-----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, HM5jnEYHNk3OvQ12k/2t3+DJb1qJ91xbEbfPoljk9l78v9gRp98SqYTYyhy6GR9j zZh9RB+KRuKG6q+PBhsnXA== 0000899243-02-002269.txt : 20020813 0000899243-02-002269.hdr.sgml : 20020813 20020813171003 ACCESSION NUMBER: 0000899243-02-002269 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 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: 02730600 BUSINESS ADDRESS: STREET 1: ONE HOUSTON CENTER #700 STREET 2: 1221 MCKINNEY ST CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7136527300 MAIL ADDRESS: STREET 1: ONE HOUSTON CENTER #700 STREET 2: 1221 MCKINNEY ST CITY: HOUSTON STATE: TX ZIP: 77010 10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 For the six months ended June 30, June 30, ----------------------------- ------------------------------ Millions of dollars 2002 2001 2002 2001 - --------------------- ------------- ------------- -------------- ------------- Sales and other operating revenues: Unrelated parties $ 1,111 $ 1,239 $ 2,006 $ 2,552 Related parties 351 361 592 821 ------- ------- -------- ------- 1,462 1,600 2,598 3,373 Operating costs and expenses: Cost of sales 1,390 1,522 2,552 3,245 Selling, general and administrative expenses 41 45 81 91 Research and development expense 9 10 18 20 Amortization of goodwill - - 9 - - 17 Unusual charges - - - - - - 22 ------- ------- -------- ------- 1,440 1,586 2,651 3,395 ------- ------- -------- ------- Operating income (loss) 22 14 (53) (22) Interest expense (51) (45) (103) (91) Interest income 1 - - 1 - - Other income, net - - 1 1 6 ------- ------- -------- ------- Net loss before cumulative effect of accounting change (28) (30) (154) (107) Cumulative effect of accounting change - - - - (1,053) - - ------- ------- -------- ------- Net loss $ (28) $ (30) $ (1,207) $ (107) ======== ======== ======== =======
See Notes to Consolidated Financial Statements. 1 EQUISTAR CHEMICALS, LP CONSOLIDATED BALANCE SHEETS
June 30, December 31, Millions of dollars 2002 2001 - ------------------- ---------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 25 $ 202 Accounts receivable: Trade, net 557 440 Related parties 133 100 Inventories 445 448 Prepaid expenses and other current assets 28 36 ------- ------- Total current assets 1,188 1,226 Property, plant and equipment, net 3,615 3,705 Investment in PD Glycol 46 47 Goodwill, net - - 1,053 Other assets, net 301 277 ------- ------- Total assets $ 5,150 $ 6,308 ======= ======= LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable: Trade $ 404 $ 331 Related parties 24 29 Current maturities of long-term debt 4 104 Other accrued liabilities 170 197 ------- ------- Total current liabilities 602 661 Long-term debt 2,331 2,233 Other liabilities 187 177 Commitments and contingencies Partners' capital: Partners' accounts 2,050 3,257 Accumulated other comprehensive loss (20) (20) ------- ------- Total partners' capital 2,030 3,237 ------- ------- Total liabilities and partners' capital $ 5,150 $ 6,308 ======= =======
See Notes to Consolidated Financial Statements. 2 EQUISTAR CHEMICALS, LP CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, ------------------------------ Millions of dollars 2002 2001 - ------------------- ------------- ------------- Cash flows from operating activities: Net loss $ (1,207) $ (107) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Cumulative effect of accounting change 1,053 - - Depreciation and amortization 150 159 Net gain on disposition of assets - - (3) Changes in assets and liabilities that provided (used) cash: Accounts receivable (150) 145 Inventories 3 (34) Accounts payable 68 (73) Other assets and liabilities (56) 8 -------- -------- Net cash (used in) provided by operating activities (139) 95 -------- -------- Cash flows from investing activities: Expenditures for property, plant and equipment (29) (53) Contributions to affiliates (6) - - Purchase of business from AT Plastics, Inc. - - (7) Proceeds from sales of assets - - 4 -------- -------- Net cash used in investing activities (35) (56) -------- -------- Cash flows from financing activities: Net borrowing under lines of credit 100 - - Repayment of long-term debt (101) - - Other (2) - - -------- -------- Net cash used in financing activities (3) - - -------- -------- (Decrease) increase in cash and cash equivalents (177) 39 Cash and cash equivalents at beginning of period 202 18 -------- -------- Cash and cash equivalents at end of period $ 25 $ 57 ======== ========
See Notes to Consolidated Financial Statements. 3 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Preparation The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of Equistar Chemicals, LP ("Equistar" or "the Partnership") in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. 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 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"). During 2002, Lyondell entered into an agreement to purchase Occidental's interest in Equistar. Upon completion of the related transactions, Lyondell's ownership interest in Equistar would increase to 70.5%. Closing of the transactions, which is expected to occur by September 1, 2002, is subject to certain conditions, including approval by Lyondell's shareholders. 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, severance benefits of $5 million, pension benefits of $2 million, and other exit costs of $3 million. The remaining $5 million of the charge related primarily to the write down of certain assets. The severance and pension benefits covered approximately 125 people employed at the Port Arthur facility. Payments of $5 million for severance, $3 million for exit costs and $3 million for environmental remediation were made through June 30, 2002. The pension benefits of $2 million will be paid from the assets of the pension plans. As of June 30, 2002, the remaining liability included $4 million for environmental remediation costs (see Note 9). 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 an indicator of fair value. 4 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 to eliminate goodwill amortization expense.
For the three months For the six months ended June 30, ended June 30, -------------------- ------------------ Millions of dollars 2002 2001 2002 2001 - ------------------- ------- ------- ------ ------ Reported loss before cumulative effect of accounting change $ (28) $ (30) $ (154) $ (107) Add back: goodwill amortization -- 9 -- 17 ------- ------- ------- ------- Adjusted loss before cumulative effect of accounting change $ (28) $ (21) $ (154) $ (90) ======= ======= ======= ======= Reported net loss $ (28) $ (30) $(1,207) $ (107) Add back: Goodwill amortization -- 9 -- 17 ------- ------- ------- ------- Adjusted net loss $ (28) $ (21) $(1,207) $ (90) ======= ======= ======= =======
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.13, and Technical Corrections. The primary impact of the statement on Equistar will be the classification of losses that result from the early extinguishment of debt as a charge to income before extraordinary items. Reclassification of prior period losses that were originally reported as extraordinary items also will be required. Application of the statement will be required in 2003. In July 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities. SFAS No. 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities, essentially codifying prior accounting guidance on these matters. SFAS No. 146 will be effective for activities initiated after December 31, 2002. Early application is permitted. Equistar does not expect adoption of SFAS No. 146 to have any impact on its consolidated financial statements. 5. Inventories Inventories consisted of the following at: June 30, December 31, Millions of dollars 2002 2001 - ------------------- -------- ------------ Finished goods $ 247 $ 243 Work-in-process 14 12 Raw materials 100 104 Materials and supplies 84 89 ----- ------ Total inventories $ 445 $ 448 ===== ====== 5 6. Property, Plant and Equipment, Net The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows at: June 30, December 31, Millions of dollars 2002 2001 - ------------------- ------ ------------ Land $ 79 $ 79 Manufacturing facilities and equipment 5,973 5,929 Construction in progress 75 92 ------ ------ Total property, plant and equipment 6,127 6,100 Less accumulated depreciation 2,512 2,395 ------ ------ Property, plant and equipment, net $3,615 $3,705 ====== ====== Depreciation and amortization are summarized as follows:
For the three months ended For the six months ended June 30, June 30, -------------------------------- ------------------------------ 2002 2001 2002 2001 --------------- --------------- --------------- ------------- Millions of dollars - ------------------- Property, plant and equipment $ 59 $ 58 $ 119 $ 117 Goodwill - - 9 - - 17 Turnaround expense 5 5 12 11 Software costs 4 2 8 5 Catalysts 3 4 4 5 Debt issuance costs 1 - - 3 - - Other 3 3 4 4 ------ ------ ----- ----- $ 75 $ 81 $ 150 $ 159 ====== ====== ===== =====
