542 -- (458) 1,773 Operating income (loss) 115 (89) (62) -- (36) Interest expense -- -- (46) -- (46) Other income, net -- -- 5 -- 5 Net income (loss) 115 (89) (103) -- (77)
The following table presents the details of "Operating income (loss)" as presented above in the "Unallocated" column for the three-month periods ended: March 31, March 31, Millions of dollars 2002 2001 - ------------------- ------ ------ Expenses not allocated to petrochemicals and polymers: Principally general and administrative expenses $ (30) $ (40) Unusual charges -- (22) ----- ------ Total--Unallocated $ (30) $ (62) ===== ====== During the first quarter of 2002, Equistar wrote off the entire balance of its goodwill, resulting in a $1.1 billion charge that was reported as the cumulative effect of an accounting change (see Note 4). 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview General--U.S. demand for ethylene in the first quarter 2002 grew an estimated 2% compared to the first quarter 2001 and 3% compared to the fourth quarter 2001. Nonetheless, the first quarter 2002 demand growth failed to absorb the effects of an estimated 7.6% increase in worldwide ethylene industry capacity during calendar 2001 or to offset the effects of a 10% contraction in U.S. ethylene demand in 2001. Raw material costs in the first quarter 2002 were significantly lower than in the first quarter 2001. The benchmark price of crude oil averaged 24% lower in the first quarter 2002 than in the first quarter 2001. Natural gas prices, which spiked to historically high levels in the first quarter 2001, averaged 67% lower in the first quarter 2002, resulting in lower energy costs. Despite increased demand in the first quarter 2002, the ongoing industry overcapacity and the decreases in raw material costs during 2001 and most of the first quarter 2002 put downward pressure on product sales prices. This resulted in sales prices decreasing more than the costs of raw materials. Average benchmark sales prices for ethylene were 41% lower in the first quarter 2002 compared to the first quarter 2001, while average benchmark prices for co-product propylene were 29% lower in the first quarter 2002 compared to the first quarter 2001. These factors combined to reduce Equistar's margins in the first quarter 2002 compared to the first quarter 2001. In addition, in response to political uncertainties in the Middle East and Venezuela, raw material costs rose rapidly toward the end of the first quarter 2002. March 2002 crude oil prices averaged 18% higher than in February 2002, while March 2002 natural gas prices averaged 20% higher than in February 2002. This also had a negative effect on Equistar's first quarter 2002 margins due to lags in implementing sales price increases in response to cost increases. Net Loss--Equistar had a loss before cumulative effect of accounting change of $126 million in the first quarter 2002 compared to a net loss of $77 million in the first quarter 2001. The first quarter 2001 included $22 million of shutdown costs for Equistar's Port Arthur facility and $8 million of goodwill amortization. Excluding the effect of the first quarter 2001 shutdown costs and the goodwill amortization, the net loss increased by $79 million, reflecting a significant decrease in petrochemicals segment operating results partly offset by improvement in polymers segment results. The decrease in petrochemicals segment profitability was due to lower prices and margins, lower sales volumes and the negative effects of certain above-market fixed price contracts. Polymers segment results, however, improved due to higher margins as raw materials costs decreased more than sales prices. RESULTS OF OPERATIONS First Quarter 2002 versus Fourth Quarter 2001 Equistar had a loss before cumulative effect of accounting change of $126 million in the first quarter 2002 compared to a loss of $94 million in the fourth quarter 2001, which included $8 million of goodwill amortization. Excluding the effect of the fourth quarter 2001 goodwill amortization, the $40 million increase in the net loss reflected a decrease in petrochemicals segment operating results partly offset by improvement in polymers segment operating results. The decrease in petrochemicals segment profitability was due to lower prices and margins. Polymers segment results improved on higher margins as raw materials costs decreased more than sales prices. Both petrochemicals and polymers segment sales volumes increased in the first quarter 2002 compared to the fourth quarter 2001. The petrochemicals segment had an operating loss of $24 million in the first quarter 2002 compared to operating income of $50 million in the fourth quarter 2001. Margins in the first quarter 2002 decreased from the fourth quarter 2001 as ethylene prices declined in the first quarter 2002, while raw material and energy costs increased. First quarter 2002 average benchmark prices for ethylene were 19.3 cents per pound compared to 20.9 cents per pound in the fourth quarter 2001, an 8% decrease. Costs of raw materials increased due to rising ethane and naphtha prices during the first quarter 2002. Benchmark prices of co-product propylene decreased an estimated 2.0 cents per pound, or 12%, in the first quarter 2002, further contributing to lower margins. Equistar's costs were also higher 10 due to certain fixed price natural gas and NGL supply contracts entered into in early 2001. In the first quarter 2002, Equistar's costs under these fixed-price contracts were approximately $33 million higher than market-based contracts would have been. These fixed-price contracts largely expired at the end of the first quarter 2002. Sales volumes for petrochemical products increased 6.5% in the first quarter 2002 compared to the fourth quarter 2001 as aggressive inventory reductions by customers in the fourth quarter 2001 ended and there were some indications of improved demand in the first quarter 2002. The polymers segment operating loss of $21 million in the first quarter 2002 improved from an operating loss of $48 million in the fourth quarter 2001 due to improved margins and higher volumes. Margins in the polymers segment improved somewhat as decreasing prices for ethylene, a major raw material, more than offset lower sales prices. Estimated benchmark polymer sales prices fell approximately 0.5 cents per pound in the first quarter 2002 compared to the above-noted decrease of 1.6 cents per pound for ethylene over the same period. Polymer sales volume increases in the first quarter 2002 reflected the end of aggressive inventory reductions by customers in late December 2001 as well as some evidence of improved demand late in the first quarter 2002. Total Equistar polymer sales volumes increased approximately 3% versus the fourth quarter 2001. Segment Data The following tables reflect selected actual sales volume data, including intersegment sales volumes, and summarized financial information for Equistar's business segments. For the three months ended March 31, -------------------------- In millions 2002 2001 ----------- ------ ------ Selected petrochemicals products: Olefins (pounds) 4,137 4,241 Aromatics (gallons) 86 90 Polymers products (pounds) 1,508 1,441 Millions of dollars Sales and other operating revenues: Petrochemicals segment $ 993 $ 1,689 Polymers segment 410 542 Intersegment eliminations (267) (458) ------- ------- Total $ 1,136 $ 1,773 ======= ======= Cost of sales: Petrochemicals segment $ 1,015 $ 1,568 Polymers segment 414 613 Intersegment eliminations (267) (458) ------- ------- Total $ 1,162 $ 1,723 ======= ======= Other operating expenses: Petrochemicals segment $ 2 $ 6 Polymers segment 17 18 Unallocated 30 40 Unusual charges -- 22 ------- ------- Total $ 49 $ 86 ======= ======= Operating income (loss): Petrochemicals segment $ (24) $ 115 Polymers segment (21) (89) Unallocated and unusual charges (30) (62) ------- ------- Total $ (75) $ (36) ======= ======= 11 Petrochemicals Segment Revenues--Revenues of $1.0 billion in the first quarter 2002 decreased 41% compared to revenues of $1.7 billion in the first quarter 2001 primarily due to lower sales prices and, to a lesser extent, lower sales volumes. Benchmark ethylene prices averaged 41% lower in the first quarter 2002 compared to the first quarter 2001. Sales volumes decreased 3% in the first quarter 2002 compared to the first quarter 2001. Cost of Sales--Cost of sales of $1.0 billion in the first quarter 2002 decreased 35% compared to $1.6 billion in the first quarter 2001, less than the percentage decrease in sales noted above. While the costs of NGL-based raw materials and energy decreased from the historically high levels experienced in the first quarter 2001, other raw material costs, such as heavy liquids, did not decrease proportionately to the decrease in sales prices. Costs were also higher due to certain fixed price natural gas and NGL supply contracts entered into in early 2001. In the first quarter 2002, Equistar's costs under these fixed-price contracts were approximately $33 million higher than market-based contracts would have been. These fixed-price contracts largely expired by the end of the first quarter 2002. Operating Income--The operating loss of $24 million in the first quarter 2002 compares to operating income of $115 million in the first quarter 2001. The $139 million decrease is primarily due to lower product margins as sales prices decreased much more than raw material costs. As noted above, raw material and energy costs actually rose rapidly in March 2002 after declining steadily since the first quarter 2001. This negatively affected first quarter 2002 margins, as sales prices could not be increased timely in response to the cost increases. Polymers Segment Revenues--Revenues of $410 million in the first quarter 2002 decreased 24% compared to revenues of $542 million in the first quarter 2001. The decrease was due to lower sales prices partly offset by a 5% increase in sales volumes. First quarter 2002 average sales prices decreased in response to lower raw material costs, primarily ethylene and propylene. The higher sales volumes reflected improvement in demand. Cost of Sales--Cost of sales of $414 million in the first quarter 2002 decreased 32% compared to $613 million in the first quarter 2001. This decrease reflected decreases in raw material costs, primarily ethylene and propylene. Benchmark ethylene and propylene costs were 41% and 29% lower, respectively, in the first quarter 2002 compared to the first quarter 2001. The benefits of these cost decreases were reduced by the effect of the increase in sales volumes. Operating Income--For the first quarter 2002, the polymers segment had an operating loss of $21 million compared to an operating loss of $89 million in the first quarter 2001. The reduced operating loss was due to improvement in polymer margins and, to a lesser extent, higher sales volumes. Margins improved in the first quarter 2002 compared to the first quarter 2001 as sales prices decreased less than the decreases in polymer raw material costs. Unallocated Items The following discusses significant changes in expenses that were not allocated to the petrochemicals or polymers segments. Unusual Charges--Equistar discontinued production at its higher-cost Port Arthur, Texas polyethylene facility in February 2001 and shut down the facility. During the first quarter 2001, Equistar recorded a $22 million charge, which included environmental remediation liabilities of $7 million, other exit costs of $3 million and severance and pension benefits of $7 million for approximately 125 people employed at the Port Arthur facility. The remaining $5 million balance primarily related to the write down of certain assets. 