-----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, Su4JWIsV2R207VG/uSzttTUMfv9Y6rckTqdfpLg1R2KqUadF25QcM3+0vVcZxnf2 EzPCM/CyZsSS1+zCzP9LXw== 0000899243-02-002800.txt : 20021105 0000899243-02-002800.hdr.sgml : 20021105 20021105163527 ACCESSION NUMBER: 0000899243-02-002800 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020822 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20021105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYONDELL CHEMICAL CO CENTRAL INDEX KEY: 0000842635 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 954160558 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10145 FILM NUMBER: 02810039 BUSINESS ADDRESS: STREET 1: 1221 MCKINNEY ST STREET 2: STE 700 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7136527200 MAIL ADDRESS: STREET 1: 1221 MCKINNEY ST STREET 2: SUITE 700 CITY: HOUSTON STATE: TX ZIP: 77010 FORMER COMPANY: FORMER CONFORMED NAME: LYONDELL PETROCHEMICAL CO DATE OF NAME CHANGE: 19920703 8-K/A 1 d8ka.txt AMENDMENT TO FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (date of earliest event reported): August 22, 2002 LYONDELL CHEMICAL COMPANY (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation) 1-10145 95-4160558 (Commission File Number) (I.R.S. Employer Identification No.) 1221 McKinney Street, Suite 700, Houston, Texas 77010 (Address of principal executive offices) (Zip Code) (713) 652-7200 (Registrant's telephone number, including area code) Not Applicable (Former Name or Former Address, if Changed Since Last Report) Item 2. Acquisition of Assets. On August 22, 2002, Lyondell Chemical Company ("Lyondell") issued 34 million shares of new Series B common stock, warrants to purchase 5 million shares of Lyondell's original common stock at a price of $25 per share and the right to receive a contingent payment having a value of up to $35 million to Occidental Chemical Holding Corporation, a subsidiary of Occidental Petroleum Corporation for $440 million in cash and used the proceeds of the issuance to purchase Occidental's 29.5% interest in Equistar Chemicals, LP ("Equistar"). Lyondell now owns 70.5% of Equistar. Item 7. Financial Statements and Exhibits. (a) Financial Statements of Business Acquired 1. Equistar consolidated balance sheets as of December 31, 2001 and 2000 and the related consolidated statements of income, partners' capital and cash flows and notes thereto for each of the three years in the period ended December 31, 2001 which are included on pages 28 through 51 of its annual report on Form 10-K for the year ended December 31, 2001, filed by Equistar Chemicals, LP on March 15, 2002 (File No. 333-76473), which financial statements, to the extent herein described, are incorporated herein by reference. 2. Equistar consolidated balance sheets as of June 30, 2002 and December 31, 2001 and the consolidated statements of income and cash flows and notes thereto for the six months ended June 30, 2002 and 2001, which are included on pages 1 through 10 in its quarterly report on Form 10-Q for the six months ended June 30, 2002, filed by Equistar Chemicals, LP on August 13, 2002 (File No. 333-76473), which financial statements, to the extent herein described, are incorporated herein by reference. (b) Unaudited Pro Forma Financial Information of Lyondell Chemical Company
Page No. Unaudited Pro Forma Financial Data 1 Balance Sheet as of June 30, 2002 2 Income Statement for the Six Months Ended June 30, 2002 3 Income Statement for the Year Ended December 31, 2001 4 Notes to Unaudited Pro Forma Financial Statements 5
(c) Exhibits. 10.1 Securities Purchase Agreement dated as of July 8, 2002 between Lyondell and Occidental Chemical Holding Corporation (incorporated by reference to Exhibit 10.1 of Lyondell's Form 8-K dated July 8, 2002) 10.2 Occidental Partner Sub Purchase Agreement dated as of July 8, 2002 among Lyondell , Occidental Chemical Holding Corporation, Oxy CH Corporation, and Occidental Chemical Corporation (incorporated by reference to Exhibit 10.2 of Lyondell's Form 8-K dated July 8, 2002) 99.1 Effect of Goodwill Amortization on Equistar Chemicals, LP Earnings 99.2 Pages 30 through 51 of Equistar's 2001 Annual Report on Form 10-K incorporated by reference into this Current Report on Form 8-K. 99.3 Pages 1 through 10 of Equistar's Quarterly Report on Form 10-Q for the six months ended June 30, 2002 incorporated by reference into this Current Report on Form 8-K. 99.4 Pages 63 through 101 of Lyondell's 2001 Annual Report on Form 10-K incorporated by reference into this Current Report on Form 8-K. 99.5 Pages 1 through 20 of Lyondell's Quarterly Report on Form 10-Q for the six months ended June 30, 2002 incorporated by reference into this Current Report on Form 8-K. LYONDELL CHEMICAL COMPANY UNAUDITED PRO FORMA FINANCIAL DATA The unaudited pro forma financial statements of Lyondell Chemical Company ("Lyondell") below give effect to: (1) the sale of 34 million shares of new Series B common stock ("Series B Common Stock"), warrants to purchase 5 million shares of Lyondell's original common stock ("Original Common Stock") at a price of $25 per share and the right to receive a contingent payment having a value of up to $35 million that may be paid, at Lyondell's option, in shares of Series B Common Stock or Original Common Stock, (collectively "the Securities"), to Occidental Chemical Holding Corporation ("OCHC"), a subsidiary of Occidental Petroleum Corporation ("Occidental") and (2) the purchase of Occidental's 29.5% interest in Equistar Chemicals, LP ("Equistar"), as if both transactions had been completed as of June 30, 2002 for purposes of the pro forma balance sheet and January 1, 2001 for purposes of the pro forma income statements. These unaudited pro forma financial statements do not necessarily reflect the results of operations or financial position of Lyondell that would have resulted had such transactions actually been consummated as of such dates. Also, they are not necessarily indicative of the future results of operations or the future financial position of Lyondell. The unaudited pro forma financial statements have been prepared based on the estimated fair value of the Securities issued on August 22, 2002. As described under "Item 2. Acquistition of Assets," the transactions have specified values of approximately $440 million. The difference in indicated value primarily relates to changes in Lyondell's stock price during the period subsequent to January 23, 2002, the date Lyondell confirmed its interest in purchasing Occidental's 29.5% interest in Equistar. The unaudited pro forma financial statements should be read together with the financial statements and notes of Lyondell, which are incorporated by reference from Lyondell's Annual Report on Form 10-K for the year ended December 31, 2001 and Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002. 1 Lyondell Chemical Company Unaudited Pro Forma Balance Sheet As of June 30, 2002
Historical Adjustments Pro Forma -------------- -------------- -------------- (Dollars in millions, except per-share data) ASSETS Cash and cash equivalents .................................... $ 215 $ -- $ 215 Accounts receivable, net ..................................... 360 360 Inventories .................................................. 312 312 Prepaid expenses and other current assets .................... 57 57 Deferred tax assets .......................................... 23 23 -------------- -------------- -------------- Total current assets .................................... 967 -- 967 Property, plant and equipment, net ........................... 2,382 2,382 Investment in Equistar Chemicals, LP ......................... 472 792(a) 1,264 Other investments and long-term receivables .................. 1,128 1,128 Goodwill, net ................................................ 1,120 1,120 Other assets, net ............................................ 437 437 -------------- -------------- -------------- Total assets ............................................ $ 6,506 $ 792 $ 7,298 ============== ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable ............................................. $ 341 $ -- $ 341 Current maturities of long-term debt ......................... 6 6 Accrued liabilities .......................................... 232 2(a) 234 -------------- -------------- -------------- Total current liabilities .................................... 579 2 581 Long-term debt ............................................... 3,831 3,831 Other liabilities ............................................ 589 589 Deferred income taxes ........................................ 578 340(a) 918 Minority interest ............................................ 158 158 Stockholders' equity: Common stock ............................................ 120 120 Common stock, B Series .................................. -- 34(b) 34 Additional paid-in capital .............................. 854 405(b) 1,270 8(c) 3(d) Retained earnings ....................................... 141 141 Accumulated other comprehensive loss .................... (269) (269) Treasury stock, at cost ................................. (75) (75) -------------- -------------- -------------- Total stockholders' equity ......................... 771 450 1,221 -------------- -------------- -------------- Total liabilities and stockholders' equity ................... $ 6,506 $ 792 $ 7,298 ============== ============== ==============
See notes to Unaudited Pro Forma Financial Statements of Lyondell. 2 Lyondell Chemical Company Unaudited Pro Forma Income Statement For the Six Months Ended June 30, 2002
Historical Adjustments Pro Forma -------------- -------------- -------------- (Dollars in millions, except per-share data) Sales and other operating revenues ............................ $ 1,517 $ 1,517 Operating costs and expenses: Cost of sales ............................................ 1,313 1,313 Selling, general and administrative expenses ............. 86 86 Research and development expense ......................... 15 15 -------------- -------------- 1,414 1,414 -------------- -------------- Operating income ......................................... 103 103 Interest expense .............................................. (187) (187) Interest income ............................................... 5 5 Other income, net ............................................. (3) (3) -------------- -------------- Loss before equity investments and income taxes .......... (82) (82) Income (loss) from equity investments: Equistar Chemicals, LP ................................... (50) $ (45)(e) (101) (6)(f) Other .................................................... 61 61 -------------- -------------- -------------- 11 (51) (40) -------------- -------------- -------------- Loss before income taxes ................................. (71) (51) (122) Benefit from income taxes ..................................... (18) (18)(g) (36) -------------- -------------- -------------- Net loss ...................................................... $ (53) $ (33) $ (86) ============== ============== ============== Basic and diluted loss per common share ....................... $ (.45) $ (.56)(i) ============== ============== Cash dividends per share ...................................... $ .45 $ .45 ============== ============== Basic and diluted weighted average shares outstanding (in thousands) ................................................. 117,565 154,098(h) ============== ==============
See notes to Unaudited Pro Forma Financial Statements of Lyondell. 3 Lyondell Chemical Company Unaudited Pro Forma Income Statement For the Year Ended December 31, 2001
Historical(j) Adjustments Pro Forma --------------- -------------- ------------- (Dollars in millions, except per-share data) Sales and other operating revenues ........................ $ 3,193 $ 3,193 Operating costs and expenses: Cost of sales ........................................ 2,799 2,799 Selling, general and administrative expenses ......... 157 157 Research and development expense ..................... 32 32 Amortization of goodwill ............................. 30 30 Unusual charges ...................................... 63 63 ------------- ------------ 3,081 3,081 ------------- ------------ Operating income .......................................... 112 112 Interest expense .......................................... (386) (386) Interest income ........................................... 17 17 Other expense, net ........................................ (4) (4) ------------- ------------ Loss before equity investments, income taxes and extraordinary item ........................................ (261) (261) ------------- ------------ Income (loss) from equity investments: Equistar Chemicals, LP ............................... (77) $ (83)(e) (172) (12)(f) Other ................................................ 117 117 ------------- ------------ ------------ 40 (95) (55) ------------- ------------ ------------ Loss before income taxes and extraordinary item ...... (221) (95) (316) Benefit from income taxes ................................. (76) (33)(g) (109) ------------- ------------ ------------ Loss before extraordinary item ............................ $ (145) $ (62) $ (207)(k) ============= ============ ============ Basic and diluted loss before extraordinary item per common share ...................................... $ (1.24) $ (1.36)(i)(k) ============= ============ Cash dividends per share .................................. $ .90 $ .90 ============= ============ Basic and diluted weighted average shares outstanding (in thousands) ............................. 117,563 152,431 (h) ============= ============
See notes to Unaudited Pro Forma Financial Statements of Lyondell. 4 Lyondell Chemical Company Notes to Unaudited Pro Forma Financial Statements (a) To reflect the acquisition of an additional 29.5% interest in Equistar, including the recognition of $340 million of deferred tax liabilities and transaction expenses of $2 million. After this acquisition, Lyondell holds 70.5% of the Equistar partnership interests. Lyondell expects to continue to account for its investment in Equistar using the equity method of accounting, reflecting the joint governance of Equistar. (b) To reflect the issuance and sale, as occurred on August 22, 2002, in accordance with the transaction documents, of 34.0 million shares of Series B Common Stock, $1.00 par value. The $439 million fair value of the 34.0 million shares of Series B Common Stock issued was determined based on an average of the high and low per-share stock prices for Original Common Stock for 10 consecutive business days, beginning 4 business days prior to and ending 5 business days after August 8, 2002, the measurement date. The measurement date is the first date after the date the terms of the agreement were finalized and announced that the number of shares of Series B Common Stock to be issued became fixed without subsequent revision. (c) To reflect the issuance of five million warrants at an estimated fair value of $1.60 per warrant. The fair value of the warrants was estimated using the Black-Scholes option-pricing model. Each warrant is exercisable for one share of Original Common Stock at $25 per share. Both the number of warrants and the exercise price are subject to adjustment depending on the 15 business-day average price for Lyondell's Original Common Stock. If the 15 business-day average price on December 31, 2002 is $11.00 or above, the number of warrants and the exercise price will not be adjusted. If the 15 business-day average price on that day is between $7.00 and $11.00: (1) the number of warrants will be determined by adding to five million the number computed by multiplying (a) $11.00 minus the 15 business-day average Original Common Stock price, by (b) 250,000 and (2) the exercise price will be determined by Original Common Stock price, by (y) $0.675. If the 15 business-day average price on that day is $7.00 or below: (1) the number of warrants will be increased to six million and (2) the exercise price will be reduced to $22.30 per share. (d) To reflect the sale of the right to receive a contingent payment having a value of up to $35 million, payable in cash or shares of Original Common Stock or Series B Common Stock, as determined by Lyondell, that will be equivalent in value to 7.38% of Equistar's cash distributions for 2002 and 2003. The estimated fair value of $3 million of the right is based on estimates of future cash distributions from Equistar, adjusted for the risk attributable to the significant uncertainties associated with future events. (e) To reflect the additional 29.5% interest in Equistar's net loss for the period. The $83 million adjustment for the year ended December 31, 2001 reflects a charge of $10 million resulting from Equistar's goodwill amortization. See Note (k). (f) To reflect the change, resulting from the acquisition of an additional 29.5% interest in Equistar, in the accretion of the difference between Lyondell's investment in Equistar and its underlying equity in Equistar's net assets. (g) To reflect the tax effect of the pro forma adjustments using the 35% U.S. federal statutory income tax rate. 5 (h) Series B Common Stock will pay dividends at the same rate as Original Common Stock, which, in all historical periods presented, was at an annual rate of $.90 per share. However, dividends on shares of Series B Common Stock may be paid, at Lyondell's option, in cash, in Original Common Stock or in additional Series B Common Stock. The pro forma financial information reflects the assumption that the dividends will be paid in additional Series B Common Stock and, therefore, such dividends increase the pro forma weighted average shares outstanding by 868,000 shares and 2,533,000 shares for the periods ending December 31, 2001 and June 30, 2002, respectively. The number of shares issued was based on the historical Original Common Stock prices for the 10 consecutive business days, beginning 4 days before and ending 5 business days after, the dividend payment date. If, instead, the dividends on Series B Common Stock were paid in cash, the cumulative cash dividends on the pro forma Series B Common Stock outstanding over the 18-month period ending June 30, 2002 would have been $46 million. (i) Basic and diluted earnings per common share are based on weighted average shares outstanding, including the pro forma issuance of 34.0 million shares of Series B Common Stock as described in (b) above and the pro forma issuance of additional Series B Common Stock in payment of dividends on the pro forma Series B Common Stock outstanding as described in (h) above. The pro forma effect of the warrants is antidilutive in both periods presented. (j) Amortization of intangible assets included in historical amounts for the year ended December 31, 2001 has been reclassified to conform to the June 30, 2002 presentation. (k) Pre-tax earnings in 2002 and subsequent years will be favorably affected by $30 million annually because of the elimination of Lyondell's goodwill amortization upon adoption of SFAS No. 142, Goodwill and Other Intangibles. The following table presents Lyondell's reported net loss and earnings per share for the year ended December 31, 2001, as adjusted for goodwill amortization expense.
Millions of dollars Historical Pro Forma ------------------- ------------ ------------- Reported net loss before extraordinary item ........................... $ (145) $ (207) Add back: goodwill amortization, net of tax ........................... 22 28 ------------ ------------- Adjusted net loss ..................................................... $ (123) $ (179) ============ ============= Earnings per share ------------------ Reported net loss before extraordinary item ........................... $(1.24) $ (1.36) Add back: goodwill amortization, net of tax ........................... .19 .18 ------------ ------------- Adjusted net loss ..................................................... $(1.05) $ (1.18) ============ ==============
Lyondell's earnings from its historical 41% equity interest in Equistar were not affected by Equistar's amortization of goodwill. The effect of Equistar's goodwill amortization was offset by the accretion of the excess of Lyondell's 41% share of Equistar's partners' capital over the carrying value of Lyondell's investment in Equistar. The pro forma reported net loss of $207 million above includes $10 million pretax, $6 million after tax, of Equistar goodwill amortization, representing Lyondell's additional 29.5% interest in Equistar's $33 million pretax annual goodwill amortization charge, which is not offset by accretion. The adjusted net loss adds back this $6 million after tax charge. 6 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 hereunto duly authorized. LYONDELL CHEMICAL COMPANY /s/ Charles L. Hall By: ______________________________ Charles L. Hall Vice President and Controller (Duly Authorized Officer and Principal Accounting Officer) Date: November 5, 2002 INDEX TO EXHIBITS Exhibit Number Description - ------ ----------- 10.1 Securities Purchase Agreement dated as of July 8, 2002 between Lyondell and Occidental Chemical Holding Corporation (incorporated by reference to Exhibit 10.1 of Lyondell's Form 8-K dated July 8, 2002) 10.2 Occidental Partner Sub Purchase Agreement dated as of July 8, 2002 among Lyondell, Occidental Chemical Holding Corporation, Oxy CH Corporation, and Occidental Chemical Corporation (incorporated by reference to Exhibit 10.2 of Lyondell's Form 8-K dated July 8, 2002) 99.1 Effect of Goodwill Amortization on Equistar Chemicals, LP Earnings 99.2 Pages 30 through 51 of Equistar's 2001 Annual Report on Form 10-K incorporated by reference into this Current Report on Form 8-K. 99.3 Pages 1 through 10 of Equistar's Quarterly Report on Form 10-Q for the six months ended June 30, 2002 incorporated by reference into this Current Report on Form 8-K. 99.4 Pages 63 through 101 of Lyondell's 2001 Annual Report on Form 10-K incorporated by reference into this Current Report on Form 8-K. 99.5 Pages 1 through 20 of Lyondell's Quarterly Report on Form 10-Q for the six months ended June 30, 2002 incorporated by reference into this Current Report on Form 8-K. EX-99.1 3 dex991.txt EFFECT OF GOODWILL AMORTIZATION ON EQUISTAR Exhibit 99.1 Effect of Goodwill Amortization on Equistar Chemicals, LP Earnings 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 Chemicals, LP's loss before cumulative effect of accounting change and net loss for all periods presented as adjusted to eliminate goodwill amortization expense.