7. Long-Term Debt In late March 2002, Equistar amended its credit facility making certain financial ratio requirements less restrictive, making the covenant limiting acquisitions more restrictive and adding a covenant limiting certain non-regulatory capital expenditures (see also Note 8). As a result of the amendment, the interest rate on the credit facility was increased by 0.5% per annum. Long-term debt consisted of the following at: June 30, December 31, Millions of dollars 2002 2001 - ------------------- -------- ------------ Bank credit facility: Revolving credit facility due 2006 $ 100 $ - - 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 7 9 ------- ------- Total long-term debt 2,335 2,337 Less current maturities 4 104 ------- ------- Total long-term debt, net $ 2,331 $ 2,233 ======= ======= 6 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 June 30, 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. Early in 2002, Equistar's credit rating was lowered by two major rating agencies, which permitted the early termination of one of Equistar's railcar leases by the lessor. As a result, Equistar renegotiated the lease during the first quarter 2002, resulting in a payment of additional fees and a $17 million prepayment, which is being amortized over the remaining lease term. The prepayment reduced the guaranteed residual value and reduced future lease payments. The guaranteed residual value at June 30, 2002 was $85 million. Two of the three Equistar railcar operating leases contain financial and other covenants that are substantially the same as those contained in Equistar's 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. Under the other lease, Equistar amended the covenants to incorporate the March 2002 amendment to the credit facility. The amendment, which was completed in the second quarter 2002, required the payment of additional fees and a $16 million prepayment, which is being amortized over the remaining lease term. The $16 million prepayment reduced the guaranteed residual value and the future lease payments. The guaranteed residual value at June 30, 2002 was $72 million. Equistar plans either to exercise the purchase option under this lease or to enter into a new lease arrangement with another lessor covering the subject railcars, prior to December 31, 2002. The third railcar lease, with a guaranteed residual value of $34 million at June 30, 2002, terminates in December 2002. Equistar plans either to exercise its option to purchase the railcars covered by this lease or to enter into another lease arrangement with a new lessor covering the subject railcars. The total guaranteed residual value under these leases at June 30, 2002, after considering the prepayments noted above, was approximately $191 million. Based on indications of lower current market values Equistar has estimated a potential loss on two of these leases and is accruing this amount ratably over the remaining terms of the respective leases. 9. 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 with respect to each partner, subject to certain terms of the respective asset contribution agreements. From formation through June 30, 2002, Equistar had incurred a total of $20 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 June 30, 2002 was $4 million and primarily related to the Port Arthur facility, which was permanently shut down in February 2001. In 7 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 to encourage adoption of an 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, would be expected to reduce Equistar's estimated capital investments for NOx reductions required to comply with the standards. Recently proposed revisions by the regulatory agencies would change the required NOx reduction levels from 90% to 80%. However, any potential resulting savings from this proposed revision could be offset by the costs of stricter proposed controls over volatile organic compounds, or VOCs. Equistar is still assessing the impact of these proposed regulations and there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as methyl tertiary butyl ether ("MTBE"), in gasoline sold in areas not meeting specified air quality standards. The presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain federal and state governmental initiatives in the U.S. have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or ban the use of MTBE. 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 and which would not ban the use of MTBE. 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 or volumes in 2002. Should it become necessary or desirable to reduce MTBE production, Equistar would need to make capital expenditures to add the flexibility to produce alternative gasoline blending components at its plants. The profit margins on such alternative gasoline blending components could be lower than those historically realized on MTBE. General--Equistar is involved in various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings, or any liability arising from the matters discussed in this note, will not have a material adverse effect on the financial position, liquidity or results of operations of Equistar. 10. Comprehensive Loss The components of the comprehensive loss were as follows:
For the three months For the six months ended June 30, ended June 30, -------------------- ------------------ 2002 2001 2002 2001 ------ ------ ------ ------ Net loss $ (28) $ (30) $ (1,207) $(107) ------ ----- -------- ----- Other comprehensive income (loss): Derivative instruments - - - - - - (2) Available-for-sale securities - - 1 - - - - ------ ----- -------- ----- Total other comprehensive income (loss) - - 1 - - (2) ------ ----- -------- ----- Comprehensive loss $ (28) $ (29) $ (1,207) $ (109) ====== ===== ======== =======
8 11. 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 June 30, 2002: Sales and other operating revenues: Customers $ 983 $ 479 $ - - $ - - $ 1,462 Intersegment 335 - - - - (335) - - --------- -------- -------- --------- --------- Total sales and operating revenues 1,318 479 - - (335) 1,462 Operating income (loss) 79 (26) (31) - - 22 Interest expense, net - - - - (50) - - (50) Net income (loss) 79 (26) (81) - - (28) For the three months ended June 30, 2001: Sales and other operating revenues: Customers $ 1,084 $ 516 $ - - $ - - $ 1,600 Intersegment 391 - - - - (391) - - --------- -------- -------- --------- --------- Total sales and operating revenues 1,475 516 - - (391) 1,600 Operating income (loss) 81 (23) (44) - - 14 Interest expense, net - - - - (45) - - (45) Other income, net - - - - 1 - - 1 Net income (loss) 81 (23) (88) - - (30) For the six months ended June 30, 2002: Sales and other operating revenues: Customers $ 1,709 $ 889 $ - - $ - - $ 2,598 Intersegment 602 - - - - (602) - - --------- -------- -------- --------- --------- Total sales and operating revenues 2,311 889 - - (602) 2,598 Operating income (loss) 55 (47) (61) - - (53) Interest expense, net - - - - (102) - - (102) Other income, net - - - - 1 - - 1 Net income (loss) 55 (47) (162) - - (154) For the six months ended June 30, 2001: Sales and other operating revenues: Customers $ 2,315 $ 1,058 $ - - $ - - $ 3,373 Intersegment 849 - - - - (849) - - --------- -------- -------- --------- --------- Total sales and operating revenues 3,164 1,058 - - (849) 3,373 Operating income (loss) 196 (112) (106) - - (22) Interest expense, net - - - - (91) - - (91) Other income, net - - - - 6 - - 6 Net income (loss) 196 (112) (191) - - (107)
9 The following table presents the details of "Operating income (loss)" as presented above in the "Unallocated" column:
For the three months ended For the six months ended June 30, June 30, ---------------------------- ----------------------------- Millions of dollars 2002 2001 2002 2001 - ------------------- ------------ ------------ ------------- ------------ Expenses not allocated to petrochemicals and polymers: Principally general and administrative expenses $ (31) $ (44) $ (61) $ (84) Unusual charges - - - - - - (22) ------ ------ ------ ------ Total--Unallocated $ (31) $ (44) $ (61) $ (106) ====== ====== ====== =======
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). 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview U.S. demand for ethylene in the second quarter 2002 was approximately 7% higher than in the second quarter 2001 and 1.5% higher than in the first quarter 2002. For the first six months 2002, U.S. ethylene demand was an estimated 4.4% higher compared to the first six months of 2001. Nonetheless, the demand growth failed to absorb the effects of increases in worldwide ethylene industry capacity during 2001 or to offset the effects of a 10% contraction in U.S. ethylene demand from 2000 to 2001. Partly in response to political uncertainties in the Middle East and Venezuela, raw material and energy costs, which had trended downward since the beginning of 2001, rose rapidly toward the end of the first quarter 2002. During the second quarter 2002, these costs stabilized at the higher levels. Second quarter 2002 benchmark crude oil prices averaged 22% higher than in the first quarter 2002, while second quarter 2002 natural gas prices averaged 45% higher than in the first quarter 2002. Nonetheless, raw material and energy costs were still lower in the second quarter and the first six months of 2002 than in the comparable 2001 periods. The benchmark price of crude oil averaged 5% lower in the second quarter 2002 and 15% lower in the first six months of 2002 than in the comparable 2001 periods. Natural gas prices, which spiked to historically high levels in January 2001, averaged 28% lower in the second quarter 2002 and 51% lower in the first six months of 2002 than in the comparable 2001 periods, resulting in lower energy costs. The increased demand for ethylene in the first six months of 2002 as well as the higher raw material costs and industry outages in the second quarter 2002 provided support for sales price increases in the second quarter 2002. Average benchmark sales prices for ethylene were 17% higher in the second quarter 2002 compared to the first quarter 2002, while average benchmark prices for co-product propylene were 28% higher in the second quarter 2002 compared to the first quarter 2002. As a result, Equistar's second quarter 2002 operating margins approached the levels experienced in the second quarter 2001. However, on a six-month basis, 2002 margins were considerably below the comparable 2001 period. For the first six months of 2002, the ongoing industry overcapacity and the decreases in raw material costs during 2001 and most of the first quarter 2002 resulted in lower product sales prices compared to the first six months of 2001. Average benchmark sales prices for ethylene were 31% lower in the first six months of 2002 compared to the