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As filed with the Securities and Exchange Commission on June 11, 1999
Registration No. 333-76473
333-76473-01
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
to
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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EQUISTAR CHEMICALS, LP
EQUISTAR FUNDING CORPORATION
(Exact name of each registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 2869 76-0550481
Delaware 2869 51-0388569
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
Gerald A. O'Brien
Vice President, Secretary
and General Counsel
1221 McKinney Street, Suite 700
Houston, Texas 77010
(713) 652-4560
1221 McKinney Street, Suite 700 (Name, address, including zip code, and
Houston, Texas 77010 telephone number,
including area code, of agent for service
(713) 652-7200 for each registrant)
(Address, including zip code, and
telephone number,
including area code, of each
registrants' principal executive
offices)
Copy to:
Darrell W. Taylor
Baker & Botts, L.L.P.
One Shell Plaza
910 Louisiana
Houston, Texas 77002
(713) 229-1234
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable following the effectiveness of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS
Subject to completion, dated June 11, 1999.
Equistar Chemicals, LP
Equistar Funding Corporation
$900,000,000
Offers to Exchange
$300,000,000 8 1/2% Outstanding Notes due 2004
for
$300,000,000 8 1/2% Registered
Notes due 2004
$600,000,000 8 3/4% Outstanding Notes due 2009
for
$600,000,000 8 3/4% Registered
Notes due 2009
The new notes
. will be freely tradeable
. are substantially identical to the outstanding notes
. will accrue interest at the same rate per annum as the outstanding notes,
payable semiannually in arrears on each February 15 and August 15, beginning
August 15, 1999
. will be unsecured and will rank equally with outstanding notes that are not
exchanged and all other unsecured and unsubordinated indebtedness
. will not be listed on any securities exchange or on any automated dealer
quotation system
The exchange offers
. expire at 5:00 p.m., New York City time, on , 1999,
unless extended
. are not conditioned on any minimum aggregate principal amount of outstanding
notes being tendered
In addition, you should note that
. all outstanding notes that are validly tendered and not validly withdrawn
will be exchanged for an equal principal amount of new notes that are
registered under the Securities Act of 1933
. tenders of outstanding notes may be withdrawn any time before the expiration
of the exchange offers
. the exchange of outstanding notes for new notes in the exchange offers will
not be a taxable event for U.S. federal income tax purposes
You should consider carefully the risk factors beginning on page 8 of this
prospectus before participating in the exchange offers.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the new notes or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 1999.
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Prospectus Summary
This summary highlights information from this prospectus, but does not
contain all information that is important to you. This prospectus includes
specific terms of the exchange offers, information about our business and
detailed financial data. We encourage you to read the detailed information and
financial statements and the related notes appearing elsewhere in this
prospectus in their entirety.
About Equistar
Equistar is one of the largest chemical producers in the world with total
1998 pro forma revenues of $5 billion and $7 billion of assets at the end of
1998. It is the world's second largest, and North America's largest, producer
of ethylene, the world's most widely used petrochemical. Equistar is also the
largest producer of polyethylene and propylene in North America.
Equistar's petrochemicals segment manufactures and markets olefins,
oxygenated chemicals and aromatics. Equistar's olefins products are ethylene,
propylene and butadiene. Olefins and their co-products are basic building
blocks used to create a wide variety of products. Ethylene is used to produce
polyethylene, ethylene oxide, ethylene dichloride and ethylbenzene. Propylene
is used to produce polypropylene. Equistar's oxygenated chemicals include
ethylene oxide, ethylene glycol, ethanol and methyl tertiary butyl ether.
Oxygenated chemicals have uses ranging from paint to cleaners to polyester
fibers. Equistar's aromatics are benzene and toluene.
Equistar's polymers segment manufactures and markets polyolefins, including
high-density polyethylene, low-density polyethylene, linear low-density
polyethylene, polypropylene and performance polymers. Polyethylene is used to
produce packaging film, trash bags and lightweight high-strength plastic
bottles for milk, juices, shampoos and detergents. Polypropylene is used in a
variety of products including plastic caps and other closures, rigid packaging
and carpet facing and backing. Equistar's performance polymers include enhanced
grades of polyethylene such as wire and cable resins and polymeric powders.
Equistar was formed in December 1997 as a Delaware limited partnership owned
by Lyondell Chemical Company and Millennium Chemicals Inc. Lyondell contributed
substantially all of the assets of its petrochemicals and polymers business
segments. Millennium contributed substantially all of the assets of Millennium
Petrochemicals, polyethylene and related products, performance polymers and
ethyl alcohol businesses. In May 1998, Lyondell, Millennium, Equistar and
Occidental Petroleum Corporation consummated a series of transactions to expand
Equistar through the addition of Occidental petrochemical assets. Lyondell's
aggregate interest in Equistar is 41%. Millennium's aggregate interest in
Equistar is 29.5%. Occidental's aggregate interest in Equistar is 29.5%.
About Equistar Funding
Equistar Funding, a wholly owned subsidiary of Equistar, is a Delaware
corporation formed for the sole purpose of facilitating the financing
activities of Equistar. The outstanding notes were co-issued by Equistar and
Equistar Funding. Equistar and Equistar Funding are also co-issuers of the new
notes. Some institutional investors that might otherwise be limited in their
ability to invest in securities issued by a limited partnership, due to legal
investment laws of their State of organization or their charter documents, may
be able to invest in the notes because Equistar Funding is a co-obligor.
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Summary of the Exchange Offers
On February 16, 1999, we completed the private offering of the outstanding
notes.
We entered into an exchange and registration rights agreement with the
initial purchasers in the private offering. We agreed to deliver this
prospectus to you and to use our best efforts to complete the exchange offers
within 180 days after the date we issued the outstanding notes. You are
entitled to exchange your outstanding notes for new notes with substantially
identical terms.
You should read the discussion under the headings "--Summary of Terms of the
New Notes" beginning on page 6 and "Description of the New Notes" beginning on
page 95 for further information regarding the new notes.
We summarize the terms of the exchange offers below. You should read the
discussion under the heading "The Exchange Offers" beginning on page 85 for
further information regarding the exchange offers and resale of the new notes.
The Exchange Offers......... We are offering to issue to you:
. new 8 1/2% notes due 2004 in exchange for your
outstanding 8 1/2% notes due 2004
. new 8 3/4% notes due 2009 in exchange for your
outstanding 8 3/4% notes due 2009
Expiration Date............. The exchange offers will expire at 5:00 p.m., New
York City time, on , 1999, or at a later
date and time to which we extend them. We may
choose to extend one of the exchange offers
without extending the other.
Withdrawal of Tenders....... You may withdraw your tender of outstanding notes
at any time before the expiration date of the
applicable exchange offer.
Conditions to the Exchange
Offers..................... We will not be required to accept outstanding
notes for exchange if the exchange offers would
violate applicable law or if any legal action has
been instituted or threatened that would impair
our ability to proceed with the exchange offers.
The exchange offers are not conditioned on each
other or on any minimum aggregate principal
amount of outstanding notes being tendered.
Please read the section "The Exchange Offers--
Conditions to the Exchange Offers" beginning on
page 88 for more information regarding the
conditions to the exchange offers.
Procedures for Tendering
Outstanding Notes.......... If you wish to participate in the exchange
offers, you must complete, sign and date the
letter of transmittal or a facsimile of a letter
of transmittal and mail or deliver the letter of
transmittal, together with the outstanding notes,
to the exchange agent. If your outstanding notes
are held through The Depository Trust Company you
may effect delivery of the outstanding notes by
book-entry transfer.
In the alternative, if your outstanding notes are
held through The Depository Trust Company and you
wish to participate in the exchange offers, you
may do so instead through the automated
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tender offer program of The Depository Trust
Company. If you tender under this program, you
will agree to be bound by the letter of
transmittal that we are providing with this
prospectus as though you had signed the letter of
transmittal.
By signing or agreeing to be bound by the letter
of transmittal, you will represent to us, among
other things, that
. any new notes you receive will be acquired in
the ordinary course of your business
. you have no arrangement or understanding with
any person or entity to participate in the
distribution of the new notes
. if you are not a broker-dealer, you are not
engaged in and do not intend to engage in the
distribution of the new notes
. if you are a broker-dealer that will receive
new notes for your own account in exchange for
outstanding notes that were acquired as a
result of market-making activities, you will
deliver a prospectus, as required by law, in
connection with any resale of those new notes
. you are not our "affiliate," as defined in Rule
405 of the Securities Act of 1933, or, if you
are our affiliate, you will comply with any
applicable registration and prospectus delivery
requirements of the Securities Act of 1933
Guaranteed Delivery
Procedures................. If you wish to tender your outstanding notes and
cannot comply with the requirement to deliver the
letter of transmittal and notes or use the
applicable procedures under the automated tender
offer program of The Depository Trust Company,
before the expiration date, you must tender your
outstanding notes according to the guaranteed
delivery procedures described in "The Exchange
Offers--Guaranteed Delivery Procedures" on page
91.
U.S. Federal Income Tax
Considerations............. The exchange of outstanding notes for new notes
in the exchange offers will not be a taxable
event for U.S. federal income tax purposes.
Please read "Federal Income Tax Considerations"
beginning on page 103.
Use of Proceeds............. We will not receive any cash proceeds from the
issuance of new notes.
Plan of Distribution... All broker-dealers who receive new notes in the
exchange offers have a prospectus delivery
obligation.
Broker-dealers who acquired the outstanding notes
as a result of market-making or other trading
activities may use this exchange offer
prospectus, as supplemented or amended, in
connection with the resales of the new notes.
Broker-dealers who acquired the outstanding notes
from Equistar must comply with the registration
and prospectus delivery requirements of the
Securities Act--including being named as selling
noteholders--in order to resell the outstanding
notes or the new notes.
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The Exchange Agent
We have appointed The Bank of New York as exchange agent for the exchange
offers. You should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for the notice of guaranteed delivery, to the exchange agent,
addressed as follows:
For Delivery by Mail: For Overnight Delivery Only or by Hand:
The Bank of New York The Bank of New York
01 Barclay St., Floor 7E 101 Barclay St.
New York, NY 10286 Corporate Trust Services Window
Attn: Reorg. Dept. Ground Level
New York, NY 10286
Attn: Reorg. Dept.
By Facsimile Transmission (for eligible institutions only):
(212) 815-6339
Attn:
or
(212) 815-4699
Attn:
To Confirm Receipt:
or
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Summary of Terms of the New Notes
Unlike the outstanding notes, the new notes will be freely tradeable and
will not have registration rights or provisions for additional interest.
Otherwise, the new notes are substantially identical to the outstanding notes.
The new notes will evidence the same debt as the outstanding notes, and the
outstanding notes and the new notes will be governed by the same indenture.
Securities Offered.......... $300 million of 8 1/2% notes due 2004.
$600 million of 8 3/4% notes due 2009.
Co-Issuers.................. The new notes will be joint and several
obligations of Equistar and Equistar Funding.
Maturity Dates.............. The new 8 1/2% notes will mature on August 15,
2004.
The new 8 3/4% notes will mature on August 15,
2009.
Interest Payment Dates...... February 15 and August 15 of each year,
commencing August 15, 1999.
Limited Recourse............ None of Lyondell, Millennium, Occidental or any
of their subsidiaries or affiliates, other than
Equistar and Equistar Funding, are obligated to
pay the new notes.
Optional Redemption.........
At any time, we may redeem any and all of the new
notes. We will pay a redemption price equal to
the greater of 100% of the principal amount of
the notes we redeem or a redemption price as
described under the heading "Description of the
New Notes--Optional Redemption of the New Notes"
on page 96. We will also pay accrued and unpaid
interest.
Sinking Fund................ None.
Ranking..................... The new notes:
. will be senior unsecured indebtedness of
Equistar and Equistar Funding
. will rank equal in right of payment with any
outstanding notes that are not exchanged and
with all of our existing and future unsecured
and unsubordinated indebtedness and will rank
senior to any future subordinated indebtedness
. will effectively be subordinated to any secured
debt that we may incur to the extent of the
collateral for the secured debt; currently we
have no secured debt
We may not incur additional debt that is senior
to the notes.
Restrictive Covenants....... The outstanding notes have been and the new notes
will be issued under an indenture containing
restrictive covenants for your benefit. These
covenants restrict our ability to
. incur indebtedness secured by liens
. engage in sale and leaseback transactions
. sell all or substantially all of our assets or
merge with another entity
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Form of New Notes........... The new notes will be represented by one or more
permanent global securities deposited with The
Depository Trust Company. You will not receive
certificates for your new notes unless one of the
events described under the heading "Book Entry;
Delivery and Form--Certificated Notes" on page
107 occurs. Instead, beneficial ownership
interests in the new notes will be shown on, and
transfers of beneficial ownership will be
effected only through, book-entry records
maintained by The Depository Trust Company.
Rights Under Exchange and
Registration Rights
Agreement.................. If we fail to complete the exchange offers as
required by the exchange and registration rights
agreement, we will be obligated to pay additional
interest to holders of the outstanding notes.
Use of Proceeds............. We will not receive any cash proceeds from the
issuance of the new notes.
Risk Factors
Please read "Risk Factors" beginning on page 8 and carefully consider the
risk factors before participating in the exchange offers.
Principal Executive Offices
Our principal executive offices are located at 1221 McKinney Street, Suite
700, Houston, Texas 77010 and our telephone number is (713) 652-7200.
Selected Financial and Operating Data
Please read "Selected Pro Forma and Historical Financial and Operating Data
of Equistar beginning on page 16 for our selected financial data for the year
ended December 31, 1998 and as of and for the one month ended December 31,
1997. Please also read "Selected Historical Financial and Operating Data of the
Lyondell Contributed Business" on page 18 and "Selected Historical Financial
and Operating Data of the Millennium Contributed Business" on page 19, each
containing selected financial data as of November 30, 1997 and for the eleven-
month period then ended and as of December 31, 1996 and for the two years in
the period then ended.
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Risk Factors
You should carefully consider the risks below before participating in the
exchange offers.
Risk Factors Relating to the New Notes and the Exchange Offers
If you fail to exchange your outstanding notes, the existing transfer
restrictions will remain in effect; the market value of your outstanding notes
may be adversely affected because of a smaller float.
If you do not exchange your outstanding notes for new notes under the
exchange offers, then you will continue to be subject to the existing transfer
restrictions on the outstanding notes. In general, the outstanding notes may
not be offered or sold unless they are registered or exempt from registration
under the Securities Act of 1933 and from applicable state securities laws.
Except as required by the exchange and registration rights agreement, we do not
intend to register resales of the outstanding notes.
The tender of outstanding notes under the exchange offers will reduce the
aggregate principal amount of the notes outstanding. This may have an adverse
effect upon, and increase the volatility of, the market price of any
outstanding notes that you continue to hold due to a reduction in liquidity.
There is no public market for the new notes, and we do not intend to list them
on any securities exchange or automated quotation system; an active trading
market for the notes may not develop.
There is no existing public market for the new notes. We cannot provide any
assurance about
. the liquidity of any markets that may develop for the new notes
. your ability to sell your new notes
. the prices at which you will be able to sell your new notes
Future trading prices of the new notes will depend on many factors,
including prevailing interest rates, our operating results, ratings of the new
notes and the market for similar securities. Chase Securities Inc. and Banc of
America Securities LLC, who were the joint book running managers for the
offering of the outstanding notes, have advised us that they currently intend
to make a market in the new notes after completion of the exchange offers.
However, they do not have any obligation to do so, and they may discontinue any
market-making activities at any time without any notice.
We do not intend to apply for listing of the new notes on any securities
exchange or for quotation of the new notes in any automated dealer quotation
system.
None of the partners of Equistar or their affiliates will have any liability
for payments of principal or interest on the new notes, and you will have no
right to recover against them.
Our ability to make payments on the new notes is solely dependent upon
Equistar's ability to generate sufficient cash from operations. If Equistar or
Equistar Funding fails to fulfill its obligations under the outstanding notes,
the new notes or the indenture, you will not have the right to recover against
any of Equistar's partners, whether as a general partner or limited partner or
otherwise, or against the partners' respective parents or other affiliates.
Equistar Funding is a wholly owned subsidiary of Equistar. The new notes
will be joint and several obligations of Equistar and Equistar Funding.
However, Equistar Funding will have little or no revenues or assets that could
be used to satisfy its obligations under the new notes. As a result, you will
be required as a practical matter to look only to Equistar to satisfy the
obligations under the new notes.
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Risk Factors Relating to Equistar's Business
The petrochemical and polymer industries are highly cyclical, and Equistar's
income and cash flows will be affected by external factors beyond our control;
the market value of the new notes may, in turn, be affected by Equistar's
results of operations.
External factors beyond Equistar's control, such as general economic
conditions, competitor actions, international events and circumstances and
governmental regulation in the United States and abroad, can cause volatility
in the price of raw materials. These external factors can also cause
fluctuations in demand for our products and fluctuations in our prices and
margins. In addition, these external factors can magnify the impact of economic
cycles on our business. As a result, Equistar's income and cash flow will be
affected by industry cycles.
Equistar and its predecessors' historical operating results reflect the
cyclical and volatile nature of the petrochemical and polymer industries. The
petrochemical and polymer industries are mature, and industry margins are
sensitive to cyclical petrochemical supply and demand balances. The
petrochemical and polymer industries historically experience alternating
periods of tight supply, causing prices and profit margins to increase,
followed by periods when substantial additional capacity is added, resulting in
oversupply and declining prices and profit margins. A number of our products
are highly dependent on durable goods markets, such as housing and automotive,
that are themselves particularly cyclical.
Changes in commodities prices cannot be controlled and will affect Equistar's
income and cash flows; the market value of the new notes may, in turn, be
affected by Equistar's results of operations.
Due to the commodity nature of most of Equistar's products, we are not
necessarily able to protect our market position by product differentiation or
pass on cost increases to our customers. Accordingly, increases in raw material
and other costs do not necessarily correlate with changes in product prices,
either in the direction of the price change or in magnitude. As a result,
changes in commodity prices will affect Equistar's income and cash flow.
There is overcapacity in the petrochemical and polymer industries, which
results in lower production rates and margins and affects Equistar's income and
cash flows; the market value of the new notes may, in turn, be affected by
Equistar's results of operations.
Currently, there is overcapacity in the petrochemical and polymer
industries. Moreover, a number of Equistar's competitors in various segments of
the petrochemical and polymer industries have announced plans for expansion of
plant capacity. There can be no assurance that future growth in product demand
will be sufficient to utilize this additional, or even current, capacity.
Excess industry capacity may lower Equistar's production rates and margins and
its income and cash flow.
External factors will cause Equistar's quarter-to-quarter income and cash flows
to vary; the market value of the new notes may, in turn, be affected by
Equistar's results of operations.
Equistar's quarterly results, including its income and cash flow, may vary
significantly depending on various factors, most of which are out of our
control, including
. changes in the prices of and demand for our products
. changes in the cost of raw materials
. changes in supply arrangements
. developments in foreign markets
. unanticipated expenses
. unscheduled downtime and maintenance
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Actions we take will cause Equistar's quarter-to-quarter income and cash flows
to vary; the market value of the new notes may, in turn, be affected by
Equistar's results of operations.
The actual mix of production rates at our facilities will impact the
comparison of period-to-period results. We commonly take actions that are
intended to yield long-term benefits but may increase the variance of results
from quarter to quarter or even from year to year. For example, Equistar
regularly adjusts the production rate of its facilities to optimize production
costs and margins. Different facilities may have different production rates
from period to period depending on many factors, such as feedstock costs,
transportation costs and supply and demand for the product produced at the
facility during that period. As a result, individual facilities may be operated
below or above their production capacities in any period.
We will incur costs of any temporary shut-downs of our facilities. Equistar
may idle a facility for an extended period of time because an oversupply of a
particular product and/or a lack of demand for that particular product makes
production uneconomical. These temporary shut-downs could last for several
quarters, and we will incur costs, including the expenses of the shut-down and
restart of these facilities, that may affect quarterly results, including
income and cash flow, when shut-downs and start-ups occur.
Equistar enters into exchange arrangements with other producers whereby
Equistar exchanges a product in expectation of repayment in another period. If
we lend a product to other producers, we will incur production costs but will
not necessarily have corresponding increases in revenues and cash flow in the
same period. If we borrow a product, we will see an increase in revenues and
cash flow but will not necessarily incur the costs required to produce the
product in the same period. These exchange arrangements may also affect the
comparison of period-to-period results.
Equistar may be active in adding assets or in disposing of assets, which could
affect short-term results of operations; the market value of the new notes may,
in turn, be affected by Equistar's results of operations.
The purchase or sale of assets may often affect the results of operations of
Equistar, including its income and cash flow, in the short term because of the
costs associated with these transactions. Equistar actively seeks opportunities
to maximize the value of its assets, including combining its assets with those
of third parties to operate more efficiently or create greater value. In many
circumstances, maximizing value will be achieved through the purchase or sale
of assets or through contractual arrangements or joint ventures.
We will require a significant amount of cash to service our indebtedness, and
our ability to generate cash depends on many factors beyond our control; if we
cannot generate sufficient cash, we may not be able to pay our indebtedness,
including principal or interest on the new notes.
Our ability to make payments on and to refinance our indebtedness, including
the new notes, will depend on our ability to generate cash in the future. Our
ability to fund working capital and planned capital expenditures will also
depend on our ability to generate cash in the future. Several factors beyond
our control will affect our ability to make these payments and refinancings,
including
. uncertainties associated with the United States and worldwide economies
. prices of raw materials and products
. current and potential governmental actions
. operating interruptions including leaks, explosions, fires, mechanical
failure, transportation interruptions and spills, releases and other
environmental risks
Equistar's $1.25 billion revolving credit facility requires that Equistar
maintain compliance with specified financial ratios and covenants. These
requirements include that the ratio of debt-to-capitalization not exceed 0.6 to
1.0. These requirements also include that we maintain specified levels of an
interest coverage ratio, which varies from period to period. For the period
ended June 30, 1999, the ratio of (a) the sum of operating income and specified
non-cash charges to (b) net interest expense is required to be at least 2.25 to
1.0. A more detailed
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description of these financial ratios and the other covenants under the $1.25
billion credit facility, as amended in February 1999, is described under
"Summary Description of Other Indebtedness of Equistar." Equistar is in
compliance with each of the covenants of the $1.25 billion revolving credit
facility as of March 31, 1999. The ability of Equistar to comply with these
ratios and covenants may be affected by events beyond our control. The failure
of Equistar to comply with the required covenants could permit the lenders to
declare all borrowings outstanding under the credit facility to be due and
payable and to terminate some lending obligations. See "Summary Description of
Other Indebtedness of Equistar--$1.25 Billion Revolving Credit Facility." If
this were to occur, Equistar cannot assure you that its assets would be
sufficient to fund a repayment of the indebtedness under the credit facility.
At June 1, 1999, the amount outstanding under the $1.25 billion revolving
credit facility was $750 million.
We cannot assure you
. that Equistar's business will generate sufficient cash flow from
operations
. that further anticipated cost savings and operating improvements will be
realized
. that future borrowings will be available under the $1.25 billion
revolving credit facility in an amount sufficient to enable us to pay our
indebtedness, including the new notes, on or before maturity
. that we will be able to refinance any of our indebtedness on commercially
reasonable terms, if at all
Equistar's debt instruments, including the new notes and the outstanding
notes, do not contain cross-default provisions. However, the Lyondell debt
which Equistar assumed in connection with its formation and on which Lyondell
remains contingently liable (see pages 33 and 110) contains an event of default
relating to a bankruptcy, or an admission in writing of an inability to pay
debts when due, of Lyondell or Equistar. As such, a bankruptcy of Lyondell or
Lyondell's inability to pay its debts would be an event of default under the
assumed debt, of which $563 million remains outstanding as of June 1, 1999. If
one of these events were to occur, the outstanding balance of $563 million
could be accelerated, and Equistar could be required to use its cash available,
or borrow sufficient cash, or both, to fund a repayment of the outstanding
debt. The acceleration of the $563 million of debt could permit the lenders
under Equistar's $1.25 billion revolving credit facility to declare all
borrowings outstanding under the credit facility to be due and payable and to
terminate some lending obligations. See "Summary Description or Other
Indebtedness of Equistar--$1.25 Billion Revolving Credit Facility." If this
were to occur, Equistar cannot assure you that its assets would be sufficient
to fund a repayment of the indebtedness under the $1.25 billion revolving
credit facility.
Environmental compliance, cleanup and other requirements can significantly
impact Equistar's operations or cash flow; if the financial impact of
environmental costs or expenditures materially affects Equistar's income, cash
flow or liquidity, the market value of the new notes may be affected.
Equistar is subject to stringent environmental, health and safety laws and
regulations addressing air emissions, water discharges, generation, handling
and disposal of waste, and other aspects of its operations. Typically, these
laws provide for substantial fines and potential criminal sanctions for
violations. Several of these laws, including the Superfund law, also impose
extensive requirements relating to investigation and cleanup of contamination.
In addition, Equistar may face liability for alleged personal injury or
property damage due to exposure to chemicals at its facilities or chemicals
that it otherwise manufactures, handles or owns.
Equistar incurs capital and operating costs to comply with environmental,
health and safety laws and regulations. Although we believe Equistar is in
material compliance with environmental, health and safety laws and regulations,
from time to time Equistar receives and addresses notices of violation.
Environmental costs also may arise from changes in laws and regulations and
from identification of additional areas of contamination requiring
investigation or cleanup. We cannot predict with certainty the extent of
Equistar's future liabilities and costs under environmental, health and safety
laws and regulations but expect that it will continue to be significant.
11
<PAGE>
Year 2000 disruptions in operations of Equistar or third parties could
adversely affect Equistar; if the financial impact of Year 2000 disruptions
materially affects Equistar's income or cash flow, the market value of the new
notes may be affected.
Systems that do not properly recognize and process date-sensitive
information could generate erroneous data, or even fail, as the year 2000
approaches. Equistar is conducting reviews of its key computer systems and has
identified a number of systems that could be affected by the year 2000 issue.
Equistar is upgrading these systems to allow them to function properly. If
these steps are not completed successfully in a timely manner, Equistar's
operations and financial performance could be adversely affected through
disruptions in operations.
Disruptions in the operations of third parties could potentially disrupt
Equistar's operations as well. Equistar relies on services, energy and raw
materials from third parties who may or may not be adversely affected by the
year 2000 issue.
We cannot predict how a change in control of one or more of Lyondell,
Millennium or Occidental, or an exit of any of them, could affect the
operations or business of Equistar.
Any one or more of Lyondell, Millennium or Occidental may transfer control
of their interests in Equistar. In addition, Lyondell, Millennium and
Occidental may engage in mergers or other business combination transactions
that could result in a change in control of any one of them. Because of the
unanimous approval requirements in Equistar's partnership governance
structure, any transfer of an interest in Equistar or change of control of a
partner would affect the governance of Equistar. We cannot predict how any
such change would affect the operations or business of Equistar.
Equistar's $1.25 billion revolving credit facility provides that an event
of default occurs if Lyondell, Millennium and Occidental, collectively, cease
to own at least a majority interest in Equistar. An event of default under
Equistar's $1.25 billion revolving credit facility would permit the lenders to
declare amounts outstanding under the credit facility immediately due and
payable and to terminate commitments of the lenders to make revolving loans
and acquire participations in letters of credit or swingline loans. If the
lenders accelerated their loans, Equistar cannot assure you that its assets
would be sufficient to fund a repayment of the indebtedness under the $1.25
billion revolving credit facility.
Cautionary Statement
This prospectus is part of a registration statement we filed with the
Securities and Exchange Commission.
. You should rely only on the information or representations provided in
this prospectus
. We have not authorized any person to provide information in this
prospectus other than that provided in this prospectus
. We have not authorized anyone to provide you with different information
. We are not making an offer of these securities in any jurisdiction where
the offer is not permitted
. You should not assume that the information in this prospectus is accurate
as of any date other than the date on the front of this document
12
<PAGE>
Forward-Looking Information
Some of the statements contained in this prospectus contain forward-looking
statements. These statements include, in particular, statements about our
plans, strategies and prospects under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Description of Equistar's Business." We use the
terms "estimate," "project," "plan," "intend," "anticipate," "believe,"
"expect," "budget," "forecast," "will," "could," "should" and "may" and similar
expressions to identify forward-looking statements. These statements
. address activities, events or developments that we expect, believe,
anticipate or estimate will or may occur in the future
. are based on assumptions and analyses that we have made and that we
believe are reasonable
. are based on various risks and uncertainties, general economic and
business conditions, business opportunities that may be presented to and
pursued by us from time to time, changes in laws or regulations and other
factors, many of which are beyond our control
Any one of these factors, or a combination of these factors, could
materially affect our future results of operations and the ultimate accuracy of
the forward-looking statements. Although we believe the expectations reflected
in these forward-looking statements are reasonable, they do involve
assumptions, risks and uncertainties, and we cannot assure you that these
expectations will prove to have been correct. These forward-looking statements
are not guarantees of our future performance, and our actual results and future
developments may differ materially from those projected in the forward-looking
statements. See "Risk Factors" beginning on page 8.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information or otherwise. All oral or
written forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary
statements.
Use of Proceeds
We will not receive any cash proceeds from the issuance of the new notes. In
consideration for issuing the new notes, we will receive in exchange a like
principal amount of outstanding notes. The outstanding notes surrendered in
exchange for the new notes will be retired and canceled and cannot be re-
issued. Accordingly, issuance of the new notes will not result in any change in
our capitalization.
We used the net proceeds from the sale of the outstanding notes to
. terminate the outstanding balance under Equistar's $500 million credit
facility, which was $152 million at termination
. repay $205 million of capital lease obligations
. repay $385 million of indebtedness outstanding under the $1.25 billion
revolving credit facility
. retire $150 million aggregate principal amount of 10.00% notes upon their
maturity on June 1, 1999
13
<PAGE>
Capitalization
The following table sets forth our capitalization as of March 31, 1999 on a
historical basis.
You should read this table in conjunction with "Selected Pro Forma and
Historical Financial and Operating Data of Equistar," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial statements and the related notes and other financial
and operating data included elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31,
1999
---------
(millions
of
dollars)
<S> <C>
Cash and cash equivalents.............................................. $ 118
======
Long-term debt, including current maturities:
$1.25 billion revolving credit facility.............................. 750
10.00% Notes due 1999(a)............................................. 150
9.125% Notes due 2002................................................ 100
Medium-term notes (due 2000-2005).................................... 163
6.50% Notes due 2006................................................. 150
7.55% Debentures due 2026............................................ 150
8 1/2% Notes due 2004................................................ 300
8 3/4% Notes due 2009................................................ 600
------
Total long-term debt, including current maturities................. 2,363
------
Partners' capital...................................................... 3,842
------
Total capitalization................................................... $6,205
======
Debt to total capitalization ratio..................................... 38%
======
</TABLE>
- --------
(a) These notes were repaid upon their June 1, 1999 maturity.
14
<PAGE>
The Partners of Equistar
Lyondell, Millennium and Occidental file annual, quarterly and special
reports, proxy statements and other information with the U.S. Securities and
Exchange Commission. SEC filings of Lyondell, Millenium and Occidental are
available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document that is filed with
the SEC. Call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. In addition, reports and other information concerning
Lyondell, Millennium and Occidental can be inspected at the office of the New
York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
Lyondell
Lyondell is a global chemical company. Lyondell had revenues on a pro forma
basis after its acquisition of ARCO Chemical Company in July 1998 of $3.6
billion for the year ended December 31, 1998. Lyondell had $9.2 billion of
assets at December 31, 1998. Lyondell has a market presence in the areas of
. Intermediate Chemicals and Derivatives. Lyondell acquired its
intermediate chemicals and derivatives business through the acquisition
of ARCO Chemical Company in July 1998.
. Petrochemicals and Polymers. Lyondell owns 41% of Equistar.
. Refining. Lyondell owns 58.75% of LYONDELL-CITGO Refining LP. LYONDELL-
CITGO Refining processes large volumes of this extra-heavy crude oil into
premium petroleum products such as reformulated gasoline, low-sulfur
diesel, jet fuel, aromatics and lubricants. LYONDELL-CITGO Refining was
formed in 1993 as a joint venture with CITGO Petroleum Corporation, an
indirect wholly owned subsidiary of Petroleos de Venezuela, S.A.
. Methanol. Lyondell owns 75% of Lyondell Methanol, L.P. Lyondell Methanol
was formed in December 1996 by Lyondell and MCN Investment Corporation, a
producer of natural gas, which is the primary raw material of methanol.
Millennium
Millennium is an international chemical company, with market positions in a
broad range of commodity, industrial, performance and specialty chemicals.
Millennium's products include titanium dioxide, acetic acid and vinyl acetate
monomer and terpene fragrance chemicals. Millennium had revenues of
approximately $1.6 billion for the year ended December 31, 1998, and
approximately $4.1 billion of assets at December 31, 1998. Millennium owns
29.5% of Equistar.
Occidental
Occidental explores for, develops, produces and markets crude oil and
natural gas and manufactures and markets a variety of basic chemicals,
including chlorine, caustic soda, and ethylene dichloride, as well as specialty
chemicals. Occidental conducts its principal operations through two
subsidiaries, Occidental Oil and Gas Corporation and Occidental Chemical
Corporation. Occidental has an interest in the vinyls intermediates business,
including polyvinyl chloride and vinyl chloride monomer, through its 76%
interest in the Oxy Vinyls, LP partnership. Occidental also has an interest in
petrochemicals through its 29.5% ownership interest in Equistar. Occidental had
net sales of approximately $6.6 billion for the year ended December 31, 1998,
and approximately $15.3 billion of assets at December 31, 1998.
15
<PAGE>
Selected Pro Forma and Historical Financial and
Operating Data of Equistar
The table below shows selected pro forma and historical financial and
operating data for Equistar. The selected historical income statement and
balance sheet data
. as of and for the year ended December 31, 1998
. as of and for the one month ended December 31, 1997
have been derived from financial statements of Equistar, which have been
audited by PricewaterhouseCoopers LLP, independent accountants.
PricewaterhouseCoopers' report is included elsewhere in this prospectus.
The selected historical income statement and balance sheet data as of and
for the three months ended March 31, 1999 and 1998 have been derived from the
unaudited financial statements of Equistar. In the opinion of Equistar, the
unaudited financial statements include all material adjustments, consisting of
normal recurring adjustments, necessary to present fairly the information
stated herein. The results of operations for the three months ended March 31,
1999 and 1998 are not necessarily indicative of the operating results for the
entire year. The operating data have been derived from the historical operating
records of Equistar. Neither the historical financial data nor the historical
operating data are necessarily indicative of the future results of operations
of Equistar. The pro forma financial and operating data are not necessarily
indicative of the future results of operations of Equistar.
The Occidental contributed business was added to Equistar on May 15, 1998.
The actual amounts for the year ended December 31, 1998 include the Occidental
contributed business amounts from May 15, 1998 to December 31, 1998. The
unaudited pro forma financial and operating data present the results of
Equistar as if the Occidental contributed business had been contributed as of
January 1, 1998.
The selected pro forma and historical financial and operating data for
Equistar shown below highlight information found elsewhere in this prospectus.
They are not complete and may not contain all of the information that you
should consider. You should read the entire prospectus carefully, including the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the Equistar financial statements
and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
For the For the For the
three three three
For the one For the year For the year months months months
month ended ended ended ended ended ended
December 31, December 31, December 31, March 31, March 31, March 31,
1997 1998 1998 1999 1998 1999
------------ ------------ ------------ --------- --------- -----------
(pro forma) (pro forma)
<S> <C> <C> <C> <C> <C> <C>
Income statement data
(millions of dollars):
Sales and other
operating revenues..... $365 $4,363 $4,869 $1,104 $1,021 $1,104
Cost of sales........... 287 3,773 4,235 980 798 980
Selling, general and
administrative
expenses............... 21 273 279 75 70 75
Restructuring charges... 42 35 35 3 6 3
---- ------ ------ ------ ------ ------
Operating income........ 15 282 320 46 147 46
Loss from equity
investment............. -- -- 2 -- -- --
Interest expense, net... 8 139 173 39 26 47
Other income............ -- -- 5 -- -- --
---- ------ ------ ------ ------ ------
Income before income
taxes.................. 7 143 150 $ 7 $ 121 $ (1)
Provisions for income
taxes.................. -- -- -- -- -- --
---- ------ ------ ------ ------ ------
Net income.............. $ 7 $ 143 $ 150 $ 7 $ 121 $ (1)
==== ====== ====== ====== ====== ======
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
For the For the For the
three three three
For the one For the year For the year months months months
month ended ended ended ended ended ended
December 31, December 31, December 31, March 31, March 31, March 31,
1997 1998 1998 1999 1998 1999
------------ ------------ ------------ --------- --------- ---------
(pro
(pro forma) forma)
<S> <C> <C> <C> <C> <C> <C>
Other operating data
(millions of dollars):
EBITDA.................. $ 34 $ 550 N/A $ 119 $ 205 N/A
Cash flows from
operating activities... 102 846 N/A 21 209 N/A
Cash flows from
investing activities... (12) (212) N/A (54) (21) N/A
Cash flows from
financing activities... (49) (609) N/A 85 (223) N/A
Ratio of earnings to
fixed charges.......... 1.5x 1.7x 1.7x 1.1x 4.0x 1.0x
Depreciation and
amortization........... 19 268 $ 305 73 58 $ 73
Capital expenditures.... 12 200 210 46 21 46
Balance sheet data (at end of period)
(millions of dollars):
Working capital, net.... $ 856 $ 492 N/A 587 789 N/A
Total assets............ 4,600 6,668 N/A 6,702 4,552 N/A
Total debt.............. 1,548 2,220 N/A 2,361 1,745 N/A
Total partners'
capital................ 2,718 3,885 N/A 3,842 2,428 N/A
Sales volumes
(millions):
Selected petrochemical
products:
Ethylene, propylene
and other olefins
(pounds)............. 737 16,716 18,291 4,527 3,392 4,527
Aromatics (gallons)... 17 271 281 85 47 85
Polymer products
(pounds)............... 167 6,488 6,488 1,652 1,552 1,652
</TABLE>
17
<PAGE>
Selected Historical Financial and Operating Data
of the Lyondell Contributed Business
The table below shows selected historical financial and operating data for
the Lyondell contributed business. The selected historical income statement and
balance sheet data
. as of November 30, 1997 and for the eleven-month period then ended
. as of December 31, 1996 and for the two years in the period then ended
have been derived from financial statements of the Lyondell contributed
business, which have been audited by PricewaterhouseCoopers LLP, independent
accountants. PricewaterhouseCoopers' report is included elsewhere in this
prospectus.
The selected historical income statement data for the year ended December
31, 1994 and the balance sheet data as of December 31, 1995 have been derived
from financial statements of the Lyondell contributed business, which have been
audited by PricewaterhouseCoopers. The selected historical balance sheet data
as of December 31, 1994 have been derived from the historical financial records
of Lyondell. The operating data have been derived from the historical operating
records of Lyondell. Neither the historical financial data nor the historical
operating data are necessarily indicative of the future results of operations
of Equistar.
The selected historical financial and operating data shown below are not
complete. You should read the entire prospectus carefully, including the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the Lyondell contributed business
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
For the
For the year ended eleven months
December 31, ended
---------------------- November 30,
1994 1995 1996 1997
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Income statement data (millions of
dollars):
Sales and other operating revenues...... $1,806 $2,509 $2,515 $2,715
Cost of sales........................... 1,449 1,869 2,135 2,153
Selling, general and administrative
expenses............................... 69 125 157 166
------ ------ ------ ------
Operating income........................ 288 515 223 396
Interest expense, net................... 73 76 65 50
Other income............................ -- -- -- --
------ ------ ------ ------
Income before income taxes.............. 215 439 158 346
Provision for income taxes.............. 78 162 56 127
------ ------ ------ ------
Net income.............................. $ 137 $ 277 $ 102 $ 219
====== ====== ====== ======
Other operating data (millions of
dollars):
EBITDA.................................. $ 323 $ 561 $ 290 $ 464
Cash flows from operating activities.... 11 318 79 156
Cash flows from investing activities.... (40) (476) (80) (49)
Cash flows from financing activities.... 29 158 1 (106)
Ratio of earnings to fixed charges...... 3.6x 5.9x 3.0x 6.4x
Depreciation and amortization........... 35 46 67 68
Capital expenditures.................... 40 476 80 49
Balance sheet data (at end of period)
(millions of dollars):
Working capital, net.................... $ 218 $ 69 $ 269 $ 352
Total assets............................ 834 1,306 1,494 1,532
Total debt.............................. 717 745 745 745
Total invested capital.................. (87) 320 423 536
Sales volumes (millions):
Selected petrochemical products:
Ethylene, propylene and other olefins
(pounds)............................... 7,146 7,688 7,973 8,084
Aromatics (gallons)..................... 178 175 188 176
Polymer products (pounds)............... 616 1,598 2,136 1,985
</TABLE>
18
<PAGE>
Selected Historical Financial and Operating Data
of the Millennium Contributed Business
The table below shows selected historical financial and operating data for
the Millennium contributed business. The selected historical income statement
and balance sheet data
. as of November 30, 1997 and for the eleven-month period then ended
. as of December 31, 1996 and for the two years in the period then ended
have been derived from the financial statements of the Millennium contributed
business, which have been audited by PricewaterhouseCoopers LLP, independent
accountants. PricewaterhouseCoopers' report is included elsewhere in this
prospectus.
The selected historical income statement data for the year ended December
31, 1994 and the balance sheet data as of December 31, 1995 have been derived
from financial statements of the Millennium contributed business, which have
been audited by PricewaterhouseCoopers. The selected historical balance sheet
data as of December 31, 1994 have been derived from the historical financial
records of Millennium Petrochemicals. The operating data have been derived from
the historical operating records of Millennium Petrochemicals. Neither the
historical financial data nor the historical operating data are necessarily
indicative of the future results of operations of Equistar.
The selected historical financial and operating data shown below are not
complete. You should read the entire prospectus carefully, including the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the Millennium contributed business
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
For the
For the year ended eleven months
December 31, ended
---------------------- November 30,
1994 1995 1996 1997
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Income statement data (millions of
dollars):
Sales................................... $1,645 $1,932 $1,860 $1,786
Cost of sales........................... 1,331 1,324 1,503 1,341
Selling, development and administrative
expenses............................... 104 113 109 136
------ ------ ------ ------
Operating income........................ 210 495 248 309
Interest expense, net................... 80 80 80 66
Other income............................ -- -- -- --
------ ------ ------ ------
Income before income taxes.............. 130 415 168 243
Provision for income taxes.............. 62 172 76 96
------ ------ ------ ------
Net income.............................. $ 68 $ 243 $ 92 $ 147
====== ====== ====== ======
Other operating data (millions of
dollars):
EBITDA.................................. $ 339 $ 627 $ 375 $ 434
Cash flows from operating activities.... 126 262 80 304
Cash flows from investing activities.... (38) (75) (127) (41)
Cash flows from financing activities.... (88) (187) 47 (263)
Ratio of earnings to fixed charges...... 2.4x 5.4x 2.8x 4.1x
Depreciation and amortization........... 129 132 127 125
Capital expenditures.................... 38 75 127 41
Balance sheet data (at end of period)
(millions of dollars):
Working capital, net.................... $ 247 $ 331 $ 363 $ 265
Total assets............................ 2,978 2,977 3,121 2,804
Total debt.............................. 1,016 1,013 1,009 4
Total invested capital.................. 1,633 1,692 1,835 2,724
Sales volumes (millions):
Selected petrochemical products:
Ethylene, propylene and other olefins
(pounds)............................. 955 735 950 608
Aromatics (gallons)................... -- -- -- --
Polymer products (pounds)............... 4,123 3,926 3,884 3,980
</TABLE>
19
<PAGE>
For purposes of
. Selected Pro Forma and Historical Financial and Operating Data of
Equistar
. Selected Historical Financial and Operating Data of the Lyondell
Contributed Business
. Selected Historical Financial and Operating Data of the Millennium
Contributed Business
we utilized the definitions and assumptions explained below.
Calculation of EBITDA
EBITDA is calculated as operating income plus depreciation and amortization
and other income and should not be construed as a substitute for operating
income or a better indicator of liquidity than cash flows from operating
activities, which are determined according to generally accepted accounting
principles. Management included EBITDA to provide additional information with
respect to the ability of Equistar to meet its
. future debt service
. capital expenditures
. working capital requirements
EBIDTA is not necessarily a measure of Equistar's ability to fund its cash
needs. Management believes that investors may find the calculation of EBITDA a
useful tool for measuring our ability to service debt.
Calculation of Ratio of Earnings to Fixed Charges
For purposes of calculating the ratio of earnings to fixed charges,
earnings represent net income plus fixed charges, excluding capitalized
interest. Fixed charges include
. interest expense
plus
. capitalized interest and that portion of non-capitalized rental expense
deemed to be the equivalent of interest
Definition of Total Debt
Total debt is defined as long-term debt, current maturities of long-term
debt and capital lease obligations.
20
<PAGE>
Equistar Unaudited Pro Forma Income Statement Data
For the Year Ended December 31, 1998
The unaudited pro forma financial data shown below present the financial
results of Equistar for 1998. Occidental contributed assets and liabilities
with a fair value of $2.1 billion to Equistar in exchange for a 29.5% interest
in Equistar in May 1998. However, the financial results of Equistar are
presented below as if both
. the Occidental contributed business had been contributed as of January 1,
1998
. the change in interest expense resulting from Equistar's use of proceeds
from the issuance of the outstanding notes had occurred as of January 1,
1998
The unaudited pro forma financial data do not necessarily reflect the results
of operations of Equistar that would have resulted had these transactions
actually been consummated as of the dates indicated. The data shown below are
not necessarily indicative of the future results of operations of Equistar.
<TABLE>
<CAPTION>
Occidental
Contributed Pro Forma Pro Forma
Equistar Business(a) Adjustments Combined
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Income statement data (millions of
dollars):
Sales and other operating revenues.. $4,363 $506 $4,869
Operating costs and expenses:
Cost of goods sold................ 3,773 457 $ 5 (b) 4,235
Selling, general and
administrative expenses.......... 273 6 279
Restructuring charges............. 35 -- 35
------ ---- ---- ------
Operating income.................... 282 43 (5) 320
Loss from equity investment......... -- 2 2
Interest expense, net............... 139 39 $(38)(c) 173
$ 16 (d)
$ 17 (e)
Other income........................ -- 5 5
------ ---- ---- ------
Net income.......................... $ 143 $ 7(f) $ -- $ 150
====== ==== ==== ======
</TABLE>
- --------
(a) To reflect the results of the Occidental contributed business from January
1, 1998 to May 14, 1998, before its addition to Equistar.
(b) To reflect the additional depreciation expense and goodwill amortization
for the period from January 1, 1998 to May 14, 1998, related to the
increase in the fair value in excess of the historical book basis of the
Occidental contributed business over an average useful life of 25 years.
Equistar recorded $43 million of goodwill in connection with the purchase
of the Occidental contributed business.
(c) To reflect the elimination of $38 million of interest expense related to
debt not contributed to Equistar by Occidental.
(d) To reflect the interest expense of $16 million for the period from January
1, 1998 to May 14, 1998, related to the additional $700 million of debt
that was incurred upon consummation of the Occidental contribution using a
weighted-average interest rate of 6%. The effect of a 1/8% change in
interest rate would result in an increase or decrease of interest expense
of approximately $328,000 for the period January 1, 1998 through May 14,
1998.
21
<PAGE>
(e) To reflect an interest expense increase related to the offering of the
outstanding notes offset by a decrease resulting from the use of proceeds,
which amounts to $17 million, net.
<TABLE>
<CAPTION>
Principal Interest Annual
Amount Rate Interest
--------- -------- --------
<S> <C> <C> <C>
In millions (except interest rates)
Old debt:
Capital lease.................................... $205 6.34% $13
Bank debt........................................ 545 6.00% 33
10% Notes due 1999............................... 150 10.00% 15
---- ----- ---
Subtotal..................................... 900 6.74% 61
New debt:
8 1/2% notes due 2004............................ 300 8.50% 26
8 3/4% notes due 2009............................ 600 8.75% 52
---- ----- ---
Subtotal..................................... 900 8.67% 78
---
Interest increase effect of replacing debt at 1/1/98................ $17
===
</TABLE>
(f) Amount represents pretax income of the Occidental contributed business.
22
<PAGE>
Equistar Unaudited Pro Forma Income Statement Data
For the Three Months Ended March 31, 1999
The unaudited pro forma financial data shown below present the financial
results of Equistar as if the change in interest expense resulting from
Equistar's use of proceeds from the issuance of the outstanding notes had
occurred as of January 1, 1999.
The unaudited pro forma financial data do not necessarily reflect the results
of operations of Equistar that would have resulted had these transactions
actually been consummated as of the dates indicated. The data shown below are
not necessarily indicative of the future results of operations of Equistar.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Equistar Adjustments Combined
-------- ----------- ---------
<S> <C> <C> <C>
Income statement data (millions of dollars):
Sales and other operating revenues............... $1,104 $1,104
Operating costs and expenses:
Cost of goods sold............................. 980 980
Selling, general and administrative expenses... 75 75
Restructuring charges.......................... 3 3
------ ------
Operating income................................. 46 46
Loss from equity investment...................... -- --
Interest expense, net............................ 39 8(a) 47
Other income..................................... -- --
------ --- ------
Net income (loss)................................ $ 7 $ 8 $ (1)
====== === ======
</TABLE>
- --------
(a) To reflect an interest expense increase related to the offering of the
outstanding notes offset by a decrease resulting from the use of proceeds,
which amounts to $8 million, net.
23
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following is a description of Equistar's business affairs. You should
read it in conjunction with the historical financial statements and the notes
to those statements of Equistar and the Lyondell, Millennium and Occidental
contributed businesses, which are included in this prospectus.
Selected Pricing Information for Ethylene and Crude Oil Industry
The following graphs present industry pricing information for the periods
discussed below, based on published industry sources.
[Chart 1--Month-end average delivered-contract, monthly low price agreement
prices for Ethylene as reported by CMAI Monomers Market Report from January
1996 through December 1998. Chart indicates 1996 prices increased steadily,
with an annual average of the month-end prices of 23.33 cents per pound. 1997
prices were relatively flat, although slightly decreasing, with an annual
average of the month-end prices of 27.42 cents per pound. 1998 prices declined
steadily with an annual average of the month-end prices of 21.17 cents per
pound. Selected month-end average prices are as follows: January 1996--19.75
cents per pound, December 1996--26.25 cents per pound, December 1997--26.25
cents per pound, December 1998--19.00 cents per pound.]
[Chart 2--Month-end average spot price WTS low prices for Crude Oil as
reported by Platts Oilgram Price Report from January 1996 through December
1998. Chart indicates volatile, but increasing prices in 1996 with the chart's
peak occurring at $24.32 per barrel in December 1996. Annual average month-end
prices were $21.35 per barrel in 1996. Prices decreased in 1997 with an annual
average of the month-end prices of $19.35 per barrel. Prices declined steadily
in 1998 with a low point of $10.02 per barrel in December 1998 and an annual
average of the month-end prices of $12.94 per barrel. Selected month-end
average prices are as follows: January 1996--$18.39 per barrel, December 1996--
$24.32 per barrel, December 1997--$17.13 per barrel, December 1998--$10.02 per
barrel.]
First Quarter 1999 Compared to Fourth Quarter 1998
Equistar reported net income of $7 million in first quarter 1999 versus a
net loss of $51 million in fourth quarter 1998. The increase was primarily
attributable to higher ethylene product margins, reflecting a tighter
supply/demand balance due to scheduled and unscheduled production outages
throughout the industry. The higher product margins increased net income by
approximately $50 million. Polymer margins decreased from fourth quarter 1998
to first quarter 1999 as raw material costs for polymers increased more than
polymer sales prices. This decreased net income by $9 million. The decrease was
partly offset by an increase in net income of $8 million due to increased
polymer sales volumes. The remaining $9 million difference for first quarter
1999 as compared with fourth quarter 1998 was due to restructuring charges in
fourth quarter 1998.
First Quarter 1999 Compared to First Quarter 1998
Equistar's pretax income of $7 million in first quarter 1999 was lower than
pretax income of $121 million in first quarter 1998. The decrease was
attributable to substantially lower ethylene and polymers margins in first
quarter 1999 versus first quarter 1998, which was a result of excess industry
capacity that began in fourth quarter 1997 and continued throughout 1998. The
lower margins reduced net income by $175 million. The decrease in pretax income
was also due to the impact of higher ethylene production costs associated with
Equistar's LaPorte, Texas plant maintenance turnaround and operating problems
at two Equistar plants in first quarter 1999, which collectively decreased net
income by $20 million. These decreases were partially offset by a $97 million
increase in net income due to increased sales volumes primarily as a result of
the addition of the Occidental contributed business in May 1998.
24
<PAGE>
The following table reflects selected financial and operating data for
Equistar for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
For the three
months ended
March 31,
--------------
1999 1998
------ ------
(In millions)
<S> <C> <C>
Selected petrochemicals products:
Olefins (pounds).............................................. 4,527 3,392
Aromatics (gallons)........................................... 85 47
Polymers products (pounds)...................................... 1,652 1,552
Sales and Other Operating Revenues:
Petrochemicals segment.......................................... $ 907 $ 787
Polymers segment................................................ 479 558
Intersegment eliminations....................................... (282) (324)
------ ------
Total....................................................... $1,104 $1,021
====== ======
Cost of Sales:
Petrochemicals segment.......................................... $ 813 $ 656
Polymers segment................................................ 449 466
Intersegment eliminations....................................... (282) (324)
------ ------
Total....................................................... $ 980 $ 798
====== ======
Selling, General and Administrative Expenses:
Petrochemicals segment.......................................... $ 3 $ 2
Polymers segment................................................ 19 20
Unallocated..................................................... 53 48
------ ------
Total....................................................... $ 75 $ 70
====== ======
Operating Income:
Petrochemicals segment.......................................... $ 91 $ 129
Polymers segment................................................ 11 72
Unallocated..................................................... (56) (54)
------ ------
Total....................................................... $ 46 $ 147
====== ======
</TABLE>
Petrochemicals Segment
Revenues
Sales and other operating revenues increased for first quarter 1999 compared
to first quarter 1998, primarily due to increased sales volumes as a result of
the addition of the Occidental contributed business in May 1998. The increased
sales volumes resulted in an increase in sales revenues of approximately $227
million. The increase was partially offset by lower industry sales prices for
ethylene, propylene and co-products, which reduced revenues by $107 million.
The decrease in industry sales prices is primarily attributable to excess
industry capacity and the decline in raw material costs that occurred in 1998.
The sales price decreases began in fourth quarter 1997 and continued their
downward trend through most of 1998. U.S. market sales prices increased during
first quarter 1999, but first quarter 1999 prices were still lower compared to
first quarter 1998.
Cost of Sales
Cost of sales increased from first quarter 1998 to first quarter 1999,
primarily due to the addition of the Occidental contributed business in May
1998. The increased sales volumes resulted in an increase in cost of
25
<PAGE>
sales of approximately $155 million. The increase was also due to the impact of
higher ethylene production costs associated with Equistar's LaPorte, Texas
plant maintenance turnaround and other operating problems during first quarter
1999, which collectively increased cost of sales by $20 million. These
increases were partially offset by lower raw material costs in first quarter
1999 compared to first quarter 1998, which reduced cost of sales by $18
million.
Operating Income
Operating income decreased in first quarter 1999 compared to first quarter
1998, primarily due to lower product margins as industry sales prices, declined
more than the cost of raw materials. This reduced operating income by
approximately $114 million. The decrease was also due to the impact of higher
ethylene production costs relating to Equistar's LaPorte, Texas plant
maintenance turnaround and other operating problems at two Equistar plants,
which collectively decreased operating income by $20 million in the 1999
period. These decreases were partially offset by increased sales volumes as a
result of the Occidental contributed business in May 1998, which increased
operating income by approximately $96 million. Gross margin (sales less cost of
sales) as a percentage of sales decreased from 17% for the 1998 period to 10%
for the 1999 period due to lower product margins.
Polymers Segment
Revenues
Revenues decreased in first quarter 1999 compared to first quarter 1998 as a
result of decreases in industry sales prices, which reduced revenues by
approximately $115 million. This decrease was partially offset by an increase
in sales volumes, which increased revenues by approximately $36 million. The
sales price decreases reflect excess industry supply, as industry capacity
additions exceeded demand growth, and downward pressure from lower raw material
costs, which declined throughout 1998. The decreases in sales prices started
during fourth quarter 1997 and continued in a downward trend through 1998.
Industry sales prices increased during first quarter 1999; however, first
quarter 1999 prices were significantly lower than first quarter 1998 prices.
The increase in sales volumes reflects additional polyethylene capacity.
Cost of Sales
Cost of sales decreased from first quarter 1998 to first quarter 1999. The
decrease was primarily attributable to a decrease in polymer raw material
costs, which decreased cost of sales by approximately $36 million. The primary
raw material for polymers products is ethylene, and, as noted above, the prices
for ethylene decreased throughout 1998. Ethylene prices increased slightly
during first quarter 1999 but were still lower than first quarter 1998 prices.