Millions of dollars 2001 2000 1999 - ------------------- ------- ------ ------ Reported income (loss) before cumulative effect of accounting change $ (280) $ 153 $ 32 Add back: goodwill amortization 33 33 33 ------ ----- ----- Adjusted income (loss) before cumulative effect of accounting change $ (247) $(120) $ 65 ====== ===== ===== Reported net income (loss) $ (283) $ 153 $ 32 Add back: goodwill amortization 33 -- 33 ------ ----- ----- Adjusted net income (loss) $ (250) $ 153 $ 65 ====== ===== =====
EX-99.2 4 dex992.txt EQUISTAR 2001 ANNUAL REPORT ON FORM 10-K PAGES 30-51 Exhibit 99.2 EQUISTAR CHEMICALS, LP CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31, ---------------------------------------------- Millions of dollars 2001 2000 1999 - ------------------- ------------ ------------ ------------ Sales and other operating revenues: Unrelated parties $ 4,583 $ 5,770 $ 4,506 Related parties 1,326 1,725 1,088 ------------ ------------ ------------ 5,909 7,495 5,594 ------------ ------------ ------------ Operating costs and expenses: Cost of sales 5,733 6,908 5,002 Selling, general and administrative expenses 181 182 259 Research and development expense 39 38 42 Amortization of goodwill 33 33 33 Unusual charges 22 -- 96 ------------ ------------ ------------ 6,008 7,161 5,432 ------------ ------------ ------------ Operating income (loss) (99) 334 162 Interest expense (192) (185) (182) Interest income 3 4 6 Other income, net 8 -- 46 ------------ ------------ ------------ Income (loss) before extraordinary item (280) 153 32 Extraordinary loss on extinguishment of debt (3) -- -- ------------ ------------ ------------ Net income (loss) $ (283) $ 153 $ 32 ============ ============ ============
See Notes to Consolidated Financial Statements. 30 EQUISTAR CHEMICALS, LP CONSOLIDATED BALANCE SHEETS December 31, ------------------------- Millions of dollars 2001 2000 - ------------------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 202 $ 18 Accounts receivable: Trade, net 440 568 Related parties 100 190 Inventories 448 506 Prepaid expenses and other current assets 36 50 ----------- ----------- Total current assets 1,226 1,332 Property, plant and equipment, net 3,705 3,819 Investment in PD Glycol 47 53 Goodwill, net 1,053 1,086 Other assets, net 277 292 ----------- ----------- Total assets $ 6,308 $ 6,582 =========== =========== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable: Trade $ 331 $ 426 Related parties 29 61 Current maturities of long-term debt 104 90 Accrued liabilities 197 166 ----------- ----------- Total current liabilities 661 743 Long-term debt 2,233 2,158 Other liabilities 177 141 Commitments and contingencies -- -- Partners' capital: Partners' accounts 3,257 3,540 Accumulated other comprehensive income (loss) (20) -- ----------- ----------- Total partners' capital 3,237 3,540 ----------- ----------- Total liabilities and partners' capital $ 6,308 $ 6,582 =========== =========== See Notes to Consolidated Financial Statements. 31 EQUISTAR CHEMICALS, LP CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, ----------------------------------------------------- Millions of dollars 2001 2000 1999 - ------------------- ---------------- -------------- -------------- Cash flows from operating activities: Net income (loss) $ (283) $ 153 $ 32 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 321 310 300 Net (gain) loss on disposition of assets (3) 5 35 Extraordinary loss on extinguishment of debt 3 -- -- Changes in assets and liabilities that provided (used) cash: Accounts receivable 220 (58) (213) Inventories 61 14 17 Accounts payable (129) 28 119 Accrued liabilities 30 (65) 82 Other assets and liabilities 10 (48) (28) ---------------- -------------- -------------- Cash provided by operating activities 230 339 344 ---------------- -------------- -------------- Cash flows from investing activities: Expenditures for property, plant and equipment (110) (131) (157) Proceeds from sales of assets 10 4 75 Purchase of business from AT Plastics, Inc. (7) -- -- ---------------- -------------- -------------- Cash used in investing activities (107) (127) (82) ---------------- -------------- -------------- Cash flows from financing activities: Net borrowing (payments) under lines of credit (820) 20 (502) Proceeds from issuance of long-term debt 1,000 -- 898 Repayment of other long-term debt (91) (42) (150) Repayment of obligations under capital leases -- -- (205) Distributions to partners -- (280) (255) Other (28) -- (6) ---------------- -------------- -------------- Cash provided by (used in) financing activities 61 (302) (220) ---------------- -------------- -------------- Increase (decrease) in cash and cash equivalents 184 (90) 42 Cash and cash equivalents at beginning of period 18 108 66 ---------------- -------------- -------------- Cash and cash equivalents at end of period $ 202 $ 18 $ 108 ================ ============== ==============
See Notes to Consolidated Financial Statements. 32 EQUISTAR CHEMICALS, LP CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
Accumulated Partners' Accounts Other ----------------------------------------------------- Comprehensive Comprehensive Millions of dollars Lyondell Millennium Occidental Total Income (loss) Income (loss) - ------------------- ------------ ------------ ------------ ----------- ---------------- ---------------- Balance at January 1, 1999 $ 613 $ 1,621 $ 1,651 $ 3,885 $ -- $ - Net income 14 9 9 32 -- 32 Distributions to partners (105) (75) (75) (255) -- -- ------------ ------------ ------------ ----------- ---------------- ---------------- Comprehensive income $ 32 ================ Balance at December 31, 1999 522 1,555 1,585 3,662 -- -- Net income 63 45 45 153 -- 153 Distributions to partners (114) (83) (83) (280) -- -- Other 5 -- -- 5 -- -- ------------ ------------ ------------ ----------- ---------------- ---------------- Comprehensive income $ 153 ================ Balance at December 31, 2000 476 1,517 1,547 3,540 -- -- Net loss (115) (84) (84) (283) -- (283) Other comprehensive income: Unrealized loss on securities -- -- -- -- (1) (1) Minimum pension liability -- -- -- -- (19) (19) ------------ ------------ ------------ ----------- ---------------- ---------------- Comprehensive loss $ (303) ================ Balance at December 31, 2001 $ 361 $ 1,433 $ 1,463 $ 3,257 $ (20) ============ ============ ============ =========== ================
See Notes to Consolidated Financial Statements. 33 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. FORMATION OF THE PARTNERSHIP AND OPERATIONS Lyondell Chemical Company ("Lyondell") and Millennium Chemicals Inc. ("Millennium") formed Equistar Chemicals, LP ("Equistar" or "the Partnership"), a Delaware limited partnership, which commenced operations on December 1, 1997. On May 15, 1998, Equistar was expanded with the contribution of certain assets from Occidental Petroleum Corporation ("Occidental"). Equistar is currently owned 41% by Lyondell, 29.5% by Millennium and 29.5% by Occidental, all through wholly owned subsidiaries (see also Note 18). Equistar owns and operates the petrochemicals and polymers businesses contributed by Lyondell, Millennium and Occidental, which consist of 18 manufacturing facilities primarily on the U.S. Gulf Coast and in the U.S. Midwest. The petrochemicals segment manufactures and markets olefins, oxygenated products, aromatics and specialty products. Olefins include ethylene, propylene and butadiene, and oxygenated products include ethylene oxide, ethylene glycol, ethanol and methyl tertiary butyl ether ("MTBE"). The petrochemicals segment also includes the production and sale of aromatics, including benzene and toluene. The polymers segment manufactures and markets polyolefins, including high-density polyethylene ("HDPE"), low-density polyethylene ("LDPE"), linear low-density polyethylene ("LLDPE"), polypropylene, and performance polymers, all of which are used in the production of a wide variety of consumer and industrial products. The performance polymers include enhanced grades of polyethylene, including wire and cable insulating resins, and polymeric powders. Equistar is governed by a Partnership Governance Committee consisting of nine representatives, three appointed by each general partner. Most of the significant decisions of the Partnership Governance Committee require unanimous consent, including approval of the Partnership's strategic plan and annual updates thereof. Distributions are made to the partners based upon their percentage ownership of Equistar. Additional cash contributions required by the Partnership are also based upon the partners' percentage ownership of Equistar. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation--The consolidated financial statements include the accounts of Equistar and its wholly owned subsidiaries. Revenue Recognition--Revenue from product sales is recognized as risk and title to the product transfer to the customer, which usually occurs when shipment is made. Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts purchased with an original maturity date of three months or less. Cash equivalents are stated at cost, which approximates fair value. Equistar's policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution. Equistar performs periodic evaluations of the relative credit standing of these financial institutions which are considered in Equistar's investment strategy. Equistar has no requirements for compensating balances in a specific amount at a specific point in time. The Partnership does maintain compensating balances for some of its banking services and products. Such balances are maintained on an average basis and are solely at Equistar's discretion. As a result, none of Equistar's cash is restricted. 34 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Inventories--Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out ("LIFO") basis, except for materials and supplies, which are valued at average cost. Inventory exchange transactions, which involve homogeneous commodities in the same line of business and do not involve the payment or receipt of cash, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the normal LIFO valuation policy. Property, Plant and Equipment--Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is computed using the straight-line method over the estimated useful lives of the related assets, generally 25 years for major manufacturing equipment, 30 years for buildings, 10 to 15 years for light equipment and instrumentation, 15 years for office furniture and 3 to 5 years for information systems equipment. Upon retirement or sale, Equistar removes the cost of the assets and the related accumulated depreciation from the accounts and reflects any resulting gains or losses in the Consolidated Statement of Income. Equistar's policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year. Long-Lived Asset Impairment--Equistar evaluates long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is probable that undiscounted future cash flows will not be sufficient to recover an asset's carrying amount, the asset is written down to its fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Beginning in 2002, as discussed below, goodwill will be reviewed for impairment under SFAS No. 142 based on fair values. Investment in PD Glycol--Equistar holds a 50% interest in a joint venture with E.I. DuPont de Nemours and Company that owns an ethylene glycol facility in Beaumont, Texas. This investment was contributed by Occidental in 1998. The investment in PD Glycol is accounted for using the equity method of accounting. At December 31, 2001 and 2000, Equistar's underlying equity in the net assets of PD Glycol exceeded the cost of the investment by $7 million. The excess is being accreted into income on a straight-line basis over a period of 25 years. Goodwill--Goodwill includes goodwill contributed by Millennium and goodwill recorded in connection with the contribution of Occidental's assets. Goodwill is being amortized using the straight-line method over 40 years, the estimated useful life. Amortization of goodwill will cease as of January 1, 2002 as described below under Recent Accounting Standards. Turnaround Maintenance and Repairs Costs--Cost of maintenance and repairs incurred in connection with turnarounds of major units at Equistar's manufacturing facilities exceeding $5 million are deferred and amortized using the straight-line method until the next planned turnaround, generally four to six years. These costs are maintenance, repair and replacement costs that are necessary to maintain, extend and improve the operating capacity and efficiency rates of the production units. Deferred Software Costs--Costs to purchase and to develop software for internal use are deferred and amortized on a straight-line basis over a range of 3 to 10 years. Environmental Remediation Costs--Anticipated expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable a liability has been incurred and the amount of the liability can be reasonably estimated. The estimated liabilities have not been discounted to present value. Income Taxes--The Partnership is not subject to federal income taxes as income is reportable directly by the individual partners; therefore, there is no provision for income taxes in the accompanying financial statements. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. 35 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Accounting Changes Adopted in 2001--As of January 1, 2001, Equistar adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. Under SFAS No. 133, all derivative instruments are recorded on the balance sheet at fair value. Gains or losses from changes in the fair value of derivatives used as cash flow hedges are deferred in accumulated other comprehensive income, to the extent the hedge is effective, and subsequently reclassified to earnings to offset the impact of the related forecasted transaction. Implementation of SFAS No. 133 and SFAS No. 138 did not have a material effect on the consolidated financial statements of Equistar. Recent Accounting Standards--In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. SFAS No. 141 is effective for business combinations initiated after June 30, 2001 and is not expected to have a material effect on intangible assets acquired in business combinations effected prior to July 1, 2001. SFAS No. 142 prescribed the discontinuance of amortization of goodwill as well as annual review of goodwill for impairment. Equistar expects the implementation of SFAS No. 142 to result in the impairment of the entire balance of goodwill, resulting in a $1.1 billion charge that will be reported as the cumulative effect of a change in accounting principle as of January 1, 2002. Earnings in 2002 and subsequent years will be favorably affected by $33 million annually because of the elimination of goodwill amortization. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Adoption of SFAS No. 143 and SFAS No. 144 in calendar years 2003 and 2002, respectively, is not expected to have a material effect on the consolidated financial statements of Equistar. Reclassifications--Certain previously reported amounts have been reclassified to conform to classifications adopted in 2001. 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, as discussed below. During the first quarter 2001, Equistar recorded an additional $22 million charge, which included environmental remediation liabilities of $7 million (see Note 15), severance benefits of $5 million, pension benefits of $2 million, and other exit costs of $3 million. The severance and pension benefits covered approximately 125 people employed at the Port Arthur facility. The remaining $5 million of the charge related primarily to the write down of certain assets. Payments of $4 million for severance, $3 million for exit costs and $1 million for environmental remediation were made through December 31, 2001. The pension benefits of $2 million will be paid from the assets of the pension plans. As of December 31, 2001, the remaining liability included $6 million for environmental remediation costs and $1 million for severance benefits. During 1999, Equistar recorded a charge of $96 million associated with decisions to shut down certain polymer reactors and to consolidate certain administrative functions between Lyondell and Equistar. Accordingly, Equistar recorded a charge of $72 million to adjust the asset carrying values. The remaining $24 million of the total charge represented severance and other employee-related costs for approximately 500 employee positions that were eliminated. The eliminated positions, primarily administrative functions, resulted from opportunities to share such services between Lyondell and Equistar. Through December 31, 2001, approximately $19 million of severance and other employee-related costs had been paid and charged against the accrued liability. As of December 31, 2001, all of the employee terminations had been completed and the remaining liability of $5 million was eliminated. 36 4. EXTRAORDINARY ITEM As part of the third quarter 2001 refinancing (see Note 11), Equistar wrote off unamortized debt issuance costs and amendment fees of $3 million related to the early repayment of the $1.25 billion bank credit facility and reported the charge as an extraordinary loss on extinguishment of debt. 5. RELATED PARTY TRANSACTIONS Product Transactions with Lyondell--Lyondell purchases ethylene, propylene and benzene at market-related prices from Equistar under various agreements expiring in 2013 and 2014. Under the agreements, Lyondell is required to purchase 100% of its ethylene, propylene and benzene requirements for its Channelview and Bayport, Texas facilities, with the exception of quantities of one product that Lyondell is obligated to purchase under a supply agreement with an unrelated third party entered into prior to 1999 and expiring in 2015. In addition, a wholly owned subsidiary of Lyondell licenses MTBE technology to Equistar. Lyondell also purchases a significant portion of the MTBE produced by Equistar at one of its two Channelview units at market-related prices. Product Transactions with Occidental Chemical--In connection with the contribution of Occidental Chemical assets to Equistar, Equistar and Occidental Chemical entered into a long-term agreement for Equistar to supply 100% of the ethylene requirements for Occidental Chemical's U.S. manufacturing plants. The pricing terms under the agreement between Equistar and Occidental Chemical are similar to the pricing terms under the ethylene sales agreement between Equistar and Lyondell. The ethylene raw material is exclusively for internal use in production at these plants, less any quantities up to 250 million pounds per year tolled in accordance with the provisions of the agreement. Upon three years notice from either party to the other, sales may be "phased down" over a period not less than five years. No phase down may commence before January 1, 2009. Therefore, the annual required minimum cannot decline to zero prior to December 31, 2013, unless certain specified force majeure events occur. In addition to ethylene, Equistar sells methanol, ethers, and glycols to Occidental Chemical. Equistar also enters into over-the-counter derivatives, primarily price swap contracts, for crude oil with Occidental Energy Marketing, Inc., a subsidiary of Occidental Chemical, to help manage its exposure to commodity price risk with respect to crude oil-related raw material purchases (see Note 13). Equistar also purchases various products from Occidental Chemical at market-related prices. Product Transactions with Millennium Petrochemicals--Equistar sells ethylene to Millennium Petrochemicals at market-related prices pursuant to an agreement entered into in connection with the formation of Equistar. Under this agreement, Millennium Petrochemicals is required to purchase 100% of its ethylene requirements for its LaPorte, Texas facility from Equistar. The contract expires December 1, 2002 and, thereafter, renews annually. Either party may terminate on one year's notice. The pricing terms of this agreement are similar to the pricing terms of the ethylene sales agreements with Lyondell and Occidental Chemical. Under an agreement entered into in connection with the formation of Equistar, Equistar is required to purchase 100% of its vinyl acetate monomer ("VAM") raw material requirements at market-related prices from Millennium Petrochemicals for its LaPorte, Texas, Clinton, Iowa and Morris, Illinois plants for the production of ethylene vinyl acetate products at those locations. The contract expires December 31, 2002 and, thereafter, renews annually. Product Transactions with Oxy Vinyls, LP--Occidental Chemical owns 76% of Oxy Vinyls, LP ("Oxy Vinyls"), a joint venture partnership. Equistar sells ethylene to Oxy Vinyls for Oxy Vinyls' LaPorte, Texas facility at market-related prices pursuant to an agreement which expires on December 31, 2003. 37 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Transactions with LYONDELL-CITGO Refining LP--Lyondell's rights and obligations under the terms of its product sales and raw material purchase agreements with LYONDELL-CITGO Refining LP ("LCR"), a joint venture investment of Lyondell, have been assigned to Equistar. Accordingly, certain olefins by-products are sold by Equistar to LCR for processing into gasoline and certain refinery products are sold by LCR to Equistar as raw materials. Equistar also has assumed certain processing arrangements as well as storage obligations between Lyondell and LCR and provides certain marketing services for LCR. All of the agreements between LCR and Equistar are on terms generally representative of prevailing market prices. Transactions with LMC--Lyondell Methanol Company, L.P. ("LMC") sells all of its products to Equistar at market-related prices. The natural gas for LMC's plant is purchased by Equistar as agent for LMC under Equistar master agreements with various third party suppliers. Equistar provides operating and other services for LMC under the terms of existing agreements that were assumed by Equistar from Lyondell, including the lease to LMC by Equistar of the real property on which LMC's methanol plant is located. Pursuant to the terms of those agreements, LMC pays Equistar a management fee and reimburses certain expenses of Equistar at cost. Shared Services Agreement with Lyondell--During 1999, Lyondell provided certain administrative services to Equistar, including legal, risk management, treasury, tax and employee benefit plan administrative services, while Equistar provided services to Lyondell in the areas of health, safety and environment, human resources, information technology and legal. Effective January 1, 2000, Lyondell and Equistar implemented a revised agreement to utilize shared services more broadly. Lyondell now provides services to Equistar including information technology, human resources, raw material supply, supply chain, health, safety and environmental, engineering, research and development, facility services, legal, accounting, treasury, internal audit and tax. Lyondell charges Equistar for its share of the cost of such services. Direct third party costs, if incurred exclusively for Equistar, are charged directly to Equistar. Shared Services and Shared-Site Agreements with Millennium Petrochemicals--Equistar and Millennium Petrochemicals have agreements under which Equistar provides utilities, fuel streams and office space to Millennium Petrochemicals. In addition, Millennium Petrochemicals provides Equistar certain operational services, including utilities as well as barge dock access and related services. Transition Services Agreement with Occidental Chemical--On June 1, 1998, Occidental Chemical and Equistar entered into a transition services agreement. Under the terms of the agreement, Occidental Chemical provided Equistar certain services in connection with the businesses contributed by Occidental Chemical, including services related to accounting, payroll, office administration, marketing, transportation, purchasing and procurement, management, human resources, customer service, technical services and others. Most of these services ceased in June 1999. Health, safety, and environmental services were extended until December 31, 1999. 38 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Related party transactions are summarized as follows:
For the year ended December 31, ---------------------------------------- Millions of dollars 2001 2000 1999 - ------------------- ------------- ------------ ----------- Equistar billed related parties for: - ----------------------------------- Sales of products and processing services: Lyondell $ 405 $ 572 $ 246 Occidental Chemical 441 558 435 LCR 377 438 260 Millennium Petrochemicals 55 90 54 Oxy Vinyls 48 67 93 Shared services and shared site agreements: LCR 3 2 3 LMC 6 6 6 Millennium Petrochemicals 17 24 21 Lyondell -- -- 8 Gas purchased for LMC 86 85 46 Related parties billed Equistar for: - ----------------------------------- Purchases of products: LCR $ 203 $ 264 $ 190 LMC 151 165 95 Millennium Petrochemicals 15 16 12 Lyondell 4 2 6 Occidental Chemical 1 2 2 Shared services and transition agreements: Lyondell 147 133 9 Millennium Petrochemicals 19 22 24 LCR 2 -- -- Occidental Chemical -- -- 2