first six months of 2001, while average benchmark prices for co-product propylene were 12% lower. Compared to the first six months of 2001, sales prices decreased more than the costs of raw materials. As a result, Equistar's product margins in the first six months of 2002 were generally lower compared to the first six months of 2001. RESULTS OF OPERATIONS Net Loss--Equistar's net loss of $28 million in the second quarter 2002 was comparable to a net loss of $30 million in the second quarter 2001, which included goodwill amortization of $9 million. Excluding the effect of the second quarter 2001 goodwill amortization, the net loss would have increased by $7 million in the second quarter 2002. Petrochemicals and polymers segment operating results in the second quarter 2002 were roughly comparable to the second quarter 2001, while interest expense increased by $6 million in the second quarter 2002 compared to the second quarter 2001. The increase in interest expense was due to the August 2001 refinancing of Equistar's debt, which included the issuance of fixed rate debt with higher rates of interest. Equistar's net loss before cumulative effect of accounting change was $154 million in the first six months of 2002 compared to a net loss of $107 million in the first six months of 2001. The first six months of 2001 included $17 million of goodwill amortization and $22 million of shutdown costs for Equistar's Port Arthur polyethylene facility. Excluding the effects of the goodwill amortization and shutdown costs, the net loss for the first six months of 2001 would have been $68 million. Compared to the adjusted net loss of $68 million for the first six months of 2001, the net loss for the first six months of 2002 increased by $86 million. The increased net loss reflected lower margins in the petrochemicals segment as sales prices decreased more than raw 11 material costs. In addition, certain fixed-price natural gas and natural gas liquid ("NGL") supply contracts negatively impacted the first quarter 2002 by approximately $33 million. These fixed-price contracts largely expired by the end of the first quarter 2002. The petrochemicals segment margin decreases were only partly offset by the benefit of higher polymers segment margins and higher sales volumes in both segments. Second Quarter 2002 versus First Quarter 2002 Equistar had a net loss of $28 million in the second quarter 2002 or an improvement of $98 million compared to a net loss before cumulative effect of accounting change of $126 million in the first quarter 2002. The petrochemicals segment reported operating income of $79 million in the second quarter 2002 compared to an operating loss of $24 million in the first quarter 2002, a $103 million improvement. The polymers segment had an operating loss of $26 million in the second quarter 2002 compared to an operating loss of $21 million in the first quarter 2002. Improvement in the petrochemicals segment was driven by sales price increases across the entire product line, while Equistar's net cost of ethylene production remained relatively stable. Benchmark ethylene prices increased 3.25 cents per pound, or 17%, in the second quarter 2002 compared to the first quarter 2002. The average cost of ethylene production for the industry increased by approximately 1.2 cents per pound. However, Equistar's cost of ethylene production, which was aided by Equistar's higher proportionate utilization of heavy liquid raw materials, did not experience the same increase. The heavy liquid raw material utilization provided benefits from higher co-product prices as propylene, benzene and butadiene sales price increases offset heavy liquid raw material cost increases. Also contributing to the sequential improvement was the expiration of certain fixed-price natural gas and NGL supply contracts, which negatively impacted the first quarter 2002 by approximately $33 million. Petrochemicals segment sales volumes increased 5% in the second quarter 2002 compared to the first quarter 2002. Sales price increases in Equistar's polymers segment kept pace with price increases in ethylene and propylene, the key raw materials for polymers. Sales volumes for the polymers segment increased by 6% in the second quarter 2002 compared to the first quarter 2002. Overall, performance in this segment remained relatively unchanged. The sales volume increases for both segments of 5% to 6% were in line with industry trends. 12 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 For the six months ended June 30, ended June 30, -------------------- ------------------ In millions 2002 2001 2002 2001 ----------- ------ ------ ------ ------ Selected petrochemicals products: Olefins (pounds) 4,393 4,072 8,530 8,313 Aromatics (gallons) 103 98 189 188 Polymers products (pounds) 1,593 1,396 3,101 2,837 Millions of dollars ------------------- Sales and other operating revenues: Petrochemicals segment $ 1,318 $ 1,475 $ 2,311 $ 3,164 Polymers segment 479 516 889 1,058 Intersegment eliminations (335) (391) (602) (849) ------- ------- ------- ------- Total $ 1,462 $ 1,600 $ 2,598 $ 3,373 ======= ======= ======= ======= Cost of sales: Petrochemicals segment $ 1,236 $ 1,393 $ 2,251 $ 2,961 Polymers segment 489 520 903 1,133 Intersegment eliminations (335) (391) (602) (849) ------- ------- ------- ------- Total $ 1,390 $ 1,522 $ 2,552 $ 3,245 ======= ======= ======= ======= Other operating expenses: Petrochemicals segment $ 3 $ 1 $ 5 $ 7 Polymers segment 16 19 33 37 Unallocated 31 44 61 84 Unusual charges -- -- -- 22 ------- ------- ------- ------- Total $ 50 $ 64 $ 99 $ 150 ======= ======= ======= ======= Operating income (loss): Petrochemicals segment $ 79 $ 81 $ 55 $ 196 Polymers segment (26) (23) (47) (112) Unallocated (31) (44) (61) (84) Unusual charges -- -- -- (22) ------- ------- ------- ------- Total $ 22 $ 14 $ (53) $ (22) ======= ======= ======= =======
Petrochemicals Segment Revenues--Revenues of $1.3 billion in the second quarter 2002 decreased 11% compared to second quarter 2001 revenues of $1.5 billion as a result of lower average sales prices, which were partly offset by 5% higher sales volumes. The lower sales prices in the second quarter 2002 reflect the effects of lower raw material costs and excess industry capacity. Benchmark quoted ethylene prices averaged 22.6 cents per pound in the second quarter 2002, a 21% decrease compared to the second quarter 2001. However, average benchmark prices of co-product propylene increased 10% compared to the second quarter 2001, partly offsetting the ethylene decrease. Sales volumes increased due to demand growth in the second quarter 2002. Revenues of $2.3 billion for the first six months of 2002 decreased 27% compared to the first six months of 2001 as lower 2002 average sales prices were only partly offset by a 2% increase in sales volumes. Sales prices in the first six months of 2002 averaged 29% lower than in the first six months of 2001 as a result of the effects of lower raw material costs and excess industry capacity. 13 Cost of Sales--Cost of sales of $1.2 billion in the second quarter 2002 decreased 11% compared to $1.4 billion in the second quarter 2001. The decrease was primarily due to lower raw material and natural gas costs in the second quarter 2002. The decreases were partly offset by the 5% increase in sales volumes in the second quarter 2002. Cost of sales of $2.3 billion in the first six months of 2002 decreased 24% compared to the first six months of 2001, somewhat less than the percentage decrease in revenues noted above. While the costs of natural gas and NGL raw materials decreased from the historically high levels experienced in the first six months of 2001, other raw material costs, such as heavy liquids, did not decrease proportionately to the decrease in sales prices. Costs were also higher in the first quarter 2002 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, whereas these contracts benefited the first six months of 2001 by approximately $10 million. These fixed-price contracts largely expired by the end of the first quarter 2002. Operating Income--The petrochemicals segment had operating income of $79 million in the second quarter 2002 compared to $81 million in the second quarter 2001. Operating margins in the second quarter 2002 were slightly lower than in the second quarter 2001. This was offset by the benefit from a 5% increase in sales volumes in the second quarter 2002 compared to the second quarter 2001. Operating income of $55 million for the first six months of 2002 decreased from $196 million in the first six months of 2001. The decrease was primarily due to lower margins as sales prices decreased more than raw material costs in the first six months of 2002 compared to the first six months of 2001. This was only partly offset by a 2% increase in sales volumes in the first six months of 2002. Polymers Segment Revenues--Revenues of $479 million in the second quarter 2002 decreased 7% compared to $516 million in the second quarter 2001, reflecting a 19% decrease in average sales prices offset by a 14% increase in sales volumes. Second quarter 2002 average sales prices decreased in response to lower raw material costs, primarily ethylene. The higher sales volumes reflected improvement in demand. Revenues of $889 million for the first six months of 2002 decreased 16% compared to $1,058 million in the first six months of 2001 due to a 23% decrease in average sales prices offset by a 9% increase in sales volumes. Cost of Sales--Cost of sales of $489 million in the second quarter 2002 decreased 6% compared to $520 million in the second quarter 2001. The decrease in the second quarter 2002 reflected lower raw material costs, primarily ethylene, partly offset by the 14% increase in sales volumes. Cost of sales of $903 million in the first six months of 2002 decreased 20% compared to $1,133 million for the first six months of 2001, more than the percentage decrease in revenues noted above. The decrease in the first six months of 2002 reflected lower raw material costs, both ethylene and propylene, partly offset by the 9% increase in sales volumes. Benchmark ethylene and propylene costs were 31% and 12% lower, respectively, in the first six months of 2002 compared to the first six months of 2001. Operating Income--The polymers segment had an operating loss of $26 million in the second quarter 2002 compared to a $23 million operating loss in the second quarter 2001. Operating margins in the second quarter 2002 were comparable to the second quarter 2001. For the first six months of 2002, the operating loss was $47 million compared to an operating loss of $112 million in the comparable 2001 period. The reduced operating loss was due to improvement in polymer margins and, to a lesser extent, higher sales volumes. Margins improved in the first six months of 2002 compared to the first six months of 2001 as decreases in sales prices were less than the decreases in polymer raw material costs. 