The decrease in raw material costs was partially offset by an increase in sales
volumes, which increased cost of sales by $19 million.
Operating income
Operating income for first quarter 1999 decreased compared to first quarter
1998 primarily as a result of lower product margins due to decreases in
polymers sales prices, which more than offset decreases in polymers raw
material prices. The lower product margins caused gross margin as a percentage
of sales to decrease from 16% in the 1998 period to 6% in the 1999 period.
Interest expense
Interest expense increased from $32 million in first quarter 1998 to $43
million in first quarter 1999, primarily reflecting higher levels of long-term
debt due to the addition of the Occidental contributed business in May 1998.
26
<PAGE>
Financial Condition
Operating Activities
Cash provided by operating activities totaled $21 million for first quarter
1999 compared to cash provided by operating activities of $209 million for
first quarter 1998. Cash provided by operating activities in first quarter 1999
was primarily due to income before depreciation, offset by an increase in
working capital. Cash provided by operating activities in first quarter 1998
primarily related to reimbursements from Equistar's owners for payment of their
retained accounts payable balances.
Investing Activities
Equistar's capital expenditures were $46 million during first quarter 1999.
The most significant capital expenditures related to the 480-million-pound HDPE
resin expansion project at Equistar's Matagorda, Texas facility, which has a
targeted start-up of third quarter 1999.
The capital program for 1999 has budgeted for $195 million in capital
expenditures, of which $106 million relates to projects that were started
before 1999. Management plans to fund capital expenditures in 1999 from cash
flow from operations.
Financing Activities
Net cash flows from financing activities was $85 million during first
quarter 1999. During first quarter 1999, Equistar completed an offering of
outstanding notes in the principal amount of $900 million. The proceeds were
used to refinance $750 million of existing indebtedness of Equistar during
first quarter 1999, with an additional $150 million repaid on June 1, 1999.
Additionally, Equistar made distributions to its owners of $50 million during
first quarter 1999.
Liquidity
As noted above, Equistar completed an offering of senior unsecured notes in
the principal amount of $900 million in February 1999. The notes consist of
$300 million of 8 1/2% notes due February 2004 and $600 million of 8 3/4% notes
due February 2009. The proceeds were used to
. terminate the outstanding balance of $152 million under the $500 million
credit facility
. repay the $205 million of capital lease obligations and repay $385
million of indebtedness outstanding under the $1.25 billion revolving
credit facility
during first quarter 1999. Equistar repaid and retired $150 million aggregate
principal amount of 10.00% notes upon their June 1, 1999 maturity.
Subsequent Events
In April 1999, Equistar shutdown one of its two Channelview, Texas olefins
units to make mechanical repairs to a compressor. The unit which was shutdown
has an annual ethylene capacity of 1.9 billion pounds. This event did not have
a material adverse impact on our results of operations, taking into account
business interruption insurance. The unit restarted operations in May 1999.
Equistar announced the completion of the sale of its concentrates and
compounds business at the Crockett, Texas and Heath, Ohio facilities to Ampacet
Corporation on April 30, 1999 for a purchase price of $68 million. Equistar
reported a net gain on the sale of $42 million.
27
<PAGE>
For the Year Ended December 31, 1998 Compared to the Year Ended December 31,
1997
The following discussion and analysis compares the historical results of
Equistar for the year ended December 31, 1998 with the combined historical
results of the Lyondell and Millennium contributed businesses for the eleven
months ended November 30, 1997 and Equistar for the one month ended December
31, 1997, which we refer to as the "combined businesses." These combined
results for the year ended December 31, 1997 are not intended to, and do not
represent, pro forma results of Equistar. In addition, they may not be
indicative of results that will be obtained in the future.
Selected financial and operating information for Equistar for the year ended
December 31, 1998, for the Lyondell contributed business and the Millennium
contributed business for the eleven months ended November 30, 1997, for
Equistar for the one month ended December 31, 1997 and for the combined
businesses for the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Lyondell Millennium
contributed contributed Combined
Equistar for business for business for Equistar for businesses
the year the eleven the eleven the one for the year
ended months ended months ended month ended ended
December 31, November 30, November 30, December 31, December 31,
1998 1997 1997 1997 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Income statement data
(millions of dollars):
Sales and other
operating revenues..... $4,363 $2,715 $1,786 $365 $4,866
Cost of sales........... 3,773 2,153 1,341 287 3,781
Selling, general and
administrative
expenses............... 273 166 136 21 323
Restructuring charges... 35 -- -- 42 42
------ ------ ------ ---- ------
Operating income....... 282 396 309 15 720
Interest expense, net... 139 50 66 8 124
------ ------ ------ ---- ------
Income before income
taxes................. 143 346 243 7 596
Provision for income
taxes.................. -- 127 96 -- 223
------ ------ ------ ---- ------
Net income............. $ 143 $ 219 $ 147 $ 7 $ 373
====== ====== ====== ==== ======
Sales volumes
(millions):
Selected petrochemical
products:
Ethylene, propylene and
other olefins
(pounds).............. 16,716 8,084 608 737 9,429
Aromatics (gallons).... 271 176 -- 17 193
Polymers products
(pounds)............... 6,488 1,985 3,980 167 6,132
</TABLE>
The income statement data and sales volumes of the combined businesses in
the table above do not necessarily reflect the results of operations of
Equistar that would have resulted had the businesses been combined as of
January 1, 1997 and are not necessarily indicative of future results of
operations of Equistar.
Overview
Income before income taxes was $143 million for the year ended December 31,
1998 compared to $596 million for 1997. The decline in income before income
taxes from 1997 to 1998 was primarily due to lower prices and margins in both
the petrochemicals and polymers segments, which reduced income before taxes by
approximately $776 million. The decline in prices and margins began in fourth
quarter 1997 and continued throughout 1998. The decline was partially offset by
the lower cost of raw materials, which increased income before taxes by $207
million, and increased sales volumes primarily as a result of the addition of
the Occidental contributed business in May 1998, which increased income before
income taxes by $148 million. Occidental contributed assets and liabilities
with a fair value of $2.1 billion to Equistar in exchange for a 29.5% interest
in Equistar. The addition of the Occidental contributed business increased
Equistar's income before taxes for 1998 by approximately $10 million.
28
<PAGE>
The following tables for the petrochemicals and polymers segments show
selected income statement and operating data. Revenues include intersegment
sales. Cost of sales include intersegment purchases. Total intersegment sales
were $1,158 million for 1998 and $1,512 million for 1997. Total intersegment
purchases were $1,158 million for 1998 and $1,512 million for 1997.
Additionally, Equistar recorded sales to related parties of $545 million during
1998 and $559 million during 1997. All sales are reflected at market price, and
there are no material differences in gross margins between sales to related
parties and sales to third parties.
Petrochemicals Segment
<TABLE>
<CAPTION>
Lyondell Millennium
contributed contributed Combined
Equistar for business for business for Equistar for businesses
the year the eleven the eleven the one for the year
ended months ended months ended month ended ended
December 31, November 30, November 30, December 31, December 31,
1998 1997 1997 1997 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Income statement data
(millions of dollars):
Sales revenues.......... $3,463 $2,369 $1,213 $284 $3,866
Cost of sales........... 3,130 1,965 950 236 3,151
Selling expenses........ 14 26 4 1 31
------ ------ ------ ---- ------
Operating income........ $ 319 $ 378 $ 259 $ 47 $ 684
====== ====== ====== ==== ======
Sales volumes
(millions):
Selected petrochemical
products:
Ethylene, propylene and
other olefins
(pounds).............. 16,716 8,084 608 737 9,429
Aromatics (gallons).... 271 176 -- 17 193
</TABLE>
The income statement data and sales volumes of the combined businesses in
the table above do not necessarily reflect the results of operations of
Equistar that would have resulted had the businesses been combined as of
January 1997 and are not necessarily indicative of future results of operations
of Equistar.
Revenues
Sales revenues for the petrochemicals segment decreased from $3,866 million
for 1997 to $3,463 million for 1998. The decrease of $403 million was due to
declines in industry sales prices. Sales prices are primarily driven by each of
. the demand for products as a result of economic conditions in end-use
markets such as the auto industry, housing construction and consumer
durable and nondurable goods
. the operating rate of the installed capacity to produce olefins products
. the underlying cost of raw materials
For olefins products, the decrease in sales prices was primarily
attributable to increased industry capacity and downward pressure on sales
prices as a result of the lower cost of raw materials. The decline in sales
prices reduced sales revenue by $1,076 million. This decline was partially
offset by an increase in sales revenue of $673 million due to increased sales
volumes primarily as a result of the addition of the Occidental contributed
business in May 1998.
Cost of Sales
Cost of sales decreased from $3,151 million in 1997 to $3,130 million in
1998. The decrease was primarily due to declines in the cost of raw materials,
which were partially offset by slightly higher fixed costs and the addition of
the Occidental contributed business in May 1998.
Equistar's olefins raw materials tend to follow the cost trends of crude oil
and natural gas. Crude oil prices began dropping in 1997 and continued to fall
throughout 1998, which resulted in lower raw material costs for
29
<PAGE>
the petrochemicals segment. Natural gas prices also dropped in early 1998 and
remained at that level throughout 1998.
Selling Expenses
Selling expenses decreased from $31 million in 1997 to $14 million in 1998.
The decrease was primarily due to lower personnel costs as a result of the
consolidation of operations.
Operating Income
Operating income decreased from $684 million in 1997 to $319 million in
1998, while gross margin as a percentage of sales decreased from 18% in 1997 to
10% in 1998. The decrease in operating income and gross margin as a percentage
of sales primarily reflected lower product margins as a result of declines in
sales prices and slightly higher fixed costs. The lower product margins
decreased operating income by approximately $720 million. This was partially
offset by an increase in operating income of $207 million due to lower
feedstock costs and an increase of $148 million due to increased sales volumes
primarily as a result of the addition of the Occidental contributed business in
May 1998.
Polymers Segment
<TABLE>
<CAPTION>
Lyondell Millennium
contributed contributed Combined
Equistar for business for business for Equistar for businesses
the year the eleven the eleven the one for the year
ended months ended months ended month ended ended
December 31, November 30, November 30, December 31, December 31,
1998 1997 1997 1997 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Income statement data
(millions of dollars):
Sales revenues.......... $2,058 $ 770 $1,557 $186 $2,513
Cost of sales........... 1,799 612 1,375 156 2,143
Selling expenses........ 82 76 53 8 137
------ ----- ------ ---- ------
Operating income ....... $ 177 $ 82 $ 129 $ 22 $ 233
====== ===== ====== ==== ======
Sales volumes
(millions):
Polymer products
(pounds)............... 6,488 1,985 3,980 167 6,132
</TABLE>
The income statement data and sales volumes of the combined businesses in
the table above do not necessarily reflect the results of operations of
Equistar that would have resulted had the businesses been combined as of
January 1997 and are not necessarily indicative of future results of operations
of Equistar.
Revenues
Sales revenues for the polymers segment decreased from $2,513 million for
1997 to $2,058 million for 1998. The decrease of $455 million is a result of
decreases in industry sales prices. Sales prices are primarily driven by the
following three factors
. the demand for products as a result of economic conditions in end-use
markets, such as the auto industry, housing construction and consumer
durable and nondurable goods
. the operating rate of the installed capacity to produce polymer products
. the underlying cost of raw materials
For polymer products, the sales price decreases were a result of excess
industry supply and lower raw material costs. The excess industry supply and
related sales price decreases began in fourth quarter 1997
30
<PAGE>
and continued throughout 1998. The sales price decreases reduced sales revenues
by approximately $600 million. This was partially offset by an increase in
sales volumes, which increased sales revenues by $145 million.
Cost of Sales
Cost of sales was $1,799 million for 1998 as compared to $2,143 million for
1997. The primary raw materials for the polymers segment are olefins, primarily
ethylene and propylene. During 1998, the industry sales price of ethylene and
propylene decreased steadily, which resulted in lower raw material costs for
the polymers segment. This decrease was partially offset by an increase in
sales volumes.
Selling Expenses
Selling expenses were $82 million for 1998 as compared to $137 million for
1997. The decrease of $55 million was primarily due to lower personnel costs as
a result of the consolidation of operations.
Operating Income
Operating income decreased from $233 million in 1997 to $177 million in
1998. The decrease of $56 million is a result of lower product margins in 1998.
Polymer sales prices decreased throughout 1998 but were partially offset by
lower raw material costs, resulting in lower margins. The lower product margins
caused gross margin as a percentage of sales to decrease from 15% in 1997 to
13% in 1998.
Restructuring Charges
Equistar incurred restructuring charges related to the initial merger and
integration of the businesses contributed by Lyondell and Millennium
Petrochemicals upon the formation of Equistar. Equistar initially recorded $42
million of these costs in December 1997. These charges included severance and
other employee-related termination costs related to a workforce reduction of
approximately $21 million. The workforce reduction included approximately 430
employees, primarily in duplicate corporate overhead functions. These costs
were included in other accrued liabilities at December 31, 1997 and were
substantially paid in 1998. Additionally, these restructuring charges included
employee relocation costs of $6 million, transaction closing costs of $8
million and various other charges of $7 million, all of which were paid as
incurred in 1997. In 1998, Equistar recorded and paid, as incurred, an
additional $26 million in restructuring charges related to the initial merger
and integration of Equistar. These costs included transition personnel costs of
$14 million, costs associated with the consolidation of operations and
facilities of $11 million and other miscellaneous charges of $1 million. The
restructuring actions related to the initial merger and integration were
substantially completed in 1998. The restructuring charges were not allocated
to the business segments.
Equistar also incurred restructuring charges related to the merger and
integration of the Occidental contributed business into Equistar. These charges
included transition services provided by Occidental Chemical of $7 million and
other costs of $2 million. These charges were paid as incurred during 1998. All
restructuring charges were not allocated to the business segments. The
restructuring actions related to the merger and integration of the Occidental
contributed business into Equistar are expected to be completed during the
first half of 1999 and are primarily related to transition services for
corporate overhead functions.
Financial Condition--Equistar
Operating Activities
Cash provided by operating activities totaled $846 million for the year
ended December 31, 1998. This was primarily attributable to income before
depreciation and reimbursements from Equistar's owners for payment of their
retained accounts payable balances. This amount also includes $130 million in
proceeds from
31
<PAGE>
the sale of accounts receivable primarily related to the petrochemicals
segment. See "--Liquidity and Capital Resources--Accounts Receivable."
Investing Activities
Equistar's capital expenditures were $200 million during the year ended
December 31, 1998. The most significant capital expenditures in 1998 were
. $56 million for the 480-million-pound HDPE resin expansion project at the
Matagorda, Texas facility, which has a targeted start-up in third quarter
1999
. $22 million for the scheduled maintenance turnaround and expansion of the
Victoria, Texas facility, which was completed during fourth quarter 1998
and increased the plant's annual HDPE capacity by approximately 125
million pounds
Financing Activities
Cash used in financing activities during the year ended December 31, 1998
consisted primarily of distributions to owners of $1.4 billion, offset by net
borrowings of $467 million and the repayment of the $345 million note
receivable from Lyondell. The distributions to owners consisted of $495 million
in distributions to Millennium and Occidental in the aggregate, as part of the
addition of the Occidental contributed businesses to Equistar, which were
funded by additional borrowings of long-term debt; $345 million in
distributions to Lyondell and Millennium in the aggregate, related to the
repayment of the note receivable from Lyondell; and $327 million in
distributions to Lyondell and Millennium in the aggregate, for payment of their
retained accounts payable balances. The remaining amount was distributions of
available net operating cash. The borrowings were primarily related to the
acquisition of the Occidental contributed business.
Liquidity and Capital Resources
Cash Flows. Equistar's management believes business conditions will be such
that cash balances, cash flow from operations and existing lines of credit will
be adequate to meet near-term and long-term cash requirements for scheduled
debt repayments and to fund ongoing operations. Equistar has a $1.25 billion
revolving credit facility that extends until November 2002, under which $750
million had been borrowed at March 31, 1999. Aggregate maturities of long-term
debt as of June 1, 1999 are
. 1999 - $-0-
. 2000 - $42 million
. 2001 - $90 million
. 2002 - $866 million
. 2003 - $29 million
. thereafter--$1,201 million
In January 1999, Equistar announced that it was going to temporarily shut
down its gas phase HDPE reactor at Port Arthur, Texas, on March 31, 1999. As a
consequence of the shutdown, Equistar's HDPE production has been reduced by 300
million pounds per year and employment at the unit has been reduced from 200 to
approximately 125. Customers for products at the temporarily shut down unit
will be supplied with comparable products produced at Equistar's Matagorda,
Victoria and LaPorte, Texas, facilities. This transaction is not expected to
have a material impact on Equistar's financial condition, results of operations
or liquidity.
Capital Expenditures. Equistar's capital expenditures for the one month
ended December 31, 1997 were $12 million. Capital expenditures for the year
ended December 31, 1998 were $200 million. Pro forma capital expenditures in
1998, including the Occidental contributed business, were $222 million.
32
<PAGE>
Management plans to fund capital expenditures in 1999 from cash flow from
operations. The capital program for 1999 plans for the spending of $195
million, of which $106 million relates to projects which were started before
1999.
As part of ongoing operations, maintenance turnarounds are periodically
conducted on facilities. Although maintenance turnarounds on principal
facilities are usually scheduled well in advance, the timing of maintenance
turnarounds may be accelerated or delayed because of unscheduled maintenance
requirements on facilities and as a result of margins and anticipated margins
on products produced at Equistar's facilities. These business decisions to
accelerate or delay do not affect Equistar safety and environmental standards
which govern operation at the facilities at all times. For instance, when
margins are high for Equistar's products, Equistar will be more likely to delay
scheduled maintenance turnarounds to take advantage of higher margins.
Similarly, when margins for Equistar's products are low, Equistar will be more
likely to accelerate scheduled maintenance turnarounds in an attempt to have
the applicable maintenance complete when we anticipate margins will be
improving. Unscheduled downtime and outages are beyond Equistar's control.
Increases and decreases in supply and demand, which affect Equistar's margins,
are also beyond the control of Equistar, although timing of accelerating or
delaying maintenance turnarounds as a result of the supply and demand factors
can be controlled by Equistar.
Debt. The principal amounts outstanding, current interest rates and maturity
dates of the debt obligations of Equistar as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Principal
Amount
Outstanding
Debt (in millions) Interest Rate Maturity
---- ------------- ------------------------ ------------------
<S> <C> <C> <C>
Bank Credit Facilities:
$1.25 billion
revolving credit
facility(a).......... 750 LIBOR plus 0.5%(b)
Other Debt Obligations:
10.00% notes due
1999(c)(d)........... 150 10.00% June 1999
9.125% notes due
2002(c).............. 100 9.125% March 2002
Medium-term notes(c).. 163 Fixed rates ranging from Various dates from
9.50% to 11.30% February 2000 to
March 2005
8 1/2% notes due 300 8 1/2% August 2004
2004.................
6.50% notes due
2006(c).............. 150 6.50% February 2006
8 3/4% notes due 600 8 3/4% August 2009
2009.................
7.55% debentures due
2026(c).............. 150 7.55% February 2026
------
Other................. (2)
Total................. $2,361
======
</TABLE>
- --------
(a) Equistar had net repayments of $400 million on this facility during first
quarter 1999. Equistar repaid approximately $385 million indebtedness
outstanding under this facility in February 1999 with the proceeds of the
offering of the outstanding notes.
(b) At March 31, 1999, the average interest rate under the $1.25 billion
revolving credit facility was 5.7%.
(c) Lyondell remains liable on these debt obligations assumed by Equistar in
connection with Equistar's formation to those debtholders, although
Equistar and Lyondell have agreed that Equistar will indemnify Lyondell
with respect to the assumed debt. As a result, as between Equistar and
Lyondell, Lyondell is effectively secondarily liable.
(d) Equistar retired $150 million aggregate principal amount of these notes
upon their June 1, 1999 maturity.
33
<PAGE>
Covenants. Under the financial covenant provisions of the $1.25 billion
revolving credit facility, Equistar has agreed to
. maintain a debt to capitalization ratio of no more than 0.60 to 1.0
. maintain an interest coverage ratio which varies from period to period,
as specified in the credit facility, and which is 2.25 to 1.0 for the
period ended June 30, 1999
Equistar is in compliance with each of the covenants under the $1.25 billion
revolving credit facility as of March 31, 1999. The terms of the $1.25 billion
credit facility, including the covenants and events of default, are described
in more detail under "Summary Description of Other Indebtedness of Equistar."
The ability of Equistar to meet its debt service obligations and to comply
with the covenants and financial requirements in the $1.25 billion revolving
credit facility will largely depend on
. the future performance of Equistar
. the availability of additional financing to repay and refinance bank debt
Both of these circumstances will be influenced by prevailing economic and
competitive conditions and by other factors beyond Equistar's control. The
breach of any of the covenants or financial requirements in the $1.25 billion
revolving credit facility could result in a default, which would permit the
lenders to declare the loans immediately payable and to terminate future
lending commitments.
Accounts Receivable. In December 1998, Equistar entered into an accounts
receivable sales facility providing for the ongoing sale of accounts
receivable. The facility provided $130 million in proceeds in 1998. The
accounts receivable sales facility expires in December 1999. Equistar used the
proceeds of this facility to reduce outstanding debt under the $500 million
credit facility. Fees associated with the sale of accounts receivable totaled
$0.4 million in 1998 and are included as general and administrative expenses.
34
<PAGE>
For the Eleven Months Ended November 30, 1997 Compared to the Year Ended
December 31, 1996
The following discussion and analysis compares the historical results of the
Lyondell contributed business and the Millennium contributed business for the
eleven months ended November 30, 1997 with the historical results of those
businesses for the year ended December 31, 1996.
Selected financial and operating information for the Lyondell contributed
business and the Millennium contributed business for the eleven months ended
November 30, 1997 and for the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Lyondell Lyondell Millennium Millennium
contributed contributed contributed contributed
business for business for business for business for
the eleven the year the eleven the year
months ended ended months ended ended
November 30, December 31, November 30, December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income statement data
(millions of dollars):
Sales and other operating
revenues.................. $2,715 $2,515 $1,786 $1,860
Cost of sales.............. 2,153 2,135 1,341 1,503
Selling, general and
administrative expenses... 166 157 136 109
------ ------ ------ ------
Operating income......... 396 223 309 248
Interest expense, net...... 50 65 66 80
------ ------ ------ ------
Income before income
taxes................... 346 158 243 168
Provision for income
taxes..................... 127 56 96 76
------ ------ ------ ------
Net income............... $ 219 $ 102 $ 147 $ 92
====== ====== ====== ======
Sales volumes (millions)
Selected petrochemical
products:
Ethylene, propylene and
other olefins
(pounds)................ 8,084 7,973 608 950
Aromatics (gallons)...... 176 188 -- --
Polymers products
(pounds).................. 1,985 2,136 3,980 3,884
</TABLE>
Lyondell Contributed Business
Revenues
Sales and other operating revenues were $2.7 billion for the eleven months
ended November 30, 1997, compared to $2.5 billion in 1996. On an annualized
basis, sales and operating revenues increased 18%. This increase was due
primarily to increases in industry sales prices for ethylene and co-products.
Sales prices in the 1997 period showed significant increases over 1996 as
strong demand from the polymers markets resulted in a tighter balance of supply
and demand for olefins. Further, cost increases for olefins raw materials over
the course of 1996 were reflected in olefins product prices in the 1997 period.
In addition, olefins sales volumes increased due to strong demand in the
downstream markets as well as to planned and unscheduled industry maintenance
turnarounds. On an annualized basis, polymers revenues increased 7% due to
higher industry sales prices for polyethylene. These were partially offset by
decreased industry sales prices for polypropylene.
Cost of Sales
Cost of sales was $2.1 billion both in the 1997 period and in 1996. On an
annualized basis, cost of sales increased 10% or $214 million due primarily to
higher production levels to meet the demand for olefins, which increased cost
of sales by $518 million, and to increased polymers raw material costs caused
by tight supply and demand in the olefins markets, which increased cost of
sales by $59 million. These increases were slightly offset by lower raw
material costs for olefins, generally due to lower crude oil prices, which
decreased cost of sales by $363 million.
35
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from $157 million in
1996 to $166 million in the 1997 period. This increase of 15% or $24 million on
an annualized basis was primarily due to
. $15 million for higher employee compensation due to headcount increases
. $3 million for increased computer support costs related to software
implementation
In addition, employee incentive compensation increased approximately $6 million
in 1997.
Operating Income
Operating income increased from $223 million in 1996 to $396 million in the
1997 period. On an annualized basis, the increase of 94% was due to higher
sales margins and sales volumes for olefins. Sales margins improved due to
higher olefins sales prices, resulting from strong demand in the downstream
markets for polyethylene and polypropylene, which also resulted in increased
sales volumes. Sales margins also benefited from lower petrochemical raw
material costs. The higher sales margins increased operating income by
approximately $261 million. These increases were slightly offset by lower sales
prices for polypropylene due to additional industry capacity in 1997, which
decreased operating income by approximately $15 million. There were also higher
polymers raw material costs in 1997 due to tighter supply and demand in the
olefins markets, which decreased operating income by approximately $59 million.
The higher product margins caused gross margin as a percentage of sales to
increase from 15% in 1996 to 21% in 1997.
Interest Expense, Net
Interest expense, net, decreased 15% on an annualized basis from 1996 to the
1997 period, primarily due to lower interest rates in 1997.
Income Taxes
The effective income tax rate during the 1997 period was 37.3% compared to
35.7% for 1996. The effective income tax rate increased in the 1997 period due
to the nondeductibility of executive compensation. State income tax was the
primary difference between the effective tax rate and the 35% federal statutory
rate during both years.
Millennium Contributed Business
Revenues
Sales and other operating revenues were $1,860 million in 1996 compared to
$1,786 million in the 1997 period. On an annualized basis, sales increased 5%.
This increase was attributable to strong demand, both domestically and in the
export markets, coupled with tight supply, resulting in prices rising through
the third quarter. Prices began to slowly weaken in fourth quarter 1997 as
expectations of new industry capacity coming on-stream and normal seasonal
slowdowns reduced demand and put pressure on prices.
Cost of Sales
Cost of sales was $1,503 million in 1996 compared to $1,341 million in the
1997 period. On an annualized basis, cost of sales decreased 3%. This decrease
was due to lower raw material costs, which declined from peak 1996 levels,
offset by higher production levels resulting from strong demand in 1997. Raw
material costs were on average 31% lower than the historical highs in 1996 as
warmer-than-normal winter weather reduced demand for natural gas and natural
gas liquids. These costs continued their decline in late 1997 as winter
temperatures remained above normal and crude oil inventories began building due
to decreased demand from Asian markets.
36
<PAGE>
Operating Income
Operating income increased from $248 million in 1996 to $309 million in the
1997 period. On an annualized basis, the increase of 36% was primarily due to
an increase in average selling prices during the 1997 period coupled with lower
raw material costs. The resulting increase in product margins caused gross
margin as a percentage of sales to increase from 19% in 1996 to 25% in 1997.
Interest Expense, Net
Interest expense decreased from $80 million in 1996 to $66 million in the
1997 period. This annualized decrease of 10% was a result of a decrease in
outstanding debt.
Income Taxes
The effective income tax rate during the 1997 period was 39.5% compared to
45.2% for 1996. Differences between the effective income tax rates arise from
the different levels of income along with the effect of goodwill amortization
and state income tax, which are not deductible for federal tax purposes.
Environmental, Health and Safety Matters
Equistar is subject to stringent environmental, health and safety laws and
regulations addressing air emissions, water discharges, generation, handling
and disposal of waste and other aspects of Equistar's operations. Equistar
devotes considerable efforts to comply with these laws and regulations, and in
so doing, it may incur significant capital expenditures and operating expenses.
Equistar spent $5 million in 1998 on environmental matters. Equistar
anticipates expenditures for environmental matters of $5 million in 1999 and $5
million in 2000.
It is difficult to predict the future development of these laws and
regulations or their impact on Equistar's operations and products. In
particular, the future effect of the Clean Air Act may be significant. However,
future effects of the Clean Air Act are dependent upon the development of
future regulations and interpretations as well as other factors, such as the
development of environmental control technologies. Equistar's MTBE sales may
also be materially adversely affected by pending or future changes in laws or
regulations. 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 watercraft has led to public concern that MTBE
may contaminate drinking water supplies and thereby result in a possible health
risk. The Governor of California has announced an intention to eliminate MTBE
from gasoline sold in California by December 31, 2002. California is the
largest market for MTBE and if such intent were to be effected, sales prices of
MTBE would be adversely impacted. There have been claims that MTBE
. travels more rapidly through soil
. is more soluble in water than most other gasoline components
. is more difficult and more costly to remediate
Heightened public awareness about MTBE has resulted in state and federal
legislative initiatives that have sought either to rescind the oxygenate
requirement for reformulated gasoline sold in California and other states or to
restrict the use of MTBE. There is ongoing review of this issue, and the
ultimate resolution of the appropriateness of using MTBE could result in a
significant reduction in Equistar's MTBE sales.
Equistar is also subject to liabilities and costs under Superfund and other
laws relating to investigation, cleanup or closure of former waste disposal
units or other areas of contamination. Investigation, cleanup and closure
responsibilities include both Equistar's facilities and third-party waste
facilities. Some Equistar facilities are currently undergoing assessment and
remedial actions under the Resource Conservation and Recovery Act. It is
difficult to predict how these liabilities and costs might be affected by
future changes, including more stringent cleanup standards and the discovery of
additional areas of contamination.
37
<PAGE>
Under indemnification arrangements in the asset contribution agreements with
Lyondell, Millennium Petrochemicals Inc., a subsidiary of Millennium, and the
contributing subsidiaries of Occidental, each of Lyondell, Millennium
Petrochemicals and the Occidental subsidiaries agreed to assume, and to
indemnify and defend Equistar against, some types of third-party claims and
liabilities which Equistar may incur relating to the pre-closing operation of
the contributed businesses. This obligation includes liabilities exceeding $7
million per contributed business asserted within the first seven years after
the date of the respective asset contributions.
In its financial statements, Equistar reserves for contingencies that are
probable and reasonably estimable, including those based upon unasserted
claims. Based on current matters described above, Equistar has not established
any reserves for potential environmental issues and does not anticipate any
material adverse effect upon its earnings, operations or competitive position
resulting therefrom. However, the amount or timing of future environmental
liabilities and costs cannot be predicted with certainty, and liabilities and
costs could be material in future quarterly or annual results of Equistar's
operations for that period.
Year 2000
Equistar uses many information technology or "IT" systems as well as non-IT
systems, such as manufacturing support and other systems, that could be
impacted by the "Year 2000 problem." The Year 2000 problem arises from computer
programs that have been written using two digits rather than four to designate
the year. Date-sensitive computer software may recognize a date using "00" as
the year 1900 rather than the year 2000, resulting in system failures or
miscalculations, potentially causing operational disruptions.
Equistar has a Year 2000 Steering Committee, along with Lyondell and
LYONDELL-CITGO Refining, and has appointed representatives to Lyondell's Year
2000 Executive Sponsor Team. The Executive Sponsor Team provides oversight to
each member's steering committee. Equistar's steering committee is in the
process of completing an assessment of the state of readiness of the IT and
non-IT systems. The steering committee's assessments cover both
. manufacturing systems, including laboratory information systems and field
instrumentation
. significant third-party vendor and supplier systems, including employee
compensation and benefit plan maintenance related systems
The steering committee is also beginning to assess the readiness of significant
customers and suppliers, primarily through formal written representations as to
Year 2000 readiness. Suppliers of natural gas liquids and petroleum liquids,
the raw materials used in the production of olefins, as well as utility and
transportation providers, are critical to our business.
In May 1997, before the formation of Equistar, Lyondell commenced the first
major use of new software for business information systems it contributed to
Equistar. The new systems, based on enterprise software from SAP America, Inc.,
replaced older business systems and allowed employees at different locations to
share financial and operating information more effectively. Equistar is in the
process of replacing the business information systems for the operations
contributed by Millennium Petrochemicals and Occidental with the same systems.
In November 1998, Equistar completed a system-wide implementation of SAP
America business information systems for its polymers business and a portion of
its petrochemicals business. Full business information systems conversion will
be completed in the first half of 1999. The new systems and software are Year
2000-compatible, thus addressing the majority of Equistar's Year 2000 business
system requirements.
38
<PAGE>
Equistar's Year 2000 assessment process consists of an
. inventory of Year 2000-sensitive equipment
. assessment of the impact of possible failures
. determination of the required remediation actions and testing
. implementation of the solutions
The inventory, assessment and remediation phases should be completed in
1999. The majority of the testing and final implementation is scheduled to
take place in 1999. The progress of these phases as of March 31, 1999 is
summarized as follows:
[Bar chart appears here disclosing the percentage completion of each of
inventory (99%), assessment (99%), remediation (97%), testing (66%)
and implementation (65%)]
The inventory, assessment and remediation phases are expected to be
completed in second quarter 1999. The testing and implementation phases are
expected to be completed in third quarter 1999. There are currently 200
employees working on the Year 2000 problem on a part time basis. Their time is
equivalent to 60 full-time employees working on the Year 2000 problem.
As of March 31, 1999, Year 2000 spending and estimated spending by Equistar
is summarized as follows:
<TABLE>
<CAPTION>
(Millions of dollars)
<S> <C>
Spending through March 31, 1999...................................... $ 3
Estimated additional spending........................................ 10
---
Total estimated spending(a)........................................ $13
===
Replacement of IT systems............................................ $ 2
Replacement of non-IT systems........................................ --
---
All other costs...................................................... 11
---
Total estimated spending(a)........................................ $13
===
</TABLE>
- --------
(a) Does not include amounts incurred in connection with implementation of the
SAP America-related software, which addresses Year 2000 readiness in
Equistar's business information systems, and internal costs.
39
<PAGE>
As of March 31, 1999, spending to date by phase is as follows:
.Inventory--$455,000
.Assessment--$585,000
.Remediation--$990,000
.Testing and Implementation--$885,000
As of March 31, 1999, estimated additional spending is as follows:
.Inventory--$360,000
.Assessment--$510,000
.Remediation--$7,130,000
.Testing and Implementation--$2,170,000
The total estimated spending of $13 million represents the midpoint of the
estimated range between $11 million and $15 million. These spending estimates
will be refined as phases of the process are completed. Spending is funded by
cash generated from operations.
Management believes that all significant systems controlled by Equistar will
be Year 2000 ready in the last half of 1999. Equistar's operations are
dependent on a continuous supply of key services from raw material suppliers
and utility and transportation providers. While the steering committee is
assessing the readiness of third-party customers and suppliers, there can be no
assurance that third parties with whom we have a significant business
relationship will successfully test, reprogram and replace all of their IT and
non-IT systems on a timely basis. A failure of key raw materials suppliers to
address Year 2000 issues could interfere with their ability to make and cause
delivery of products. This, in turn, could cause disruptions in the chemical
industry, including Equistar's operations, resulting in the idling of capacity.
These potential disruptions could make it necessary to seek alternative sources
of supply, which may be more expensive or difficult to obtain. Approximately
97% of Equistar's raw materials suppliers have indicated that they will be Year
2000 compliant by third quarter 1999. Equistar is developing contingency plans
with the assistance of an outside consultant. The final plans, when
implemented, are intended to avoid material interruption of core business
operations through the year 2000 and beyond, while ensuring safe operations and
optimal financial performance. The contingency planning will involve an
analysis of critical business processes and an identification of the most
likely threats to these processes. Solutions and alternatives will be developed
for these internal or external threats. Equistar expects to complete its
analysis and plan development by mid-year 1999, with implementation to be
completed in the last half of the year.
There is inherent uncertainty in the Year 2000 problem due to the
possibility of unanticipated failures by third-party customers and suppliers.
Accordingly, Equistar is unable, at this time, to assess the extent and
resulting materiality of the impact of possible Year 2000 failures on its
operations, liquidity or financial position. In a worst case scenario,
controlled plant shutdowns using Equistar's standard shutdown procedures might
be necessitated by failure of utility providers or suppliers or by internal
conditions affecting plant operability. Such events could have a material
adverse effect on Equistar's operations, liquidity or financial position. In
the event of a plant shutdown, Equistar would evaluate the need to reroute or
reschedule the production at another Equistar facility or to find alternative
suppliers for its customers. The Year 2000 assessment process is expected to
provide information that will significantly reduce the level of uncertainty
regarding the Year 2000 impact. Management believes that the completion of the
assessment and remediation plan as scheduled will help minimize the possibility
of any significant disruptions of Equistar's operations.
Accounting Standards
In 1998, Equistar adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for the reporting and display of comprehensive
40
<PAGE>
income and its components. SFAS No. 130 requires all items that are required to
be recognized under accounting standards as components of comprehensive income
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. The effect of adoption of SFAS No.
130 in 1998 did not have a material impact on the financial statements of
Equistar.
In 1998, Equistar adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supercedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of
Equistar's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. The adoption of
SFAS No. 131 did not have a material impact on the financial statements of
Equistar.
In 1998, Equistar adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Retirement Benefits." The provisions of SFAS No. 132 revise
employers' disclosures about pension and other postretirement benefit plans.
SFAS No. 132 does not change the measurement or recognition of these plans.
SFAS No. 132 standardizes the disclosure requirements for these plans, to the
extent practicable. The adoption of SFAS No. 132 did not have a material impact
on the financial statements of Equistar.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The statement
is effective for Equistar's fiscal year 2001; however, early adoption is
permitted. SFAS No. 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in fair value of derivatives are
recorded each period in current earnings or in other comprehensive income,
depending upon whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The gains and losses
on the derivative instrument that are reported in other comprehensive income
will be reclassified as earnings in the periods in which earnings are impacted
by the hedged item. The ineffective portion of all hedges will be recognized in
current period earnings. Equistar does not intend to adopt this pronouncement
before 2001. The adoption of this pronouncement is not expected to have a
material impact on the financial statements of Equistar.
Disclosure of Market Risk
Commodity Price Risk
A substantial portion of Equistar's products and raw materials are
commodities whose prices fluctuate as market supply and demand fundamentals
change. Accordingly, product margins and the level of Equistar's profitability
tend to fluctuate with changes in the business cycle. Equistar tries to protect
against such instability through various business strategies. These strategies
include increasing the olefins plants' ability to change between different
types of raw materials, entering into multi-year processing and sales
agreements and moving downstream into derivatives products whose pricing is
more stable. Equistar has not used derivative instruments for commodity hedging
purposes.
Interest Rate Risk
The interest rate on Equistar's $1.25 billion revolving credit facility is a
floating rate. The use of floating rate debt instruments provides benefit
during times of downward interest rate movements but represents exposure to
risk from future interest rate increases. Based on the March 31, 1999 floating
interest rate of 5.7% and the amount outstanding under the $1.25 billion
revolving credit facility at March 31, 1999 of $750 million, a 10% change in
interest rate would result in an increase or decrease of interest expense of
approximately $75 million on an annual basis. This exposure may be limited by
our ability to select a different interest rate mechanism under the $1.25
billion revolving credit facility.
41
<PAGE>
Description of Equistar's Business
Equistar is one of the largest chemical producers in the world with total
1998 pro forma revenues of $5 billion and $7 billion of assets at the end of
1998. It is the world's second largest, and North America's largest, producer
of ethylene, the world's most widely used petrochemical. Equistar is also the
largest producer of polyethylene and propylene in North America.
Olefins, the generic name for ethylene and propylene, and their co-products
are basic building blocks used to create a wide variety of products. Ethylene
is used to produce polyethylene, ethylene oxide and its primary derivative,
ethylene glycol, ethylene dichloride and ethylbenzene. Polyethylene is used to
produce packaging film, trash bags and lightweight high-strength plastic
bottles for milk, juices, shampoos and detergents. Propylene is used to produce
polypropylene, which is used in products such as plastic caps and other
closures, rigid packaging and carpet facing and backing. Substantially all of
Equistar's revenues are derived from sales in North America.
Equistar was formed to maximize the long-term cash flow and economic value
creation potential of its contributed businesses. Management believes that
Equistar's operations to date have provided and will continue to provide
opportunities for significant cost savings and expanded business opportunities,
leading to improved earnings and cash flow. The strengths inherent in the
combined businesses, including the multiple locations and the ability to
alternate between different types of raw materials provide Equistar with
competitive advantages that exceed those which were available to Lyondell,
Millennium and Occidental, individually.
Equistar's Business Strategies
Equistar's business strategies include
. Achieving savings or "synergy" targets in earnings and cash flow by
operating the Lyondell, Millennium and Occidental contributed businesses
as a single entity and continuing to reduce costs by focusing on
--aligning and improving the efficiency of processing units for
improved on-stream processing time and increased capacity
--maximizing the value of the ability to alternate between different
types of raw materials and olefins co-products produced in the olefins
operations
--lowering distribution costs through high-volume purchases and sales
--reducing raw materials and other purchasing costs
. Realizing maximum value from the strategic flexibility and optimization
potential inherent in Equistar's large number of plant sites, in the
ability to alternate between different types of raw materials and in a
broad selection of polymer products
. Focusing on capital projects designed to increase reliability and
undertaking cost efficient expansions of value-added product lines by
--realizing the benefits of its recently completed 125-million-pound
HDPE expansion at its Victoria facility by continuing to develop its
established sales base in high value products
--completing a 480-million-pound HDPE resin expansion project at its
Matagorda facility for late 1999 start-up to support high molecular-
weight HDPE film growth
. Pursuing a market strategy of expanding value-added businesses using
minimal capital by increasing production and sales volumes in key
markets, such as high and medium molecular-weight HDPE film resins,
specialized HDPE injection molding resins and wire and cable resins
. Leveraging technology by
--pursuing research on alternative olefins raw material technology as a
method to lower costs and gain competitive advantages
42
<PAGE>
--integrating Lyondell proprietary catalyst technology with Millennium
process technologies, enabling Equistar to produce higher-margin,
value-added polymer products
The following chart illustrates the ability of our olefins processing
units, or crackers, to use different types of raw materials for ethylene
production and the breakdown of ethylene consumption.
[Flowchart showing the production path of feedstocks at Equistar's olefins
plants or "crackers," the plants' products and the downstream customers and
end-uses of the products appears here. Equistar's NGL crackers refine ethane,
propane and butane to produce ethylene. Equistar's Petroleum Liquid Crackers
refine condensate, naphtha, kerosene and diesel to produce ethylene.
Equistar's ethylene production is used as a feedstock by Equistar's ethylene
oxide and derivatives plants and its polymers operations, and by plants
operated by Lyondell, Millennium and Occidental. A portion of Equistar's
ethylene production is sold to unrelated third parties. Equistar uses ethylene
for the production of ethylene oxide and derivatives, the enduses of which
include detergents, industrial cleaners, polyester fiber, antifreeze and brake
fluid. Equistar's polymers operations use the ethylene to produce polyethylene
(LDPE, LLDPE and HDPE), which is used in grocery and trash bags, food
packaging films, plastics caps and closures, milk and water bottles, drink
cups and toys. Occidental uses ethylene to produce ethylene dichloride, which
is used in the manufacture of PVC drain pipe, vinyl flooring and siding.
Millennium uses ethylene in its vinyl acetate operations; vinyl acetate is
used in household adhesives, paint and ice bags. Lyondell uses ethylene for
the production of styrene, enduses of which include polystyrene cups, packages
and cutlery.
Equistar's petroleum liquid crackers also produce butadiene, aromatics,
gasoline, fuel oil and propylene. A portion of the propylene produced by
Equistar is used by Equistar's polymers operations and by Lyondell; the
balance is sold to unrelated third parties. Equistar's polymers operations use
the propylene to produce polypropylene which in turn is used in carpet fibers,
housewares and auto bumpers. Lyondell uses the propylene to produce propylene
oxide, which is used in polyurethane foam for furniture and insulation.]
For additional segment information, see Note 18 of Notes to the Audited
Financial Statements of Equistar Chemicals, LP.
Petrochemicals Segment
Petrochemicals are fundamental to many segments of the economy, including
the production of consumer products, housing components, automotive products
and other durable and nondurable goods. We produce petrochemicals, including
olefins, aromatics and oxygenated chemicals, at twelve facilities located in
six states. Olefins include ethylene, propylene and butadiene. Aromatics
include benzene and toluene. Oxygenated chemicals include ethylene oxide,
ethylene glycol, ethanol and MTBE. Our petrochemical products are used to
manufacture polymers and intermediate chemicals, which are used in a variety
of consumer and industrial products. Ethylene is the most significant
petrochemical in terms of worldwide production volume. Ethylene is also the
key building block for polyethylene and a large number of other chemicals,
plastics and synthetics.
43
<PAGE>
With the strong growth of end-use products derived from ethylene during the
past several decades, especially as plastics have developed into low-cost,
high-performance substitutes for a wide range of materials such as metals,
paper and glass, U.S. ethylene consumption has grown by an average annual rate
of approximately 4%.
The Chocolate Bayou, Corpus Christi and two Channelview, Texas olefins
plants use petroleum liquids as raw materials, including naphtha, condensates
and gas oils (collectively "petroleum liquids"), to produce ethylene. The cost
of ethylene production from petroleum liquids has historically been less than
the cost of producing ethylene from natural gas liquids, including ethane,
propane and butane (collectively "NGLs"). The use of petroleum liquids results
in the production of a significant amount of co-products, such as propylene,
butadiene, benzene and toluene, and of specialty products such as
dicyclopentadiene, isoprene, resin oil, piperylenes, hydrogen and alkylate.
Based upon an independent third-party survey, we believe our Channelview
facility is the lowest production cost olefins facility in North America. Our
Morris, Illinois; Clinton, Iowa; Lake Charles, Louisiana; and LaPorte, Texas
plants are designed to use NGLs, which primarily produce ethylene with some co-
products such as propylene. In addition, we are currently modifying the LaPorte
plant to run some forms of petroleum liquids, such as condensate. A
comprehensive pipeline system connects our plants along the Gulf Coast with
major olefins customers. Raw materials are sourced both internationally and
domestically and are shipped via vessel and pipeline.
We produce ethylene oxide and its primary derivative, ethylene glycol, at
facilities located in Pasadena, Texas and through PD Glycol, a 50% joint
venture with DuPont de Nemours and Company, in Beaumont, Texas. The Pasadena
facility also produces other derivatives of ethylene oxide, principally ethers
and ethanolamine. Ethylene glycol is used in antifreeze and in polyester
fibers, resins and films. The other ethylene oxide derivatives are used in many
consumer and industrial end uses, such as detergents and surfactants, brake
fluids and polyurethane foams for seating and bedding.
We produce synthetic ethyl alcohol at the Tuscola, Illinois plant by a
process that combines water and ethylene, referred to as direct hydration.
Equistar also owns and operates facilities in Newark, New Jersey and Anaheim,
California for denaturing ethyl alcohol. In addition, it produces small volumes
of diethyl ether, a byproduct of its ethyl alcohol production, at Tuscola.
These ethyl alcohol products are ingredients in various consumer and industrial
products, as described more fully in the table below.
The following table outlines our petrochemical products, our annual
processing capacity and the primary uses for these products. Unless otherwise
specified, in the table below, processing capacity was calculated by estimating
the number of days in a typical year that a production unit of a plant is
expected to operate, after allowing for downtime for regular maintenance, and
multiplying that number by an amount equal to the unit's optimal daily output
based on the current design raw material mix. Because processing capacity of a
production unit is an estimated amount, actual production volumes may be more
or less than the processing capacity listed.
<TABLE>
<CAPTION>
ANNUAL PROCESSING
PRODUCT CAPACITY PRIMARY USES
- ---------------------------------------------------------------------------
<S> <C> <C>
OLEFINS
- ---------------------------------------------------------------------------
Ethylene 11.5 billion pounds Ethylene is used as a raw material to
manufacture polyethylene, ethylene
oxide, ethylene dichloride and ethyl
benzene. Polyethylene is used for films
for food packaging and trash bags and
for blow-molded plastic bottles for
milk, juices, shampoos and detergents.
Ethylene oxide is used to produce
ethylene glycol, which in turn is used
to produce antifreeze and polyester.
Ethylene dichloride is used to produce
polyvinyl chloride for pipe and other
vinyl products. Ethyl benzene is used to
produce styrene, which in turn is used
to produce polystyrene for food
packaging and drinking cups.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
ANNUAL PROCESSING
PRODUCT CAPACITY PRIMARY USES
- --------------------------------------------------------------------------------------
<S> <C> <C>
Propylene 5.0 billion pounds(a) Propylene is used to produce
polypropylene, acrylonitrile and
propylene oxide. Polypropylene is used
in products such as plastic caps,
closures, rigid packaging and carpet
facing and backing. Acrylonitrile is
used in clothing (acrylic fibers)
and high-impact plastics (computers,
auto parts). Propylene oxide is used in
polyurethane foams for furniture and
insulation.
- --------------------------------------------------------------------------------------
Butadiene 1.2 billion pounds Butadiene is used to manufacture
styrene, butadiene, rubber and
polybutadiene rubber, which are used in
the manufacture of tires, hoses, gaskets
and other rubber products. Butadiene is
also used in the production of paints,
adhesives, nylon clothing, carpets and
engineered plastics.
- --------------------------------------------------------------------------------------
OXYGENATED PRODUCTS
- --------------------------------------------------------------------------------------
Ethylene Oxide and 1.1 billion pounds Ethylene oxide is used to produce
Equivalents ethylene oxide surfactants, industrial cleaners,
equivalents; 400 cosmetics, emulsifiers, paint, heat
million pounds as transfer fluids and ethylene glycol
pure ethylene oxide (polyester fibers and film, polyethylene
terephthalate ("PET") resin and
antifreeze).
- --------------------------------------------------------------------------------------
Ethylene Glycol 1 billion pounds Ethylene glycol is used to produce
polyester fibers and film, PET resin,
heat transfer fluids, paint and
automobile antifreeze.
- --------------------------------------------------------------------------------------
Ethylene Oxide 225 million pounds Ethylene oxide derivatives are used to
Derivatives produce paint and coatings, polishes,
solvents and chemical intermediates.
- --------------------------------------------------------------------------------------
MTBE 284 million MTBE is an octane enhancer and clean
gallons(b) fuel additive in reformulated gasoline.
- --------------------------------------------------------------------------------------
AROMATICS
- --------------------------------------------------------------------------------------
Benzene 301 million gallons Benzene is used to produce styrene,
phenol and cyclohexane. These products
are used in the production of nylon,
plastics, rubber and polystyrene.
Polystyrene is used in insulation,
packaging and drink cups.
- --------------------------------------------------------------------------------------
Toluene 66 million gallons Toluene is used as an octane enhancer in
gasoline, as a chemical raw material for
benzene production and as a core
ingredient in toluene diisocyanate, a
compound in urethane production.
- --------------------------------------------------------------------------------------
SPECIALTY PRODUCTS
- --------------------------------------------------------------------------------------
Dicyclopentadiene 80 million pounds DCPD is a component of inks, adhesives
("DCPD") and polyester resins for molded parts
such as tub and shower stalls and boat
hulls.
- --------------------------------------------------------------------------------------
Isoprene 105 million pounds Isoprene is a component of premium
tires, adhesive sealants and other
rubber products.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
ANNUAL PROCESSING
PRODUCT CAPACITY PRIMARY USES
- --------------------------------------------------------------------------------
<S> <C> <C>
Resin Oil 120 million pounds Resin oil is used in the production of
hot-melt adhesives, inks, sealants,
paints and varnishes.
- --------------------------------------------------------------------------------
Piperylenes 100 million pounds Piperylenes are used in the production
of adhesives, inks and sealants.
- --------------------------------------------------------------------------------
Hydrogen 44 billion cubic feet Hydrogen is used by refineries to remove
sulfur from process gas in heavy crude
oil.
- --------------------------------------------------------------------------------
Alkylate 337 million Alkylate is a premium blending component
gallons(c) used by refiners to meet Clean Air Act
standards for reformulated gasoline.
- --------------------------------------------------------------------------------
Ethyl Alcohol 50 million gallons Ethyl alcohol is used in the production
of solvents as well as household,
medicinal and personal care products.
- --------------------------------------------------------------------------------
Diethyl Ether 5 million gallons Diethyl ether is used in laboratory
reagents, gasoline and diesel engine
starting fluid, liniments, analgesics
and smokeless gun powder.
</TABLE>
- --------
(a) Does not include refinery-grade material or production from the product
flexibility unit at Equistar's Channelview facility, which can convert
ethylene and other light petrochemicals into propylene. This facility has a
current rated capacity of one billion pounds per year of propylene.
(b) Includes up to 44 million gallons/year of capacity, which is operated for
the benefit of LYONDELL-CITGO Refining.
(c) Includes up to 172 million gallons/year of capacity, which is operated for
the benefit of LYONDELL-CITGO Refining.
Raw Materials and Ethylene Purchases for Our Petrochemicals Segment
The raw material cost for olefins production is generally the largest
component of total cost for the petrochemicals business. Olefins plants with
the flexibility to consume a wide range of raw materials are better able to
maintain higher levels of profitability during periods of changing energy and
petrochemicals prices than olefins plants that are restricted in their raw
material processing capability. The primary feedstocks used in the production
of olefins are petroleum liquids, also referred to as "heavy raw materials,"
and NGLs, also referred to as "light raw materials." As of January 1, 1999,
approximately 44% of domestic ethylene industry capacity was limited to NGL raw
materials. As of January 1, 1999, approximately 56% of domestic capacity
processed to some extent both NGLs and petroleum liquids or only petroleum
liquids.
Petroleum liquids have had a historical variable margin advantage over NGLs
such as ethane and propane. For example, using petroleum liquids typically
generates between one and four cents additional margin per pound of ethylene
produced compared to using ethane. We have the capability to realize this
margin advantage at the Channelview, Corpus Christi and Chocolate Bayou
facilities. This variable margin advantage is expected to continue due to the
significantly higher capital cost for plants with the capability to process
both heavy raw materials, or petroleum liquids, and their resulting co-products
in contrast to processing light raw materials, or NGLs.
46
<PAGE>
The following chart illustrates, for the fourth quarter of 1998, our
percentage usage of heavy raw materials and light raw materials as compared
with industry usage, based on industry sources.
Pie chart appears here showing, for the fourth quarter of 1998, Equistar's
percentage usage of heavy feedstocks and light feedstocks as compared to
industry usage of heavy feedstocks and light feedstocks as shown below.
Heavy Feedstocks Light Feedstocks
-----------------------------------
Industry Crackers 32% 68%
Equistar Crackers 58% 42%
The Channelview facility is unusually flexible in that it can process 100%
petroleum liquids or up to 80% NGLs. The Corpus Christi plant can process up to
70% Petroleum Liquids or up to 70% NGLs. The Chocolate Bayou facility processes
100% petroleum liquids. Equistar's four other olefins facilities currently
process only NGLs. We are currently upgrading the LaPorte facility to integrate
the operations of the LaPorte and Channelview facilities. The upgrade will
permit the LaPorte facility to process 25% to 30% petroleum liquids and the
Channelview facility to process the co-products resulting from the processing
of petroleum liquids.
The majority of our petroleum liquids requirements are purchased via
contractual arrangements from a variety of third-party domestic and foreign
sources. We also purchase a minimal amount of petroleum liquids from third-
party domestic and foreign sources selling goods via the spot market at the
market rate at time of purchase. We also purchase NGLs from a wide variety of
domestic sources. We obtain a portion of our olefins raw material requirements
from LYONDELL-CITGO Refining at market-related prices.
In addition to producing our own ethylene, we assumed some agreements of an
affiliate of Millennium for the purchase of ethylene from Gulf Coast producers
at market prices. Ethylene purchase obligations under these contracts will
decline to zero at the end of 2000.
Marketing, Sales and Distribution of Our Petrochemicals Segment
Ethylene produced by the LaPorte, Morris and Clinton facilities is generally
consumed as raw material by the polymers operations at those sites. Ethylene
and propylene produced at the Channelview, Corpus Christi, Chocolate Bayou and
Lake Charles olefins plants are generally distributed by pipeline or via
exchange agreements to our Gulf Coast polymer and ethylene oxide facilities as
well as to other third parties. As of January 1, 1999, approximately 75% of the
ethylene we produced was consumed internally or sold to our affiliates based on
current market prices. See "Related Transactions."
With respect to sales to third parties, we sell a majority of olefins
products to customers with whom Lyondell and Occidental have had long-standing
relationships. Sales to third parties generally are made under
47
<PAGE>
written agreements. These written agreements typically provide for
. monthly negotiation of price
. customer purchase of a specified minimum quantity
. three- to six-year terms with automatic one- or two-year term extension
provisions
Some contracts may be terminated early if deliveries have been suspended for
several months.
Ethylene oxide and ethylene glycol are sold under long-term contracts of
three-to-five years' duration to third-party customers, with pricing negotiated
on a quarterly basis to reflect market conditions.
Glycol ethers are sold primarily into the solvent and distributor markets
under one-year contracts at market prices, as are ethanolamines and brake
fluids.
Ethanol and ethers are sold to third-party customers under one-year
contracts at market prices.