12 Cumulative Effect of Accounting Change--Effective January 1, 2002, Equistar adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. Upon implementation of SFAS No. 142, Equistar reviewed goodwill for impairment and concluded that the entire balance of goodwill was impaired, resulting in a $1.1 billion charge that was reported as the cumulative effect of an accounting change as of January 1, 2002. See Note 4 of Notes to Consolidated Financial Statements. In addition, as a result of implementing SFAS No. 142, earnings in 2002 and subsequent years will be favorably affected by $33 million annually because of the elimination of goodwill and its related amortization. FINANCIAL CONDITION Operating Activities--Operating activities used cash of $119 million in the first quarter 2002 compared to $154 million in the first quarter 2001. For Equistar, the first quarter of the year includes significant payments of annual and semiannual property taxes, interest and compensation-related items, generally resulting in negative operating cash flow for the period. Despite a $49 million higher loss before the cumulative effect of accounting change in the first quarter 2002, cash used by operating activities in the first quarter 2002 decreased compared to the first quarter 2001. This was primarily due to a net reduction of $39 million in the main components of working capital - receivables, inventory and payables - during the first quarter 2002. This compares to a $62 million increase in these components of working capital during the first quarter 2001. The improvement in the first quarter 2002 was due to a significant increase in payables. During the first quarter 2001, the inventory component of working capital increased $74 million, primarily due to increased levels of raw materials compared to December 31, 2000. Investing Activities--Equistar's capital expenditures were $15 million in the first quarter 2002 and $24 million in the first quarter 2001. The reduced level of expenditures in 2002 reflects the continuing poor business environment. Equistar's capital budget for 2002 is $94 million, primarily for regulatory and environmental compliance and cost reduction projects. Financing Activities--Cash used by financing activities was $53 million in the first quarter 2002, and included the scheduled retirement of $100 million principal amount of the 9.125% notes. This $100 million payment was partly funded by net borrowing of $50 million under the revolving credit facility. There were no distributions to partners in the first quarter 2002. Liquidity and Capital Resources--At March 31, 2002, Equistar had cash on hand of $15 million. In addition $450 million of the $500 million revolving credit facility, which matures in August 2006, was available at March 31, 2002. Amounts available under the revolving credit facility are also reduced to the extent of outstanding letters of credit, which were $5 million as of March 31, 2002. Early in 2002, Equistar's credit rating was lowered by two major rating agencies, which could affect Equistar's borrowing costs in the future. Management believes that conditions will be such that cash balances, cash flow from operations and funding under the credit facility will be adequate to meet anticipated future cash requirements, including scheduled debt repayments, other contractual obligations, necessary capital expenditures and ongoing operations. Long-Term Debt--The bank credit facility and the indenture governing Equistar's senior notes contain covenants that, subject to certain exceptions, restrict sale and leaseback transactions, lien incurrence, debt incurrence, sales of assets, investments, certain payments, and mergers and consolidations. In addition, the bank credit facility requires Equistar to maintain specified financial ratios. The breach of these covenants could permit the lenders under Equistar's credit facility and the indenture governing the senior notes to declare the loans immediately payable and could permit the lenders under Equistar's credit facility to terminate future lending commitments. As a result of the continued poor current business environment, in late March 2002, Equistar amended its $800 million credit facility making certain financial ratio requirements less restrictive. See Note 7 of Notes to Consolidated Financial Statements. As a result of the amendment, the interest rate on the credit facility was increased by 0.5% per annum. If certain financial ratios are met, the interest rate will only increase by 0.25% per annum. Equistar was in compliance with all covenants under its debt instruments as of March 31, 2002. 13 Railcar Leases--Equistar leases railcars, under operating leases, from unaffiliated entities established for the purpose of serving as lessors with respect to these leases. The leases include options for Equistar to purchase the railcars covered by the leases during a lease term. If Equistar does not exercise a purchase option, the affected railcars will be sold upon termination of the lease. In the event the sales proceeds are less than the lessor's unrecovered investment, Equistar will pay the difference to the lessor, but no more than the guaranteed residual value. The total guaranteed residual value under these leases was approximately $208 million at March 31, 2002. One of the railcar leases with a guaranteed residual value of $35 million terminates in December 2002. Equistar has not decided whether to exercise the purchase option under this lease, but does not currently anticipate payment of a material amount under the residual value guarantee provisions. Early in 2002, Equistar's credit rating was lowered by two major rating agencies. The credit rating downgrade permitted the early termination of one of Equistar's railcar leases by the lessor, which could have accelerated the payment of $126 million of minimum lease payments. Equistar renegotiated the lease during the first quarter 2002, resulting in a payment of additional fees and a prepayment of basic rent of $17 million, which reduced the guaranteed residual value to $87 million, and will be fully offset by a corresponding reduction in future cash lease payments. Certain of Equistar's railcar operating leases contain financial and other covenants that are substantially the same as those contained in the $800 million credit facility. A breach of these covenants could permit the early termination of these railcar leases by the lessors. Under one of the leases, the covenants were automatically updated with the March 2002 amendment to the credit facility. Equistar also amended the covenants under the remaining railcar lease to incorporate the March 2002 amendment to the $800 million credit facility. The amendment, which was completed in the second quarter 2002, required the payment of additional fees and a payment of $16 million, which reduced the guaranteed residual value to $70 million. The $16 million payment will be partially offset by a corresponding reduction in future lease payments. In addition, the lessor has the option to terminate the lease under certain circumstances by December 31, 2002. RECENT DEVELOPMENTS Early in 2002, Lyondell and Occidental agreed in principle to Lyondell's acquisition of Occidental's 29.5% share of Equistar and Occidental's purchase of an equity interest in Lyondell. Upon completion of these transactions, Lyondell's ownership interest in Equistar would increase to 70.5%. Millennium holds the remaining 29.5% interest in Equistar. There can be no assurance that the proposed transactions will be completed. CURRENT BUSINESS OUTLOOK Equistar expects modestly improved demand coupled with the expiration of many of its fixed price natural gas and NGL contracts to result in improved results in the second quarter 2002. Such improvement could be offset by any significant increases in raw material costs. RECENT ACCOUNTING STANDARDS Effective January 1, 2002, Equistar implemented SFAS No. 141, Business Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. See "Results of Operations" and Note 4 of Notes to Consolidated Financial Statements. 14 Item 3. Disclosure of Market and Regulatory Risk. Equistar's exposure to market and regulatory risks is described in Item 7a of its Annual Report on Form 10-K for the year ended December 31, 2001. Equistar's exposure to market and regulatory risks has not changed materially in the quarter ended March 31, 2002, except as noted below. Certain federal and state governmental initiatives in the U.S. have sought either to rescind the oxygenate requirement for reformulated gasoline or to restrict or ban the use of MTBE. On April 25, 2002, the U.S. Senate passed its version of an omnibus energy bill, which, among other things, would ban the use of MTBE as a fuel oxygenate. The Senate bill is not law and needs to be reconciled with the U.S. House of Representatives' omnibus energy bill, which was passed in July 2001. Equistar's MTBE sales represented approximately 4% of its total 2001 revenues. Equistar does not expect these initiatives to have a significant impact on MTBE margins and volumes in 2002. Should it become necessary to reduce MTBE production, Equistar would need to make capital expenditures to convert its MTBE plants to production of alternate gasoline blending components. The profit margins on such alternate gasoline blending components could differ from those historically realized on MTBE. FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report are "forward-looking statements" within the meaning of the federal securities laws. Although Equistar believes the expectations reflected in such forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and Equistar can give no assurance that such expectations will prove to have been correct. Equistar's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including: ... the cyclical nature of the chemical industry, ... uncertainties associated with the economy, ... substantial chemical industry capacity additions resulting in oversupply and declining prices and margins, ... the availability and cost of raw materials and utilities, ... access to capital markets, ... technological developments, ... current and potential governmental regulatory actions, ... potential terrorist acts, ... operating interruptions (including leaks, explosions, fires, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, spills and releases and other environmental risks), and ... Equistar's ability to implement its business strategies, including cost reductions. Many of such factors are beyond Equistar's ability to control or predict. Any of the factors, or a combination of these factors, could materially affect Equistar's future results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of Equistar's future performance, and Equistar's actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. All forward-looking statements in this Form 10-Q are qualified in their entirety by the cautionary statements contained in this section and in Equistar's Annual Report on Form 10-K for the year ended December 31, 2001. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings There have been no material developments with respect to Equistar's legal proceedings previously reported in the Annual Report on Form 10-K for the year ended December 31, 2001. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4.2(a) Amendment No. 1 dated as of March 26, 2002 to the Amended and Restated Credit Agreement dated as of August 24, 2001 among Equistar Chemicals, LP, the lenders from time to time party thereto and Citicorp USA, Inc. and Credit Suisse First Boston, as co-syndication agents, Bank of America, N.A., as servicing agent and as administrative agent and The Chase Manhattan Bank, as collateral agent and as administrative agent 99 Consolidated Financial Statements (Unaudited) of Lyondell Chemical Company (b) Reports on Form 8-K None. 16 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Equistar Chemicals, LP Dated: May 13, 2002 /s/ CHARLES L. HALL ------------------------------------ Charles L. Hall Vice President and Controller (Duly Authorized Officer and Principal Accounting Officer) 17 EX-4.2(A) 3 dex42a.txt AMENDMENT NO. 1 TO CREDIT AGREEMENT Exhibit 4.2(a) AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT AMENDMENT dated as of March 26, 2002 to the Amended and Restated Credit Agreement dated as of August 24, 2001 (the "Credit Agreement") among EQUISTAR CHEMICALS, LP, a Delaware limited partnership; the LENDERS from time to time party thereto, CITICORP USA, INC. and CREDIT SUISSE FIRST BOSTON, as Co-Syndication Agents; BANK OF AMERICA, N.A. ("BofA"), as Servicing Agent; JPMORGAN CHASE BANK ("JPMCB"), as Collateral Agent; and BofA and JPMCB as administrative agents (in such capacity, the "Administrative Agents"). The parties hereto agree as follows: SECTION 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall, after this Amendment becomes effective, refer to the Credit Agreement as amended hereby. SECTION 2. Amended Definitions. (a) The following new defined terms are added to Section 1.01 of the Credit Agreement in their appropriate alphabetical position: "Capital Expenditures" means, for the Borrower and its Consolidated Subsidiaries for any fiscal year, the aggregate cash expenditures for property, plant and equipment of the Borrower and its Consolidated Subsidiaries for such fiscal year, as the same are (or would in accordance with GAAP be) set forth in a statement of cash flows of such person for such fiscal year; provided that "Capital Expenditures" shall exclude (i) expenditures required, mandated or necessary to comply with the laws, rules, regulations or other requirements of any Governmental Authority, (ii) expenditures of property and casualty insurance or any award or other compensation with respect to any condemnations of property (or any transfer or disposition of property in lieu of condemnation) and related insurance deductibles and (iii) capital expenditures resulting from the acquisition of rolling stock and related accessories, additions, improvements, parts and replacements leased by the Borrower and/or its Consolidated Subsidiaries under railcar operating leases at fiscal year end 2001. 1 "Relaxed Compliance Period" means the period from and including the Amendment Effective Date (as defined in Amendment No. 1 to this Agreement) to and including the date on which the Borrower delivers the financial statements and officer's certificate required pursuant to Section 5.05(a) and (d), respectively, with respect to its fiscal year ended December 31, 2003; provided that the Borrower may terminate the Relaxed Compliance Period by including an election to that effect in an officer's certificate delivered to each of the Administrative Agents and to the Servicing Agent so long as the Total Leverage Ratio for the immediately prior reporting period as set forth in such certificate is not more than 5.00 to 1.00 and the Interest Coverage Ratio for the immediately prior reporting period as set forth in such certificate is not less than 2.50 to 1.00. (b) The following definition in Section 1.01 of the Credit Agreement is amended to read in its entirety as follows: "Senior Secured Leverage Ratio" shall mean the ratio of (i) Total Indebtedness at such date (plus, to the extent not otherwise reflected therein, any outstanding Deferred Amounts and minus, to the extent reflected therein, (x) any outstanding unsecured Indebtedness, (y) any Acceptable Subordinated Loans and (z) at any date from and including April 1, 2002 to and including September 30, 2002, a principal amount of outstanding Revolving Loans of up to $226,000,000 which the Borrower shall have certified in the related notice of borrowing were borrowed to provide financing of rolling stock and related accessories, additions, improvements, parts and replacements leased by the Borrower and/or its Consolidated Subsidiaries under railcar operating leases at fiscal year end 2001) at such date to (ii) EBITDA for the period of four consecutive fiscal quarters most recently ended on or prior to such date, all determined for the Borrower and its Consolidated Subsidiaries on a consolidated basis. (c) The following definition in Section 1.01 of the Credit Agreement is amended to read in its entirety as follows: "Applicable Margin" shall mean (i) with respect to the Term Loans, (A) at any time at which the Applicable Total Leverage Ratio (as defined in the Pricing Schedule) is greater than 6.50 to 1.00, a rate per annum equal to 2.50% in the case of ABR Loans and 3.50% in the case of LIBOR Loans and (B) at any other time, a rate per annum equal to 2.25% in the case of ABR Loans and 3.25% in the case of LIBOR Loans and (ii) with respect to Revolving Loans of any Type outstanding at any time, the percentage rate per annum set forth in the Pricing Schedule as the margin with respect to Loans of such Type which is applicable at such time; 2 provided that the Applicable Margin on any date with respect to Committed Loans of any Type and any Class shall be the sum of the percentage determined in accordance with clause (i) or clause (ii) above, as applicable, plus 2.00%, if on such date (x) an Event of Default exists and (y) except in the case of an Event of Default under Sections 7.01(b), 7.01(c), 7.01(e) or 7.01(f), the Administrative Agents shall have notified the Borrower at the request of the Required Lenders that this proviso shall be applicable. SECTION 3. Covenant Amendments. (a) Section 6.04 is amended to read in its entirety as follows: SECTION 6.04. Total Leverage Ratio. Permit the Total Leverage Ratio at any time during any period set forth below to exceed the applicable ratio set forth below opposite such period (such applicable ratio being the Relaxed Ratio at any date during the Relaxed Compliance Period and the Maximum Ratio at any other date): Period Maximum Ratio Relaxed Ratio - ------ ------------- ------------- June 30, 2002- 7.25 to 1.00 Not applicable September 29, 2002 September 30, 2002- 6.25 to 1.00 Not applicable December 30, 2002 December 31, 2002- 5.50 to 1.00 Not applicable March 30, 2003 March 31, 2003- 5.00 to 1.00 8.75 to 1.00 June 29, 2003 June 30, 2003- 5.00 to 1.00 6.75 to 1.00 September 29, 2003 September 30, 2003- 5.00 to 1.00 5.25 to 1.00 December 30, 2003 December 31, 2003 5.00 to 1.00 5.00 to 1.00 and at all times thereafter (b) Section 6.05 is amended to read in its entirety as follows: SECTION 6.05. Interest Coverage Ratio. Permit the Interest Coverage Ratio for the period of four consecutive fiscal quarters ending on 3 any date set forth below to be less than the applicable ratio set forth below opposite such date (such applicable ratio to be the Relaxed Ratio for each day during the Relaxed Compliance Period and the Minimum Ratio for any other date): Date Minimum Ratio Relaxed Ratio ---- ------------- ------------- March 31, 2002 1.25 to 1.00 1.00 to 1.00 June 30, 2002 1.40 to 1.00 0.60 to 1.00 September 30, 2002 1.75 to 1.00 0.85 to 1.00 December 31, 2002 2.00 to 1.00 1.00 to 1.00 March 31, 2003 2.50 to 1.00 1.25 to 1.00 June 30, 2003 2.50 to 1.00 1.60 to 1.00 September 30, 2003 2.50 to 1.00 2.00 to 1.00 December 31, 2003 2.50 to 1.00 2.50 to 1.00 each fiscal quarter end thereafter 3.00 to 1.00 3.00 to 1.00 (c) Section 6.10 is amended (i) by designating the existing text as subsection (a) and (ii) by adding the following new subsection (b): (b) During the Relaxed Compliance Period, make any Business Acquisition if after giving effect thereto, the aggregate cash consideration paid by the Borrower and its Consolidated Subsidiaries for all Business Acquisitions consummated during the Relaxed Compliance Period would exceed $25,000,000. (d) The following new Section 6.17 is added to the Credit Agreement: SECTION 6.17. Capital Expenditures. For each fiscal year of the Borrower ending during the Relaxed Compliance Period, permit the Capital Expenditures of the Borrower and its Consolidated Subsidiaries to exceed the applicable Limit Amount set forth in the table below, plus, in the case of fiscal year 2003, the amount if any (in no case to exceed $20,000,000) by which their Capital Expenditures for the fiscal year ending December 31, 2002 are less than $100,000,000: Fiscal Year Limit Amount - ----------- ------------ 2002 $100,000,000 2003 $101,530,000 SECTION 4. Increased Pricing. The Pricing Schedule is amended in its entirety to read as Exhibit A attached hereto. 4 SECTION 5. Representations of Borrower. The Borrower represents and warrants that (i) the representations and warranties of the Borrower set forth in Article III of the Credit Agreement will be true on and as of the Amendment Effective Date with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date and (ii) no Default will have occurred and be continuing on such date. SECTION 6. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 8. Effectiveness. This Amendment shall become effective on the first date when the following conditions are met (the "Amendment Effective Date"): (a) the Administrative Agents shall have received counterparts hereof signed by each of the Required Lenders and the Borrower (or, in the case of any party as to which an executed counterpart shall not have been received, the Administrative Agents shall have received in form satisfactory to them telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party); (b) the Administrative Agents shall have received payment of an amendment fee for each Lender which shall have executed and delivered a counterpart hereof as contemplated by clause (a) not later than the Amendment Effective Date, such amendment fee to be in an amount equal to 0.25% of such Lender's Credit Exposure; and (c) each of the Agents and the Arrangers shall have received payment of all amendment fees, other costs, fees and expenses (including, without limitation, reasonable legal fees and expenses for which invoices shall have been submitted to the Borrower) and other compensation payable to any of the foregoing on or prior to the Amendment Effective Date in connection with the Loan Documents. Promptly after the Amendment Effective Date occurs, the Administrative Agents shall notify the Borrower, the other Agents and the Lenders thereof, and such notice shall be conclusive and binding on all parties hereto. 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. EQUISTAR CHEMICALS, LP, By: /s/ Karen A. Twitchell ------------------------------------- Name: Karen A. Twitchell Title: Principal Financial Officer 6 BANK OF AMERICA, N.A., individually and as Swingline Lender, Fronting Bank, Administrative Agent and Servicing Agent By: /s/ Richard L. Stein ------------------------------- Name: Richard L. Stein Title: Principal JPMORGAN CHASE BANK, individually and as Fronting Bank, Administrative Agent and Collateral Agent By: /s/ Stacey Haimes ------------------------------- Name: Stacey Haimes Title: VP AERIES FINANCE-II, LTD. By: INVESCO Senior Secured Management, Inc. As Sub-Managing Agent By: /s/ Joseph Rotondo ------------------------------- Name: Joseph Rotondo Title: Authorized Signatory AIMCO CLO SERIES 2001-A By: /s/ Jerry D. Zinkula ------------------------------- Name: Jerry D. Zinkula Title: Authorized Signatory By: /s/ Dorothy E. Even ------------------------------- Name: Dorothy E. Even Title: Authorized Signatory 7 AMARA 2 FINANCE, LTD. By: INVESCO Senior Secured Management, Inc. As Sub-Advisor By: /s/ Joseph Rotondo ------------------------------- Name: Joseph Rotondo Title: Authorized Signatory AMARA-1 FINANCE, LTD. By: INVESCO Senior Secured Management, Inc. As Sub-Advisor By: /s/ Joseph Rotondo ------------------------------- Name: Joseph Rotondo Title: Authorized Signatory ANCHOR NATIONAL LIFE INSURANCE COMPANY By: /s/ Steven Oh ------------------------------- Name: Steven Oh Title: Authorized Agent AETNA CDO, LIMITED (ACCT 1277) By: Pacific Investment Management Company LLC, As its Investment Advisor By: /s/ Mohan V. Phansalkar ------------------------------- Name: Mohan V. Phansalkar Title: Executive Vice President 8 AVALON CAPITAL LTD. By: INVESCO Senior Secured Management, Inc. As Portfolio Advisor By: /s/ Joseph Rotondo ------------------------------- Name: Joseph Rotondo Title: Authorized Signatory AVALON CAPITAL LTD. 2 By: INVESCO Senior Secured Management, Inc. As Portfolio Advisor By: /s/ Joseph Rotondo ------------------------------- Name: Joseph Rotondo Title: Authorized Signatory THE BANK OF NEW YORK By: /s/ Raymond J. Palmer ------------------------------- Name: Raymond J. Palmer Title: Vice President THE BANK OF NOVA SCOTIA By: /s/ N. Bell ------------------------------- Name: N. Bell Title: Assistant Agent BANK ONE, N.A. By: /s/ Daniel A. Davis ------------------------------- Name: Daniel A. Davis Title: Director 9 BILL & MELINDA GATES FOUNDATION By: David L. Babson & Company, Inc. As Investment Adviser By: /s/ Kathleen Lynch ------------------------------- Name: Kathleen Lynch Title: Managing Director BLACK DIAMOND CLO 2000-1 LTD. By: /s/ Alan Corkish ----------------- Name: Alan Corkish Title: Director CAPTIVA II FINANCE LTD. By: /s/ David Dyer --------------- Name: David Dyer Title: Director CAPTIVA III FINANCE LTD. (Acct. 275), As advised by Pacific Investment Management Company LLC By: /s/ David Dyer --------------- Name: David Dyer Title: Director CAPTIVA IV FINANCE LTD. (Acct 1275), As advised by Pacific Investment Management Company LLC By: /s/ David Dyer --------------- Name: David Dyer Title: Director 10 CERES II FINANCE LTD. By: INVESCO Senior Secured Management, Inc. As Sub-Managing Agent (Financial) By: /s/ Joseph Rotondo ------------------- Name: Joseph Rotondo Title: Authorized Signatory CHANCELLOR/TRITON CBO, LIMITED By: INVESCO Senior Secured Management, Inc. As Collateral Manager By: /s/ Joseph Rotondo ------------------- Name: Joseph Rotondo Title: Authorized Signatory CITICORP USA, INC. By: /s/ Nicolas T. Erni --------------------------------------- Name: Nicolas T. Erni Title: Director/VP COLUMBUS LOAN FUNDING LTD. By: Travelers Asset Management International Company LLC By: /s/ Allen R. Cantrell --------------------------------------- Name: Allen R. Cantrell Title: Investment Officer 11 CONSTANTINUS EATON VANCE CDO V, LTD. By: Eaton Vance Management As Investment Advisor By: /s/ Payson F. Swaffield ------------------------ Name: Payson F. Swaffield Title: Vice President CONTINENTAL ASSURANCE COMPANY Separate Account (E) By: TCW Asset Management Company As Attorney-in-Fact By: /s/Mark Gold ------------- Name: Mark Gold Title: Managing Director By: /s/ William Brennan -------------------- Name: William Brennan Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Bernard Waymuller ---------------------------------------- Name: Bernard Waymuller Title: Senior Vice President 12 CREDIT SUISSE FIRST BOSTON By: /s/ Paul L. Colon ---------------------------------------- Name: Paul L. Colon Title: Vice President By: /s/ Vanessa Gomez ---------------------------------------- Name: Vanessa Gomez Title: Associate CSAM FUNDING I By: /s/ David H. Lerner -------------------- Name: David H. Lerner Title: Authorized Signatory DELANO COMPANY (ACCT 274) By: Pacific Investment Management Company LLC, As its Investment Advisor By: /s/ Mohan V. Phansalkar ---------------------------------------- Name: Mohan V. Phansalkar Title: Executive Vice President EATON VANCE CDO III, LTD. By: Eaton Vance Management As Investment Advisor By: /s/ Payson F. Swaffield ------------------------ Name: Payson F. Swaffield Title: Vice President 13 EATON VANCE CDO IV, LTD. By: Eaton Vance Management As Investment Advisor By: /s/ Payson F. Swaffield ------------------------ Name: Payson F. Swaffield Title: Vice President EATON VANCE INSTITUTIONAL SENIOR LOAN FUND By: Eaton Vance Management As Investment Advisor By: /s/ Payson F. Swaffield ------------------------ Name: Payson F. Swaffield Title: Vice President EATON VANCE SENIOR INCOME TRUST By: Eaton Vance Management As Investment Advisor By: /s/ Payson F. Swaffield ------------------------ Name: Payson F. Swaffield Title: Vice President 14 FIRST UNION INSTITUTIONAL DEBT MANAGEMENT, INC. In its individual capacity and as Collateral Manager on behalf of the investment funds under its management as listed on Annex A hereto By: /s/ William A. Hayes --------------------- Name: William A. Hayes Title: Director ANNEX A As of the date of this Agreement, IDM serves as Collateral Manager on behalf of the following funds: ELC (Cayman) Ltd. CDO Series 1999-I ELC (Cayman) Ltd. 1999-III ELC (Cayman) Ltd. 2000-I 15 ELT LTD. By: /s/ Ann E. Morris ------------------ Name: Ann E. Morris Title: Authorized Agent FIRST DOMINION FUNDING II By: /s/ David H. Lerner -------------------- Name: David H. Lerner Title: Authorized Signatory FIRST DOMINION FUNDING III By: /s/ David H. Lerner -------------------- Name: David H. Lerner Title: Authorized Signatory THE FUJI BANK, LIMITED By: /s/ Jacques Azagury --------------------------------- Name: Jacques Azagury Title: Senior Vice President & Manager GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Robert M. Kadlick ---------------------- Name: Robert M. Kadlick Title: Duly Authorized Signatory 16 GRAYSON & CO. By: Boston Management and Research As Investment Advisor By: /s/ Payson F. Swaffield ------------------------ Name: Payson F. Swaffield Title: Vice President HARBOUR TOWN FUNDING LLC By: /s/ Ann E. Morris ------------------ Name: Ann E. Morris Title: Asst. Vice President HARBOURVIEW CDO II LTD., FUND By: /s/ Bill Campbell ------------------ Name: Bill Campbell Title: Manager HARBOURVIEW CLO IV LTD., FUND By: /s/ Bill Campbell ------------------ Name: Bill Campbell Title: Manager THE INDUSTRIAL BANK OF JAPAN, LIMITED NEW YORK BRANCH By: /s/ Michael N. Oakes --------------------- Name: Michael N. Oakes Title: Senior Vice President, Houston Office 17 ING PRIME RATE TRUST By: ING Investments, LLC As its investment manager By: /s/ Charles E. LeMieux, CPA ---------------------------- Name: Charles E. LeMieux, CPA Title: Vice President ING SENIOR INCOME FUND By: ING Investments, LLC As its investment manager By: /s/ Charles E. LeMieux, CPA ---------------------------- Name: Charles E. LeMieux, CPA Title: Vice President INVESCO CBO 2000-1 LTD. By: INVESCO Senior Secured Management, Inc. As Portfolio Advisor By: /s/ Joseph Rotondo ------------------- Name: Joseph Rotondo Title: Authorized Signatory JISSEKIKUN FUNDING, LTD. (ACCT 1288) By: Pacific Investment Management Company LLC, As its Investment Advisor By: /s/ Mohan V. Phansalkar ----------------------------------- Name: Mohan V. Phansalkar Title: Executive Vice President 18 JUPITER LOAN FUNDING LLC By: /s/ Ann E. Morris ------------------ Name: Ann E. Morris Title: Asst. Vice President KZH CNC LLC By: /s/ Joyce Fraser-Bryant ------------------------ Name: Joyce Fraser-Bryant Title: Authorized Agent KZH CRESCENT-2 LLC By: /s/ Joyce Fraser-Bryant ------------------------ Name: Joyce Fraser-Bryant Title: Authorized Agent KZH CRESCENT-3 LLC By: /s/ Joyce Fraser-Bryant ------------------------ Name: Joyce Fraser-Bryant Title: Authorized Agent KZH CRESCENT LLC By: /s/ Joyce Fraser-Bryant ------------------------ Name: Joyce Fraser-Bryant Title: Authorized Agent 19 KZH RIVERSIDE LLC By: /s/ Joyce Fraser-Bryant ------------------------ Name: Joyce Fraser-Bryant Title: Authorized Agent KZH SHOSHONE LLC By: /s/ Joyce Fraser-Bryant ------------------------ Name: Joyce Fraser-Bryant Title: Authorized Agent KZH SOLEIL LLC By: /s/ Joyce Fraser-Bryant ------------------------ Name: Joyce Fraser-Bryant Title: Authorized Agent KZH SOLEIL-2 LLC By: /s/ Joyce Fraser-Bryant ------------------------ Name: Joyce Fraser-Bryant Title: Authorized Agent MAPLEWOOD (CAYMAN) LIMITED By: Mass Mutual Life Insurance Company As Investment Manager By: /s/ Steven J. Katz -------------------------------- Name: Steven J. Katz Title: Second Vice President and Associate General Counsel 20 MASS MUTUAL LIFE INSURANCE COMPANY By: /s/ Steven J. Katz -------------------------------- Name: Steven J. Katz Title: Second Vice President and Associate General Counsel MERRILL, LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Neil Brisson -------------------------------- Name: Neil Brisson Title: Director METROPOLITAN LIFE INSURANCE COMPANY By: /s/ James R. Dingler -------------------------------- Name: James R. Dingler Title: Director ML CLO XX PILGRIM AMERICA (CAYMAN) LTD. By: ING Investments, LLC As its investment manager By: /s/ Charles E. LeMieux, CPA ---------------------------- Name: Charles E. LeMieux, CPA Title: Vice President MOUNTAIN CAPITAL CLO I, LTD. By: /s/ Darren P. Riley -------------------------------- Name: Darren P. Riley Title: Director 21 NATEXIS BANQUES POPULAIRES By: /s/ Timothy L. Polvado -------------------------------- Name: Timothy L. Polvado Title: Vice President and Group Manager By: /s/ Louis P. Laville, III -------------------------------- Name: Louis P. Laville, III Title: Vice President and Group Manager NATIONAL WESTMINSTER BANK PLC By: NatWest Captial Markets Limited, its Agent By: Greenwich Capital Markets, Inc., its Agent By: /s/ Henry Pashalidis --------------------- Name: Henry Pashalidis Title: Vice President NEW ALLIANCE GLOBAL CDO, LIMITED By: Alliance Capital Management L.P., as Sub-advisor By: Alliance Capital Management Corporation, as General Partner By: /s/ Joel Serebransky --------------------- Name: Joel Serebransky Title: Senior Vice President 22 NORSE CBO, LTD. By: Regiment Capital Management, LLC, as its Investment Advisor By: Regiment Capital Advisors, LLC, it Manager and pursuant to delegated authority By: /s/ Timothy S. Peterson ------------------------ Name: Timothy S. Peterson Title: President OASIS COLLATERALIZED HIGH INCOME PORTFOLIOS-1, LTD. By: INVESCO Senior Secured Management, Inc. As Subadvisor By: /s/ Joseph Rotondo ------------------- Name: Joseph Rotondo Title: Authorized Signatory OCTAGON INVESTMENT PARTNERS II, LLC By: Octagon Credit Investors, LLC As sub-investment manager By: /s/ Michael B. Nechamkin ------------------------- Name: Michael B. Nechamkin Title: Portfolio Manager OCTAGON INVESTMENT PARTNERS III, LLC By: Octagon Credit Investors, LLC As portfolio manager By: /s/ Michael B. Nechamkin --------------------------- Name: Michael B. Nechamkin Title: Portfolio Manager 23 OCTAGON INVESTMENT PARTNERS IV, LLC By: Octagon Credit Investors, LLC As collateral manager By: /s/ Michael B. Nechamkin ------------------------- Name: Michael B. Nechamkin Title: Portfolio Manager PILGRIM AMERICA HIGH INCOME INVESTMENTS LTD. By: ING Investments, LLC As its investment manager By: /s/ Charles E. LeMieux, CPA ---------------------------- Name: Charles E. LeMieux, CPA Title: Vice President PILGRIM CLO 1999-1 LTD. By: ING Investments, LLC As its investment manager By: /s/ Charles E. LeMieux, CPA ---------------------------- Name: Charles E. LeMieux, CPA Title: Vice President PINEHURST TRADING, INC. By: /s/ Ann E. Morris ------------------ Name: Ann E. Morris Title: Asst. Vice President 24 ROYALTON COMPANY (ACCT 280) By: Pacific Investment Management Company LLC, As its Investment Advisor By: /s/ Mohan V. Phansalkar --------------------------------- Name: Mohan V. Phansalkar Title: Executive Vice President Sankaty Advisors, LLC as Collateral Manager for GREAT POINT CLO 1999-1 LTD., as Term Lender By: /s/ Diane J. Exter --------------------------------- Name: Diane J. Exter Title: Managing Director Portfolio Manager Sankaty Advisors, LLC as Collateral Manager for RACE POINT CLO, LIMITED, as Term Lender By: /s/ Diane J. Exter --------------------------------- Name: Diane J. Exter Title: Managing Director Portfolio Manager SANKATY HIGH YIELD PARTNERS II, L.P. By: /s/ Diane J. Exter --------------------------------- Name: Diane J. Exter Title: Managing Director Portfolio Manager 25 SANKATY HIGH YIELD PARTNERS III, L.P. By: /s/ Diane J. Exter --------------------------------- Name: Diane J. Exter Title: Managing Director Portfolio Manager SCUDDER FLOATING RATE FUND By: /s/ Kenneth Weber --------------------------------- Name: Kenneth Weber Title: Senior Vice-President SENIOR DEBT PORTFOLIO BY: Boston Management and Research As Investment Advisor By: /s/ Payson F. Swaffield --------------------------------- Name: Payson F. Swaffield Title: Vice President SEQUILS I, LTD By: TCW Advisors, Inc. as its Collateral Manager By: /s/ Mark L. Gold --------------------------------- Name: Mark L. Gold Title: Managing Director By: /s/ William Brennan --------------------------------- Name: William Brennan Title: Vice President 26 SEQUILS IV, LTD By: TCW Advisors, Inc. as its Collateral Manager By: /s/ Mark L. Gold --------------------------------- Name: Mark L. Gold Title: Collateral Manager By: /s/ William Brennan --------------------------------- Name: William Brennan Title: Vice President SEQUILS-LIBERTY, LTD. By: INVESCO Senior Secured Management, Inc. As Collateral Manager By: /s/ Joseph Rotondo --------------------------------- Name: Joseph Rotondo Title: Authorized Signatory SEQUILS-MAGNUM, LTD. (#1280) By: Pacific Investment Management Company LLC, As its Investment Advisor By: /s/ Mohan V. Phansalkar --------------------------------- Name: Mohan V. Phansalkar Title: Executive Vice President SIMSBUEY CLO, LIMITED By: Mass Mutual Life Insurance Co. As Collateral Manager By: /s/ Steven J. Katz --------------------------------- Name: Steven J. Katz Title: Second Vice President & Associate General Counsel 27 SOCIETE GENERALE By: /s/ Anthony C. Quaglietta --------------------------------- Name: Anthony C. Quaglietta Title: Vice President SRF 2000 LLC By: /s/ Ann E. Morris -------------------------------- Name: Ann E. Morris Title: Asst. Vice President STEIN ROE & FARNHAM CLO I Ltd. By Stein Roe & Farnham Incorporated As Portfolio Manager By: /s/ James R. Fellows -------------------------------- Name: James R. Fellows Title: Sr. Vice President & Portfolio Manager Suffield CLO, Limited By David L. Babson & Co., Inc. As Collateral Manager By: /s/ Kathleen Lynch -------------------------------- Name: Kathleen Lynch Title: Managing Director 28 THE SUMITOMO TRUST & BANKING CO., LTD. New York Branch By: /s/ Elizabeth A. Quirk -------------------------------- Name: Elizabeth A. Quirk Title: Vice President SUNAMERICA LIFE INSURANCE CO. By: /s/ Steven Oh -------------------------------- Name: Steven Oh Title: Authorized Agent TCW SELECT LOAN FUND, LIMITED By: TCW Advisors, Inc. as its Collateral Manager By: /s/ Mark L. Gold -------------------------------- Name: Mark L. Gold Title: Managing Director By: /s/ William Brennan -------------------------------- Name: William Brennan Title: Vice President TEXTRON FINANCIAL CORPORATION By: /s/ Matthew J. Colgan -------------------------------- Name: Matthew J. Colgan Title: Director 29 THERMOPYLAE FUNDING CORP. By: /s/ Frank Bilotta -------------------------------- Name: Frank Bilotta Title: Vice President TORONTO DOMINION (NEW YORK), INC. By: /s/ David G. Parker -------------------------------- Name: David G. Parker Title: Vice President THE TRAVELERS INSURANCE CO. By: /s/ Allen R. Cantrell -------------------------------- Name: Allen R. Cantrell Title: Investment Officer TRITON CBO III, LIMITED By: INVESCO Senior Secured Management, Inc. As Investment Advisor By: /s/ Joseph Rotondo -------------------------------- Name: Joseph Rotondo Title: Authorized Signatory 30 TRITON CDO IV, LIMITED By: INVESCO Senior Secured Management, Inc. As Investment Advisor By: /s/ Joseph Rotondo ------------------- Name: Joseph Rotondo Title: Authorized Signatory UNITED OF OMAHA LIFE INSURANCE COMPANY By: TCW Asset Management Company As Investment Advisor By: /s/ Mark L. Gold -------------------------------- Name: Mark L. Gold Title: Managing Director By: /s/ William Brennan -------------------------------- Name: William Brennan Title: Vice President WHITNEY CASH FLOW FUND II By: /s/ Adrian Duffy -------------------------------- Name: Adrian Duffy Title: Managing Director WINGED FOOT FUNDING TRUST By: /s/ Ann E. Morris -------------------------------- Name: Ann E. Morris Title: Authorized Agent 31 EX-99 4 dex99.txt CONSOLIDATED FIN. STMTS (UNAUDITED)-LYONDELL CHEM. CO. EXHIBIT 99 LYONDELL CHEMICAL COMPANY CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, -------------------------------------- Millions of dollars, except per share data 2002 2001 ------------------------------------------ ------------------ ----------------- Sales and other operating revenues $ 674 $ 849 Operating costs and expenses: Cost of sales 589 761 Selling, general and administrative expenses 40 41 Research and development expense 7 8 Amortization of goodwill - - 8 -------- -------- 636 818 -------- -------- Operating income 38 31 Interest expense (93) (99) Interest income 2 7 Other income, net 1 3 -------- -------- Loss before equity investments and income taxes (52) (58) -------- -------- Income (loss) from equity investments: Equistar Chemicals, LP (45) (22) LYONDELL-CITGO Refining LP 27 27 Other (3) (3) -------- -------- (21) 2 -------- -------- Loss before income taxes (73) (56) Benefit from income taxes (18) (22) -------- -------- Net loss $ (55) $ (34) ======== ======== Basic and diluted earnings per share: Net loss $ (.47) $ (.29) ======== ========
See Notes to Consolidated Financial Statements. 1 LYONDELL CHEMICAL COMPANY CONSOLIDATED BALANCE SHEETS
March 31, December 31, Millions, except shares and par value data 2002 2001 - ------------------------------------------ --------- ------------ ASSETS Current assets: Cash and cash equivalents $ 228 $ 146 Accounts receivable, net 320 352 Inventories 303 316 Prepaid expenses and other current assets 45 116 Deferred tax assets 61 277 ------- ------ Total current assets 957 1,207 Property, plant and equipment, net 2,265 2,293 Investments and long-term receivables: Investment in PO joint ventures 722 717 Investment in Equistar Chemicals, LP 477 522 Receivable from LYONDELL-CITGO Refining LP 229 229 Investment in LYONDELL-CITGO Refining LP 54 29 Other investments and long-term receivables 118 122 Goodwill, net 1,100 1,102 Other assets, net 453 482 ------ ------ Total assets $6,375 $6,703 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 275 $ 319 Current maturities of long-term debt 7 7 Accrued liabilities 282 233 ------ ------ Total current liabilities 564 559 Long-term debt 3,833 3,846 Other liabilities 589 583 Deferred income taxes 580 790 Commitments and contingencies - - - - Minority interest 155 176 Stockholders' equity: Common stock, $1.00 par value, 250,000,000 shares authorized, 120,250,000 issued 120 120 Additional paid-in capital 854 854 Retained earnings 166 247 Accumulated other comprehensive loss (411) (397) Treasury stock, at cost, 2,685,080 and 2,687,080 shares, respectively (75) (75) ------ ------ Total stockholders' equity 654 749 ------ ------ Total liabilities and stockholders' equity $6,375 $6,703 ====== ======