14 Unallocated Items The following discusses expenses that were not allocated to the petrochemicals or polymers segments. Other Operating Expenses--Other operating expenses not allocated to the petrochemicals and polymers segments were $31 million in the second quarter 2002 compared to $44 million in the second quarter 2001 and $61 million in the first six months of 2002 compared to $84 million in the first six months of 2001. The decreases were primarily due to goodwill amortization of $9 million and $17 million included in the second quarter 2001 and the first six months of 2001, respectively, as well as cost reduction efforts. Goodwill amortization ceased effective January 1, 2002. See Note 2 of Notes to Consolidated Financial Statements. Unusual Charges--Equistar discontinued production at its higher-cost Port Arthur, Texas polyethylene facility on February 28, 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. FINANCIAL CONDITION Operating Activities--Operating activities used cash of $139 million in the first six months of 2002 compared to providing $95 million in the first six months of 2001. The decrease in operating cash flow in the 2002 period was due to a $47 million higher loss before the cumulative effect of an accounting change, increases in working capital levels, and payments related to railcar leases in the first six months of 2002. Equistar's working capital increased during the first six months of 2002 compared to a decrease during the first six months of 2001. The major components of working capital - receivables, inventory and payables - increased by a net $79 million in the first six months of 2002, primarily due to increases in receivables. The increase in receivables reflected higher sales prices and volumes, primarily during the second quarter 2002. By contrast, in the first six months of 2001, these three major components of working capital decreased by a net $38 million. During the first six months of 2002, Equistar made certain payments totaling $33 million, discussed further below, related to its railcar leases. The payments are reflected in other assets, net at June 30, 2002. Investing Activities--Equistar's capital expenditures were $29 million in the first six months of 2002 and $53 million in the first six months of 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. Equistar currently estimates that 2002 capital expenditures will be 5% to 10% below the annual budget amounts. During the second quarter 2002, Equistar contributed $6 million to a mutual insurance company formed by Equistar and other companies in the industry to provide catastrophic business interruption and excess property damage insurance coverage for its members. Financing Activities--Cash used by financing activities was a net $3 million in the first six months of 2002. Financing activities in the first six months of 2002 included net borrowing of $100 million under the revolving credit facility, partly to fund the increase in working capital, primarily receivables. See "Liquidity and Capital Resources" discussion below. Financing activities also included the scheduled retirement of $100 million principal amount of the 9.125% notes. There were no distributions to partners in the first six months of 2002. Liquidity and Capital Resources--At June 30, 2002, Equistar had cash on hand of $25 million. In addition, $400 million of the $500 million revolving credit facility, which matures in August 2006, was undrawn at June 30, 2002. Amounts available under the revolving credit facility are also reduced to the extent of certain outstanding letters of credit provided under the credit facility, which totaled $16 million as of June 30, 2002. 15 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 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, non-regulatory capital expenditures, certain payments, and mergers and consolidations. In addition, the 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. Equistar amended its credit facility in late March 2002, making certain financial ratio requirements less restrictive, making the covenant limiting acquisitions more restrictive and adding a covenant limiting certain non-regulatory capital expenditures. The amendment increased the interest rate on the credit facility by 0.5% per annum. Equistar was in compliance with all covenants under its debt instruments as of June 30, 2002. 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. Early in 2002, Equistar's credit rating was lowered by two major rating agencies, which permitted the early termination of one of Equistar's railcar leases by the lessor. As a result, Equistar renegotiated the lease during the first quarter 2002, resulting in a payment of additional fees and a $17 million prepayment, which is being amortized over the remaining lease term. The prepayment reduced the guaranteed residual value and reduced future cash lease payments. The guaranteed residual value at June 30, 2002 was $85 million. Two of the three Equistar railcar operating leases contain financial and other covenants that are substantially the same as those contained in Equistar's 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. Under the other lease, Equistar amended the covenants to incorporate the March 2002 amendment to the credit facility. The amendment, which was completed in the second quarter 2002, required the payment of additional fees and a $16 million prepayment, which is being amortized over the remaining lease term. The $16 million prepayment reduced the guaranteed residual value and the future lease payments. The guaranteed residual value at June 30, 2002 was $72 million. Equistar plans either to exercise the purchase option under this lease or to enter into a new lease arrangement with another lessor covering the subject railcars, prior to December 31, 2002. The third railcar lease, with a guaranteed residual value of $34 million at June 30, 2002, terminates in December 2002. Equistar plans either to exercise its option to purchase the railcars covered by this lease or to enter into another lease arrangement with a new lessor covering the subject railcars. The total guaranteed residual value under these leases at June 30, 2002, after considering the prepayments noted above, was approximately $191 million. Based on indications of lower current market values Equistar has estimated a potential loss on two of these leases and is accruing this amount ratably over the remaining terms of the respective leases. 16 PROPOSED TRANSACTION BETWEEN LYONDELL AND OCCIDENTAL During 2002, Lyondell entered into an agreement to purchase Occidental's 29.5% interest in Equistar. Upon completion of the related transactions, Lyondell's ownership interest in Equistar would increase to 70.5%. Millennium holds the remaining 29.5% interest in Equistar. Closing of the transactions, which is expected to occur by September 1, 2002, is subject to certain conditions, including approval by Lyondell's shareholders. There can be no assurance that the proposed transactions will be completed. CURRENT BUSINESS OUTLOOK Third quarter 2002 operating results will largely depend on the strength of the economy. The near-term volatility of product markets as well as the energy market are difficult to forecast. Polymer and co-product prices are expected to provide some momentum for the third quarter 2002, as market support has continued going into the period. Industry operating rates have improved, but oversupply exists and the industry remains vulnerable to any sudden increases in raw material costs or to a fall-off in economic activity. While Equistar is optimistic that the global economic recovery will continue, it also believes that it is prudent to remain cautious. Equistar is well positioned financially should there be disruptions or delays in the economic recovery. 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. In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The primary impact of the statement on Equistar will be the classification of losses that result from the early extinguishment of debt as a charge to income before extraordinary items. Reclassification of prior period losses that were originally reported as extraordinary items also will be required. Application of the statement will be required in 2003. In July 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities. SFAS No. 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities, essentially codifying prior accounting guidance on these matters. SFAS No. 146 will be effective for activities initiated after December 31, 2002. Early application is permitted. Equistar does not expect adoption of SFAS No. 146 to have any impact on its consolidated financial statements. See "Results of Operations" and Note 4 of Notes to Consolidated Financial Statements. 