We license MTBE technology under a license from an affiliate of Lyondell and
sell a significant portion of MTBE produced at one of our two Channelview units
to Lyondell at market-related prices. The production from the second unit is
consumed by LYONDELL-CITGO Refining for gasoline blending. MTBE produced at
Chocolate Bayou is sold to third parties at market-related prices.
We sell most of our aromatics production under contracts that have initial
terms ranging from two to three years and that typically contain automatic one-
year term extension provisions. These contracts generally provide for monthly
or quarterly price adjustments based upon current market prices. Aromatics
produced by LYONDELL-CITGO Refining, with the exception of benzene, are
marketed by Equistar for LYONDELL-CITGO Refining under contracts with similar
terms to its own. Benzene produced by LYONDELL-CITGO Refining is sold directly
to Equistar at market-related prices.
Most of the ethylene and propylene production of the Channelview, Chocolate
Bayou, Corpus Christi and Lake Charles facilities are shipped via a 1,430-mile
pipeline system which has connections to numerous Gulf Coast ethylene and
propylene consumers. This pipeline system, some of which we own and some of
which we lease, extends from Corpus Christi to Mont Belvieu to Port Arthur,
Texas as well as around the Lake Charles area. In addition, exchange agreements
with other olefins producers allow access to customers who are not directly
connected to our pipeline system. Some propylene is shipped by ocean-going
vessel. Ethylene oxide and its derivatives are shipped by rail car. Butadiene,
aromatics and other petrochemicals are distributed by pipeline, railcar, truck,
barge or ocean-going vessel.
Competition and Industry Conditions in the Petrochemicals Segment
The basis for competition in our petrochemicals products is price, product
quality, the ability to deliver product when and where the customer wants and
customer service. We compete with other large domestic producers of
petrochemicals, including
.BP Amoco Chemical Company
.Chevron Chemical Company
.Dow Chemical Company
.Exxon Chemical Company
.Huntsman Chemical Company
.Mobil Chemical Company
.Phillips Petroleum Company
.Shell Chemical Company
.Union Carbide Corporation
48
<PAGE>
The combined processing capacity of our ethylene units at January 1, 1999
was approximately 11.5 billion pounds of ethylene per year or approximately 18%
of total North American production capacity. Based on published rated
production capacities, we believe we are the largest producer of ethylene in
North America. North American ethylene processing capacity at January 1, 1999
was approximately 62 billion pounds per year. Of the total ethylene production
capacity in the United States, approximately 95% is located along the Gulf
Coast. Approximately 80% of U.S. production capacity is owned by nine
manufacturers.
The following chart illustrates our production capacity position for
ethylene both in North America and worldwide as of January 1, 1998, based on
industry sources.
Bar chart appears here showing Equistar's production capacity position for
ethylene in North America and world wide as of January 1, 1998 as compared with
other producers as set forth below.
Ethylene Production Capacity
Billions Lbs./Year
North America
Producer Production Capacity
-------- -------------------
Equistar 11.5
Dow 7.1
Exxon 6.4
Shell 5.0
Nova 4.9
Phillips 4.6
Union Carbide 4.2
Chevron 3.3
Pemex 3.1
BP Amoco 2.9
Worldwide
Producer Production Capacity
-------- -------------------
Dow 11.8
Equistar 11.5
Shell 10.6
Exxon 9.8
Union Carbide 5.8
BP Amoco 5.6
SABIC 5.2
Nova 4.9
BASF 4.6
Phillips 4.6
Petrochemicals profitability is affected by the level of demand for
petrochemicals and derivatives along with vigorous price competition among
producers which may intensify due to, among other things, the addition of new
capacity. In general, weak economic conditions, either in the United States or
in the world, and higher raw material costs tend to reduce demand and/or put
pressure on margins. Capacity additions in excess of annual growth also put
pressure on margins. In addition, in recent years, industry consolidation has
occurred, a trend which we expect will continue. It is not possible to predict
accurately the changes in raw material costs, market conditions and other
factors which will affect petrochemical industry margins in the future.
The petrochemicals industry has historically experienced significant
volatility in capacity utilization and profitability. Producers of olefins
primarily for merchant supply to unaffiliated customers typically experience
greater variations in their sales volumes and profitability in comparison to
more integrated competitors when industry supply and demand relationships are
at extremes. This is due primarily to a higher proportion of captive demand for
olefins derivatives production experienced by the more integrated competitors.
We currently consume or sell approximately 75% of our ethylene production to
downstream derivatives facilities owned by us or one of our partners, which has
the effect of reducing volatility.
Our other major commodity chemical products also experience cyclical market
conditions similar to, although not necessarily coincident with, those of
ethylene.
49
<PAGE>
Polymers Segment
Through twelve facilities located in four states, our polymers segment
manufactures a wide variety of polyolefins, including polyethylene,
polypropylene and various performance polymers.
We currently manufacture polyethylene using a variety of technologies at six
facilities in Texas and at our Morris and Clinton facilities. The Morris and
Clinton facilities are the only polyethylene facilities located in the Midwest.
These facilities enjoy a freight cost advantage over Gulf Coast producers in
delivering products to customers in the Midwest and on the East Coast of the
United States. Polyethylene is used in a wide variety of consumer products,
packaging materials and industrial applications.
Our Morris, Illinois and Pasadena, Texas facilities manufacture
polypropylene using propylene produced as a co-product of our ethylene
production and propylene purchased from third parties. Polypropylene is sold
for various applications in the automotive, housewares and appliance
industries. We also produce performance polymer products, which include
enhanced grades of polyethylene and polypropylene, at several of our polymers
facilities. We believe that, over a business cycle, average selling prices and
profit margins for performance polymers tend to be higher than average selling
prices and profit margins for higher volume commodity polyethylenes.
We produce wire and cable resins and compounds at Morris, Illinois; La
Porte, Texas; Tuscola, Illinois; and Fairport Harbor, Ohio. Wire and cable
resins and compounds are used to insulate copper and fiber optic wiring in
power, telecommunication and computer and automobile applications.
50
<PAGE>
The following table outlines our polymers and performance polymers products,
our annual processing capacity, the primary uses for these products and our
brand names. Unless otherwise specified, in the table below, processing
capacity was calculated by estimating the number of days in a typical year that
a production unit of a plant is expected to operate, after allowing for
downtime for regular maintenance, and multiplying that number by an amount
equal to the unit's optimal daily output based on the current design raw
material mix. Because processing capacity of a production unit is an estimated
amount, the actual production volumes may be more or less than the processing
capacity listed.
<TABLE>
<CAPTION>
ANNUAL
PROCESSING
PRODUCT CAPACITY PRIMARY USES BRAND NAMES
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
POLYETHYLENE AND
POLYPROPYLENE
- ------------------------------------------------------------------------------------------------
High-density 3.4 billion HDPE is used to manufacture grocery, ALATHON(R)
polyethylene ("HDPE") pounds(a) merchandise and trash bags; food Petrothene(R)
containers for items from frozen
desserts to margarine; plastic caps and
closures; liners for boxes of cereal and
crackers; plastic drink cups and toys;
dairy crates; bread trays and pails for
items from paint to fresh fruits and
vegetables; safety equipment such as
hard hats; house wrap for insulation;
bottles for household/industrial
chemicals and motor oil;
milk/water/juice bottles; and large
(rotomolded)
tanks for storing liquids like
agricultural and lawn care chemicals.
- ------------------------------------------------------------------------------------------------
Low-density polyethylene 1.7 billion LDPE is used to manufacture food Petrothene(R)
("LDPE") pounds packaging films; plastic bottles for Acrythene(R)
packaging food and personal care items; (EMA)
dry-cleaning bags; ice bags; pallet Ultrathene(R)
shrink-wrap; heavy-duty bags for mulch (EVA)
and potting soil; boil-in-bag bags;
coatings on flexible packaging products;
and coating on paper board such as milk
cartons. Specialized forms of LDPE are
Ethyl Methyl Acrylate ("EMA"), which
provides adhesion in a variety of
applications, and Ethylene Vinyl Acetate
("EVA"), which is used in foamed sheets,
bag-in-box bags, vacuum cleaner hoses,
medical tubing, clear sheet protectors
and flexible binders.
- ------------------------------------------------------------------------------------------------
Linear low-density 1.1 billion LLDPE is used to manufacture garbage and Petrothene(R)
polyethylene ("LLDPE") pounds lawn/leaf bags; housewares; lids for
coffee cans and margarine tubs; and
large (rotomolded) toys like outdoor gym
sets.
- ------------------------------------------------------------------------------------------------
Polypropylene 680 million Polypropylene is used to manufacture KromaLon(R)
pounds fibers for carpets, rugs and upholstery; Petrofil(R)
housewares; automotive battery cases; Petrothene(R)
automotive fascia, running boards and KromaLux(R)
bumpers; grid-type flooring for sports KromaTex(R)
facilities; fishing tackle boxes; and Flexathene(R)
bottle caps and closures.
- ------------------------------------------------------------------------------------------------
PERFORMANCE POLYMERS
- ------------------------------------------------------------------------------------------------
Wire and Cable Resins (b) Wire and cable resins and compounds are Petrothene(R)
and Compounds(d) used to insulate copper and fiber optic
wiring in power, telecommunication,
computer and automobile applications.
- ------------------------------------------------------------------------------------------------
Polymeric Powders (b) Polymeric powders are component products Microthene(R)
in structural and bulk molding
compounds; and parting agents and
filters for appliance, automotive and
plastics processing industries.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
ANNUAL
PROCESSING
PRODUCT CAPACITY(a) PRIMARY USES BRAND NAMES
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Polymers for Adhesives, (b) Polymers are components in hot-metal- Petrothene(R)
Sealants and Coatings adhesive formulations for case, carton Ultrathene(R)
and beverage package sealing; glue
sticks; automotive sealants; carpet
backing; and adhesive labels.
- -----------------------------------------------------------------------------------------------
Reactive Polyolefins (b) Reactive polyolefins are functionalized Plexar(R)
polymers used to bond nonpolar and polar
substrates in barrier food packaging;
wire and cable insulation and jacketing;
automotive gas tanks; and metal coating
applications.
- -----------------------------------------------------------------------------------------------
Liquid Polyolefins (b) Liquid polyolefins are a diesel fuel Vynathene(R)
additive to inhibit freezing.
</TABLE>
- --------
(a) We increased our HDPE capacity by approximately 125 million pounds in 1998.
A 480-million-pound HDPE resin expansion project at the Matagorda facility
has a targeted start-up in the third quarter of 1999. The idling of a
portion of the Port Arthur facility effective March 31, 1999 resulted in a
decrease in capacity of 300 million pounds at the end of the first quarter
of 1999.
(b) These are enhanced grades of polyethylene and are included in the capacity
figures for HDPE, LDPE and LLDPE above, as appropriate.
Research and development for our polymers segment is conducted in
laboratories at our Cincinnati, Ohio facility and at pilot plants in Matagorda,
Texas and Morris, Illinois. These facilities provide product and process
technology support for the polymers segment and its customers. See "--Research
and Technology; Patents and Trademarks Owned or In Use by Equistar."
Raw Materials for Our Polymers Segment
With the exception of the Chocolate Bayou polyethylene plant, our
polyethylene and polypropylene production facilities can receive their ethylene
and propylene directly from our petrochemical facilities. The raw material is
sent via our olefins pipeline system at our own production at the site. The
polyethylene plants at Chocolate Bayou, LaPorte, Port Arthur and Pasadena are
pipeline-connected to third parties and can receive ethylene via exchanges or
purchases. The polypropylene facility at Morris also receives propylene from a
third party.
Marketing, Sales and Distribution for Our Polymers Segment
Our polymers products are primarily sold to an extensive base of established
customers. Approximately 30% of these customers have term contracts typically
having a duration of one to three years. The remainder is generally sold
without contractual term commitments. In either case, in most of the continuous
supply relationships prices may be changed upon mutual agreement with our
customers.
Polymers are primarily distributed via railcar. We own or lease, under long-
term lease arrangements, approximately 10,000 railcars for use in our polymers
business. We sell our polymers products in the United States primarily through
our own sales organization. The sales organization generally engages sales
agents to market its products in the rest of the world.
52
<PAGE>
Competition and Industry Conditions in Our Polymers Segment
The basis for competition in our polymers products is
. product performance
. product quality
. the ability to deliver product when and where the customer wants it
. customer service
. price
We compete with other large producers of polymers, including Chevron
Chemical Corporation, Dow Chemical Company, Eastman Chemical Company, Exxon
Chemical Company, Formosa Plastics, Huntsman Chemical Company, NOVA
Corporation, Phillips Petroleum Company, Solvay Polymers, Total Fina, Union
Carbide Corporation and Westlake Polymers. Polymers profitability is affected
by the worldwide level of demand for polymers along with vigorous price
competition, which may intensify due to, among other things, new domestic and
foreign industry capacity. In general, weak economic conditions either in the
United States or elsewhere in the world tend to reduce demand and put pressure
on margins. It is not possible to predict accurately the changes in raw
material costs, market conditions and other factors that will affect polymers
industry margins in the future.
Based on published rated industry capacities, we are the largest producer of
polyethylene in North America and a leading domestic producer of polyolefins
powders, compounds, wire and cable resins, and polymers for adhesives. The
combined processing capacity of our polyethylene units as of January 1, 1999
was approximately 6.2 billion pounds per year or approximately 16% of total
industry capacity in North America. There are approximately 19 other North
American producers of polyethylene, including Chevron Chemical Company, Dow
Chemical Company, Exxon Chemical Company, Phillips Petroleum Company, Solvay
Polymers and Union Carbide Corporation. Our polypropylene capacity, 680 million
pounds per year as of January 1, 1999, represents approximately 4.5% of the
total North American polypropylene capacity. There are approximately 14 other
North American competitors in the polypropylene business, including BP Amoco
Chemical Company, Exxon Chemical Company, Montell Polyolefins BV and Total
Fina.
The following chart illustrates our production capacity position for
polyethylene and polypropylene, or "polyolefins," for 1998, based on industry
sources.
Bar chart appears here showing Equistar's production capacity position for
polyethylene and polypropylene, or "polyolefins" for 1998 as compared with other
leading North American producers as set forth below.
Leading North America Polyolefins Producers
Millions Lbs./Year
Producer Production Capacity
Exxon 6,902
Equistar 6,880
Dow 4,293
Union Carbide 4,450
Montell 3,550
Phillips 2,927
Nova 2,677
Chevron 2,635
Solvay 2,490
Fina 2,143
Huntsman 1,985
Mobil 1,941
BP Amoco 1,820
Formosa 1,739
Eastman 1,067
Westlake 1,018
53
<PAGE>
Properties Owned or Leased by Equistar
Our principal manufacturing facilities and principal products are detailed
below. All of these facilities are wholly owned by Equistar unless otherwise
noted.
<TABLE>
<CAPTION>
Location Principal Products
-------- ------------------
<S> <C>
Beaumont, Texas(a)...... Ethylene Glycol
Channelview, Texas(b)... Ethylene, Propylene, Butadiene, Benzene,
Toluene, DCPD, Isoprene, Resin Oil, Piperylenes,
Alkylate and MTBE
Corpus Christi, Texas... Ethylene, Propylene, Butadiene and Benzene
Chocolate Bayou, HDPE
Texas(c)...............
Chocolate Bayou, Ethylene, Propylene, Butadiene, Benzene,
Texas(c)(d)............ Toluene, DCPD, Isoprene, Resin Oil and MTBE
LaPorte, Texas.......... Ethylene, Propylene, LDPE, LLDPE, HDPE and
Liquid Polyolefins
Matagorda, Texas........ HDPE
Pasadena, Texas(e)...... Ethylene Oxide and Ethylene Glycol and other EO
derivatives
Pasadena, Texas(e)...... Polypropylene and LDPE
Port Arthur, Texas(f)... LDPE and HDPE
Victoria, Texas(d)...... HDPE
Lake Charles, Ethylene and Propylene
Louisiana(g)...........
Morris, Illinois........ Ethylene, LDPE, LLDPE and Polypropylene
Tuscola, Illinois....... Ethyl Alcohol, Diethyl Ether, Wire and Cable
Resins and Compounds and Polymeric Powders
Clinton, Iowa........... Ethylene, LDPE and HDPE
Fairport Harbor, Wire and Cable Resins and Compounds
Ohio(g)................
Anaheim, California..... Denatured Alcohol
Newark, New Jersey...... Denatured Alcohol
</TABLE>
- --------
(a) The Beaumont facility is owned by PD Glycol, a partnership owned 50% by
Equistar and 50% by DuPont de Nemours and Company.
(b) The Channelview facility has two ethylene processing units. Lyondell
Methanol owns a methanol plant located within the Channelview facility on
property leased from Equistar. A third party owns and operates a facility
on land leased from Equistar that is used to purify hydrogen from Lyondell
Methanol's methanol plant. We also operate a styrene maleic anhydride unit
and a polybutadiene unit, which are owned by a third party and are located
on property leased from Equistar within the Channelview facility.
(c) Millennium Petrochemicals and Occidental each contributed a facility
located in Chocolate Bayou. These facilities are not on contiguous
property.
(d) The land is leased. The facility is owned.
(e) Occidental and Lyondell each contributed facilities located in Pasadena.
These facilities are primarily on contiguous property, and we plan to
operate them as one site to the extent practicable. These facilities are
operated in conjunction with the LaPorte facility.
(f) A substantial portion of the HDPE capacity was idled on March 31, 1999, and
could be restarted when market conditions warrant.
(g) The facilities and land are leased.
We also own a storage facility, a brine pond and a tract of vacant land in
Mont Belvieu, Texas, located approximately 15 miles east of the Channelview
facility. Storage capacity for up to approximately 13 million barrels of NGLs,
ethylene, propylene and other hydrocarbons is provided in salt domes at the
Mont Belvieu facility. We operate an additional 3 million barrels of ethylene
and propylene storage on leased property in Markham, Texas.
54
<PAGE>
We use an extensive olefins pipeline system, some of which we own and some
of which we lease, extending from Corpus Christi to Mont Belvieu to Port Arthur
and around the Lake Charles area. We own other pipelines in connection with our
Morris, Clinton, Tuscola, Chocolate Bayou, Matagorda, Victoria, Corpus Christi
and LaPorte facilities. We own and lease several pipelines connecting the
Channelview facility, the refinery owned by LYONDELL-CITGO Refining and the
Mont Belvieu storage facility; these pipelines are used to transport raw
materials, butylenes, hydrogen, butane, MTBE and unfinished gasolines. We also
own a barge docking facility near the Channelview facility capable of berthing
eight barges and related terminal equipment for loading and unloading raw
materials and products. We own or lease, under long-term lease arrangements,
approximately 10,000 railcars for use in our business.
We sublease our executive offices and corporate headquarters from Lyondell
in downtown Houston, Texas. In addition, we own facilities which house the
Morris and Cincinnati research operations. We also lease sales facilities and
storage facilities, primarily in the Gulf Coast area, from various third
parties for the handling of products.
Research and Technology; Patents and Trademarks Owned or In Use by Equistar
We maintain a significant research and development facility in Cincinnati,
Ohio. The Cincinnati facility features more than 30 plastics processing lines,
all of commercial or semi-commercial size, allowing our engineers and
technicians to evaluate polyolefins products under conditions similar to a
customer's plant. We also have additional research facilities in Morris,
Illinois, Matagorda, Texas and Plano, Texas. Product development efforts are
aimed at tailoring products to meet specific customer needs.
The Channelview facility employs proprietary technology owned by Lyondell to
convert ethylene and other light petrochemical streams into propylene. We are
conducting a research project to investigate alternative raw materials for use
at the Channelview, Chocolate Bayou and/or Corpus Christi facilities. These
alternative raw materials could significantly lower costs and provide an
additional competitive advantage at these facilities.
Recent polymers industry announcements relate to the development of single-
site catalysts. Successful development and commercialization of these catalysts
are expected to result in enhanced polymer properties. We are conducting a
broad search to evaluate outside technology and are concentrating in-house
research in an effort to identify and develop single-site catalysts for use in
the production of polyolefins resins. We hold several United States patents and
the rights to several patents pending in connection with research and
development efforts in this area. We are not dependent upon obtaining or
retaining any particular patent, and believe the failure to receive or retain
any individual patent would not have a material effect on operations.
We use numerous technologies in our operations, many of which are licensed
from third parties. Significant licenses we hold include
. BP Amoco fluid bed polyethylene process for the production of both
LLDPE and HDPE
. Unipol process for the production of LLDPE
. other licenses for the production of polyethylene and polypropylene
We are not dependent on the retention of any particular license and believe
that the loss of any individual license would not have a material adverse
effect on operations.
We acquired rights to numerous recognized brand names from Lyondell and
Millennium Petrochemicals Inc., a wholly owned subsidiary of Millennium, in
connection with the formation of Equistar. The brand names are ALATHON(R),
KromaLon(R), Petrothene(R), Ultrathene(R), Vynathene(R) and Microthene(R). Our
rights to use these trademarks are perpetual as long as we actively use the
trademarks. We are not dependent upon any particular trademark and believe the
loss of any individual trademark would not have a material adverse effect on
operations.
55
<PAGE>
Employee Relations
As of March 31, 1999, we employed approximately 5,000 full-time employees.
We also use the services of independent contractors in the routine conduct of
our business. Approximately 365 hourly workers are covered by collective
bargaining agreements. We believe that our relations with our employees are
good.
Management
Members of the Partnership Governance Committee, Executive Officers of Equistar
and Directors and Executive Officers of Equistar Funding
All of Equistar management's functions are the responsibility of the
partnership governance committee. The partnership governance committee is
composed of nine members. Each general partner may appoint three members to the
partnership governance committee. The partnership governance committee has
delegated responsibility of day-to-day operations to the executive officers of
Equistar.
The current members of the partnership governance committee are
. Dan F. Smith, President and Chief Executive Officer of Lyondell and
Equistar and co-chairman of the partnership governance committee
. William M. Landuyt, Chairman and Chief Executive Officer of Millennium
and co-chairman of the partnership governance committee
. Dr. Ray R. Irani, Chairman and Chief Executive Officer of Occidental
Petroleum and co-chairman of the partnership governance committee
. John E. Lushefski, Senior Vice President and Chief Financial Officer of
Millennium
. Jeffrey R. Pendergraft, Executive Vice President and Chief Administrative
Officer of Lyondell
. Kevin DeNicola, Vice President, Corporate Development of Lyondell
. George Robbins, President and Chief Executive Officer of Millennium
Specialty Chemicals
. Stephen I. Chazen, Executive Vice President of Occidental
. J. Roger Hirl, President and Chief Executive Officer of Occidental
Chemical Corporation.
56
<PAGE>
The following table sets forth the names and ages of the executive officers
of Equistar and the executive officers and directors of Equistar Funding as of
March 31, 1999. Officers of Equistar are chosen from time to time by vote of
the partnership governance committee. Directors of Equistar Funding are elected
annually and hold office until a successor is elected. Officers of Equistar
Funding are chosen from time to time by vote of its board of directors.
<TABLE>
<CAPTION>
Name Age Partnership Position
---- --- --------------------
<S> <C> <C>
Dan F. Smith.............. 52 Chief Executive Officer of Equistar and Equistar
Funding; Director of Equistar Funding
Eugene R. Allspach........ 51 President and Chief Operating Officer of
Equistar and Equistar Funding; Director of
Equistar Funding
John R. Beard............. 46 Senior Vice President, Manufacturing of Equistar
Kelvin R. Collard......... 41 Vice President and Controller of Equistar and
Equistar Funding; Director of Equistar Funding
Clifton B. Currin, Jr..... 44 Vice President, Supply and Optimization of
Equistar
J. R. Fontenot............ 46 Vice President, Research and Engineering of
Equistar
Brian A. Gittings......... 52 Senior Vice President, Petrochemicals of
Equistar
Jeffrey L. Hemmer......... 40 Vice President, Information Systems and Business
Process Improvement of Equistar
Alan Houlton.............. 52 Vice President, Customer Supply Chain of
Equistar
Gerald A. O'Brien......... 46 Vice President, General Counsel and Secretary of
Equistar and Equistar Funding
Myra J. Perkinson......... 47 Vice President, Human Resources of Equistar
W. Norman Phillips, Jr.... 43 Senior Vice President, Polymers of Equistar
</TABLE>
Mr. Smith has been Chief Executive Officer of Equistar since December 1997.
Mr. Smith has been a Director of Lyondell since 1988, President and Chief
Executive Officer since December 1996 and a member of the LYONDELL-CITGO
Refining partnership governance committee since July 1993. Mr. Smith was
President and Chief Operating Officer of Lyondell from 1994 to December 1996.
Before 1994, Mr. Smith held various senior executive positions with Lyondell
and Atlantic Richfield Company, including Executive Vice President and Chief
Financial Officer of Lyondell, Vice President, Corporate Planning of ARCO and
Senior Vice President in the areas of management, manufacturing, control and
administration for Lyondell and the Lyondell Division of ARCO.
Mr. Allspach has been President and Chief Operating Officer of Equistar
since December 1997. Mr. Allspach served as Group Vice President, Manufacturing
and Technology for Millennium Petrochemicals from 1993 to 1997. Before 1993,
Mr. Allspach held various senior executive positions with Millennium, including
Group Vice President, Manufacturing and Manufacturing Services and Vice
President, Specialty Polymers and Business Development.
Mr. Beard has been Senior Vice President, Manufacturing of Equistar since
May 1998. He was Vice President, Manufacturing of Equistar from December 1997
to May 1998. Mr. Beard previously served as Vice President, Petrochemical
Manufacturing of Lyondell from May 1995 to December 1997. Mr. Beard served as
Vice President in the areas of quality, supply, planning and evaluations of
Lyondell from 1992 to May 1995.
Mr. Collard has been a Vice President of Equistar since July 1998. Mr.
Collard has been the Controller of Equistar since December 1997. From May 1989
to December 1997, Mr. Collard held various senior manager positions with
Lyondell and ARCO, including Controller of ARCO Coal Company, manager of
accounting policy of ARCO and manager of financial reporting and internal
control of Lyondell. Before May 1989, Mr. Collard was an audit manager for
Coopers & Lybrand.
Mr. Currin has been Vice President, Supply and Optimization of Equistar
since May 1998. Mr. Currin previously served as Vice President, Corporate
Development of Lyondell from December 1997 to May 1998.
57
<PAGE>
Before May 1998, Mr. Currin served as Vice President of Lyondell with
responsibilities in the areas of strategic development, petrochemicals business
management and olefins.
Mr. Fontenot has been Vice President, Research and Development and
Engineering of Equistar since September 1998. Mr. Fontenot previously served as
Vice President, Engineering of Lyondell from December 1997 to September 1998.
Mr. Fontenot served as Vice President, Technology of Lyondell from January 1997
to December 1997 and as Director of Technology of Lyondell from 1995 to January
1997. Before 1995, Mr. Fontenot held various positions in operations,
evaluation and technology for Lyondell.
Mr. Gittings has been Senior Vice President, Petrochemicals of Equistar
since August 1998 and was Vice President, Oxygenated Chemicals of Equistar from
May 1998 to August 1998. Before that, he was Vice President and General
Manager, Isocyanurates for Occidental Chemicals, where he had previously served
as Vice President and General Manager, Ethylene Oxide and Derivatives.
Mr. Hemmer has been Vice President, Information Systems and Business Process
Development of Equistar since August 1998. He was Director of Business Process
Improvement of Equistar from December 1997 to August 1998. Mr. Hemmer also had
been Director, Engineering and Licensing for Millennium Petrochemicals from
October 1996 to December 1997. Before October 1996, he was manager of
polyethylene process and engineering technology for Exxon Chemical.
Mr. Houlton has been Vice President, Customer Supply Chain of Equistar since
December 1997. He previously served as Vice President, Manufacturing for
Millennium Petrochemicals, with responsibility for Millennium Petrochemicals'
11 manufacturing and compounding operations, beginning in October 1993.
Mr. O'Brien has been Vice President, General Counsel and Secretary of
Equistar since December 1997. Mr. O'Brien previously served as associate
general counsel of Lyondell, where his responsibilities included joint
responsibility for the management of the legal department and responsibility
for a variety of legal department functions, including mergers and
acquisitions, general corporate, finance and securities.
Ms. Perkinson has been Vice President, Human Resources of Equistar since
December 1997. Ms. Perkinson served as Vice President, Human
Resources/Communications of Millennium Petrochemicals beginning in November
1991, in which position she was responsible for all human resources, employee
labor relations functions and the administration of all of Millennium
Petrochemicals' compensation, benefits and communications programs.
Mr. Phillips has been Senior Vice President, Polymers of Equistar since
August 1998. He was previously Vice President, Petrochemicals of Equistar from
December 1997 to August 1998. Mr. Phillips previously served as Vice President,
Polymers of Lyondell from January 1997 to December 1997. Mr. Phillips
previously served as Vice President of Lyondell with responsibilities in the
areas of marketing and operations from 1993 to January 1997.
58
<PAGE>
Compensation
Summary Compensation Table
The table below provides information regarding the compensation awarded to
or earned by Equistar's Chief Executive Officer and the next four most highly
compensated executive officers, each of whom earned $100,000 or more in
combined salary and bonus during the fiscal year ended December 31, 1998. In
the table below
. Other annual compensation includes imputed income in respect of the Long-
Term Disability Plan and tax gross-ups in respect of financial counseling
reimbursements
. Actual reimbursement for financial counseling in 1998 is included in the
"All Other Compensation" column below
. ""Tax gross-ups" refers to the additional reimbursement paid to a
recipient to cover the federal income tax obligations associated with the
underlying benefit, including an additional amount based on maximum
applicable income tax rates
<TABLE>
<CAPTION>
Name and Principal Salary Bonus Other Annual All Other
Position ($) ($) Compensation ($) Compensation ($)(a)
------------------ -------- -------- ---------------- -------------------
<S> <C> <C> <C> <C>
Dan F. Smith(b)......... (b) (b) (b) (b)
Chief Executive Officer
Eugene R. Allspach...... $335,531 $321,600 $11,344 $48,641
President & Chief
Operating Officer
W. Norman Phillips,
Jr..................... $256,188 $185,640 $ 9,845 $39,039
Senior Vice President
John R. Beard........... $237,128 $161,800 $ 5,491 $31,347
Senior Vice President
J. R. Fontenot.......... $213,496 $111,200 $ 8,988 $40,251
Vice President
</TABLE>
- --------
(a) Includes contributions to the Executive Supplementary Savings Plan,
incremental executive medical plan premiums, financial counseling
reimbursements and amounts in respect of the Executive Life Insurance Plan,
as follows:
<TABLE>
<CAPTION>
Mr. Mr. Mr. Mr.
Allspach Phillips Beard Fontenot
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Executive Supplementary Savings Plan....... $27,103 $20,495 $18,970 $17,080
Incremental Medical Plan Premiums.......... $ 8,441 $ 8,441 $ 8,441 $ 8,441
Financial Counseling Reimbursement......... $11,742 $ 7,107 $ 0 $12,525
Executive Life Insurance Plan.............. $ 1,355 $ 2,996 $ 3,936 $ 2,205
</TABLE>
(b) Mr. Smith serves as the Chief Executive Officer of both Lyondell and
Equistar. Mr. Smith does not receive any compensation from Equistar.
Equistar pays a fee to Lyondell in recognition of Mr. Smith's services. See
"Related Transactions--Agreement Regarding Services of Equistar's Chief
Executive Officer."
Equistar's Long-Term Incentive Plan
In 1998 Equistar adopted a performance-driven, long-term incentive plan, or
LTIP, for selected key employees. Awards are based on whether Equistar reaches
its performance and financial goals in two critical areas: economic value added
and the achievement of synergies. Economic value added measures Equistar's cash
flow performance in excess of a capital charge, which is calculated by
multiplying the capital invested in Equistar by Equistar's weighted average
cost of capital. Synergies include both one-time and ongoing potential savings
from operating the Lyondell, Millennium and Occidental contributed businesses
together. Synergy targets include each of
. aligning and improving the efficiency of processing units for improved
processing time and increased capacity capability
. maximizing the value of raw material and olefins co-products
59
<PAGE>
. lowering distribution costs
. reducing the cost of raw materials and other purchasing costs
. reducing the amount of staffing services required by each contributed
business
The partnership governance committee approves all awards based on its
assessment of Equistar's operating performance in the preceding year in the
areas of synergy attainment and economic value added.
Equistar assigns each LTIP participant a target award percentage for the
year based on that participant's salary, position and any other factors
Equistar deems appropriate. Each LTIP participant's award for the year is
determined by multiplying his/her target award percentage by an award multiple
determined by the partnership governance committee, the product of which is
multiplied by his/her base pay. The award multiple for 1998 was based on the
achievement of a four-year rolling average economic value added of $160 million
and the achievement of net synergies of $50 million.
Awards will be paid only to LTIP participants who are actually employed at
year-end. Those LTIP participants whose employment terminates due to death,
disability or retirement before the end of the year will be paid a pro rata
portion of their award based on the number of full months completed while
actively employed. All other participants terminated with or without cause
forfeit their award. LTIP participants hired after the first of the year are
eligible to receive a pro rata award based on the number of full months
completed during the year.
Awards consist of a combination of annual or current cash and deferred cash
compensation. The relative percentages of current cash and deferred cash
components are based on the LTIP participant's salary range. The percentage of
deferred cash compensation as compared with current cash compensation increases
as the LTIP participant's salary increases. The current portion of the award is
disclosed under the "Bonus" column of the Summary Compensation Table above. The
deferred cash portion of the award is paid out over three consecutive years,
one-third each year, beginning approximately one year from the payment of the
related annual cash component. The payout amounts for the deferred compensation
component may be adjusted upward, with no cap, or downward, capped at 20%,
based on Equistar's ongoing results with respect to synergies over that three-
year period. Awards are adjusted one percentage point for every percentage
point of synergy gained or lost during the award period.
The following table details the amount of the deferred compensation
component of the 1998 award to the four most highly paid executive officers as
well as their estimated future payouts resulting from such award under the
LTIP.
Long-Term Incentive Plan--Awards In Last Fiscal Year
<TABLE>
<CAPTION>
Performance
or Other Estimated Future Payouts under
Number of Period Non-Stock Price-Based Plans
Shares, Units Until ------------------------------
or Other Maturation Threshold Target(b) Maximum(c)
Name Rights ($)(a) or Payout ($) ($) ($)
---- ------------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Dan F. Smith............ (d) (d) (d) (d) (d)
Eugene R. Allspach...... $462,384 (e) $369,907 $462,384 --
W. Norman Phillips,
Jr..................... $265,221 (e) $212,177 $189,810 --
John R. Beard........... $245,419 (e) $196,335 $245,419 --
J. R. Fontenot.......... $189,810 (e) $151,848 $189,810 --
</TABLE>
- --------
(a) Award is denominated in dollars. Amounts represent deferred compensation
component of 1998 award. Current portion is disclosed under the "Bonus"
column of the Summary Compensation Table above.
(b) Assumes current 1999 target of achievement of synergies of $200 million.
The partnership governance committee may revise targets for 1999 upward or
downward.
(c) Award is not capped.
(d) Mr. Smith does not receive any compensation from Equistar. Equistar pays a
fee to Lyondell in recognition of Mr. Smith's services. See "Related
Transactions--Agreement Regarding Services of Equistar's Chief Executive
Officer."
(e) Long-term compensation awards with respect to 1998 will be paid in annual
increments of one-third beginning in March 2000.
60
<PAGE>
Annual Pension Benefits Offered by Equistar
Pension Plan
In 1998, Equistar adopted a pension plan available to all full-time or
regular part-time Equistar employees and those employees on an approved long-
term disability leave of absence. The pension plan is fully funded by Equistar.
Employees are not required, nor are they allowed, to contribute to the pension
plan. Participation began for former Lyondell, Millennium Petrochemicals and
Occidental employees on their first day of service with Equistar. All other
employees are eligible on the first day following 12 months of service with
Equistar or any predecessor company. Participation in the pension plan ends on
the earliest of the day the employee
. quits, retires, is discharged or dies
. is absent from work more than 12 consecutive months
. is no longer eligible for benefits
Benefits are not reduced for social security or other amounts.
Annual retirement benefit under the pension plan is calculated by
multiplying
. the pension plan participant's years of service to Equistar after January
1, 1998, by
. Final Average Earnings as defined below, by
. the Benefit Percentage as shown below
"Final Average Earnings" is the pension plan participant's highest average
monthly base pay received for any 36 consecutive months during the last 120
months of continuous service with Equistar or Lyondell, Millennium
Petrochemicals or Occidental. For pension plan participants with less than 36
months of continuous service with Equistar or Lyondell, Millennium
Petrochemicals or Occidental, Final Average Earnings is the average of all
monthly base pay, including salary, earned with Equistar, Lyondell, Millennium
Petrochemicals or Occidental.
The Benefit Percentage applicable to each pension plan participant is based
on the participant's age when he begins to receive benefits, as shown in the
following table:
<TABLE>
<CAPTION>
Benefit
Beginning Benefits Age Percentage
---------------------- ----------
<S> <C>
Under 35....................................................... 3%
35-39.......................................................... 4%
40-44.......................................................... 5%
45-49.......................................................... 6%
50-54.......................................................... 9%
55-59.......................................................... 13%
60 and over.................................................... 15%
</TABLE>
The estimated annual benefit payable upon retirement at age 65, normal
retirement age under the pension plan, for the four most highly compensated
officers is as follows:
<TABLE>
<CAPTION>
Estimated
Annual
Benefit
Name at Age 65
---- ---------
<S> <C>
Eugene R. Allspach.............................................. $31,182
W. Norman Phillips, Jr.......................................... $49,079
John R. Beard................................................... $42,621
J. R. Fontenot.................................................. $43,360
</TABLE>
61
<PAGE>
Supplemental Executive Retirement Plan
Equistar offers a Supplemental Executive Retirement Plan ("SERP") to senior
managers and executive officers who receive a retirement benefit under the
pension plan and who have had the amount of that benefit reduced due to
required limitations under the Internal Revenue Code of 1986, as amended, or
under the Employee Retirement Income Security Act, as amended ("ERISA").
Calculation of benefits under the SERP is based on
. base wage
. salary deferrals, and
. annual incentive awards
Equistar bears all costs of the SERP, including administration of the SERP.
SERP participants are not allowed to contribute to the SERP. The SERP provides
for two types of supplementary benefits: deferral/incentive supplements and
qualification limitation supplements.
Deferral/Incentive Supplements. Participants are eligible for a
deferral/incentive supplement under the SERP if their Excess Retirement
Benefit, as defined below, is a positive amount. The monthly amount of
supplemental benefits is calculated by multiplying the SERP participant's
Excess Retirement Benefit by a fraction based on his/her years of service. For
purposes of this paragraph, Excess Retirement Benefit is
. the amount the SERP participant would have received at retirement as a
basic allowance from the pension plan if it included the SERP
participant's awards and deferred compensation, minus
. the amount of monthly retirement allowance the SERP participant is
actually entitled to receive at retirement under the pension plan
The total annual benefit payable to each SERP participant, including payment
under the pension plan, shall not exceed 65% of the greater of
. the SERP participant's final base pay, exclusive of deferrals, and most
recent annual incentive pay, or
. the highest average base pay plus annual incentive pay during a 36-month
consecutive period out of 120 months of service with Equistar or
Lyondell, Millennium Petrochemicals or Occidental
Qualification Limitation Supplements. SERP participants are eligible for a
qualification limitation supplement if their Excess Retirement Benefit, as
defined below, is a positive amount. The monthly amount of qualification
limitation supplement benefit is calculated by multiplying the SERP
participant's Excess Retirement Benefit by a fraction based on the SERP
participant's years of service. For purposes of this paragraph, Excess
Retirement Benefit is
. the amount of monthly allowance the SERP participant would have received
as a base allowance under the pension plan had the amount not been
limited or reduced due to requirements under the Internal Revenue Code of
1986, as amended, or ERISA
minus
. the amount of monthly allowance the SERP participant is actually entitled
to receive at retirement
SERP participants may elect to receive their SERP benefit in any form
available for payment of their normal retirement benefit, provided that the
same form of payment is elected for all supplementary benefits. If the SERP
participant elects a form of annuity for these supplementary benefits, the SERP
participant must elect the same form of annuity under the pension plan.
Benefits are not reduced for social security or other amounts.
62
<PAGE>
The estimated annual benefit payable upon retirement at age 65, normal
retirement age under the SERP, for each of the four most highly compensated
officers, is as follows:
<TABLE>
<CAPTION>
Estimated
Annual
Benefit
Name at Age 65
---- ---------
<S> <C>
Eugene R. Allspach.............................................. $94,958
W. Norman Phillips, Jr.......................................... $84,449
John R. Beard................................................... $64,695
J. R. Fontenot.................................................. $51,105
</TABLE>
Executive Severance Arrangements with Former Millennium Petrochemicals and
Lyondell Executives
In connection with the formation of Equistar and to ensure the continued
dedication of executive officers, Equistar assumed obligations under severance
agreements executed by Millennium Petrochemicals and Lyondell with their
executives who agreed to join Equistar.
The severance agreement between Equistar and Eugene Allspach, which was
assumed by Equistar from Millennium Petrochemicals, provides for Mr. Allspach's
receipt of payments and benefits described below in the event of his
termination before January 1, 2001. Benefits under Mr. Allspach's severance
agreement apply if he is terminated either
. by Equistar without cause
. as a result of a Constructive Termination for Good Reason
Notice of Constructive Termination for Good Reason, as defined in Mr.
Allspach's severance agreement, can be given by Mr. Allspach if Equistar does
any of the following
. assigns him to any duties or responsibilities not comparable to his
duties or responsibilities when he joined Equistar or reduces his
responsibilities or position
. relocates Equistar's principal executive offices outside a 25-mile radius
of its current location or requests Mr. Allspach's transfer, in writing,
to a new location
. reduces Mr. Allspach's annual base salary or comparable benefits to a
level below the annual base salary or benefits he received when joining
Equistar
. fails to continue any bonus plan, program or arrangement in which Mr.
Allspach participates or changes Mr. Allspach's status under any bonus
plan, program or arrangement
. fails to comply with any material provision of Mr. Allspach's severance
agreement
In the event Mr. Allspach is entitled to receive benefits under his
severance agreement, Equistar agrees to provide all of the following rights and
benefits
. a lump-sum payment in cash equal to three times his annual earnings plus
any unreimbursed business expenses and any base salary, bonus, vacation
pay or other deferred compensation accrued or earned under law or
according to Equistar's policies
. additional pension benefits by crediting Mr. Allspach with three
additional years of age and service
. an amount equal to three years of the maximum employer contribution to a
qualified or nonqualified 401(k) plan, assuming the executive deferred
the maximum amount and continued to earn his then current salary
. continuation of insurance and other benefits for 36 months following
termination
. financial counseling for a period of one year
. out-placement services and assistance, not to exceed $40,000
63
<PAGE>
. any other amounts or benefits due under then-applicable employee benefit
incentive or equity plans of Equistar applicable to him
Mr. Allspach would also receive an additional payment equal to the amount of
excise tax imposed under the Internal Revenue Code of 1986, as amended, plus
any federal, state or local taxes incurred as a result of the payment. As a
result, he would be in the same position after payment of the excise tax as he
would have been if he were not subject to the excise tax at all.
The severance agreements between Equistar and each of Messrs. Phillips,
Beard and Fontenot were assumed by Equistar from Lyondell. These severance
agreements provide for Messrs. Phillips, Beard and Fontenot's receipt of
payments and benefits described below in the event of their termination before
January 1, 2000. Benefits under their severance agreements apply if any one of
Messrs. Phillips, Beard or Fontenot is terminated either
. by Equistar without cause
. as a result of Constructive Termination for Good Reason
Notice of Constructive Termination for Good Reason can be given by Messrs.
Phillips, Beard or Fontenot if Equistar does any of the following
. assigns him to any duties or responsibilities not comparable to his
duties or responsibilities when he joined Equistar or reduces his
responsibilities or position
. reduces the level of benefits or compensation provided to him below the
comparable level of benefits or compensation payable to similarly
situated executives at Equistar
. relocates his principal office outside a 50-mile radius of its current
location over his written complaint
In the event Messrs. Phillips, Beard or Fontenot is entitled to receive
benefits under his severance agreement, Equistar agrees to provide all of the
following rights and benefits
. all nonvested stock options provided under Lyondell's long-term incentive
plan becomes 100% vested and fully exercisable, notwithstanding any
agreement to the contrary
. a lump-sum payment in cash equal to three times his annual earnings,
provided that if he is within 24 months of normal retirement, the payment
he is entitled to receive shall be multiplied by the number of months
remaining and divided by 24
. additional pension benefits by crediting him with five additional years
of age and service
. the full amount of contributions and earnings accrued or credited his
account balance under Lyondell's Executive Deferral Plan
. continuation of insurance and other benefits for 24 months following
termination
. financial counseling for a period of one year
. out-placement services and assistance, not to exceed $40,000
. any other amounts or benefits due under employee benefit incentive or
equity plans of Equistar to which he is entitled
Compensation of Partnership Governance Committee Members
Members of the partnership governance committee do not receive any
compensation from Equistar for their service.
64
<PAGE>
Indemnification Arrangements with Equistar's Executive Officers
The partnership governance committee has provided for the indemnification of
Equistar's executive officers. Executives are entitled to indemnification with
respect to all matters to which Section 145 of the General Corporation Law of
the State of Delaware may relate, as if Section 145 were applicable to a
partnership. The right to indemnification and payment of expenses incurred in
defending a proceeding in advance of its final disposition is not exclusive of
any other right which the executive may have or hereafter acquire under any
statute, agreement or otherwise, both as to action in that executive's official
capacity and as to action in any other capacity by holding this office. The
indemnification right continues after the executive ceases to serve as an
Equistar officer or to serve another entity at the request of Equistar.
Equistar may elect to enter into individual indemnification agreements with
each of its executive officers and with any other persons as the partnership
governance committee may designate. In addition, Equistar may elect to maintain
liability insurance to protect itself and any executive officer of Equistar or
another partnership, corporation, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not Equistar would have the
power to indemnify this person against expense, liability or loss under the
laws of the State of Delaware.
Ownership
Equistar
Equistar is a limited partnership wholly owned by Lyondell Petrochemical
L.P. Inc. ("Lyondell LP"), Millennium Petrochemicals LP LLC ("Millennium LP"),
Occidental Petrochem Partner 1, Inc. ("Occidental LP1") and Occidental
Petrochem Partner 2, Inc. ("Occidental LP2"), as the limited partners, and
Lyondell Petrochemical G.P. Inc. ("Lyondell GP"), Millennium Petrochemicals GP
LLC ("Millennium GP") and Occidental Petrochem Partner GP, Inc. ("Occidental
GP"), as the general partners. The following information is given with respect
to the partners' interests in Equistar as of the date of this prospectus.
<TABLE>
<CAPTION>
Nature of Percentage
Beneficial Partnership
Name and Address of Beneficial Owner Ownership Interest
------------------------------------ --------------- -----------
<S> <C> <C>
Lyondell LP................................... Limited Partner 40.180%
300 Delaware Ave.
Wilmington, DE 19801
Millennium LP................................. Limited Partner 28.910%
230 Half Mile Road
Red Banks, NJ 00770
Occidental LP1................................ Limited Partner 6.623%
10889 Wilshire Blvd.
Los Angeles, CA 90004
Occidental LP2................................ Limited Partner 22.876%
10889 Wilshire Blvd.
Los Angeles, CA 90004
Lyondell GP................................... General Partner 0.820%
1221 McKinney Street
Houston, TX 77010
Millennium GP................................. General Partner 0.590%
230 Half Mile Road
Red Banks, NJ 00770
Occidental GP................................. General Partner 0.001%
10889 Wilshire Blvd.
Los Angeles, CA 90004
</TABLE>
Lyondell owns 100% of the outstanding capital stock of each of Lyondell LP
and Lyondell GP. Lyondell has pledged its interests in each Equistar partner
under its bank credit facility. Millennium indirectly owns 100% of the
65
<PAGE>
outstanding capital stock of each of Millennium LP and Millennium GP.
Occidental indirectly owns 100% of the outstanding capital stock of each of
Occidental LP1, Occidental LP2 and Occidental GP.
Equistar Funding
All of the outstanding capital stock of Equistar Funding is owned directly
by Equistar.
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Description of the Partnership Agreement
The partnership agreement of Equistar governs, among other things,
ownership, cash distributions, capital contributions and management of
Equistar. The following is a summary of the material provisions of the
partnership agreement. This summary is qualified in its entirety by reference
to the full and complete text of the partnership agreement, which is available
upon written request as provided under "Available Information."
Background
Lyondell GP, Lyondell LP, Millennium GP and Millennium LP entered into the
partnership agreement as of October 10, 1997. PDG Chemical Inc., Occidental LP1
and Occidental LP2 became parties to the partnership agreement as of May 15,
1998. PDG Chemical Inc. withdrew from Equistar as of June 30, 1998, and
Occidental GP became a general partner on the same date. Equistar will continue
in existence until its dissolution as provided in the partnership agreement.
The three general partners of Equistar are Lyondell GP, Millennium GP and
Occidental GP. Lyondell GP is a direct wholly owned subsidiary of Lyondell.
Millennium GP is an indirect wholly owned subsidiary of Millennium. Occidental
GP is an indirect wholly owned subsidiary of Occidental.
Governance of Equistar
A partnership governance committee manages and controls the business,
property and affairs of Equistar, including the determination and
implementation of Equistar's strategic direction. The general partners exercise
their authority to manage and control Equistar only through the partnership
governance committee. The partnership governance committee consists of nine
members, called representatives, three of whom are representatives of Lyondell
GP, three of whom are representatives of Millennium GP and three of whom are
representatives of Occidental GP.
In general, the approval of two or more representatives acting for Lyondell
GP will be necessary and sufficient for the partnership governance committee to
take any action. This means, in effect, that Lyondell GP's representatives have
the ability to control the partnership governance committee and, as a result,
Equistar, except where the approval of Millennium's and Occidental's general
partner representatives is required. See "--Actions Requiring Unanimous
Voting." Even though ordinary actions by the partnership governance committee
may be approved by two representatives of Lyondell GP, the partnership
governance committee may not take any action at a meeting with respect to any
matter that was not reflected on an agenda that was properly delivered to all
of the representatives in advance, unless at least one of each of Millennium
GP's and Occidental GP's representatives is present. The participation rights
of any general partner's representatives may be curtailed to the extent that
the general partner or its affiliates cause a default under the partnership
agreement.
Actions Requiring Unanimous Voting
Unless approved by two or more representatives of each of Lyondell GP,
Millennium GP and Occidental GP, the partnership governance committee may not
directly or indirectly take, or commit to take, the actions described below.
Equistar, any subsidiary of Equistar or any person acting in the name of or on
behalf of any of them, directly or indirectly, may not take or commit to take,
whether in a single transaction or a series of related transactions
. to cause Equistar, directly or indirectly, to engage, participate or
invest in any business outside the scope of its business as described in
the partnership agreement
. to approve any strategic plan, as well as any amendments or updates to
the strategic plan, including the annual update described under "--
Strategic Plans and Preparation of an Annual Budget" below
. to authorize any disposition of assets having a fair market value
exceeding $30 million in any one transaction or a series of related
transactions not contemplated in an approved strategic plan
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. to authorize any acquisition of assets or any capital expenditure
exceeding $30 million that is not contemplated in an approved strategic
plan
. to require capital contributions to Equistar within any fiscal year if
the total of contributions required from the partners within that year
would exceed $100 million or if the total of contributions required from
the partners within that year and the immediately preceding four years
would exceed $300 million. This does not apply to
--contributions contemplated by the asset contribution agreements
--the Lyondell, Millennium and Occidental contributed businesses
--an approved strategic plan
--requirements made to achieve or maintain compliance with health,
safety and environmental laws
. to authorize the incurrence of debt for borrowed money, unless
--the debt is to refinance all or a portion of Equistar's credit
facilities as contemplated below
--after giving effect to the incurrence of the debt and any related
transactions, Equistar would be expected to have an "investment grade"
debt rating by Moody's and S&P's , or
--the debt is incurred to refinance the public or bank debt assumed or
incurred by Equistar as contemplated by documents relating to the
formation of Equistar and the contribution of the Occidental
contributed business or to refinance any such refinancing debt
and in the case of each of the three exceptions above, the agreement
relating to the debt does not provide that the transfer by a partner of
its partnership interests, or a change of control with respect to any
partner or any of its affiliates, would either
--constitute a default under the debt instruments
--otherwise accelerate the maturity of the debt
--give the lender or holder any "put rights" or similar rights with
respect to the debt instrument
. to authorize a refinancing that would not satisfy provisions relating to
the Millennium guaranteed debt and the Occidental guaranteed debt
. to make borrowings under one or more of Equistar's bank credit
facilities, uncommitted lines of credit or any credit facility, or debt
instruments that refinances all or any portion of Equistar's credit
facility or facilities, at any time, if, as a result of any borrowing,
the aggregate principal amount of all borrowings outstanding at the time
would exceed the sum of $1.75 billion
. to enter into interest rate protection or other hedging agreements, other
than hydrocarbon hedging agreements, in the ordinary course of business
. to enter into any capitalized lease or off-balance sheet financing
arrangements involving payments, individually or in the aggregate, by it
in excess of $30 million in any fiscal year
. to cause Equistar or any subsidiary of Equistar to issue, sell, redeem or
acquire any partnership interests in Equistar or other equity securities,
or any rights to acquire, or any securities convertible into or
exchangeable for, partnership interests or other equity securities
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. to make cash distributions from Equistar in excess of Available Net
Operating Cash, as defined below, or to make noncash distributions,
except as provided in the partnership agreement, in respect of a
dissolution or liquidation
. to appoint or discharge executive officers based on the recommendation of
the Chief Executive Officer
. to approve material compensation and benefit plans and policies, material
employee policies and material collective bargaining agreements for
Equistar's employees
. to initiate or settle any litigation or governmental proceedings if the
effect would be material to the financial condition of Equistar
. to change the independent accountants for Equistar
. to change Equistar's method of accounting as adopted in the partnership
agreement or to make tax elections under the Internal Revenue Code of
1986, as amended, approved by the partnership governance committee
. to create or change the authority of any auxiliary committee
. to merge, consolidate or convert Equistar or any of its subsidiaries with
or into any other entity, other than a wholly owned subsidiary of
Equistar
. to engage in bankruptcy and reorganization actions such as
--filing a petition in bankruptcy or seeking any reorganization,
liquidation or similar relief on behalf of Equistar or any subsidiary
--consenting to the filing of a petition in bankruptcy against Equistar
or any subsidiary
--consenting to the appointment of a receiver, custodian, liquidator or
trustee for Equistar or any subsidiary or for all or any substantial
portion of its property
. to exercise any of the powers or rights described below with respect to a
business conflict involving either
--LYONDELL-CITGO Refining, its successors or assigns
--Lyondell Methanol, its successors or assigns
--any other affiliate of either Lyondell GP, Millennium GP or
Occidental GP, if the affiliate's actions with respect to the conflict
circumstance are not controlled by Lyondell, Millennium or Occidental,
other than a business conflict involving the exercise of any rights
and remedies with respect to a default under any agreement that is the
subject of the conflict
. to repay any of the indebtedness that is guaranteed by the Millennium
America guarantee before December 1, 2004, or refinance any Millennium-
guaranteed debt before December 1, 2004, if any of the principal amount
of debt refinancing the guaranteed debt would be due and payable after
December 1, 2004; provided, however, that if the Millennium-guaranteed
debt continues to be guaranteed by Millennium America or its successors
after December 1, 2004, then the term of the debt shall not exceed 365
days
. to repay any of the indebtedness that is guaranteed by an Occidental
guarantee before June 14, 2005, other than through refinancing, or
refinance any Occidental-guaranteed debt before June 14, 2005, if any of
the principal of the debt refinancing Occidental guaranteed debt would be
due and payable after June 14, 2005; provided, however, that if
Occidental-guaranteed debt continues to be guaranteed by an affiliate of
Occidental or its successors after June 14, 2005, then the term of the
debt shall not exceed 365 days
Although unanimous approval by all nine members of the partnership
governance committee is never required, the requirements described above are
referred to as "unanimous voting requirements" because two
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representatives of each of the general partners must agree on any action taken
in respect of the enumerated matters.
Transactions with Affiliates
Except as described above under "--Actions Requiring Unanimous Voting," if a
business conflict caused by any transaction or dealing between Equistar, or any
of its subsidiaries, and one or more of Equistar's general partners, or any of
their affiliates, occurs, the other general partners will have sole and
exclusive power, at the expense of Equistar, to both
. control all decisions, elections, notifications, actions, exercises or
nonexercises and waivers of all rights, privileges and remedies provided
to, or possessed by, Equistar with respect to the conflict
. retain and direct legal counsel and to control, assert, enforce, defend,
litigate, mediate, arbitrate, settle, compromise or waive any and all
claims, disputes and actions if any potential, threatened or asserted
claim, dispute or action about a conflict occurs
Accordingly, any action by the partnership governance committee with respect to
a conflict, except as described above, will require the approval of at least
two representatives of the uninvolved general partners.