6. PURCHASE AND SALE OF BUSINESSES Effective June 1, 2001, Equistar expanded its wire and cable business through the acquisition of the low- and medium-voltage power cable materials business of AT Plastics, Inc. Equistar accounted for the acquisition as a purchase, allocating the $7 million purchase price to property, plant and equipment and inventory. Effective April 30, 1999, Equistar completed the sale of its concentrates and compounds business. The transaction included two manufacturing facilities, located in Heath, Ohio and Crockett, Texas, and related inventories. Equistar's proceeds from the sale were approximately $75 million. 7. ACCOUNTS RECEIVABLE Equistar sells its products primarily to other chemical manufacturers in the petrochemicals and polymers industries. Equistar performs ongoing credit evaluations of its customers' financial condition and, in certain circumstances, requires letters of credit from them. The Partnership's allowance for doubtful accounts, which is reflected in the accompanying Consolidated Balance Sheets as a reduction of accounts receivable, totaled $14 million and $9 million at December 31, 2001 and 2000, respectively. 39 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During 2001, Equistar terminated an agreement with an independent issuer of receivables-backed commercial paper. Previously, Equistar sold, on an ongoing basis and without recourse, designated accounts receivable, maintaining the balance of the accounts receivable sold by selling new receivables as existing receivables were collected. At December 31, 2000 and 1999, the balance of Equistar's accounts receivable sold was $130 million. Increases and decreases in the amount sold were reported as operating cash flows in the Consolidated Statement of Cash Flows. Costs related to the sales were included in "Selling, general and administrative expenses" in the Consolidated Statement of Income. 8. INVENTORIES Inventories were as follows at December 31: Millions of dollars 2001 2000 - ------------------- ----------------- ----------------- Finished goods $ 243 $ 273 Work-in-process 12 16 Raw materials 104 123 Materials and supplies 89 94 ----------------- ----------------- Total inventories $ 448 $ 506 ================= ================= Income in 2001 benefited from a reduction in the levels of raw material and product inventories, which are carried under the LIFO method of accounting. The charges to cost of sales associated with the inventory reductions were valued based on relatively low LIFO inventory values. If these charges had been valued based on average 2001 costs, cost of sales for 2001 would have been higher by approximately $10 million. The excess of the current cost of inventories over book value was approximately $28 million at December 31, 2001. 9. PROPERTY, PLANT AND EQUIPMENT AND OTHER ASSETS The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows at December 31: Millions of dollars 2001 2000 - ------------------- ----------------- ---------------- Land $ 79 $ 78 Manufacturing facilities and equipment 5,929 5,769 Construction in progress 92 134 ------------------ ---------------- Total property, plant and equipment 6,100 5,981 Less accumulated depreciation 2,395 2,162 ------------------ ---------------- Property, plant and equipment, net $ 3,705 $ 3,819 ================== =============== Equistar did not capitalize any interest during 2001, 2000 and 1999 with respect to construction projects. Goodwill, at cost, and the related accumulated amortization were as follows at December 31: Millions of dollars 2001 2000 - ------------------- --------------- --------------- Goodwill $ 1,318 $ 1,318 Less accumulated amortization 265 232 --------------- --------------- Goodwill, net $ 1,053 $ 1,086 =============== =============== 40 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The unamortized balances of deferred turnaround, software and debt issuance costs included in "Other assets, net" were as follows at December 31: Millions of dollars 2001 2000 - ------------------- --------------- ------------- Turnaround costs $ 70 $ 75 Software costs 97 104 Debt issuance costs 34 9 Depreciation and amortization is summarized as follows for the periods presented: For the year ended December 31, ------------------------------------------------ Millions of dollars 2001 2000 1999 - ------------------- ------------- -------------- ------------- Property, plant and equipment $ 237 $ 229 $ 221 Goodwill 33 33 33 Turnaround expense 20 24 25 Software costs 12 13 12 Other 17 11 9 Debt issuance costs 2 -- -- ------------- -------------- ------------- $ 321 $ 310 $ 300 ============= ============== ============= 10. ACCRUED LIABILITIES Accrued liabilities were as follows at December 31: Millions of dollars 2001 2000 - ------------------- ----------------- --------------- Property taxes $ 68 $ 73 Interest 68 52 Payroll and benefits 49 38 Other 12 3 ----------------- --------------- Total accrued liabilities $ 197 $ 166 ================= =============== 11. LONG-TERM DEBT In August 2001, Equistar completed a $1.5 billion debt refinancing. The refinancing included a bank credit facility consisting of a $500 million secured revolving credit facility maturing in August 2006 and a $300 million secured term loan, maturing in August 2007, with scheduled quarterly amortization payments, beginning December 31, 2001. The revolving credit facility was undrawn at December 31, 2001. Borrowing under the revolving credit facility generally bears interest based on a margin over, at Equistar's option, LIBOR or a base rate. The sum of the applicable margin plus a facility fee varies between 1.5% and 2.5%, in the case of LIBOR loans, and 0.5% and 1.5%, in the case of base rate loans, depending on Equistar's ratio of debt to EBITDA. The term loan generally bears interest at a rate equal to LIBOR plus 3% or the base rate plus 2%, at Equistar's option. Borrowing under the 41 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) term loan had a weighted average interest rate of 6.26% during 2001. Certain financial ratio requirements were modified in the refinancing to make them less restrictive. The bank credit facility is secured by a lien on Equistar's accounts receivable, inventory, other personal property and certain fixed assets. The refinancing also included the issuance of $700 million of new unsecured 10.125% senior notes maturing in August 2008. The 10.125% senior notes rank pari passu with existing Equistar notes. The August 2001 refinancing replaced a five-year, $1.25 billion credit facility with a group of banks that would have expired November 2002. Borrowing under the facility at December 31, 2000 was $820 million and had a weighted average interest rate of 7.13% at December 31, 2000. Millennium America Inc., a subsidiary of Millennium, provided limited guarantees with respect to the payment of principal and interest on a total of $750 million principal amount of indebtedness under the $1.25 billion revolving credit facility. As a result of the refinancing, the related guarantees have been terminated. In March 2001, Equistar amended the previous $1.25 billion credit facility making certain financial ratio requirements less restrictive. As a result of the amendment, the interest rate on the previous credit facility was increased from LIBOR plus 5/8 of 1% to LIBOR plus 8/10 of 1%. In February 1999, Equistar issued $900 million of debt securities. The debt securities included $300 million of 8.50% Notes, which mature on February 15, 2004, and $600 million of 8.75% Notes, which mature on February 15, 2009. Equistar used the net proceeds from this offering (i) to repay $205 million outstanding under a capitalized lease obligation relating to Equistar's Corpus Christi facility, (ii) to repay the outstanding balance under a $500 million credit agreement, after which the $500 million credit agreement was terminated, (iii) to repay $150 million of 10.00% Notes due in June 1999, and (iv) to the extent of the remaining net proceeds, to reduce outstanding borrowing under the revolving credit facility and for Partnership working capital purposes. The bank credit facility and the indenture governing Equistar's 10.125% senior notes contain covenants that, subject to certain exceptions, restrict sale and leaseback transactions, lien incurrence, debt incurrence, sales of assets and mergers and consolidations. In addition, the bank credit facility requires Equistar to maintain specified financial ratios. The breach of these covenants could permit the lenders to declare the loans immediately payable and could permit the lenders under Equistar's credit facility to terminate future lending commitments. As a result of the continued poor current business environment, Equistar is seeking an amendment to its credit facility that would increase its financial flexibility by easing certain financial ratio requirements. Such an amendment will require the payment of additional fees. Equistar anticipates that the amendment will become effective prior to March 31, 2002. 42 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Long-term debt consisted of the following at December 31: Millions of dollars 2001 2000 - ------------------- ---------- ---------- Bank credit facilities: Revolving credit facility due 2006 $ -- $ 820 Term loan due 2007 299 -- Other debt obligations: Medium-term notes due 2002-2005 31 121 9.125% Notes due 2002 100 100 8.50% Notes due 2004 300 300 6.50% Notes due 2006 150 150 10.125% Senior Notes due 2008 700 - - 8.75% Notes due 2009 598 598 7.55% Debentures due 2026 150 150 Other 9 9 ---------- ----------- Total long-term debt 2,337 2,248 Less current maturities 104 90 ---------- ----------- Total long-term debt, net $ 2,233 $ 2,158 ========== =========== The 8.75% notes have a face amount of $600 million and are shown net of unamortized discount. The medium-term notes had a weighted average interest rate of 9.8% and 9.6% at December 31, 2001 and 2000, respectively. The medium-term notes, the 9.125% notes, the 6.5% notes and the 7.55% debentures were assumed by Equistar from Lyondell when Equistar was formed in 1997. As between Equistar and Lyondell, Equistar is primarily liable for this debt. Lyondell remains a co-obligor for the medium-term notes and certain events involving only Lyondell could give rise to events of default under those notes, permitting the obligations to be accelerated. Under certain limited circumstances, the holders of the medium-term notes have the right to require repurchase of the notes. Following amendments to the indentures for the 9.125% notes and 6.5% notes and the 7.55% debentures in November 2000, Lyondell remains a guarantor of that debt but not a co-obligor. The consolidated financial statements of Lyondell are filed as an exhibit to Equistar's Annual Report on Form 10-K for the year ended December 31, 2001. Aggregate maturities of long-term debt during the next five years are $104 million in 2002, $32 million in 2003; $303 million in 2004; $8 million in 2005; $153 million in 2006 and $1.8 billion thereafter. 12. LEASE COMMITMENTS Equistar leases various facilities and equipment under noncancelable lease arrangements for various periods. Operating leases include leases of railcars used in the distribution of products in Equistar's business. Equistar leases the railcars 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 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 related guaranteed residual value, Equistar will pay the difference to the lessor. The total guaranteed residual value under these leases was approximately $225 million at December 31, 2001. 43 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Certain of Equistar's railcar operating leases contain financial and other covenants that are substantially the same as those contained in the credit facility discussed in Note 11 above. A breach of these covenants would permit the early termination of those leases. As a result of the continued poor current business environment, Equistar is seeking an amendment to these railcar leases. Such amendments will require the payment of additional fees. Equistar anticipates that the amendments will become effective prior to March 31, 2002. In addition, the credit rating downgrade in 2002 permits the early termination of one of Equistar's railcar leases by the lessor, which would accelerate the payment of $126 million of minimum lease payments. Equistar has reached an agreement in principal with the lessor to renegotiate the lease. At December 31, 2001, future minimum lease payments and residual value guarantees relating to noncancelable operating leases with lease terms in excess of one year were as follows: Minimum Residual Lease Value Payments Guarantees ------------ -------------- Millions of dollars - ------------------- 2002 $ 95 $ 39 2003 78 - - 2004 67 186 2005 43 - - 2006 35 - - Thereafter 287 - - --------------- -------------- Total minimum lease payments $ 605 $ 225 =============== ============== Operating lease net rental expense was $110 million, $115 million and $112 million for the years ending December 31, 2001, 2000 and 1999, respectively. 13. FINANCIAL INSTRUMENTS AND DERIVATIVES Equistar enters into over-the-counter derivatives, primarily price swap contracts, related to crude oil with Occidental Energy Marketing, Inc., a subsidiary of Occidental Chemical, to help manage its exposure to commodity price risk with respect to crude oil-related raw material purchases. At December 31, 2000, price swap contracts covering 5.1 million barrels of crude oil were outstanding. The carrying value and fair market value of these derivative instruments at December 31, 2000 represented a liability of $13 million, which was based on quoted market prices. The resulting loss from these hedges of anticipated raw material purchases was deferred on the consolidated balance sheet. On January 1, 2001, in accordance with the transition provisions of SFAS No. 133, Equistar reclassified the deferred loss of $13 million to accumulated other comprehensive income as a transition adjustment, representing the cumulative effect of a change in accounting principle. The transition adjustment was reclassified to the Consolidated Statement of Income during the period January through July 2001 as the related raw material purchases occurred. During 2001, Equistar entered into additional price swap contracts covering 7.2 million barrels of crude oil and primarily maturing from July 2001 through December 2001. In the third quarter 2001, outstanding price swap contracts, covering 4.1 million barrels of crude oil and primarily maturing from October 2001 through December 2001, were effectively terminated. The termination resulted in realization of a gain of nearly $9 million, which was recognized in the fourth quarter 2001 as the related forecasted transactions occurred. There were no outstanding price swap contracts at December 31, 2001. 44 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes activity included in accumulated other comprehensive income ("AOCI") related to the fair value of derivative instruments for the year ended December 31, 2001: Millions of dollars 2001 - ------------------- ------------ Gain (loss): Balance at beginning of period $ -- ------------ January 1, 2001 transition adjustment - reclassification of December 31, 2000 deferred loss (13) Net gains on derivative instruments 35 Reclassification of gains on derivative instruments to earnings (22) ------------ Net change included in AOCI for the period -- ------------ Net gain on derivative instruments included in AOCI at December 31, 2001 $ -- ============ The fair value of all nonderivative financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximated their carrying value due to their short maturity. Based on the borrowing rates currently available to Equistar for debt with terms and average maturities similar to Equistar's debt portfolio, the fair value of Equistar's long-term debt, including amounts due within one year, was approximately $2.3 billion and $2.1 billion at December 31, 2001 and 2000, respectively. Equistar is exposed to credit risk related to its financial instruments in the event of nonperformance by the counterparties. Equistar does not generally require collateral or other security to support these financial instruments. The counterparties to these transactions are major institutions deemed creditworthy by Equistar. Equistar does not anticipate nonperformance by the counterparties. Equistar accounts for certain investments as "available-for-sale" securities in accordance with the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, changes in the fair value of the investments are recognized in the balance sheet and the unrealized holding gains and losses are recognized in other comprehensive income. 14. PENSION AND OTHER POSTRETIREMENT BENEFITS All full-time regular employees of the Partnership are covered by defined benefit pension plans sponsored by Equistar. In connection with the formation of Equistar, no pension assets or obligations were contributed to Equistar, with the exception of union represented plans contributed by Occidental. Retirement benefits are based upon years of service and the employee's highest three consecutive years of compensation during the last ten years of service. Equistar accrues pension costs based upon an actuarial valuation and funds the plans through periodic contributions to pension trust funds. Equistar also has unfunded supplemental nonqualified retirement plans, which provide pension benefits for certain employees in excess of the tax qualified plans' limits. In addition, Equistar sponsors unfunded postretirement benefit plans other than pensions, which provide medical and life insurance benefits. The postretirement medical plans are contributory while the life insurance plans are noncontributory. 45 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table provides a reconciliation of benefit obligations, plan assets and the funded status of these plans:
Other Pension Benefits Postretirement Benefits ------------------------------- ------------------------------- Millions of dollars 2001 2000 2001 2000 - ------------------- ------------- -------------- -------------- ------------- Change in benefit obligation: Benefit obligation, January 1 $ 120 $ 99 $ 92 $ 77 Service cost 16 17 2 2 Interest cost 10 9 6 6 Plan amendments -- -- 29 -- Actuarial loss (gain) 12 8 (14) 11 Benefits paid (11) (12) (3) (2) Net effect of curtailments, settlements and special termination benefits -- (1) -- 1 Transfer to Lyondell -- -- -- (3) ------------- -------------- -------------- ------------- Benefit obligation, December 31 147 120 112 92 ------------- -------------- -------------- ------------- Change in plan assets: Fair value of plan assets, January 1 117 101 -- -- Actual return on plan assets (6) (3) -- -- Partnership contributions 7 31 3 2 Benefits paid (11) (12) (3) (2) ------------- -------------- -------------- ------------- Fair value of plan assets, December 31 107 117 -- -- ------------- -------------- -------------- ------------- Funded status (40) (3) (112) (91) Unrecognized actuarial loss 48 24 5 20 Unrecognized prior service cost -- -- 29 -- ------------- -------------- -------------- ------------- Net amount recognized $ 8 $ 21 $ (78) $ (71) ============= ============== ============== ============= Amounts recognized in the Consolidated Balance Sheet consist of: Prepaid benefit cost $ 22 $ 35 $ -- $ -- Accrued benefit liability (33) (14) (78) (71) Accumulated other comprehensive income 19 -- -- -- ------------- -------------- -------------- ------------- Net amount recognized $ 8 $ 21 $ (78) $ (71) ============= ============== ============== =============
The increase in other postretirement benefit obligations in 2001 resulted from a medical plan amendment that increased Equistar's maximum contribution level per employee by 25%. Pension plans with benefit obligations in excess of the fair value of assets are summarized as follows at December 31: 2001 2000 ------------- -------------- Benefit obligation $ 129 $ 63 Fair value of assets 81 40 Pension plans with accumulated benefit obligations in excess of the fair value of assets are summarized as follows at December 31: 2001 2000 ------------- -------------- Accumulated benefit obligation $ 106 $ 9 Fair value of assets 81 6 46 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net periodic pension and other postretirement benefit costs included the following components:
Pension Benefits Other Postretirement Benefits ----------------------------------- ----------------------------------- Millions of dollars 2001 2000 1999 2001 2000 1999 - ------------------- --------- --------- -------- --------- --------- --------- Components of net periodic benefit cost: Service cost $ 16 $ 17 $ 22 $ 2 $ 2 $ 4 Interest cost 10 9 7 6 6 6 Amortization of actuarial loss 2 -- 1 -- 1 1 Expected return on plan assets (11) (8) (8) -- -- -- Net effect of curtailments, settlements and special termination benefits 3 (1) -- 2 1 -- --------- --------- -------- --------- --------- --------- Net periodic benefit cost $ 20 $ 17 $ 22 $ 10 $ 10 $ 11 ========= ========= ======== ========= ========= =========
The assumptions used in determining the net pension cost and the net pension liability were as follows at December 31:
Pension Benefits Other Postretirement Benefits 2001 2000 1999 2001 2000 1999 --------- --------- -------- --------- --------- --------- Weighted-average assumptions as of December 31: Discount rate 7.00% 7.50% 8.00% 7.00% 7.50% 8.00% Expected return on plan assets 9.50% 9.50% 9.50% -- -- -- Rate of compensation increase 4.50% 4.50% 4.75% 4.50% 4.50% 4.75%
The assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 2001 was 7.0% for 2002 through 2004 and 5.0% thereafter. The health care cost trend rate assumption does not have a significant effect on the amounts reported due to limits on Equistar's maximum contribution level under the medical plan. To illustrate, increasing or decreasing the assumed health care cost trend rates by one percentage point in each year would change the accumulated postretirement benefit liability as of December 31, 2001 by less than $1 million and would not have a material effect on the aggregate service and interest cost components of the net periodic postretirement benefit cost for the year then ended. Equistar also maintains voluntary defined contribution savings plans for eligible employees. Contributions to the plans by Equistar were $16 million, $17 million and $20 million for the years ended December 31, 2001, 2000 and 1999, respectively. 15. COMMITMENTS AND CONTINGENCIES Commitments--Equistar has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business. At December 31, 2001, Equistar had commitments for natural gas and natural gas liquids at prices in excess of current market. Using December 31, 2001 spot market prices for these products the estimated negative impact on first quarter 2002 operating results would be approximately $30 million. Since December 31, 2001, natural gas prices have further declined. These fixed-price contracts substantially terminate by the end of the first quarter 2002. See also Note 5, describing related party commitments. 47 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Equistar is party to various unconditional purchase obligation contracts as a purchaser for products and services, principally for steam and power. At December 31, 2001, future minimum payments under these contracts with noncancelable contract terms in excess of one year were as follows: Millions of dollars 2002 $ 109 2003 132 2004 135 2005 137 2006 138 Thereafter 1,688 ---------------- Total minimum contract payments $ 2,339 ================ Equistar's total purchases under these agreements were $77 million, $51 million and $56 million for the years ending December 31, 2001, 2000 and 1999, respectively. The increases in 2001, 2002 and 2003 are due to commitments for steam and power from a new co-generation facility, which is expected to reach full capacity in mid-2002. Indemnification Arrangements--Lyondell, Millennium Petrochemicals and certain subsidiaries of Occidental have each agreed to provide certain indemnifications to Equistar with respect to the petrochemicals and polymers businesses contributed by the partners. In addition, Equistar agreed to assume third party claims that are related to certain pre-closing contingent liabilities that are asserted prior to December 1, 2004 as to Lyondell and Millennium Petrochemicals, and May 15, 2005 as to certain Occidental subsidiaries, to the extent the aggregate thereof does not exceed $7 million to each partner, subject to certain terms of the respective asset contribution agreements. As of December 31, 2001, Equistar had incurred a total of $17 million for these uninsured claims and liabilities. Equistar also agreed to assume third party claims that are related to certain pre-closing contingent liabilities that are asserted for the first time after December 1, 2004 as to Lyondell and Millennium Petrochemicals, and for the first time after May 15, 2005 as to certain Occidental subsidiaries. As of September 30, 2001, Equistar, Lyondell, Millennium Petrochemicals and certain subsidiaries of Occidental amended the asset contribution agreements governing these indemnification obligations to clarify the treatment of, and procedures pertaining to the management of, certain claims arising under the asset contribution agreements. Equistar management believes that these amendments do not materially change the asset contribution agreements. Environmental Remediation--Equistar's accrued liability for environmental matters as of December 31, 2001 was $6 million and related to the Port Arthur facility, which was permanently shut down on February 28, 2001. In the opinion of management, there is currently no material estimable range of loss in excess of the amounts recorded for environmental remediation. Clean Air Act--The eight-county Houston/Galveston region has been designated a severe non-attainment area for ozone by the U.S. Environmental Protection Agency ("EPA"). Emission reduction controls for nitrogen oxides ("NOx") must be installed at each of Equistar's six plants located in the Houston/Galveston region during the next several years. Compliance with the plan will result in increased capital investment, which could be between $200 million and $260 million, before the 2007 deadline, as well as higher annual operating costs for Equistar. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. In January 2001, Equistar and an organization composed of industry participants filed a lawsuit against the Texas Natural Resource Conservation Commission ("TNRCC") to encourage adoption of their alternative plan to achieve the same air quality improvement with less negative economic impact on the region. Adoption of the alternative plan, as sought by the lawsuit, is expected to reduce Equistar's estimated capital investments for NOx reductions required to comply with the standards. However, there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. 48 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. The presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain federal and state governmental initiatives have sought either to rescind the oxygenate requirement for reformulated gasoline or to restrict or ban the use of MTBE. These initiatives or other governmental actions could result in a significant reduction in Equistar's MTBE sales, which represented approximately 4% of its total 2001 revenues. Equistar has developed technologies to convert its process to produce alternate gasoline blending components should it be necessary to reduce MTBE production in the future. However, implementation of such technologies would require additional capital investment. General--The Partnership is also subject to various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material adverse effect on the financial position or liquidity of Equistar. 16. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information is summarized as follows for the periods presented: For the year ended December 31, ----------------------------------------------- Millions of dollars 2001 2000 1999 ------------------- ------------- ------------- ------------- Cash paid for interest $ 171 $ 180 $ 146 ============== ============= ============= 49 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 17. SEGMENT INFORMATION AND RELATED INFORMATION Equistar operates in two reportable segments, petrochemicals and polymers. The accounting policies of the segments are the same as those described in "Summary of Significant Accounting Policies" (see Note 2). No third-party customer accounted for 10% or more of sales during the three-year period ended December 31, 2001. Summarized financial information concerning Equistar's reportable segments is shown in the following table. Intersegment sales between the petrochemicals and polymers segments were based on current market prices.