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 June 30, 2002, except as noted below. Certain federal and state governmental initiatives in the U.S. have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or ban the use of MTBE. 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 and which would not ban the use of MTBE. 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 or desirable to reduce MTBE production, Equistar would need to make capital expenditures to add the flexibility to produce alternative gasoline blending components at its 17 plants. The profit margins on such alternative gasoline blending components could be lower than those historically realized on MTBE. New air pollution standards promulgated by federal and state regulatory agencies in the U.S., including those specifically targeting the eight-county Houston/Galveston region, will affect a substantial portion of the operating facilities of Equistar. Compliance with these standards will result in increased capital investment during the next several years and higher annual operating costs for Equistar. Recently proposed revisions by the regulatory agencies would change the required nitrogen oxides, or NOx, reduction levels from 90% to 80%. However, any potential resulting savings from this proposed revision could be offset by the costs of stricter proposed controls over volatile organic compounds, or VOCs. Equistar is still assessing the impact of these proposed regulations and there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. See Note 9 of Notes to Consolidated Financial Statements. 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: o the cyclical nature of the chemical industry, o uncertainties associated with the economy, o substantial chemical industry capacity additions resulting in oversupply and declining prices and margins, o the availability and cost of raw materials and utilities, o access to capital markets, o technological developments, o current and potential governmental regulatory actions, o potential terrorist acts, o operating interruptions (including leaks, explosions, fires, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, spills and releases and other environmental risks), and o 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. 18 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 99.1 Certificate of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 99.2 Certificate of Controller (principal financial officer) pursuant to Section 906 of Sarbanes-Oxley Act of 2002 99.3 Consolidated Financial Statements (Unaudited) of Lyondell Chemical Company (b) Reports on Form 8-K None. 19 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: August 13, 2002 /s/ CHARLES L. HALL ------------------------------------- Charles L. Hall Vice President and Controller (Duly Authorized Officer and Principal Accounting Officer) 20 EX-99.1 3 dex991.txt CERTIFICATE OF PRINCIPAL EXECUTIVE OFFICER Exhibit 99.1 CERTIFICATE OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (the "Periodic Report"), I, Dan F. Smith, Chief Executive Officer of Equistar Chemicals, LP, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m or 78o(d)); and (2) the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Equistar Chemicals, LP. Date: August 13, 2002 /s/ Dan F. Smith ---------------------------- Dan F. Smith Chief Executive Officer EX-99.2 4 dex992.txt CERTIFICATE OF PRINCIPAL FINANCIAL OFFICER Exhibit 99.2 CERTIFICATE OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (the "Periodic Report"), I, Charles L. Hall, Vice President, Controller and Chief Accounting Officer of Equistar Chemicals, LP, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m or 78o(d)); and (2) the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Equistar Chemicals, LP. Date: August 13, 2002 /s/ Charles L. Hall ----------------------------------- Charles L. Hall Vice President, Controller and Chief Accounting Officer (Principal Financial Officer) EX-99.3 5 dex993.txt CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OF LYONDELL CHEMICAL COMPANY EXHIBIT 99.3 LYONDELL CHEMICAL COMPANY CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME
For the three months For the six months ended June 30, ended June 30, -------------------- ------------------ Millions of dollars, except per share data 2002 2001 2002 2001 ------------------------------------------ ------ ------ ------ ------ Sales and other operating revenues $ 843 $ 893 $ 1,517 $ 1,742 Operating costs and expenses: Cost of sales 724 770 1,313 1,531 Selling, general and administrative expenses 46 42 86 83 Research and development expense 8 8 15 16 Amortization of goodwill -- 7 -- 15 ------- ------- ------- ------- 778 827 1,414 1,645 ------- ------- ------- ------- Operating income 65 66 103 97 Interest expense (94) (98) (187) (197) Interest income 3 4 5 11 Other income (expense), net (4) (1) (3) 2 ------- ------- ------- ------- Loss before equity investments and income taxes (30) (29) (82) (87) ------- ------- ------- ------- Income (loss) from equity investments: Equistar Chemicals, LP (5) (2) (50) (24) LYONDELL-CITGO Refining LP 39 41 66 68 Other (2) 3 (5) -- ------- ------- ------- ------- 32 42 11 44 ------- ------- ------- ------- Income (loss) before income taxes 2 13 (71) (43) Provision for (benefit from) income taxes -- 9 (18) (13) ------- ------- ------- ------- Net income (loss) $ 2 $ 4 $ (53) $ (30) ======= ======= ======= ======= Basic and diluted earnings (loss) per share $ .02 $ .04 $ (.45) $ (.25) ======= ======= ======= =======
See Notes to Consolidated Financial Statements. 1 LYONDELL CHEMICAL COMPANY CONSOLIDATED BALANCE SHEETS
June 30, December 31, Millions of dollars, except par value data 2002 2001 - ------------------------------------------ -------- ------------ ASSETS Current assets: Cash and cash equivalents $ 215 $ 146 Accounts receivable, net 360 352 Inventories 312 316 Prepaid expenses and other current assets 57 116 Deferred tax assets 23 277 ------- ------- Total current assets 967 1,207 ------- ------- Property, plant and equipment, net 2,382 2,293 Investments and long-term receivables: Investment in PO joint ventures 740 717 Investment in Equistar Chemicals, LP 472 522 Receivable from LYONDELL-CITGO Refining LP 229 229 Investment in LYONDELL-CITGO Refining LP 71 29 Other investments and long-term receivables 88 122 Goodwill, net 1,120 1,102 Other assets, net 437 482 ------- ------- Total assets $ 6,506 $ 6,703 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 341 $ 319 Current maturities of long-term debt 6 7 Other accrued liabilities 232 233 ------- ------- Total current liabilities 579 559 ------- ------- Long-term debt 3,831 3,846 Other liabilities 589 583 Deferred income taxes 578 790 Commitments and contingencies Minority interest 158 176 Stockholders' equity: Common stock, $1.00 par value, 250,000,000 shares authorized, 120,250,000 shares issued 120 120 Additional paid-in capital 854 854 Retained earnings 141 247 Accumulated other comprehensive loss (269) (397) Treasury stock, at cost, 2,685,080 and 2,687,080 shares, respectively (75) (75) ------- ------- Total stockholders' equity 771 749 ------- ------- Total liabilities and stockholders' equity $ 6,506 $ 6,703 ======= =======
See Notes to Consolidated Financial Statements. 2 LYONDELL CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, ------------------ Millions of dollars 2002 2001 - ------------------- ----- ----- Cash flows from operating activities: Net loss $ (53) $ (30) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 123 132 Losses from equity investments 55 25 Deferred income taxes 16 (23) Changes in assets and liabilities that provided (used) cash: Accounts receivable 23 75 Inventories 11 (6) Accounts payable (2) (106) Prepaid expenses and other current assets 60 (46) Other assets and liabilities (28) (45) ----- ----- Net cash provided by (used in) operating activities 205 (24) ----- ----- Cash flows from investing activities: Expenditures for property, plant and equipment (12) (40) Contributions and advances to affiliates (57) (40) Distributions from affiliates in excess of earnings -- 11 ----- ----- Net cash used in investing activities (69) (69) ----- ----- Cash flows from financing activities: Dividends paid (53) (53) Repayment of long-term debt (16) (5) Other -- (3) ----- ----- Net cash used in financing activities (69) (61) ----- ----- Effect of exchange rate changes on cash 2 (1) ----- ----- Increase (decrease) in cash and cash equivalents 69 (155) Cash and cash equivalents at beginning of period 146 260 ----- ----- Cash and cash equivalents at end of period $ 215 $ 105 ===== =====
See Notes to Consolidated Financial Statements. 3 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Preparation The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of Lyondell Chemical Company ("Lyondell") in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. 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 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 Chemicals, LP ("Equistar") (see Note 3) reviewed its goodwill for impairment and concluded that the entire balance was impaired, resulting in a $1.1 billion charge to Equistar's earnings. The conclusion was based on a comparison to Equistar's indicated fair value, using multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) for comparable companies as an indicator of fair value. Lyondell's 41% share of the Equistar charge was offset by a corresponding reduction in 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 of the impairment on Lyondell's earnings or investment in Equistar. As a result of implementing SFAS No. 142, Lyondell's pretax earnings in 2002 and subsequent years will be favorably affected by $30 million annually because of the elimination of Lyondell's goodwill amortization. The following table presents Lyondell's reported net income (loss) for all periods presented as adjusted to eliminate goodwill amortization expense.