Officers of Equistar
The executive officers of Equistar consist of a Chief Executive Officer, a
President and Chief Operating Officer and others as determined from time to
time by the partnership governance committee. See "Management." Except for the
Chief Executive Officer, the approval of at least two representatives of each
of Lyondell GP, Millennium GP and Occidental GP is required to appoint or
discharge executive officers, based upon the recommendation of the Chief
Executive Officer. However, any of Lyondell GP, Millennium GP or Occidental GP
may, by action of two or more of its representatives, remove from office any
executive officer of Equistar, including the Chief Executive Officer, who
takes, or causes Equistar to take, any action described above under "--Actions
Requiring Unanimous Voting" without the required approval of two or more
representatives of each of Lyondell GP, Millennium GP and Occidental GP.
The Chief Executive Officer holds office for a five-year term, assuming he
does not resign or die and is not removed. Upon the expiration of his term or
earlier vacancy, Lyondell GP will designate the Chief Executive Officer,
provided that this person shall be reasonably acceptable to Millennium GP and
Occidental GP. The Chief Executive Officer will not be required to be an
employee of Equistar. The Chief Executive Officer may be removed at any time by
action of the partnership governance committee, meaning that the approval of
two representatives of Lyondell GP is required to effect a removal.
The Chief Executive Officer of Equistar has general authority and
discretion, comparable to that of a chief executive officer of a publicly held
Delaware corporation of similar size, to direct and control the business and
affairs of Equistar, including, without limitation, its day-to-day operations
in a manner consistent with the annual budget and the most recently approved
strategic plan. The Chief Executive Officer takes steps to implement all orders
and resolutions of the partnership governance committee. The Chief Executive
Officer also establishes salaries or other compensation for the other executive
officers of Equistar consistent with plans approved by the partnership
governance committee.
Strategic Plans and Preparation of an Annual Budget
Equistar is managed under a five-year strategic plan which is updated
annually under the direction of the Chief Executive Officer and presented for
approval by the partnership governance committee no later than 90 days before
the start of the first fiscal year covered by the updated plan. The strategic
plan must be approved each year by at least two representatives of each of
Lyondell GP, Millennium GP and Occidental GP. The strategic plan establishes
the strategic direction of Equistar, including
. plans relating to capital maintenance and enhancement
. geographic expansion, acquisitions and dispositions
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. new product lines
. technology
. long-term supply and customer arrangements
. internal and external financing
. environmental and legal compliance
. plans, programs and policies relating to compensation and industrial
relations
In addition, the executive officers of Equistar prepare an annual budget for
each fiscal year. Each annual budget includes an operating budget and capital
expenditure budget. Each annual budget must be consistent with the information
for its fiscal year included in the most recently approved strategic plan.
Unless otherwise provided in the most recently approved strategic plan, each
annual budget utilizes a format and provides a level of detail consistent with
Equistar's previous annual budget.
If for any fiscal year the partnership governance committee fails to approve
an updated strategic plan, for that year and each subsequent year before the
approval of an updated strategic plan, the executive officers of Equistar will
prepare an annual budget consistent with the projections and other information
for that year included in the strategic plan most recently approved. The Chief
Executive Officer, acting in good faith, shall be entitled to modify any annual
budget
. to satisfy current contractual and compliance obligations and/or
. to account for other changes in circumstances resulting from the passage
of time or the occurrence of events beyond Equistar's control
The Chief Executive Officer is not authorized to cause Equistar to proceed with
capital expenditures to accomplish capital enhancement projects except to the
extent that the expenditures would enable Equistar to continue or complete any
capital project reflected in the last strategic plan that was approved by the
partnership governance committee.
Solutions for Partnership Governance Committee Deadlock
After a strategic plan and an annual budget have been approved by the
partnership governance committee, or an annual budget has been developed as
described above in cases where an updated strategic plan has not yet been
approved, the Chief Executive Officer is authorized, without further action by
the partnership governance committee, to cause Equistar to make expenditures
consistent with the updated strategic plan and annual budget, provided that all
internal control policies and procedures, including those regarding the
required authority for expenditures, shall have been followed.
If the partnership governance committee has not agreed upon and approved an
updated strategic plan by 12 months after the beginning of the first fiscal
year that would have been covered by the plan, then Lyondell GP, Millennium GP
and Occidental GP are required to submit to a nonbinding dispute resolution
process. The partners are required to continue the dispute resolution process
until either
. agreement is reached by the general partners, acting through their
representatives on an updated strategic plan
. at least 24 months have elapsed since the beginning of the first fiscal
year that was to be covered by the first updated strategic plan for which
agreement was not reached
Once 24 months have elapsed, one general partner will determine and notify
the other general partners in writing that no agreement resolving the dispute
is likely to be reached. Following receipt of notice, any general partner may
elect to dissolve Equistar.
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Distribution of Available Net Operating Cash to Equistar's Partners
Equistar shall distribute to the partners, as soon as practicable following
the end of each month, all Available Net Operating Cash, as defined below. On a
cumulative basis
. distributions are to be made to the extent of cumulative profits to the
partners in the ratio of the percentage interest owned by each partner
. the remaining distributions are to be made to Equistar's limited partners
in the ratio of their percentage interest
See "Ownership."
"Available Net Operating Cash" is defined in Equistar's partnership
agreement, at the relevant time of determination, as
. all cash and cash equivalents on hand at Equistar as of the most recent
month's end, plus the excess, if any, of Equistar's targeted level of
indebtedness over Equistar's actual indebtedness as of that month's end,
less
. the Projected Cash Requirements, if any, of Equistar as of that month's
end, as determined by Equistar's executive officers
Equistar's targeted level of indebtedness is shown in the most recently
updated strategic plan. Equistar's actual indebtedness is determined according
to generally accepted accounting principles and represents all short term and
long term debt.
"Projected Cash Requirements" means, for the 12-month period following any
month's end, the excess, if any, of the sum of
. forecast capital expenditures
. forecast cash payments for taxes, debt service, including principal and
interest payment requirements and other noncash credits to income
. forecast cash reserves for future operations or other requirements
over the sum of
. forecast net income of Equistar
. the sum of forecast depreciation, amortization, other noncash charges to
income, interest expense and tax expenses, in each case to the extent
deducted in determining net income
. forecast decreases in working capital or minus forecast increases in
working capital
. the forecast cash proceeds of disposition of assets, net of expenses
. an amount equal to the forecast net proceeds of debt financings and
capital contributions
Projected Cash Requirements for Equistar shall be calculated consistently
with the most recently updated strategic plan, except to the extent Equistar's
executive officers determine that changes in Equistar's financial condition,
results of operations, assets, business or prospects make a change advisable,
in which case Equistar shall promptly advise the general partners regarding the
basis for the change.
Distributions to the partners of cash or property arising from a liquidation
of Equistar will be made according to the capital account balances of the
partners.
Any amount otherwise distributable to a partner as described above will be
applied by Equistar to satisfy any of the following obligations that are owed
by a partner or its affiliate to Equistar and that are not paid when
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due, unless otherwise agreed by the general partners not involved with a
business conflict as described under "--Transactions with Affiliates" above for
a partner's failure
. to pay any interest or principal when due on any indebtedness for
borrowed money of the partner or its affiliate to Equistar
. to make any indemnification payment required by its asset contribution
agreement that has been finally determined to be due or the failure of
that partner's affiliate
. to make any capital contribution required by the partnership agreement,
other than as required by its asset contribution agreement
Indemnification of Equistar's Partners
Equistar has agreed, to the fullest extent permitted by applicable law, to
indemnify, defend and hold harmless each partner, its affiliates and its
respective officers, directors and employees. This indemnification is from,
against and in respect of any liability which that person may sustain, incur or
assume as a result of, or relative to, any third-party claim arising out of or
in connection with the business, property or affairs of Equistar. This
indemnification does not apply to the extent that it is finally determined that
the third-party claim arose out of or was related to actions or omissions of
the indemnified partner, its affiliates or any of their respective officers,
directors or employees acting in those capacities constituting a breach of
Equistar's partnership agreement or any related agreement. This indemnification
obligation is not intended to, nor will it, affect or take precedence over the
indemnity provisions contained in any related agreement.
Transfers and Pledges of a Partner's Interest in Equistar
Without the consent of the partnership governance committee, no partner may
transfer less than all of its interest in Equistar. If an Equistar limited
partner and its affiliated general partner desire to transfer, via a cash sale,
all of their units, they must give written notice to Equistar and the other
partners stating
. their desire to transfer their partnership interests
. the cash purchase price
. all other terms on which they are willing to sell
Delivery of this initial notice will constitute the irrevocable offer by the
selling partners to sell their partnership interest. The nonselling partners
shall have the option, exercisable by delivering written acceptance notice of
the exercise to the selling partners within 45 days after receiving notice of
the sale, to elect to purchase all of the partnership interests of the selling
partners on the terms described in the initial notice. If all of the other
nonselling partners deliver notice of acceptance, then all of the partnership
interests shall be transferred in proportion to the partners' current
percentage interest unless otherwise agreed. If less than all of the nonselling
partners deliver notice of acceptance, the partner who delivers notice of
acceptance will have the option of purchasing all of the partnership interests
up for sale. The notice of acceptance will set a date for closing the purchase
which is not less than 30 nor more than 90 days after delivery of the notice of
acceptance, subject to extension. The purchase price for the selling partners'
partnership interests will be paid in cash. The cash shall be delivered at the
closing.
If the nonselling partners do not elect to purchase the selling partners'
partnership interests within 45 days after the receipt of initial notice of
sale, the selling partners will have a further 180 days during which they may
consummate the sale of their units to a third-party purchaser. The sale to a
third-party purchaser must be at a purchase price and on other terms that are
no more favorable to the purchaser than the terms offered to the Equistar
partners. If the sale is not completed within the 180-day period, the initial
notice will be deemed to have expired, and a new notice and offer shall be
required before the selling partners may make any transfer of their partnership
interests.
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Before the selling partners may consummate a transfer of their partnership
interests to a third party under the partnership agreement, the selling
partners will demonstrate the suitability of the proposed purchaser as an
Equistar partner. The person willing to serve as the proposed purchaser's
guarantor must have outstanding indebtedness that is rated investment grade by
Moody's and S&P's. If the proposed guarantor has no rated indebtedness
outstanding, it shall provide an opinion from a nationally recognized
investment banking firm that it could be reasonably expected to obtain suitable
ratings. In addition, a partner may transfer its partnership interests only if
. the transferee executes an appropriate agreement to be bound by the
partnership agreement
. the transferor and/or the transferee bears all reasonable costs incurred
by Equistar in connection with the transfer
. the guarantor of the transferee delivers an agreement to the ultimate
parent entity of the nonselling partners and to Equistar substantially in
the form of the parent agreement
A partner will not in any transaction or series of actions, directly or
indirectly, pledge all or any part of its partnership interest. However, a
partner may at any time assign its right to receive distributions from Equistar
so long as the assignment does not purport to assign any
. right of the partner to participate in or manage the affairs of Equistar
. right of the partner to receive any information or accounting of the
affairs of Equistar
. right of the partner to inspect the books or records of Equistar
. any other right of a partner under the partnership agreement or the
Delaware Revised Uniform Limited Partnership Act
In addition, except for any restrictions imposed by the parent agreement,
nothing in Equistar's partnership agreement will prevent the transfer or pledge
by the owner of any capital stock, equity ownership interests or other security
of the partner or any affiliate of a partner.
Business Opportunities Which Must be Offered to Equistar
Except as described below, each partner's affiliates are free to engage in
or possess an interest in any other business of any type and to avail
themselves of any business opportunity available to it without having to offer
Equistar or any partner the opportunity to participate in that business. If a
partner's affiliate desires to initiate or pursue an opportunity to undertake,
engage in, acquire or invest in a "related business," as defined in the
partnership agreement, that partner or its affiliate will offer Equistar the
business opportunity.
A "related business" is any business related to
. the manufacturing, marketing and distribution of the types of olefins,
polyolefins, ethyl alcohol and ethyl ether and ethylene oxide, ethylene
glycol and derivatives of ethylene oxide and ethylene glycol that are
specific in the partnership agreement
. the purchasing, processing and disposing of raw materials in connection
with the manufacturing, marketing and distributing of the chemicals
identified in the previous bulletpoint, and
. any research and development in connection with the previous two
bulletpoints
When a proposing partner offers a business opportunity to Equistar, Equistar
will elect to do one of the following within a reasonably prompt period
. acquire or undertake the business opportunity for the benefit of Equistar
as a whole, at the cost, expense and benefit of Equistar
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. permit the proposing partner to acquire or undertake the business
opportunity for its own benefit and account without any duty to Equistar
or the other partners
If the business opportunity is in direct competition with the then-existing
business of Equistar, then the proposing partner and Equistar shall, if either
so elects, seek to negotiate and implement an arrangement whereby Equistar
would either
. acquire or undertake the competing opportunity at the sole cost, expense
and benefit of the proposing partner under a mutually acceptable
arrangement. Under the arrangement, the competing opportunity will be
treated as a separate business within Equistar. The proposing partner
bears costs, expenses and benefits of the separate business
or
. enter into a management agreement with the proposing partner to manage
the competing opportunity on behalf of the proposing partner. The
management agreement will be on terms and conditions mutually acceptable
to the proposing partner and Equistar.
If Equistar and the proposing partner do not reach agreement as to an
arrangement, the proposing partner may acquire or undertake the competing
opportunity for its own benefit and account without any duty to Equistar or the
other partners.
In addition, if the business opportunity constitutes less than 25% of an
acquisition of or investment in assets, activities, operations or businesses
that is not otherwise a related business, then a proposing partner may acquire
or invest in a business opportunity without first offering it to Equistar. The
25% figure is based on annual revenues for the most recently completed fiscal
year. After completion of the above acquisition or investment, the proposing
partner must offer the business opportunity to Equistar under the terms
described above. If Equistar elects to pursue the business opportunity, it will
be acquired by Equistar at its fair market value as of the date of the
acquisition.
Equistar will permit the first general partner and its affiliates to acquire
or undertake a business opportunity, and the business opportunity shall be
treated in the same manner as if the general partners and its affiliates were a
proposing partner with respect to the business opportunity if
. Equistar is presented with an opportunity to acquire or undertake a
business opportunity that it determines not to acquire or undertake
. the representatives of one general partner, but not the other general
partners, desire that Equistar acquire or undertake the business
opportunity
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Description of the Parent Agreement
Lyondell, Millennium, Occidental, Occidental Chemical Corporation, Oxy CH
Corporation and Equistar are parties to an amended and restated parent
agreement and, along with Occidental Chemical Holding Corporation, an
assignment and assumption agreement. The parent agreement, as modified by the
assignment and assumption agreement, provides for, among other things, a
guarantee of the obligations of their respective subsidiaries by each of
Lyondell, Millennium and Occidental Chemical Holding (the "Guarantor Parents"),
transfer restrictions with respect to the stock of the subsidiaries that hold
the direct interests in Equistar (the "Partner Sub Stock") and a requirement to
present specified business opportunities to Equistar. The following is a
summary of the material provisions of the parent agreement as modified by the
assignment and assumption agreement, which is available upon written request as
provided under "Available Information."
Guarantee of Obligations Under the Partnership Agreement and Related Party
Agreements
Each of the Guarantor Parents has guaranteed, undertaken and promised to
cause the due and punctual payment and the full and prompt performance of all
of the amounts to be paid and all of the terms and provisions to be performed
or observed by or on the part of its Affiliated Obligors, as defined below,
under various agreements, including, without limitation, the partnership
agreement and the asset contribution agreements, by its respective
subsidiaries. The subsidiaries are as follows
. Lyondell GP and Lyondell LP in the case of Lyondell (the "Lyondell
Partner Subs")
. Millennium GP and Millennium LP in the case of Millennium (the
"Millennium Partner Subs")
. Occidental GP, Occidental LP1 and Occidental LP2 in the case of
Occidental Chemical Holding (the "Occidental Partner Subs")
The Occidental Partner Subs, Lyondell Partner Subs and Millennium Partner Subs,
and any other direct or indirect subsidiary of any of the Guarantor Parents
that are parties to the other agreements defined below are collectively
referred to as the "Affiliated Obligors." The guarantee extends, according to
the terms of the other agreements, as follows
. in the event that its Affiliated Obligors fail in any manner whatsoever
to timely pay, perform or observe any of the terms and provisions of
other agreements, the Guarantor Parent will either
--itself duly and punctually pay, or fully and promptly perform or
observe, as the case may be, the terms and provisions
--cause the same to be duly and punctually paid, or fully and promptly
performed or observed
. in each of the above, the Guarantor Parent will act as if the Guarantor
Parent were itself the obligor with respect to the terms and provisions
under other agreements
Insofar as the foregoing relates to the obligations of an Affiliated Obligor
under Equistar's partnership agreement, no Guarantor Parent will be required to
make, or cause a Partner Sub to make, any contribution to Equistar that the
Partner Sub is not otherwise required to make under terms of Equistar's
partnership agreement concerning required capital contributions. Insofar as
this paragraph applies to agreements other than the partnership agreement and
the parent agreement, the term "Affiliated Obligors" will not include Equistar
or any partner of Equistar in its capacity as a partner. The parent agreement
provides expressly that the parent guarantees inure solely to the benefit of
the beneficiaries specified in the parent agreement, which consist of Equistar,
Lyondell, Millennium, Occidental and the Affiliated Obligors. The parent
agreement also states that nothing in the agreement confers upon any other
person any rights, benefits or remedies by reason of the parent agreement.
Accordingly, the holders of the notes may not enforce any provision, or seek
relief by reason, of the parent agreement.
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Conflict Circumstance
The provisions described under the caption "Guarantee of Obligations Under
the Partnership Agreement and Related Party Agreements" do not apply to terms
and provisions of other agreements that are within the scope of the provisions
described in this subsection. Equistar's partnership agreement includes
definitions of "Conflicted General Partner" and "Nonconflicted General Partner"
and provides that the Nonconflicted General Partners have some exclusive rights
to control Equistar with respect to any Conflict Circumstance. Without limiting
the rights of its Partner Sub under the partnership agreement, and without
prejudice to any rights, remedies or defenses Equistar may have in any other
agreement or Conflict Circumstance, each of Lyondell, Millennium and Occidental
Chemical Holding has agreed to cause its Partner Sub to both
. cause Equistar to pay, perform and observe all of the terms and
provisions of other agreements to be paid, performed or observed by or on
the part of Equistar under the agreements, according to their terms to
the extent that the Partner Sub is a Nonconflicted General Partner and is
thereby entitled to cause the payment, performance and observance of the
terms and provisions
. except to the extent inconsistent with its obligations above, abide by
its obligations as a Nonconflicted General Partner with respect to any
conflict circumstance arising in connection with any other agreement
according to the terms of the partnership agreement that apply; each of
Lyondell's, Millennium's or Occidental Chemical Holding's responsibility
for a failure of Equistar to pay, perform or observe its obligations
under the other agreements shall be limited to the circumstances in which
Equistar's failure to so pay, perform or observe its obligations under
the other agreements was directly caused by an act or failure to act by
its Partner Sub
Nothing in the provisions described in this subsection shall require Lyondell,
Millennium or Occidental Chemical Holding to make or cause the Partner Sub to
either
. cure or mitigate any inability of Equistar to make any payment or to
perform or observe any terms and provisions under any other agreements
. cause Equistar to require from the Partner Subs any cash contributions in
respect of any payment, performance or observance involving a conflict
circumstance
. make any contribution to Equistar that the Partner Sub is not otherwise
required to make under terms of the partnership agreement concerning
required capital contributions
See "Description of the Partnership Agreement--Transactions with Affiliates."
Restrictions on Transfer of Partner Sub Stock
Without the consent of each of Lyondell, Millennium, Oxy CH and Occidental
Chemical (the "Ownership Parents"), none of Lyondell, Millennium, Occidental
Chemical or Oxy CH may transfer less than all of its Partner Sub Stock. Unless
such transfer is otherwise permitted under the parent agreement, no Ownership
Parent may transfer its Partner Sub Stock for consideration other than cash.
However, each of Lyondell, Millennium, Oxy CH or Occidental Chemical may
transfer all, but not less than all, of its Partner Sub Stock, if the transfer
is in connection with either
. a merger, consolidation, conversion or share exchange of the Ownership
Parent
. a sale or other disposition of
--the Partner Sub Stock
plus
--other assets representing at least 50% of the book value of the
Ownership Parent's assets excluding the Partner Sub Stock, as
reflected on its most recent audited consolidated or combined
financial statements
Following the consummation of any transaction involving Oxy CH or Occidental
Chemical, the Partner Sub Stock held directly or indirectly by Oxy CH and
Occidental Chemical on the date of the parent agreement shall
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be held by the same transferee or one or more transferees that are wholly owned
affiliates of each other or of a common parent entity.
Any transfer of Partner Sub Stock by any Ownership Parent is only permitted
if the acquiring, succeeding or surviving entity, if any, both
. succeeds to and is substituted for the transferring Ownership Parent with
the same effect as if it had been named in the parent agreement
. executes an instrument agreeing to be bound by the obligations of the
transferring Ownership Parent under the parent agreement, with the same
effect as if it had been named in the instrument
The transferring Ownership Parent may be released from its guarantee
obligations under the parent agreement after the successor parent agrees to be
bound by the Ownership Parent's obligations.
Unless a transfer is permitted under the provisions described above, any
Ownership Parent desiring to transfer all of its Partner Sub Stock to any
person, including another Ownership Parent or any affiliate of an Ownership
Parent, will give written notice to Equistar and each of the other Ownership
Parents. The notice will state
. the selling parent's desire to transfer its Partner Sub Stock
. the cash purchase price, and
. all other terms on which the selling parent is willing to sell
Each offeree parent will have the option to elect to purchase all of its
proportional share, in the case of both of the limited partner and general
partner, of all of the Partner Sub Stock of the selling parent. The option to
purchase is on the terms described in the initial notice of sale. If one of the
selling parents, but not the other, elects to so purchase, the selling parent
shall give written notice thereof to the offeree parent electing to purchase,
and that parent shall have the option to purchase all of the Parent Sub Stock
held by the selling parent, including the Partner Sub Stock it has not
previously elected to purchase. Any election by an offeree parent not to
purchase all of the Partner Sub Stock shall be deemed a rescission of the
parent's original notice of acceptance and an election not to purchase any of
the Partner Sub Stock of that selling parent. If one or both of the offeree
parents do not elect to purchase all of the selling parent's Partner Sub Stock
within 45 days after the receipt of the initial notice or within 15 days after
the receipt of the notice to an offeree parent electing to purchase, if
applicable, the selling parent will have a further 180 days during which it
may, subject to the provisions of the following paragraph, consummate the sale
of its Partner Sub Stock to a third-party purchaser. The sale to a third-party
purchaser may be at a purchase price and on other terms that are no more
favorable to the purchaser than the initial terms offered to the offeree
parents. If the sale is not completed within the further 180-day period, the
initial notice of sale will be deemed to have expired and a new notice and
offer shall be required before the selling parent may make any transfer of its
Partner Sub Stock.
Before the selling parent may consummate a transfer of its Partner Sub Stock
to a third party under the parent agreement, the selling parent shall
demonstrate to the other Ownership Parents that the proposed purchaser, or the
person willing to serve as its guarantor as contemplated by the terms of the
parent agreement, has outstanding indebtedness that is rated investment grade
by either Moody's or S&P. If such proposed purchaser or the other person has no
rated indebtedness outstanding, that person shall provide an opinion from
Moody's, S&P or from a nationally recognized investment banking firm that it
could be reasonably expected to obtain a suitable rating. Moreover, an
Ownership Parent may transfer its Partner Sub Stock, under the previous
paragraph, only if all of the following occur:
. the transfer is accomplished in a nonpublic offering in compliance with,
and exempt from, the registration and qualification requirements of all
federal and state securities laws and regulations
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. the transfer does not cause a default under any material contract which
has been approved unanimously by the partnership governance committee and
to which Equistar is a party or by which Equistar or any of its
properties is bound
. the transferee executes an appropriate agreement to be bound by the
parent agreement
. the transferor and/or transferee bears all reasonable costs incurred by
Equistar in connection with the transfer
. the transferee, or the guarantor of the obligations of the transferee,
delivers an agreement to each of the other Ownership Parents and Equistar
substantially in the form of the parent agreement
. the proposed transferor is not in default in the timely performance of
any of its material obligations to Equistar
In no event may any Ownership Parent transfer the Partner Sub Stock of any
of its Partners' subs to any person unless the Ownership Parent simultaneously
transfers the Partner Sub Stock of its other partners' sub or subs to the
person or a wholly owned affiliate of the person or a common parent.
Competing Business by Partners of Equistar or Their Affiliates
If any of Lyondell, Millennium or Occidental Chemical, Oxy CH or Occidental
Chemical Holding or any of their affiliates desires to initiate or pursue any
opportunity to undertake, engage in, acquire or invest in a business
opportunity, it shall agree to offer that business opportunity to Equistar
under the terms and conditions in the partnership agreement as if it were the
"proposing partner," as described above in "Description of the Partnership
Agreement--Business Opportunities Which Must be Offered to Equistar." Equistar
will have the rights and obligations arising from the offer of the business
opportunity granted by the partnership agreement. See "Description of the
Partnership Agreement--Business Opportunities Which Must be Offered to
Equistar."
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Related Transactions
All of the related transactions described below were obtained on terms
substantially no more favorable than those that would have been agreed upon by
third parties on an arm's length basis.
Asset Contributions by Lyondell and Affiliates of Millennium and Occidental
Both Lyondell and Millennium Petrochemicals entered into separate asset
contribution agreements on December 1, 1997, providing for the contribution of
the Lyondell and Millennium contributed businesses. Wholly owned subsidiaries
of Occidental (the "Occidental Subsidiaries") entered into an asset
contribution agreement with Equistar on May 15, 1998, with respect to the
transfer of the Occidental contributed business, a portion of which transfer
was accomplished through a merger of an Occidental Subsidiary with and into
Equistar. Among other things, the asset contribution agreements required
representations and warranties by the contributor regarding the transferred
assets and indemnification of Equistar by the contributor. These agreements
also provide for the assumption by Equistar of, among other things
. third-party claims that are related to preclosing contingent liabilities
that are asserted before December 1, 2004, as to Lyondell and Millennium
Petrochemicals or before May 15, 2005, as to the Occidental Subsidiaries,
to the extent the aggregate amount does not exceed, in the case of each
of Lyondell, Millennium and the Occidental Subsidiaries, $7 million
. third-party claims related to preclosing contingent liabilities that are
asserted for the first time after December 1, 2004, as to Lyondell and
Millennium Petrochemicals or after May 15, 2005, as to the Occidental
Subsidiaries
. obligations for $745 million of Lyondell indebtedness, a portion of which
was since repaid
. a $750 million intercompany obligation of Millennium Petrochemicals to an
indirect subsidiary of Millennium, which was since repaid
. the lease intended for security relating to the Corpus Christi facility
contributed by Occidental, which was since repaid
. liabilities for products sold after December 1, 1997, as to Lyondell and
Millennium Petrochemicals or after May 15, 1998, as to the Occidental
Subsidiaries, regardless of when manufactured
. in the case of each of the Lyondell and Millennium Petrochemicals asset
contribution agreements, unfunded health care and life insurance post-
retirement benefits related to the applicable contributed business or to
former Lyondell employees
. in the case of the Millennium Petrochemicals asset contribution
agreement, future maintenance and maintenance turnaround costs related to
the Millennium contributed business
. in the case of each of the Millennium Petrochemicals and Occidental asset
contribution agreements, obligations under railcar leases under which
Equistar is the lessee
Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries entered
into Master Intellectual Property Agreements and other related agreements with
respect to intellectual property with Equistar. These agreements provide for
all of the following
. the transfer of intellectual property of Lyondell, Millennium
Petrochemicals and the Occidental Subsidiaries related to the businesses
each contributed to Equistar
. rights and licenses to Equistar with respect to intellectual property
retained by Lyondell, Millennium Petrochemicals or the Occidental
Subsidiaries that was not solely related to the business of Equistar but
is useful in that business
. rights and licenses from Equistar to Lyondell, Millennium Petrochemicals
and the Occidental Subsidiaries with respect to intellectual property
transferred to Equistar that Lyondell, Millennium Petrochemicals and the
Occidental Subsidiaries may use in connection with their other businesses
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Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries each
entered into various other conveyance documents with Equistar to effect their
asset contributions as provided for in their respective contribution
agreements.
Loans by Millennium and Occidental
In May 1998, in connection with Occidental's entry into Equistar, Equistar
executed promissory notes to Millennium in the principal amount of $75.0
million and to Occidental in the principal amount of $419.7 million. Each of
the notes provided for the annual accrual of interest based on a year of 360
days and actual days elapsed at an interest rate equal to LIBOR plus 0.6%.
These notes were paid in full in June 1998 with borrowings under Equistar's
bank $500 million credit facility and $1.25 billion revolving credit facility.
Loan by Equistar to Lyondell
In December 1997, Lyondell's subsidiary that is a limited partner in
Equistar executed a promissory note to Equistar in the principal amount of $345
million as part of its capital contribution to Equistar. The note provided for
the annual accrual of interest based on a year of 360 days at a rate of LIBOR
plus 0.5%. Lyondell had the right to prepay any portion of the principal and
interest due without penalty or premium. This note was repaid in full in July
1998, and the proceeds were distributed to Lyondell and Millennium.
Transactions with Lyondell Methanol
Equistar provides operating and other services for Lyondell Methanol under
the terms of existing agreements that were assumed by Equistar from Lyondell,
including the lease to Lyondell Methanol by Equistar of the real property on
which its methanol plant is located. Under the terms of those agreements,
Lyondell Methanol pays Equistar a management fee of $6 million per year and
will reimburse some expenses of Equistar at cost. Equistar sells natural gas to
Lyondell Methanol at prices generally representative of Equistar's cost.
Lyondell Methanol purchased natural gas in the amounts of $44 million for 1998
and $4 million for December 1997. All of the foregoing agreements with Lyondell
Methanol are expected to continue on terms similar to those described above.
Transactions with LYONDELL-CITGO Refining
In connection with the formation of Equistar, Lyondell's rights and
obligations under the terms of its product sales and raw material purchase
agreements with LYONDELL-CITGO Refining were assigned to Equistar. Accordingly,
refinery products, including propane, butane, naphthas, heating oils and gas
oils, are sold by LYONDELL-CITGO Refining to Equistar as raw materials, and
some olefins by-products are sold by Equistar to LYONDELL-CITGO Refining for
processing into gasoline. Net payments from LYONDELL-CITGO Refining to Equistar
in connection with these product sales and raw material purchase agreements
were $92 million for 1998 and $1 million for December 1997.
Equistar and LYONDELL-CITGO Refining are also parties to
. tolling arrangements under which some of LYONDELL-CITGO Refining's
coproducts are transmitted to Equistar and processed by Equistar, with
the resulting product being returned to LYONDELL-CITGO Refining
. terminaling and storage obligations
. agreements for Equistar to perform some marketing services for LYONDELL-
CITGO Refining
Aggregate payments under these various services agreements of $15 million
were made by LYONDELL-CITGO Refining to Equistar with respect to 1998. No
payments were made for December 1997.
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All of the agreements between LYONDELL-CITGO Refining and Equistar are on
terms generally representative of prevailing market prices. All of the
foregoing agreements with LYONDELL-CITGO Refining are expected to continue on
terms similar to those described above.
Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium
and Occidental
Lyondell has agreed to provide some types of corporate, general and
administrative services to Equistar, including legal, treasury, risk
management, tax services and employee benefit plan administration. Equistar has
also agreed to provide services to Lyondell, including health, safety and
environmental services, human resource services, information services and legal
services. Depending on the nature of the services, a fixed price may be paid or
costs reimbursed. As a consequence of services being provided by Equistar to
Lyondell and by Lyondell to Equistar, a net payment is made by Equistar to
Lyondell of approximately $90,000 per month. These service agreements are
expected to continue on terms substantially similar to those described above.
Equistar and Millennium Petrochemicals have entered into a variety of
operating, manufacturing and technical service agreements related to the
business of Equistar and the vinyl acetate monomer, acetic acid, synthesis gas
and methanol businesses retained by Millennium Petrochemicals. These agreements
include the provision by Equistar to Millennium Petrochemicals of materials
management, utilities, fuelstreams, office space, health, safety and
environmental services and computer services. These agreements also include the
provision by Millennium Petrochemicals to Equistar of operational services,
including waste water treatment, fuelstreams and barge dock access and
services. As a consequence of services being provided by Equistar to Millennium
Petrochemicals and by Millennium Petrochemicals to Equistar, net payments were
made by Millennium Petrochemicals to Equistar of $5 million with respect to
1998. No payments were made for December 1997. In the case of product sales,
prices are generally market-related. In the case of services, prices are
usually based on an allocation of costs according to anticipated relative
usage. Equistar also purchases relatively small amounts of vinyl acetate
monomer from Millennium Petrochemicals. Millennium Petrochemicals purchases
relatively small amounts of hydrogen and natural gas from Equistar. Except for
modifications resulting from Millennium Petrochemicals' recent sale of its
synthesis gas and methanol businesses, these service and product sales
agreements are expected to continue on terms similar to those described above.
On May 15, 1998, Occidental Chemical and Equistar entered into an operating
agreement under which Occidental Chemical agreed to operate and maintain the
Occidental contributed business and to cause third parties to continue to
provide equipment, products and commodities in connection with the Occidental
contributed business upon substantially the same terms and conditions as
provided before the transfer of the Occidental contributed business. Under the
terms of the operating agreement, Equistar agreed to reimburse Occidental
Chemical for its costs in connection with the services provided to Equistar and
to pay Occidental Chemical an administrative fee. The operating agreement
terminated according to its terms on June 1, 1998. During the term of the
operating agreement, Equistar paid Occidental Chemical an administrative fee of
$1 million in connection with the services Occidental Chemical rendered to
Equistar under the agreement.
On June 1, 1998, Occidental Chemical and Equistar entered into a transition
services agreement. Under the terms of the transition services agreement,
Occidental Chemical agreed to provide to Equistar services in connection with
the transferred businesses, including services related to accounting, payroll,
office administration, marketing, transportation, purchasing and procurement,
management, human resources, customer service and technical services. In
consideration for the services provided by Occidental Chemical under the
agreement, depending on the service, Equistar is required to either
. pay Occidental Chemical a fixed fee for their services according to the
terms of the transition services agreement
. reimburse Occidental Chemical for all reasonable, direct, out-of-pocket
costs that are incurred by Occidental Chemical in connection with
providing their services
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The transition services agreement provides that the parties must mutually agree
as to which payment option they wish to use. Between June 1, 1998 and December
31, 1998, Equistar paid Occidental Chemical $6 million in connection with
services provided under the agreement. The transition services agreement
expires by its terms on June 1, 1999.
Equistar and Occidental Chemical have entered into a toll processing
agreement, dated as of May 15, 1998, whereby Equistar has retained the services
of Occidental Chemicals's facilities in Ashtabula, Ohio, for the processing of
Glycol Ether TM into Glycol Ether TM Borate Ester material for brake or clutch
fluid. Under the terms of the agreement, Equistar procures from Occidental
Chemical its total requirements of Glycol Ether TM Borate Ester, up to a
maximum of 1 million pounds, in any calendar quarter. The agreement requires
Occidental Chemical to process Glycol Ether TM into Glycol Ether TM Borate
Ester exclusively for Equistar. The fee for the processing is $0.35 per pound
of Glycol Ether TM Borate Ester until April 30, 1999. After April 30, 1999, the
fee may be adjusted based on a price index according to the terms of the
agreement. Between May 15, 1998 and December 31, 1998, Equistar paid Occidental
Chemical $124,000 under the agreement. The initial term of the agreement ends
on December 31, 2001, but will continue from year to year unless terminated
effective December 31 of the relevant year by either party upon at least 12
months' written notice.
Occidental Ethylene Sales Agreement
Equistar and Occidental Chemical entered into an ethylene sales agreement,
dated May 15, 1998. Under the terms of the ethylene sales agreement with
Occidental Chemical, Occidental Chemical has agreed to purchase an annual
minimum amount of ethylene from Equistar equal to 100% of the ethylene raw
material requirements of Occidental Chemical's United States plants. The
ethylene raw material is exclusively for internal use in production at these
plants less any quantities up to 250 million pounds tolled according to the
provisions of the agreement. Internal use in production is estimated to be 2
billion pounds per year at the time of signing the agreement.
Equistar's maximum supply obligation in any calender year under the ethylene
sales agreement with Occidental Chemical is 2.55 billion pounds. Upon three
years' notice from either party to the other, the ethylene sales agreement with
Occidental Chemical may be "phased down." No phase down may commence before
January 1, 2009. According to the phase-down provisions of the agreement, the
annual minimum requirements specified in the agreement must be phased down over
at least a five-year period.
The ethylene sales agreement with Occidental Chemical provides that each
month Occidental Chemical will pay a price approximately equal to Equistar's
quarterly quantity weighted-average net ethylene final transaction price for
sales to third parties. Between May 15, 1998 and December 31, 1998, Equistar
received aggregate payments from Occidental Chemical of $171 million under the
ethylene sales agreement.
Other Product Sales to Related Parties
Ethylene Sales Agreement with Millennium Petrochemicals. Equistar sells
ethylene to Millennium Petrochemicals at market-related prices under an
agreement entered into in connection with the formation of Equistar. Under this
agreement with Millennium Petrochemicals, Millennium Petrochemicals is required
to purchase 100% of its ethylene requirements for its La Porte, Texas facility,
estimated at 300 million pounds per year, up to a maximum of 330 million pounds
per year. Millennium Petrochemicals has the option to increase the amount
purchased up to 400 million pounds per year beginning January 1, 2001. The
initial term of the contract expires December 1, 2000. The contract
automatically renews annually. Either party may terminate on one year's notice.
If Millennium Petrochemicals elects to increase its purchases under
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the contract, however, a party must provide two years' notice of termination.
The pricing terms under this agreement between Equistar and Millennium
Petrochemicals are similar to the ethylene sales agreement. Millennium
Petrochemicals paid $40 million to Equistar for ethylene for 1998. Millennium
Petrochemicals paid $5 million to Equistar for ethylene for December 1997.
Ethylene Sales Agreement with Lyondell. Lyondell has purchased ethylene and
propylene from Equistar since its formation on price terms comparable to those
of the ethylene sales agreement. Lyondell paid $21 million to Equistar for
ethylene for 1998. Lyondell paid $3 million to Equistar for ethylene for
December 1997. Lyondell paid $29 million to Equistar for propylene for 1998 and
$4 million to Equistar for propylene for December 1997. Lyondell and Equistar
contemplate entering into agreements concerning sales by Equistar to Lyondell
of ethylene, propylene, benzene, ethylene oxide and methanol. In the case of
ethylene, propylene, benzene and ethylene oxide, the contracts are expected to
be requirements contracts, less amounts Lyondell is required to purchase under
outstanding agreements, at market-related prices. A wholly owned subsidiary of
Lyondell licenses MTBE technology to Equistar. This subsidiary also purchases a
significant portion of the MTBE produced by Equistar at one of its two
Channelview units at market-related prices.
Related Party Leases
Equistar subleases office space for its headquarters and administrative
functions from Lyondell. Equistar paid $5 million for the office space for
1998. Equistar paid $234,000 for the office space for December 1997. Millennium
Petrochemicals subleases administrative office space from Equistar. Millennium
Petrochemicals paid $504,000 for 1998. Millennium Petrochemicals paid $42,000
for December 1997 under the sublease agreement.
Agreement Regarding Services of Equistar's Chief Executive Officer
Dan F. Smith serves as the Chief Executive Officer of both Lyondell and
Equistar and is a director of Lyondell. Mr. Smith receives no compensation from
Equistar. Under an agreement between Equistar and Lyondell, Equistar pays
Lyondell a monthly amount in respect of Mr. Smith's services. In 1998, Equistar
paid Lyondell $1.2 million. In December 1997, Equistar paid Lyondell $100,000.
After December 31, 1998, Equistar will pay an amount equal to 125% of Eugene
Allspach's estimated cash compensation as compensation to Lyondell for the
services rendered by Mr. Smith. See "Management--Members of the Partnership
Governance Committee, Executive Officers of Equistar and Directors and
Executive Officers of Equistar Funding" and "Compensation."
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The Exchange Offers
Purpose and Effect of the Exchange Offers
We entered into an exchange and registration rights agreement with the
initial purchasers of the outstanding notes in which we agreed to file a
registration statement relating to our offers to exchange the outstanding notes
for new notes. We also agreed to use our reasonable best efforts to complete
the offers within 180 days after February 16, 1999. We are offering the new
notes under this prospectus to satisfy those obligations under the exchange and
registration rights agreement.
However, the SEC has recently proposed the repeal of its interpretations
permitting the use of a registration statement in connection with exchange
offers such as ours. We cannot predict whether the SEC will act on this
proposal before completion of the exchange offers. If those interpretations are
repealed before the exchange offers are completed, holders of outstanding notes
will not be able to receive new notes under the exchange offers. Rather, we
will be required to register the outstanding notes under a shelf registration
statement, in connection with resales by the holders. Holders will be required
to deliver a prospectus to the purchasers and will be subject to civil
liability provisions under the Securities Act in connection with their resales.
We will file with the SEC a shelf registration statement to cover resales of
outstanding notes if any of the following occur
. any changes in law or applicable interpretations by the staff of the SEC
do not permit us to effect the exchange offers as contemplated by the
exchange and registration rights agreement
. any outstanding notes validly tendered under the exchange offers are not
exchanged for new notes within 180 days after February 16, 1999
. any initial purchaser so requests with respect to the outstanding notes
not eligible to be exchanged for new notes in the exchange offers
. any applicable law or interpretations do not permit any holder of
outstanding notes to participate in the exchange offers
. any holder of outstanding notes that participates in the exchange offers
does not receive freely transferable new notes in exchange for tendered
outstanding notes
. we so elect
If we are required to file a shelf registration statement, we will use our
reasonable best efforts to cause the SEC to declare effective the shelf
registration statement. We will also use our reasonable best efforts to keep
the shelf registration statement effective for up to two years after February
16, 1999. We will have the ability to suspend the shelf registration statement
for no more than (a) 45 days during the first 12-month period after February
16, 1999, and (b) 90 days during any subsequent 12-month period (a "Suspension
Period"), if we determine, in our reasonable best judgment upon written advice
of counsel, that continued effectiveness would require disclosure of
confidential information or interfere with any financing, acquisition,
reorganization or other material transaction involving Equistar.
If we fail to comply with deadlines for completion of the exchange offers,
we will be required to pay additional interest to holders of the outstanding
notes. Please read the section captioned "The Exchange and Registration Rights
Agreement" for more details regarding the exchange and registration rights
agreement.
To exchange an outstanding note for transferable new notes in the exchange
offers, the holder of that outstanding note will be required to make all of the
following representations
. any new note the holder receives will be acquired in the ordinary course
of business
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. the holder has no arrangements or understandings with any person to
participate in the distribution of the outstanding notes or the new notes
within the meaning of the Securities Act
. if the holder is not a broker-dealer, that holder is not engaged in and
does not intend to engage in the distribution of the new notes
. if the holder is a broker-dealer that will receive new notes in exchange
for outstanding notes acquired for its own account as a result of market-
making activities or other trading activities, that holder will deliver a
prospectus, as required by law, in connection with any resale of the new
notes
. the holder is not our "affiliate," as defined in Rule 405 of the
Securities Act, or, if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities Act
to the extent applicable
Resale of New Notes
Based on interpretations of the SEC staff in "no action letters" issued to
third parties, we believe that each new note issued under the exchange offers
may be offered for resale and be resold and otherwise transferred by the holder
of that new note without compliance with the registration and prospectus
delivery provisions of the Securities Act if all of the following apply
. the holder is not our "affiliate" within the meaning of Rule 405 under
the Securities Act
. the new note is acquired in the ordinary course of the holder's business
. the holder does not intend to participate in the distribution of new
notes
If a holder of outstanding notes tenders in the exchange offers with the
intention of participating in any manner in a distribution of the new notes,
that holder both
. cannot rely on these interpretations by the SEC staff
. must comply with the registration and prospectus delivery requirements of
the Securities Act -including being named as selling noteholders-in
connection with a secondary resale transaction
Unless an exemption from registration is otherwise available, any security
holder intending to distribute new notes should be covered by an effective
registration statement under the Securities Act containing the selling security
holder's information required by Item 507 of Regulation S-K under the
Securities Act. This prospectus may be used for an offer to resell, resale or
other retransfer of new notes only as specifically described in this
prospectus. Only broker-dealers that acquired the outstanding notes as a result
of market-making activities or other trading activities may participate in the
exchange offers. Please read the section captioned "Plan of Distribution" for
more details regarding the transfer of new notes.
Terms of the Exchange Offers
Upon the terms and subject to the conditions described in this prospectus
and in the letter of transmittal, we will accept for exchange any outstanding
notes properly tendered and not withdrawn before the expiration date. We will
issue $1,000 principal amount of new notes in exchange for each $1,000
principal amount of outstanding notes surrendered under the exchange offers.
Outstanding notes may be tendered only in integral multiples of $1,000. The
exchange offers are not conditioned upon any minimum aggregate principal amount
of outstanding notes being tendered for exchange.
As of the date of this prospectus, $300 million aggregate principal amount
of 8 1/2% notes due 2004 and $600 million aggregate principal amount of 8 3/4%
notes due 2009 are outstanding. This prospectus and the letter of transmittal
are being sent to all registered holders of outstanding notes. There will be no
fixed record date for determining registered holders of outstanding notes
entitled to participate in the exchange offers.
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We intend to conduct the exchange offers according to the provisions of the
exchange and registration rights agreement, the applicable requirements of the
Securities Act and the Securities Exchange Act of 1934 and the rules and
regulations of the SEC. Outstanding notes that are not tendered for exchange in
the exchange offers will remain outstanding and continue to accrue interest and
will be entitled to the rights and benefits the holders have under the
indenture relating to the notes and the exchange and registration rights
agreement.
We will be deemed to have accepted for exchange properly tendered
outstanding notes when we have given oral or written notice of the acceptance
to the exchange agent and complied with the applicable provisions of the
exchange and registration rights agreement. The exchange agent will act as
agent for the tendering holders for the purposes of receiving the new notes.
Holders tendering outstanding notes in the exchange offers will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the letter of transmittal, transfer taxes with respect to the exchange of
outstanding notes. We will pay all charges and expenses, other than some
applicable taxes as described below, in connection with the exchange offers. It
is important for holders to read the section labeled "--Fees and Expenses" for
more details regarding fees and expenses incurred in the exchange offers.
We will return any outstanding notes that we do not accept for exchange for
any reason without expense to the tendering holder as promptly as practicable
after the expiration or termination of the exchange offers.
Expiration Date
The exchange offers will expire at 5:00 p.m., New York City time, on
, 1999, unless, in our sole discretion, we extend one or both of
the exchange offers.
Extensions, Delay in Acceptance, Termination or Amendment
We expressly reserve the right, at any time or at various times, to extend
the period of time during which an exchange offer is open. During any
extensions, all outstanding notes previously tendered will remain subject to
the exchange offer, and we may accept them for exchange.
To extend an exchange offer, we will notify the exchange agent orally or in
writing of any extension. We will also make a public announcement of the
extension no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
If any of the conditions described below under "--Conditions to the Exchange
Offers" have not been satisfied, we reserve the right, in our sole discretion
to either
. delay accepting for exchange any outstanding notes
. extend either or both of the exchange offers
. terminate either or both of the exchange offers
by giving oral or written notice of a delay, extension or termination to the
exchange agent. Subject to the terms of the exchange and registration rights
agreement, we also reserve the right to amend the terms of the exchange offers
in any manner.
Any delay in acceptance, extension, termination or amendment will be
followed, as promptly as practicable, by oral or written notice to the
registered holders of the outstanding notes. If we amend an exchange offer in a
manner we determine to constitute a material change, we will promptly disclose
the amendment by means of a prospectus supplement and, if required, a post-
effective amendment to the registration statement. The supplement will be
distributed to the registered holders of the outstanding notes. Depending upon
the significance of the amendment and the manner of disclosure to the
registered holders, we will extend an exchange offer if the exchange offer
would otherwise expire during that period.
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Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of either or both of the exchange offers, we will have no obligation to
publish, advertise or otherwise communicate any public announcement, other than
by making a timely release to the Dow Jones News Service.
Conditions to the Exchange Offers
Despite any other term of the exchange offers, if in our reasonable judgment
either of the exchange offers, or the making of any exchange by a holder of
outstanding notes, would violate applicable law or any applicable
interpretation of the staff of the SEC
. we will not be required to accept for exchange, or exchange any new notes
for, any outstanding notes
. we may terminate either or both of the exchange offers as provided in
this prospectus before accepting any outstanding notes for exchange
In addition, we will not be obligated to accept for exchange the outstanding
notes of any holder that has not made
. the representations described under "--Purpose and Effect of the Exchange
Offers," "--Procedures for Tendering" and "Plan of Distribution"
. other representations as may be reasonably necessary under applicable SEC
rules, regulations or interpretations to make available to us an
appropriate form for registration of the new notes under the Securities
Act
We expressly reserve the right to amend or terminate either or both of the
exchange offers, and to reject for exchange any outstanding notes not
previously accepted for exchange, upon the occurrence of any of the conditions
to the exchange offers specified above. We will give oral or written notice of
any extension, amendment, nonacceptance or termination to the holders of the
outstanding notes as promptly as practicable. These conditions are for our sole
benefit, and we may assert them or waive them in whole or in part at any time
or at various times in our sole discretion. If we fail at any time to exercise
any of these rights, this failure will not mean that we have waived our rights.
Each right will be deemed an ongoing right that we may assert at any time or at
various times. In addition, we will not accept for exchange any outstanding
notes tendered and will not issue new notes in exchange for any outstanding
notes if, at that time, any stop order has been threatened or is in effect with
respect to (1) the registration statement of which this prospectus is a part or
(2) the qualification of the indenture relating to the notes under the Trust
Indenture Act of 1939.
Procedures for Tendering
How to Tender Generally
Only a holder of outstanding notes may tender their outstanding notes in the
exchange offers. To tender in the exchange offers, a holder must comply with
all of the following
. complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal, have the signature on the letter of transmittal
guaranteed if the letter of transmittal so requires, and mail or deliver
the letter of transmittal or a facsimile of the letter of transmittal to
the exchange agent before the expiration date
or
. comply with the automated tender offer program procedures of DTC
described below
In addition, one of the following must occur:
. the exchange agent must receive outstanding notes along with the letter
of transmittal
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. the exchange agent must receive, before the expiration date, a timely
confirmation of book-entry transfer of the outstanding notes into the
exchange agent's account at DTC according to the procedure for book-entry
transfer described below or a properly transmitted agent's message
. the holder must comply with the guaranteed delivery procedures described
below
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at its
address provided above under "Prospectus Summary--The Exchange Agent" before
the expiration date. The tender by a holder that is not withdrawn before the
expiration date will constitute an agreement between the holder and us
according to the terms and subject to the conditions described in this
prospectus and in the letter of transmittal.
The method of delivery of outstanding notes, the letter of transmittal and
all other required documents to the exchange agent is at the holder's election
and risk. Rather than mail these items, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. Holders should not send the letter of transmittal or outstanding notes to
us. Holders may request their broker-dealers, commercial banks, trust companies
or other nominees to effect the above transactions on their behalf.
Tendering Through DTC's Automated Tender Offer Program
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's automated tender offer
program to tender. Participants in the program may, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, transmit their acceptance of the exchange offers
electronically. They may do so by causing DTC to transfer the outstanding notes
to the exchange agent according to its procedures for transfer. DTC will then
send an agent's message to the exchange agent.
The term "agent's message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, stating
that
. DTC has received an express acknowledgment from a participant in its
automated tender offer program that is tendering outstanding notes that
are the subject of book-entry confirmation
. the participant has received and agrees to be bound by the terms of the
letter of transmittal or, in the case of an agent's message relating to
guaranteed delivery, that the participant has received and agrees to be
bound by the applicable notice of guaranteed delivery
. the agreement may be enforced against the participant
How to Tender if You Are a Beneficial Owner
If you beneficially own outstanding notes that are registered in the name of
a broker-dealer, commercial bank, trust company or other nominee and you wish
to tender those notes, you should contact the registered holder promptly and
instruct it to tender on your behalf. If you are a beneficial owner and wish to
tender on your own behalf, you must, before completing and executing the letter
of transmittal and delivering your outstanding notes, either
. make appropriate arrangements to register ownership of the outstanding
notes in your name
. obtain a properly completed bond power from the registered holder of
outstanding notes
The transfer of registered ownership may take considerable time and may not be
completed before the expiration date.
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Signatures and Signature Guarantees
You must have signatures on a letter of transmittal or a notice of
withdrawal described below guaranteed by
. a member firm of a registered national securities exchange
. a member of the National Association of Securities Dealers, Inc.
. a commercial bank or trust company having an office or correspondent in
the United States
. an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Securities Exchange Act of 1934
The above must be a member of one of the recognized signature guarantee
programs identified in the letter of transmittal, unless the outstanding notes
are tendered
. by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal, and the new notes are being issued directly to the
registered holder of the outstanding notes tendered in the exchange for
those new notes
. for the account of a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States, or an eligible guarantor institution
When Endorsements or Bond Powers are Needed
If the letter of transmittal is signed by a person other than the registered
holder of any outstanding notes, the outstanding notes must be endorsed or
accompanied by a properly completed bond power. The bond power must be signed
by the registered holder as the registered holder's name appears on the
outstanding notes and a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States, or an eligible guarantor institution must guarantee the
signature on the bond power.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, those persons should so indicate when signing. They should also
submit evidence of their authority to deliver the letter of transmittal
satisfactory to us unless we waive this requirement.
Determinations Under the Exchange Offers
We will determine in our sole discretion all questions as to the validity,
form, eligibility, time of receipt, acceptance of tendered outstanding notes
and withdrawal of tendered outstanding notes. Our determination will be final
and binding. We reserve the absolute right to reject any outstanding notes not
properly tendered or any outstanding notes our acceptance of which would, in
the opinion of our counsel, be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular outstanding
notes. Our interpretation of the terms and conditions of the exchange offers,
including the instructions in the letter of transmittal, will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of outstanding notes must be cured within the time we
shall determine. Neither we, the exchange agent nor any other person will be
under any duty to give notification of defects or irregularities with respect
to tenders of outstanding notes, and none of the aforementioned will incur
liability for failure to give notification. Tenders of outstanding notes will
not be deemed made until any defects or irregularities have been cured or
waived. Any outstanding notes received by the exchange agent that are not
properly tendered and the defects or irregularities of which have not been
cured or waived will be returned to the tendering holder, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date.
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When We Will Issue New Notes
In all cases, we will issue new notes for outstanding notes that we have
accepted for exchange under the exchange offers only after the exchange agent
timely receives both
. outstanding notes or a timely book-entry confirmation of the outstanding
notes into the exchange agent's account at DTC
. a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message
Return of Outstanding Notes Not Accepted or Exchanged
If we do not accept any tendered outstanding notes for exchange for any
reason described in the terms and conditions of the exchange offers or if
outstanding notes are submitted for a greater principal amount than the holder
desires to exchange, the unaccepted or nonexchanged outstanding notes will be
returned without expense to their tendering holder. In the case of outstanding
notes tendered by book-entry transfer into the exchange agent's account at DTC
according to the procedures described below, the nonexchanged outstanding
notes will be credited to an account maintained with DTC. These actions will
occur as promptly as practicable after the expiration or termination of the
exchange offers.
Your Representations to Us
By signing or agreeing to be bound by the letter of transmittal, you will
represent that, among other things
. any new notes that the holder receives will be acquired in the ordinary
course of its business
. the holder has no arrangement or understanding with any person or entity
to participate in the distribution of the new notes
. if the holder is not a broker-dealer, the holder is not engaged in and
does not intend to engage in the distribution of the new notes
. if the holder is a broker-dealer that will receive new notes for its own
account in exchange for outstanding notes that were acquired as a result
of market-making activities, the holder will deliver a prospectus, as
required by law, in connection with any resale of the new notes
. that holder is not our "affiliate," as defined in Rule 405 of the
Securities Act, or, if the holder is an affiliate, that holder will
comply with any applicable registration and prospectus delivery
requirements of the Securities Act
Book-Entry Transfer
The exchange agent will make a request to establish an account with respect
to the outstanding notes at DTC for purposes of the exchange offers promptly
after the date of this prospectus. Any financial institution participating in
DTC's system may make book-entry delivery of outstanding notes by causing DTC
to transfer the outstanding notes into the exchange agent's account at DTC
according to DTC's procedures for transfer. Holders of outstanding notes who
are unable to deliver confirmation of the book-entry tender of their
outstanding notes into the exchange agent's account at DTC or all other
documents required by the letter of transmittal to the exchange agent on or
before the expiration date must tender their outstanding notes according to
the guaranteed delivery procedures described below.