Millions of dollars Petrochemicals Polymers Unallocated Eliminations Consolidated - ------------------- --------------- ------------ ------------ ------------- ------------- For the year ended December 31, 2001: Sales and other operating revenues: Customers $ 3,929 $ 1,980 $ -- $ -- $ 5,909 Intersegment 1,455 -- -- (1,455) -- --------------- ------------ ------------ ------------- ------------- 5,384 1,980 -- (1,455) 5,909 Unusual charges -- -- 22 -- 22 Operating income (loss) 275 (186) (188) -- (99) Total assets 3,458 1,365 1,485 -- 6,308 Capital expenditures 84 24 2 -- 110 Depreciation and amortization expense 204 58 59 -- 321 For the year ended December 31, 2000: Sales and other operating revenues: Customers $ 5,144 $ 2,351 $ -- $ -- $ 7,495 Intersegment 1,887 -- -- (1,887) -- --------------- ------------ ------------ ------------- ------------- 7,031 2,351 -- (1,887) 7,495 Operating income (loss) 694 (185) (175) -- 334 Total assets 3,693 1,534 1,355 -- 6,582 Capital expenditures 79 46 6 -- 131 Depreciation and amortization expense 199 55 56 -- 310 For the year ended December 31, 1999: Sales and other operating revenues: Customers $ 3,435 $ 2,159 $ -- $ -- $ 5,594 Intersegment 1,324 -- -- (1,324) -- --------------- ------------ ------------ ------------- ------------- 4,759 2,159 -- (1,324) 5,594 Unusual charges -- -- 96 -- 96 Operating income (loss) 447 51 (336) -- 162 Total assets 3,671 1,551 1,514 -- 6,736 Capital expenditures 61 83 13 -- 157 Depreciation and amortization expense 194 53 53 -- 300
50 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table presents the details of "Operating income (loss)" as presented above in the "Unallocated" column for the years ended December 31, 2001, 2000 and 1999.
Millions of dollars 2001 2000 1999 - ------------------- ---------- --------- ---------- Expenses not allocated to petrochemicals and polymers: Principally general and administrative expenses $ (166) $ (175) $ (240) Unusual charges (22) -- (96) ---------- --------- ---------- Total--Unallocated $ (188) $ (175) $ (336) ========== ========= ==========
The following table presents the details of "Total assets" as presented above in the "Unallocated" column as of December 31, for the years indicated:
Millions of dollars 2001 2000 1999 - ------------------- ---------- --------- ---------- Cash $ 202 $ 18 $ 108 Accounts receivable--trade and related parties 17 16 18 Prepaids and other current assets 20 17 22 Property, plant and equipment, net 44 56 58 Goodwill, net 1,053 1,086 1,119 Other assets 149 162 189 ---------- --------- ---------- $ 1,485 $ 1,355 $ 1,514 ========== ========= ==========
18. SUBSEQUENT EVENT Early in 2002, Lyondell and Occidental agreed in principle for Lyondell's acquisition of Occidental's 29.5% share of Equistar and Occidental's purchase of an equity interest in Lyondell. Upon completion of these transactions, Lyondell's ownership interest in Equistar would increase to 70.5%. Millennium holds the remaining 29.5% interest in Equistar. There can be no assurance that the proposed transactions will be completed. 51 EX-99.3 5 dex993.txt EQUISTAR JUNE 30, 2002 QUARTERLY REPORT ON FORM 10-Q PAGES 1-10 Exhibit 99.3 EQUISTAR CHEMICALS, LP 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 EX-99.4 6 dex994.txt LYONDELL 2001 ANNUAL REPORT ON FORM 10-Q PAGES 63-101 Exhibit 99.4 LYONDELL CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31, ------------------------------- Millions of dollars, except per share data 2001 2000 1999 - ------------------------------------------------ ------- ------- ------- Sales and other operating revenues $ 3,226 $ 4,036 $ 3,693 Operating costs and expenses: Cost of sales 2,771 3,371 2,891 Selling, general and administrative expenses 149 190 240 Research and development expense 32 35 58 Amortization of goodwill and other intangibles 99 101 100 Unusual charges 63 -- -- ------- ------- ------- 3,114 3,697 3,289 ------- ------- ------- Operating income 112 339 404 Interest expense (386) (514) (616) Interest income 17 52 27 Other income (expense), net (4) 27 5 Gain on sale of assets -- 590 -- ------- ------- ------- Income (loss) before equity investments, income taxes and extraordinary items (261) 494 (180) ------- ------- ------- Income (loss) from equity investments: Equistar Chemicals, LP (77) 101 52 LYONDELL-CITGO Refining LP 129 86 23 Other (12) 12 1 ------- ------- ------- 40 199 76 ------- ------- ------- Income (loss) before income taxes and extraordinary items (221) 693 (104) Provision for (benefit from) income taxes (76) 223 (24) ------- ------- ------- Income (loss) before extraordinary items (145) 470 (80) Extraordinary losses on extinguishment of debt, net of income taxes (5) (33) (35) ------- ------- ------- Net income (loss) $ (150) $ 437 $ (115) ======= ======= ======= Basic earnings per share: Income (loss) before extraordinary items $ (1.24) $ 4.00 $ (.77) Extraordinary losses (.04) (.28) (.33) ------- ------- ------- Net income (loss) $ (1.28) $ 3.72 $ (1.10) ======= ======= ======= Diluted earnings per share: Income (loss) before extraordinary items $ (1.24) $ 3.99 $ (.77) Extraordinary losses (.04) (.28) (.33) ------- ------- ------- Net income (loss) $ (1.28) $ 3.71 $ (1.10) ======= ======= =======
See Notes to Consolidated Financial Statements. 63 LYONDELL CHEMICAL COMPANY CONSOLIDATED BALANCE SHEETS
December 31, ------------------ Millions, except shares and par value data 2001 2000 - ------------------------------------------ ------- ------- ASSETS Current assets: Cash and cash equivalents $ 146 $ 260 Accounts receivable: Trade, net 317 465 Related parties 35 43 Inventories 316 392 Prepaid expenses and other current assets 116 49 Deferred tax assets 277 136 ------- ------- Total current assets 1,207 1,345 Property, plant and equipment, net 2,293 2,429 Investments and long-term receivables: Investment in PO joint ventures 717 621 Investment in Equistar Chemicals, LP 522 599 Receivable from LYONDELL-CITGO Refining LP 229 229 Investment in LYONDELL-CITGO Refining LP 29 20 Other investments and long-term receivables 122 137 Goodwill, net 1,102 1,152 Other assets, net 482 515 ------- ------- Total assets $ 6,703 $ 7,047 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable: Trade $ 261 $ 315 Related parties 58 86 Current maturities of long-term debt 7 10 Accrued liabilities 233 323 ------- ------- Total current liabilities 559 734 Long-term debt 3,846 3,844 Other liabilities 583 441 Deferred income taxes 790 702 Commitments and contingencies Minority interest 176 181 Stockholders' equity: Common stock, $1.00 par value, 250,000,000 shares authorized, 120,250,000 issued 120 120 Additional paid-in capital 854 854 Retained earnings 247 504 Accumulated other comprehensive loss (397) (258) Treasury stock, at cost, 2,687,080 and 2,689,667 shares, respectively (75) (75) ------- ------- Total stockholders' equity 749 1,145 ------- ------- Total liabilities and stockholders' equity $ 6,703 $ 7,047 ======= =======
See Notes to Consolidated Financial Statements. 64 LYONDELL CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, ------------------------------- Millions of dollars 2001 2000 1999 - ------------------- ------- ------- ------- Cash flows from operating activities: Net income (loss) $ (150) $ 437 $ (115) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 269 279 330 Gain on sale of assets -- (590) -- Losses from equity investments 89 -- -- Unusual charges 63 -- -- Extraordinary items 5 33 35 Deferred income taxes 7 55 36 Changes in assets and liabilities that provided (used) cash: Accounts receivable 154 (160) (124) Inventories 48 3 15 Accounts payable (74) 67 52 Prepaid expenses and other current assets (85) 85 (51) Other assets and liabilities (127) (148) 122 ------- ------- ------- Cash provided by operating activities 199 61 300 ------- ------- ------- Cash flows from investing activities: Expenditures for property, plant and equipment (68) (104) (131) Proceeds from sales of assets, net of cash sold -- 2,497 -- Contributions and advances to affiliates (173) (40) (52) Distributions from affiliates in excess of earnings 50 85 134 Other -- -- 4 ------- ------- ------- Cash (used in) provided by investing activities (191) 2,438 (45) ------- ------- ------- Cash flows from financing activities: Repayments of long-term debt (394) (2,417) (4,122) Proceeds from issuance of long-term debt 393 -- 3,400 Payment of debt issuance costs (15) (20) (107) Issuance of common stock -- -- 736 Dividends paid (106) (106) (97) Other -- -- 8 ------- ------- ------- Cash used in financing activities (122) (2,543) (182) ------- ------- ------- Effect of exchange rate changes on cash -- (3) 1 ------- ------- ------- (Decrease) increase in cash and cash equivalents (114) (47) 74 Cash and cash equivalents at beginning of period 260 307 233 ------- ------- ------- Cash and cash equivalents at end of period $ 146 $ 260 $ 307 ======= ======= =======
See Notes to Consolidated Financial Statements. 65 LYONDELL CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Additional Other Common Stock Paid-In Retained Comprehensive Comprehensive ---------------------- Millions, except shares and per share data Issued Treasury Capital Earnings Income(Loss) Income(Loss) - ------------------------------------------ --------- ---------- ---------- ----------- -------------- -------------- Balance, January 1, 1999 (80,000,000 shares issued; 2,978,203 treasury shares) $ 80 $ (83) $ 158 $ 387 $ 32 $ -- Net loss -- -- -- (115) -- (115) Cash dividends ($.90 per share) -- -- -- (97) -- -- Issuance of common stock 40 -- 696 -- -- -- Reissuance of 299,227 treasury shares under restricted stock plan -- 8 -- (3) -- -- Foreign currency translation, net of tax of $31 -- -- -- -- (96) (96) --------- --------- ---------- --------- ------------- ------------- Comprehensive loss $ (211) ============ Balance, December 31, 1999 (120,250,000 shares issued; 2,678,976 treasury shares) $ 120 $ (75) $ 854 $ 172 $ (64) $ -- Net income -- -- -- 437 -- 437 Cash dividends ($.90 per share) -- -- -- (106) -- -- Reissuance of 60,436 treasury shares under restricted stock plan -- 2 -- -- -- -- Forfeiture of 71,127 shares under restricted stock plan -- (2) -- 1 -- -- Foreign currency translation -- -- -- -- (183) (183) Minimum pension liability, net of tax of $5 -- -- -- -- (11) (11) --------- --------- ---------- --------- ------------- ------------ Comprehensive income $ 243 ============ Balance, December 31, 2000 (120,250,000 shares issued; 2,689,667 treasury shares) $ 120 $ (75) $ 854 $ 504 $ (258) $ -- Net loss -- -- -- (150) -- (150) Cash dividends ($.90 per share) -- -- -- (106) -- -- Reissuance of 2,587 treasury shares under restricted stock plan -- -- -- (1) -- -- Unrealized loss on derivative instruments (2) (2) Foreign currency translation -- -- -- -- (53) (53) Minimum pension liability, net of tax of $46 -- -- -- -- (84) (84) --------- --------- ---------- --------- ------------- ------------- Comprehensive loss $ (289) ============ Balance, December 31, 2001 (120,250,000 shares issued; 2,687,080 treasury shares) $ 120 $ (75) $ 854 $ 247 $ (397) ========= ========= ========== ========= =============
See Notes to Consolidated Financial Statements. 66 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of the Company and Operations Lyondell Chemical Company ("Lyondell") is a leading worldwide producer and marketer of propylene oxide ("PO"), propylene glycol, propylene glycol ethers, butanediol ("BDO") toluene diisocyanate ("TDI"), styrene monomer ("SM") and methyl tertiary butyl ether ("MTBE"), the principal derivative of tertiary butyl alcohol ("TBA"). These operations are consolidated and reported as the intermediate chemicals and derivatives ("IC&D") segment. Lyondell's operations in the petrochemicals and polymers segments are conducted through its joint venture ownership interest in Equistar Chemicals, LP ("Equistar") (see Note 8). Lyondell accounts for its investment in Equistar using the equity method of accounting. Equistar's petrochemicals segment produces olefins, including ethylene, propylene and butadiene; aromatics, including benzene and toluene; oxygenated products, including ethylene oxide and derivatives, ethylene glycol, ethanol and MTBE. Equistar's polymers segment produces polyolefins, including high density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear-low density polyethylene ("LLDPE") and polypropylene; and performance polymers products, including wire and cable insulating resins, and polymeric powders. Lyondell's refining segment operations are conducted through its joint venture ownership interest in LYONDELL-CITGO Refining LP ("LCR") (see Note 9). Lyondell accounts for its investment in LCR using the equity method of accounting. LCR produces refined petroleum products, including gasoline, low sulfur diesel, jet fuel, aromatics, and lubricants. Lyondell has additional operations conducted through its 75% joint venture ownership interest in Lyondell Methanol Company, LP ("LMC"), which produces methanol. Lyondell accounts for its investment in LMC using the equity method of accounting. 2. Summary of Significant Accounting Policies Basis of Presentation--The consolidated financial statements include the accounts of Lyondell and its subsidiaries. Investments in joint ventures where Lyondell exerts a certain level of management control, but lacks full decision making ability over all major issues, are accounted for using the equity method of accounting. Under those circumstances, this accounting treatment is used even though Lyondell's ownership percentage may exceed 50%. Revenue Recognition--Revenue from product sales is recognized as risk and title to the product transfer to the customer, which usually occurs when shipment is made. Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts purchased with an original maturity date of three months or less. Cash equivalents are stated at cost, which approximates fair value. Lyondell's policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution. Lyondell performs periodic evaluations of the relative credit standing of these financial institutions, which are considered in Lyondell's investment strategy. Lyondell has no requirements for compensating balances in a specific amount at a specific point in time. Lyondell does maintain compensating balances for some of its banking services and products. Such balances are maintained on an average basis and are solely at Lyondell's discretion. As a result, none of Lyondell's cash is restricted. Inventories--Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out ("LIFO") basis for substantially all inventories, excluding materials and supplies. Materials and supplies are valued using the average cost method. 67 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Inventory exchange transactions, which involve homogeneous commodities in the same line of business and do not involve the payment or receipt of cash, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the normal LIFO valuation policy. Property, Plant and Equipment--Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is computed using the straight-line method over the estimated useful lives of the related assets, generally 25 years for major manufacturing equipment, 30 years for buildings, 10 to 15 years for light equipment and instrumentation, 15 years for office furniture and 3 to 5 years for information system equipment. Upon retirement or sale, Lyondell removes the cost of the asset and the related accumulated depreciation from the accounts and reflects any resulting gain or loss in the Consolidated Statement of Income. Lyondell's policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year. Long-Lived Asset Impairment--Lyondell evaluates long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is probable that undiscounted future cash flows will not be sufficient to recover an asset's carrying amount, the asset is written down to its fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Beginning in 2002, as discussed below, goodwill will be reviewed for impairment under SFAS No. 142 based on fair values. Goodwill--Goodwill represents the excess of purchase price paid over the value assigned to the net tangible and identifiable intangible assets of a business acquired. Goodwill is being amortized using the straight-line method over 40 years, the estimated useful life. Amortization of goodwill will cease as of January 1, 2002 as described below under Recent Accounting Standards. Turnaround Maintenance and Repair Costs--Cost of maintenance and repairs incurred in connection with turnarounds of major units at Lyondell's manufacturing facilities exceeding $5 million are deferred and amortized using the straight-line method until the next planned turnaround, generally four to six years. These costs are maintenance, repair and replacement costs that are necessary to maintain, extend and improve the operating capacity and efficiency rates of the production units. Deferred Software Costs--Costs to purchase and to develop software for internal use are deferred and amortized on a straight-line basis over a range of 3 to 7 years. Other Deferred Charges--Other deferred charges are carried at amortized cost and primarily consist of capacity reservation fees and other long-term processing rights and costs, deferred debt issuance costs and patents and licensed technology. These assets are amortized using the straight-line method over their estimated useful lives or the term of the related agreement, if shorter. Environmental Remediation Costs--Anticipated expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable a liability has been incurred and the amount of the liability can reasonably be estimated. Estimates have not been discounted to present value. Minority Interest--Minority interest primarily represents the interest of third-party investors in a partnership that owns Lyondell's PO/SM II plant at the Channelview, Texas complex. The minority interest share of the partnership's income or loss is reported in "Other income (expense), net" in the Consolidated Statement of Income. Income Taxes--Deferred income taxes result from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes. Valuation allowances are provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. 68 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Foreign Currency Translation--The functional currency of Lyondell's principal foreign operations is the local currency, except the Brazilian operation for which it is the U.S. dollar. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounting Changes Adopted in 2001--As of January 1, 2001, Lyondell adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. Under SFAS No. 133, all derivative instruments are recorded on the balance sheet at fair value. Gains or losses from changes in the fair value of derivatives used as cash flow hedges are deferred in accumulated other comprehensive income, to the extent the hedge is effective, and subsequently reclassified to earnings to offset the impact of the forecasted transaction. Implementation of SFAS No. 133 and SFAS No. 138 did not have a material effect on the consolidated financial statements of Lyondell. Recent Accounting Standards--In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. SFAS No. 141 is effective for business combinations initiated after June 30, 2001 and is not expected to have a material effect on intangible assets acquired in business combinations effected prior to July 1, 2001. SFAS No. 142 prescribes discontinuance of the amortization of goodwill as well as annual review of goodwill for impairment. Lyondell does not expect the implementation of SFAS No. 142 to result in any impairment of goodwill. Equistar expects the implementation of SFAS No. 142 to result in the impairment of the entire balance of its goodwill, resulting in a $1.1 billion charge. Lyondell's 41% share of the Equistar charge, or $432 million, will be reported as the cumulative effect of a change in accounting principle as of January 1, 2002. In addition, also as a cumulative effect of the implementation of SFAS No. 142, Lyondell's "negative" goodwill, representing a portion of the difference between Lyondell's investment in Equistar and Lyondell's 41% share of Equistar's partners' capital, will be written off, offsetting the cumulative effect charge. Pretax earnings in 2002 and subsequent years will be favorably affected by $30 million annually because of the elimination of goodwill amortization. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Adoption of SFAS No. 143 and SFAS No. 144 in calendar years 2003 and 2002, respectively, is not expected to have a material effect on the consolidated financial statements of Lyondell. Reclassifications--Certain previously reported amounts have been reclassified to conform to classifications adopted in 2001. 3. Unusual Charges During 2001, Lyondell recorded a pretax charge of $63 million associated with its decision to exit the aliphatic diisocyanates ("ADI") business. The decision reflected the limited ongoing strategic value to Lyondell of the ADI business and Lyondell's poor competitive position. The decision involves the shutdown of the ADI manufacturing unit at the Lake Charles, Louisiana facility. The action included a 20% reduction of the Lake Charles workforce, as well as ADI-related research and sales positions at other locations. 