For the three months ended For the six months ended June 30, June 30, ------------------------------- ------------------------------- Millions of dollars 2002 2001 2002 2001 - ------------------- -------------- -------------- -------------- -------------- Reported net income (loss) $ 2 $ 4 $ (53) $ (30) Add back: goodwill amortization, net of tax - - 5 - - 11 ------ ------ -------- -------- Adjusted net income (loss) $ 2 $ 9 $ (53) $ (19) ====== ====== ======== ======== Basic and diluted earnings per share: Reported net income (loss) $ .02 $ .04 $ (.45) $ (.25) Add back: goodwill amortization, net of tax - - .04 - - .09 ------ ------ -------- -------- Adjusted net income (loss) $ .02 $ .08 $ (.45) $ (.16) ====== ====== ======== ========
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The primary impact of the statement on Lyondell will be the classification of losses that result from the early extinguishment of debt as a charge to income before extraordinary items. Reclassification of prior period losses that were originally reported as extraordinary items also will be required. Application of the statement will be required in 2003. See Note 16. 4 In July 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities. SFAS No. 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities, essentially codifying prior accounting guidance on these matters. SFAS No. 146 will be effective for activities initiated after December 31, 2002. Early application is permitted. Lyondell does not expect adoption of SFAS No. 146 to have any impact on the consolidated financial statements of Lyondell, Equistar or LYONDELL-CITGO Refining LP ("LCR"). 3. Equity Interest in Equistar Chemicals, LP Lyondell's operations in the petrochemicals and polymers segments are conducted through its joint venture ownership interest in Equistar. Lyondell currently has a 41% interest in Equistar, while Millennium Chemicals Inc. ("Millennium") and Occidental Petroleum Corporation ("Occidental") each have a 29.5% interest. Because the partners jointly control certain management decisions, Lyondell accounts for its investment in Equistar using the equity method of accounting. Lyondell has entered into an agreement to purchase Occidental's interest in Equistar (see Note 15). As a partnership, Equistar is not subject to federal income taxes. Summarized financial information for Equistar follows: June 30, December 31, Millions of dollars 2002 2001 - -------------------- -------- ------------ BALANCE SHEETS Total current assets $ 1,188 $ 1,226 Property, plant and equipment, net 3,615 3,705 Goodwill, net - - 1,053 Other assets 347 324 ------- -------- Total assets $ 5,150 $ 6,308 ======= ======== Current maturities of long-term debt $ 4 $ 104 Other current liabilities 598 557 Long-term debt 2,331 2,233 Other liabilities 187 177 Partners' capital 2,030 3,237 ------- -------- Total liabilities and partners' capital $ 5,150 $ 6,308 ======= ========
For the three months ended For the six months ended June 30, June 30, ----------------------------- ------------------------------ 2002 2001 2002 2001 ------------- -------------- ------------- ------------- STATEMENTS OF INCOME Sales and other operating revenues $ 1,462 $ 1,600 $ 2,598 $ 3,373 Cost of sales 1,390 1,522 2,552 3,245 Selling, general and administrative expenses 50 55 99 111 Amortization of goodwill - - 9 - - 17 Unusual charges - - - - - - 22 ------- ------- --------- -------- Operating income (loss) 22 14 (53) (22) Interest expense, net (50) (45) (102) (91) Other income, net - - 1 1 6 ------- ------- --------- -------- Loss before cumulative effect of accounting change (28) (30) (154) (107) Cumulative effect of accounting change - - - - (1,053) - - ------- ------- --------- -------- Net loss $ (28) $ (30) $ (1,207) $ (107) ======= ======= ========= ========= SELECTED CASH FLOW INFORMATION Depreciation and amortization $ 75 $ 81 $ 150 $ 159 Expenditures for property, plant and equipment 14 29 29 53
5 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 loss from its investment in Equistar as presented in the Consolidated Statements of Income consists of Lyondell's share of Equistar's loss before the cumulative effect of the accounting change and the accretion of the remaining difference between Lyondell's investment and its underlying equity in Equistar's net assets. 4. Equity Interest in LYONDELL-CITGO Refining LP Lyondell's refining segment operations are conducted through its joint venture ownership interest in LCR. Lyondell has a 58.75% interest in LCR, while CITGO Petroleum Corporation ("CITGO") has a 41.25% interest. Because the partners jointly control certain management decisions, Lyondell accounts for its investment in LCR using the equity method of accounting. As a partnership, LCR is not subject to federal income taxes. Summarized financial information for LCR follows: June 30, December 31, Millions of dollars 2002 2001 - ------------------- ------ ------ BALANCE SHEETS Total current assets $ 283 $ 230 Property, plant and equipment, net 1,332 1,343 Other assets 91 97 ------ ------ Total assets $1,706 $1,670 ====== ====== Notes payable $ 10 $ 50 Current maturities of long-term debt 450 -- Other current liabilities 388 335 Long-term debt -- 450 Loans payable to partners 264 264 Other liabilities 81 79 Partners' capital 513 492 ------ ------ Total liabilities and partners' capital $1,706 $1,670 ====== ======
For the three months ended For the six months ended June 30, June 30, -------------------------------- ------------------------------ 2002 2001 2002 2001 --------------- --------------- --------------- ------------- STATEMENTS OF INCOME Sales and other operating revenues $ 838 $ 932 $ 1,545 $ 1,842 Cost of sales 754 837 1,400 1,675 Selling, general and administrative expenses 14 14 26 28 ------- ------- ------- ------- Operating income 70 81 119 139 Interest expense, net (7) (15) (15) (31) ------- ------- ------- ------- Net income $ 63 $ 66 $ 104 $ 108 ======= ======= ======= ======= SELECTED CASH FLOW INFORMATION Depreciation and amortization $ 30 $ 27 $ 59 $ 55 Expenditures for property, plant and equipment 20 18 42 29
LCR's $450 million term loan and $70 million revolving credit facility mature in January 2003. Management has initiated the refinancing process and, based on previous experience in refinancing LCR's debt and the current conditions of the financial markets, anticipates that this debt can be refinanced prior to its maturity. 6 Lyondell's income from its investment 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. 5. Unusual Charges During the second half of 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 June 30, 2002, resulting in a remaining accrued liability of $11 million. 6. Inventories Inventories consisted of the following components at: June 30, December 31, Millions of dollars 2002 2001 - ------------------- -------- ------------ Finished goods $ 236 $ 262 Work-in-process 6 5 Raw materials 37 19 Materials and supplies 33 30 ----- ----- Total inventories $ 312 $ 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: June 30, December 31, Millions of dollars 2002 2001 - ------------------- -------- ------------ Land $ 12 $ 10 Manufacturing facilities and equipment 2,801 2,529 Construction in progress 123 113 ------- ------- Total property, plant and equipment 2,936 2,652 Less accumulated depreciation 554 359 ------- ------- Property, plant and equipment, net $ 2,382 $ 2,293 ======= ======= Depreciation and amortization are summarized as follows:
For the three months ended For the six months ended June 30, June 30, ----------------------------- ------------------------------ 2002 2001 2002 2001 ------------ --------------- --------------- ------------- Millions of dollars - -------------------- Property, plant and equipment $ 32 $ 30 $ 63 $ 60 Investment in PO joint venture 7 7 15 15 Goodwill - - 7 - - 15 Debt issuance costs 4 4 8 7 Turnaround expense 5 4 8 8 Software costs 3 3 5 3 Other intangibles 12 12 24 24 ------- ------- ------ ------ $ 63 $ 67 $ 123 $ 132 ======= ======= ====== ======
7 8. Long-Term Debt Long-term debt consisted of the following at: June 30, December 31, Millions of dollars 2002 2001 - ------------------- -------- ------------ Term Loan E due 2006 $ 619 $ 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 1 2 ------- ------- Total long-term debt 3,837 3,853 Less current maturities 6 7 ------- ------- Long-term debt, net $ 3,831 $ 3,846 ======= ======= See Note 16 for a discussion of Lyondell's debt offering and amendments to its credit facility, the indentures related to its senior notes and related documents, occurring subsequent to June 30, 2002. 9. Lease Commitments Lyondell's operating lease commitments as of December 31, 2001 are described in Note 15 to the Consolidated Financial Statements included in the Lyondell 2001 Annual Report on Form 10-K. In addition, in July 2002, Lyondell began leasing a new butanediol ("BDO") production facility in Europe, known as BDO-2, under an operating lease with an initial term of 5 years. Construction of the facility was completed in June 2002 and was financed by an unaffiliated entity that had been established for the purpose of serving as lessor with respect to this facility. Future minimum annual lease payments under the operating lease, amounting to $16 million per year using June 30, 2002 exchange rates and interest rates, are equivalent to interest on the final construction costs, including interest incurred on the construction costs during construction. The interest rate specified in the lease is based on EURIBOR plus 3.75%. Lyondell may, at its option, renew the lease for four additional five-year terms or may purchase the facility at any time during the lease terms at the lessor's cost of construction. 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 lessor's construction costs, Lyondell will pay the difference to the lessor, but not more than the guaranteed residual value. The guaranteed residual value currently is estimated at 172 million euros, or $170 million, using June 30, 2002 exchange rates. Under the transaction documents related to BDO-2, Lyondell is subject to certain financial and other covenants that are substantially the same as those contained in Lyondell's credit facility. See Note 16. 8 10. 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 months ended For the six months ended June 30, June 30, ------------------------- ------------------------ Millions of dollars 2002 2001 2002 2001 - ------------------- ----------- ---------- ---------- ---------- Gain (loss): Beginning balance $ (3) $ (4) $ (2) $ - - Net gains (losses) 3 - - 2 (4) Reclassification of net (gains) losses to earnings - - - - - - - - ------ ------ ------ ------ Net change in AOCL for the period 3 - - 2 (4) ------ ------ ------ ------ Net accumulated loss at June 30 $ - - $ (4) $ - - $ (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. 