Guaranteed Delivery Procedures
Any holder wishing to tender its outstanding notes but whose outstanding
notes are not immediately available or who cannot deliver its outstanding
notes, the letter of transmittal or any other required documents to the
exchange agent or comply with the applicable procedures under DTC's automated
tender offer program before the expiration date may tender if
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. the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or
correspondent in the United States or an eligible guarantor institution
. before the expiration date, the exchange agent receives from the member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., commercial bank or trust company
having an office or correspondent in the United States, or eligible
guarantor institution either a properly completed and duly executed
notice of guaranteed delivery by facsimile transmission, mail or hand
delivery or a properly transmitted agent's message and notice of
guaranteed delivery
--stating the holder's name and address, the registered number(s) of
the holder's outstanding notes and the principal amount of outstanding
notes tendered
--stating that the tender is being made
--guaranteeing that, within five business days after the expiration
date, the letter of transmittal or a facsimile of the letter of
transmittal, together with the outstanding notes or a book-entry
confirmation, and any other documents required by the letter of
transmittal will be deposited by the eligible guarantor institution
with the exchange agent
. the exchange agent receives the properly completed and executed letter of
transmittal or a facsimile of the letter of transmittal, as well as all
tendered outstanding notes in proper form for transfer or a book-entry
confirmation, and all other documents required by the letter of
transmittal, within five business days after the expiration date
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to a holder if it wishes to tender its outstanding notes according to the
guaranteed delivery procedures described above.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, any holder may withdraw its
tender at any time before 5:00 p.m., New York City time, on the expiration date
unless previously accepted for exchange. For a withdrawal to be effective
. the exchange agent must receive a written notice of withdrawal at one of
the addresses listed above under "Prospectus Summary--The Exchange Agent"
. the withdrawing holder must comply with the appropriate procedures of
DTC's automated tender offer program system
Any notice of withdrawal must comply with all of these requirements
. specify the name of the person who tendered the outstanding notes to be
withdrawn (the "Depositor")
. identify the outstanding notes to be withdrawn, including the
registration number or numbers and the principal amount of the
outstanding notes
. be signed by the Depositor in the same manner as the original signature
on the letter of transmittal used to deposit those outstanding notes or
be accompanied by documents of transfer sufficient to permit the trustee
for the outstanding notes to register the transfer into the name of the
Depositor withdrawing the tender
. specify the name in which the outstanding notes are to be registered, if
different from that of the Depositor
If outstanding notes have been tendered under the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn outstanding
notes and otherwise comply with the procedures of DTC.
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Equistar will determine all questions as to the validity, form, eligibility
and time of receipt of notice of withdrawal, and Equistar's determination shall
be final and binding on all parties. Equistar will deem any outstanding notes
so withdrawn not to have been validly tendered for exchange for purposes of the
exchange offers.
Any outstanding notes that have been tendered for exchange but are not
exchanged for any reason will be returned to their holder without cost to the
holder, or, in the case of outstanding notes tendered by book-entry transfer
into the exchange agent's account at DTC according to the procedures described
above, the outstanding notes will be credited to an account maintained with DTC
for the outstanding notes. This return or crediting will take place as soon as
practicable after withdrawal, rejection of tender or termination of the
exchange offers. Holders may retender properly withdrawn outstanding notes by
following one of the procedures described under the caption "--Procedures for
Tendering" above at any time on or before the expiration date.
Fees and Expenses
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitation by
telegraph, telephone or in person by our officers and regular employees and the
officers and regular employees of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offers and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offers. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses. We may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this prospectus, letter of transmittal
and related documents to the beneficial owners of the outstanding notes and in
handling or forwarding tenders for exchange.
We will pay the cash expenses to be incurred in connection with the exchange
offers, including
. SEC registration fees
. fees and expenses of the exchange agent and trustee
. accounting and legal fees and printing costs
. related fees and expenses
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes under the exchange offers. The tendering holder, however,
will be required to pay any transfer taxes, whether imposed on the registered
holder or any other person, if
. certificates representing outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding notes tendered
. tendered outstanding notes are registered in the name of any person other
than the person signing the letter of transmittal
. a transfer tax is imposed for any reason other than the exchange of
outstanding notes under the exchange offers.
If satisfactory evidence of payment of any transfer taxes payable by a note
holder is not submitted with the letter of transmittal, the amount of the
transfer taxes will be billed directly to that tendering holder.
Transfer Taxes
If a holder tenders its outstanding notes for exchange, it will not be
required to pay any transfer taxes. However, if a holder instructs us to
register new notes in the name of, or requests that outstanding notes not
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tendered or not accepted in the exchange offers be returned to, a person other
than that holder, in that holder's capacity as the registered tendering holder,
that holder will be required to pay any applicable transfer tax.
Consequences of Failure to Exchange
Holders who do not exchange their outstanding notes for new notes under the
exchange offers will remain subject to the existing restrictions on transfer of
the outstanding notes. In general, a holder may not offer or sell the
outstanding notes unless they are registered under the Securities Act or if the
offer or sale is exempt from registration under the Securities Act and
applicable state securities laws. Except as required by the exchange and
registration rights agreement, we do not intend to register resales of the
outstanding notes under the Securities Act. Based on interpretations of the SEC
staff, holders may offer for resale, or may resell or otherwise transfer new
notes issued in the exchange offers without compliance with the registration
and prospectus delivery provisions of the Securities Act, if they
. are not our "affiliate" within the meaning of Rule 405 under the
Securities Act
. acquired the new notes in the ordinary course of their business
. have no arrangement or understanding with respect to the distribution of
the new notes to be acquired in the exchange offers
If a holder tenders in the exchange offers for the purpose of participating
in a distribution of the new notes, it both
. cannot rely on the applicable interpretations of the SEC
. must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction
Accounting Treatment
We will not recognize a gain or loss for accounting purposes upon the
consummation of the exchange offers. We will amortize expenses of the exchange
offers over the term of the new notes under generally accepted accounting
principles.
Other
Participation in the exchange offers is voluntary, and holders of
outstanding notes should carefully consider whether to accept. Those holders
are urged to consult their financial and tax advisors in making their own
decision on what action to take.
We may, in the future, seek to acquire untendered outstanding notes in open-
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. We have no present plans to acquire any outstanding notes that
are not tendered in the exchange offers or to file a registration statement to
permit resales of any untendered outstanding notes.
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Description of the New Notes
General
The new notes will be issued, and the outstanding notes were issued, under
an indenture dated January 15, 1999, that we entered into with The Bank of New
York, as trustee. We supplemented the indenture to establish the terms of the
notes. The terms of the notes include those stated in the indenture, the
supplemental indentures and those made part of the indenture by the Trust
Indenture Act of 1939, as amended. The Indenture does not limit the aggregate
principal amount of securities that can be issued thereunder and does not limit
our right to issue additional notes of any series at any time.
We have summarized below material selected provisions of the notes and the
indenture, as supplemented. For a complete description, you should refer to the
indenture and the notes filed as exhibits to this registration statement which
includes this prospectus. See "Available Information." Capitalized terms used
in this summary are defined below under "--Definitions Used in This Description
of New Notes."
The outstanding 8 1/2% notes and the new 8 1/2% notes will constitute a
single class of debt securities under the indenture. The outstanding 8 3/4%
notes and the new 8 3/4% notes will constitute a separate single class of debt
securities under the indenture. If the exchange offers contemplated by this
prospectus are consummated, holders of the applicable series of outstanding
notes who do not exchange those notes for new notes in the exchange offers will
vote together with holders of new notes for all relevant purposes under the
indenture. Accordingly, when determining whether the required holders have
given any notice, consent or waiver or taken any other action permitted under
the indenture, any outstanding notes that remain outstanding after the exchange
offers will be aggregated with the applicable series of new notes. All
references herein to specified percentages in aggregate principal amount of a
series of notes outstanding shall be deemed to mean, at any time after the
exchange offers are consummated, percentages in aggregate principal amount of a
series of outstanding notes and the applicable series of new notes then
outstanding.
The form and term of the new notes are the same as the form and term of the
outstanding notes they will replace, except that
. we will register the new notes under the Securities Act
. the new notes, once registered, will not bear legends restricting
transfer
. holders of the new notes will not be entitled to some rights under the
exchange and registration rights agreement, including our payment of
additional interest for failure to meet specified deadlines, which
terminate when the exchange offers are consummated
The new notes will be issued solely in exchange for an equal principal amount
of outstanding notes. As of the date of this prospectus, $300 million aggregate
principal amount of 8 1/2% notes and $600 million aggregate principal amount of
8 3/4% notes are outstanding. See "The Exchange Offers."
Ranking of the New Notes
The outstanding notes are, and the new notes will
. be senior unsecured indebtedness of Equistar and Equistar Funding
. rank equal in right of payment with any outstanding notes that are not
exchanged and with all of our existing and future unsecured and
unsubordinated indebtedness and shall rank senior to any future
subordinated indebtedness
. effectively be subordinated to any secured debt that we may be permitted
to incur under the covenants of the indenture for the notes to the extent
of the collateral for the secured debt; currently we have no secured debt
We may not incur additional debt that is senior to the notes.
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Maturity and Interest of the New Notes
The 8 1/2% notes will mature on February 15, 2004. The 8 3/4% notes will
mature on February 15, 2009. Interest on both the 8 1/2% notes and the 8 3/4%
notes began to accrue on February 16, 1999. We will
. pay interest semiannually on February 15 and August 15 of each year,
beginning August 15, 1999
. pay interest to the person registered as owner of the notes on the
February 1 or August 1 preceding the interest payment date
. compute interest based on a 360-day year consisting of twelve 30-day
months
Optional Redemption of the New Notes
At any time, we may redeem any or all of either series of new notes. We will
pay a redemption price equal to the greater of the principal amount of the
series of notes being redeemed or, as determined by a Quotation Agent, the sum
of the present values of the remaining scheduled payments of principal and
interest on the series of notes to be redeemed discounted to the date of
redemption on a semiannual basis, assuming a 360-day year consisting of twelve
30-day months at the Adjusted Treasury Rate. We will also pay accrued but
unpaid interest.
Notice of redemption will be mailed between 30 and 60 days before the
redemption date to each holder of the new notes to be redeemed. Interest will
cease to accrue on the new notes or the portions of the new notes called for
redemption on and after the redemption date unless we default in payment of the
redemption price.
Covenants Restricting Equistar's Actions Contained in the Indenture for the New
Notes
We have agreed to two principal restrictions on our activities for the
benefit of the holders of the outstanding notes and the new notes. In the
description of these covenants, all references to "us" or "our" mean Equistar
Chemicals, LP and any of its Subsidiaries, unless the context clearly indicates
otherwise.
Limitation on Liens
We have agreed that Equistar will not, and will not permit any Restricted
Subsidiary to, issue, assume or guarantee any indebtedness for borrowed money
secured by any liens upon any Restricted Subsidiary unless we secure the notes
equally and ratably with or prior to the other indebtedness secured by the
lien. This covenant has exceptions that permit each of
. liens affecting property of a corporation existing at the time it becomes
a Subsidiary or at the time it is merged into or consolidated with
Equistar
. liens on property existing at the time of its acquisition or incurred to
secure payment of all or part of its purchase price or to secure debt
incurred before, at the time of or within 24 months after its acquisition
for the purpose of financing all or part of the purchase price
. liens on our property existing on the date of the indenture
. liens on any property to secure all or part of the cost of construction
or improvements on that property or debt incurred to provide funds for
any such liens in a principal amount not exceeding the cost of the
construction or improvements
. liens which secure only an indebtedness owed to us by a Subsidiary
. liens in favor of the United States or any state within the United
States, or any department, agency, instrumentality, or political
subdivision of any U.S. jurisdiction to secure partial progress, advance
or other payments under any contract or statute or to secure any
indebtedness incurred for the purpose of financing all or any part of the
purchase price or cost of constructing or improving the property subject
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thereto, including, without limitation, liens to secure debt of the
pollution control or industrial revenue bond type
. liens required by any contract or statute to permit our performance of
any contract or subcontract made by us with or at the request of the
United States of America, any state or any department, agency or
instrumentality or political subdivision of either the United States or
any state
. any extension, renewal or replacement, or successive extensions, renewals
or replacements, in whole or in part, of any lien referred to in the
foregoing exceptions or of any debt secured thereby, provided that the
principal amount of debt secured thereby shall not exceed the greater of
the following
-- the principal amount of debt so secured
-- the fair market value of the underlying property or assets to which
that lien relates at the time of the extension, renewal or replacement
and provided that the extension, renewal or replacement lien shall be
limited to all or part of substantially the same property which secured
the lien extended, renewed or replaced, including improvements on the
property
If Equistar so determines, it may also equally and ratably secure any other
indebtedness or other obligation then existing and any other indebtedness or
obligation created after that time.
Notwithstanding the foregoing provisions of "--Limitation on Liens,"
Equistar and any one or more Restricted Subsidiaries may issue, assume or
guarantee debt secured by liens, that would otherwise be subject to the
foregoing restrictions if the sum of
. the aggregate principal amount of such secured debt
. the aggregate outstanding principal amount of all of other debt of
Equistar and the Restricted Subsidiaries, not including debt permitted to
be secured under the exceptions described above, which would otherwise be
subject to the foregoing restrictions
. the aggregate Value of the Sale and Leaseback Transactions in existence
at that time, not including Sale and Leaseback Transactions as to which
Equistar has complied with paragraph B of "--Limitation on Sale and
Leaseback Transactions"
do not at any one time exceed 15% of the Consolidated Net Tangible Assets of
Equistar and its consolidated Subsidiaries.
Limitation on Sale and Leaseback Transactions
We have agreed that Equistar will not, and will not permit any Restricted
Subsidiary to, enter into any Sale and Leaseback Transactions with any person
unless at least one of the following applies:
A. Equistar or the Restricted Subsidiary would be entitled, under "--
Limitation on Liens," to incur debt in a principal amount equal to or
exceeding the Value of the Sale and Leaseback Transaction, secured by a
lien on the property to be leased, without equally and ratably securing
the notes
B. Within four months after the effective date of the Sale and Leaseback
Transaction, whether made by Equistar or a Restricted Subsidiary,
Equistar applies to the voluntary retirement of Funded Debt an amount
equal to the Value of the Sale and Leaseback Transaction, less the
principal amount of notes delivered, within four months after the
effective date of the arrangements, to the trustee for retirement and
cancellation and the principal amount of other Funded Debt voluntarily
retired within that four-month period, excluding retirements of notes
and other Funded Debt as a result of conversions or under mandatory
sinking fund or prepayment provisions or by payment at maturity
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Events of Default Under the New Notes
Each of the following is an event of default with respect to the notes
. our failure to pay interest on the notes for 30 days
. our failure to pay principal or premium on the notes
. our failure to observe or perform any other covenant or agreement in the
indenture for 60 days after written notice by the trustee or by the
holders of at least 25% in aggregate principal amount of the outstanding
debt securities under the indenture affected thereby
. bankruptcy, insolvency or reorganization events
If an event of default with respect to notes occurs and is continuing,
either the trustee or the holders of at least 25% in aggregate principal amount
of the outstanding notes or, if applicable, 25% in aggregate principal amount
of the outstanding debt securities affected thereby, may declare the principal
of and the accrued but unpaid interest immediately due and payable. At any time
after a declaration of acceleration with respect to notes has been made, but
before a judgment or decree for payment of money has been obtained by the
trustee, the holders of a majority in aggregate principal amount of the notes
may rescind the acceleration and its consequences if they comply with specified
conditions.
The holders of a majority in aggregate principal amount of the outstanding
debt securities under the indenture with notice to the trustee, have the right
to waive existing or past defaults under the indenture except that they may not
waive
. an existing or past default on the payment or the principal on, or
premium, if any, or interest on any additional amounts relating to taxes,
assessments or other governmental charges, or
. a continued default that the indenture requires the consent of all
effected holders to waive without the consent of each holder effected.
The indenture provides that, subject to the duty of the trustee during
default to act with the required standard of care, the trustee is under no
obligation to exercise any of its rights or powers under the indenture at the
request or direction of any holders, unless such holders offer reasonable
indemnity to the trustee. As long as the requirements concerning
indemnification are satisfied, the holders of a majority in aggregate principal
amount of the outstanding affected debt securities under the indenture have the
right in most cases to direct the time, method and place of conducting any
proceeding for any remedy available to the trustee under the indenture or
exercising any trust or power conferred on the trustee.
We are required to give the trustee a certificate stating whether or not we
are in default under the indenture and, if so, specifying all defaults and the
nature of all defaults every year.
Indenture Requirements Relating to Consolidation, Merger and Sale of Assets
We have agreed that each of Equistar and Equistar Funding will not
consolidate with or merge into, or sell, assign, transfer, lease, convey or
otherwise dispose of, all or substantially all of its assets, to anyone unless
each of the following conditions is satisfied:
. immediately after giving effect to the transaction, no default or event
of default will have happened and be continuing
. either Equistar or Equistar Funding shall be the continuing partnership
or corporation, as applicable, or the successor is
--organized under the laws of the United States, one of the states of
the United States or the District of Columbia
and
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--assumes by supplemental indenture all our obligations under the
indenture and the notes
. we deliver to the trustee an officer's certificate and opinion of counsel
stating that the transaction complies with these conditions
Modification and Waiver of the Indenture
We and the trustee may amend or supplement the indenture with the consent of
the holders of not less than a majority in aggregate principal amount of all
series of outstanding debt securities that are issued under the indenture and
affected by the amendment or supplement. Without the consent of the holder of
each outstanding note, we may not
. reduce the principal or premium or change the stated maturity of the
principal or premium of any note
. reduce the amount of debt securities under the indenture, the holders of
which must consent to an amendment or supplement to the indenture
. make any change in the percentage of principal amount of debt securities
under the indenture necessary to modify or waive any default
. reduce the rate of or change the time for payment of interest on any note
. impair the right to institute suit for the enforcement of any payment on
any note
The holders of a majority in aggregate principal amount of outstanding notes
affected by a covenant have the right to waive Equistar's compliance with some
of the covenants contained in the indenture.
We and the trustee may modify and amend the indenture without the consent of
any holder of notes
. to evidence a successor obligor under the indenture
. to add covenants or events of default for the benefit of the holders
. to secure the debt securities under the indenture
. to establish the form or terms of debt securities under the indenture
. to provide for the acceptance of appointment by a successor trustee or
facilitate the administration of the trusts under the indenture by more
than one trustee
. to cure any ambiguity or inconsistency in the indenture, provided such
modification or amendment does not adversely affect in any material
respect the interests of the holders of the notes
. to supplement any of the provisions of the indenture to the extent
necessary to permit or facilitate defeasance and discharge of any series
of notes, provided such modification or amendment does not adversely
affect in any material respect the interests of the holders of the notes
. to make any other change that does not adversely affect the rights of any
holder
Defeasance and Covenant Defeasance Under the Indenture
The indenture provides that we may elect either
. to defease and be discharged from any and all obligations with respect to
all or a portion of the notes of any series (legal defeasance) except for
the obligations
--to register the transfer or exchange of notes
--to replace temporary, mutilated, destroyed, lost or stolen notes of
the series
--to maintain an office or agency in respect of the series of notes
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--to hold moneys for payment in trust
or
. to be released from our obligations with respect to restrictive and other
covenants, and any omission to comply with these obligations will not
constitute a default or an event of default with respect to the notes
(covenant defeasance)
In either case, upon our irrevocable deposit with the trustee, or other
qualifying trustee, in trust, of
. an amount in cash
. government obligations that, through the payment of principal and
interest according to their terms, will provide money in an amount
or
. a combination of the above
The amount deposited must be sufficient to pay the principal of and premium, if
any, on and interest, if any, to stated maturity, or redemption, on the notes,
on the scheduled due dates.
We are required to deliver to the trustee an opinion of counsel stating that
the holders of these notes proposed to be defeased will not recognize income,
gain or loss for United States federal income tax purposes as a result of legal
defeasance or covenant defeasance. The opinion must also state that holders
will be subject to United States federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if legal
defeasance or covenant defeasance had not occurred. The opinion, in the case of
legal defeasance, must refer to and be based upon a ruling of the Internal
Revenue Service or a change in applicable United States federal income tax law
occurring after the date of the indenture.
Payment Under the Indenture for the New Notes
We are required to maintain an office or agency in each payment location for
the notes and may from time to time designate additional offices or agencies at
which the principal of and premium, if any, on and interest, if any, on the
notes will be payable. Payments will be made in New York City, and we will
initially designate the office of the agent of the trustee in New York City as
an office where the principal, premium and interest will be payable. We reserve
the option to pay interest, if any, on the notes either by
. check mailed to the registered holder at their address
. wire transfer to an account located inside the United States maintained
by the registered holder.
We may designate additional offices or agencies, approve a change in the
location of any office or agency and, except as provided above, rescind the
designation of any office or agency at any time.
Moneys we pay to the trustee or a paying agent for the payment of principal,
premium, if any, or interest, if any, on any note that remains unclaimed for
two years after the principal, premium or interest becomes due and payable will
be repaid to us. After that time, the holder of the note, subject to applicable
abandoned property or similar laws, will be an unsecured general creditor and
may look only to us for payment.
Transfer and Exchange of the New Notes
Subject to the terms of the indenture, notes may be presented for
registration of transfer and for exchange either
. at each office or agency required to be maintained by us for payment of
each series, as described under "--Payment Under the Indenture for the
New Notes"
. at each other office or agency that we may designate from time to time
Registration of transfers and exchanges will be effected if the transfer agent
is satisfied with the evidence of ownership and identity of the holder making
the request and if the transfer form is duly executed. No service
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charge will be made for any registration of transfer or exchange of notes, but
we may require you to pay any tax or other governmental charge incurred in
connection with the transfer or exchange.
In the event of any redemption in whole or in part, we will not be required
. to register the transfer of or exchange new notes of any series during a
period beginning at the opening of business 15 days before any selection
of notes of that series to be redeemed and ending at the close of
business on the date the relevant notice of redemption is mailed
. to register the transfer of or exchange of any note or portion of any
note called for redemption, except the unredeemed portion, if any, of a
note being redeemed in part
. to register the transfer of or exchange of any note that has been
surrendered for repayment at the option of the holder, except the
portion, if any, of the note not to be so repaid
Definitions Used in This Description of New Notes
We have provided below a summary of capitalized terms used in this summary
description of the notes. The indenture contains the full definition of all
these terms.
"Adjusted Treasury Rate" means, with respect to any redemption date, the
rate per annum equal to the semiannual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue,
expressed as a percentage of its principal amount equal to the Comparable
Treasury Price for the redemption date, plus 0.25%, in the case of each of the
8 1/2% notes and the 8 3/4% notes.
"Comparable Treasury Issue" means the United States Treasury security
selected by a Quotation Agent as having a maturity comparable to the remaining
term of the notes to be redeemed that would be utilized, at the time of
selection and according to customary financial practice, in pricing new issues
of corporate notes of comparable maturity to the remaining term of the notes.
"Comparable Treasury Price" is calculated with respect to any redemption
date as follows:
. the average of the bid and asked prices for the Comparable Treasury
Issue, expressed in each case as a percentage of its principal amount, on
the third business day preceding the redemption date, as shown in the
daily statistical release, or any successor release, published by the
Federal Reserve Bank of New York and designated "Composite 3:30 p.m.
Quotations for U.S. Government Securities"
. if the release, or any successor release, is not published or does not
contain prices on the business day, either
--the average of the Reference Treasury Dealer Quotations for the
Redemption Date
--the Reference Treasury Dealer Quotation if we obtain only one
Reference Treasury Dealer Quotation
"Consolidated Net Tangible Assets" means the total amount of assets, less
applicable reserves and other properly deductible items, after deducting the
following:
. all current liabilities excluding any which are by their terms extendible
or renewable at the option of the obligor to a time more than 12 months
after the time as of which the amount is being computed
. all goodwill, trade names, trademarks, patents, purchased technology,
unamortized debt discount and other like intangible assets, all as
specified on the most recent quarterly balance sheet of Equistar and
computed according to generally accepted accounting principles
"Funded Debt" means indebtedness of either Equistar or Equistar Funding,
including notes, provided that notes may only be redeemed according to "--
Optional Redemption of the New Notes," maturing by their terms thereof more
than one year after their original creation and ranking at least pari passu
with the notes.
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"Quotation Agent" means one of the Reference Treasury Dealers appointed and
certified to the trustee.
"Reference Treasury Dealer" means each of Chase Securities Inc.,
NationsBanc Montgomery Securities LLC, ABN AMRO Incorporated, BNY Capital
Markets, Inc., First Chicago Capital Markets, Inc. and J.P. Morgan Securities
Inc. and their respective successors. If any of the foregoing ceases to be a
primary U.S. Government Securities dealer in New York City, we will substitute
another Government Securities dealer and certify to the trustee.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as we
determine and certify to the trustee, of the bid and asked prices for the
Comparable Treasury Issue, expressed in each case as a percentage of its
principal amount, quoted in writing to us by the Reference Treasury Dealer at
5:00 p.m. on the third Business Day preceding the redemption date.
"Restricted Property" means
. any plant for the production of petrochemicals owned by Equistar or a
Subsidiary, except
--related facilities which in the opinion of the partnership governance
committee are transportation or marketing facilities
--any plant for the production of petrochemicals which in the opinion of
the partnership governance committee is not a principal plant of
Equistar and its Subsidiaries
. any shares of capital stock or indebtedness of a Restricted Subsidiary
owned by Equistar or a Subsidiary
"Restricted Subsidiary" means any Subsidiary which owns any Restricted
Property.
"Sale and Leaseback Transaction" means any arrangement with any person,
other than Equistar or a Subsidiary, or to which any such person is a party,
providing for the leasing to Equistar or a Restricted Subsidiary for a period
of more than five years of any Restricted Property which has been or is to be
sold or transferred by Equistar or such Restricted Subsidiary to such person
or to any other person, other than Equistar or a Subsidiary, to which funds
have been or are to be advanced by such Person on the security of the leased
property.
"Subsidiary" means any corporation in which at least a majority of the
outstanding securities have ordinary voting power to elect a majority of the
board of directors of such corporation, whether or not any other class of
securities that has or might have voting power by reason of the happening of a
contingency is at the time owned or controlled directly or indirectly by
Equistar and/or one or more Subsidiaries.
"Value" means, with respect to a Sale and Leaseback Transaction, the amount
equal to the greater of
. the net proceeds of the sale or transfer of the property leased under a
Sale and Leaseback Transaction
or
. the fair value, in the opinion of the partnership governance committee,
of the property at the time of entering into a Sale and Leaseback
Transaction, in either case divided first by the number of full years of
the term of the lease and then multiplied by the number of full years of
the term remaining at the time of determination, without regard to any
renewal or extension options contained in the lease
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Federal Income Tax Considerations
The following summary fairly describes the material United States federal
income tax consequences expected to apply to the exchange of outstanding notes
for new notes. This summary is based upon the provisions of the Internal
Revenue Code of 1986, as amended, the final, temporary and proposed regulations
promulgated under the Internal Revenue Code, and administrative rulings and
judicial decisions now in effect. All of the above are subject to change or to
different interpretations, possibly with retroactive effect. This discussion is
for general information only and does not purport to address all of the
possible federal income tax consequences or any other federal, or any state,
local or foreign, tax consequences of the acquisition, ownership and
disposition of the outstanding notes or new notes. It is limited to investors
who hold the outstanding notes and the new notes as capital assets and does not
address the federal income tax consequences that may be relevant to particular
investors in light of their unique circumstances or to particular investors,
such as dealers in securities, insurance companies, financial institutions,
foreign corporations, partnerships or trusts, nonresident alien individuals,
and tax-exempt entities, who may be subject to special treatment under the
federal income tax law.
An exchange of the outstanding notes for the new notes under the exchange
offers will not constitute a taxable event for federal income tax purposes. As
a result, holders who exchange their outstanding notes for new notes will not
recognize in income any accrued and unpaid interest on the new notes by reason
of the exchange. An exchanging holder will have the same adjusted basis and
holding period in the new notes as it had in the outstanding notes immediately
before the exchange.
Holders should consult their own tax advisor as to the particular tax
consequences for them of exchanging outstanding notes for new notes in the
exchange offers, including the applicability and effect of any state, local, or
foreign tax laws and or recent or possible future changes in the tax laws.
The Exchange and Registration Rights Agreement
In connection with the issuance of the outstanding notes, we entered into an
exchange and registration rights agreement. Under the exchange and registration
rights agreement, we agreed to
. file a registration statement with the SEC on or within 60 days after
February 16, 1999
. use our reasonable best efforts to cause the registration statement to be
declared effective under the Securities Act within 150 days after
February 16, 1999
. use our reasonable best efforts to cause the exchange offers to be
consummated within 180 days after February 16, 1999
. keep the exchange offers open for acceptance for a period of not less
than 30 calendar days after the date notice of the exchange offers is
mailed to holders of the outstanding notes
. accept for exchange all outstanding notes duly tendered and not validly
withdrawn under the exchange offers according to the terms of the
registration statement and letter of transmittal
As soon as practicable after the exchange offer registration statement
becomes effective, we will offer the holders of outstanding notes who are not
prohibited by any law or policy of the SEC from participating in these exchange
offers the opportunity to exchange their outstanding notes for exchange notes
registered under the Securities Act that are substantially identical to the
outstanding notes, except that the exchange notes will not contain terms with
respect to transfer restrictions, registration rights and additional interest.
The exchange and registration rights agreement also provides that we
. shall make available for a period of 180 days after the consummation of
the exchange offers a prospectus meeting the requirements of the
Securities Act to any broker-dealer for use in connection with any resale
of any new notes
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. shall pay all expenses incident to the exchange offers, including the
expense of one counsel to the holders of the notes, and will indemnify
some holders of the notes, including any broker-dealer, against
liabilities including liabilities under the Securities Act
A broker-dealer that delivers a prospectus to purchasers in connection with
resales will be subject to various civil liability provisions under the
Securities Act and will be bound by the provisions of the exchange and
registration rights agreement, including some of the indemnification rights and
obligations.
We will use our reasonable best efforts to file with the SEC a shelf
registration statement to cover resales of the outstanding notes by those
holders who provide required information in connection with that shelf
registration statement under each of the following circumstances
. if any changes in law, SEC rules or regulations or applicable
interpretations of these laws, rules or regulations by the staff of the
SEC do not permit us to effect the exchange offers as contemplated by the
exchange and registration rights agreement
. if the exchange offers are not consummated within 180 days after February
16, 1999
. if any initial purchaser of the outstanding notes so requests but only
with respect to any outstanding notes acquired directly by them
. if any holder of the outstanding notes notifies us that it is not
permitted to participate in the exchange offers or would not receive
fully tradeable new notes in the exchange offers
We will use our reasonable best efforts to keep the shelf registration
statement, if filed, effective for a period of two years after February 16,
1999. We have the ability to suspend the shelf registration statement for no
more than
. 45 days during the first 12-month period after February 16, 1999,
and
. 90 days during any subsequent 12-month period
if we determine, in our reasonable best judgment upon the written advice of
counsel, that continued effectiveness would require disclosure of confidential
information or would interfere with any financing, acquisition, reorganization
or other material transaction involving Equistar.
If a registration default occurs, we will be obligated to pay additional
interest to each holder of outstanding notes at a rate equal to 0.25% per
annum. If this registration default is not cured within 90 days, the interest
rate increases to 0.50% per annum. A registration defaults occurs if
. the registration statement is not filed with the SEC within 60 days of
February 16, 1999
. the registration statement or shelf registration statement is not
declared effective within 150 days of February 16, 1999
. the exchange offers are not consummated within 180 days of February 16,
1999
. the shelf registration statement is filed and declared effective within
180 days of February 16, 1999, but subsequently ceases to be effective
Following the cure of a registration default, additional interest will cease to
accrue. Additional interest does not accrue during a suspension period.
If you desire to tender your outstanding notes, you will be required to make
to us the representations described under "The Exchange Offers--Purpose and
Effect of the Exchange Offers" and "The Exchange Offers--Procedures for
Tendering" to participate in the exchange offers. In addition, we may require
you to deliver information to be used in connection with the shelf registration
statement to have your notes included in
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the shelf registration statement and to benefit from the provisions regarding
additional interest described in the preceding paragraphs. A holder who sells
outstanding notes under the shelf registration statement generally will be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers. A holder will also be subject to the
civil liability provisions under the Securities Act in connection with the
sales and will be bound by the provisions of the exchange and registration
rights agreement that are applicable to a holder, including indemnification
obligations.
The description of the exchange and registration rights agreement contained
in this section is a summary of the terms we believe are material at this time
and is qualified in its entirety by reference to all provisions of the exchange
and registration rights agreement. The exchange and registration statement is
filed as an exhibit to the registration statement of which this prospectus is a
part.
Book-Entry; Delivery and Form
The new notes will initially be represented by one or more permanent global
notes in definitive, fully registered book-entry form (the "Global Notes") that
will be registered in the name of Cede & Co., as nominee of DTC. The Global
Notes will be deposited, on behalf of the acquirors of the new notes
represented thereby, with a custodian for DTC for credit to the respective
accounts of the acquirors or to such other accounts as they may direct at DTC.
See "The Exchange Offers--Book-Entry Transfer."
The Global Notes
We expect that under procedures established by DTC
. upon deposit of the Global Notes with DTC or its custodian, DTC will
credit on its internal system a portion of the Global Notes that shall be
composed of the corresponding respective amounts of the Global Notes to
the respective accounts of persons who have accounts with the depository
. ownership of the notes will be shown on, and the transfer or ownership
will be effected only through, records maintained by DTC or its nominee,
with respect to interests and records of participants and with respect to
interests of persons other than participants
So long as DTC or its nominee is the registered owner of the Global Notes,
DTC or its nominee, as the case may be, will be considered the sole owner or
holder of the notes represented by the Global Notes for all purposes under the
indenture. Except as provided below, owners of beneficial interests in Global
Notes will not
. be entitled to have notes represented by Global Notes registered in their
names
. receive or be entitled to receive physical delivery of certificated notes
. be considered the owners or holders of the Global Notes under the
indenture for any purpose, including with respect to the giving of any
direction, instruction or approval to the trustee
Payments of the notes represented by Global Notes will be made to DTC or its
nominee, as the registered owner. None of Equistar, Equistar Funding, the
trustee or the paying agent will have any responsibility or liability for any
aspect of the records relating, to or payments made on account of, beneficial
ownership interest in the Global Notes or for maintaining, supervising or
reviewing any records relating to beneficial ownership interest under the
indenture.
We expect that DTC or its nominees, upon receipt of any payment on the notes
represented by the Global Notes, will credit participants' accounts with
payments in amounts proportionate to their respective beneficial interest in
the Global Notes as shown in the records of DTC or its nominee. We also expect
that participants will be governed by standing instructions and customary
practice as is now the case with securities held for the accounts of customers
registered in the names of nominees for the customers. Payment will be the
responsibility of the participants.
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Transfers between participants in DTC will be effected according to DTC's
procedures and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel will be effected in the ordinary way
according to their respective rules and operating procedures. If a holder
requires physical delivery of a certificated security for any reason, including
to sell notes to persons in states that require physical delivery of the
security or to pledge the security, a holder must transfer its interest in the
Global Notes according to the normal procedures of DTC, Euroclear or Cedel and
the procedures in the indenture.
Subject to compliance with the transfer restrictions applicable to the
notes, cross-market transfers between the participants in DTC, on the one hand,
and Euroclear or Cedel participants, on the other hand, will be effected
through DTC according to DTC's rules on behalf of Euroclear or Cedel, as the
case may be, by its respective depositary. Cross-market transactions will
require delivery of instructions to Euroclear or Cedel, as the case may be, by
the counter party in that system according to the rules and procedures and
within the established deadlines, in Brussels time, of such system if the
transaction meets its settlement requirements. Euroclear or Cedel, as the case
may be, will deliver instructions to its respective depositary to take action
to effect final settlement on its behalf by delivering or receiving interests
in the relevant Global Notes in DTC and making or receiving payment according
to normal procedures for same-day funds settlement applicable to DTC. Euroclear
participants and Cedel participants may not deliver instructions directly to
the depostaries for Euroclear or Cedel.
Because of time zone differences, the securities account of Euroclear or
Cedel participants purchasing an interest in a Global Note from a participant
in DTC will be credited, and any crediting will be reported to the relevant
Euroclear or Cedel participant during the note settlement processing day
immediately following the settlement date of DTC. The note settlement day must
be a business day for Euroclear and Cedel. Cash received in Euroclear or Cedel
as a result of sales of interest in a Global Note by or through a Euroclear or
Cedel participant to a participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or Cedel
cash amount only as of the business day for Euroclear or Cedel following DTC's
settlement date.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Notes among participants in
DTC, Euroclear and Cedel it is under no obligation to perform or to continue to
perform procedures, and procedures may be discontinued at any time. Neither we
nor the trustee will have any responsibility for the performance by DTC,
Euroclear and Cedel or their respective participants or indirect participants
of their respective obligations under the rules and procedures governing their
operations.
Description of DTC
The description of the operations and procedures of DTC is provided below
solely as a matter of convenience. These operations and procedures are solely
within the control of the respective settlement systems and are subject to
change by them from time to time. Neither we nor the initial purchasers takes
any responsibility for these operations or procedures, and investors are urged
to contact the relevant system or its participants directly to discuss these
matters.
DTC has advised that it is
. a limited purpose trust company organized under the laws of the State of
New York
. a "banking organization" within the meaning of the New York Banking Law
. a member of the Federal Reserve System
. a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended
. a "clearing agency" registered under Section 17A of the Securities
Exchange Act of 1934, as amended
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DTC was created to hold securities for its participants and facilitates the
clearance and settlement of securities transactions between participants
through electronic book-entry changes to the accounts of its participants,
thereby eliminating the need for physical transfer and delivery of
certificates.
DTC's participants include securities brokers and dealers, including the
initial purchasers, banks and trust companies, clearing corporations as well as
other organizations. Indirect access to DTC's system is also available to other
entities such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly. Investors who are not participants may beneficially own securities
held by or on behalf of DTC only through participants or indirect participants.
Certificated Notes
Interest in the Global Notes may be exchanged for certificated securities if
. we notify the trustee in writing that DTC is no longer willing or able to
act as a depositary or DTC ceases to be registered as a clearing agency
under the Exchange Act and a successor depositary is not appointed within
90 days of notice or cessation
. we, at our option, notify the trustee in writing that we elect to cause
the issuance of notes in certificated form under the indenture
. other events occur as provided in the indenture
Upon the occurrence of any of the events described in the preceding sentence,
we will cause the appropriate certificated securities to be delivered.
Neither Equistar, Equistar Funding nor the trustee shall be liable for any
delay by DTC or any participant or indirect participant in identifying the
beneficial owners of the related notes, and each person may conclusively rely
on, and shall be protected in relying on, instructions from DTC for all
purposes, including with respect to the registration and delivery, and the
respective principal amounts, of the notes to be issued.
Summary Description of Other Indebtedness of Equistar
$1.25 Billion Revolving Credit Facility
In connection with its formation on December 1, 1997, Equistar entered into
a $1.25 billion revolving credit facility expiring November 2002 with
Millennium America Inc., as guarantor, Bank of America National Trust and
Savings Association and The Chase Manhattan Bank, as agents, and the lenders a
party thereto from time to time. This facility was amended in February 1999.
Borrowings under the $1.25 billion revolving credit facility currently bear
interest depending on the type of borrowing made by Equistar, at its option, at
one of the following:
. LIBOR, generally the London interbank market rate, or NIBOR, generally
the New York interbank market rate, plus, in each case, an applicable
margin and facility fee based on Equistar's long-term debt ratings as
established by S&P's and Moody's. For example, at Equistar's long-term
debt ratings as of May 31, 1999, the applicable margin was 0.375% and the
facility fee was 0.125%. The margin and facility fee each increase
incrementally for each level of downgrade in long-term debt rating.
. a base rate of either the Federal Funds rate plus 0.5% or a fixed rate of
interest offered by a lender
. a rate established by competitive bids submitted by the sponsoring banks
through a competitive auction feature
The $1.25 billion revolving credit facility is available for working capital
and general purposes as needed.
107
<PAGE>
The $1.25 billion revolving credit facility limits Equistar's ability to
incur liens to secure indebtedness, enter into sale and leaseback transactions,
and to allow subsidiaries to have indebtedness or preferred stock. In general,
Equistar can only have liens to secure indebtedness, enter into sale and
leaseback transactions, and allow our material subsidiaries to have
indebtedness or preferred stock, to the extent the sum of those amounts does
not exceed the greater of
. $250 million
or
. 15% of Equistar's consolidated net tangible assets as shown on the most
recent audited consolidated balance sheet
In addition to the quantitative basket allowance described above, the $1.25
billion revolving credit facility allows Equistar to incur or permit to exist
specified categories of liens, such as
. liens securing the performance of bids and contracts
. liens that arise by operation of law
. tax liens
. liens on an asset incurred within 180 days of acquisition or construction
of the asset
. pre-existing liens
The $1.25 billion revolving credit facility also permits a material
subsidiary to issue indebtedness or preferred stock to Equistar or another
material subsidiary and allows material subsidiaries to have indebtedness for
obligations for the purchase price of real property or equipment and pre-
existing indebtedness.
Under the covenants of the $1.25 billion revolving credit facility, Equistar
may not permit the following ratio to exceed 0.6 to 1.0
. the difference of (a) total indebtedness, not including specified types
of subordinated loans from the partners of Equistar, minus (b) all cash
and cash equivalents on our consolidated balance sheet in excess of $25
million
to
. the sum of (1) the amount from the foregoing bullet point and (2) total
partners' equity
Under the covenants of the $1.25 billion revolving credit facility, we may
not permit the ratio of
. ""EBITDA," defined in the $1.25 billion revolving credit facility as the
sum of operating income, amortization, depreciation and depletion, and
noncash compensation expense
to
. net interest expense
for any period of four consecutive fiscal quarters ended on a date listed below
to be less than the amount listed opposite the applicable date:
<TABLE>
<S> <C>
March 31, 1999................................................ 2.50 to 1.0
June 30, 1999................................................. 2.25 to 1.0
September 30, 1999............................................ 2.00 to 1.0
December 31, 1999............................................. 2.00 to 1.0
March 31, 2000................................................ 2.15 to 1.0
June 30, 2000................................................. 2.25 to 1.0
September 30, 2000............................................ 2.50 to 1.0
December 31, 2000............................................. 2.75 to 1.0
After December 31, 2000....................................... 3.00 to 1.0
</TABLE>
108
<PAGE>
In the event that Equistar incurs downtime at a plant, the $1.25 billion
revolving credit facility provides that up to two times during the entire term
of the facility, but only for one quarter during any four consecutive fiscal
quarters, we may have the right to add to EBITDA the lesser of (1) the
estimated amount by which EBITDA is impacted by that downtime or (2) $20
million.
The $1.25 billion revolving credit facility also provides that Equistar may
not consolidate or merge with another person or permit another person to merge
into Equistar, without showing that
. no event of default has occurred and is continuing
. Equistar or a wholly owned subsidiary is the surviving person
. in the case of any transaction in which the consideration paid by
Equistar has an aggregate value in excess of 10% of Equistar's
consolidated net tangible assets, Equistar submit calculations showing
pro forma compliance with the two financial ratio covenants discussed
above
The $1.25 billion revolving credit facility also provides that Equistar may not
sell, lease, transfer or assign or otherwise dispose of either
. Equistar's assets, substantially as an entirety
. assets representing more than 10% of consolidated net tangible assets,
unless Equistar delivers pro forma consolidated financial information
demonstrating compliance with the two covenants discussed above
The $1.25 billion revolving credit facility limits Equistar's ability to
engage in business other than the type engaged in as of the date of the
facility and business reasonably related to not more than 10% of consolidated
net tangible assets. The $1.25 billion revolving credit facility also limits
the use of proceeds of borrowings under the facility and restricts Equistar's
ability to enter into or permit to exist any agreement that restricts the
ability of a material subsidiary to pay dividends or other distributions or to
make or repay loans or advances to Equistar.
Events of default under the $1.25 billion revolving credit facility include
. breach of representation or warranty
. default in payment of principal
. default in payment of interest that continues for a period of five days
. failure to comply with any one of the negative covenants described above
for a period of 30 days after we receive notice
. bankruptcy of Equistar or a material subsidiary
. default under other indebtedness of Equistar, if the effect of that
default is to accelerate or to permit the holder to accelerate that
indebtedness in excess of $50 million
. nonpayment when due of any amount of principal of or interest on any
indebtedness of Equistar in an aggregate principal amount in excess of
$50 million
. default in payment of principal in excess of $15 million, when due and
payable or principal in excess of $15 million is declared due and payable
before the date on which it would otherwise be due and payable
. failure of Lyondell, Millennium and Occidental at any time to own in the
aggregate, through ownership by one or more of them, at least a majority
of the total equity interest and voting power of Equistar
109
<PAGE>
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. However, the lenders may not proceed against Millennium
America Inc. until they have exhausted their remedies against Equistar. The
guarantee will remain in effect indefinitely, but at any time after December 1,
2004, Millennium America Inc. may elect to terminate the guarantee if all of
the following conditions exist.
. Equistar's ratio of total indebtedness to total capitalization is, as of
the most recently completed fiscal quarter, lower than the same ratio for
the 12-month period ending December 31, 1998
. Equistar's ratio of earnings before interests, taxes, depreciation and
amortization to net interest for the most recent 12-month period is at
least 105% of the same ratio for the 12-month period ending December 31,
1998
. Equistar is not then in default in the payment of principal of, or
interest on, any indebtedness for borrowed money in excess of $15 million
. Equistar is not then in default in respect of any covenants, other than
those relating to payment of principal and/or interest, relating to any
indebtedness for borrowed money if the effect of a default shall be to
accelerate, or to permit the holder or obligee of such indebtedness, or
any trustee on behalf of a holder or obligee, to accelerate, with or
without the giving of notice or lapse of time or both, the indebtedness
in an aggregate amount in excess of $50 million
In addition, if Millennium GP and Millennium LP sell all of their respective
interests in Equistar to an unaffiliated third party at any time, or if
Millennium Petrochemicals sells all of its interests in both Millennium GP and
Millennium LP, Millennium America Inc. may elect to terminate its guarantee if,
at the time of the sale or termination, Equistar has an investment grade credit
rating or the fair market value of Equistar's assets is at least 140% of the
gross amount of its liabilities.
On June 12, 1998, Equistar entered into a $500 million credit facility
consisting of a $250 million revolving credit facility and a $250 million one-
year term facility with Bank of America National Trust and Savings Association
and Chase Bank of Texas, National Association, as agents, and BancAmerica
Robertson Stephens and Chase Securities Inc., as arrangers, and the lenders a
party thereto from time to time. This facility was terminated in February 1999.
Assumed Lyondell Debt
At Equistar's formation, Equistar assumed specific long-term notes and
debentures of Lyondell. At June 1, 1999 following repayment of $150 million of
10% notes due June 1, 1999, the outstanding portion of those obligations
consists of
. $100 million aggregate principal amount 9.125% notes due 2002
. $150 million 6.50% notes due 2006
. $150 million aggregate principal amount debentures due 2026
. $163 million aggregate principal amount of medium-term notes with various
maturities ranging from February 2000 to March 2005 and with various
fixed interest rates ranging from 9.50% to 11.30%
Lyondell continues to be liable to the debtholders on these notes and
debentures as well, although Equistar and Lyondell have agreed that Equistar
will indemnify Lyondell with respect to the assumed debt. As a result, as
between Equistar and Lyondell, Lyondell is effectively secondarily liable.
All of the assumed Lyondell debt provides that neither Equistar nor any
restricted subsidiary may incur debt secured by a lien on any principal
petrochemical plant or refinery or on the stock of any subsidiary that owns any
principal petrochemical plant or refinery, unless Equistar equally and ratably
secures the assumed
110
<PAGE>
Lyondell debt. This requirement does not apply to some categories of liens,
substantially the same as those permitted under the outstanding notes and the
new notes, such as pre-existing liens, liens to secure all or a part of the
construction, and liens to secure debt incurred to secure payment for property
or to secure debt incurred before, at the time of or within 24 months after
acquisition of the property. Equistar is also allowed to incur secured debt,
which in the aggregate, together with the aggregate value of all sale and
leaseback transactions for which no indebtedness has been retired, does not at
any one time exceed the greater of $50 million or 10% of Equistar's
consolidated net tangible assets. Some of the assumed Lyondell debt also
restricts the incurrence of debt by any subsidiary that owns either of
Equistar's Channelview, Texas olefins plants.
The assumed Lyondell debt also provides that Equistar may not enter into a
sale and leaseback transaction unless Equistar would be allowed to incur, under
the test described in the foregoing paragraph, secured debt in principal amount
equal to or exceeding the value of the sale and leaseback transaction, without
equally and ratably securing the assumed Lyondell debt. This restriction does
not apply if Equistar voluntarily repays indebtedness in an amount equal to the
value of the sale and leaseback transaction within four months of the sale and
leaseback transaction.
The events of default under the assumed Lyondell debt include
. default in the payment of interest upon the applicable series of debt
securities that continues for 30 days
. default in the payment of principal of the applicable series of debt
securities when due and payable
. failure to observe any other applicable covenant 90 days after written
notice
. bankruptcy
Lyondell's medium-term notes, which have been assumed by Equistar, have a
provision providing for the right of the noteholders to require repurchase of
the medium-term notes upon the occurrence of events involving an obligor (which
includes both Equistar and Lyondell) under the medium-term notes. These rights
are triggered if there is a "designated event" followed by a specified drop in
the rating of the securities. A designated event includes
. a person acquires more than 20% of the voting stock of the obligor
. during any period of two consecutive years, individuals who at the
beginning of that two-year period constituted the obligor's board of
directors, or new directors whose nomination was approved by at least
two-thirds of the directors who were directors at the beginning of that
period or whose nomination was similarly approved, cease to constitute a
majority
. an obligor consolidates or merges with or into any other corporation or
conveys, transfers or leases all or substantially all of its assets to
any person or any corporation consolidates with or mergers into the
obligor, in either event under a transaction in which any shares of
voting stock of the obligor outstanding immediately before the
transaction are exchanged into or exchanged for cash, securities or other
property
. an obligor acquires beneficial ownership in excess of 30% of its own
voting stock
. an obligor makes distributions other than regular cash dividends to
holders of voting stock or purchases voting stock, and the sum of those
distributions and purchases is 30% or more of the fair market value of
all outstanding stock
. during any year, an obligor makes distributions other than regular cash
dividends or repurchases voting stock other than up to $25 million in
repurchases that may be made in connection with employee benefit plans,
and the sum of those distributions and purchases exceeds an amount equal
to the obligor's net cash flow for the prior fiscal year less the
aggregate amount of regular quarterly dividends paid during the same
prior fiscal year
111
<PAGE>
The right to require repurchase is triggered if a designated event is followed
within 90 days of public notice of the designated event by (a) a downgrade to
below investment grade if the medium-term notes are rated investment grade and
(b) a downgrade of at least one full ratings category if the medium-term notes
are rated below investment grade.
Plan of Distribution
Based on interpretations by the staff of the SEC in no action letters issued
to third parties, we believe that you may transfer new notes issued under the
exchange offers in exchange for the outstanding notes if you both
. acquire the new notes in the ordinary course of your business
. are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a
distribution of new notes
Broker-dealers receiving new notes in the exchange offers will be subject to a
prospectus delivery requirement with respect to resales of the new notes. The
letter of transmittal states that by acknowledging and delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for outstanding notes where the
outstanding notes were acquired by the broker-dealer as a result of market-
making activities or other trading activities.
We believe that you may not transfer new notes issued under the exchange
offers in exchange for the outstanding notes if you are either
. our "affiliate" within the meaning of Rule 405 under the Securities Act
. a broker-dealer that acquired outstanding notes directly from us
. a broker-dealer that acquired outstanding notes as a result of market-
making or other trading activities without compliance with the
registration and prospectus delivery provisions of the Securities Act
To date, the staff of the SEC has taken the position that participating
broker-dealers may fulfill their prospectus delivery requirements with respect
to transactions involving an exchange of securities such as this exchange
offers, other than a resale of an unsold allotment from the original sale of
the outstanding notes, with the prospectus contained in the exchange offers
registration statement. Broker-dealers who acquired the outstanding notes from
Equistar may not rely on SEC staff interpretations. They must comply with the
registration and prospectus delivery requirements of the Securities Act--
including being named as selling noteholders--in order to resell the
outstanding notes or the new notes. In the exchange and registration rights
agreement, we have agreed to permit participating broker-dealers use of this
prospectus in connection with the resale of new notes. We have agreed that, for
a period up to 180 days after the expiration of the exchange offers, we will
make this prospectus, and any amendment or supplement to this prospectus,
available to any broker-dealer that requests these documents in the letter of
transmittal. In addition, until , 1999, all dealers effecting
transactions in the new notes may be required to deliver a prospectus.
If you wish to exchange your outstanding notes for new notes in the exchange
offers, you will be required to make representations to us as described in "The
Exchange Offers--Purpose and Effect of the Exchange Offers" and "The Exchange
Offers--Procedures for Tendering--Your Representations to Us" of this
prospectus and in the letter of transmittal. In addition, if you are a broker-
dealer who receives new notes for your own account in exchange for outstanding
notes that were acquired by you as a result of market-making activities or
other trading activities, you will be required to acknowledge that you will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale by you of new notes.
112
<PAGE>
We will not receive any proceeds from any sale of new notes by broker-
dealers. Broker-dealers who receive new notes for their own account in the
exchange offers may sell them from time to time in one or more transactions
either
. in the over-the-counter market
. in negotiated transactions
. through the writing of options on the new notes or a combination of
methods of resale
. at market prices prevailing at the time of resale
. at prices related to prevailing market prices or negotiated prices
Any resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any broker-dealer or the purchasers of any new notes. Any broker-dealer
that resells new notes it received for its own account in the exchange offers
and any broker or dealer that participates in a distribution of new notes may
be deemed to be an "underwriter" within the meaning of the Securities Act. Any
profit on any resale of new notes and any commissions or concessions received
by any persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that, by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incidental to the exchange offers other
than commissions and concessions of any brokers or dealers. We will indemnify
holders of the outstanding notes, including any broker-dealers, against some
liabilities, including liabilities under the Securities Act, as provided in the
exchange and registration rights agreement.
Legal Matters
Baker & Botts, L.L.P., Houston, Texas, counsel for Equistar and Equistar
Funding, has issued an opinion about the legality of the new notes.
Experts
The following financial statements included in this prospectus have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting
. of Equistar as of and for the year ended December 31, 1998, and as of
December 31, 1997, and for the one month then ended
. of the Lyondell contributed business
--as of November 30, 1997
--as of December 31, 1996
--for the eleven-month period ended November 30, 1997
--for each of the two years in the period ended December 31, 1996
. of the Millennium contributed business
--as of November 30, 1997
--as of December 31, 1996
--for the eleven-month period ended November 30, 1997
--for each of the two years in the period ended December 31, 1996
113
<PAGE>
The financial statements included in this prospectus and elsewhere in the
registration statement, to the extent and for the periods indicated in their
report appearing on page F-55, have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
Available Information
Neither Equistar nor Equistar Funding currently files reports with the SEC
or delivers annual reports to security holders under the Exchange Act. We will
provide without charge, upon written request, a copy of any information that is
required to enable resales of the notes to be made under Rule 144A under the
Securities Act, a copy of the exchange and registration rights agreement as
described under "The Exchange Offers" and "The Exchange and Registration Rights
Agreement," and copies of other documents as described under "Description of
the Partnership Agreement" and "Description of the Parent Agreement." Written
requests for this information should be addressed to Equistar Chemicals, LP at
1221 McKinney Street, Houston, Texas 77010, Attention: Gerald A. O'Brien.
114
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Equistar Chemicals, LP:
Unaudited Financial Statements
Balance Sheets as of March 31, 1999 and December 31, 1998............. F-2
Statements of Income for the three months ended March 31, 1999 and
1998................................................................. F-3
Statements of Cash Flows for the three months ended March 31, 1999 and
1998................................................................. F-4
Notes to Financial Statements......................................... F-5
Audited Financial Statements
Report of Independent Accountants..................................... F-10
Balance Sheets as of December 31, 1998 and 1997....................... F-11
Statements of Income for the year ended December 31, 1998 and the one
month ended December 31, 1997........................................ F-12
Statements of Partners' Capital for the year ended December 31, 1998
and the one month ended December 31, 1997............................ F-13
Statements of Cash Flows for the year ended December 31, 1998 and the
one month ended December 31, 1997.................................... F-14
Notes to Financial Statements......................................... F-15
Lyondell Contributed Business:
Audited Financial Statements
Report of Independent Accountants..................................... F-33
Balance Sheets as of November 30, 1997 and December 31, 1996.......... F-34
Statements of Income and Invested Capital for the eleven months ended
November 30, 1997 and the years ended December 31, 1996 and 1995..... F-35
Statements of Cash Flows for the eleven months ended November 30, 1997
and the years ended December 31, 1996 and 1995....................... F-36
Notes to Financial Statements......................................... F-37
Millennium Contributed Business:
Audited Financial Statements
Report of Independent Accountants..................................... F-45
Balance Sheets as of November 30, 1997 and December 31, 1996.......... F-46
Statements of Income for the eleven months ended November 30, 1997 and
the years ended December 31, 1996 and 1995........................... F-47
Statements of Changes in Invested Capital for the eleven months ended
November 30, 1997 and the year ended December 31, 1996............... F-48
Statements of Cash Flows for the eleven months ended November 30, 1997
and the years ended December 31, 1996 and 1995....................... F-49
Notes to Financial Statements......................................... F-50
Occidental Contributed Business:
Unaudited Financial Statements
Balance Sheets as of March 31, 1998 and 1997.......................... F-55
Statements of Operations and Invested Capital for the three months
ended March 31, 1998 and 1997........................................ F-56
Statements of Cash Flows for the three months ended March 31, 1998 and
1997................................................................. F-57
Notes to Financial Statements......................................... F-58
Audited Financial Statements
Report of Independent Accountants..................................... F-64
Balance Sheets as of December 31, 1997 and 1996....................... F-65
Statements of Operations and Invested Capital for the years ended
December 31, 1997, 1996 and 1995..................................... F-66
Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995............................................................. F-67
Notes to Financial Statements......................................... F-68
</TABLE>
F-1
<PAGE>
EQUISTAR CHEMICALS, LP
BALANCE SHEETS
Millions of dollars
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and Cash equivalents.............................. $ 118 $ 66
Accounts receivable:
Trade, net........................................... 423 376
Related parties...................................... 87 111
Inventories............................................ 513 549
Prepaid expenses and other current assets.............. 20 25
------ ------
Total current assets............................... 1,161 1,127
------ ------
Property, plant and equipment, net....................... 4,066 4,075
Investment in PD Glycol.................................. 57 55
Goodwill, net............................................ 1,142 1,151
Deferred charges and other assets........................ 276 257
------ ------
Total assets............................................. $6,702 $6,665
====== ======
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable:
Trade................................................ $ 324 $ 331
Related parties...................................... 5 15
Payable to owners...................................... 6 6
Current maturities of long-term debt................... 160 150
Other accrued liabilities.............................. 79 133
------ ------
Total current liabilities.......................... 574 635
------ ------
Obligations under capital leases......................... -- 205
Long-term debt, less current maturities.................. 2,201 1,865
Other liabilities and deferred credits................... 85 75
Commitments and contingencies
Partners' capital:
Partners capital....................................... 3,842 3,885
------ ------
Total partners' capital............................ 3,842 3,885
------ ------
Total liabilities and partners' capital.................. $6,702 $6,665
====== ======
</TABLE>
See notes to financial statements.