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 $2 million for exit costs and $2 million for severance and other employee-related costs were made through December 31, 2001, resulting in a remaining accrued liability of $14 million at year end. 69 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Extraordinary Items As part of the fourth quarter 2001 refinancing (see Note 14), Lyondell wrote off unamortized debt issuance costs and amendment fees of $7 million related to the early repayment of $384 million of variable-rate debt outstanding under Lyondell's credit facility. The charge, less a tax benefit of $2 million, was reported as an extraordinary loss on extinguishment of debt. During 2000, Lyondell retired debt in the principal amount of $2.2 billion prior to maturity. Lyondell wrote off $40 million of unamortized debt issuance costs and amendment fees and paid call premiums of $10 million. The total charges of $50 million, less a tax benefit of $17 million, were reported as an extraordinary loss on extinguishment of debt. During 1999, Lyondell retired and partially refinanced debt in the principal amount of $4.1 billion prior to maturity. Unamortized debt issuance costs and amendment fees of $54 million, less a tax benefit of $19 million, were written off and reported as an extraordinary loss on extinguishment of debt. Previously, these debt issuance costs and amendment fees had been deferred and were being amortized to interest expense. 5. Purchase of Arco Chemical Company Substantially all of Lyondell's consolidated operations were acquired with the July 28, 1998 acquisition of ARCO Chemical Company ("ARCO Chemical"). Concurrent with the acquisition, which was accounted for as a purchase, Lyondell accrued liabilities for costs associated with the delay of construction of the PO-11 plant, vesting of certain key manager benefits pursuant to a change of control provision, severance costs for the involuntary termination of certain headquarters employees and relocation costs for moving personnel to Lyondell's Houston headquarters. The total accrued liability for these items was approximately $255 million at the date of acquisition. Lyondell subsequently revised the portion of the estimated liabilities for penalties and cancellation charges related to the PO-11 (see Note 7) lump-sum construction contract and related commitments. Based on the final negotiated terms, Lyondell reduced the accrued liability by $13 million in 1999 and by $8 million in 2000. In addition, during 2000 Lyondell finalized the portion of the accrued liability related to employee costs and reduced the liability by $10 million. The benefit in 2000 from the accrual reversal was substantially offset by other acquisition-related costs. Through December 31, 2001, Lyondell had paid and charged approximately $217 million against the accrued liability. The remaining $7 million of the accrued liability relates to PO-11 commitments and will be paid periodically through the first quarter 2003. 6. Gain on Sale of Assets On March 31, 2000, Lyondell completed the sale of the polyols business and ownership interests in its U.S. PO manufacturing operations to Bayer AG and Bayer Corporation (collectively "Bayer") for approximately $2.45 billion. Lyondell recorded a pretax gain on the sale of $544 million. In the third quarter 2000, the final settlement of working capital with Bayer and resolution of certain estimated liabilities resulted in the recording of an additional pretax gain on the sale of $46 million. The businesses sold had been acquired in the purchase of ARCO Chemical (see Note 5). Lyondell used net proceeds of the asset sale to retire a significant portion of its outstanding debt that resulted from the ARCO Chemical purchase (see Note 14). The polyols business had sales of approximately $830 million for the year ended December 31, 1999. The accompanying Consolidated Statements of Income included the operating results of the polyols business through March 31, 2000. As part of the asset sale, Lyondell accrued liabilities of $53 million for employee severance and other employee benefits, covering approximately 850 employees. The affected employees were generally terminated on or about April 1, 2000, with a limited number providing transition services through mid-2001. During the third quarter 2000, Lyondell reduced the accrued liability by $25 million due to a reduction in the number of affected employees and significantly lower than expected payments of severance and other benefits. Payments of $28 million for severance, relocation and other employee benefits were made through December 31, 2001, satisfying the remainder of the liability. 70 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Investment in PO Joint Ventures As part of the sale of the polyols business and ownership interests in its U.S. PO manufacturing operations to Bayer (see Note 6), Lyondell entered into a U.S. PO manufacturing joint venture with Bayer (the "PO Joint Venture") and a separate joint venture with Bayer for certain related PO/SM technology (the "PO Technology Joint Venture"). Lyondell contributed approximately $1.2 billion of assets at historical book value to the joint ventures, and allocated $522 million of book value to Bayer to reflect Bayer's purchased partnership interest. Lyondell's residual interests are reported as "Investment in PO joint ventures" in the accompanying Consolidated Balance Sheets. Bayer's ownership interest represents ownership of an in-kind portion of the PO production of the PO Joint Venture. Bayer's share of PO production from the PO Joint Venture will increase from approximately 1.5 billion pounds in 2001 to approximately 1.6 billion pounds annually in 2004 and thereafter. Lyondell takes in kind the remaining PO production and all co-product (SM and TBA) production from the PO Joint Venture. Lyondell operates the PO Joint Venture plants and arranges and coordinates the logistics of PO delivery. The partners share in the cost of production based on their product offtake. Lyondell reports the cost of its product offtake as inventory and cost of sales in its Consolidated Financial Statements. Related cash flows are reported in the operating cash flow section of the Consolidated Statement of Cash Flows. Lyondell's investment in the PO Joint Venture and the PO Technology Joint Venture is reduced through recognition of its share of the depreciation and amortization of the assets of the joint ventures, which is included in cost of sales. Other changes in the investment balance are principally due to additional capital investments by Lyondell in the PO Joint Venture and the PO Technology Joint Venture. In December 2000, Lyondell and Bayer formed a separate joint venture for the construction of a world-scale PO/SM plant, known as PO-11, located in The Netherlands. Lyondell sold a 50% interest in the construction project, based on project expenditures to date, to Bayer for approximately $52 million. Lyondell and Bayer each contributed their 50% interest in PO-11 into the joint venture and each will bear 50% of the costs going forward to complete the project. The plant is expected to begin operations in the second half of 2003. Lyondell and Bayer do not share marketing or product sales under either the PO Joint Venture or PO-11. Lyondell's contributions to the PO-11 joint venture are reported as "Investment in PO joint ventures" in the accompanying Consolidated Balance Sheets and as "Contributions and advances to affiliates" in the Consolidated Statements of Cash Flows. 71 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Equity Interest in Equistar Chemicals, LP Equistar was formed on December 1, 1997 as a joint venture between Lyondell and Millennium Chemicals Inc. ("Millennium"), to own and operate the businesses contributed by the partners. Lyondell contributed substantially all of the assets comprising its petrochemicals and polymers business segments, while Millennium contributed substantially all of the assets comprising its polyethylene and related products, performance polymers and ethanol businesses. On May 15, 1998, the ethylene, propylene and ethylene oxide and derivatives businesses of Occidental Petroleum Corporation ("Occidental") were contributed to Equistar ("Occidental Contributed Business"). Equistar is operated as a Delaware limited partnership owned by subsidiaries of Lyondell, Millennium and Occidental. Lyondell currently has a 41% joint venture ownership interest, while Millennium and Occidental each have 29.5% (see Note 24). Summarized financial information for Equistar is as follows: December 31, --------------------------- Millions of dollars 2001 2000 - ------------------- ------------ ------------ BALANCE SHEETS Total current assets $ 1,226 $ 1,332 Property, plant and equipment, net 3,705 3,819 Goodwill, net 1,053 1,086 Deferred charges and other assets 324 345 ------------ ------------ Total assets $ 6,308 $ 6,582 ============ ============ Current maturities of long-term debt $ 104 $ 90 Other current liabilities 557 653 Long-term debt 2,233 2,158 Other liabilities and deferred credits 177 141 Partners' capital 3,237 3,540 ------------ ------------ Total liabilities and partners' capital $ 6,308 $ 6,582 ============ ============ For the year ended December 31, -------------------------------- 2001 2000 1999 --------- ---------- -------- STATEMENTS OF INCOME Sales and other operating revenues $ 5,909 $ 7,495 $ 5,594 Cost of sales 5,733 6,908 5,002 Other operating costs and expenses 253 253 334 Restructuring and other unusual charges 22 -- 96 --------- ---------- -------- Operating income (loss) (99) 334 162 Interest expense, net 189 181 176 Other income, net 8 -- 46 --------- ---------- -------- Income (loss) before extraordinary loss (280) 153 32 Extraordinary loss on extinguishment of debt (3) -- -- --------- ---------- -------- Net income (loss) $ (283) $ 153 $ 32 ========= ========== ======== SELECTED CASH FLOW INFORMATION Depreciation and amortization $ 321 $ 310 $ 300 Expenditures for property, plant and equipment 110 131 157 72 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Lyondell's "Income (loss) from equity investments" in Equistar as presented in the Consolidated Statements of Income consists of Lyondell's share of Equistar's net income (loss) and the accretion of the difference between Lyondell's investment and its underlying equity in Equistar's net assets. Upon formation, the difference between Lyondell's investment in Equistar and its underlying equity in Equistar's net assets was approximately $900 million, of which approximately 50% was "negative" goodwill. Lyondell purchases ethylene, propylene and benzene at market-related prices from Equistar under various agreements expiring in 2013 and 2014. Under the agreements, Lyondell is required to purchase 100% of its ethylene, propylene and benzene requirements for its Channelview and Bayport, Texas facilities, with the exception of quantities of one product that Lyondell is obligated to purchase under a supply agreement with a third party entered into prior to 1999 and expiring in 2015. In addition, a wholly owned subsidiary of Lyondell licenses MTBE technology to Equistar. Lyondell also purchases a significant portion of the MTBE produced by Equistar at one of its two Channelview units at market-related prices. Equistar's sales to Lyondell were $405 million, $572 million and $246 million for the years ended December 31, 2001, 2000 and 1999, respectively. In addition, Equistar purchased $4 million, $2 million and $6 million from Lyondell for the years ended December 31, 2001, 2000 and 1999, respectively, which are included in Equistar's "Cost of sales". Sales by Equistar to LCR, primarily of products and processing services, were $380 million, $440 million and $263 million for the years ended December 31, 2001, 2000 and 1999, respectively. Purchases by Equistar from LCR primarily of refinery products, during the years ended December 31, 2001, 2000 and 1999 totaled $205 million, $264 million and $190 million, respectively. During 1999, Lyondell provided certain administrative services to Equistar, including legal, risk management, treasury, tax and employee benefit plan administrative services, while Equistar provided services to Lyondell in the areas of health, safety and environment, human resources, information technology and legal. Effective January 1, 2000, Lyondell and Equistar implemented a revised agreement to utilize shared services more broadly. Lyondell now provides services to Equistar including information technology, human resources, raw material supply, supply chain, health, safety and environmental, engineering, research and development, facility services, legal, accounting, treasury, internal audit and tax. Lyondell charges Equistar for its share of the cost of such services. Direct third party costs, incurred exclusively for Equistar, are charged to Equistar. Billings by Lyondell to Equistar were approximately $147 million, $133 million and $9 million for the years ended December 31, 2001, 2000 and 1999, respectively. The increased billings by Lyondell for 2000 and 2001 resulted from the increase in services provided by Lyondell under the Shared Services Agreement. Billings from Equistar to Lyondell were approximately $8 million for the year ended December 31, 1999. There were no billings from Equistar to Lyondell for 2001 and 2000 as a result of implementing the Shared Services Agreement. 73 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Equity Interest in LYONDELL-CITGO Refining LP In July 1993, LCR was formed to own and operate Lyondell's refining business. LCR is structured as a Delaware limited partnership owned by subsidiaries of Lyondell and CITGO. Lyondell owns 58.75% of the partnership. Lyondell's "Income from equity investments" in LCR presented in the Consolidated Statement 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. Upon formation, the difference between Lyondell's investment in LCR and its underlying equity in LCR's net assets was approximately $350 million. Summarized financial information for LCR is as follows: December 31, ---------------------------- Millions of dollars 2001 2000 - ------------------- ------------ ------------ BALANCE SHEETS Total current assets $ 230 $ 310 Property, plant and equipment, net 1,343 1,319 Deferred charges and other assets 97 67 ------------ ------------ Total assets $ 1,670 $ 1,696 ============ ============ Notes payable $ 50 $ 470 Other current liabilities 335 397 Long-term debt 450 -- Loans payable to partners 264 264 Other liabilities and deferred credits 79 57 Partners' capital 492 508 ------------ ------------ Total liabilities and partners' capital $ 1,670 $ 1,696 ============ ============ For the year ended December 31, -------------------------------- 2001 2000 1999 ---------- -------- --------- STATEMENTS OF INCOME Sales and other operating revenues $ 3,284 $ 4,075 $ 2,571 Cost of sales 2,967 3,826 2,432 Selling, general and administrative expenses 61 60 66 Unusual charges -- -- 6 ---------- -------- --------- Operating income 256 189 67 Interest expense, net 51 61 44 State income tax benefit -- -- (1) ---------- -------- --------- Income before extraordinary item 205 128 24 Extraordinary loss on extinguishment of debt, net of income taxes (2) -- -- ---------- -------- --------- Net income $ 203 $ 128 $ 24 ========== ======== ========= SELECTED CASH FLOW INFORMATION Depreciation and amortization $ 108 $ 112 $ 103 Expenditures for property, plant and equipment 109 60 56 74 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Sales from LCR to Equistar, primarily of refinery products, were $205 million, $264 million and $190 million for the years ended December 31, 2001, 2000 and 1999, respectively. Purchases by LCR from Equistar, primarily of certain olefins by-products and processing services, during the years ended December 31, 2001, 2000 and 1999 totaled $380 million, $440 million and $263 million, respectively. Lyondell has various service and cost sharing arrangements with LCR. Billings by Lyondell to LCR were approximately $3 million for the year ended December 31, 2001 and $4 million per year for the years ended December 31, 2000 and 1999. Billings from LCR to Lyondell were approximately $3 million, $2 million and $3 million for the years ended December 31, 2001, 2000 and 1999, respectively. In addition, during 1999, LCR made interest payments to Lyondell of approximately $9 million on loans and advances. LCR has a long-term crude supply agreement ("Crude Supply Agreement") with Lagoven, S.A., now known as PDVSA Petroleo, S.A. ("PDVSA Oil"), an affiliate of CITGO (see Note 19). The Crude Supply Agreement incorporates formula prices to be paid by LCR for the crude oil supplied based on the market value of a slate of refined products deemed to be produced from each particular crude oil or feedstock, less: (i) certain deemed refining costs, adjustable for inflation and energy costs; (ii) certain actual costs; and (iii) a deemed margin, which varies according to the grade of crude oil or other feedstock delivered. The actual refining margin earned by LCR may vary from the formula amount depending on, among other things, the efficiency with which LCR conducts its operations from time to time. Although LCR believes that the Crude Supply Agreement reduces the volatility of LCR's earnings and cash flows, the Crude Supply Agreement also limits LCR's ability to enjoy higher margins during periods when the market price of crude oil is low relative to then-current market prices for refined products. In addition, if the actual yields, costs or volumes of the LCR refinery differ substantially from those contemplated by the Crude Supply Agreement, the benefits of this agreement to LCR could be substantially diminished, and could result in lower earnings and cash flow for LCR. Furthermore, there may be periods during which LCR's costs for crude oil under the Crude Supply Agreement may be higher than might otherwise be available to LCR from other sources. A disparate increase in the price of heavy crude oil relative to the market prices for its products, such as experienced in 1999, has the tendency to make continued performance of its obligations under the Crude Supply Agreement less attractive to PDVSA Oil. In addition, under the terms of a long-term product sales agreement ("Products Agreement"), CITGO purchases substantially all of the refined products produced by LCR. Both PDVSA Oil and CITGO are direct or indirect, wholly owned subsidiaries of Petroleos de Venezuela, S.A., the national oil company of the Republic of Venezuela. 10. Accounts Receivable Lyondell sells its products primarily to other industrial concerns in the petrochemicals and refining industries. Lyondell performs ongoing credit evaluations of its customers' financial condition, and, in certain circumstances, requires letters of credit from them. Lyondell's allowance for doubtful accounts receivable, which is reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, totaled $12 million at December 31, 2001 and 2000. In December 2001, Lyondell amended its existing receivables purchase agreement, originally dated December 1998, with an independent issuer of receivables-backed commercial paper, extending the term until December 2004. Under the terms of the agreement, Lyondell agreed to sell, on an ongoing basis and without recourse, designated accounts receivable through December 2004. To maintain the balance of the accounts receivable sold, Lyondell is obligated to sell new receivables as existing receivables are collected. The agreement currently permits the sale of up to $85 million of domestic accounts receivable. The amount of receivables permitted to be sold is determined 75 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) by a formula, which takes into account, among other factors, Lyondell's credit rating. As of December 31, 2001 and 2000, Lyondell's gross accounts receivable that had been sold aggregated $65 million and $53 million, respectively. Increases and decreases in the amount sold have been reported as operating cash flows in the Consolidated Statement of Cash Flows. Costs related to the sales are included in "Other income (expense), net" in the Consolidated Statement of Income. 11. Inventories Inventories were as follows at December 31: Millions of dollars 2001 2000 - ------------------- ---------- ---------- Finished goods $ 262 $ 301 Work-in-process 5 7 Raw materials 19 51 Materials and supplies 30 33 ---------- ---------- Total inventories $ 316 $ 392 ========== ========== During 2001, inventories carried under the LIFO method of inventory accounting were reduced. Because the LIFO carrying costs are comparable to current costs, there was no significant benefit to income in 2001. 