See Notes to Consolidated Financial Statements. 2 LYONDELL CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, ---------------------------------------- Millions of dollars 2002 2001 - ------------------- ------------------ ------------------ Cash flows from operating activities: Net loss $ (55) $ (34) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 60 65 Losses from equity investments 48 26 Deferred income taxes 7 (29) Changes in assets and liabilities that provided (used) cash: Accounts receivable 28 68 Inventories 13 (92) Accounts payable (42) (17) Prepaid expenses and other current assets 71 (7) Other assets and liabilities 40 (21) ----- ----- Cash provided by (used in) operating activities 170 (41) ----- ----- Cash flows from investing activities: Expenditures for property, plant and equipment (11) (11) Contributions and advances to affiliates (38) (20) Distributions from affiliates in excess of earnings -- 7 ----- ----- Cash used in investing activities (49) (24) ----- ----- Cash flows from financing activities: Dividends paid (26) (27) Repayments of long-term debt (13) (2) Other -- (3) ----- ----- Cash used in financing activities (39) (32) ----- ----- Effect of exchange rate changes on cash -- (1) ----- ----- Increase (decrease) in cash and cash equivalents 82 (98) Cash and cash equivalents at beginning of period 146 260 ----- ----- Cash and cash equivalents at end of period $ 228 $ 162 ===== =====
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 generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation, have been included. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2001 included in the Lyondell Chemical Company ("Lyondell") 2001 Annual Report on Form 10-K. Certain amounts from prior periods have been reclassified to conform to the current period presentation. 2. Accounting Changes Effective January 1, 2002, Lyondell implemented Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Implementation of SFAS No. 141 and SFAS No. 144 did not have a material effect on the consolidated financial statements of Lyondell. Upon implementation of SFAS No. 142, Lyondell reviewed its goodwill for impairment and concluded that goodwill is not impaired. However, Equistar (see Note 4) reviewed its goodwill for impairment and concluded that the entire balance was impaired, resulting in a $1.1 billion charge. The conclusion was based on a comparison to Equistar's indicated fair value, using multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) for comparable companies as the indicator of fair value. Lyondell's 41% share of the Equistar charge was offset by a corresponding reduction in Lyondell's negative goodwill, representing a portion of the excess of Lyondell's 41% share of Equistar's partners' capital over the carrying value of Lyondell's investment in Equistar. Consequently, there was no net effect on Lyondell's earnings or equity investment in Equistar. In addition, as a result of implementing SFAS No. 142, pretax earnings in 2002 and subsequent years will be favorably affected by $30 million annually because of the elimination of goodwill amortization. The following table presents Lyondell's reported net loss for all periods presented as adjusted for goodwill amortization expense.
For the three months ended March 31, -------------------------- Millions of dollars 2002 2001 - ------------------- -------- ---------- Reported net loss $(55) $(34) Add back: goodwill amortization, net of tax -- 5 ---- ---- Adjusted net loss $(55) $(29) ==== ====
3. Unusual Charges During 2001, Lyondell recorded a pretax charge of $63 million associated with its decision to exit the aliphatic diisocyanates ("ADI") business. The $63 million charge included $45 million to adjust the carrying values of the ADI assets to their net realizable value, and accrued liabilities of $15 million for exit costs and $3 million for severance and other employee-related costs for nearly 100 employee positions that were eliminated. Payments of $5 million for exit costs and $2 million for severance and other employee-related costs were made through March 31, 2002, resulting in a remaining accrued liability of $11 million. 4 4. Equity Interest in Equistar Chemicals, LP Lyondell has a 41% interest in Equistar Chemicals, LP ("Equistar"), while Millennium Chemicals Inc. ("Millennium") and Occidental Petroleum Corporation ("Occidental") each have a 29.5% interest (see Note 14). Because the partners jointly control certain management decisions, Lyondell accounts for its investment in Equistar using the equity method of accounting. As a partnership, Equistar is not subject to federal income taxes. Summarized financial information for Equistar follows:
March 31, December 31, Millions of dollars 2002 2001 - ------------------- ---------------- ---------------- BALANCE SHEETS Total current assets $1,047 $1,226 Property, plant and equipment, net 3,660 3,705 Goodwill, net -- 1,053 Other assets 341 324 ------ ------ Total assets $5,048 $6,308 ====== ====== Current maturities of long-term debt $ 4 $ 104 Other current liabilities 523 557 Long-term debt 2,282 2,233 Other liabilities 181 177 Partners' capital 2,058 3,237 ------ ------ Total liabilities and partners' capital $5,048 $6,308 ====== ====== For the three months ended March 31, ----------------------------------------- 2002 2001 ---------------- ---------------- STATEMENTS OF INCOME Sales and other operating revenues $ 1,136 $ 1,773 Cost of sales 1,162 1,723 Selling, general and administrative expenses 49 56 Amortization of goodwill -- 8 Unusual charges -- 22 ------- ------- Operating loss (75) (36) Interest expense, net (52) (46) Other income, net 1 5 ------- ------- Loss before cumulative effect of accounting change (126) (77) Cumulative effect of accounting change (1,053) -- ------- ------- Net loss $(1,179) $ (77) ======= ======= SELECTED CASH FLOW INFORMATION Depreciation and amortization $ 75 $ 78 Expenditures for property, plant and equipment 15 24
As of January 1, 2002, as part of the implementation of SFAS No. 142, the entire unamortized balance of Equistar's goodwill was determined to be impaired. Accordingly, Equistar's earnings in the first quarter 2002 were reduced by $1.1 billion. Lyondell's 41% share of the charge for impairment of Equistar's goodwill was offset by a corresponding reduction in the difference between Lyondell's investment in Equistar and its underlying equity in Equistar's net assets (see Note 2). 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 loss before cumulative effect of accounting change and the accretion of the remaining 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% interest in LYONDELL-CITGO Refining LP ("LCR"), while CITGO Petroleum Corporation ("CITGO") has a 41.25% interest. As a partnership, LCR is not subject to federal income taxes. Summarized financial information for LCR follows:
March 31, December 31, Millions of dollars 2002 2001 - ------------------- --------- ------------ BALANCE SHEETS Total current assets $ 258 $ 230 Property, plant and equipment, net 1,338 1,343 Other assets 97 97 ------ ------ Total assets $1,693 $1,670 ====== ====== Notes payable $ 16 $ 50 Current maturities of long-term debt 450 -- Other current liabilities 374 335 Long-term debt -- 450 Loans payable to partners 264 264 Other liabilities 80 79 Partners' capital 509 492 ------ ------ Total liabilities and partners' capital $1,693 $1,670 ====== ====== For the three months ended March 31, -------------------- 2002 2001 ----- ------ STATEMENTS OF INCOME Sales and other operating revenues $ 707 $ 910 Cost of sales 646 838 Selling, general and administrative expenses 12 14 ----- ------ Operating income 49 58 Interest expense, net (8) (16) ----- ------ Net income $ 41 $ 42 ===== ======= SELECTED CASH FLOW INFORMATION Depreciation and amortization $ 29 $ 28 Expenditures for property, plant and equipment 22 11
Lyondell's "Income (loss) from equity investments" in LCR as presented in the Consolidated Statements of Income consists of Lyondell's share of LCR's net income and the accretion of the difference between Lyondell's investment and its underlying equity in LCR's net assets. 6 6. Inventories Inventories consisted of the following components at:
March 31, December 31, Millions of dollars 2002 2001 - ------------------- --------- ------------ Finished goods $250 $262 Work-in-process 5 5 Raw materials 16 19 Materials and supplies 32 30 ---- ---- Total inventories $303 $316 ==== ====
7. Property, Plant and Equipment, Net The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows at:
March 31 December 31, Millions of dollars 2002 2001 - ------------------- -------- ------------ Land $ 12 $ 10 Manufacturing facilities and equipment 2,524 2,529 Construction in progress 117 113 ------ ------ Total property, plant and equipment 2,653 2,652 Less accumulated depreciation 388 359 ------ ------ Property, plant and equipment, net $2,265 $2,293 ====== ======
Depreciation and amortization is summarized as follows:
March 31, March 31, Millions of dollars 2002 2001 - ------------------- --------- --------- Property, plant and equipment $31 $30 Investment in PO joint venture 8 8 Goodwill -- 8 Debt issuance costs 4 3 Turnaround expense 3 4 Software costs 2 -- Other intangibles 12 12 --- --- $60 $65 === ===
8. Long-Term Debt Long-term debt consisted of the following at:
March 31, December 31, Millions of dollars 2002 2001 - ------------------- ---------- ----------- Term Loan E due 2006 $ 621 $ 634 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 Secured Notes due 2008, 9.5% 393 393 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 3,840 3,853 Less current maturities 7 7 ------ ------ Long-term debt, net $3,833 $3,846 ====== ======
7 9. Derivative Financial Instruments The following table summarizes activity included in accumulated other comprehensive loss ("AOCL") related to the after-tax impact of the effective portion of the fair value of derivative instruments used as cash flow hedges for the three-month periods ended:
March 31, March 31, Millions of dollars 2002 2001 - ------------------- --------- --------- Gain (loss): Balance at beginning of period $(2) $-- Net losses on derivative instruments charged to AOCL (1) (4) --- --- Net change in AOCL for the period (1) (4) --- --- Net loss on derivative instruments included in AOCL at March 31 $(3) $(4) === ===