F-2
<PAGE>
EQUISTAR CHEMICALS, LP
STATEMENTS OF INCOME
Millions of dollars
(Unaudited)
<TABLE>
<CAPTION>
For the three
months ended
March 31,
--------------
1999 1998
------ ------
<S> <C> <C>
Sales and other operating revenues:
Unrelated parties............................................. $ 928 $ 943
Related parties............................................... 176 78
------ ------
1,104 1,021
------ ------
Operating costs and expenses:
Cost of sales:
Unrelated parties........................................... 828 727
Related parties............................................. 152 71
Selling, general and administrative expenses.................. 65 61
Research and development expense.............................. 10 9
Restructuring charges......................................... 3 6
------ ------
1,058 874
------ ------
Operating income.............................................. 46 147
------ ------
Interest expense................................................ (43) (32)
Interest income................................................. 4 6
------ ------
Net income...................................................... $ 7 $ 121
====== ======
</TABLE>
See notes to financial statements.
F-3
<PAGE>
EQUISTAR CHEMICALS, LP
STATEMENTS OF CASH FLOWS
Millions of dollars
(Unaudited)
<TABLE>
<CAPTION>
For the
three
months
ended
March 31,
----------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 7 $121
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 73 58
Equity in losses of investment in PD Glycol...................... 1 --
Increase in accounts receivable.................................. (23) (114)
Decrease in receivables from owners.............................. -- 141
Decrease (increase) in inventories............................... 42 (15)
(Decrease) increase in accounts payable.......................... (17) 67
Decrease in payable to owners.................................... -- (63)
Increase (decrease) in other accrued liabilities................. (54) 18
Net change in other working capital accounts..................... 5 3
Other............................................................ (13) (7)
---- ----
Net cash provided by operating activities...................... 21 209
---- ----
Cash flows from investing activities:
Expenditures for property, plant and equipment.................... (46) (21)
Contributions and advances to affiliates.......................... (8) --
---- ----
Net cash used in investing activities.......................... (54) (21)
---- ----
Cash flows from financing activities:
Borrowings of long-term debt...................................... 918 200
Repayments of long-term debt...................................... (572) (4)
Repayment of obligations under capital leases..................... (205) --
Payment of debt issuance costs.................................... (6) --
Distributions to owners........................................... (50) (419)
---- ----
Net cash provided by (used in) financing activities............ 85 (223)
---- ----
Increase (decrease) in cash and cash equivalents................... 52 (35)
Cash and cash equivalents at beginning of period................... 66 41
---- ----
Cash and cash equivalents at end of period......................... $118 $ 6
==== ====
</TABLE>
See notes to financial statements.
F-4
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Preparation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
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. Certain amounts from prior periods have been reclassified
to conform to the current period presentation.
The preparation of these 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 amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Company Operations
Pursuant to a partnership agreement (the "Partnership Agreement") Lyondell
Petrochemical Company ("Lyondell") and Millennium Chemicals Inc. ("Millennium")
formed Equistar Chemicals, LP, a Delaware limited partnership, which commenced
operations on December 1, 1997. The Partnership is a joint venture and the
businesses contributed by Lyondell and Millennium consisted of non-monetary
assets and were accounted for on a predecessor basis. From December 1, 1997 to
May 15, 1998, the Partnership was owned 57 percent by Lyondell and 43 percent
by Millennium. Lyondell owns its interest in the Partnership through two
wholly-owned subsidiaries, Lyondell Petrochemical G.P. Inc. ("Lyondell GP") and
Lyondell Petrochemical L.P. Inc. ("Lyondell LP"). Millennium also owns its
interest in the Partnership through two wholly-owned subsidiaries, Millennium
Petrochemicals GP LLC ("Millennium GP") and Millennium Petrochemicals LP LLC
("Millennium LP").
On May 15, 1998, the Partnership was expanded with the contribution of
certain assets from Occidental Petroleum Corporation ("Occidental"). These
assets include the ethylene, propylene and ethylene oxide ("EO") and
derivatives businesses and certain pipeline assets held by Oxy Petrochemicals
Inc. ("Oxy Petrochemicals"), a 50% interest in a joint venture between PDG
Chemical Inc. (" PDG Chemical") and du Pont de Nemours and Company, and a lease
to the Partnership of the Lake Charles, Louisiana olefins plant and related
pipelines held by Occidental Chemical Corporation ("Occidental Chemical")
(collectively, the "Occidental Contributed Business"). Occidental Chemical, Oxy
Petrochemicals and PDG Chemical are all wholly owned, indirect subsidiaries of
Occidental. The Occidental Contributed Business included olefins plants at
Corpus Christi and Chocolate Bayou, Texas; EO/ethylene glycol ("EG") and EG
derivatives businesses located at Bayport, Texas, Occidental's 50% ownership of
PD Glycol, which operates EO/EG plants at Beaumont, Texas, 950 miles of owned
and leased ethylene/propylene pipelines and the lease to the Partnership of the
Lake Charles, Louisiana olefins plant and related pipelines.
In exchange for the Occidental Contributed Business, two subsidiaries of
Occidental were admitted as limited partners and a third subsidiary was
admitted as a general partner in the Partnership for an aggregate partnership
interest of 29.5%. In addition, the Partnership assumed approximately $205
million of Occidental indebtedness and the Partnership issued a promissory note
to an Occidental subsidiary in the amount of $419.7 million. In connection with
the contribution of the Occidental Contributed Business and the reduction of
Millennium's and Lyondell's ownership interests in the Partnership, the
Partnership also issued a promissory note to Millennium LP in the amount of $75
million. The consideration paid for the Occidental Contributed Business was
determined based upon arms-length negotiations between Lyondell, Millennium and
Occidental. In connection with the transaction, the Partnership and Occidental
also entered into a long-term agreement for the Partnership to supply the
ethylene requirements for Occidental Chemical's US manufacturing plants.
F-5
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
Upon completion of this transaction, the Partnership is now owned 41% by
Lyondell, 29.5% by Millennium and 29.5% by Occidental, through its wholly-owned
subsidiaries Occidental Petrochem Partner GP Inc. ("Occidental GP"), Occidental
Petrochem Partner 1, Inc. ("Occidental LP1") and Occidental Petrochem Partner
2, Inc. ("Occidental LP2").
The Partnership owns and operates the petrochemicals and polymers businesses
contributed by Lyondell, Millennium and Occidental (the "Contributed
Businesses") which consist of 19 manufacturing facilities on the US Gulf Coast
and in the US Midwest. The petrochemicals segment produces products including
ethylene, propylene and butadiene; aromatics, including benzene and toluene;
oxygenated chemicals, including ethylene oxide and derivatives, and methyl
tertiary butyl ether ("MTBE"); ethyl alcohol and diethyl ether; and specialty
chemicals, including refinery building blocks. These products are used
primarily in the production of other chemicals and products, including
polymers. The petrochemicals segment also includes sales of methanol produced
by Lyondell Methanol LP ("Lyondell Methanol"), which is owned 75 percent by
Lyondell. The Partnership operates the Lyondell Methanol facility. The polymers
segment produces polyolefins, including high-density polyethylene ("HDPE"),
low-density polyethylene ("LDPE"), linear low-density polyethylene ("LLDPE"),
and polypropylene; and performance polymers products, including color
concentrates and compounds; wire and cable resins and compounds; adhesive
resins; and fine powders, which are used in the production of a wide variety of
consumer and industrial products. The color concentrates and compounds business
was sold on April 30, 1999 (see note 9).
The Partnership Agreement provides that Equistar is governed by a
Partnership Governance Committee consisting of nine representatives, three
appointed by each partner. Most of the significant decisions of the Partnership
Governance Committee require unanimous consent, including approval of the
Partnership's Strategic Plan and annual updates thereof.
Pursuant to the Partnership Agreement, net income is allocated among the
partners on a pro rata basis based on their percentage ownership of the
Partnership. Distributions are made to the partners based on their percentage
ownership of the Partnership. Additional contributions required by the
Partnership will also be based on the partners' percentage ownership of the
Partnership.
3. Inventories
The components of inventory and their book values at March 31, 1999 and
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Millions of dollars 1999 1998
------------------- ---- ----
<S> <C> <C>
Finished products............................................... $269 $301
Work-in-process................................................. 11 11
Raw materials................................................... 144 149
Materials and supplies.......................................... 89 88
---- ----
Total inventories............................................. $513 $549
==== ====
</TABLE>
F-6
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
4. Property, Plant and Equipment, Net
The components of property, plant and equipment and their gross value at
March 31, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Millions of dollars 1999 1998
------------------- ------ ------
<S> <C> <C>
Manufacturing facilities and equipment..................... $5,593 $5,344
Manufacturing equipment acquired under capital leases...... -- 236
Construction projects in progress.......................... 227 189
Land....................................................... 78 78
------ ------
Total property, plant and equipment...................... 5,898 5,847
Less accumulated depreciation.............................. 1,832 1,772
------ ------
Property, plant and equipment, net....................... $4,066 $4,075
====== ======
</TABLE>
5. Long-Term Debt and Financing Arrangements
Long-term debt at March 31, 1999 and December 31, 1998 was comprised of the
following:
<TABLE>
<CAPTION>
Millions of dollars 1999 1998
------------------- ------ ------
<S> <C> <C>
Bank credit facilities:
5-year term credit facility............................. $ 750 $1,150
$500 million credit agreement........................... -- 152
Other debt obligations:
Medium-term notes (2000-2005)........................... 163 163
10.00% Notes due in 1999................................ 150 150
9.125% Notes due in 2002................................ 100 100
8 1/2% Notes due 2004................................... 300 --
6.5% Notes due in 2006.................................. 150 150
8 3/4% Notes due 2009................................... 600 --
7.55% Debentures due in 2026............................ 150 150
Other................................................... (2) --
------ ------
Total long-term debt.................................. 2,361 2,015
Less current maturities................................... 160 150
------ ------
Long-term debt, net................................... 2,201 1,865
Capital lease obligations (5.89% due in 2000)......... -- 205
------ ------
Total long-term debt and lease obligations............ $2,201 $2,070
====== ======
</TABLE>
6. Supplemental Cash Flow Information
Supplemental cash flow information for the three months ended March 31, 1999
and 1998
<TABLE>
<CAPTION>
Millions of dollars 1999 1998
------------------- ---- ----
<S> <C> <C>
Cash paid for interest......................................... $38 $25
=== ===
Noncash investing and financing activities:
Noncash adjustments to contributed capital................... $-- $ 7
Inventory transfer from PD Glycol............................ 6 --
=== ===
</TABLE>
F-7
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
7. Commitments and Contingencies
The Partnership has various purchase commitments for materials, supplies and
services incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market.
The Partnership is also subject to various lawsuits and proceedings. Subject
to the uncertainty inherent in all litigation, management believes the
resolution of these proceedings will not have a material adverse effect upon
the financial statements or liquidity of the Partnership.
Equistar has agreed to indemnify and defend Lyondell and Millennium,
individually, against certain uninsured claims and liabilities which Equistar
may incur relating to the operation of the Contributed Business prior to
December 1, 1997 up to $7 million each within the first seven years of the
Partnership, subject to certain terms of the Asset Contribution Agreements.
Equistar has also agreed to indemnify Occidental up to $7 million on a similar
basis relating to the operation of the Occidental Contributed Business prior to
May 15, 1998. During the year ended December 31, 1998, the Partnership incurred
$5 million in expenses for these uninsured claims and liabilities. No expenses
were incurred for these uninsured claims and liabilities during the period
December 1, 1997 (inception) to December 31, 1997.
The Partnership's policy is to be in compliance with all applicable
environmental laws. The Partnership is subject to extensive environmental laws
and regulations concerning emissions to the air, discharges to surface and
subsurface waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. Some of these laws and regulations
are subject to varying and conflicting interpretations. In addition, the
Partnership cannot accurately predict future developments, such as increasingly
strict requirements of environmental laws, inspection and enforcement policies
and compliance costs therefrom which might affect the handling, manufacture,
use, emission or disposal of products, other materials or hazardous and non-
hazardous waste. The Partnership had no reserves for environmental matters as
of March 31, 1999.
In the opinion of management, any liability arising from the matters
discussed in this Note is not expected to have a material adverse effect on the
financial statements or liquidity of the Partnership. However, the adverse
resolution in any reporting period of one or more of these matters discussed in
this Note could have a material impact on the Partnership's results of
operations for that period without giving effect to contribution or
indemnification obligations of co-defendants or others, or to the effect of any
insurance coverage that may be available to offset the effects of any such
award.
F-8
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
8. Segment and Related Information
Equistar has identified three reportable segments in which it operates: (i)
petrochemicals; (ii) polymers; and (iii) unallocated. Summarized financial
information concerning Equistar's reportable segments is shown in the following
table:
<TABLE>
<CAPTION>
Millions of dollars Petrochemicals Polymers Unallocated Eliminations Total
- ------------------- -------------- -------- ----------- ------------ ------
<S> <C> <C> <C> <C> <C>
For the three months
ended March 31, 1999:
- ------------------------
Sales and other
operating revenues:
Customers............. $649 $455 $1,104
Intersegment.......... 258 24 $(282) --
---- ---- ----- ------
Total sales and
operating revenues..... $907 $479 (282) $1,104
==== ==== ===== ======
Operating income(loss).. $ 91 $ 11 $(56) $ 46
Interest expense........ (43) (43)
Interest income......... 4 4
---- ---- ---- ------
Income (loss) before
income taxes........... $ 91 $ 11 $(95) $ 7
==== ==== ==== ======
For the three months
ended March 31, 1998:
- ------------------------
Sales and other
operating revenues:
Customers............. $479 $542 $1,021
Intersegment.......... 308 16 $(324) --
---- ---- ----- ------
Total sales and
operating revenues..... $787 $558 $(324) $1,021
==== ==== ===== ======
Operating income
(loss)................. $129 $ 72 $(54) $ 147
Interest expense........ (32) (32)
Interest income......... 6 6
---- ---- ---- ------
Income (loss) before
income taxes........... $129 $ 72 (80) $ 121
==== ==== ==== ======
</TABLE>
9. Subsequent Event
On April 30, 1999, Equistar completed the sale of its Concentrates and
Compounds business to Ampacet Corporation. The transaction included two
manufacturing facilities, located in Heath, Ohio and Crockett, Texas, and
related inventories. The purchase price was approximately $68 million and
Equistar recorded a net gain on the sale of approximately $42 million.
F-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Governance Committee
of Equistar Chemicals, LP:
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of Equistar Chemicals, LP (the
"Partnership") at December 31, 1998 and 1997, and the results of its operations
and its cash flows for the year ended December 31, 1998 and for the period from
December 1, 1997 (inception) to December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
February 26, 1999
F-10
<PAGE>
EQUISTAR CHEMICALS, LP
BALANCE SHEETS
Millions of dollars
<TABLE>
<CAPTION>
December 31
----------------
1998 1997
------- -------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 66 $ 41
Accounts receivable:
Trade, net................................................ 376 428
Related parties........................................... 111 36
Receivables from partners................................... 3 150
Inventories................................................. 549 513
Prepaid expenses and other current assets................... 25 24
------- -------
Total current assets.................................... 1,130 1,192
------- -------
Property, plant and equipment................................. 5,847 3,690
Less accumulated depreciation and amortization................ (1,772) (1,572)
------- -------
4,075 2,118
Investment in PD Glycol....................................... 55 --
Goodwill, net................................................. 1,151 1,139
Deferred charges and other assets............................. 257 151
------- -------
Total assets.................................................. $ 6,668 $ 4,600
======= =======
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable:
Trade..................................................... $ 264 $ 154
Related parties........................................... 15 18
Payables to partners........................................ 9 63
Current maturities of long-term debt........................ 150 36
Other accrued liabilities................................... 200 65
------- -------
Total current liabilities............................... 638 336
------- -------
Obligations under capital leases.............................. 205 --
Long-term debt................................................ 1,865 1,512
Other liabilities and deferred credits........................ 75 34
Commitments and contingencies
Partners' capital:
Partners' capital........................................... 3,885 3,063
Note receivable from Lyondell LP............................ -- (345)
------- -------
Total partners' capital................................. 3,885 2,718
------- -------
Total liabilities and partners' capital....................... $ 6,668 $ 4,600
======= =======
</TABLE>
See notes to financial statements.
F-11
<PAGE>
EQUISTAR CHEMICALS, LP
STATEMENTS OF INCOME
Millions of dollars
<TABLE>
<CAPTION>
For the period
For the from December 1,
year ended 1997 (inception)
December 31, to December 31,
1998 1997
------------ ----------------
<S> <C> <C>
Sales and other operating revenues:
Unrelated parties............................... $3,818 $338
Related parties................................. 545 27
------ ----
4,363 365
------ ----
Operating costs and expenses:
Cost of sales:
Unrelated parties............................. 3,313 261
Related parties............................... 460 26
Selling, general and administrative expenses.... 273 21
Restructuring charges........................... 35 42
------ ----
4,081 350
------ ----
Operating income................................ 282 15
Interest expense.................................. (156) (10)
Interest income................................... 17 2
------ ----
Net income........................................ $ 143 $ 7
====== ====
</TABLE>
See notes to financial statements.
F-12
<PAGE>
EQUISTAR CHEMICALS, LP
STATEMENTS OF PARTNERS' CAPITAL
For the year ended December 31, 1998 and for the period from December 1, 1997
(inception) to
December 31, 1997
Millions of dollars
<TABLE>
<CAPTION>
Lyondell Millennium Occidental Total
-------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Balance at December 1, 1997
(inception).......................... $ -- $ -- $ -- $ --
Capital contributions at inception:
Net assets.......................... 763 2,048 -- 2,811
Note receivable from Lyondell LP.... 345 -- -- 345
Net income............................ 4 3 -- 7
Distributions to partners............. (57) (43) -- (100)
------ ------ ------ -------
Balance at December 31, 1997.......... 1,055 2,008 -- 3,063
------ ------ ------ -------
Capital contributions:
Net assets.......................... -- -- 2,097 2,097
Other............................... (14) 9 8 3
Net income (loss)..................... 84 64 (5) 143
Distributions to partners............. (512) (460) (449) (1,421)
------ ------ ------ -------
Balance at December 31, 1998.......... $ 613 $1,621 $1,651 $ 3,885
====== ====== ====== =======
</TABLE>
See notes to financial statements.
F-13
<PAGE>
EQUISTAR CHEMICALS, LP
STATEMENTS OF CASH FLOWS
Millions of dollars
<TABLE>
<CAPTION>
For the period
For the year from December 1,
ended 1997 (inception)
December 31, to
1998 December 31, 1997
------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 143 $ 7
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 268 19
Loss on disposition of property, plant and
equipment.................................... 8 --
Equity in losses of investment in PD Glycol... 3 --
Changes in assets and liabilities, net of the
effects of assets contributed:
Decrease (increase) in accounts receivable... 105 (100)
Decrease (increase) in receivables from
partners.................................... 147 (101)
Decrease (increase) in inventories........... 133 (5)
Increase in accounts payable................. 40 188
(Decrease) increase in payables to partners.. (63) 54
Increase in other accrued liabilities........ 122 48
Net change in other working capital
accounts.................................... 2 (15)
Other........................................ (62) 7
------- -----
Net cash provided by operating activities... 846 102
------- -----
Cash flows from investing activities:
Additions to property, plant and equipment..... (200) (12)
Proceeds from disposition of property, plant
and equipment................................. 3 --
Contributions and advances to affiliates....... (15) --
------- -----
Net cash used in investing activities....... (212) (12)
------- -----
Cash flows from financing activities:
Borrowings of long-term debt................... 757 50
Repayments of long-term debt................... (290) --
Proceeds from payment of note receivable by
Lyondell...................................... 345 --
Cash contributions from partners............... -- 1
Distributions to partners...................... (1,421) (100)
------- -----
Net cash used in financing activities....... (609) (49)
------- -----
Increase in cash and cash equivalents........... 25 41
Cash and cash equivalents at beginning of
period......................................... 41 --
------- -----
Cash and cash equivalents at end of period...... $ 66 $ 41
======= =====
</TABLE>
See notes to financial statements.
F-14
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS
1. Formation of the Company and Operations
Pursuant to a partnership agreement (the "Partnership Agreement") 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. The
Partnership is a joint venture and the businesses contributed by Lyondell and
Millennium consisted of non-monetary assets and were accounted for on a
predecessor basis. From December 1, 1997 to May 15, 1998, the Partnership was
owned 57 percent by Lyondell and 43 percent by Millennium. Lyondell owns its
interest in the Partnership through two wholly-owned subsidiaries, Lyondell
Petrochemical G.P. Inc. ("Lyondell GP") and Lyondell Petrochemical L.P. Inc.
("Lyondell LP"). Millennium also owns its interest in the Partnership through
two wholly-owned subsidiaries, Millennium Petrochemicals GP LLC ("Millennium
GP") and Millennium Petrochemicals LP LLC ("Millennium LP").
On May 15, 1998, the Partnership was expanded with the contribution of
certain assets from Occidental Petroleum Corporation ("Occidental") (see Note
3). These assets include the ethylene, propylene and ethylene oxide ("EO") and
EO derivatives businesses and certain pipeline assets held by Oxy
Petrochemicals Inc. ("Oxy Petrochemicals"), a 50 percent interest in a joint
venture between PDG Chemical Inc. ("PDG Chemical") and Du Pont de Nemours and
Company ("PD Glycol"), and a lease to the Partnership of the Lake Charles,
Louisiana olefins plant and related pipelines held by Occidental Chemical
Corporation ("Occidental Chemical") (collectively, the "Occidental Contributed
Business"). Occidental Chemical, Oxy Petrochemicals and PDG Chemical are
wholly-owned, indirect subsidiaries of Occidental. The Occidental Contributed
Business included olefins plants at Corpus Christi and Chocolate Bayou, Texas,
EO/ethylene glycol and EO derivatives businesses located at Bayport, Texas,
Occidental's 50 percent ownership of PD Glycol, which operates a polyglycol
plant at Beaumont, Texas, 1,430 miles of owned and leased ethylene/propylene
pipelines, and the lease to the Partnership of the Lake Charles, Louisiana
olefins plant and related pipelines.
In exchange for the Occidental Contributed Business, two subsidiaries of
Occidental were admitted as limited partners and a third subsidiary was
admitted as a general partner in the Partnership for an aggregate partnership
interest of 29.5 percent. In addition, the Partnership assumed approximately
$205 million of Occidental indebtedness and the Partnership issued a promissory
note to an Occidental subsidiary in the amount of $419.7 million, which was
subsequently paid in cash in June 1998. In connection with the contribution of
the Occidental Contributed Business and the reduction of Millennium's and
Lyondell's ownership interests in the Partnership, the Partnership also issued
a promissory note to Millennium LP in the amount of $75 million, which was
subsequently paid in June 1998. These payments are included in distributions to
partners in the accompanying statements of partners' capital and of cash flows.
The consideration paid for the Occidental Contributed Business was determined
based upon arms-length negotiations between Lyondell, Millennium, and
Occidental. In connection with the transaction, the Partnership and Occidental
also entered into a long-term agreement for the Partnership to supply the
ethylene requirements for Occidental Chemical's U.S. manufacturing plants.
After completion of this transaction, the Partnership is owned 41 percent by
Lyondell, 29.5 percent by Millennium and 29.5 percent by Occidental, through
its wholly-owned subsidiaries Occidental Petrochem Partner GP Inc. ("Occidental
GP"), Occidental Petrochem Partner 1, Inc. ("Occidental LP1") and Occidental
Petrochem Partner 2, Inc. ("Occidental LP2").
The Partnership owns and operates the petrochemicals and polymers businesses
contributed by Lyondell, Millennium, and Occidental (the "Contributed
Businesses") which consist of 20 manufacturing facilities on the U.S. Gulf
Coast and in the U.S. Midwest. The petrochemicals segment manufactures and
markets olefins, oxygenated chemicals, aromatics and specialty chemicals.
Olefins include ethylene, propylene and butadiene, and oxygenated chemicals
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
F-15
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
("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 resins, concentrates and compounds, and polymeric powders.
The Partnership Agreement provides that Equistar is governed by a
Partnership Governance Committee consisting of nine representatives, three
appointed by each partner. Most of the significant decisions of the Partnership
Governance Committee require unanimous consent, including approval of the
Partnership's Strategic Plan and annual updates thereof.
Pursuant to the Partnership Agreement, net income is allocated among the
partners on a pro rata basis based on their percentage ownership of the
Partnership. Distributions are made to the partners based on their percentage
ownership of the Partnership. Additional cash contributions required by the
Partnership will also be based on the partners' percentage ownership of the
Partnership.
2. Summary of Significant Accounting Policies
Revenue Recognition--Revenue from product sales is recognized upon delivery
of products to the customer.
Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. The
Partnership's policy is to invest cash in conservative, highly rated
instruments and limit the amount of credit exposure to any one institution. The
Partnership performs periodic evaluations of the relative credit standing of
these financial institutions which are considered in the Partnership's
investment strategy.
The Partnership has no requirements for compensating balances in a specific
amount at a specific point in time. The Partnership does maintain compensating
balances for some of its banking services and products. Such balances are
maintained on an average basis and are solely at the Partnership's discretion.
As a result, none of the Partnership's cash is restricted.
Accounts Receivable--The Partnership sells its products primarily to
companies in the petrochemicals and polymers industries. The Partnership
performs ongoing credit evaluations of its customers' financial condition and,
in certain circumstances, requires letters of credit from them. The
Partnership's allowance for doubtful accounts, which is reflected in the
accompanying balance sheet as a reduction of accounts receivable, totaled $3
million at December 31, 1998. The Partnership had no allowance for doubtful
accounts recorded at December 31, 1997.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined on the last-in, first-out ("LIFO") basis except for materials and
supplies, which are valued at average cost.
Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. Depreciation of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the related assets,
ranging from 5 to 30 years.
Upon retirement or sale, the Partnership removes the cost of the assets and
the related accumulated depreciation from the accounts and reflects any
resulting gains or losses in the statement of income. The Partnership's policy
is to capitalize interest cost incurred on debt during the construction of
major projects exceeding one year.
F-16
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Turnaround Maintenance and Repair Expenses--Cost of major repairs and
maintenance incurred in connection with turnarounds of units at the
Partnership's manufacturing facilities are deferred and amortized on a
straight-line basis until the next planned turnaround, generally five to seven
years. These costs are maintenance, repair and replacement costs that are
necessary to maintain the operating capacity and efficiency rates of the
production units. The Partnership amortized $20 million and $2 million of
deferred turnaround maintenance and repair costs for the year ended December
31, 1998 and during the period from December 1, 1997 (inception) to December
31, 1997, respectively.
Deferred Software Costs--Costs to purchase and develop software for internal
use are deferred and amortized on a straight-line basis over 10 years. The
Partnership amortized $6 million and less than $1 million of deferred software
costs for the year ended December 31, 1998 and during the period from December
1, 1997 (inception) to December 31, 1997, respectively.
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 forty years. Management
periodically evaluates goodwill for impairment based on the anticipated future
cash flows attributable to the related operations. Such expected cash flows, on
an undiscounted basis, are compared to the carrying value of the tangible and
intangible assets, and if impairment is indicated, the carrying value of
goodwill, and if necessary other related assets, is adjusted. Management
believes that no impairment exists at December 31, 1998. The Partnership
amortized $31 million and $3 million of goodwill for the year ended December
31, 1998 and during the period from December 1, 1997 (inception) to December
31, 1997, respectively. Accumulated amortization of goodwill was $166 million
and $135 million at December 31, 1998 and 1997, respectively.
Investment in PD Glycol--Equistar holds a 50 percent interest in a joint
venture with Du Pont 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 under the equity method.
Environmental Remediation Costs--Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Estimates have not
been discounted to present value. Environmental remediation costs are expensed
or capitalized in accordance with generally accepted accounting principles.
Pension and Other Postretirement Benefit Plans--During 1998, the Partnership
adopted Statement of Financial Accounting Standards ("SFAS") No. 132,
Employers' Disclosures about Pensions and Other Retirement Benefits. The
provisions of SFAS No. 132 revise employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of these plans. SFAS No. 132 standardizes the disclosure
requirements for these plans, to the extent practicable.
Exchanges--Finished product 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. Exchanges settled through payment and receipt
of cash are accounted for as purchases and sales.
Income Taxes--The Partnership is not subject to federal income taxes as
income is reportable directly by the individual partners; therefore, there is
no provision for income taxes in the accompanying financial statements.
F-17
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Segment and Related Information--In 1998, the Partnership adopted SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 supercedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Partnership's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect the results of operations or the
financial position of the Partnership (see Note 18).
Comprehensive Income--Effective January 1, 1998, Equistar adopted SFAS No.
130, Reporting Comprehensive Income. Equistar had no items of other
comprehensive income during the year ended December 31, 1998 and the one-month
period ended December 31, 1997.
Derivatives--In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. The statement is effective for
Equistar's calendar year 2001; however, early adoption is permitted. SFAS No.
133 requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending upon
whether a derivative is designated as part of a hedge transaction and, if it
is, the type of hedge transaction. The gains and losses on the derivative
instrument that are reported in other comprehensive income will be reclassified
as earnings in the periods in which earnings are impacted by the hedged item.
The ineffective portion of all hedges will be recognized in current-period
earnings. Equistar does not intend to adopt this pronouncement prior to 2001.
Reclassifications--Certain 1997 amounts have been restated to conform to
classifications adopted in 1998.
3. Addition of Occidental Contributed Business
On May 15, 1998, the Partnership was expanded with the contribution of
certain assets from Occidental. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the results of operations for
these assets are included in the accompanying statement of income prospectively
from May 15, 1998. Occidental contributed assets and liabilities to the
Partnership with a fair value of $2.1 billion in exchange for a 29.5% interest
in the Partnership. (The Partnership also issued a promissory note to an
Occidental subsidiary in the amount of $420 million, which was subsequently
paid in cash in June 1998). The fair value was allocated to the assets
contributed and liabilities assumed based on the estimated fair values of such
assets and liabilities at the date of the contribution. The fair value was
determined based on a combination of internal valuations performed by Lyondell,
Millennium and Occidental using the income approach and substantiated by an
appraisal performed by an independent third-party. The fair value of the assets
contributed and liabilities assumed by the Partnership on May 15, 1998 is as
follows:
F-18
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Millions of dollars
-------------------
<S> <C>
Total current assets.............................................. $ 281
Property, plant and equipment..................................... 1,964
Investment in PD Glycol........................................... 58
Goodwill.......................................................... 43
Deferred charges and other assets................................. 49
------
Total assets.................................................... $2,395
======
Other current liabilities......................................... $ 79
Long-term debt.................................................... 205
Other liabilities and deferred credits............................ 14
Partners' capital................................................. 2,097
------
Total liabilities and partners' capital......................... $2,395
======
</TABLE>
The unaudited pro forma combined historical results of the Partnership as if
the Occidental Contributed Business had been contributed on January 1, 1998 is
as follows:
<TABLE>
<CAPTION>
For the year
ended
December 31,
Millions of dollars 1998
------------------- ------------
<S> <C>
Sales and other operating revenues........................... $4,869
Unusual charges.............................................. 35
Operating income............................................. 320
Net income................................................... 154
</TABLE>
The unaudited pro forma data presented above is not necessarily indicative
of the results of operations of the Partnership that would have occurred had
such transaction actually been consummated as of January 1, 1998, nor are they
necessarily indicative of future results.
4. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Cash paid for interest.......................................... $154 $--
==== ===
Noncash investing and financing activities:
Noncash adjustments to contributed capital.................... $ 3 $--
Inventory transfer from PD Glycol............................. 15 --
==== ===
</TABLE>
F-19
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Historical cost of assets contributed and liabilities assumed by the
Partnership in December 1997 (inception):
<TABLE>
<S> <C>
Total current assets.............................................. $ 948
Property, plant and equipment, net................................ 2,121
Goodwill, net..................................................... 1,142
Deferred charges and other assets................................. 158
------
Total assets.................................................... $4,369
======
Current maturities of long-term debt.............................. $ 36
Other current liabilities......................................... 17
Long-term debt.................................................... 1,462
Other liabilities and deferred credits............................ 43
Partners' capital................................................. 3,156
Note receivable from Lyondell LP.................................. (345)
------
Total liabilities and partners' capital......................... $4,369
======
</TABLE>
5. Financial Instruments
The fair value of all financial instruments included in current assets and
current liabilities, including cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities approximated their carrying value due
to their short maturity. Based on the borrowing rates currently available to
the Partnership for debt with terms and average maturities similar to the
Partnership's debt portfolio, the fair value of the Partnership's long-term
debt, including amounts due within one year, was approximately $2.3 billion and
$1.5 billion at December 31, 1998 and 1997, respectively.
The Partnership had issued letters of credit totaling $2.6 million and $4
million at December 31, 1998 and 1997, respectively.
6. Related Party Transactions
Loans to Millennium and Occidental--In connection with Occidental's entry
into Equistar in May 1998, Equistar executed promissory notes to Millennium and
Occidental in the principal amounts of $75.0 million and $419.7 million,
respectively. Each of the notes provides for the annual accrual of interest
(based on a year of 360 days and actual days elapsed) at a rate equal to LIBOR
plus .6 percent. These notes were paid in full in June 1998. Interest expense
incurred on these notes during 1998 was $3 million.
Note Receivable from Lyondell LP--Upon formation of the Partnership,
Lyondell LP contributed capital to the Partnership in the form of a $345
million promissory note (the "Lyondell Note"). The Lyondell Note bears interest
at LIBOR plus a market spread. The note was repaid in full by Lyondell in July
1998. Interest income accrued on the Lyondell note totaled $12.8 million and
$1.75 million during 1998 and during the period from December 1, 1997
(inception) to December 31, 1997, respectively.
Shared Services Agreement with Lyondell--Lyondell provides certain
corporate, general and administrative services to the Partnership, including
legal, tax, treasury, risk management and other services pursuant to a shared
services agreement. During the year ended December 31, 1998, Lyondell charged
the Partnership $3 million for these services. During the period December 1,
1997 (inception) to December 31, 1997, charges from Lyondell were less than $1
million. As part of the shared services agreement, the Partnership provides
certain general and administrative services to Lyondell, such as health, safety
and environmental services, human resource services, information services and
legal services. During the year ended December 31, 1998 and during the period
December 1, 1997 (inception) to December 31, 1997, the Partnership charged
Lyondell less than $1 million for these services.
F-20
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Shared Services and Shared-Site Agreements with Millennium--The Partnership
and Millennium have entered into a variety of operating, manufacturing and
technical service agreements related to the business of Equistar and the vinyl
acetate monomers, acetic acid, synthesis gas and methanol businesses retained
by Millennium Petrochemicals. These agreements include the provision by the
Partnership to Millennium Petrochemicals of materials management, certain
utilities, administrative office space, health, safety and environmental
services and computer services. During the year ended December 31, 1998, the
Partnership charged Millennium Petrochemicals $5 million for these services.
During the period from December 1, 1997 (inception) to December 31, 1997,
charges to Millennium Petrochemicals were less than $1 million. These
agreements also include the provision by Millennium Petrochemicals to the
Partnership of certain operational services, including waste water treatment
and barge dock access. During the year ended December 31, 1998 and during the
period December 1, 1997 (inception) to December 31, 1997, Millennium
Petrochemicals charged the Partnership less than $1 million for these services.
Operating Agreement with Occidental Chemical Corporation--On May 15, 1998,
Occidental Chemical and the Partnership entered into an Operating Agreement
(the "Operating Agreement") whereby Occidental Chemical agreed to operate and
maintain the Occidental Contributed Business and to cause third-parties to
continue to provide equipment, products and commodities to those businesses
upon substantially the same terms and conditions as provided prior to the
transfer. Under the terms of the Operating Agreement, the Partnership agreed to
reimburse Occidental Chemical for its cost in connection with the services
provided to the Partnership, and the Partnership agreed to pay Occidental
Chemical an administrative fee. The Operating Agreement terminated in
accordance with its terms on June 1, 1998. During the term of the Operating
Agreement, the Partnership paid Occidental Chemical an administrative fee of $1
million.
Transition Services Agreement with Occidental Chemical--On June 1, 1998,
Occidental Chemical and the Partnership entered into a Transition Services
Agreement (the "TSA"). Under the terms of the TSA, Occidental Chemical agreed
to provide the Partnership certain services in connection with the Occidental
Contributed Business, including services related to accounting, payroll, office
administration, marketing, transportation, purchasing and procurement,
management, human resources, customer service, technical services and others.
Between June 1, 1998 and December 31, 1998, the Partnership expensed $6 million
in connection with services provided pursuant to the TSA. The TSA expires by
its terms on June 1, 1999.
Occidental Chemical Ethylene Sales Agreement--The Partnership and Occidental
Chemical entered into a Sales Agreement, dated May 15, 1998 (the "Ethylene
Sales Agreement"). Under the terms of the Ethylene Sales Agreement, Occidental
Chemical has agreed to purchase an annual minimum amount of ethylene from the
Partnership equal to 100 percent of the ethylene feedstock requirements of
Occidental Chemical's United States plants (estimated to be 2 billion pounds
per year at the time of the signing of the agreement) less any quantities up to
250 million pounds tolled in accordance with the provisions of such agreement.
The Partnership's maximum supply obligation in any calendar year under the
Ethylene Sales Agreement is 2.55 billion pounds. Upon three years notice from
either party to the other, the Partnership's maximum supply obligation in any
calendar year under the Ethylene Sales Agreement may be "phased down" as set
forth in the agreement, provided that no phase down may occur prior to January
1, 2009. In accordance with the phase down provisions of the agreement, the
annual minimum requirements set forth in the agreement must be phased down over
at least a five year period so that the annual required minimum can not decline
to zero prior to December 31, 2013 unless certain specified force majeure
events occur. The Ethylene Sales Agreement provides for an ethylene sales price
that is generally reflective of market prices and will be determined pursuant
to a formula using the Partnership's sales price to third parties and several
published market price indices. During the period from May 15, 1998 to December
31, 1998, the Partnership charged Occidental Chemical $171 million under the
Ethylene Sales Agreement.
F-21
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Product Sales to Millennium--The Partnership sells ethylene to Millennium at
market-related prices pursuant to an agreement entered into in connection with
the formation of Equistar. Under this agreement, Millennium is required to
purchase 100 percent of its ethylene requirements for its LaPorte, Texas
facility (estimated to be 300 million pounds per year), up to a maximum of 330
million pounds per year. Millennium has the option to increase the amount
purchased to up to 400 million pounds per year beginning January 1, 2001. The
initial term of the contract expires December 1, 2000 and thereafter, the
contract automatically renews annually. Either party may terminate on one
year's notice, except that if Millennium elects to increase its purchases under
the contract, a party must provide two year's notice of termination. The
pricing terms of this agreement are similar to the Ethylene Sales Agreement
with Occidental Chemical. The Partnership charged Millennium $41 million and $4
million for ethylene for 1998 and December 1997, respectively.
Product Sales to Lyondell--Lyondell acquired its intermediate chemicals and
derivatives business through the acquisition of ARCO Chemical Company effective
August 1, 1998. Sales to Lyondell, primarily for ethylene, propylene, MTBE,
benzene and alkylate, totaled $97 million for the period from August 1, 1998 to
December 31, 1998, and were based on price terms generally reflective of
market.
Transactions with LCR.--Lyondell's rights and obligations under the terms of
its product sales and feedstock purchase agreements with LYONDELL-CITGO
Refining LP ("LCR"), a joint venture investment of Lyondell, were assigned to
the Partnership. Accordingly, certain refinery products are sold to the
Partnership as feedstocks, and certain olefins by-products are sold to LCR for
processing into gasoline. Sales to LCR were $236 million and $27 million and
purchases from LCR were $131 million and $10 million for the year ended
December 31, 1998 and for the period from December 1, 1997 (inception) to
December 31, 1997, respectively. The Partnership also assumed certain tolling
arrangements as well as terminalling and storage obligations between Lyondell
and LCR and performs certain marketing services for LCR. Aggregate charges
under these various service agreements of $15 million were made to LCR by the
Partnership with respect to 1998. No charges were made during December 1997.
All of the agreements between LCR and the Partnership are on terms generally
representative of prevailing market prices. The Partnership also has a shared
services agreement with LCR to provide LCR with information services, including
mainframe processing and maintenance. Net charges to LCR by the Partnership for
the shared services agreement were less than $1 million during 1998. No charges
were made during December 1997.
Transactions with Lyondell Methanol--The Partnership provides operating and
other services for Lyondell Methanol Company, L.P. ("Lyondell Methanol") under
the terms of existing agreements that were assumed by Equistar from Lyondell,
including the lease to Lyondell Methanol by the Partnership of the real
property on which its methanol plant is located. Pursuant to the terms of those
agreements, Lyondell Methanol pays the Partnership a management fee and will
reimburse certain expenses of the Partnership at cost. Management fees charged
by the Partnership to Lyondell Methanol totaled $6 million for the year ending
December 31, 1998 and less than $1 million during the period from December 1,
1997 (inception) to December 31, 1997. The Partnership sells natural gas to
Lyondell Methanol at prices generally representative of its cost. Purchases by
Lyondell Methanol of natural gas feedstock from the Partnership totaled $44
million and $4 million for the year ended December 31, 1998 and during the
period from December 1, 1997 (inception) to December 31, 1997, respectively.
Lyondell Methanol sells all of its products to Equistar. For the year ending
December 31, 1998 and during the period from December 1, 1997 (inception) to
December 31, 1997, purchases from Lyondell Methanol were $103 million and $15
million, respectively.
Related Party Leases--As part of their shared services agreement with the
Partnership, Millennium subleases from the Partnership certain administrative
office space at a monthly rent of $42,000.
F-22
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Accounts Receivable
In December 1998, the Partnership entered into a purchase agreement with an
independent issuer of receivables-backed commercial paper. Under the terms of
the agreement, the Partnership agreed to sell on an ongoing basis and without
recourse, designated accounts receivable. To maintain the balance of the
accounts receivable sold, the Partnership is obligated to sell new receivables
as existing receivables are collected. The agreement expires in December 1999.
At December 31, 1998, the Partnership's gross accounts receivable that had
been sold to the purchasers aggregated $130 million. This amount has been
reported as operating cash flows in the statement of cash flows. Costs related
to the sale are included in selling, general and administrative expenses in the
statement of income.
8. Inventories
Inventories at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Raw materials.................................................. $149 $160
Work-in-process................................................ 11 5
Finished goods................................................. 301 282
Materials and supplies......................................... 88 66
---- ----
$549 $513
==== ====
</TABLE>
For the year ending December 31, 1998, cost of sales increased by less than
$1 million associated with the reduction of LIFO inventories. For the period
from December 1, 1997 (inception) to December 31, 1997, cost of sales increased
by approximately $1 million associated with the reduction in LIFO inventories.
The excess of the current cost of inventories over book value was approximately
$103 million at December 31, 1997.
9. Property, Plant and Equipment, Net
The components of property, plant and equipment, at cost, and the related
accumulated depreciation at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ------ ------
<S> <C> <C>
Manufacturing facilities and equipment..................... $5,344 $3,489
Manufacturing equipment acquired under capital leases...... 236 --
Construction projects in progress.......................... 189 127
Land....................................................... 78 74
------ ------
Total property, plant and equipment...................... 5,847 3,690
Less accumulated depreciation.............................. 1,772 1,572
------ ------
Property, plant and equipment, net....................... $4,075 $2,118
====== ======
</TABLE>
Depreciation expense for the year ending December 31, 1998 and for the
period from December 1, 1997 (inception) to December 31, 1997 was $200 million
and $15 million, respectively. At December 31, 1998, $10 million of the
accumulated depreciation reported in the accompanying balance sheet related to
the manufacturing equipment acquired under capital leases that was contributed
by Occidental in 1998.
In July 1998, the depreciable lives of certain assets, primarily
manufacturing facilities and equipment, were increased from a range of 5 to 25
years to a range of 5 to 30 years. The change was made to more
F-23
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
accurately reflect the estimated periods during which such assets will remain
in service, based on the Partnership's actual experiences with those assets.
This change was accounted for as a change in accounting estimate and resulted
in a $33 million decrease in depreciation expense for 1998.
10. Deferred Charges and Other Assets
Deferred charges and other assets at December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Deferred turnaround costs, net.................................. $ 84 $ 66
Deferred software costs, net.................................... 70 44
Deferred pension asset.......................................... 30 23
Other........................................................... 73 18
---- ----
Total deferred charges and other assets....................... $257 $151
==== ====
</TABLE>
11. Other Accrued Liabilities
Other accrued liabilities at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Accrued property taxes......................................... $ 76 $ 4
Accrued freight................................................ 22 8
Accrued payroll costs.......................................... 44 19
Accrued interest............................................... 18 --
Accrued severance and other costs related to formation of the
Partnership................................................... 3 27
Other.......................................................... 37 7
---- ---
Total other accrued liabilities.............................. $200 $65
==== ===
</TABLE>
12. Long-Term Debt and Financing Arrangements
Long-term debt at December 31, 1998 and 1997 was comprised of the following:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ------ ------
<S> <C> <C>
Bank credit facilities:
5-year term credit facility.............................. $1,150 $ 800
$500 million credit agreement............................ 152 --
Other debt obligations:
Medium-term notes (2000-2005)............................ 163 194
10.00% Notes due in 1999................................. 150 150
9.125% Notes due in 2002................................. 100 100
6.5% Notes due in 2006................................... 150 150
7.55% Debentures due in 2026............................. 150 150
Other.................................................... -- 4
------ ------
Total long-term debt................................... 2,015 1,548
Less current maturities.................................... 150 36
------ ------
Long-term debt, net.................................... 1,865 1,512
Capital lease obligations (5.89% due in 2000).............. 205 --
------ ------
Total long-term debt and lease obligations............. $2,070 $1,512
====== ======
</TABLE>
F-24
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Aggregate maturities of long-term debt during the five years subsequent to
December 31, 1998 are as follows: 1999-$302 million; 2000-$247 million; 2001-
$90 million; 2002-$1.251 billion; 2003-$29 million. All of the above debt is
guaranteed by the partners.
The medium-term notes mature at various dates from 2000 to 2005 and have a
weighted average interest rate of 9.87 percent and 9.83 percent at December 31,
1998 and 1997, respectively.
The Partnership has a five-year, $1.25 billion credit facility (the
"Facility") with a group of banks expiring November 2002. Borrowings under the
Facility bear interest at either the Federal Funds rate plus 1/2 of 1 percent,
LIBOR plus 1/2 of 1 percent, a fixed rate offered by one of the sponsoring
banks or interest rates that are based on a competitive auction feature wherein
the interest rate can be established by competitive bids submitted by the
sponsoring banks, depending on the type of borrowing made under the Facility.
Borrowings under the Facility had a weighted average interest rate of 5.8
percent and 5.7 percent at December 31, 1998 and 1997, respectively. 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. However, the lenders may not proceed against Millennium America Inc.
until they have exhausted their remedies against Equistar. The guarantee will
remain in effect indefinitely, but at any time after December 1, 2004,
Millennium America Inc. may elect to terminate the guarantee if certain
conditions are met including financial ratios and covenants. Occidental
Chemical Corporation, a wholly owned subsidiary of Occidental, provided a
similar limited guarantee to Equistar on a total of $419.7 million principal
amount of indebtedness under the credit facility, which has since been
terminated.
On June 12, 1998, the Partnership entered into a $500 million credit
agreement consisting of a $250 million revolving credit facility and a $250
million one-year term facility. Borrowings under the $500 million credit
agreement bear interest at either the Federal Funds rate plus 1/2 of 1 percent,
LIBOR plus 0.625 percent, a fixed rate offered by one of the sponsoring banks
or interest rates that are based on a competitive auction feature wherein the
interest rate can be established by competitive bids submitted by the
sponsoring banks. At December 31, 1998, the weighted average interest rate for
borrowings under the $500 million credit agreement was 6.1 percent.
The Facility and the $500 million credit agreement (the "Bank Credit
Facilities") are available for working capital and general purposes as needed
and contain covenants relating to liens, sale and leaseback transactions, debt
incurrence, leverage and interest coverage ratios, sales of assets and mergers
and consolidations.
In February 1999, the Partnership and Equistar Funding Corporation
("Equistar Funding") co-issued $900 million of debt securities. (Equistar
Funding, a wholly owned subsidiary of Equistar, is a Delaware corporation
formed for the sole purpose of facilitating the financing activities of
Equistar). Equistar is jointly and severally liable with Equistar Funding on
the outstanding notes and the new notes. The debt securities include $300
million of 8.50 percent Notes, which will mature on February 15, 2004, and $600
million of 8.75 percent Notes, which will mature on February 15, 2009. The
Partnership intends to use the net proceeds from this offering (i) to repay the
$205 million outstanding under a capitalized lease obligation relating to the
Partnership's Corpus Christi facility, (ii) to repay the outstanding balance
under the $500 million credit agreement, after which the $500 million credit
agreement will be terminated, (iii) to repay the outstanding $150 million, 10.0
percent Notes due in June 1999, upon maturity and (iv) to the extent of the
remaining net proceeds, reduce outstanding borrowings under the Facility and
for Partnership working capital. Outstanding borrowings under the Partnership's
$500 million credit agreement that are payable in 1999 are included as long-
term obligations of the Partnership in the accompanying balance sheet at
December 31, 1998 based on the expectation that these borrowings will be
refinanced as described above.
F-25
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
13. Restructuring Charges
The Partnership incurred restructuring charges related to the initial merger
and integration of the businesses contributed by Lyondell and Millennium upon
formation of the Partnership. The Partnership initially recorded $42 million of
these costs in December 1997. These charges included severance and other
employee related termination costs related to a workforce reduction ($21
million). The workforce reduction included approximately 430 employees,
primarily in duplicate corporate overhead functions. These costs were included
in other accrued liabilities at December 31, 1997 and were substantially paid
in 1998. Additionally, these restructuring charges included employee relocation
costs ($6 million), transaction closing costs ($8 million) and various other
charges ($7 million), all of which were paid as incurred in 1997. In 1998, the
Partnership recorded and paid, as incurred, an additional $26 million in
restructuring charges related to the initial merger and integration of the
Partnership. These costs included transition personnel costs ($14 million),
costs associated with the consolidation of operations and facilities ($11
million) and other miscellaneous charges ($1 million). The restructuring
actions related to the initial merger and integration were substantially
completed in 1998. All restructuring charges were included in the Unallocated
segment.
The Partnership also incurred restructuring charges related to the merger
and integration of the Occidental contributed business into the Partnership.
These charges included transition services provided by Occidental Chemical ($7
million) and other costs ($2 million). These charges were paid as incurred
during 1998. All restructuring charges were included in the Unallocated
segment. The restructuring actions related to the merger and integration of the
Occidental contributed business into the Partnership are expected to be
completed during the first half of 1999 and are primarily related to transition
services for corporate overhead functions.
14. Leases
At December 31, 1998, future minimum lease payments for capital and
operating leases with noncancelable lease terms in excess of one year were as
follows:
<TABLE>
<CAPTION>
Millions of dollars Capital Operating
------------------- ------- ---------
<S> <C> <C>
1999.................................................. $ 13 $101
2000.................................................. 208 74
2001.................................................. -- 58
2002.................................................. -- 44
2003.................................................. -- 38
Thereafter............................................ -- 336
---- ----
Total minimum lease payments........................ 221 $651
====
Imputed interest...................................... (16)
----
Present value of minimum lease payments............... $205
====
</TABLE>
Operating lease net rental expense was $110 million for the year ending
December 31, 1998 and $11 million for the period from December 1, 1997
(inception) to December 31, 1997.
The Partnership is party to various unconditional purchase obligation
contracts as a purchaser for product and services. At December 31, 1998, future
minimum payments under these contracts with noncancelable contract terms in
excess of one year were as follows:
<TABLE>
<CAPTION>
Millions of dollars Amount
------------------- ------
<S> <C>
1999............................................................. $ 29
2000............................................................. 28
2001............................................................. 24
2002............................................................. 23
2003............................................................. 23
Thereafter....................................................... 142
----
Total minimum contract payments................................ $269
====
</TABLE>
F-26
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Partnership's total purchases under these agreements were $33 million
for the year ending December 31, 1998 and $3 million during the period from
December 1, 1997 (inception) to December 31, 1997.
15. Retirement Plans
All full-time regular employees of the Partnership are covered by defined
benefit pension plans sponsored by the Partnership. The plans became effective
on January 1, 1998, except for union represented employees formerly employed by
Millennium, whose plans were contributed to the Partnership on December 1,
1997, and union represented employees formerly employed by Occidental, whose
plans were contributed to the Partnership on May 15, 1998. In connection with
the formation of the Partnership, there were no pension assets or obligations
contributed to the Partnership, except for the union represented plans
described above. Retirement benefits are based on years of service and the
employee's highest three consecutive years of compensation during the last ten
years of service. The funding policy for these plans is to make periodic
contributions as required by applicable law. The Partnership accrues pension
costs based on an actuarial valuation and funds the plans through contributions
to pension trust funds. The Partnership also has unfunded supplemental
nonqualified retirement plans which provide pension benefits for certain
employees in excess of the tax qualified plans' limits.
The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the retirement plans at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Change in benefit obligation:
Benefit obligation, January 1............................. $ 21 $ --
Benefit obligation contributed at inception of
Partnership.............................................. -- 21
Benefit obligation contributed by Occidental.............. 46 --
Service cost.............................................. 16 --
Interest cost............................................. 5 --
Actuarial loss (gain)..................................... 5 --
Benefits paid............................................. (5) --
---- ----
Benefit obligation, December 31........................... $ 88 $ 21
==== ====
Change in plan assets:
Fair value of plan assets, January 1...................... $ 40 $ --
Fair value of plan assets contributed at inception of
Partnership.............................................. -- 40
Fair value of plan assets contributed by Occidental....... 51 --
Actual return of plan assets.............................. 1 --
Partnership contributions................................. 1 --
Benefits paid............................................. (5) --
---- ----
Fair value of plan assets, December 31.................... $ 88 $ 40
==== ====
Funded status............................................... $ -- $ 19
Unrecognized actuarial loss (gain).......................... 13 4
---- ----
Net amount recognized....................................... $ 13 $ 23
==== ====
Amounts recognized in the Balance Sheets consist of:
Prepaid benefit cost...................................... $ 30 $ 23
Accrued benefit liability................................. (17) --
---- ----
Net amount recognized....................................... $ 13 $ 23
==== ====
Weighted-average assumptions as of December 31:
Discount rate............................................. 6.75% 7.25%
Expected return on plan assets............................ 9.50% 9.00%
Rate of compensation increase............................. 4.75% 4.75%
</TABLE>
F-27
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1998, Equistar had defined benefit pension plans where
the accumulated benefit obligation exceeded the fair value of plan assets. The
accumulated benefit obligation exceeded the fair value of plan assets by $19
million for these plans as of December 31, 1998. As of December 31, 1998 and
1997, Equistar had defined benefit pension plans where the fair value of plan
assets exceeded the accumulated benefit obligation. The fair value of plan
assets exceeded the accumulated benefit obligation by $19 million for these
plans as of December 31, 1998 and 1997.