12. Property, Plant and Equipment and Other Assets The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows at December 31: Millions of dollars 2001 2000 - ------------------- ----------- ---------- Land $ 10 $ 10 Manufacturing facilities and equipment 2,529 2,580 Construction projects in progress 113 95 ----------- ---------- Total property, plant and equipment 2,652 2,685 Less accumulated depreciation 359 256 ----------- ---------- Property, plant and equipment, net $ 2,293 $ 2,429 =========== ========== During 2001, Lyondell capitalized $3 million of interest related to major construction projects. No interest was capitalized during 2000 and 1999. Goodwill, at cost, and the related accumulated amortization, were as follows at December 31: Millions of dollars 2001 2000 - ------------------- ---------- ---------- Goodwill $ 1,212 $ 1,232 Less accumulated amortization 110 80 ---------- ---------- Goodwill, net $ 1,102 $ 1,152 ========== ========== 76 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The unamortized balances of deferred debt issuance, software and turnaround costs were as follows at December 31: Millions of dollars 2001 2000 - ------------------- ---------- ---------- Debt issuance costs $ 76 $ 79 Software costs 48 28 Turnaround costs 43 20 Depreciation and amortization is summarized as follows for the periods presented: Millions of dollars 2001 2000 1999 - ------------------- ---------- ----------- ---------- Property, plant and equipment $ 124 $ 136 $ 199 Investment in PO joint venture 31 24 -- Intangibles 47 56 60 Goodwill 30 32 34 Turnaround expense 16 10 7 Software costs 6 3 -- Debt issuance costs 15 18 30 ---------- ----------- ---------- $ 269 $ 279 $ 330 ========== =========== ========== 13. Accrued Liabilities Accrued liabilities were as follows at December 31: Millions of dollars 2001 2000 - ------------------- ---------- ---------- Interest $ 58 $ 67 Contractual obligations 52 58 Taxes other than income 46 69 Payroll and benefits 46 69 Income taxes 21 20 Other 10 40 ---------- ---------- Total accrued liabilities $ 233 $ 323 ========== ========== 14. Long-Term Debt In December 2001, Lyondell issued $393 million of 9.5% senior secured notes due December 15, 2008. The proceeds were used to prepay $384 million of variable-rate debt outstanding under Lyondell's credit facility. In September 2001, Lyondell amended its credit facility making certain financial ratio requirements less restrictive. As a result of the September 2001 amendment, the margin used to calculate the variable interest rate increased by 0.5% per annum. Lyondell had previously obtained an amendment to the credit facility and the financial ratio requirements in March 2001. Lyondell used the net proceeds of the March 31, 2000 asset sale (see Note 6) to reduce its variable-rate debt by $2.06 billion during 2000. During the fourth quarter 2000, Lyondell also repaid $200 million of debentures, which matured in November 2000 and reduced variable rate debt by an additional $150 million. During May 1999, Lyondell amended a $7 billion credit facility originally executed in connection with the ARCO Chemical acquisition in 1998. The amended credit facility retained a $500 million revolving credit facility and also provided the lenders with additional collateral consisting of Lyondell's domestic assets (excluding the assets of its subsidiaries), re-priced the existing loans to reflect then market interest rates and revised certain financial covenants. 77 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Also in May 1999, Lyondell issued 40.25 million shares of common stock, receiving net proceeds of $736 million. Lyondell also issued $500 million of senior subordinated notes and $1.9 billion of senior secured notes. Lyondell borrowed an additional $1 billion under the amended credit facility. Lyondell used the proceeds to retire $3.4 billion principal amount of variable rate debt. The $500 million credit facility, which matures in July 2003, was undrawn at December 31, 2001. Amounts available under the credit facility are reduced to the extent of certain outstanding letters of credit. Lyondell had outstanding letters of credit totaling $10 million at December 31, 2001, of which $4 million reduced the available credit facility. Long-term debt consisted of the following at December 31: Millions of dollars 2001 2000 - ------------------- ----------- ----------- Term Loan B $ -- $ 193 Term Loan E due 2006 634 835 Senior Secured Notes, Series A due 2007, 9.625% 900 900 Senior Secured Notes, Series B due 2007, 9.875% 1,000 1,000 Senior Secured Notes due 2008, 9.5% 393 -- Senior Subordinated Notes due 2009, 10.875% 500 500 Debentures due 2005, 9.375% 100 100 Debentures due 2010, 10.25% 100 100 Debentures due 2020, 9.8% 224 224 Other 2 2 ----------- ----------- Total long-term debt 3,853 3,854 Less current maturities 7 10 ----------- ----------- Long-term debt, net $ 3,846 $ 3,844 =========== =========== Term Loan E bears interest at LIBOR plus 4.375%. The credit facility and the indentures under which Lyondell's senior secured notes and senior subordinated notes were issued contain covenants that, subject to exceptions, restrict sale and leaseback transactions, lien incurrence, debt incurrence, dividends and investments, sales of assets and mergers and consolidations. In addition, the credit facility requires Lyondell to maintain specified financial ratios and consolidated net worth, in all cases as provided in the credit facility. The breach of these covenants could permit the lenders to declare the loans immediately payable and could permit the lenders under Lyondell's credit facility to terminate future lending commitments. Following amendments to the indentures for certain Equistar debt in November 2000, Lyondell is guarantor of $400 million of the Equistar debt and a co-obligor with Equistar for $31 million. Under certain limited circumstances the debt holders of the $31 million on which Lyondell is a co-obligor have the right to require repurchase of the debt by Lyondell. Aggregate maturities of all long-term debt during the next five years are $7 million in 2002, $7 million in 2003, $7 million in 2004, $107 million in 2005, $608 million in 2006 and $3.1 billion thereafter. 78 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. Lease Commitments Lyondell leases various facilities and equipment under noncancelable lease arrangements for varying periods. As of December 31, 2001, future minimum lease payments for the next five years and thereafter, relating to all noncancelable operating leases with terms in excess of one year were as follows: Millions of dollars - ------------------- 2002 $ 58 2003 48 2004 45 2005 42 2006 37 Thereafter 86 Less sublease rentals (6) ---------- Total minimum lease payments $ 310 ========== Operating lease net rental expenses for 2001, 2000 and 1999 were $70 million, $74 million and $106 million, respectively. 16. Financial Instruments and Derivatives During 2001 and 2000, Lyondell entered into foreign currency forward contracts to hedge foreign exchange exposure related to euro-denominated capital commitments on the PO-11 construction project. At December 31, 2000, forward contracts in the notional amount of 134 million euros, or approximately $125 million, were outstanding. Based on quoted market prices, the fair market value of these derivative instruments at December 31, 2000 was insignificant. Accordingly, on January 1, 2001, a transition adjustment in accumulated other comprehensive income, representing the cumulative effect of an accounting change in accordance with the transition provisions of SFAS No. 133, was not required. The fair value of outstanding foreign currency forward contracts at December 31, 2001 reflected an unrealized pretax gain of $3 million, all of which was deemed effective and, therefore, a $2 million after-tax gain was recognized in accumulated other comprehensive income. The $2 million unrealized gain net of $4 million of realized losses during 2001 is recorded in accumulated other comprehensive income, and is expected to be reclassified to earnings over the useful life of the PO-11 project upon commencement of its depreciation. Foreign currency forward contracts outstanding at December 31 were as follows: 2001 2000 ---------- ---------- Notional amount: Euros 86 134 U.S. dollars 76 125 Fair value of asset 3 -- The fair value of the foreign currency forward contracts represents the amount to be exchanged if the existing contracts were settled at year-end and are based on market quotes. 79 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In addition, during 2001 Lyondell entered into price swap contracts with Occidental Energy Marketing, Inc. covering 42 million gallons of unleaded gasoline to hedge the cost of butane, a key raw material of MTBE. These contracts matured during 2001, resulting in a $4 million pretax gain, $3 million after-tax, that was reclassified to earnings. As of December 31, 2001, there were no outstanding price swap contracts covering unleaded gasoline. The following table summarizes activity included in accumulated other comprehensive income ("AOCI") related to the after-tax impact of the effective portion of the fair value of derivative instruments for the year ended December 31: Millions of dollars 2001 - ------------------- ----------- Gain (loss): Balance at beginning of period $ -- ----------- Net gains on derivative instruments 1 Reclassification of gains on derivative instruments to earnings (3) ----------- Net change in AOCI for the period (2) ----------- Net loss on derivative instruments included in AOCI at December 31, 2001 $ (2) =========== Foreign exchange transactions were insignificant in 2001, a net gain of $13 million in 2000 and a net loss of $2 million in 1999. The effects of foreign currency derivative instruments were not significant during 2000 and 1999. The carrying value and the estimated fair value of Lyondell's non-current, non-derivative financial instruments as of December 31, 2001 and 2000 are shown in the table below:
2001 2000 ----------------------------- -------------------------- Carrying Fair Carrying Fair Millions of dollars Value Value Value Value - ------------------- -------------- ------------ ------------ ----------- Investments and long-term receivables $ 1,619 $ 1,708 $ 1,606 $ 1,606 Long-term debt (including current maturities) 3,853 3,816 3,854 3,777
The fair value of all nonderivative financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable, accounts payable and notes payable, approximated their carrying value due to their short maturity. Investments and long-term receivables, which consist primarily of equity investments in affiliated companies, were valued using current financial and other available information. Long-term debt, including amounts due within one year, was valued based upon the borrowing rates currently available to Lyondell for debt with terms and average maturities similar to Lyondell's debt portfolio. Lyondell is exposed to credit risk related to its financial instruments in the event of nonperformance by the counterparties. Lyondell does not generally require collateral or other security to support these financial instruments. The counterparties to these transactions are major institutions deemed creditworthy by Lyondell. Lyondell does not anticipate nonperformance by the counterparties. 80 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 17. Pension and Other Postretirement Benefits Lyondell has defined benefit pension plans which cover employees in the United States and a number of other countries. Retirement benefits are based on years of service and the employee's highest three consecutive years of compensation during the last ten years of service. Lyondell accrues pension costs based upon an actuarial valuation and funds the plans through periodic contributions to pension trust funds as required by applicable law. Lyondell also has unfunded supplemental nonqualified retirement plans, which provide pension benefits for certain employees in excess of the tax-qualified plans' limits. In addition, Lyondell sponsors unfunded postretirement benefit plans other than pensions for U.S. employees, which provide medical and life insurance benefits. The postretirement medical plans are contributory, while the life insurance plans are noncontributory. The following table provides a reconciliation of benefit obligations, plan assets and the funded status of the plans:
Other Pension Benefits Postretirement Benefits ------------------------------ ------------------------------ Millions of dollars 2001 2000 2001 2000 - ------------------- ------------- ------------- ------------- ------------- Change in benefit obligation: Benefit obligation, January 1 $ 431 $ 399 $ 69 $ 72 Service cost 15 14 2 2 Interest cost 36 31 5 5 Plan amendments -- -- 19 -- Actuarial loss (gain) 108 64 -- (11) Net effect of settlements, curtailments and special termination benefits -- (19) -- 1 Benefits paid (34) (53) (4) (3) Transfers 1 -- -- 3 Foreign exchange effects (3) (5) -- -- ------------- ------------- ------------- ------------- Benefit obligation, December 31 554 431 91 69 ------------- ------------- ------------- ------------- Change in plan assets: Fair value of plan assets, January 1 412 456 -- -- Actual return on plan assets (26) 5 -- -- Company contributions 17 14 4 3 Benefits paid (34) (53) (4) (3) Foreign exchange effects (5) (10) -- -- ------------- ------------- ------------- ------------- Fair value of plan assets, December 31 364 412 -- -- ------------- ------------- ------------- ------------- Funded status (190) (19) (91) (69) Unrecognized actuarial loss 224 73 7 9 Unrecognized prior service cost (benefit) 5 5 (4) (26) Unrecognized transition obligation 3 3 -- -- ------------- ------------- ------------- ------------- Net amount recognized $ 42 $ 62 $ (88) $ (86) ============= ============= ============= ============= Amounts recognized in the Consolidated Balance Sheet consist of: Prepaid benefit cost $ 17 $ 71 $ -- $ -- Accrued benefit liability (124) (28) (88) (86) Intangible asset 3 3 -- -- Accumulated other comprehensive income - pretax 146 16 -- -- ------------- ------------- ------------- ------------- Net amount recognized $ 42 $ 62 $ (88) $ (86) ============= ============= ============= =============
81 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The increase in other postretirement benefit obligations in 2001 resulted from a medical plan amendment that increased Lyondell's maximum contribution level per employee by 25%. The above table for pension benefits includes foreign pension plans of Lyondell. These plans constituted approximately 18% of the benefit obligation and 26% of the plan assets at December 31, 2001 and 20% of the benefit obligation and 25% of the plan assets at December 31, 2000. The assumptions used in determining the net periodic pension cost and pension obligation for foreign pension plans were based on the economic environment of each applicable country. Pension plans with benefit obligations and accumulated benefit obligations in excess of the fair value of assets are summarized as follows at December 31: Millions of dollars 2001 2000 - ------------------- ------------- ------------- Benefit obligations $ 475 $ 152 Accumulated benefit obligations 399 112 Fair value of assets 285 86 Net periodic pension and other postretirement benefit costs included the following components:
Other Pension Benefits Postretirement Benefits -------------------------------- -------------------------------- Millions of dollars 2001 2000 1999 2001 2000 1999 - ------------------- -------- ------- ------- ------- -------- -------- Components of net periodic benefit cost: Service cost $ 15 $ 14 $ 18 $ 2 $ 2 $ 2 Interest cost 36 31 32 5 5 5 Expected return on plan assets (36) (40) (40) -- -- -- Prior service cost amortization -- 1 1 (2) (3) (3) Actuarial loss amortization 9 2 2 -- -- 2 Net effect of curtailments, settlements and special termination benefits 9 (13) -- 1 (4) -- -------- ------- ------- ------- -------- -------- Net periodic benefit cost $ 33 $ (5) $ 13 $ 6 $ -- $ 6 ======== ======= ======= ======= ======== ========
The 2001 net effect of curtailments, settlements and special termination benefits was primarily due to lump-sum settlements taken by retiring employees, which resulted in a net charge, while the 2000 net effect primarily related to employees terminated as part of the asset sale to Bayer, which resulted in a net credit. Foreign pension plans comprised $1 million, $2 million and $2 million of net periodic pension cost for 2001, 2000 and 1999, respectively. The assumptions used in determining the domestic net pension cost and net pension liability were as follows at December 31:
Other Pension Benefits Postretirement Benefits ----------------------------------- ----------------------------------- 2001 2000 1999 2001 2000 1999 --------- --------- -------- --------- --------- --------- Weighted-average assumptions as of December 31: Discount rate 7.00% 7.50% 8.00% 7.00% 7.50% 8.00% Expected return on plan assets 9.50% 9.50% 9.50% -- -- -- Rate of compensation increase 4.50% 4.50% 4.75% 4.50% 4.50% 4.75%
82 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 2001 was 7.0% for 2002 through 2004 and 5.0% thereafter. The health care cost trend rate assumption does not have a significant effect on the amounts reported due to limits on Lyondell's maximum contribution level to the medical plan. To illustrate, increasing or decreasing the assumed health care cost trend rates by one percentage point in each year would change the accumulated postretirement benefit liability as of December 31, 2001 by $1 million and would not have a material effect on the aggregate service and interest cost components of the net periodic postretirement benefit cost for the year then ended. Lyondell also maintains voluntary defined contribution savings plans for eligible employees. Contributions to the plans by Lyondell were $12 million, $11 million and $10 million for the years ended December 31, 2001, 2000 and 1999, respectively. 18. Income Taxes The significant components of the provision for income taxes were as follows for the years ended December 31:
Millions of dollars 2001 2000 1999 - ------------------ ------------- ------------- ------------ Current: Federal $ (92) $ 154 $ (71) Foreign 15 8 6 State (2) 6 5 ------------- ------------- ------------ Total current (79) 168 (60) ------------- ------------- ------------ Deferred: Federal (35) 71 38 Foreign 52 (31) 10 State (14) 15 (12) ------------- ------------- ------------ Total deferred 3 55 36 ------------- ------------- ------------ Income tax (benefit) provision before tax effects of extraordinary items and other comprehensive income $ (76) $ 223 $ (24) Tax effect of extraordinary items (2) (17) (19) Tax effects of elements of other comprehensive income: Minimum pension liability (46) (5) -- Net unrealized losses on derivative instruments (1) -- -- ------------- ------------- ------------ Total income tax (benefit) provision on comprehensive income $ (125) $ 201 $ (43) ============= ============= ============
83 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Significant components of Lyondell's deferred tax liabilities and assets were as follows as of December 31:
Millions of dollars 2001 2000 - ------------------- ------- ------- Deferred tax liabilities: Accelerated tax depreciation and amortization $ 561 $ 717 Investments in joint venture partnerships 528 358 Other 6 47 ------- ------- Total deferred tax liabilities 1,095 1,122 ------- ------- Deferred tax assets: Net operating loss carryforwards 318 161 Provisions for employee benefit plans 92 70 Federal benefit attributable to deferred foreign taxes 35 72 Alternative minimum tax credit carryforwards 42 135 Other 111 138 ------- ------- Total deferred tax assets 598 576 Deferred tax asset valuation allowance (16) (20) ------- ------- Net deferred tax assets 582 556 ------- ------- Net deferred tax liabilities 513 566 Less current portion of deferred tax assets (277) (136) ------- ------- Long-term deferred income taxes $ 790 $ 702 ======= =======
Lyondell has available alternative minimum tax ("AMT") credit carryforwards of approximately $42 million after carryback of the current year AMT net operating loss. This credit is available to offset future U.S. federal income taxes and has no expiration date. Lyondell also has federal, state and foreign tax loss carryforwards, the tax benefit of which would be $318 million at the current statutory rate. The federal loss carryforward benefits of $254 million would begin expiring in 2014, and substantially all of the foreign tax loss carryforward benefit of $63 million has no expiration date. Management believes that it is more likely than not that the $582 million of deferred tax assets in excess of the valuation reserve of $16 million at December 31, 2001 will be realized. This conclusion is supported by the significant excess of deferred tax liabilities over deferred tax assets. These deferred tax liabilities, primarily related to depreciation, will reverse over the next 15 to 20 years. In addition, as discussed above, certain carryforwards have no expiration dates or long carryforward periods prior to their expiration. 84 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The domestic and foreign components of income (loss) before income taxes and extraordinary items and a reconciliation of the income tax provision to theoretical income tax computed by applying the U.S. federal statutory tax rate are as follows:
Millions of dollars 2001 2000 1999 - ------------------- ----- ----- ----- Income (loss) before income taxes and extraordinary items: Domestic $(280) $ 759 $(137) Foreign 59 (66) 33 ----- ----- ----- Total $(221) $ 693 $(104) ===== ===== ===== Theoretical income tax at U.S. statutory rate $ (77) $ 243 $ (36) Increase (reduction) resulting from: Reorganization of foreign operations -- (37) -- Other effects of foreign operations 17 (18) 8 Changes in estimates for prior year items (23) -- -- Goodwill and other permanent differences 3 11 5 State income taxes, net of federal 1 14 (3) Other, net 3 10 2 ----- ----- ----- Income tax (benefit) provision $ (76) $ 223 $ (24) ===== ===== ===== Effective income tax rate (34.0)% 32.2% (23.3)% ===== ===== =====