The transition adjustment resulting from the adoption of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as of January 1, 2001 was insignificant. 10. Commitments and Contingencies Bayer Claim--On April 30, 2002, Lyondell and Bayer AG settled the claims of Bayer AG in relation to its March 2000 purchase of Lyondell's polyols business. Lyondell had received notice of these claims in June 2001, which alleged various breaches of representations and warranties related to the condition of the business and assets and which sought damages in excess of $100 million. The settlement included new or amended commercial agreements between the parties, generally relating to the existing PO partnership. As a whole, the new or amended agreements provide new business opportunities and value for both parties over the next five to ten years. Concurrent with the settlement, Lyondell made a $5 million indemnification payment to Bayer. The settlement had no effect on Lyondell's financial position or results of operations. Capital Commitments--Lyondell has various commitments related to capital expenditures, all made in the normal course of business. At March 31, 2002, major capital commitments primarily consisted of Lyondell's 50% share of those related to the construction of a world-scale PO facility, known as PO-11, in The Netherlands. The outstanding commitments, which are funded through contributions and advances to affiliates, totaled $101 million as of March 31, 2002. Construction Lease--During the third quarter 2000, construction began on a new butanediol ("BDO") production facility in Europe known as BDO-2. Construction is being financed by an unaffiliated entity that was established for the purpose of serving as lessor with respect to this facility. Construction spending through March 31, 2002, including interest incurred by the lessor during construction, totaled 162 million euros, or approximately $141 million using March 31, 2002 exchange rates. Upon completion in mid-2002, Lyondell will lease the facility under an operating lease for an initial term of five years. Minimum payments under the operating lease will approximate an amount equivalent to interest on the final construction costs at the interest rate implicit in the lease. Lyondell may, at its option, purchase the facility at any time during the lease term for the unrecovered construction costs of the lessor or, subject to certain conditions, renew the lease for four successive five-year terms. If Lyondell does not exercise the purchase option before the end of the last renewal period, the facility will be sold. In the event the sales proceeds are less than the guaranteed residual value, Lyondell will pay the difference to the lessor. The guaranteed residual value at the end of the lease term is estimated at approximately 206 million euros, or $180 million using March 31, 2002 exchange rates. Under the transaction documents, Lyondell is subject to certain financial and other covenants that are substantially the same as those contained in the credit facility. Crude Supply Agreement--Under the Crude Supply Agreement, PDVSA Oil 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 capacity of 268,000 barrels per day of crude oil. By letter dated April 16, 1998, PDVSA Oil informed LCR that the 8 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 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, of 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 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. During 2001, PDVSA Oil declared itself in a force majeure situation, but did not reduce crude oil deliveries to LCR during 2001. In January 2002, PDVSA Oil again declared itself in a force majeure situation and stated that crude oil deliveries could be reduced by up to 20.3% beginning March 1, 2002. In February 2002, LCR was advised by PDVSA Oil that deliveries of crude oil to LCR in March 2002 would be reduced to approximately 198,000 barrels per day. Lyondell currently expects second quarter 2002 deliveries under the Crude Supply Agreement to average 190,000 barrels per day. The recent political uncertainty in Venezuela has not affected crude oil deliveries, the Crude Supply Agreement or related matters to date, and the long-term effects of these events, if any, are not yet clear. LCR has consistently contested the validity of PDVSA Oil's and PDVSA's reductions in deliveries under the Crude Supply Agreement. The parties have different interpretations of the provisions of the contracts concerning the delivery of crude oil. The contracts do not contain dispute resolution procedures, and the parties have been unable to resolve their commercial dispute. As a result, on February 1, 2002, LCR filed a lawsuit against PDVSA and PDVSA Oil in connection with the January 2002 force majeure declaration, as well as the claimed force majeure from April 1998 to September 2000. In 1999, PDVSA announced its intention to renegotiate its crude supply agreements with all third parties, including LCR. In light of PDVSA's announced intent, there can be no assurance that PDVSA Oil will continue to perform its obligations under the Crude Supply Agreement. However, it has confirmed that it expects to honor its commitments if a mutually acceptable restructuring of the Crude Supply Agreement is not achieved. From time to time, the Company and PDVSA have had discussions covering both a restructuring of the Crude Supply Agreement and a broader restructuring of the LCR partnership. Lyondell is unable to predict whether changes in either arrangement will occur. The breach or termination of the Crude Supply Agreement, or reduction in supply thereunder, would require LCR to purchase all or a portion of its crude oil feedstocks in the merchant market, could subject LCR to significant volatility and price fluctuations and could adversely affect LCR and, therefore, Lyondell. Cross Indemnity Agreement--In connection with the transfer of assets and liabilities 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 Company ("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 9 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 March 31, 2002, Equistar had expensed nearly all of 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 subsidiaries of Occidental. Environmental Remediation--As of March 31, 2002, Lyondell's environmental liability for future remediation costs at its plant sites and a limited number of Superfund sites totaled $23 million. The liabilities per site range from less than $1 million to $11 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 investigations by regulatory agencies, could require Lyondell to reassess its potential exposure related to environmental matters. Clean Air Act--The eight-county Houston/Galveston region has been designated a severe non-attainment area for ozone by the U.S. Environmental Protection Agency ("EPA"). Emission reduction controls for nitrogen oxides ("NOx") must be installed at LCR's refinery and each of Lyondell's two facilities and Equistar's six facilities in the Houston/Galveston region. 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 direct share of such expenditures could total between $65 million and $80 million. Lyondell's proportionate share of Equistar's expenditures could total between $85 million and $105 million, and Lyondell's proportionate share of LCR's expenditures could total between $75 million and $95 million. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. In January 2001, Lyondell and an organization composed of industry participants filed a lawsuit to encourage adoption of their alternative plan to achieve the same air quality improvement with less negative economic impact on the region. Adoption of the alternative plan, as sought by the lawsuit, is expected to reduce the estimated capital investments for NOx reductions required by Lyondell, Equistar and LCR to comply with the standards. However, there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. The presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain federal and state governmental initiatives in the U.S. have sought either to rescind the oxygenate requirement for reformulated gasoline or to restrict or ban the use of MTBE. On April 25, 2002, the U.S. Senate passed its version of an omnibus energy bill, which, among other things, would ban the use of MTBE as a fuel oxygenate. The Senate bill is not law and needs to be reconciled with the U.S. House of Representatives' omnibus energy bill, which was passed in July 2001. Lyondell's MTBE sales represented approximately 35% of its total 2001 revenues. Lyondell does not expect these initiatives to have a significant impact on MTBE margins and volumes in 2002. Should it become necessary to reduce MTBE production, Lyondell would need to make capital expenditures to convert its MTBE plants to production of alternate gasoline blending components. The profit margins on such alternate gasoline blending components could differ from those historically realized on MTBE. 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. In 1998, the EPA concluded that additional controls on gasoline and diesel fuel 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 10 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 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 on the financial position, liquidity or results of operations 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 the 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. 11. Earnings Per Share Basic earnings per share for the periods presented are computed based upon the weighted average number of shares outstanding for the periods. Diluted earnings per share include the effect of outstanding stock options issued under the Executive Long-Term Incentive Plan and the Incentive Stock Option Plan. These stock options were antidilutive in the three-month periods ended March 31, 2002 and 2001. Net loss per share ("EPS") data is as follows:
For the three months ended March 31, ---------------------------------------------------- 2002 2001 ------------------------- ----------------------- Thousands of shares Shares EPS Shares EPS - ------------------- ----------- --------- ---------- --------- Basic 117,565 $ (.47) 117,562 $ (.29) Dilutive effect of options -- -- -- -- -------- -------- ------- ------- Diluted 117,565 $ (.47) 117,562 $ (.29) ======== ======== ======= =======
12. Comprehensive Loss The components of the comprehensive loss were as follows:
For the three months ended March 31, -------------------------------- 2002 2001 ------------- ------------- Net loss $(55) $(34) ---- ---- Other comprehensive loss: Foreign currency translation loss (17) (50) Net losses on derivative instruments (1) (4) Minimum pension liability adjustment 4 -- ---- ---- Total other comprehensive loss (14) (54) ---- ---- Comprehensive loss $(69) $(88) ==== ====