The Partnership's net periodic pension cost for 1998 included the following
components:
<TABLE>
<CAPTION>
Millions of dollars 1998
------------------- ----
<S> <C>
Components of net periodic benefit cost:
Service cost...................................................... $16
Interest cost..................................................... 5
Expected return on plan assets.................................... (6)
---
Net periodic benefit cost......................................... $15
===
</TABLE>
As the non-union plans became effective on January 1, 1998, the Partnership
did not recognize any net periodic pension cost during the period from December
1, 1997 (inception) to December 31, 1997.
Effective January 1, 1998, the Partnership also maintains voluntary defined
contribution savings plans for eligible employees. Under provisions of the
plans, the Partnership contributes an amount equal to 160 percent of employee
contributions up to a maximum matching contribution of eight percent of the
employee's base salary. Contributions to the plans by the Partnership were $7
million and less than $1 million for the year ended December 31, 1998 and
during the period from December 1, 1997 (inception) to December 31, 1997,
respectively.
16. Postretirement Benefits Other Than Pensions
The Partnership sponsors unfunded postretirement benefit plans other than
pensions ("OPEB") for both salaried and non-salaried employees, which provide
medical and life insurance benefits. The postretirement health care plans are
contributory while the life insurance plans are non-contributory. Currently,
the Partnership pays approximately 80 percent of the cost of the health care
plans, but reserves the right to modify the cost-sharing provisions at any
time. In connection with the formation of the Partnership on December 1, 1997,
Lyondell and Millennium contributed $31 million of accrued postretirement
benefit liabilities for employees that transferred to the Partnership. Upon
joining the Partnership in May 1998, Occidental contributed $14 million of
accrued postretirement benefit liabilities for employees that transferred to
the Partnership
F-28
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table provides a reconciliation of benefit obligations and
funded status of the OPEB plans at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
- ------------------- ---- ----
<S> <C> <C>
Change in benefit obligation:
Benefit obligation, January 1.................................... $ 50 $ --
Benefit obligation contributed at inception of Partnership....... -- 50
Benefit obligation contributed by Occidental..................... 14 --
Service cost..................................................... 3 --
Interest cost.................................................... 4 --
Actuarial loss (gain)............................................ (2) --
---- ----
Benefit obligation, December 31.................................. $ 69 $ 50
==== ====
Funded status...................................................... $(69) $(50)
Unrecognized actuarial loss (gain)................................. 16 19
---- ----
Net amount recognized.............................................. $(53) $(31)
==== ====
Amounts recognized in the Balance Sheets consist of:
Prepaid benefit cost............................................. $ -- $ --
Accrued benefit liability........................................ (53) (31)
---- ----
Net amount recognized............................................ $(53) $(31)
==== ====
Weighted-average assumptions as of December 31:
Discount rate.................................................... 6.75% 7.25%
Rate of compensation increase.................................... 4.75% 4.75%
</TABLE>
Because the OPEB plans are unfunded, there was no change in the plan assets
during the year ended December 31, 1998 and for the period from December 1,
1997 (inception) to December 31, 1997.
The Partnership's postretirement benefit costs for 1998 included the
following components:
<TABLE>
<CAPTION>
Millions of dollars 1998
------------------- ----
<S> <C>
Components of net periodic benefit cost:
Service cost...................................................... $ 3
Interest cost..................................................... 4
Expected return of plan assets.................................... --
===
Net periodic benefit cost......................................... $ 7
===
</TABLE>
The accrued postretirement benefit liabilities at December 31, 1997 were
calculated and contributed as of December 31, 1997; therefore, there was no net
periodic postretirement benefit costs for the period from December 1, 1997
(inception) to December 31, 1997.
For measurement purposes, the assumed annual rate of increase in the per
capita cost of covered health care benefits as of December 31, 1998 was 7.0
percent for 1999-2001 and 5.0 percent thereafter. The health care cost trend
rate assumption does not have a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit liability as of December 31, 1998 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.
Decreasing the assumed health care cost trend rates by one percentage point in
each year would decrease the accumulated postretirement benefit liability as of
December 31, 1998 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.
F-29
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
17. Commitments and Contingencies
The Partnership has various purchase commitments for materials, supplies and
services incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market.
The Partnership is also subject to various lawsuits and proceedings. Subject
to the uncertainty inherent in all litigation, management believes the
resolution of these proceedings will not have a material adverse effect upon
the financial statements or liquidity of the Partnership.
Equistar has agreed to indemnify and defend Lyondell and Millennium,
individually, against certain uninsured claims and liabilities which Equistar
may incur relating to the operation of the Contributed Business prior to
December 1, 1997 up to $7 million each within the first seven years of the
Partnership, subject to certain terms of the Asset Contribution Agreements.
Equistar has also agreed to indemnify Occidental up to $7 million on a similar
basis relating to the operation of the Occidental Contributed Business prior to
May 15, 1998. During the year ended December 31, 1998, the Partnership incurred
$5 million in expenses for these uninsured claims and liabilities. No expenses
were incurred for these uninsured claims and liabilities during the period
December 1, 1997 (inception) to December 31, 1997.
The Partnership's policy is to be in compliance with all applicable
environmental laws. The Partnership is subject to extensive environmental laws
and regulations concerning emissions to the air, discharges to surface and
subsurface waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. Some of these laws and regulations
are subject to varying and conflicting interpretations. In addition, the
Partnership cannot accurately predict future developments, such as increasingly
strict requirements of environmental laws, inspection and enforcement policies
and compliance costs therefrom which might affect the handling, manufacture,
use, emission or disposal of products, other materials or hazardous and non-
hazardous waste. The Partnership had no reserves for environmental matters as
of December 31, 1998 and 1997.
In the opinion of management, any liability arising from the matters
discussed in this Note is not expected to have a material adverse effect on the
financial statements or liquidity of the Partnership. However, the adverse
resolution in any reporting period of one or more of these matters discussed in
this Note could have a material impact on the Partnership's results of
operations for that period without giving effect to contribution or
indemnification obligations of co-defendants or others, or to the effect of any
insurance coverage that may be available to offset the effects of any such
award.
18. Segment Information
Using the guidelines set forth in SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, the Partnership has identified two
segments in which it operates. The reportable segments are petrochemicals and
polymers. The petrochemicals segment includes olefins, oxygenated chemicals,
aromatics and specialty chemicals. Olefins include ethylene, propylene and
butadiene, and the oxygenated chemicals include ethylene oxide, ethylene
glycol, ethanol and MTBE. The petrochemicals segment also includes the
production and sale of aromatics including benzene and toluene. The polymers
segment consists of polyolefins including high-density polyethylene, low-
density polyethylene, linear low-density polyethylene, polypropylene, and
performance polymers. The performance polymers include enhanced grades of
polyethylene, including wire and cable resins, concentrates and compounds, and
polymeric powders.
No customer accounted for 10 percent or more of sales.
The accounting policies of the segments are the same as those described in
"Summary of Significant Accounting Policies" (see Note 2).
F-30
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Summarized financial information concerning the Partnership's reportable
segments is shown in the following table. Intersegment sales between the
petrochemicals and polymers segments were made at prices based on current
market values.
For the year ended December 31, 1998:
<TABLE>
<CAPTION>
Petrochemicals Polymers
Millions of dollars Segment Segment Unallocated Eliminations Consolidated
- ------------------- -------------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales and other
operating revenues:
Customers............. $ 2,351 $2,012 $ -- $ -- $4,363
Intersegment.......... 1,112 46 -- (1,158) --
------- ------ ------ ------- ------
$ 3,463 $2,058 $ -- $(1,158) $4,363
======= ====== ====== ======= ======
Restructuring charges... $ -- $ -- $ 35 $ -- $ 35
======= ====== ====== ======= ======
Operating income........ $ 319 $ 177 $ (214) $ -- $ 282
======= ====== ====== ======= ======
Depreciation and
amortization expense... $ 152 $ 65 $ 51 $ -- $ 268
======= ====== ====== ======= ======
Capital expenditures.... $ 71 $ 116 $ 13 $ -- $ 200
======= ====== ====== ======= ======
Total assets............ $ 2,997 $2,035 $1,636 $ -- $6,668
======= ====== ====== ======= ======
</TABLE>
For the period from December 1, 1997 (inception) to December 31, 1997:
<TABLE>
<CAPTION>
Petrochemicals Polymers
Millions of dollars Segment Segment Unallocated Eliminations Consolidated
- ------------------- -------------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales and operating
revenues:
Customers............. $ 179 $ 186 $ -- $ -- $ 365
Intersegment.......... 105 -- -- (105) --
------ ------ ------ ----- ------
$ 284 $ 186 $ -- $(105) $ 365
====== ====== ====== ===== ======
Restructuring charges... $ -- $ -- $ 42 $ -- $ 42
====== ====== ====== ===== ======
Operating income........ $ 47 $ 22 $ (54) $ -- $ 15
====== ====== ====== ===== ======
Depreciation and
amortization expense... $ 7 $ 7 $ 5 $ -- $ 19
====== ====== ====== ===== ======
Capital expenditures.... $ 7 $ 4 $ 1 $ -- $ 12
====== ====== ====== ===== ======
Total assets............ $1,668 $1,504 $1,428 $ -- $4,600
====== ====== ====== ===== ======
</TABLE>
The following table presents the details of "Unallocated" operating income
as presented above for the year ended December 31, 1998 and for the period from
December 1, 1997 (inception) to December 31, 1997:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ----- ----
<S> <C> <C>
Expenses, principally selling, general and administrative,
not allocated to petrochemicals and polymers segment........ $(179) $(12)
Unallocated restructuring charges............................ (35) (42)
----- ----
Total...................................................... $(214) $(54)
===== ====
</TABLE>
F-31
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
19. Subsequent Events
In January 1999, the Partnership announced that it was going to shut down
and "mothball" its gas phase HDPE reactor at Port Arthur, Texas, on March 31,
1999, as part of its long-term strategy to maximize value. The shutdown will
reduce the Partnership's HDPE capacity by 300 million pounds per year and
reduce employment at the unit from 200 to approximately 125. Customers for
products from the mothballed unit will be supplied with comparable products
produced at the Partnership's Matagorda, Victoria, and LaPorte, Texas,
facilities. This transaction is not expected to have a material impact on
Equistar's financial condition, results of operations or liquidity.
F-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Lyondell Petrochemical Company:
In our opinion, the accompanying balance sheets and the related statements
of income and invested capital and of cash flows present fairly, in all
material respects, the financial position of the contributed petrochemicals and
polymers businesses of Lyondell Petrochemical Company ("Lyondell Contributed
Business") at November 30, 1997 and December 31, 1996, and the results of
operations, and cash flows for the eleven month period ended November 30, 1997
and each of the two years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Lyondell Contributed Business's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
July 7, 1998
F-33
<PAGE>
LYONDELL CONTRIBUTED BUSINESS
BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
November 30, December 31,
ASSETS 1997 1996
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 1 $ --
Accounts receivable:
Trade............................................ 350 259
Related parties.................................. 31 96
Inventories........................................ 233 196
Prepaid expenses and other current assets.......... 7 10
------ ------
Total current assets........................... 622 561
------ ------
Property, plant and equipment........................ 1,974 1,969
Less accumulated depreciation and amortization....... (1,148) (1,129)
------ ------
826 840
Deferred charges and other assets.................... 84 93
------ ------
Total assets......................................... $1,532 $1,494
====== ======
<CAPTION>
LIABILITIES AND INVESTED CAPITAL
--------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable:
Trade............................................ $ 153 $ 200
Related parties.................................. 7 30
Current maturities of long-term debt............... 32 --
Other accrued liabilities.......................... 78 62
------ ------
Total current liabilities...................... 270 292
Long-term debt....................................... 713 745
Other liabilities and deferred credits............... 13 34
Commitments and contingencies (Note 9)
Total invested capital............................... 536 423
------ ------
Total liabilities and invested capital............... $1,532 $1,494
====== ======
</TABLE>
See notes to financial statements.
F-34
<PAGE>
LYONDELL CONTRIBUTED BUSINESS
STATEMENTS OF INCOME AND INVESTED CAPITAL
(in millions)
<TABLE>
<CAPTION>
For the eleven For the year
months ended ended December 31,
November 30, -------------------
1997 1996 1995
-------------- --------- ---------
<S> <C> <C> <C>
Sales and other operating revenues:
Unrelated parties........................ $2,183 $ 2,002 $ 2,025
Related parties.......................... 532 513 484
------ --------- ---------
2,715 2,515 2,509
Operating costs and expenses:
Cost of sales:
Unrelated parties...................... 1,662 1,659 1,491
Related parties........................ 423 409 332
Depreciation and amortization............ 68 67 46
Selling, general and administrative
expenses................................ 166 157 125
------ --------- ---------
2,319 2,292 1,994
------ --------- ---------
Operating income......................... 396 223 515
Interest expense, net...................... 50 65 76
------ --------- ---------
Income before income taxes............... 346 158 439
Provision for income taxes................. 127 56 162
------ --------- ---------
Net income............................... 219 102 277
Invested capital at beginning of period.... 423 320 (87)
Net transactions with Lyondell............. (106) 1 130
------ --------- ---------
Invested capital at end of period.......... $ 536 $ 423 $ 320
====== ========= =========
</TABLE>
See notes to financial statements.
F-35
<PAGE>
LYONDELL CONTRIBUTED BUSINESS
STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
For the eleven For the year
months ended ended December 31,
November 30, --------------------
1997 1996 1995
-------------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 219 $ 102 $ 277
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 68 67 46
Decrease (increase) in accounts
receivable............................. (26) (95) 26
Increase in inventories................. (37) (37) (40)
Increase (decrease) in accounts
payable................................ (70) 83 13
Net change in other working capital
accounts............................... 19 (1) 10
Other................................... (17) (40) (14)
----- --------- ---------
Net cash provided by operating
activities........................... 156 79 318
Cash flows from investing activities:
Additions to property, plant and
equipment................................ (49) (80) (476)
----- --------- ---------
Net cash used in investing
activities........................... (49) (80) (476)
Cash flows from financing activities:
Net transactions with parent.............. (106) 1 130
Borrowings of long-term debt.............. -- 300 38
Repayments of long-term debt.............. -- (300) (10)
----- --------- ---------
Net cash provided by (used in)
financing activities................. (106) 1 158
Net change in cash and cash equivalents... 1 -- --
Cash and cash equivalents, beginning of
period................................... -- -- --
----- --------- ---------
Cash and cash equivalents, end of period.. $ 1 $ -- $ --
===== ========= =========
</TABLE>
See notes to financial statements.
F-36
<PAGE>
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS
(In millions)
Note 1. Basis of Presentation and Description of the Contributed Business
As of December 1, 1997, Lyondell Petrochemical Company ("Lyondell" or the
"Company") and Millennium Chemicals Inc. ("Millennium") formed a new joint
venture company named Equistar Chemicals, LP (the "Partnership") which is
being operated as a partnership. The Partnership, which is owned 57% by the
Company and 43% by Millennium, owns and operates the existing olefins and
polymers businesses contributed by the two companies. The assets of the
Partnership consist of 15 manufacturing facilities on the US Gulf Coast and in
the US Midwest, producing ethylene, propylene, polyethylene (high-density,
low-density and linear low-density), polypropylene, ethyl alcohol, butadiene,
aromatics, methyl butyl tertiary ether ("MTBE") and other products for sale to
customers throughout the US. The Partnership has $1,745 of debt including $745
face value of debt assumed from Lyondell and $750 under a new credit facility,
the proceeds of which will be used to repay debt assumed from Millennium upon
completion of the transaction, and a note receivable from Lyondell of $345.
On March 20, 1998, Lyondell and Millennium announced an agreement to expand
the Partnership with the addition of the ethylene, propylene, and ethylene
oxide and derivative businesses of Occidental Chemical Corporation
("OxyChem"), a subsidiary of Occidental Petroleum. Following the closing of
the agreement on May 15, 1998, Lyondell's percentage ownership in the
Partnership decreased to 41 percent from 57 percent, with Millennium and
OxyChem each owning a 29.5 percent share.
Lyondell contributed to the Partnership substantially all of the net assets
and operations comprising its petrochemicals and polymers segments. Lyondell
retained ownership of its 58.75% interest in LYONDELL-CITGO Refining Company
Ltd. ("LYONDELL-CITGO Refining") and its 75% interest in Lyondell Methanol
Company, L.P. ("Lyondell Methanol").
The accompanying financial statements include the results of operations,
assets and liabilities of the petrochemicals and polymers businesses currently
owned by Lyondell that will be contributed to the Partnership ("Contributed
Business"). These financial statements are presented on a going concern basis
and include only the historical net assets and results of operations that are
directly related to the Contributed Business. Consequently, the financial
position, results of operations and cash flows may not be indicative of what
would have been reported if the Contributed Business had been a separate,
stand-alone entity or had been operated as a part of the Partnership.
Lyondell provided certain corporate, general and administrative services to
the Contributed Business, including legal, tax, treasury, risk management and
other services. The Contributed Business provided certain general and
administrative services to Lyondell, including computer, office lease and
employee benefits services. Charges for the services are believed to be
reasonable and substantially offset each other for the periods presented. In
addition, Lyondell has controlled, on a centralized basis, all cash receipts
and disbursements received or made by the Contributed Business. The net
results of such transactions are included in the balance sheets as invested
capital.
Note 2. Significant Accounting Policies
Revenue Recognition. Revenue from product sales is recognized upon delivery
of product to the customer.
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
F-37
<PAGE>
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In millions)
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.
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.
Accounts Receivable. The Contributed Business sells its products primarily
to companies in the petrochemicals and polymers industries. The Contributed
Business performs ongoing credit evaluations of its customers' financial
condition and in certain circumstances requires letters of credit from them.
The Contributed Business's allowance for doubtful accounts, which is reflected
in the balance sheet as a reduction of accounts receivable, totaled $3 at
November 30, 1997 and December 31, 1996.
Inventories. Inventories are stated at the lower of cost or market value.
Cost is determined on the last-in, first-out ("LIFO") basis, except for
materials and supplies, which are valued at average cost. Inventories valued on
a LIFO basis were approximately $44 and $46 less than the amount of such
inventories valued at current cost at November 30, 1997 and December 31, 1996,
respectively.
Inventories consist of the following:
<TABLE>
<CAPTION>
November 30 December 31
1997 1996
----------- -----------
<S> <C> <C>
Petrochemicals................................... $ 136 $ 98
Polymers......................................... 74 74
Materials and supplies........................... 23 24
----- ----
$ 233 $196
===== ====
</TABLE>
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 assets, generally 5
to 30 years for manufacturing facilities and equipment. Interest cost incurred
on debt during the construction of major projects that exceed one year is
capitalized. No interest was capitalized during the periods presented.
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
November 30 December 31
1997 1996
----------- -----------
<S> <C> <C>
Manufacturing facilities and equipment............ $ 1,868 $1,822
Construction projects in progress................. 79 120
Land.............................................. 27 27
------- ------
$ 1,974 $1,969
======= ======
</TABLE>
Turnaround Maintenance and Repair Expenses. The cost of repairs and
maintenance incurred in connection with turnarounds of major units at the
Contributed Business's manufacturing facilities exceeding $5 are deferred as
incurred and amortized on a straight-line basis until the next planned
turnaround, which is generally four to six years.
F-38
<PAGE>
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In millions)
Other Accrued Liabilities. Other accrued liabilities consist of the
following:
<TABLE>
<CAPTION>
November 30 December 31
1997 1996
----------- -----------
<S> <C> <C>
Payroll........................................... $24 $20
Interest.......................................... 19 15
Taxes other than income........................... 24 20
Other............................................. 11 7
--- ---
$78 $62
=== ===
</TABLE>
Accounts payable and certain accrued expenses were not contributed to the
Partnership at its formation.
Environmental Remediation Costs. Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and
waste disposal sites, are accrued when it is probable a liability has been
incurred and the amount of the liability can reasonably be estimated. Accrued
liabilities are exclusive of claims against third parties (except where
payment has been received or the amount of liability or contribution by such
other parties, including insurance companies, has been agreed) and are not
discounted. In general, costs related to environmental remediation are charged
to expense. Environmental costs are capitalized if the costs increase the
value of the property and/or mitigate or prevent contamination from future
operations.
Exchanges. Finished product exchange transactions, which are of a
homogeneous nature of commodities in the same line of business and do not
involve the payment or receipt of cash, are not accounted for as purchases and
sales. Any resulting volumetric exchange balances are accounted for as
inventory in accordance with the normal LIFO valuation policy. Exchanges
settled through payment and receipt of cash are accounted for as purchases and
sales.
Income Taxes. Earnings of the Contributed Business have been included in
the consolidated federal income tax return filed by Lyondell. Pursuant to an
informal tax allocation agreement, income taxes have been allocated to the
Contributed Business based on applicable statutory tax rates applied to the
taxable earnings generated by such business. The effective income tax rates
were 36.6%, 35.7%, and 36.8% for the eleven months ended November 30, 1997 and
the years ended December 31, 1996, and 1995, respectively. State income tax
was the primary difference between the effective income tax rates and the 35%
federal statutory rate. Liabilities for currently and/or deferred income taxes
have been and remain the responsibility of Lyondell, and accordingly, have
been included in the balance sheet as invested capital.
As part of the transactions to consummate the Partnership, Lyondell entered
into tax sharing and indemnification agreements with the Partnership in which
Lyondell generally agreed to indemnify the Partnership for income tax
liabilities attributable to periods when the operations of the Contributed
Business were included in the consolidated tax return of Lyondell.
Research and Development. The cost of research and development efforts is
expensed as incurred. Such costs aggregated $12, $13, and $5 for the eleven
months ended November 30, 1997 and the years ended December 31, 1996, and
1995, respectively.
Note 3. Acquisition of Alathon(R) High-Density Polyethylene Business
In May 1995, the Company acquired Occidental Chemical Corporation's
Alathon(R) high-density polyethylene ("HDPE") business ("ALATHON Business")
for $356 including certain direct costs, plus
F-39
<PAGE>
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In millions)
approximately $64 for inventory. Assets involved in the purchased included
resin production facilities at Victoria and Matagorda, Texas, associated
research and development activities and the rights to the Alathon(R) trademark.
These facilities have a combined annual production capacity of approximately
1.5 billion pounds of HDPE. The Company financed the acquisition from internal
cash and $230 of short-term borrowings from its existing financing
arrangements.
The following unaudited pro forma information combines the results of
operations of the Contributed Business and the ALATHON Business for the year
ended December 31, 1995 and assumes the acquisition of the ALATHON Business
occurred on January 1, 1995. This unaudited pro forma information may not be
indicative of results that would have actually resulted if this transaction had
occurred on January 1, 1995 or which may be obtained in the future.
<TABLE>
<CAPTION>
Millions of dollars 1995
------------------- ------
<S> <C>
Sales and other operating revenues................................ $2,703
Net income........................................................ 297
</TABLE>
Note 4. Financial Instruments
The fair value of all financial instruments included in current assets and
current liabilities, including cash and cash equivalents, accounts receivable,
accounts payable and notes payable, approximated their carrying value due to
their short maturity. Based on the borrowing rates currently available to the
Contributed Business for debt with terms and average maturities similar to the
Contributed Business's debt portfolio, the fair value of the Contributed
Business's long-term debt, including amounts due within one year, was $701 and
$661 at November 30, 1997 and December 31, 1996, respectively.
The Contributed Business is party to various unconditional purchase
obligation contracts as a purchaser for product and services. At November 30,
1997, future minimum payments under these contracts with noncancelable contract
terms in excess of one year were as follows.
<TABLE>
<CAPTION>
Amount
------
<S> <C>
1998............................................................... $ 14
1999............................................................... 14
2000............................................................... 13
2001............................................................... 11
2002............................................................... 10
Thereafter......................................................... 54
----
Total minimum contract payments.................................. $116
====
</TABLE>
The Contributed Business's total purchases under these agreements were $15,
$17 and $13 for the eleven months ended November 30, 1997 and the years ended
December 31, 1996 and 1995, respectively.
F-40
<PAGE>
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In millions)
Note 5. Related Party Transactions
Related party transactions with Atlantic Richfield Company ("ARCO") for the
nine months ended September 30, 1997 excluding sales to ARCO Chemical Company,
and LYONDELL-CITGO Refining for the eleven months ended November 30, 1997 are
as follows:
<TABLE>
<CAPTION>
For the twelve
For the eleven months ended
months ended December 31
November 30 ----------------
1997 1996 1995
-------------- ------- -------
<S> <C> <C> <C>
Sales:
Products..................................... $ 319 $ 198 $ 162
Other........................................ 7 12 16
Business interruption recovery............... -- 25 --
----- ------- -------
$ 326 $ 235 $ 178
===== ======= =======
Costs:
Product purchases............................ $ 409 $ 182 $ 283
Transportation fees.......................... 19 23 21
Other, net................................... (5) (9) (7)
Business interruption recovery............... -- (3) --
----- ------- -------
$ 423 $ 193 $ 297
===== ======= =======
</TABLE>
The Company purchased 383,312 shares of common stock held by ARCO after the
conversion of the Exchangeable Notes on September 15, 1997 at a price of $25.66
per share, eliminating ARCO's ownership interest in the Contributed Business.
Therefore, as of September 30, 1997 ARCO is no longer considered a related
party of the Contributed Business.
Sales to ARCO Chemical Company, an ARCO affiliate, consisting primarily of
product sales, were $206, $278, and $306 for the nine months ended September
30, 1997 and the years ended December 31, 1996 and 1995, respectively.
In July of 1996 a fire occurred at the ARCO PipeLine Company meter station
located within the Channelview, Texas petrochemicals facility ("Channelview
Facility"). The fire forced the shutdown of the entire Channelview Facility for
several days and more than two weeks for some units. The Contributed Business
recovered lost profits from ARCO PipeLine Company for this shutdown. The
recovery was included in 1996 reported results.
F-41
<PAGE>
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In millions)
6. Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
November 30 December 31 December 31
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
10.00% Notes due in 1999.................... $150 $150 $150
9.125% Notes due in 2002.................... 100 100 100
6.5% Notes due in 2006...................... 150 150 --
7.55% Debentures due in 2026................ 150 150 --
9.95% Notes due in 1996..................... -- -- 150
Medium-term notes........................... 195 195 207
Other....................................... -- -- 138
---- ---- ----
745 745 745
Less current portion........................ 32 -- 150
---- ---- ----
$713 $745 $595
==== ==== ====
</TABLE>
Aggregate maturities of long-term debt during the five years subsequent to
November 30, 1997 are as follows: 1998-$32; 1999-$150, 2000-$42; 2001-$90;
2002-$101. After contribution to the Partnership, Lyondell will continue to be
liable on the above debt until its maturity.
The Notes due in 1999 and the medium-term notes contain provisions that
would allow the holders to require the Company to repurchase the debt upon the
occurrence of certain events together with specified declines in public ratings
on the Notes due in 1999. Certain events include acquisitions by persons other
than ARCO or the Company of more than 20% of the Company's common stock, any
merger or transfer of substantially all of the Company's assets, in connection
with which the Company's common stock is changed into or exchanged for cash,
securities or other property and payment of certain "special" dividends.
The medium-term notes mature at various dates from 1998 to 2005 and have a
weighted average interest rate at November 30, 1997, December 31, 1996 and 1995
of 9.8%, 9.8% and 9.9%, respectively.
Interest paid was $59, $61, and $75 for the eleven months ended November 30,
1997 and the years ended December 31, 1996, and 1995, respectively.
7. Pension and Other Postretirement Benefits
Defined Benefit Pension Plans--All full-time regular employees of the
Contributed Business are covered by defined benefit pension plans sponsored by
Lyondell. Retirement benefits are based on years of service and the employee's
highest three consecutive years of compensation during the last ten years of
service. The funding policy for these plans is to make periodic contributions
as required by applicable law. The Contributed Business accrues pension costs
based on an actuarial valuation and funds the plans through contributions to
the Company, reflected in invested capital, who then contributes to pension
trust funds separate from Lyondell funds. The Contributed Business also has
unfunded supplemental nonqualified retirement plans which provide pension
benefits for certain employees in excess of the tax qualified plans' limits.
The Contributed Business recorded expense related to participation in these
plans of $7, $7 and $4 for the eleven months ended November 30, 1997 and the
years ended December 31, 1996, and 1995, respectively.
Defined Contribution Plans--Effective July 1, 1995, Lyondell also maintains
voluntary defined contribution savings plans for eligible employees, including
those employed by the Contributed Business.
F-42
<PAGE>
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In millions)
Under provisions of the plans, Lyondell contributes an amount equal to 160% of
employee contributions up to a maximum matching contribution of eight percent
of the employee's base salary. Prior to July 1, 1995, Lyondell had similar
voluntary defined contribution plans. The Contributed Business recorded expense
related to participation in these voluntary defined contribution savings plans
totaled $6, $6, and $5 for the eleven months ended November 30, 1997 and the
years ended December 31, 1996, and 1995, respectively.
Other Postretirement Benefit Plans--Lyondell sponsors unfunded
postretirement benefit plans other than pensions ("OPEB") for both salaried and
non-salaried employees, including those employed by the Contributed Business,
which provide medical and life insurance benefits. The postretirement health
care plans are contributory while the life insurance plans are non-
contributory. Currently, Lyondell pays approximately 80% of the cost of the
health care plans, but reserves the right to modify the cost-sharing provisions
at any time. The Contributed Business recorded expense related to participation
in these plans of approximately $4, $4, and $2 for the eleven months ended
November 30, 1997 and the years ended December 31, 1996, and 1995,
respectively. The actuarially determined liability associated with the
currently active employees of the Contributed Business based on current plan
provisions at November 30, 1997 and December 31, 1996 was $25 and $22,
respectively.
Note 8. Leases
At November 30, 1997, future minimum rental payments for operating leases
with noncancelable lease terms in excess of one year were as follows:
<TABLE>
<S> <C>
1998................................................................ $ 85
1999................................................................ 69
2000................................................................ 54
2001................................................................ 39
2002................................................................ 29
Thereafter.......................................................... 351
----
Total minimum contract payments................................... $627
====
</TABLE>
Operating lease net rental expenses were $42, $44, and $39 for the eleven
months ended November 30, 1997 and the years ended December 31, 1996, and 1995,
respectively.
Note 9. Commitments and Contingencies
The Contributed Business has various purchase commitments for materials,
supplies and services incident to the ordinary conduct of business. In the
aggregate, such commitments are not at prices in excess of current market.
In connection with the transfer of assets and liabilities from ARCO to the
Company, the Company and ARCO entered into an agreement ("Cross-Indemnity
Agreement") whereby the Company agreed to defend and indemnify ARCO against
certain uninsured claims and liabilities which ARCO may incur relating to the
operation of the Company's integrated petrochemicals and petroleum processing
business prior to July 1, 1988, including certain liabilities which may arise
out of pending and future lawsuits. ARCO indemnified the Company under the
Cross-Indemnity Agreement with respect to other claims or liabilities and other
matters of litigation not related to the assets or business included in the
Company's consolidated financial statements. The Company has reached an
agreement-in-principle with ARCO to update the Cross-Indemnity Agreement
("Revised Cross-Indemnity Agreement"). The Cross-Indemnity Agreement and the
Revised Cross-Indemnity
F-43
<PAGE>
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In millions)
Agreement cover operations of the Company included in the Contributed Business.
Subject to the uncertainty inherent in all litigation, management believes the
resolution of the matters pursuant to the Revised Cross-Indemnity Agreement
will not have a material adverse effect upon the financial statements or
liquidity of the Contributed Business.
In addition to lawsuits for which the Company has indemnified ARCO, the
Company is also subject to various lawsuits and proceedings which may involve
the operations of the Contributed Business. Subject to the uncertainty inherent
in all litigation, management believes the resolution of these proceedings will
not have a material adverse effect upon the consolidated financial statements
or liquidity of the Contributed Business.
As part of the transactions to consummate the Partnership, Lyondell will
agree to indemnify the Partnership for any present or future liabilities
arising within a seven year period after the consummation of the partnership
which are attributable to the Contributed Business operations prior to the
Partnership's formation in excess of $7.
The Contributed Business's policy is to be in compliance with all applicable
environmental laws. The Contributed Business is subject to extensive
environmental laws and regulations concerning emissions to the air, discharges
to surface and subsurface waters and the generation, handling, storage,
transportation, treatment and disposal of waste materials. Some of these laws
and regulations are subject to varying and conflicting interpretations. In
addition, the Contributed Business cannot accurately predict future
developments, such as increasingly strict requirements of environmental laws,
inspection and enforcement policies and compliance costs therefrom which might
affect the handling, manufacture, use, emission or disposal of products, other
materials or hazardous and non-hazardous waste.
As of November 30, 1997 and December 31, 1996, the Contributed Business has
accrued $2 and $3, respectively, related to future regulatory agency assessment
and remediation costs, of which $1 is included in current liabilities at
November 30, 1997 while the remaining amounts are expected to be incurred over
the next two to seven years. In the opinion of management, there is currently
no material range of loss in excess of the amount recorded. However, it is
possible that new information about the sites for which the reserve has been
established, new technology or future developments such as involvement in other
regulatory agency or other comparable state law investigations, could require
the Contributed Business to reassess its potential exposure related to
environmental matters.
In the opinion of management, any liability arising from the matters
discussed in this Note will not have a material adverse effect on the
consolidated financial statements or liquidity of the Contributed Business.
However, the adverse resolution in any reporting period of one or more of these
matters discussed in this Note could have a material impact on the Contributed
Business'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.
F-44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Millennium Chemicals Inc.:
In our opinion, the accompanying balance sheets and the related statements
of income and invested capital and of cash flows present fairly, in all
material respects, the financial position of the contributed business of
Millennium Chemicals Inc. ("Millennium Contributed Business") at November 30,
1997 and December 31, 1996, and the results of operations, and cash flows for
the eleven month period ended November 30, 1997 and each of the two years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Millennium Contributed Business's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Cincinnati, Ohio
July 9, 1998
F-45
<PAGE>
MILLENNIUM CONTRIBUTED BUSINESS
BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, December 31,
1997 1996
------------ ------------
(In millions)
<S> <C> <C>
ASSETS
------
Current assets:
Accounts receivable--net............................ $ 49 $ 269
Inventories......................................... 275 294
Prepaid expenses and other current assets -- 25
------ ------
Total current assets.............................. 324 588
Property, plant and equipment, net.................... 1,305 1,335
Other non-current assets:
Deferred charges and other assets................... 33 27
Goodwill............................................ 1,142 1,171
------ ------
Total assets...................................... $2,804 $3,121
====== ======
LIABILITIES AND INVESTED CAPITAL
--------------------------------
Current liabilities:
Current maturities of long-term debt................ $ 4 $ 4
Accounts payable.................................... -- 53
Accrued expenses and other liabilities.............. 55 168
------ ------
Total current liabilities......................... 59 225
Non-current liabilities:
Long-term debt...................................... -- 5
Indebtedness to Millennium.......................... -- 1,000
Other liabilities................................... 21 56
------ ------
Total liabilities................................. 80 1,286
Commitments and contingencies (Note 7)
Invested capital...................................... 2,724 1,835
------ ------
Total liabilities and invested capital............ $2,804 $3,121
====== ======
</TABLE>
See notes to financial statements.
F-46
<PAGE>
MILLENNIUM CONTRIBUTED BUSINESS
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Eleven Months Year
Ended Ended
November 30, December 31,
------------- -------------
1997 1996 1995
------------- ------ ------
(In Millions)
<S> <C> <C> <C>
Sales.............................................. $1,786 $1,860 $1,932
Cost of Sales...................................... 1,341 1,503 1,324
Selling, development and administrative expenses... 136 109 113
------ ------ ------
Operating income................................. 309 248 495
Interest expense, net.............................. 66 80 80
------ ------ ------
Income before income taxes......................... 243 168 415
Provision for income taxes......................... 96 76 172
------ ------ ------
Net income......................................... $ 147 $ 92 $ 243
====== ====== ======
</TABLE>
See notes to financial statements.
F-47
<PAGE>
MILLENNIUM CONTRIBUTED BUSINESS
STATEMENTS OF CHANGES IN INVESTED CAPITAL
<TABLE>
<CAPTION>
(In millions)
-------------
<S> <C>
Balance at December 31, 1995...................................... $1,692
Net income........................................................ 92
Net transactions with Millennium.................................. 51
------
Balance at December 31, 1996...................................... 1,835
Net income........................................................ 147
Net transactions with Millennium.................................. 742
------
Balance at November 30, 1997...................................... $2,724
======
</TABLE>
See notes to financial statements.
F-48
<PAGE>
MILLENNIUM CONTRIBUTED BUSINESS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Eleven Months Year Ended
Ended November 30, December 31,
------------------ --------------
1997 1996 1995
------------------ ------ ------
(In millions)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 147 $ 92 $ 243
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 125 127 132
(Increase) decrease in accounts
receivable............................. 220 (53) 32
Decrease (increase) in inventories...... 19 (15) (42)
Decrease (increase) in prepaid expenses
and other current assets............... 25 (6) (8)
Increase in other assets................ (31) (70) (39)
Increase (decrease) in trade accounts
payable................................ (53) (7) 7
(Decrease) increase in accrued expenses
and other liabilities.................. (113) 49 (73)
(Decrease) increase in other
liabilities............................ (35) (37) 10
----- ------ ------
Net cash provided by operating
activities........................... 304 80 262
Cash flows from investing activities:
Capital expenditures...................... (41) (127) (75)
----- ------ ------
Net cash used in investing
activities........................... (41) (127) (75)
----- ------ ------
Cash flows from financing activities:
Net transactions with Millennium.......... (258) 51 (184)
Repayment of long term debt............... (5) (4) (3)
----- ------ ------
Net cash (used in) provided by financing
activities............................... (263) 47 (187)
----- ------ ------
Net change in cash and cash equivalents... $ -- $ -- $ --
===== ====== ======
</TABLE>
See notes to financial statements.
F-49
<PAGE>
MILLENNIUM CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS
(amounts in millions)
NOTE 1--DESCRIPTION OF THE CONTRIBUTED BUSINESS AND OPERATIONS
Pursuant to a partnership agreement (the "Partnership Agreement"),
Millennium Chemicals Inc. ("Millennium") and Lyondell Petrochemical Company
("Lyondell") formed Equistar Chemicals, LP ("Equistar" or the "Partnership"), a
Delaware limited partnership, which commenced operations on December 1, 1997.
Equistar is 57% owned by Lyondell and 43% owned by Millennium. The Lyondell
interest is owned through two wholly owned subsidiaries, Lyondell Petrochemical
G.P. Inc. ("Lyondell GP") and Lyondell Petrochemical L.P. Inc. ("Lyondell LP").
Millennium also owns its interest in the Partnership through two wholly owned
subsidiaries, Millennium Petrochemicals GP LLC ("Millennium GP") and Millennium
Petrochemicals LP LLC ("Millennium LP").
The Partnership owns and operates the petrochemical and polymer businesses
contributed by Millennium and Lyondell (the "Contributed Business"). The assets
of the Partnership consist of 15 manufacturing facilities on the U.S. Gulf
Coast and in the U.S. Midwest. The petrochemical segment produces products
including ethylene, propylene, ethyl alcohol, butadiene, aromatics and methyl
tertiary butyl ether ("MTBE"). The products are used primarily in the
production of other chemicals and products, including polymers, for sales to
customers throughout the U.S. The petrochemicals segment also includes sales of
methanol produced by Lyondell Methanol LP ("Lyondell Methanol"), which is owned
75% by Lyondell and is operated by the Partnership. The polymers segment
produces products that include polyethylene (high-density, low-density and
linear low-density), and polypropylene, which are used in the production of a
wide variety of consumer and industrial products.
In May 1998, Equistar announced that Occidental Petroleum Corporation joined
the Partnership with a contribution of assets and liabilities (the "Occidental
Contributed Business"). The ownership percentages of Equistar after the
inclusion of the Occidental Contributed Business are Lyondell (41%), Millennium
(29.5%) and Occidental (29.5%).
Millennium contributed to the Partnership substantially all of the net
assets and operations comprising its petrochemicals and polymers segments.
Millennium retained $250 of the accounts receivable of the Contributed
Business.
The accompanying financial statements include the results of operations,
assets and liabilities of the petrochemicals and polymers businesses owned by
Millennium that were contributed to the Partnership ("Contributed Business").
The financial statements are presented on a going concern basis and include
only the historical net assets and results of operations that are directly
related to the Contributed Business. Consequently, the financial position,
results of operations and the cash flows may not be indicative of what may have
been reported had the Contributed Business been a separate, stand-alone entity
or operated as a part of the Partnership.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition. Revenue from product sales is recognized upon shipment
of product to the customer.
F-50
<PAGE>
MILLENNIUM CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(amounts in millions)
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, liabilities,
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Trade Receivables. Trade receivables consist of the following:
<TABLE>
<CAPTION>
November 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Trade receivables.................................. $49 $270
Allowance for doubtful accounts.................... -- (1)
--- ----
$49 $269
=== ====
</TABLE>
Inventories. Inventories are stated at the lower of cost or market value.
Cost is determined for the various categories of inventory using first-in,
first-out ("FIFO"); last-in, first-out ("LIFO") basis or average cost method as
deemed appropriate. Inventories valued on a LIFO basis were approximately $2
and $13 less than the amount of such inventories valued at current cost at
November 30, 1997 and December 31, 1996, respectively.
<TABLE>
<CAPTION>
November 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Finished products.................................. $169 $154
In-process products................................ 2 2
Raw materials...................................... 62 105
Other inventories.................................. 42 33
---- ----
$275 $294
==== ====
</TABLE>
Property, Plant and Equipment. Property, plant and equipment is stated on
the basis of cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets, generally 20 to 40 years for
buildings and 10 to 25 years for machinery and equipment.
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
November 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Land and buildings................................. $ 129 $ 125
Machinery and equipment............................ 1,569 1,516
Leasehold improvements............................. 4 4
------ ------
1,702 1,645
Allowance for depreciation and amortization........ 397 310
------ ------
$1,305 $1,335
====== ======
</TABLE>
Turnaround Maintenance. Costs relating to future major maintenance projects
are estimated and expensed ratably from the date a turnaround is completed
until the next planned turnaround, generally 4 to 6 years.
Goodwill. The net assets of the Contributed Business include goodwill of
$1,142 at November 30, 1997, which is being amortized using the straight line
method over forty years. Such goodwill arose from Millennium's 1993 acquisition
of Quantum Chemical Corporation of which the Contributed Business was a
F-51
<PAGE>
MILLENNIUM CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(amounts in millions)
part. The value of the purchase consideration was allocated to the acquired
assets and liabilities based on their fair values, resulting in $1,272 of
goodwill being allocated to the Contributed Business. Management periodically
evaluates goodwill for impairment based on the anticipated future cash flows
attributable to the operation. Such expected cash flows, on an undiscounted
basis, are compared to the carrying value of the tangible and intangible
assets, and if impairment is indicated, the carrying value of goodwill is
adjusted. Management believes that no impairment exists at November 30, 1997.
Accumulated amortization aggregated $130 and $101 at November 30, 1997 and
December 31, 1996, respectively. Amortization of goodwill amounted to $29 for
the eleven months ended November 30, 1997 and $31 each for the years ended
December 31, 1996 and 1995, respectively.
Accrued Expenses and Other Liabilities. Accrued expenses and other
liabilities consist of the following:
<TABLE>
<CAPTION>
November 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Major maintenance............................... $44 $ 56
Feedstock accruals.............................. -- 65
All other....................................... 11 47
--- ----
$55 $168
=== ====
</TABLE>
Accounts payable, feedstock accruals and certain other accrued expenses are
not being contributed to the Partnership at its formation.
Environmental Remediation Cost. Environmental remediation costs are
expensed or capitalized in accordance with generally accepted accounting
principles. In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP 96-1"), "Environmental
Remediation Liabilities," which establishes new accounting and reporting
standards for the recognition and disclosure of environmental remediation
liabilities. The adoption of SOP 96-1 in 1997 did not have a material impact
on the results of operations.
Research and Development. The cost of research and development efforts is
expensed as incurred. Such costs aggregated $28 for the eleven month period
ended November 30, 1997 and $33 and $32 for the years ended December 31, 1996
and 1995, respectively.
Exchanges. Finished product exchange transactions, which do not require
payment or receipt of cash, are not accounted for as purchases or sales. Any
resulting volumetric exchange balances are accounted for as inventory in
accordance with the normal LIFO valuation policy. Exchanges settled through
payment and receipt of cash are accounted for as purchases and sales.
Federal Income Taxes. Earnings of the Contributed Business have been
included in a consolidated income tax return filed by its ultimate U.S.
parent, Millennium America Holdings Inc. ("MAHI"), a subsidiary of Millennium.
Pursuant to an informal tax allocation agreement, income taxes have been
allocated to the Contributed Business based on applicable statutory tax rates
applied to the taxable earnings generated by such business. Effective income
tax rates for the periods as of and at November 30, 1997 and December 31, 1996
and 1995 were 39.5%, 45.2% and 41.4%, respectively. Differences between the
effective income tax rates and the statutory federal income tax rates arise
primarily from goodwill amortization and state income taxes. Liabilities for
current and/or deferred income taxes have been and remain the responsibility
of MAHI, and accordingly, have been included in the balance sheet as invested
capital.
F-52
<PAGE>
MILLENNIUM CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(amounts in millions)
As part of the transactions to consummate the Partnership, Millennium
entered into tax sharing and indemnification agreements with the Partnership in
which Millennium generally agreed to indemnify the partnership for income tax
liabilities attributable to periods when the operations of the Contributed
Business were included in the consolidated tax return of Millennium. The
Partnership is not subject to federal income taxes as income is reportable
directly by the individual partners; therefore, going forward there will be no
provision for income taxes in the partnership's financial statements.
Fair Value of Financial Instruments. The fair values of all short-term
financial instruments are estimated to approximate their carrying value because
of their short maturity.
Earnings Per Share. Historical earnings per share are not presented because
there is no separate identifiable pool of capital for the periods prior to
incorporation upon which a per share calculation could be based.
Reclassifications. Certain previously reported amounts have been restated to
conform to classifications currently adopted.
NOTE 3--LONG-TERM DEBT AND INDEBTEDNESS TO MILLENNIUM
The debt included in the balance sheets reflects the obligations directly
related to the Contributed Business including allocated debt from Millennium.
<TABLE>
<CAPTION>
November 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Note payable to Millennium bearing interest at
8% due 2006.................................... -- $ 750
Other indebtedness to Millennium................ -- 250
Industrial revenue bonds bearing interest at
5.5% due 1998.................................. $ 4 9
Less current maturities......................... (4) (4)
------ ------
$ -- $1,005
====== ======
</TABLE>
Interest paid for the eleven months ended November 30, 1997 and the years
ended December 31, 1996 and 1995 was $66, $80 and $80, respectively.
NOTE 4--PENSION AND OTHER POSTRETIREMENT BENEFITS
All full-time employees of the Contributed Business are covered by defined
benefit pension plans sponsored by Millennium. Retirement benefits are based on
years of service and average compensation as defined under the respective
plans' provisions. The funding policy is to contribute amounts to the plans
sufficient to meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974. The Contributed Business accrues
pension costs based on actuarial valuations and funds the plan through
contributions to Millennium who then contributes the funds to a master trust
sponsored by Millennium. Such contributions are reflected in invested capital.
Pension income related to participation in these plans was $2, $5 and $4 for
the eleven months ended November 30, 1997 and the years ended December 31, 1996
and 1995, respectively. One such plan covers benefits for union-represented
employees of the Contributed Business. Such plan will be assumed by the
Partnership upon its consummation.
Millennium also provides unfunded health care and life insurance benefits to
certain groups of retirees. Expenses related to the employees of the
Contributed Business were $3, $2 and $2 for the eleven months ended November
30, 1997 and the years ended December 31, 1996 and 1995, respectively.
F-53
<PAGE>
MILLENNIUM CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
(amounts in millions)
NOTE 5--RELATED PARTY TRANSACTIONS
Millennium provided certain corporate, general and administrative services
to the Contributed Business, including legal, financial, tax, risk management
and employee benefits services. Charges for these services are included in
selling and administration expenses and are believed to be reasonable. In
addition, a subsidiary of Millennium has controlled, on a centralized basis,
all cash receipts and disbursements received or made by the Contributed
Business. The net results of such transactions are included in the balance
sheets as invested capital. The Contributed Business also sells ethylene to an
affiliated business unit of Millennium for the manufacture of vinyl acetate
monomer. Vinyl acetate monomer is sold by Millennium to the Partnership. These
sales are reflected at market price and have been included in the accompanying
income statement. All significant intercompany accounts and transactions within
the Contributed Business have been eliminated. Millennium provides the
Partnership with certain operational services, including waste water treatment
and barge dock access. The Partnership provides certain general and
administrative services to Millennium, including materials management, certain
utilities, office space, health, safety and environmental services and computer
services. The Partnership has also controlled certain cash receipts and
disbursements received or made on behalf of Millennium.
NOTE 6--LEASES
Rental expense for operating leases was $38, $45 and $43 for the eleven
months ended November 30, 1997 and the years ended December 31, 1996 and 1995,
respectively.
Minimum Rentals
Future minimum rental commitments under noncancellable operating leases with
terms in excess of one year as of November 30, 1997 are as follows:
<TABLE>
<S> <C>
1998.................................... $43
1999.................................... 42
2000.................................... 26
2001.................................... 17
2002.................................... 13
Thereafter.............................. 18
----
$159
====
</TABLE>
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Contributed Business is subject, among other things, to several
proceedings under the Federal Comprehensive Environmental Response Compensation
and Liability Act and other federal and state statutes. These proceedings are
in various stages ranging from initial investigation to active settlement
negotiations to implementation of clean-up remediation of sites. Additionally,
Millennium and/or its subsidiaries are defendants or plaintiffs in lawsuits
that have arisen in the normal course of business including those relating to
commercial transactions and product liability with respect to the Contributed
Business. The Contributed Business had no reserves for environmental matters at
November 30, 1997.
As part of the transactions to consummate the Partnership, Millennium agreed
to indemnify the partnership for any present or future liabilities arising
within a seven-year period after the consummation of the Partnership which are
attributable to the Contributed Business's operations prior to the
Partnership's formation in excess of $7.
The Contributed Business has various contractual obligations to purchase raw
materials used in its production of polyethylene. Commitments to purchase
ethylene used in the production of polyethylene are based on market prices and
expire from 1997 to 2001.
F-54
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
BALANCE SHEETS
March 31, 1998 and 1997
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash.................................................... $ 13 $ 93
Trade receivables....................................... 13,492 19,627
Other receivables....................................... 9,264 5,743
Inventories............................................. 159,420 137,414
Prepaid expenses........................................ 8,315 9,701
---------- ----------
Total current assets................................... 190,504 172,578
EQUITY INVESTMENT........................................ 86,155 91,685
PROPERTY, PLANT AND EQUIPMENT, net....................... 1,807,605 1,891,415
OTHER ASSETS............................................. 28,685 39,473
---------- ----------
TOTAL ASSETS........................................... $2,112,949 $2,195,151
========== ==========
CURRENT LIABILITIES:
Accounts payable........................................ $ 74,547 $ 83,064
Accrued liabilities..................................... 33,879 37,658
---------- ----------
Total current liabilities.............................. 108,426 120,722
CAPITAL LEASE LIABILITIES................................ 205,000 205,000
NOTES PAYABLE TO AFFILIATES.............................. 1,222,674 1,209,269
DEFERRED CREDITS AND OTHER LIABILITIES................... 72,733 60,112
INVESTED CAPITAL......................................... 504,116 600,048
---------- ----------
TOTAL LIABILITIES AND INVESTED CAPITAL................. $2,112,949 $2,195,151
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
STATEMENTS OF OPERATIONS AND INVESTED CAPITAL
For the three months ended March 31, 1998 and 1997
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
NET SALES AND OPERATING REVENUES........................... $355,442 $447,681
OPERATING COSTS AND EXPENSES:
Cost of sales............................................ 320,067 419,150
Selling, general and administrative and other operating
expenses................................................ 4,206 12,704
-------- --------
OPERATING INCOME........................................... 31,169 15,827
Loss from equity investment.............................. (1,490) (1,502)
Interest expense, affiliates and other................... (25,991) (26,584)
Other income (expense), net.............................. 888 (1,579)
-------- --------
INCOME (LOSS) BEFORE TAXES................................. 4,576 (13,838)
Provision for income taxes............................... 2,255 (4,542)
-------- --------
NET INCOME (LOSS).......................................... 2,321 (9,296)
INCREASE IN INVESTED CAPITAL............................... 11,586 22,025
INVESTED CAPITAL, beginning of period...................... 490,209 587,319
-------- --------
INVESTED CAPITAL, end of period............................ $504,116 $600,048
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1998 and 1997
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 2,321 $ (9,296)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization of assets................ 30,966 28,738
Loss from equity investment............................ 1,490 1,502
Other noncash charges to income........................ 202 4,975
Changes in operating assets and liabilities:
Decrease (increase) in receivables..................... 4,996 (9,266)
Decrease (increase) in inventories..................... (16,364) 38,253
Decrease in prepaid expenses........................... 1,979 2,399
Decrease in accounts payable and accrued liabilities... (33,800) (67,237)
Increase in other assets and other liabilities, net...... 1,126 462
-------- --------
Net cash used by operating activities...................... (7,084) (9,470)
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures..................................... (6,121) (6,427)
Other investing, net..................................... 730 857
-------- --------
Net cash used by investing activities...................... (5,391) (5,570)
CASH FLOW FROM FINANCING ACTIVITIES:
Principal payments on capital lease liabilities.......... -- (6,905)
Increase in invested capital............................. 11,586 22,025
-------- --------
Net cash provided by financing activities.................. 11,586 15,120
-------- --------
Change in cash............................................. (889) 80
Cash--beginning of period.................................. 902 13
-------- --------
Cash--end of period........................................ $ 13 $ 93
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
(Unaudited)
(1) BASIS OF PRESENTATION AND DESCRIPTION OF THE CONTRIBUTED BUSINESS--
On May 15, 1998, Occidental Petroleum Corporation (Occidental) signed an
agreement with Lyondell Petrochemical Company and Millenium Chemicals Inc. to
effect the proposed contribution of its ethylene, propylene, ethylene oxide and
ethylene glycol derivatives businesses (collectively, the Occidental
Contributed Business) to a joint venture limited partnership called Equistar
Chemicals, LP (Equistar) in return for a 29.5% interest in Equistar, the
receipt of approximately $420 million in cash and the assumption by Equistar of
approximately $205 million of Occidental capital lease liabilities.
Under terms of the agreement, on May 15, 1998, Occidental contributed to
Equistar substantially all of the net assets and operations of the Occidental
Contributed Business. The accompanying financial statements include the results
of operations, assets and liabilities of the Occidental Contributed Business
represented by Oxy Petrochemicals Inc., PDG Chemical Inc. and a plant owned by
Occidental Chemical Corporation, which are all indirect subsidiaries of
Occidental Chemical Holding Corporation (OCHC). OCHC is an indirect subsidiary
of Occidental. These financial statements include only the historical results
of operations and net assets that are directly related to the Occidental
Contributed Business. Consequently, the financial position, results of
operations, and cash flows may not be indicative of what would have been
reported if the Occidental Contributed Business had been a separate, stand-
alone entity or had been operated as a part of Equistar during the period
presented. Additionally, certain assets and liabilities of the Occidental
Contributed Business were retained by Occidental. The retained assets will be
leased to Equistar under terms of the agreement.
Certain information and disclosures normally included in the notes to
financial statements have been condensed or omitted pursuant to Securities and
Exchange Commission (SEC) rules and regulations, but resultant disclosures are
in accordance with generally accepted accounting principles as they apply to
interim reporting. These interim financial statements should be read in
conjunction with the Occidental Contributed Business audited financial
statements as of December 31, 1997 (1997 Financial Statements).
The accompanying financial statements as of March 31, 1998 and 1997 are
unaudited. All references made to amounts for the period then ended have been
prepared in accordance with the rules and regulations of the SEC. They include
all adjustments which are considered necessary for a fair statement of the
results of operations and financial position of the Occidental Contributed
Business for the interim period presented. Such adjustments consisted only of
normal recurring items.
Occidental provided certain corporate, general and administrative services
to the Occidental Contributed Business, including legal, financial, marketing
and executive services. Charges for these services were allocated based on the
estimated costs of specific functions performed by Occidental and affiliates
for the Occidental Contributed Business. Management believes the charges, which
amounted to $2.6 million for the three months ended March 31, 1998 and 1997,
are reasonable. Such amounts are included in selling, general and
administrative expenses.