11. Commitments and Contingencies Bayer Claim--On April 30, 2002, Lyondell and Bayer settled the claims of Bayer in relation to its March 2000 purchase of Lyondell's polyols business. Lyondell had received notice of these claims in June 2001, which had alleged various breaches of representations and warranties related to the condition of the business and assets and which had sought damages in excess of $100 million. The settlement included new or amended commercial agreements between the parties, generally relating to the existing propylene oxide ("PO") partnership between Bayer and Lyondell. 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, including the indemnification payment, had no net 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 June 30, 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. Lyondell's share of the outstanding commitments, which are funded through contributions and advances to affiliates, totaled $104 million as of June 30, 2002. Construction Lease--During the third quarter 2000, construction began on the BDO-2 production facility in Europe. Construction was completed in June 2002 and Lyondell leased the facility under an operating lease, beginning in July 2002. See Note 9. Crude Supply Agreement--Under the Crude Supply Agreement ("CSA"), PDVSA Petroleo, S.A. ("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 LCR's refinery capacity of 268,000 barrels per day of crude oil. In April 1998, PDVSA Oil informed LCR that the Venezuelan government, through the Ministry of Energy and Mines, had instructed that production of certain grades of crude oil be reduced. PDVSA Oil declared itself in a force majeure situation and subsequently reduced 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. On several occasions since then, PDVSA Oil further reduced crude oil deliveries, although it made payments under a different provision of the CSA in partial compensation for such further reductions. Subsequently, PDVSA Oil unilaterally began increasing deliveries of crude oil to LCR in April 2000, and ultimately returned to the contract level of 230,000 barrels per day effective October 2000. 9 During 2001, PDVSA Oil declared itself in a force majeure situation, but did not reduce crude oil deliveries to LCR in 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. Beginning in March 2002, deliveries of crude oil to LCR were reduced to approximately 198,000 barrels per day, reaching a level of 190,000 barrels per day during the second quarter 2002. The recent political uncertainty in Venezuela has not affected crude oil deliveries, the CSA 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 the reductions in deliveries under the CSA. 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 Oil and its parent company, Petroleos de Venezuela, S.A. ("PDVSA"), 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 CSA. However, it has confirmed that it expects to honor its commitments if a mutually acceptable restructuring of the CSA is not achieved. From time to time, the Company and PDVSA have had discussions covering both a restructuring of the CSA 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 CSA, 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 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 June 30, 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. 10 Environmental Remediation--As of June 30, 2002, Lyondell's environmental liability for future remediation costs at its plant sites and a limited number of Superfund sites totaled $22 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 during the next several years. 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 current 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 an 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, would be expected to reduce the estimated capital investments for NOx reductions required by Lyondell, Equistar and LCR to comply with the standards. Recently proposed revisions by the regulatory agencies would change the required NOx reduction levels from 90% to 80%. However, any potential resulting savings from this proposed revision could be offset by the costs of stricter proposed controls over volatile organic compounds, or VOCs. Lyondell, Equistar and LCR are still assessing the impact of these proposed revisions and there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as methyl tertiary butyl ether ("MTBE"), in gasoline sold in areas not meeting specified air quality standards. The presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain federal and state governmental initiatives in the U.S. have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or ban the use of MTBE. 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 and which would not ban the use of MTBE. Lyondell's North American MTBE sales represented approximately 27% of its total 2001 revenues. Lyondell does not expect these initiatives to have a significant impact on MTBE margins or volumes in 2002. Should it become necessary or desirable to significantly reduce MTBE production, Lyondell would need to make capital expenditures to add the flexibility to produce alternative gasoline blending components at its U.S.-based MTBE plants. The profit margins on such alternative gasoline blending components could be lower than 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 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 and $225 million for the new gasoline standards and between $250 million and $300 million for the new diesel standard, between now and the implementation dates. Lyondell's proportionate 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. 11 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. 12. 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 1999 Long-Term Incentive Plan and the Executive Long-Term Incentive Plan. These stock options were antidilutive in the six-month periods ended June 30, 2002 and 2001. Net income (loss) per share ("EPS") data is as follows: For the three months ended June 30, ------------------------------------------------- 2002 2001 ---------------------- ----------------------- Thousands of shares Shares EPS Shares EPS - ------------------- --------- --------- ---------- --------- Basic 117,565 $ .02 117,563 $ .04 Dilutive effect of options 764 - - 398 - - ------- ------- ------- ------- Diluted 118,329 $ .02 117,961 $ .04 ======= ======= ======= ======= For the six months ended June 30, ------------------------------------------------- 2002 2001 ---------------------- ----------------------- Thousands of shares Shares EPS Shares EPS - ------------------- --------- --------- ---------- --------- Basic 117,565 $ (.45) 117,563 $ (.25) Dilutive effect of options - - - - - - - - ------- ------- ------- ------- Diluted 117,565 $ (.45) 117,563 $ (.25) ======= ======= ======= ======= See Note 16 for discussion of common stock issued subsequent to June 30, 2002 and Note 15 for discussion of additional common stock expected to be issued. 13. Comprehensive Income (Loss) The components of the comprehensive income (loss) were as follows:
For the three months ended For the six months ended June 30, June 30, ----------------------------- --------------------------- Millions of dollars 2002 2001 2002 2001 - ------------------- ------------ ------------- ------------ ------------ Net income (loss) $ 2 $ 4 $ (53) $ (30) ------ -------- -------- -------- Other comprehensive income (loss): Foreign currency translation 139 (48) 122 (98) Derivative instruments 3 - - 2 (4) Minimum pension liability - - - - 4 - - ------ -------- -------- -------- Total other comprehensive income (loss) 142 (48) 128 (102) ------ -------- -------- -------- Comprehensive income (loss) $ 144 $ (44) $ 75 $ (132) ====== ======== ======== ========
12 14. Segment and Related Information Lyondell operates in four reportable segments: (i) intermediate chemicals and derivatives; (ii) petrochemicals; (iii) polymers; and (iv) refining. 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 June 30, 2002: Sales and other operating revenues $ 843 $ - - $ - - $ - - $ - - $ 843 Operating income 65 65 Interest expense (94) (94) Interest income 3 3 Other expense, net (4) (4) Income (loss) from equity investments -- 32 (11) 39 (28) 32 Income before income taxes 2 For the three months ended June 30, 2001: Sales and other operating revenues $ 893 $ - - $ - - $ - - $ - - $ 893 Operating income 66 66 Interest expense (98) (98) Interest income 4 4 Other expense, net (1) (1) Income (loss) from equity investments -- 33 (9) 41 (23) 42 Income before income taxes 13 For the six months ended June 30, 2002: Sales and other operating revenues $ 1,517 $ - - $ - - $ - - $ - - $ 1,517 Operating income 103 103 Interest expense (187) (187) Interest income 5 5 Other expense, net (3) (3) Income (loss) from equity investments -- 23 (19) 66 (59) 11 Loss before income taxes (71) For the six months ended June 30, 2001: Sales and other operating revenues $ 1,742 $ - - $ - - $ - - $ - - $ 1,742 Operating income 97 97 Interest expense (197) (197) Interest income 11 11 Other income, net 2 2 Income (loss) from equity investments 1 80 (46) 68 (59) 44 Loss before income taxes (43)
13 The following table presents the details of "Income (loss) from equity investments" as presented above in the "Other" column for the periods indicated:
For the three months ended For the six months ended June 30, June 30, ------------------------------- ---------------------------- Millions of dollars 2002 2001 2002 2001 - ------------------- -------------- ------------- ------------ ------------ Equistar items not allocated to segments: Principally general and administrative expenses and interest expense, net $ (26) $ (26) $ (54) $ (49) Unusual charges - - - - - - (9) Other (2) 3 (5) (1) --------- ------- -------- -------- Total--Other $ (28) $ (23) $ (59) $ (59) ========= ======= ======== ========