11 13. Segment and Related Information Lyondell operates in four reportable segments: (i) intermediate chemicals and derivatives; (ii) petrochemicals; (iii) polymers; and (iv) refining. The methanol operations are not a reportable segment. Lyondell's entire $1.1 billion balance of goodwill is allocated to the intermediate chemicals and derivatives segment. 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 March 31, 2002: Sales and other operating revenues $ 674 $ -- $ -- $ -- $ -- $ 674 Operating income 38 38 Interest expense (93) (93) Interest income 2 2 Other income, net 1 1 Income (loss) from equity investments -- (10) (9) 27 (29) (21) Loss before income taxes (73) For the three months ended March 31, 2001: Sales and other operating revenues $ 849 $ -- $ -- $ -- $ -- $ 849 Operating income 31 31 Interest expense (99) (99) Interest income 7 7 Other income, net 3 3 Income (loss) from equity investments 1 47 (36) 27 (37) 2 Loss before income taxes (56)
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 March 31, ----------------------------------- Millions of dollars 2002 2001 - ------------------- --------------- --------------- Equistar items not allocated to segments: Principally general and administrative expenses and interest expense, net $(26) $(24) Unusual charges -- (9) Loss from equity investment in LMC (3) (4) ---- ---- Total--Other $(29) $(37) ==== ====
12 14. Proposed Transactions with Occidental Early in 2002, Lyondell and Occidental agreed in principle to Lyondell's acquisition of Occidental's 29.5% interest in Equistar and to Occidental's acquisition of an equity interest in Lyondell. Upon consummation of these transactions, Occidental would receive the following from Lyondell: ... 30 to 34 million shares of newly issued Lyondell Series B Common Stock, with the final number to be determined at closing of this transaction. These shares would have the same rights as Lyondell's regular common stock with the exception of the dividend. The Series B Common Stock would pay a dividend at the same rate as the regular common stock but, at Lyondell's option, the dividend may be paid in additional shares of Series B Common Stock or in cash. These new Series B shares also would include provisions for conversion to regular common stock three years after issuance or earlier in certain circumstances; ... five-year warrants to acquire five million shares of Lyondell regular common stock at $25 per share, subject to adjustment upon the occurrence of certain events; and ... a contingent payment equivalent in value to 7.38% of Equistar's cash distributions for 2002 and 2003, up to a total of $35 million, payable in cash, Series B Common Stock or regular common stock, as determined by Lyondell. On April 19, 2002, the formal right of first offer process began in connection with certain of the transactions. Under this process, Millennium, the third partner in Equistar, has 45 days to decide whether to participate on a pro rata basis in the acquisition of Occidental's Equistar interest. At the end of the process, Occidental, Lyondell and, if it elects to participate, Millennium are expected to sign definitive documentation. Lyondell's board of directors approved the transactions on May 2, 2002. Closing of the transactions is subject to certain conditions, including approval by Lyondell's shareholders. Lyondell anticipates that these transactions will close during the third quarter of 2002. However, there can be no assurance that the proposed transactions will be completed. 15. Deferred Tax Assets The deferred tax assets classified as current assets decreased by $216 million during the first quarter of 2002. The reduction primarily represented a change in the timing of anticipated realization of the tax benefits of domestic net operating loss carryforwards. These benefits, which are expected to be realized within the next few years, have been reclassified from current assets to long-term net liabilities on the consolidated balance sheet. There was no change in management's expectation that these deferred tax assets will be fully realized. 16. Supplemental Guarantor Information ARCO Chemical Technology Inc. ("ACTI"), ARCO Chemical Technology L.P. ("ACTLP") and Lyondell Chemical Nederland, Ltd. ("LCNL") are guarantors, jointly and severally, (collectively "Guarantors") of the $393 million senior secured notes issued in December 2001 and the $500 million senior subordinated notes and $1.9 billion senior secured notes issued in May 1999. LCNL, a Delaware corporation, is a wholly owned subsidiary of Lyondell that owns a Dutch subsidiary that operates a chemical production facility near 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 March 31, 2002 and December 31, 2001 and for the three-month periods ended March 31, 2002 and 2001. 13 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED BALANCE SHEET As of March 31, 2002
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------- ---------- ---------- ------------ ------------ Total current assets $ 595 $ 136 $ 226 $ -- $ 957 Property, plant and equipment, net 910 505 850 -- 2,265 Investments and long-term receivables 7,000 475 1,508 (7,383) 1,600 Goodwill, net 453 386 261 -- 1,100 Other assets 361 86 4 2 453 ------- ------- ------- ------- ------- Total assets $ 9,319 $ 1,588 $ 2,849 $(7,381) $ 6,375 ======= ======= ======= ======= ======= Current maturities of long-term debt $ 7 $ -- $ -- $ -- $ 7 Other current liabilities 401 68 88 -- 557 Long-term debt 3,831 -- 2 -- 3,833 Other liabilities 518 55 16 -- 589 Deferred income taxes 399 130 51 -- 580 Intercompany liabilities (assets) 3,509 (1,115) (2,394) -- -- Minority interest -- -- 155 -- 155 Stockholders' equity 654 2,450 4,931 (7,381) 654 ------- ------- ------- ------- ------- Total liabilities and stockholders' equity $ 9,319 $ 1,588 $ 2,849 $(7,381) $ 6,375 ======= ======= ======= ======= =======
BALANCE SHEET As of December 31, 2001
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------- ---------- ---------- ------------ ------------ Total current assets $ 781 $ 132 $ 294 $ -- $ 1,207 Property, plant and equipment, net 915 516 862 -- 2,293 Other investments and long-term receivables 7,007 461 1,537 (7,386) 1,619 Goodwill, net 453 389 260 -- 1,102 Other assets 344 88 50 -- 482 ------- ------- ------- ------- ------- Total assets $ 9,500 $ 1,586 $ 3,003 $(7,386) $ 6,703 ======= ======= ======= ======= ======= Current maturities of long-term debt $ 7 $ -- $ -- $ -- $ 7 Other current liabilities 391 73 88 -- 552 Long-term debt 3,844 -- 2 -- 3,846 Other liabilities 515 55 13 -- 583 Deferred income taxes 611 133 46 -- 790 Intercompany liabilities (assets) 3,383 (1,101) (2,282) -- -- Minority interest -- -- 176 -- 176 Stockholders' equity 749 2,426 4,960 (7,386) 749 ------- ------- ------- ------- ------- Total liabilities and stockholders' equity $ 9,500 $ 1,586 $ 3,003 $(7,386) $ 6,703 ======= ======= ======= ======= =======
14 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued) STATEMENT OF INCOME For the Three Months Ended March 31, 2002
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------- ----------- ---------- ------------ ------------- Sales and other operating revenues $ 469 $ 165 $ 351 $(311) $ 674 Cost of sales 460 148 292 (311) 589 Selling, general and administrative expenses 26 3 11 -- 40 Research and development expense 7 -- -- -- 7 ----- ----- ----- ----- ----- Operating income (loss) (24) 14 48 -- 38 Interest income (expense), net (95) 2 2 -- (91) Other income (expense), net (10) 4 7 -- 1 Income (loss) from equity 65 -- (21) (65) (21) investments Intercompany income 8 12 18 (38) -- (Benefit from) provision for income taxes (14) 8 13 (25) (18) ----- ----- ----- ----- ----- Net income (loss) $ (42) $ 24 $ 41 $ (78) $ (55) ===== ===== ===== ===== =====
STATEMENT OF INCOME For the Three Months Ended March 31, 2001
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------- ---------- ---------- ------------ ------------ Sales and other operating revenues $ 594 $ 237 $ 406 $(388) $ 849 Cost of sales 569 149 431 (388) 761 Selling, general and administrative expenses 25 2 14 -- 41 Research and development expense 8 -- -- -- 8 Amortization of goodwill 4 2 2 -- 8 ----- ----- ----- ----- ----- Operating income (loss) (12) 84 (41) -- 31 Interest income (expense), net (97) 1 4 -- (92) Other income (expense), net (17) (61) 81 -- 3 Income from equity investments 82 -- 2 (82) 2 Intercompany income (expense) (30) 28 37 (35) -- (Benefit from) provision for income taxes (29) 20 33 (46) (22) ----- ----- ----- ----- ----- Net income (loss) $ (45) $ 32 $ 50 $ (71) $ (34) ===== ===== ===== ===== =====
15 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued) STATEMENT OF CASH FLOWS For the Three Months Ended March 31, 2002
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------- ---------- ---------- ------------ ------------ Net income (loss) $ (42) $ 24 $ 41 $ (78) $ (55) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 29 9 22 -- 60 Deferred income taxes 4 (2) 5 -- 7 Net changes in working capital and other 147 (27) (2) 40 158 ----- ----- ----- ----- ----- Net cash provided by operating activities 138 4 66 (38) 170 ----- ----- ----- ----- ----- Expenditures for property, plant and equipment (8) (1) (2) -- (11) Contributions and advances to affiliates -- -- (38) -- (38) Distributions from affiliates in excess of earnings -- -- -- -- -- ----- ----- ----- ----- ----- Net cash used in investing activities (8) (1) (40) -- (49) ----- ----- ----- ----- ----- Dividends paid (26) -- (38) 38 (26) Repayments of long-term debt (13) -- -- -- (13) ----- ----- ----- ----- ----- Net cash used in financing activities (39) -- (38) 38 (39) ----- ----- ----- ----- ----- Effect of exchange rate changes on cash -- 1 (1) -- -- ----- ----- ----- ----- ----- Increase (decrease) in cash and cash equivalents $ 91 $ 4 $ (13) $ -- $ 82 ===== ===== ===== ===== =====
16 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued) STATEMENT OF CASH FLOWS--(Continued) For the Three Months Ended March 31, 2001
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------- ---------- ---------- ------------ ------------ Net income (loss) $ (45) $ 32 $ 50 $ (71) $ (34) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 33 9 23 -- 65 Deferred income taxes (27) 1 (3) -- (29) Net changes in working capital and other 86 (40) (160) 71 (43) ----- ----- ----- ----- ----- Net cash provided by (used in) operating activities 47 2 (90) -- (41) ----- ----- ----- ----- ----- Expenditures for property, Plant and equipment (8) (2) (1) -- (11) Contributions and advances to affiliates (12) (15) 7 -- (20) Distributions from affiliates in excess of earnings 3 -- 4 -- 7 ----- ----- ----- ----- ----- Net cash provided by (used in) investing activities (17) (17) 10 -- (24) ----- ----- ----- ----- ----- Dividends paid (27) -- -- -- (27) Repayments of long-term debt (2) -- -- -- (2) Other (3) -- -- -- (3) ----- ----- ----- ----- ----- Net cash used in financing activities (32) -- -- -- (32) ----- ----- ----- ----- ----- Effect of exchange rate changes on cash -- (2) 1 -- (1) ----- ----- ----- ----- ----- Decrease in cash and cash equivalents $ (2) $ (17) $ (79) $ -- $ (98) ===== ===== ===== ===== =====
17 -----END PRIVACY-ENHANCED MESSAGE-----