The change in estimate for prior year items primarily represents certain tax effects related to the sale of assets to Bayer in 2000. 19. Commitments and Contingencies Bayer Claim--In June 2001, Bayer AG delivered a notice of claim to Lyondell in relation to its March 2000 purchase of Lyondell's polyols business, asserting various claims relating to alleged breaches of representations and warranties related to condition of the business and assets. The notice of claim seeks damages in excess of $100 million. Lyondell has vigorously contested the claims. The agreement governing the transaction with Bayer provides a formal dispute resolution process, the final step of which would be binding arbitration in Houston, Texas. Currently, as part of the process, the parties are engaged in negotiations to resolve the claims. Lyondell does not expect the resolution of the claims to result in any material adverse effect on its business, financial condition, liquidity or results of operations. Capital Commitments--Lyondell has various commitments related to capital expenditures, all made in the normal course of business. At December 31, 2001, major capital commitments primarily consisted of Lyondell's 50% share of those related to the construction of a world-scale PO facility, known as PO-11, in The Netherlands. The outstanding commitments totaled $117 million as of December 31, 2001. Construction Lease--During the third quarter 2000, construction began on a new butanediol ("BDO") production facility in Europe known as BDO-2. Construction is being financed by an unaffiliated entity that was established for the purpose of serving as lessor with respect to this facility. Construction spending through December 31, 2001, including interest capitalized during construction, totaled 144 million euros, or approximately $127 million using December 31, 2001 exchange rates. Upon completion in 2002, Lyondell will lease the facility under the operating lease for an initial term of five years. Minimum payments under the operating lease will approximate an amount equivalent to interest on the final construction costs at the interest rate implicit in the lease. Lyondell may, at its option, purchase the facility at any time during the lease term for the unrecovered construction costs of the lessor or may renew the lease for four successive five-year terms. If Lyondell does not exercise the purchase option before the end of the last renewal period, the facility will be sold. In the event the sales proceeds are less than their 85 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) guaranteed residual value, Lyondell will pay the difference to the lessor. The residual value at the end of the lease term is estimated at approximately 206 million euros, or $181 million using December 31, 2001 exchange rates. Under the transaction documents, Lyondell is subject to certain financial and other covenants that are substantially the same as those contained in the credit facility. TDI Agreements--Lyondell is committed to purchase minimum annual quantities of TDI at plant cost from Rhodia through 2016. Such annual commitments are currently estimated at approximately 200 million pounds of TDI per year. Under a predecessor tolling agreement and resale agreement, both entered into in 1995, Lyondell's purchases, including amounts in excess of its previous minimum of 212 million pounds of TDI per year, were $120 million, $159 million and $154 million in 2001, 2000 and 1999, respectively. The resale agreement expired December 31, 2001. Crude Supply Agreement--Under the Crude Supply Agreement, PDVSA Oil is required to sell, and LCR is required to purchase, 230,000 barrels per day of extra heavy crude oil. This constitutes approximately 86% of the refinery's capacity of 268,000 barrels per day of crude oil. By letter dated April 16, 1998, PDVSA Oil informed LCR that the Venezuelan government, through the Ministry of Energy and Mines, had instructed that production of certain grades of crude oil be reduced. The letter stated that PDVSA Oil declared itself in a force majeure situation and would reduce deliveries of crude oil. Such reductions in deliveries were purportedly based on announced OPEC production cuts. LCR began receiving reduced deliveries of crude oil from PDVSA Oil in August 1998, of 195,000 barrels per day in that month. LCR was advised by PDVSA Oil in May 1999 of a further reduction in the deliveries of crude oil supplied under the Crude Supply Agreement to 184,000 barrels per day, effective May 1999. On several occasions since then, PDVSA Oil further reduced crude oil deliveries, although it made payments under a different provision of the Crude Supply Agreement in partial compensation for such reductions. Subsequently, PDVSA Oil unilaterally increased deliveries of crude oil to LCR to 195,000 barrels per day effective April 2000, to 200,000 barrels per day effective July 2000 and to 230,000 barrels per day effective October 2000. During 2001, PDVSA Oil informed LCR that the Venezuelan government, through the Ministry of Energy and Mines, had instructed that production of certain grades of crude oil be reduced effective February 1, 2001. PDVSA Oil declared itself in a force majeure situation, but did not reduce crude oil deliveries to LCR during 2001. In January 2002, PDVSA Oil again declared itself in a force majeure situation and stated that crude oil deliveries could be reduced by up to 20.3% beginning March 1, 2002. In February 2002, LCR was advised by PDVSA Oil that deliveries of crude oil to LCR in March 2002 would be reduced to approximately 198,000 barrels per day. Although additional reductions may be forthcoming, PDVSA Oil has not specified the level of reductions after March 2002. LCR has consistently contested the validity of PDVSA Oil's and PDVSA's reductions in deliveries under the Crude Supply Agreement. The parties have different interpretations of the provisions of the contracts concerning the delivery of crude oil. The contracts do not contain dispute resolution procedures, and the parties have been unable to resolve their commercial dispute. As a result, on February 1, 2002, LCR filed a lawsuit against PDVSA and PDVSA Oil in connection with the January 2002 force majeure declaration, as well as the claimed force majeure from April 1998 to September 2000. 86 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In 1999, PDVSA announced its intention to renegotiate its crude supply agreements with all third parties, including LCR. In light of PDVSA's announced intent, there can be no assurance that PDVSA Oil will continue to perform its obligations under the Crude Supply Agreement. However, it has confirmed that it expects to honor its commitments if a mutually acceptable restructuring of the Crude Supply Agreement is not achieved. From time to time, the Company and PDVSA have had discussions covering both a restructuring of the Crude Supply Agreement and a broader restructuring of the LCR partnership. Lyondell is unable to predict whether changes in either arrangement will occur. The breach or termination of the Crude Supply Agreement 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 1988 transfer of assets and liabilities to Lyondell from Atlantic Richfield Company ("ARCO"), now wholly owned by BP p.l.c., Lyondell agreed to assume certain liabilities arising out of the operation of Lyondell's integrated petrochemicals and refining business prior to July 1, 1988. In connection with the transfer of such liabilities, Lyondell and ARCO entered into an agreement, updated in 1997 ("Revised Cross-Indemnity Agreement"), whereby Lyondell agreed to defend and indemnify ARCO against certain uninsured claims and liabilities which ARCO may incur relating to the operation of Lyondell prior to July 1, 1988, including certain liabilities which may arise out of pending and future lawsuits. For current and future cases related to Lyondell's products and operations, ARCO and Lyondell bear a proportionate share of judgment and settlement costs according to a formula that allocates responsibility based upon years of ownership during the relevant time period. Under the Revised Cross-Indemnity Agreement, Lyondell will assume responsibility for its proportionate share of future costs for waste site matters not covered by ARCO insurance. In connection with the acquisition of ARCO Chemical, Lyondell succeeded, indirectly, to a cross indemnity agreement with ARCO whereby ARCO Chemical indemnified ARCO against certain claims or liabilities that ARCO may incur relating to ARCO's former ownership and operation of the businesses of ARCO Chemical, including liabilities under laws relating to the protection of the environment and the workplace, and liabilities arising out of certain litigation. As part of the agreement, ARCO indemnified ARCO Chemical with respect to claims or liabilities and other matters of litigation not related to the ARCO Chemical business. Indemnification Arrangements Relating to Equistar--Lyondell, Millennium Petrochemicals and certain subsidiaries of Occidental have each agreed to provide certain indemnifications to Equistar with respect to the petrochemicals and polymers businesses contributed by the partners. In addition, Equistar agreed to assume third party claims that are related to certain pre-closing contingent liabilities that are asserted prior to December 1, 2004 as to Lyondell and Millennium Petrochemicals, and May 15, 2005 as to certain Occidental subsidiaries, to the extent the aggregate thereof does not exceed $7 million to each partner, subject to certain terms of the respective asset contribution agreements. As of December 31, 2001, Equistar had incurred approximately $5 million under the $7 million indemnification basket with respect to the business contributed by Lyondell. Equistar also agreed to assume third party claims that are related to certain pre-closing contingent liabilities that are asserted for the first time after December 1, 2004 as to Lyondell and Millennium Petrochemicals, and for the first time after May 15, 2005 as to certain Occidential subsidiaries. As of September 30, 2001, Equistar, Lyondell, Millennium Petrochemicals and certain subsidiaries of Occidental amended the asset contribution agreements governing these indemnification obligations to clarify the treatment of, and procedures pertaining to the management of, certain claims arising under the asset contribution agreements. Lyondell believes that these amendments do not materially change the asset contribution agreements. Environmental Remediation--As of December 31, 2001, Lyondell's environmental liability for future remediation costs at its plant sites and a limited number of Superfund sites totaled $26 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. 87 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Clean Air Act--The eight-county Houston/Galveston region has been designated a severe non-attainment area for ozone by the U.S. Environmental Protection Agency ("EPA"). Emission reduction controls for nitrogen oxides ("NOx") must be installed at LCR's refinery and each of Lyondell's two facilities and Equistar's six facilities in the Houston/Galveston region. Lyondell estimates that aggregate related capital expenditures could total between $400 million and $500 million for Lyondell, Equistar and LCR before the 2007 deadline. Lyondell's direct share of such expenditures could total between $65 million and $80 million. Lyondell's proportionate share of Equistar's expenditures could total between $85 million and $105 million, and Lyondell's proportionate share of LCR's expenditures could total between $75 million and $95 million. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. In January 2001, Lyondell and an organization composed of industry participants filed a lawsuit to encourage adoption of their alternative plan to achieve the same air quality improvement with less negative economic impact on the region. Adoption of the alternative plan, as sought by the lawsuit, is expected to reduce the estimated capital investments for NOx reductions required by Lyondell, Equistar and LCR to comply with the standards. However, there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. The presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain federal and state governmental initiatives have sought either to rescind the oxygenate requirement for reformulated gasoline or to restrict or ban the use of MTBE. These initiatives or other governmental actions could result in a significant reduction in Lyondell's MTBE sales, which represented approximately 35% of Lyondell's 2001 revenues. Lyondell has developed technologies to convert TBA into alternate gasoline blending components should it be necessary to reduce MTBE production in the future. However, implementation of such technologies would require additional capital investment. 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 to $225 million for the new gasoline standards and $250 million to $300 million for the new diesel standard, between now and the implementation dates. Lyondell's share of LCR's capital expenditures would be between $250 million and $300 million. In addition, these standards could result in higher operating costs for LCR. Equistar's business may also be impacted if these standards increase the cost for processing fuel components. General--Lyondell is involved in various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material adverse effect on the financial position, liquidity or results of operations of Lyondell. In the opinion of management, any liability arising from the matters discussed in this note is not expected to have a material adverse effect on the financial position or liquidity of Lyondell. However, the adverse resolution in any reporting period of one or more of these matters discussed in this note could have a material impact on Lyondell's results of operations for that period without giving effect to contribution or indemnification obligations of co-defendants or others, or to the effect of any insurance coverage that may be available to offset the effects of any such award. 88 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 20. Stockholders' Equity Preferred Stock--Lyondell has authorized 80 million shares of $.01 par value preferred stock. As of December 31, 2001, none was outstanding. Common Stock--In May 1999, Lyondell issued 40.25 million shares of common stock at $19 per share. The net proceeds of $736 million were credited to "Common stock" and "Additional paid in capital" in the Consolidated Balance Sheet. Basic and Diluted Earnings per Share--Basic earnings per share for income (loss) before extraordinary items for the periods presented are computed based upon the weighted average number of shares outstanding for the periods. Diluted earnings per share for income (loss) before extraordinary items include the effect of outstanding stock options issued under the Executive Long-Term Incentive Plan and the Incentive Stock Option Plan. These stock options were antidilutive in 2001 and 1999. Earnings (loss) per share ("EPS") data is as follows for the years ended December 31:
2001 2000 1999 -------------------------- ------------------------ ------------------------- Thousands of shares Shares EPS Shares EPS Shares EPS - ------------------- ------------- ---------- ------------ ---------- ----------- --------- Basic 117,563 $(1.24) 117,557 $ 4.00 103,115 $(.77) Dilutive effect of options -- -- 221 (.01) -- -- ------------- ---------- ------------ ---------- ----------- --------- Diluted 117,563 $(1.24) 117,778 $ 3.99 103,115 $(.77) ============= ========== ============ ========== =========== =========
Accumulated Other Comprehensive Loss--The components of accumulated other comprehensive loss were as follows at December 31: Millions of dollars 2001 2000 - ------------------- ----- ----- Foreign currency translation $(300) $(247) Minimum pension liability (95) (11) Unrealized loss on derivative instruments (2) -- ----- ----- Total accumulated other comprehensive loss $(397) $(258) ===== ===== Treasury Stock--From time to time Lyondell purchases its shares in the open market to issue under its employee compensation and benefits plans, including stock option and restricted stock plans. For the years ended December 31, 2001, 2000 and 1999, respectively, Lyondell reissued, under the Restricted Stock Plan, 2,587 shares, 60,436 shares and 299,227 shares previously purchased. 1999 Incentive Plan--The 1999 Long-Term Incentive Plan ("1999 LTIP") provides for the grant of awards to employees of Lyondell and its subsidiaries. Awards to employees may be in the form of (i) stock options, (ii) stock appreciation rights, payable in cash or common stock, (iii) restricted grants of common stock or units denominated in common stock, (iv) performance grants denominated in common stock or units denominated in common stock that are subject to the attainment of one or more goals, (v) grants of rights to receive the value of a specified number of shares of common stock (phantom stock), and (vi) a cash payment. Awards of common stock under the 1999 LTIP are generally limited to the lesser of ten million shares or 10% of the number of shares of common stock outstanding at the time of granting of the award. During 2001, Lyondell awarded stock option grants for 3,143,231 shares and grants for 797,949 performance shares under this plan. The weighted-average grant-date fair value of the performance share grants was $16.25 per share. During 2000, Lyondell awarded stock option grants for 2,228,241 shares and grants for 706,345 performance shares under this plan. The weighted-average grant-date fair value of the performance share grants was $12.91 per share. 89 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Restricted Stock Plan--Under the 1995 Restricted Stock Plan, one million shares of common stock are available for grants and awards to officers and other key management employees. Lyondell grants fixed awards of common stock that are forfeitable and subject to restrictions on transfer. Vesting is contingent on the participant's continuing employment at Lyondell for a period specified in the award. During 2001, 2000 and 1999 Lyondell granted and issued restricted stock of 2,587 shares, 60,436 shares and 299,277 shares respectively, to officers and employees. The shares vest on various dates through May 4, 2003, depending upon the terms of the individual grants. Employees are entitled to receive dividends on the restricted shares. Rights to Purchase Common Stock--On December 8, 1995, the Board of Directors of Lyondell declared a dividend of one right ("Right") for each outstanding share of Lyondell's common stock to stockholders of record on December 20, 1995. The Rights become exercisable upon the earlier of: (i) ten days following a public announcement by another entity that it has acquired beneficial ownership of 15% or more of the outstanding shares of common stock; or (ii) ten business days following the commencement of a tender offer or exchange offer to acquire beneficial ownership of 15% or more of the outstanding shares of common stock, except under certain circumstances. The Rights expire at the close of business on December 8, 2005 unless earlier redeemed at a price of $.0005 per Right or exchanged by Lyondell as described in the Rights Agreement dated as of December 8, 1995. Stock Options--The following table summarizes activity relating to stock options under the 1999 LTIP. As of December 31, 2001, options covering 6,636,163 shares were outstanding at prices ranging from $11.25 to $20.00 per share. Of these, 5,223,998 shares with a weighted average remaining life of 9 years were outstanding at a weighted average price of $14.89 per share, of which 910,630 shares were exercisable at a weighted average price of $13.09 per share. In addition, 1,412,165 shares with a weighted average remaining life of 7 years were outstanding at a weighted average price of $18.17 per share, of which 995,031 shares were exercisable at a weighted average price of $18.17 per share. Average Number Option Price of Shares Per Share ---------------- ---------------- Balance, January 1, 1999 -- $ -- Granted 1,756,098 17.82 Cancelled (132,664) 18.13 ---------------- Balance, December 31, 1999 1,623,434 17.79 Granted 2,228,241 13.07 Cancelled (185,908) 16.64 ---------------- Balance, December 31, 2000 3,665,767 14.98 Granted 3,143,231 16.25 Exercised (49,618) 12.91 Cancelled (123,217) 15.06 ---------------- Balance, December 31, 2001 6,636,163 $ 15.59 ================ 90 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Lyondell's Executive Long-Term Incentive Plan ("LTI Plan") became effective in November 1988. The last stock options granted under the LTI Plan were granted in March 1994. No additional stock option grants will be made under this plan. As of December 31, 2001, options covering 529,839 shares were outstanding under the LTI Plan with a weighted average remaining life of 1 year, all of which were exercisable at prices ranging from $23.00 to $26.00 per share. The following summarizes stock option activity for the LTI Plan: Average Number Option Price of Shares Per Share -------------- ------------- Balance, January 1, 1999 616,481 $ 23.61 Cancelled (7,884) 23.62 ---------------- Balance, December 31, 1999 608,597 23.61 Exercised (6,850) 20.25 Cancelled (5,483) 21.30 ---------------- Balance, December 31, 2000 596,264 23.67 Cancelled (66,425) 20.25 ---------------- Balance, December 31, 2001 529,839 $ 24.09 ================ Lyondell's Incentive Stock Option Plan ("ISO Plan"), a tax qualified plan, became effective in January 1989. The last stock options granted under the ISO Plan were granted in March 1993. No additional grants will be made under the ISO Plan. At December 31, 1999, no stock options were outstanding. The following summarizes stock option activity for the ISO Plan: Average Number Option Price of Shares Per Share --------------- --------------- Balance January 1, 1999 145,191 $ 30.00 Cancelled (145,191) 30.00 --------------- Balance, December 31, 1999 -- =============== 91 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Employee stock options are accounted for under the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation cost has been recognized in connection with stock option grants under the plans. The pro forma impact on net income and earnings per share from calculating compensation expense in the manner described in SFAS No. 123, Accounting for Stock-Based Compensation, in 2001, 2000 and 1999 was approximately $8 million, $6 million and $6 million, or $.07 per share, $.05 per share and $.06 per share, respectively. The fair value per share of options granted was estimated as of the date of grant using the Black-Scholes option-pricing model and the following assumptions.