The methanol operations of Lyondell Methanol Company, L.P. ("LMC") are not a reportable segment and, through April 30, 2002, were included in the "Other" column. Effective May 1, 2002, LMC became a wholly owned subsidiary of Lyondell and the methanol results are included in the intermediate chemicals and derivatives segment from that date. The effect of consolidating the LMC operations, which previously had been accounted for using the equity method, was not material. 15. 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. On June 3, 2002, Millennium advised Lyondell and Occidental that it would not participate, under its formal right of first offer, in the acquisition of Occidental's Equistar interest and, accordingly, Occidental and Lyondell signed definitive documentation on July 8, 2002. Closing of the transactions is subject to certain conditions, including approval by Lyondell's shareholders. Lyondell's special shareholder meeting is scheduled for August 21, 2002. Lyondell anticipates that these transactions will close by September 1, 2002. However, there can be no assurance that the proposed transactions will be completed. 16. Subsequent Events In early July 2002, Lyondell completed debt and equity offerings, as well as amendments to its credit facility, to the transaction documents related to the BDO-2 facility and to the indentures related to its senior notes. Lyondell issued $278 million principal amount of 11.125% senior secured notes due 2012, using proceeds of $204 million to prepay $200 million of the principal amount outstanding under Term Loan E of the credit facility and a $4 million prepayment premium. The remaining net proceeds, after discount and fees, of approximately $65 million will be used for working capital and general corporate purposes. Lyondell also issued 8.28 million shares of common stock, receiving net proceeds of $110 million that will be used for working capital and general corporate purposes. The amended and restated credit facility extended the maturity of the revolving credit facility from July 2003 to June 2005, reduced the size of the revolving credit facility from $500 million to $350 million, made certain financial ratio requirements less restrictive, made the covenant limiting acquisitions more restrictive and added a covenant limiting certain non-regulatory capital expenditures. The BDO-2 transaction documents were also amended to incorporate the revised covenants from the credit facility. Also, after receiving consents from the holders of the senior secured and senior subordinated notes, Lyondell amended the indentures related to those notes. The principal indenture amendment removed a limitation that restricted payment of Lyondell's current $0.90 per share annual dividend to a specified number of shares. As a result of the amendment, the $0.90 per share annual dividend can be paid on all current and future common shares outstanding. Lyondell paid fees totaling $17 million related to the amendments. 14 As a result of the early retirement of a portion of Term Loan E, and the amendment and restatement of the credit facility, Lyondell will recognize the $4 million prepayment premium and the writeoff of unamortized debt issuance costs of $7 million, or a total of $7 million after tax, as an extraordinary charge on early debt retirement in the third quarter 2002. See also Note 2. 17. Deferred Tax Assets The deferred tax assets classified as current assets decreased by $254 million during the first half 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 net long-term liabilities on the consolidated balance sheet. There was no change in management's expectation that these deferred tax assets will be fully realized. 18. 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 $278 million senior secured notes issued in July 2002 (see Note 16), the $393 million senior secured notes, the $500 million senior subordinated notes and the $1.9 billion senior secured notes. 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 secured notes and senior subordinated notes. The following condensed consolidating financial information present supplemental information for the Guarantors as of June 30, 2002 and December 31, 2001 and for the three-month and six-month periods ended June 30, 2002 and 2001. 15 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
BALANCE SHEET As of June 30, 2002 Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------------- -------------- -------------- -------------- -------------- Total current assets $ 520 $ 180 $ 267 $ -- $ 967 Property, plant and equipment, net 897 567 918 -- 2,382 Investments and long-term receivables 7,338 472 1,481 (7,691) 1,600 Goodwill, net 453 420 247 -- 1,120 Other assets 334 90 13 -- 437 ------- ------- ------- ------- ------- Total assets $ 9,542 $ 1,729 $ 2,926 $(7,691) $ 6,506 ======= ======= ======= ======= ======= Current maturities of long-term debt $ 6 $ -- $ -- $ -- $ 6 Other current liabilities 375 101 97 -- 573 Long-term debt, less current maturities 3,830 -- 1 -- 3,831 Other liabilities 524 46 19 -- 589 Deferred income taxes 359 153 66 -- 578 Intercompany liabilities (assets) 3,677 (1,125) (2,550) (2) -- Minority interest -- -- 158 -- 158 Stockholders' equity 771 2,554 5,135 (7,689) 771 ------- ------- ------- ------- ------- Total liabilities and stockholders' equity $ 9,542 $ 1,729 $ 2,926 $(7,691) $ 6,506 ======= ======= ======= ======= ======= 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 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 ======= ======= ======= ======= =======
16 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued)
STATEMENTS OF INCOME For the Three Months Ended June 30, 2002 Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------------- -------------- -------------- -------------- -------------- Sales and other operating revenues $ 584 $ 210 $ 462 $(413) $ 843 Cost of sales 599 188 350 (413) 724 Selling, general and administrative expenses 29 5 12 -- 46 Research and development expense 8 -- -- -- 8 ----- ----- ----- ----- ----- Operating income (loss) (52) 17 100 -- 65 Interest income (expense), net (94) 2 1 -- (91) Other income (expense), net (18) 15 (1) -- (4) Income from equity investments 153 -- 32 (153) 32 Intercompany income (expense) (37) 8 31 (2) -- Provision for (benefit from) income taxes (12) 10 42 (40) -- ----- ----- ----- ----- ----- Net income (loss) $ (36) $ 32 $ 121 $(115) $ 2 ===== ===== ===== ===== ===== STATEMENTS OF INCOME For the Three Months Ended June 30, 2001 Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------------- -------------- -------------- -------------- -------------- Sales and other operating revenues $ 618 $ 200 $ 435 $(360) $ 893 Cost of sales 618 141 371 (360) 770 Selling, general and administrative expenses 26 5 11 -- 42 Research and development expense 8 -- -- -- 8 Amortization of goodwill and other intangible assets 2 3 2 -- 7 ----- ----- ----- ----- ----- Operating income (loss) (36) 51 51 -- 66 Interest income (expense), net (97) -- 3 -- (94) Other income (expense), net (23) (44) 66 -- (1) Income from equity investments 160 -- 42 (160) 42 Intercompany income (expense) (43) 16 32 (5) -- Provision for (benefit from) income taxes (6) 4 53 (42) 9 ----- ----- ----- ----- ----- Net income (loss) $ (33) $ 19 $ 141 $(123) $ 4 ===== ===== ===== ===== =====
17 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued)
STATEMENTS OF INCOME For the Six Months Ended June 30, 2002 Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------------- -------------- -------------- -------------- -------------- Sales and other operating revenues $ 1,053 $ 375 $ 813 $ (724) $ 1,517 Cost of sales 1,059 336 642 (724) 1,313 Selling, general and administrative expenses 55 8 23 - - 86 Research and development expense 15 - - - - - - 15 ------- -------- -------- --------- ------- Operating income (loss) (76) 31 148 - - 103 Interest income (expense), net (189) 4 3 - - (182) Other income (expense), net (28) 19 6 - - (3) Income from equity investments 218 - - 11 (218) 11 Intercompany income (expense) (29) 20 49 (40) - - Provision for (benefit from) income taxes (26) 18 55 (65) (18) ------- -------- -------- --------- ------- Net income (loss) $ (78) $ 56 $ 162 $ (193) $ (53) ======== ========= ======== ========= ======== STATEMENTS OF INCOME For the Six Months Ended June 30, 2001 Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------------- -------------- -------------- -------------- -------------- Sales and other operating revenues $ 1,212 $ 437 $ 841 $ (748) $ 1,742 Cost of sales 1,187 290 802 (748) 1,531 Selling, general and administrative expenses 51 7 25 - - 83 Research and development expense 16 - - - - - - 16 Amortization of goodwill and other intangible assets 6 5 4 - - 15 ------- -------- -------- ------- ------- Operating income (loss) (48) 135 10 - - 97 Interest income (expense), net (194) 1 7 - - (186) Other income (expense), net (40) (105) 147 - - 2 Income from equity investments 242 - - 44 (242) 44 Intercompany income (expense) (73) 44 69 (40) - - Provision for (benefit from) income taxes (35) 24 86 (88) (13) ------- -------- -------- ------- ------- Net income (loss) $ (78) $ 51 $ 191 $ (194) $ (30) ======= ======== ======== ======= =======
18 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued) STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2002
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------------- ------------- -------------- -------------- -------------- Net income (loss) $ (78) $ 56 $ 162 $(193) $ (53) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 62 18 43 -- 123 Net changes in working capital and other 151 (8) (161) 153 135 ----- ----- ----- ----- ----- Net cash provided by operating activities 135 66 44 (40) 205 ----- ----- ----- ----- ----- Expenditures for property, plant and equipment (8) (1) (3) -- (12) Contributions and advances to affiliates (3) (21) (33) -- (57) ----- ----- ----- ----- ----- Net cash used in investing activities (11) (22) (36) -- (69) ----- ----- ----- ----- ----- Dividends paid (53) (1) (39) 40 (53) Repayment of long-term debt (15) -- (1) -- (16) ----- ----- ----- ----- ----- Net cash used in financing activities (68) (1) (40) 40 (69) ----- ----- ----- ----- ----- Effect of exchange rate changes on cash -- (8) 10 -- 2 ----- ----- ----- ----- ----- Increase (decrease) in cash and cash equivalents $ 56 $ 35 $ (22) $-- $ 69 ===== ===== ===== ===== =====
19 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued) STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2001
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------------- ------------- -------------- -------------- -------------- Net income (loss) $ (78) $ 51 $ 191 $ (194) $ (30) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 68 23 41 - - 132 Net changes in working capital and other 32 (56) (256) 154 (126) -------- -------- --------- --------- -------- Net cash provided by (used in) operating activities 22 18 (24) (40) (24) -------- -------- --------- --------- -------- Expenditures for property, plant and equipment (14) (4) (22) - - (40) Contributions and advances to affiliates - - (30) (10) - - (40) Distributions from affiliates in excess of earnings - - - - 11 - - 11 -------- -------- --------- --------- -------- Net cash used in investing activities (14) (34) (21) - - (69) -------- -------- --------- --------- -------- Dividends paid (53) - - (40) 40 (53) Repayments of long-term debt (5) - - - - - - (5) Other (3) - - - - - - (3) -------- -------- --------- --------- -------- Net cash used in financing activities (61) - - (40) 40 (61) -------- -------- --------- --------- -------- Effect of exchange rate changes on cash - - (1) - - - - (1) -------- -------- --------- --------- -------- Increase (decrease) in cash and cash equivalents $ (53) $ (17) $ (85) $ - - $ (155) ======== ======== ========= ========= ========
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