2001 2000 1999 -------------- ------------- ----------- Fair value per share of options granted $ 4.08 $ 4.04 $ 4.67 Fair value assumptions: Dividend yield 5.88% 5% 5% Expected volatility 42% 46% 35% Risk-free interest rate 5.28% 6.5% 5% Maturity, in years 10 10 10
21. Supplemental Cash Flow Information Supplemental cash flow information is summarized as follows for the years ended December 31:
Millions of dollars 2001 2000 1999 - ------------------- --------------- --------------- --------------- Interest paid $ 372 $ 521 $ 570 =============== =============== =============== Net income taxes (received) paid $ (12) $ 57 $ (91) =============== =============== ===============
Effective December 31, 1999, Lyondell made a noncash capital contribution to LCR by converting $47 million of its note receivable from LCR to a capital investment in LCR. 22. Segment and Related Information Lyondell operates in four reportable segments: (i) intermediate chemicals and derivatives; (ii) petrochemicals; (iii) polymers; and (iv) refining. The accounting policies of the segments are the same as those described in "Summary of Significant Accounting Policies" (see Note 2). The methanol operations are not a reportable segment. No customer accounted for 10% or more of consolidated sales during the three years ended December 31, 2001. However, under the terms of LCR's Products Agreement (see Note 9), CITGO purchases substantially all of the refined products of the refining segment. 92 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Summarized financial information for Lyondell's reportable segments is shown in the following table.
Intermediate Chemicals and Millions of dollars Derivatives Petrochemicals Polymers Refining Other Total - ------------------- -------------- --------------- ------------- ------------- ------------- ---------- 2001 - ---- Sales and other operating revenues $ 3,226 $ -- $ -- $ -- $ -- $ 3,226 Operating income 112 -- -- -- -- 112 Income (loss) from equity investments -- 113 (77) 129 (125) 40 Total assets 5,887 286 113 258 159 6,703 Capital expenditures 68 -- -- -- -- 68 Depreciation and amortization expense 269 -- -- -- -- 269 2000 - ---- Sales and other operating revenues $ 4,036 $ -- $ -- $ -- $ -- $ 4,036 Operating income 339 -- -- -- -- 339 Income (loss) from equity investments -- 285 (76) 86 (96) 199 Total assets 6,150 336 140 249 172 7,047 Capital expenditures 104 -- -- -- -- 104 Depreciation and amortization expense 279 -- -- -- -- 279 1999 - ---- Sales and other operating revenues $ 3,693 $ -- $ -- $ -- $ -- $ 3,693 Operating income 404 -- -- -- -- 404 Income (loss) from equity investments -- 183 21 23 (151) 76 Total assets 8,557 314 140 271 216 9,498 Capital expenditures 131 -- -- -- -- 131 Depreciation and amortization expense 330 -- -- -- -- 330
The following table presents the details of "Income (loss) from equity investments" as presented above in the "Other" column for the years ended December 31:
Millions of dollars 2001 2000 1999 - ------------------- --------------- --------------- --------------- Equistar items not allocated to segments: Principally general and administrative expenses and interest expense, net $ (116) $ (108) $ (171) Other income, net 3 -- 19 Income (loss) from equity investment in LMC (12) 12 1 --------------- --------------- --------------- Total--Other $ (125) $ (96) $ (151) =============== =============== ===============
93 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table presents the details of "Total assets" as presented above in the "Other" column for the years ended December 31:
Millions of dollars 2001 2000 1999 - ------------------- --------------- --------------- --------------- Equistar items not allocated to segments: Goodwill $ 87 $ 99 $ 113 Other assets 36 24 40 Equity investment in LMC 36 49 63 --------------- --------------- --------------- Total--Other $ 159 $ 172 $ 216 =============== =============== ===============
The following "Revenues" by country data are based upon the location of the use of the product. The "Long-lived assets" by country data is based upon the location of the assets.
Revenues Long-Lived Assets --------------------------------------- --------------------------------------- Millions of dollars 2001 2000 1999 2001 2000 1999 - ------------------- ---------- ---------- ---------- ---------- ---------- ---------- United States $ 1,765 $ 2,101 $ 1,826 $ 1,382 $ 1,482 $ 2,944 Foreign 1,461 1,935 1,867 911 947 1,347 ---------- ---------- ---------- ---------- ---------- ---------- Total $ 3,226 $ 4,036 $ 3,693 $ 2,293 $ 2,429 $ 4,291 ========== ========== ========== ========== ========== ==========
Foreign long-lived assets primarily consist of the net property, plant and equipment of two plants, located near Rotterdam, The Netherlands, and Fos-sur-Mer, France, both of which are part of the IC&D segment. 23. Unaudited Quarterly Results
For the quarter ended -------------------------------------------------------------------- Millions of dollars, except per share data March 31 June 30 September 30 December 31 - ------------------------------------------ ------------- ------------ --------------- --------------- 2001 - ---- Sales and other operating revenues $ 857 $ 902 $ 750 $ 717 Operating income (loss) 31 66 (26) 41 Income (loss) from equity investments 2 42 17 (21) Net income (loss) (a) (34) 4 (67) (53) Basic and diluted earnings (loss) per share before extraordinary item (b) (.29) .04 (.57) (.42) 2000 - ---- Sales and other operating revenues $1,136 $ 976 $ 975 $ 949 Operating income 87 142 97 13 Income from equity investments 50 66 83 -- Net income (loss) (c) 306 46 133 (48) Basic and diluted earnings (loss) per share before extraordinary item (a) (b) 2.69 .39 1.13 (.38) - -------------- (a) The fourth quarter of 2001 included an extraordinary loss on early extinguishment of debt of $5 million, or $.04 per share. (b) Earnings per common share calculations for each of the quarters are based upon the weighted average number of shares outstanding for each period (basic earnings per share). The sum of the quarters may not necessarily be equal to the full year earnings per share amount. (c) The first and third quarters of 2000 included after-tax gains on asset sales of $369 million, or $3.14 per share, and $31 million, or $.26 per share, respectively. The first, second and fourth quarters of 2000 included an extraordinary loss on early extinguishment of debt of $11 million, or $.09 per share, $19 million, or $.16 per share, and $3 million, or $.03 per share, respectively.
94 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 24. Subsequent Event Early in 2002, Lyondell and Occidental agreed in principle for Lyondell's acquisition of Occidental's 29.5% interest in Equistar and for Occidental's acquisition of an equity interest in Lyondell. Upon consummation of these transactions, Occidental would receive the following from Lyondell: . 30 to 34 million shares of newly issued Lyondell Series B Common Stock, with the final number to be determined at closing of this transaction. These shares would have the same rights as Lyondell's regular common stock with the exception of the dividend. The Series B Common Stock would pay a dividend at the same rate as the regular common stock but, at Lyondell's option, the dividend may be paid in additional shares of Series B Common Stock or in cash. These new Series B shares also would include provisions for conversion to regular common stock three years after issuance or earlier in certain circumstances; . five-year warrants to acquire five million shares of Lyondell regular common stock at $25 per share, subject to adjustment upon the occurrence of certain events; and . a contingent payment equivalent in value to 7.38% of Equistar's cash distributions for 2002 and 2003, up to a total of $35 million, payable in cash, Series B Common Stock or regular common stock, as determined by Lyondell. These transactions are subject to negotiation, completion and execution of definitive documentation, compliance with the applicable provisions of the partnership agreement and the parent agreement, approval by the boards of directors of Lyondell and Occidental, approval by Lyondell's stockholders, regulatory approvals and other customary conditions. There can be no assurance that the proposed transactions will be completed. 25. Supplemental Guarantor Information ARCO Chemical Technology Inc. ("ACTI"), ARCO Chemical Technology L.P. ("ACTLP") and Lyondell Chemical Nederland, Ltd. ("LCNL") are guarantors, jointly and severally, (collectively "Guarantors") of the $393 million senior secured notes issued in December 2001 and the $500 million senior subordinated notes and $1.9 billion senior secured notes issued in May 1999. LCNL, a Delaware corporation, is a wholly owned subsidiary of Lyondell that owns a Dutch subsidiary that operates a chemical production facility near Rotterdam, The Netherlands. ACTI is a Delaware corporation, which holds the investment in ACTLP. ACTLP is a Delaware limited partnership, which holds and licenses technology to other Lyondell affiliates and to third parties. Separate financial statements of the Guarantors are not considered to be material to the holders of the senior subordinated notes and senior secured notes. The following condensed consolidating financial information present supplemental information for the Guarantors as of December 31, 2001 and 2000 and for the three years ended December 31, 2001. 95 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING FINANCIAL INFORMATION As of and for the year ended December 31, 2001
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- ------------ ------------- ------------- -------------- ------------ BALANCE SHEET Total current assets $ 781 $ 132 $ 294 $ -- $ 1,207 Property, plant and equipment, net 915 516 862 -- 2,293 Other investments and long-term receivables 7,007 461 1,537 (7,386) 1,619 Goodwill, net 453 389 260 -- 1,102 Other assets 344 88 50 -- 482 ------------ ------------- ------------- -------------- ------------ Total assets $ 9,500 $ 1,586 $ 3,003 $ (7,386) $ 6,703 ============ ============= ============= ============== ============ Current maturities of long-term debt $ 7 $ -- $ -- $ -- $ 7 Other current liabilities 391 73 88 -- 552 Long-term debt 3,844 -- 2 -- 3,846 Other liabilities 515 55 13 -- 583 Deferred income taxes 611 133 46 -- 790 Intercompany liabilities (assets) 3,383 (1,101) (2,282) -- -- Minority interest -- -- 176 -- 176 Stockholders' equity 749 2,426 4,960 (7,386) 749 ------------ ------------- ------------- -------------- ------------ Total liabilities and stockholders' equity $ 9,500 $ 1,586 $ 3,003 $ (7,386) $ 6,703 ============ ============= ============= ============== ============ STATEMENT OF INCOME Sales and other operating revenues $ 2,211 $ 786 $ 1,605 $ (1,376) $ 3,226 Cost of sales 2,156 559 1,432 (1,376) 2,771 Selling, general and administrative expenses 79 16 54 -- 149 Research and development expense 32 -- -- -- 32 Amortization of goodwill and other intangibles 70 18 11 -- 99 Unusual charges 63 -- -- -- 63 ------------ ------------- ------------- -------------- ------------ Operating income (loss) (189) 193 108 -- 112 Interest (expense) income, net (384) 3 12 -- (369) Other (expense) income, net (127) (83) 206 -- (4) Income from equity investments 616 -- 60 (636) 40 Intercompany income 267 335 128 (730) -- (Benefit from) provision for income taxes 62 152 174 (464) (76) ------------ ------------- ------------- -------------- ------------ Income (loss) before extraordinary items 121 296 340 (902) (145) Extraordinary items, net of taxes (5) -- -- -- (5) ------------ ------------- ------------- -------------- ------------ Net income (loss) $ 116 $ 296 $ 340 $ (902) $ (150) ============ ============= ============= ============== ============
96 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the year ended December 31, 2001
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- ------------ ------------- ------------- -------------- -------------- STATEMENT OF CASH FLOWS Net income (loss) $ 116 $ 296 $ 340 $ (902) $ (150) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 138 47 84 -- 269 Extraordinary items 5 -- -- -- 5 Net changes in working capital and other (662) 119 (284) 902 75 ------------ ------------- ------------- -------------- -------------- Net cash (used in) provided by operating activities (403) 462 140 -- 199 ------------ ------------- ------------- -------------- -------------- Expenditures for property, plant and equipment (17) (8) (43) -- (68) Contributions and advances to affiliates 61 (115) (119) -- (173) Distributions from affiliates in excess of earnings (10) -- 60 -- 50 Other 470 -- -- (470) -- ------------ ------------- ------------- -------------- -------------- Net cash provided by (used in) investing activities 504 (123) (102) (470) (191) ------------ ------------- ------------- -------------- -------------- Payment of debt issuance costs (15) -- -- -- (15) Proceeds from issuance of long-term debt 393 -- -- -- 393 Repayment of long-term debt (394) -- -- -- (394) Dividends paid (106) (426) (44) 470 (106) ------------ ------------- ------------- -------------- -------------- Net cash used in financing activities (122) (426) (44) 470 (122) ------------ ------------- ------------- -------------- -------------- Effect of exchange rate changes on cash -- 67 (67) -- -- ------------ ------------- ------------- -------------- -------------- Decrease in cash and cash equivalents (21) (20) (73) -- (114) Cash and cash equivalents: Beginning of year 142 20 98 -- 260 ------------ ------------- ------------- -------------- -------------- End of year $ 121 $ -- $ 25 $ -- $ 146 ============ ============= ============= ============== ==============
97 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING FINANCIAL INFORMATION As of and for the year ended December 31, 2000
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------------- -------------- -------------- -------------- -------------- BALANCE SHEET Total current assets $ 695 $ 242 $ 408 $ -- $ 1,345 Property, plant and equipment, net 980 566 883 -- 2,429 Other investments and long-term receivables 6,914 413 1,638 (7,359) 1,606 Goodwill, net 476 414 262 -- 1,152 Other assets 398 61 48 8 515 -------------- -------------- -------------- -------------- -------------- Total assets $ 9,463 $ 1,696 $ 3,239 $ (7,351) $ 7,047 ============== ============== ============== ============== ============== Current maturities of long-term debt $ 10 $ -- $ -- $ -- $ 10 Other current liabilities 556 73 95 -- 724 Long-term debt 3,842 -- 2 -- 3,844 Other liabilities 378 59 4 -- 441 Deferred income taxes 556 140 6 -- 702 Intercompany liabilities (assets) 2,976 (1,095) (1,889) 8 -- Minority interest -- -- 181 -- 181 Stockholders' equity 1,145 2,519 4,840 (7,359) 1,145 -------------- -------------- -------------- -------------- -------------- Total liabilities and stockholders' equity $ 9,463 $ 1,696 $ 3,239 $ (7,351) $ 7,047 ============== ============== ============== ============== ============== STATEMENT OF INCOME Sales and other operating revenues $ 2,794 $ 936 $ 1,585 $ (1,279) $ 4,036 Cost of sales 2,441 673 1,536 (1,279) 3,371 Selling, general and administrative expenses 141 5 44 -- 190 Research and development expense 32 -- 3 -- 35 Amortization of goodwill and other intangibles 67 22 12 -- 101 -------------- -------------- -------------- -------------- -------------- Operating income 113 236 (10) -- 339 Interest income (expense), net (481) 1 18 -- (462) Other income (expense), net (155) (128) 310 -- 27 Gain on sale of assets -- (9) 599 -- 590 Income from equity investments 1,048 -- 215 (1,064) 199 Intercompany income (expense) (88) 156 181 (249) -- Provision for income taxes 140 82 423 (422) 223 -------------- -------------- -------------- -------------- -------------- Income before extraordinary items 297 174 890 (891) 470 Extraordinary items, net of taxes (33) -- -- -- (33) -------------- -------------- -------------- -------------- -------------- Net income $ 264 $ 174 $ 890 $ (891) $ 437 ============== ============== ============== ============== ==============
98 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the year ended December 31, 2000
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------------- -------------- -------------- -------------- -------------- STATEMENT OF CASH FLOWS Net income $ 264 $ 174 $ 890 $ (891) $ 437 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on sale of assets -- 9 (599) -- (590) Depreciation and amortization 148 57 74 -- 279 Extraordinary items 33 -- -- -- 33 Net changes in working capital and other (101) (292) (596) 891 (98) -------------- ------------- -------------- -------------- -------------- Net cash provided by (used in) operating activities 344 (52) (231) -- 61 -------------- ------------- -------------- -------------- -------------- Proceeds from sales of assets, net of cash sold 1,903 216 378 -- 2,497 Expenditures for property, plant and equipment (27) (36) (41) -- (104) Contributions and advances to affiliates 12 -- (52) -- (40) Distributions from affiliates in excess of earnings (19) -- 104 -- 85 Other 249 -- -- (249) -- -------------- ------------- -------------- -------------- -------------- Net cash provided by investing activities 2,118 180 389 (249) 2,438 -------------- ------------- -------------- -------------- -------------- Payment of debt issuance costs (20) -- -- -- (20) Proceeds from issuance of long-term debt -- -- -- -- -- Repayment of long-term debt (2,416) -- (1) -- (2,417) Dividends paid (106) (91) (158) 249 (106) -------------- ------------- -------------- -------------- -------------- Net cash used in financing activities (2,542) (91) (159) 249 (2,543) -------------- ------------- -------------- -------------- -------------- Effect of exchange rate changes on cash -- (49) 46 -- (3) -------------- ------------- -------------- -------------- -------------- (Decrease) increase in cash and cash equivalents (80) (12) 45 -- (47) Cash and cash equivalents: Beginning of year 222 32 53 -- 307 -------------- ------------- -------------- -------------- -------------- End of year $ 142 $ 20 $ 98 $ -- $ 260 ============== ============= ============== ============== ==============
99 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---(Continued) CONDENSED CONSOLIDATING FINANCIAL INFORMATION For the year ended December 31, 1999
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- -------------- -------------- -------------- -------------- -------------- STATEMENT OF INCOME Sales and other operating revenues $ 2,602 $ 796 $ 882 $ (587) $ 3,693 Cost of sales 1,976 556 946 (587) 2,891 Selling, general and administrative expenses 167 -- 73 -- 240 Research and development expense 44 -- 14 -- 58 Amortization of goodwill and other intangibles 56 35 9 -- 100 -------------- -------------- -------------- -------------- -------------- Operating income (loss) 359 205 (160) -- 404 Interest (expense) income, net (606) 3 14 -- (589) Other income (expense), net 24 (146) 127 -- 5 Income from equity investments 395 -- 94 (413) 76 Intercompany income 13 225 176 (414) -- Provision for income taxes 43 67 58 (192) (24) -------------- -------------- -------------- -------------- -------------- Income (loss) before extraordinary items 142 220 193 (635) (80) Extraordinary items, net of taxes (35) -- -- -- (35) -------------- -------------- -------------- -------------- -------------- Net income (loss) $ 107 $ 220 $ 193 $ (635) $ (115) ============== ============== ============== ============== ==============
100 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the year ended December 31, 1999 Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- ------------- ------------- ------------- --------------- --------------- STATEMENT OF CASH FLOWS Net income (loss) $ 107 $ 220 $ 193 $ (635) $ (115) Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 194 61 75 -- 330 Extraordinary items 35 -- -- -- 35 Net changes in working capital and other (398) (71) (116) 635 50 ------------- ------------- ------------- --------------- --------------- Net cash (used in) provided by operating activities (62) 210 152 -- 300 ------------- ------------- ------------- --------------- --------------- Expenditures for property, plant and equipment (97) (15) (19) -- (131) Contributions and advances to affiliates (18) -- (34) -- (52) Distributions from affiliates in excess of earnings -- -- 134 -- 134 Other 425 1 4 (426) 4 ------------- ------------- ------------- --------------- --------------- Net cash provided by (used in) investing activities 310 (14) 85 (426) (45) ------------- ------------- ------------- --------------- --------------- Repayment of long-term debt (4,122) -- -- -- (4,122) Proceeds from issuance of long-term debt 3,400 -- -- -- 3,400 Payment of debt issuance costs (107) -- -- -- (107) Issuance of common stock 736 -- -- -- 736 Dividends paid (97) (167) (259) 426 (97) Other 8 -- -- -- 8 ------------- ------------- ------------- --------------- --------------- Net cash used in financing activities (182) (167) (259) 426 (182) ------------- ------------- ------------- --------------- --------------- Effect of exchange rate changes on cash -- (28) 29 -- 1 ------------- ------------- ------------- --------------- --------------- Increase in cash and cash equivalents 66 1 7 -- 74 Cash and cash equivalents: Beginning of year 156 31 46 -- 233 ------------- ------------- ------------- -------------- --------------- End of year $ 222 $ 32 $ 53 $ -- $ 307 ============= ============= ============= ============== ===============
101 EX-99.5 7 dex995.txt LYONDELL JUNE 30, 2002 QUARTERLY REPORT ON FORM 10-Q PAGES 1-20 Exhibit 99.5 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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