The Occidental Contributed Business sells ethylene to affiliated businesses
of Occidental. These sales, reflected at market prices and included in the
accompanying Statement of Operations, were $49 million for the three months
ended March 31, 1998 and $73 million for the three months ended March 31, 1997.
Occidental utilizes a centralized cash management system for its operations,
including the Occidental Contributed Business. Cash distributed to or advanced
from Occidental has been reflected in invested capital in the accompanying
balance sheets. In addition, settlement of transactions with other Occidental
affiliates are recorded through invested capital.
F-58
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1998 and 1997
(Unaudited)
(2) SIGNIFICANT ACCOUNTING POLICIES--
Risks and uncertainties--
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts, generally not by material amounts. Management
believes that these estimates and assumptions provide a reasonable basis for
the fair presentation of the Occidental Contributed Business' financial
position and results of operations.
Since the Occidental Contributed Business' major products are commodities,
significant changes in the prices of chemical products could have a significant
impact on the Occidental Contributed Business' results of operations for any
particular period.
Environmental liabilities and costs--
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Reserves for estimated costs that relate to
existing conditions caused by past operations and that do not contribute to
current or future revenue generation are recorded when environmental remedial
efforts are probable and the costs can be reasonably estimated. In determining
the reserves, Occidental uses the most current information available, including
similar past experiences, available technology, regulations in effect, the
timing of remediation and cost-sharing arrangements. The environmental reserves
are based on management's estimate of the most likely cost to be incurred and
are reviewed periodically and adjusted as additional or new information becomes
available. The environmental reserves are included in other noncurrent
liabilities and amounted to $7.8 million and $8.2 million at March 31, 1998 and
1997, respectively.
Income taxes--
The Occidental Contributed Business has been included in the consolidated
U.S. federal income tax return and in certain unitary state income tax returns
of Occidental. A portion of the income tax provision for these returns is
allocated to the Occidental Contributed Business using the same method as a tax
sharing arrangement between OCHC and Occidental. The Occidental Contributed
Business also records state income tax provisions for operations required to be
reported in separate tax returns. The difference between the provision for
income taxes at the U.S. federal statutory rate and the effective tax rate is
primarily due to state income taxes. Liabilities for current and/or deferred
income taxes have been and remain the responsibility of Occidental and,
accordingly, have been included in the Balance Sheet as invested capital.
Fair value of financial instruments--
The fair value of on-balance sheet financial instruments approximates
carrying value. However, the fair value of notes payable to affiliates cannot
be practicably determined due to the related party nature of the balances.
Change in accounting principle--
Effective January 1, 1998, the Occidental Contributed Business adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of
F-59
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1998 and 1997
(Unaudited)
general purpose financial statements. The implementation of SFAS No. 130 did
not have an impact on the Occidental Contributed Business' results of
operations. The Occidental Contributed Business' comprehensive income was $2.3
million for the three months ended March 31, 1998 and comprehensive loss was
$9.3 million for the three months ended March 31, 1997.
(3) RECEIVABLES--
As of March 31, 1998 and 1997, the Occidental Contributed Business
transferred, with limited recourse, to an Occidental affiliate net domestic
trade receivables under a revolving sale program in connection with the
ultimate sale for cash of an undivided ownership interest in such receivables
by the affiliate. The net trade receivables transferred amounted to $113.7
million and $165.7 million as of March 31, 1998 and 1997, respectively. The
Occidental Contributed Business transferred the receivables to the affiliate in
a noncash transaction that was reflected as a reduction in invested capital.
Occidental retained collection responsibility with respect to the receivables
sold. An interest in newly created receivables is transferred monthly, net of
collections made from customers. Fees related to the sales of receivables under
this program, which are allocated from Occidental, were $1.6 million and $1.7
million for the three months ended March 31, 1998 and 1997, respectively and
are included in other income, net.
Under the terms of the Equistar agreement, Occidental repurchased the net
domestic trade receivables of $114.8 million of the Occidental Contributed
Business as of May 15, 1998 and contributed $100.3 million to Equistar.
Other receivables include $3.2 million and $5.1 million as of March 31, 1998
and 1997, respectively, from the equity investee.
(4) INVENTORIES--
Inventories are stated at the lower of cost or market value determined using
the first-in, first-out (FIFO) or weighted-average-cost methods. Inventories
consist of the following as of March 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Raw materials.......................................... $ 60,494 $ 53,672
Materials and supplies................................. 17,250 16,896
Work in process........................................ 9,956 8,938
Finished goods......................................... 71,720 57,908
-------- --------
$159,420 $137,414
======== ========
</TABLE>
(5) EQUITY INVESTMENT--
The Occidental Contributed Business has a fifty percent interest in PD
Glycol, a partnership which manufactures ethylene oxide and ethylene glycol
derivatives at its plant in Beaumont, Texas. The investment, which is accounted
for on the equity method, exceeded the historical underlying equity in net
assets by approximately $43 million at March 31, 1998 and $44 million at March
31, 1997. The excess is being amortized into income over the estimated total
productive life of the plant.
F-60
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1998 and 1997
(Unaudited)
(6) PROPERTY, PLANT AND EQUIPMENT--
Property additions and major renewals and improvements are capitalized at
cost. Property acquired under a capital lease has been capitalized at the
present value of future minimum lease payments. Depreciation is primarily
provided using the units-of-production method based on estimated total
productive life.
Interest costs incurred in connection with major capital expenditures are
capitalized and amortized over the lives of the related assets. Capitalized
interest is calculated based on the average borrowing rate of Occidental. The
amount of interest capitalized was $39,000 and $142,000 for the three months
ended March 31, 1998 and 1997, respectively.
Property, plant and equipment consists of the following as of March 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land and land improvements...................... $ 81,950 $ 82,164
Buildings....................................... 38,061 37,870
Machinery and equipment......................... 2,421,068 2,402,006
Property acquired under capital lease........... 350,000 350,000
Construction in progress........................ 50,263 41,364
----------- -----------
2,941,342 2,913,404
Accumulated depreciation and amortization....... (1,133,737) (1,021,989)
----------- -----------
Property, plant and equipment, net.............. $ 1,807,605 $ 1,891,415
=========== ===========
</TABLE>
Included above is $103.4 million as of March 31, 1998 and $105.2 million as
of March 31, 1997 of net property, plant and equipment that was retained by
Occidental and will be leased to Equistar under the terms of the agreement
dated May 15, 1998.
(7) OTHER ASSETS--
Other assets consist of the following as of March 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Catalyst................................................. $ 7,600 $11,896
Deferred start-up costs.................................. 6,287 7,057
Prepaid pension costs.................................... 6,493 6,660
Other.................................................... 8,305 13,860
------- -------
$28,685 $39,473
======= =======
</TABLE>
Catalyst is amortized over estimated lives ranging from 18 months to 3
years. Deferred start-up costs are amortized over a period of 20 years. Other
amortizable assets are written off to income over the estimated periods to be
benefited.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
(SOP 98-5), which requires that costs of start-up activities, including
organizational costs, be expensed as incurred. The initial application of the
statement will result in a charge to income for any costs of start-up
activities that have not yet been fully amortized. Occidental will implement
SOP 98-5 effective January 1, 1999.
F-61
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1998 and 1997
(Unaudited)
(8) ACCRUED LIABILITIES--
Accrued liabilities consist of the following as of March 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Turnaround maintenance................................... $15,362 $10,466
Property taxes and insurance............................. 9,481 9,747
Other.................................................... 9,036 17,445
------- -------
$33,879 $37,658
======= =======
</TABLE>
Maintenance turnarounds are generally performed every 2 to 5 years.
Occidental utilizes an accrual methodology under which it estimates the
projected cost of a turnaround and accrues the cost equally over the years
between turnarounds. Total accruals relating to these future major maintenance
projects were $42.3 million and $21.6 million as of March 31, 1998 and 1997,
respectively, and were included in accrued liabilities as noted above and
deferred credits and other liabilities in the accompanying Balance Sheets.
(9) NOTES PAYABLE TO AFFILIATES--
The financial statements of the Occidental Contributed Business include
several notes payable to Occidental and an affiliate. Accrued interest on these
notes is settled annually through and is included in invested capital at rates
ranging between 6 and 11 percent. Interest expense on notes payable to
affiliates was $22.8 million for the three months ended March 31, 1998 and
$23.4 million for the three months ended March 31, 1997.
Principal amounts of the notes payable to an affiliate totaling $63.9
million are due on December 31, 1998. As the amounts will be settled either
through invested capital or another note payable to the affiliate, no notes
payable to affiliates have been classified as current in the accompanying
Balance Sheets.
(10) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS--
Reference is made to Note 10 of the 1997 Financial Statements regarding
retirement plans and postretirement benefits.
(11) LEASE COMMITMENTS--
At March 31, 1998, future net minimum lease payments for capital and
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
-------- ---------
<S> <C> <C>
1998.................................................. $ 9,884 $12,086
1999.................................................. 13,179 5,986
2000.................................................. 208,286 5,339
2001.................................................. -- 4,886
2002.................................................. -- 3,765
Thereafter............................................ -- 22,535
-------- -------
Total minimum lease payments.......................... 231,349 $54,597
-------- =======
Imputed interest...................................... (26,349)
--------
Present value of net minimum lease payments........... $205,000
========
</TABLE>
Rental expense for operating leases, excluding leases with terms of one year
or less, was approximately $4 million for each of the three months ended March
31, 1998 and 1997.
F-62
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1998 and 1997
(Unaudited)
(12) COMMITMENTS AND CONTINGENCIES--
OCHC has been named as defendant or as potentially responsible party with
regard to the Occidental Contributed Business in a number of lawsuits, claims
and proceedings, including governmental proceedings under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) and
corresponding state acts. These governmental proceedings seek funding,
remediation and, in some cases, compensation for alleged property damage,
punitive damages and civil penalties, aggregating substantial amounts. OCHC is
usually one of many companies in these proceedings, and has to date been
successful in sharing response costs with other financially sound companies.
OCHC has accrued reserves with regard to the Occidental Contributed Business at
the most likely cost to be incurred in those proceedings where it is probable
that OCHC will incur remediation costs which can be reasonably estimated.
It is impossible at this time to determine the ultimate liabilities that
OCHC may incur with regard to the Occidental Contributed Business resulting
from the foregoing lawsuits, claims and proceedings. Certain of these matters
may involve substantial amounts, and if these were to be ultimately resolved
unfavorably to the full amount of their maximum potential exposure, an event
not currently anticipated, it is possible that such an event could have a
material adverse effect upon the financial position or results of operations of
the Occidental Contributed Business. However, in management's opinion, after
taking into account reserves and indemnities, it is unlikely that any of the
foregoing matters will have a material adverse effect upon the financial
position or results of operations of the Occidental Contributed Business.
Under the terms of the agreement with Equistar, Occidental has agreed to
indemnify Equistar for any present or future contingent liabilities arising
within a seven year period after May 15, 1998 which are attributable to the
Occidental Contributed Business's operations prior to May 15, 1998 in excess of
$7 million.
The Occidental Contributed Business has certain other commitments to
purchase electrical power, raw materials and other potential obligations, all
in the ordinary course of business.
(13) SUBSEQUENT EVENT--
On January 11, 1999, CITGO Petroleum Corporation (CITGO) initiated a legal
action against Occidental Chemical Corporation (OCC) in the United States
District Court for the Northern District of Oklahoma seeking compensatory and
exemplary damages in an unspecified amount. It alleges that OCC breached the
provisions of a Plant Site Right of First Refusal Agreement pertaining to the
Lake Charles plant (Right of First Refusal) dated August 31, 1983, between
CITGO and Cities Service Oil and Gas Corporation, predecessor in interest to
OCC. It is impossible at this time to determine the ultimate legal liabilities,
if any, that may arise from this lawsuit. The CITGO complaint was not filed
against Equistar and seeks only money damages from OCC. However, in
management's opinion, the lawsuit is not likely to have a material adverse
effect upon the financial position of the Occidental Contributed Business.
F-63
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
Occidental Chemical Holding Corporation:
We have audited the accompanying balance sheets of the Occidental Contributed
Business as of December 31, 1997 and 1996, and the related statements of
operations and invested capital, and cash flows for each of the three years in
the period ended December 31, 1997. The Occidental Contributed Business is the
ethylene, propylene, ethylene oxide and ethylene glycol derivatives businesses
of Occidental Chemical Holding Corporation included in its indirect
subsidiaries Oxy Petrochemicals Inc., PDG Chemical Inc. and a plant owned by
Occidental Chemical Corporation. These financial statements are the
responsibility of Occidental Chemical Holding Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Occidental Contributed
Business as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas,
July 10, 1998 (except with
respect to the matter
discussed in Note 13, as to
which the date is January
26, 1999)
F-64
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
BALANCE SHEETS
December 31, 1997 and 1996
(amounts in thousands)
<TABLE>
<CAPTION>
December 31
1997 1996
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash................................................... $ 902 $ 13
Trade receivables...................................... 17,235 13,841
Other receivables...................................... 10,517 2,263
Inventories............................................ 143,056 175,667
Prepaid expenses....................................... 10,294 12,100
---------- ----------
Total current assets................................. 182,004 203,884
EQUITY INVESTMENT........................................ 88,375 94,044
PROPERTY, PLANT AND EQUIPMENT, net....................... 1,830,446 1,913,834
OTHER ASSETS............................................. 30,636 26,539
---------- ----------
TOTAL ASSETS......................................... $2,131,461 $2,238,301
========== ==========
CURRENT LIABILITIES:
Current portion of capital lease liabilities........... -- $ 6,905
Accounts payable....................................... $ 89,309 125,129
Accrued liabilities.................................... 53,981 62,796
---------- ----------
Total current liabilities............................ 143,290 194,830
CAPITAL LEASE LIABILITIES................................ 205,000 205,000
NOTES PAYABLE TO AFFILIATES.............................. 1,222,674 1,209,269
DEFERRED CREDITS AND OTHER LIABILITIES................... 70,288 41,883
INVESTED CAPITAL......................................... 490,209 587,319
---------- ----------
TOTAL LIABILITIES AND INVESTED CAPITAL .............. $2,131,461 $2,238,301
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
STATEMENTS OF OPERATIONS AND INVESTED CAPITAL
For the years ended December 31, 1997, 1996 and 1995
(amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES AND OPERATING REVENUES........... $1,802,854 $1,671,158 $1,899,191
OPERATING COSTS AND EXPENSES:
Cost of sales............................ 1,530,521 1,506,399 1,437,155
Selling, general and administrative and
other operating expenses................ 21,666 22,212 20,397
---------- ---------- ----------
OPERATING INCOME........................... 250,667 142,547 441,639
Loss from equity investment.............. (6,052) (5,859) (5,566)
Interest expense, affiliates and other... (105,960) (119,811) (136,298)
Other expense, net....................... (6,881) (2,190) (3,549)
---------- ---------- ----------
INCOME BEFORE TAXES........................ 131,774 14,687 296,226
Provisions for income taxes.............. 50,482 8,254 111,624
---------- ---------- ----------
NET INCOME................................. 81,292 6,433 184,602
PENSION LIABILITY ADJUSTMENT............... 4,191 963 1,334
DECREASE IN INVESTED CAPITAL............... (182,593) (127,916) (142,929)
INVESTED CAPITAL, beginning of year........ 587,319 707,839 664,832
---------- ---------- ----------
INVESTED CAPITAL, end of year.............. $ 490,209 $ 587,319 $ 707,839
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
(amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income..................................... $ 81,292 $ 6,433 $184,602
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of assets...... 121,209 111,519 117,912
Loss from equity investment.................. 6,052 5,859 5,566
Other noncash charges to income.............. 14,380 8,159 2,197
Changes in operating assets and liabilities:
Decrease (increase) in receivables........... (11,648) 3,282 271
Decrease (increase) in inventories........... 32,611 (17,504) 10,673
Decrease (increase) in prepaid expenses...... 1,806 (1,421) 493
Increase (decrease) in accounts payable and
accrued liabilities......................... (23,710) 6,541 (11,223)
Other operating, net........................... (8,210) (12,621) (9,007)
-------- -------- --------
Net cash provided by operating activities........ 213,782 110,247 301,484
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................... (40,608) (40,933) (43,372)
Other investing, net........................... (383) (643) (6,549)
-------- -------- --------
Net cash used by investing activities............ (40,991) (41,576) (49,921)
CASH FLOW FROM FINANCING ACTIVITIES:
Principal payments on capital lease
liabilities................................... (6,905) (27,619) (27,619)
Increase (decrease) in notes payable to
affiliates.................................... 13,405 85,820 (82,739)
Decrease in invested capital................... (178,402) (126,953) (141,595)
-------- -------- --------
Net cash used by financing activities............ (171,902) (68,752) (251,953)
-------- -------- --------
Change in cash................................... 889 (81) (390)
Cash--beginning of year.......................... 13 94 484
-------- -------- --------
Cash--end of year................................ $ 902 $ 13 $ 94
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(1) BASIS OF PRESENTATION AND DESCRIPTION OF THE CONTRIBUTED BUSINESS--
On May 15, 1998, Occidental Petroleum Corporation (Occidental) signed an
agreement with Lyondell Petrochemical Company and Millennium Chemicals Inc. to
effect the proposed contribution of its ethylene, propylene, ethylene oxide and
ethylene glycol derivatives businesses (collectively, the Occidental
Contributed Business) to a joint venture limited partnership called Equistar
Chemicals, LP (Equistar) in return for a 29.5% interest in Equistar, receipt of
approximately $420 million in cash and the assumption by Equistar of
approximately $205 million of Occidental capital lease liabilities.
Under terms of the agreement, on May 15, 1998, Occidental contributed to
Equistar substantially all of the net assets and operations of the Occidental
Contributed Business. The accompanying financial statements include the results
of operations, assets and liabilities of the Occidental Contributed Business
represented by Oxy Petrochemicals Inc., PDG Chemical Inc. and a plant owned by
Occidental Chemical Corporation, which are all indirect subsidiaries of
Occidental Chemical Holding Corporation (OCHC). OCHC is an indirect subsidiary
of Occidental. These financial statements include only the historical results
of operations and net assets that are directly related to the Occidental
Contributed Business. Consequently, the financial position, results of
operations, and cash flows may not be indicative of what would have been
reported if the Occidental Contributed Business had been a separate, stand-
alone entity or had been operated as a part of Equistar during the periods
presented. Additionally, certain assets and liabilities of the Occidental
Contributed Business were retained by Occidental. The retained assets will be
leased to Equistar under terms of the agreement.
Occidental provided certain corporate, general and administrative services
to the Occidental Contributed Business, including legal, financial, marketing
and executive services. Charges for these services were allocated based on the
estimated costs of specific functions performed by Occidental and affiliates
for the Occidental Contributed Business. Management believes the charges, which
amounted to $10.4 million in each of the years 1997, 1996 and 1995, are
reasonable. Such amounts are included in selling, general and administrative
expenses.
The Occidental Contributed Business sells ethylene to affiliated businesses
of Occidental. These sales, reflected at market prices and included in the
accompanying Statements of Operations, were $242 million, $227 million and $474
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Occidental utilizes a centralized cash management system for its operations,
including the Occidental Contributed Business. Cash distributed to or advanced
from Occidental has been reflected in invested capital in the accompanying
balance sheets. In addition, settlement of transactions with other Occidental
affiliates are recorded through invested capital.
(2) SIGNIFICANT ACCOUNTING POLICIES--
Risks and uncertainties--
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial
F-68
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
statements. Accordingly, upon settlement, actual results may differ from
estimated amounts, generally not by material amounts. Management believes that
these estimates and assumptions provide a reasonable basis for the fair
presentation of the Occidental Contributed Business' financial position and
results of operations.
Since the Occidental Contributed Business' major products are commodities,
significant changes in the prices of chemical products could have a significant
impact on the Occidental Contributed Business' results of operations for any
particular period.
Environmental liabilities and costs--
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Reserves for estimated costs that relate to
existing conditions caused by past operations and that do not contribute to
current or future revenue generation are recorded when environmental remedial
efforts are probable and the costs can be reasonably estimated. In determining
the reserves, Occidental uses the most current information available, including
similar past experiences, available technology, regulations in effect, the
timing of remediation and cost-sharing arrangements. The environmental reserves
are based on management's estimate of the most likely cost to be incurred and
are reviewed periodically and adjusted as additional or new information becomes
available. The environmental reserves are included in other noncurrent
liabilities and amounted to $7.9 million and $8.2 million at December 31, 1997
and 1996, respectively.
Income taxes--
The Occidental Contributed Business has been included in the consolidated
U.S. federal income tax return and in certain unitary state income tax returns
of Occidental. A portion of the income tax provision for these returns is
allocated to the Occidental Contributed Business using the same method as a tax
sharing arrangement between OCHC and Occidental. The Occidental Contributed
Business also records state income tax provisions for operations required to be
reported in separate tax returns. The difference between the provision for
income taxes at the U.S. federal statutory rate and the effective tax rate is
primarily due to state income taxes. Liabilities for current and/or deferred
income taxes have been and remain the responsibility of Occidental and,
accordingly, have been included in the Balance Sheets as invested capital.
Fair value of financial instruments--
The fair value of on-balance sheet financial instruments approximates
carrying value. However, the fair value of notes payable to affiliates cannot
be practicably determined due to the related party nature of the balances.
Change in accounting principle--
Effective January 1, 1998, the Occidental Contributed Business adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The implementation of SFAS No. 130 did
not have an impact on the Occidental Contributed Business' results of
operations. The Occidental Contributed Business' comprehensive income was $85.4
million for 1997, $5.9 million for 1996 and $185.7 million for 1995.
F-69
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
(3) RECEIVABLES--
As of December 31, 1997, 1996, and 1995, the Occidental Contributed Business
transferred, with limited recourse, to an Occidental affiliate net domestic
trade receivables under a revolving sale program in connection with the
ultimate sale for cash of an undivided ownership interest in such receivables
by the affiliate. The net trade receivables transferred amounted to $136.4
million and $164.3 million as of December 31, 1997 and 1996, respectively. The
Occidental Contributed Business transferred the receivables to the affiliate to
a noncash transaction that was reflected as a reduction in invested capital.
Occidental retained collection responsibility with respect to the receivables
sold. An interest in newly created receivables is transferred monthly, net of
collections made from customers. Fees related to the sales of receivables under
this program, which are allocated from Occidental, were $8.4 million, $6.8
million and $8.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively, and are included in other expense, net.
Under the terms of the Equistar agreement, Occidental repurchased net
domestic trade receivables of $114.8 million of the Occidental Contributed
Business as of May 15, 1998 and contributed $100.3 million to Equistar.
Other receivables include $3.9 million and $1.7 million as of December 31,
1997 and 1996, respectively, from the equity investee.
(4) INVENTORIES--
Inventories are stated at the lower of cost or market value determined using
the first-in, first-out (FIFO) or weighted-average-cost methods. Inventories
consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials........................................ $ 55,954 $ 91,824
Materials and supplies............................... 17,666 16,667
Work in process...................................... 9,729 7,635
Finished goods....................................... 59,707 59,541
-------- --------
$143,056 $175,667
======== ========
</TABLE>
(5) EQUITY INVESTMENT--
The Occidental Contributed Business has a fifty percent interest in PD
Glycol, a partnership which manufactures ethylene oxide and ethylene glycol
derivatives at its plant in Beaumont, Texas. The investment, which is accounted
for on the equity method, exceeded the historical underlying equity in net
assets by approximately $43 million at December 31, 1997 and $44 million at
December 31, 1996. The excess is being amortized into income over the estimated
total productive life of the plant.
(6) PROPERTY, PLANT AND EQUIPMENT--
Property additions and major renewals and improvements are capitalized at
cost. Property acquired under a capital lease has been capitalized at the
present value of future minimum lease payments. Depreciation is primarily
provided using the units-of-production method based on estimated total
productive life.
F-70
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
Interest costs incurred in connection with major capital expenditures are
capitalized and amortized over the lives of the related assets. Capitalized
interest is calculated based on the average borrowing rate of Occidental. The
amount of interest capitalized was $637,000 and $639,000 for the years ended
December 31, 1997 and 1996, respectively.
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Land and land improvements........................... $ 81,752 $ 82,164
Buildings............................................ 37,906 37,870
Machinery and equipment.............................. 2,420,446 2,400,202
Property acquired under capital lease................ 350,000 350,000
Construction in progress............................. 46,273 39,561
----------- ----------
2,936,377 2,909,797
Accumulated depreciation and amortization............ (1,105,931) (995,963)
----------- ----------
Property, plant and equipment, net................... $ 1,830,446 $1,913,834
=========== ==========
</TABLE>
Included above is $103.9 million and $106.4 million as of December 31, 1997
and 1996, respectively, of net property, plant and equipment that was retained
by Occidental and will be leased to Equistar under the terms of the agreement
dated May 15, 1998.
(7) OTHER ASSETS--
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Catalyst.............................................. $10,502 $10,923
Deferred start-up costs............................... 6,479 7,249
Prepaid pension costs................................. 6,558 --
Other................................................. 7,097 8,367
------- -------
$30,636 $26,539
======= =======
</TABLE>
Catalyst is amortized over estimated lives ranging from 18 months to 3
years. Deferred start-up costs are amortized over a period of 20 years. Other
amortizable assets are written off to income over the estimated periods to be
benefited.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
(SOP 98-5), which requires that costs of start-up activities, including
organizational costs, be expensed as incurred. The initial application of the
statement will result in a charge to income for any costs of start-up
activities that have not yet been fully amortized. Occidental will implement
SOP 98-5 effective January 1, 1999.
F-71
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
(8) ACCRUED LIABILITIES--
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Turnaround maintenance................................ $15,356 $17,557
Property taxes and insurance.......................... 25,396 24,206
Capital and purchase reserves......................... 4,319 5,517
Other................................................. 8,910 15,516
------- -------
$53,981 $62,796
======= =======
</TABLE>
Maintenance turnarounds are generally performed every 2 to 5 years.
Occidental utilizes an accrual methodology under which it estimates the project
cost of a turnaround and accrues the cost equally over the years between
turnarounds. Total accruals relating to these future major maintenance projects
were $41.2 million and $22.1 million as of December 31, 1997 and 1996,
respectively, and were included in accrued liabilities as noted above and
deferred credits and other liabilities in the accompanying Balance Sheets.
(9) NOTES PAYABLE TO AFFILIATES--
The financial statements of the Occidental Contributed Business include
several notes payable to Occidental and an affiliate. Accrued interest on these
notes is settled annually through and is included in invested capital at rates
ranging between 6 and 11 percent. Interest expense on notes payable to
affiliates was $93.4 million, $105.8 million and $137.1 million for the years
ended December 31, 1997, 1996 and 1995.
Principal amounts of the notes payable to an affiliate totaling $63.9
million are due on December 31, 1998. As the amounts will be settled either
through invested capital or another note payable to the affiliate, no notes
payable to affiliates have been classified as current in the accompanying
Balance Sheets.
(10) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS--
The Occidental Contributed Business participates in various defined
contribution retirement plans sponsored by Occidental for its salaried,
domestic union and nonunion hourly employees that provide for periodic
contributions by the Occidental Contributed Business based on plan-specific
criteria, such as base pay, age level, and/or employee contributions. The
Occidental Contributed Business contributed and expensed approximately $6
million under the provisions of these plans in each of the years 1997, 1996 and
1995.
Occidental provides medical and dental benefits and life insurance coverage
for certain active, retired and disabled employees and their eligible
dependents. Beginning in 1993, certain salaried participants pay for all
medical cost increases in excess of increases in the Consumer Price Index
(CPI). The benefits generally are funded by Occidental as the benefits are paid
during the year. The cost of providing these benefits is based on claims filed
and insurance premiums paid for the period.
The Occidental Contributed Business' retirement and postretirement defined
benefit plans are accrued based on various assumptions and discount rates, as
described below. The actuarial assumptions used could change in the near term
as a result of changes in expected future trends and other factors which,
depending on the nature of the changes, could cause increases or decreases in
the liabilities accrued.
Retirement plans--
Pension costs for the Occidental Contributed Business' defined benefit
pension plans, determined by independent actuarial valuations, are funded by
payments to trust funds, which are administered by independent
F-72
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
trustees. The components of net pension cost for employees of the Occidental
Contributed Business for the years ended December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service cost--benefits earned during the period..... $ 135 $ 140 $ 121
Interest cost on projected benefit obligation....... 3,154 3,037 2,647
Actual return on plan assets........................ (8,243) (5,116) (5,066)
Net amortization and deferral....................... 5,889 3,251 3,746
------- ------- -------
Net pension cost.................................. $ 935 $ 1,312 $ 1,448
======= ======= =======
</TABLE>
In 1997 and 1996, the Occidental Contributed Business recorded an adjustment
to invested capital of $4.2 million and $1.0 million, respectively, to reflect
the net-of-tax difference between the additional liability required under
pension accounting provisions and the corresponding intangible asset.
The following table sets forth the defined benefit plans funded status and
amounts recognized in the Occidental Contributed Business Balance Sheets at
December 31 (in thousands):
<TABLE>
<CAPTION>
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
---------------- ---------------
1997 1996 1997 1996
------- ------- ------ -------
<S> <C> <C> <C> <C>
Present value of the estimated pension
benefits to be paid in the future:
Vested benefits........................... $33,309 $ -- $5,109 $36,583
Nonvested benefits........................ 5,459 -- 334 6,096
------- ------- ------ -------
Total projected benefit obligations......... 38,768 -- 5,443 42,679
Plan assets at fair value................... 41,769 -- 5,067 37,635
------- ------- ------ -------
Projected benefit obligation in excess of
(less than) plan assets.................... $(3,001) $ -- $ 376 $ 5,044
======= ======= ====== =======
Projected benefit obligation in excess of
(less than) plan assets.................... $(3,001) $ -- $ 376 $ 5,044
Unrecognized prior service cost............. -- -- (489) (767)
Unrecognized net loss....................... (2,324) -- (519) (7,098)
Additional minimum liability(a)............. -- -- 1,008 7,865
------- ------- ------ -------
Pension liability (asset)................. $(5,325) $ -- $ 376 $ 5,044
======= ======= ====== =======
</TABLE>
- --------
(a) A related amount up to the limit allowable under SFAS No. 87 "Employers'
Accounting for Pensions" has been included in other assets. Amounts
exceeding such limits have been charged to invested capital.
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.5 percent in 1997 and 1996. The rate of
increase in future compensation levels used in determining the actuarial
present value of the projected benefit obligations was between 4.5 and 5.5
percent in 1997 and 1996. The expected long-term rate of return on assets was 8
percent in 1997 and 1996.
Postretirement benefits--
To reflect the Occidental Contributed Business' participation in the
Occidental plan, the net periodic postretirement benefit costs and the
postretirement benefit obligations are based on an allocation of the Occidental
actuarial study using participant counts and demographic information for the
Occidental Contributed Business for each of the years presented in the tables
below.
The postretirement benefit obligation as of December 31, 1997 was determined
by application of the terms of medical and dental benefits and life insurance
coverage, including the effect of established maximums on
F-73
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
covered costs, together with relevant actuarial assumptions and health care
cost trend rates projected at a CPI increase of 3 percent in 1997 (except for
union employees). For union employees, the health care cost trend rates were
projected at annual rates ranging ratably from 8.5 percent in 1997 to 5 percent
through the year 2004 and level thereafter. The effect of a one percent annual
increase in these assumed cost trend rates would increase the accumulated
postretirement benefit obligation by approximately $800,000 and the annual
service and interest costs by approximately $100,000 in 1997. The weighted
average discount rate used in determining the accumulated postretirement
benefit obligation as of December 31, 1997 was 7.5 percent. The plans are
unfunded.
The following table sets forth the postretirement plans' combined status,
reconciled with the amounts included in the accompanying Balance Sheets in
deferred credits and other liabilities at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees...................................................... $ 5,751 $ 6,377
Fully eligible active plan participants....................... 4,970 5,012
Other active plan participants................................ 7,658 7,516
------- -------
Total accumulated postretirement benefit obligation............. 18,379 18,905
Unrecognized net gain (loss).................................. 1,725 (202)
------- -------
Allocated accrued postretirement benefit cost............... $20,104 $18,703
======= =======
</TABLE>
Allocated net periodic postretirement benefit cost for the employees of the
Occidental Contributed Business for the years ended December 31, 1997, 1996 and
1995 included the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost-benefits attributed to service during the
period................................................... $ 741 $ 697 $ 678
Interest cost on accumulated postretirement benefit
obligation............................................... 1,391 1,422 1,396
Net amortization and deferral............................. -- -- 39
------ ------ ------
Allocated net periodic postretirement benefit cost...... $2,132 $2,119 $2,113
====== ====== ======
</TABLE>
Under terms of the Equistar agreement, Occidental will retain liabilities
related to retirees as of May 15, 1998.
(11) LEASE COMMITMENTS--
At December 31, 1997, future net minimum lease payments for capital and
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
-------- ---------
<S> <C> <C>
1998........................................................ $ 13,179 $16,115
1999........................................................ 13,179 5,986
2000........................................................ 208,286 5,339
2001........................................................ -- 4,886
2002........................................................ -- 3,765
Thereafter.................................................. -- 22,535
-------- -------
Total minimum lease payments................................ 234,644 $58,626
=======
Imputed interest............................................ (29,644)
--------
Present value of net minimum lease payments................. $205,000
========
</TABLE>
F-74
<PAGE>
OCCIDENTAL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
Rental expense for operating leases, excluding leases with terms of one year
or less, was approximately $17 million, $17 million and $18 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
(12) COMMITMENTS AND CONTINGENCIES--
OCHC has been named as defendant or as potentially responsible party with
regard to the Occidental Contributed Business in a number of lawsuits, claims
and proceedings, including governmental proceedings under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) and
corresponding state acts. These governmental proceedings seek funding,
remediation and, in some cases, compensation for alleged property damage,
punitive damages and civil penalties, aggregating substantial amounts. OCHC is
usually one of many companies in these proceedings, and has to date been
successful in sharing response costs with other financially sound companies.
OCHC has accrued reserves with regard to the Occidental Contributed Business at
the most likely cost to be incurred in those proceedings where it is probable
that OCHC will incur remediation costs which can be reasonably estimated.
It is impossible at this time to determine the ultimate liabilities that
OCHC may incur with regard to the Occidental Contributed Business resulting
from the foregoing lawsuits, claims and proceedings. Certain of these matters
may involve substantial amounts, and if these were to be ultimately resolved
unfavorably to the full amount of their maximum potential exposure, an event
not currently anticipated, it is possible that such an event could have a
material adverse effect upon the financial position or results of operations of
the Occidental Contributed Business. However, in management's opinion, after
taking into account reserves and indemnities, it is unlikely that any of the
foregoing matters will have a material adverse effect upon the financial
position or results of operations of the Occidental Contributed Business.
Under the terms of the agreement with Equistar, Occidental has agreed to
indemnify Equistar for any present or future contingent liabilities arising
within a seven year period after May 15, 1998 which are attributable to the
Occidental Contributed Business's operations prior to May 15, 1998 in excess of
$7 million.
The Occidental Contributed Business has certain other commitments to
purchase electrical power, raw materials and other potential obligations, all
in the ordinary course of business.
(13) SUBSEQUENT EVENT--
On January 11, 1999, CITGO Petroleum Corporation (CITGO) initiated a legal
action against Occidental Chemical Corporation (OCC) in the United States
District Court for the Northern District of Oklahoma seeking compensatory and
exemplary damages in an unspecified amount. It alleges that OCC breached the
provisions of a Plant Site Right of First Refusal Agreement pertaining to the
Lake Charles plant dated August 31, 1983, between CITGO and Cities Service Oil
and Gas Corporation, predecessor in interest to OCC. It is impossible at this
time to determine any ultimate legal liabilities that may arise from this
lawsuit. The CITGO complaint was not filed against Equistar and seeks only
money damages from OCC. In management's opinion, the lawsuit is not likely to
have a material adverse effect upon the financial position of the Occidental
Contributed Business.
F-75
<PAGE>
- -------------------------------------------------------------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you
with different information.
We are not offering to exchange notes in any jurisdiction where the offer
is not permitted.
We do not claim the accuracy of the information in this prospectus as of
any date other than the date stated on the cover.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
<TABLE>
<S> <C>
Prospectus Summary........................................................ 2
Risk Factors.............................................................. 8
Cautionary Statements..................................................... 12
Forward-Looking Information............................................... 13
Use of Proceeds........................................................... 13
Capitalization............................................................ 14
The Partners of Equistar.................................................. 15
Selected Pro Forma and Historical Financial and Operating Data of
Equistar................................................................. 16
Selected Historical Financial and Operating Data of the Lyondell
Contributed Business..................................................... 18
Selected Historical Financial and Operating Data of the Millennium
Contributed Business..................................................... 19
Equistar Unaudited Pro Forma Income Statement Data for the Year Ended
December 31, 1998........................................................ 21
Equistar Unaudited Pro Forma Income Statement Data for the Three Months
Ended March 31, 1999..................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Disclosure of Market Risk................................................. 41
Description of Equistar's Business........................................ 42
Management................................................................ 56
Compensation.............................................................. 59
Ownership................................................................. 65
Description of the Partnership Agreement.................................. 67
Description of the Parent Agreement....................................... 76
Related Transactions...................................................... 80
The Exchange Offers....................................................... 85
Description of the New Notes.............................................. 95
Federal Income Tax Considerations......................................... 103
The Exchange and Registration Rights Agreement............................ 103
Book-Entry; Delivery and Form............................................. 105
Summary Description of Other Indebtedness of Equistar..................... 107
Plan of Distribution...................................................... 112
Legal Matters............................................................. 113
Experts................................................................... 113
Available Information..................................................... 114
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PROSPECTUS
Equistar Chemicals, LP
Equistar Funding Corporation
$900,000,000
Offers to Exchange
ALL OUTSTANDING
8 1/2% Notes due 2004
8 3/4% Notes due 2009
for
REGISTERED
8 1/2% Notes due 2004
8 3/4% Notes due 2009
- -------------------------------------------------------------------------------
<PAGE>
PART II
Information Not Required in Prospectus
ITEM 20. Indemnification of Directors and Officers
Equistar
The partnership governance committee has provided for the indemnification of
Equistar's executive officers. Executives are entitled to indemnification with
respect to all matters to which Section 145 of the General Corporation Law of
the State of Delaware may relate, as if Section 145 were applicable to a
partnership. The right to indemnification and payment of expenses incurred in
defending a proceeding in advance of its final disposition is not exclusive of
any other right that the executives may have or hereafter acquire under any
statute, any agreement or otherwise, both as to action in that executive's
official capacity and as to action in any other capacity by holding office. The
indemnification right continues after the executive ceases to serve as an
Equistar officer or to serve another entity at the request of Equistar.
Equistar Funding
The board of directors of Equistar Funding has provided for indemnification
of Equistar Funding's officers, directors, employees and agents to the extent
permitted by the General Corporation Law of Delaware.
General Corporation Law of Delaware
Section 145 of the General Corporation Law of the State of Delaware provides
as follows:
(a) A corporation shall have power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the
person in connection with such action, suit or proceeding if the person
acted in good faith and in a manner the person reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe
the person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the person's conduct was
unlawful.
(b) A corporation shall have power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in
a manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person
is fairly and
II-1
<PAGE>
reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the present or former director, officer, employee or agent is proper in
the circumstances because the person has met the applicable standard of
conduct set forth in subsections (a) and (b) of this section. Such
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) by a committee of such directors
designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so
direct, by independent legal counsel in a written opinion, or (4) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative, or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in this
section. Such expenses (including attorneys' fees) incurred by former
directors and officers and other employees and agents may be so paid upon
such terms and conditions, if any, as the corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action
in such person's official capacity and as to action in another capacity
while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not
the corporation would have the power to indemnify such person against such
liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers,
and employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is or was
serving at the request of such constituent corporation as director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to an employee benefit
plan; and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee or agent with respect to an employee benefit
plan, its
II-2
<PAGE>
participants or beneficiaries; and a person who acted in good faith and in
a manner such person reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any bylaw, agreement,
vote of stockholders or disinterested directors, or otherwise. The Court of
Chancery may summarily determine a corporation's obligation to advance
expenses (including attorneys' fees).
Equistar and Equistar Funding may elect to enter into individual
indemnification agreements with each of its executive officers and with other
persons as the partnership governance committee may designate.
In addition, Equistar may elect to maintain liability insurance to protect
itself and any executive officer of Equistar or another partnership,
corporation, joint venture, trust or other enterprise, including Equistar
Funding against any expense, liability or loss, whether or not Equistar would
have the power to indemnify that person against any expense, liability or loss
under the laws of the State of Delaware.
ITEM 21. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Exhibit
<C> <S>
+3.1 Certificate of Limited Partnership of Equistar Chemicals, LP dated
as of October 17, 1997
+3.2 Certificates of Amendment to the Certificate of Limited
Partnership of Equistar Chemicals, LP dated as of May 15, 1998
+3.3 Amended and Restated Limited Partnership Agreement of Equistar
Chemicals, LP dated as of May 15, 1998, as amended
+3.3(a) First Amendment to Amended and Restated Limited Partnership
Agreement of Equistar Chemicals, LP dated as of June 30, 1998
+3.4 Certificate of Incorporation of Equistar Funding Corporation dated
as of January 22, 1999
+3.5 By-Laws of Equistar Funding Corporation dated as of January 22,
1999
+4.1 Exchange and Registration Rights Agreement among Equistar
Chemicals, LP, Equistar Funding Corporation, Chase Securities
Inc., for themselves and the other Initial Purchasers (except
NationsBanc Montgomery Securities LLC), and NationsBanc Montgomery
Securities LLC, for themselves and the other Initial Purchasers
(except Chase Securities Inc.), dated as of February 9, 1999
+4.2 Indenture among Equistar Chemicals, LP, Equistar Funding
Corporation and The Bank of New York, as Trustee, dated as of
January 15, 1999
+4.2(a) First Supplemental Indenture dated as of February 16, 1999, among
Equistar Chemicals, LP, Equistar Funding Corporation and The Bank
of New York, Trustee
+4.2(b) Form of Note (attached as Exhibit A to the First Supplemental
Indenture dated as of February 16, 1999 among Equistar Chemicals,
LP, Equistar Funding Corporation and The Bank of New York,
Trustee)
*4.2(c) Form of Second Supplemental Indenture among Equistar Chemicals,
LP, Equistar Funding Corporation and The Bank of New York, as
Trustee
*4.2(d) Form of Note (attached as Exhibit A to the Form of Second
Supplemental Indenture among Equistar Chemicals, LP, Equistar
Funding Corporation and The Bank of New York, as Trustee, filed
herewith as Exhibit 4.2(c))
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
+4.3 $1.25 billion Revolving Credit Agreement among Equistar Chemicals,
LP, as Borrower, Millennium America Inc., as Guarantor, and the
Lenders party thereto dated November 25, 1997
+4.3(a) Amended and Restated Credit Agreement dated as of November 25, 1997,
as amended and restated February 5, 1999, among Equistar Chemicals,
LP, as Borrower, Millennium America Inc., as Guarantor, and the
Lenders party thereto
+4.4 Indenture between Lyondell Petrochemical Company and Texas Commerce
Bank National Association, as Trustee, dated as of May 31, 1989
+4.4(a) First Supplemental Indenture dated as of May 31, 1989, between
Lyondell Petrochemical Company and Texas Commerce Bank National
Association, Trustee, to the Indenture dated as of May 31, 1989
+4.4(b) Second Supplemental Indenture dated as of December 1, 1997, among
Lyondell Petrochemical Company, Equistar Chemicals, LP and Texas
Commerce Bank National Association, Trustee, to the Indenture dated
as of May 31, 1989
+4.5 Indenture between Lyondell Petrochemical Company and Continental
Bank, National Association, as Trustee, dated as of March 10, 1992
+4.5(a) First Supplemental Indenture dated as of March 10, 1992, between
Lyondell Petrochemical Company and Continental Bank, National
Association, as Trustee, to the Indenture dated as of March 10, 1992
+4.5(b) Second Supplemental Indenture dated as of December 1, 1997, among
Lyondell Petrochemical Company, Equistar Chemicals, LP and First
Trust National Association, Trustee, to the Indenture dated as of
March 10, 1992
+4.6 Indenture between Lyondell Petrochemical Company and Texas Commerce
Bank National Association, as Trustee, dated as of January 29, 1996
+4.6(a) First Supplemental Indenture dated as of February 15, 1996, between
Lyondell Petrochemical Company and Texas Commerce Bank National
Association, Trustee, to the Indenture dated as of January 29, 1996
+4.6(b) Second Supplemental Indenture dated as of December 1, 1997, among
Lyondell Petrochemical Company, Equistar Chemicals, LP and Texas
Commerce Bank National Association, Trustee, to the Indenture dated
as of January 29, 1996
Equistar is a party to several debt instruments under which the total amount of
securities authorized does not exceed 10% of the total assets of Equistar and
its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of
Item 601(b) of Registration S-K, Equistar agrees to furnish a copy of such
instruments to the Commission upon request.
*5 Exhibit 5 Opinion of Baker & Botts, L.L.P. with respect to the
legality of the new notes
EXECUTIVE COMPENSATION:
+10.1 Form of Severance Agreement between Lyondell Petrochemical Company
and Former Lyondell Executives
+10.2 Form of Severance Agreement between Millennium Petrochemicals Inc.
and Former Millennium Executives
*10.3 Equistar Chemicals, LP Bonus Plan
*10.4 Equistar Chemicals, LP Supplemental Executive Retirement Plan
*10.5 Equistar Chemicals, LP Long-Term Incentive Plan
+10.6 Summary Description of Equistar Chemicals, LP Executive
Supplementary Savings Plan
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
+10.7 Summary Description of Equistar Chemicals, LP Executive Medical
Plan
+10.8 Summary Description of Equistar Chemicals, LP Salary Deferral Plan
+10.9 Summary Description of Equistar Chemicals, LP Executive Disability
Plan
+10.10 Summary Description of Equistar Chemicals, LP Executive Life
Insurance Plan
OTHER MATERIAL CONTRACTS:
+10.11 Asset Contribution Agreement among Lyondell Chemical Company,
Lyondell Petrochemical LP and Equistar Chemicals, LP dated as of
December 1, 1997
+10.11(a) First Amendment dated as of May 15, 1998, to the Asset Contribution
Agreement among Lyondell Chemicals Company, Lyondell Petrochemicals
LP and Equistar Chemicals, LP dated as of December 1, 1997
+10.12 Asset Contribution Agreement among Millennium Petrochemicals Inc.,
Millennium LP and Equistar Chemicals, LP dated as of December 1,
1997
+10.12(a) First Amendment dated as of May 15, 1998, to the Asset Contribution
Agreement among Millennium Petrochemicals Inc., Millennium LP and
Equistar Chemicals, LP dated as of December 1, 1997
+10.13 Master Transaction Agreement among Equistar Chemicals, LP,
Occidental Petroleum Corporation, Lyondell Chemical Company and
Millennium Chemicals Inc. dated as of May 15, 1998
+10.14 Agreement and Plan of Merger and Asset Contribution among
Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner
2, Inc., Oxy Petrochemicals Inc., PDG Chemical Inc. and Equistar
Chemicals, LP dated as of May 15, 1998
+10.15 Amended and Restated Parent Agreement among Occidental Chemical
Corporation, Oxy CH Corporation, Occidental Petroleum Corporation,
Lyondell Petrochemical Company, Millennium Chemicals Inc. and
Equistar Chemicals, LP dated as of May 15, 1998
+10.15(a) First Amendment dated as of June 30, 1998, to the Amended and
Restated Parent Agreement among Occidental Chemical Corporation,
Oxy CH Corporation, Occidental Petroleum Corporation, Lyondell
Petrochemical Company, Millennium Chemicals Inc. and Equistar
Chemicals, LP dated as of May 15, 1998
+10.15(b) Assignment and Assumption Agreement with respect to the Amended and
Restated Parent Agreement executed as of June 19, 1998
10.16 Ethylene Sales Agreement between Equistar Chemicals, LP and
Occidental Chemical Corporation dated as of May 15, 1998
11 Statement Concerning Computation of Ratios
+21 Subsidiaries of Equistar Chemicals, LP
23.1 Consent of Arthur Andersen LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Baker & Botts, L.L.P. (included in Exhibit 5 Opinion)
+24.1 Power of Attorney for Equistar Chemicals, LP
+24.2 Power of Attorney for Equistar Funding Corporation
+24.3 Power of Attorney for Lyondell Petrochemical GP Inc.
+24.4 Power of Attorney for Millennium Petrochemicals Inc.
+24.5 Power of Attorney for Occidental Petrochem Partner GP, Inc.
24.6 Power of Attorney for Equistar Chemicals, LP Partnership Governance
Committee
+25.1 T-1 Statement of Eligibility of Trustee for the 8 1/2% notes
+25.2 T-1 Statement of Eligibility of Trustee for the 8 3/4% notes
27 Financial Data Schedule
99.1 Form of Letter to Clients for Tender of Notes
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
99.2 Form of Letter to The Depository Trust Company Participants for Tender of Notes
99.3 Form of Notice of Guaranteed Delivery
99.4 Form of Transmittal Letter for Tender of Notes
</TABLE>
- --------
+ Previously filed.
* To be filed by amendment.
ITEM 22. Undertakings
1. The undersigned registrant hereby undertakes
. to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to
--include any prospectus required by section 10(a)(3) of the
Securities Act of 1933
--include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to information in the registration statement
--reflect in the prospectus any facts or events arising after the
effective date of the registration statement or its most recent post-
effective amendment which, individually or in the aggregate,
represent a fundamental change in the information shown in the
registration statement
Any increase or decrease in volume of securities offered if the total
dollar value of securities offered would not exceed that which was
registered and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus
filed with the SEC under Rule 424(b) of the Securities Act if, in the
aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price stated in the
"Calculation of Registration Fee" table in the effective registration
statement
. that, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of securities at that time shall be deemed
to be the initial bona fide offering
. to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering
2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
3. The undersigned registrant hereby undertakes
. to respond to requests for information that is incorporated by
reference into the prospectus under items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of a request, and to send
the incorporated documents by first-class mail or other equally
prompt means. This undertaking includes information contained in
documents filed after the effective date of the registration
statement through the date of responding to the request
4. The undersigned registrant hereby undertakes to supply by means of a
posteffective amendment all information concerning a transaction, and
the company being acquired therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<PAGE>
SIGNATURES
Under the requirements of the Securities Act of 1933, the registrants have
duly caused this Registration Statement or amendment thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on June 9, 1999.
EQUISTAR CHEMICALS, LP, by its General
Partner
LYONDELL PETROCHEMICAL G.P. INC.
By: /s/ Jeffrey R. Pendergraft
--------------------------------------
Name: Jeffrey R. Pendergraft
------------------------------------
Title: Executive Vice President
------------------------------------
Under the requirements of the Securities Act of 1933, this Registration
Statement or amendment thereto has been signed by the following persons, in the
capacities indicated on June 9, 1999.
Name Title
President and Chief Executive
* Officer and Director
- -------------------------------------
Name: Dan F. Smith
Executive Vice President and
/s/ Jeffrey R. Pendergraft Director
- -------------------------------------
Name: Jeffrey R. Pendergraft
Executive Vice President and
* Director
- -------------------------------------
Name: T. Kevin DeNicola
/s/ Jeffrey R. Pendergraft
*By:_________________________________
(Jeffrey R. Pendergraft, as
Attorney-in-fact)
II-7
<PAGE>
SIGNATURES
Under the requirements of the Securities Act of 1933, the registrants have
duly caused this Registration Statement or amendment thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on June 9, 1999.
EQUISTAR CHEMICALS, LP, by its General
Partner
MILLENNIUM PETROCHEMICALS GP LLC
By:Millennium Petrochemicals Inc.
By: /s/ C. William Carmean
---------------------------------
Name: C. William Carmean
---------------------------------
Title: Vice President--Legal
---------------------------------
Under the requirements of the Securities Act of 1933, this Registration
Statement or amendment thereto has been signed by the following persons, in the
capacities indicated on June 9, 1999.
Name Title
* Director
- -------------------------------------
William M. Landuyt
* Director
- -------------------------------------
George H. Hempstead, III
* Director, President and Chief
- ------------------------------------- Executive Officer
Peter P. Hanik
* Vice President, Principal Accounting
_____________________________________ Officer and Principal Financial
Charles A. Daly Officer
*By: /s/ C. William Carmean
---------------------------------
(C. William Carmean, as Attorney-in-
fact)
II-8
<PAGE>
SIGNATURES
Under the requirements of the Securities Act of 1933, the registrants have
duly caused this Registration Statement or amendment thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on June 9, 1999.
EQUISTAR CHEMICALS, LP, by its General
Partner
OCCIDENTAL PETROCHEM PARTNER GP, INC.
By: /s/ J. R. Havert
--------------------------------------
Name: J. R. Havert
------------------------------------
Title: Assistant Treasurer
------------------------------------
Under the requirements of the Securities Act of 1933, this Registration
Statement or amendment thereto has been signed by the following persons, in the
capacities indicated on June 9, 1999.
Name Title
* Executive Vice President, Chief
- ------------------------------------- Financial Officer and Director
Richard A. Lorraine (Principal Accounting Officer)
* President and Director
-------------------------------------
J. Roger Hirl
* Secretary, Senior Vice President and
- ------------------------------------- Director
Keith McDole
*By:
/s/ Scott A. King
-----------------------------------
(Scott A. King, as Attorney-in-fact)
II-9
<PAGE>
SIGNATURES
Under the requirements of the Securities Act of 1933, this Registration
Statement or amendment thereto has been signed by the following persons in the
capacities indicated on June 9, 1999.
Name Title
/s/ Dan F. Smith Chief Executive Officer, Equistar
- ------------------------------------- Chemicals, LP Co-Chairman,
Dan F. Smith Partnership Governance Committee
(Chief Executive Officer)
/s/ Kelvin R. Collard Vice President and Controller,
- ------------------------------------- Equistar Chemicals, LP
Kelvin R. Collard
(Principal Financial and Accounting
Officer)
*
- -------------------------------------
Jeffrey R. Pendergraft Member, Partnership Governance
Committee
*
- -------------------------------------
Member, Partnership Governance
T. Kevin DeNicola Committee
*
- -------------------------------------
William M. Landuyt Co-Chairman, Partnership Governance
Committee
*
- -------------------------------------
Member, Partnership Governance
John E. Lushefski Committee
*
- -------------------------------------
George Robbins Member, Partnership Governance
Committee
*
- -------------------------------------
Dr. Ray R. Irani Co-Chairman, Partnership Governance
Committee
*
- -------------------------------------
Stephen I. Chazen Member, Partnership Governance
Committee
- -------------------------------------
J. Roger Hirl Member, Partnership Governance
Committee
*By: /s/ Kelvin R. Collard
-------------------------------------
(Kelvin R. Collard, as Attorney-in-fact)
II-10
<PAGE>
SIGNATURES
Under the requirements of the Securities Act of 1933, the registrants have
duly caused this Registration Statement or amendment thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on June 9, 1999.
EQUISTAR FUNDING CORPORATION
By:
/s/ Kelvin R. Collard
--------------------------------------
Name: Kelvin R. Collard
------------------------------------
Title: Vice President and Controller
------------------------------------
Under the requirements of the Securities Act of 1933, this Registration
Statement or amendment thereto has been signed by the following persons, in the
capacities indicated on June 9, 1999.
Name Title
/s/ Dan F. Smith Chief Executive Officer and Director
- -------------------------------------
Dan F. Smith
(Chief Executive Officer)
* President and Chief Operating
- ------------------------------------- Officer and Director
Eugene R. Allspach
/s/ Kelvin R. Collard Vice President and Controller and
- ------------------------------------- Director
Kelvin R. Collard
(Principal Financial and Accounting Officer)
*By: /s/ Kelvin R. Collard
-------------------------------------
(Kelvin R. Collard, as Attorney-in-fact)
II-11
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit
<C> <S>
+3.1 Certificate of Limited Partnership of Equistar Chemicals, LP dated
as of October 17, 1997
+3.2 Certificates of Amendment to the Certificate of Limited
Partnership of Equistar Chemicals, LP dated as of May 15, 1998
+3.3 Amended and Restated Limited Partnership Agreement of Equistar
Chemicals, LP dated as of May 15, 1998, as amended
+3.3(a) First Amendment to Amended and Restated Limited Partnership
Agreement of Equistar Chemicals, LP dated as of June 30, 1998
+3.4 Certificate of Incorporation of Equistar Funding Corporation dated
as of January 22, 1999
+3.5 By-Laws of Equistar Funding Corporation dated as of January 22,
1999
+4.1 Exchange and Registration Rights Agreement among Equistar
Chemicals, LP, Equistar Funding Corporation, Chase Securities
Inc., for themselves and the other Initial Purchasers (except
NationsBanc Montgomery Securities LLC) and NationsBanc Montgomery
Securities LLC, for themselves and the other Initial Purchasers
(except Chase Securities Inc.) dated as of February 9, 1999
+4.2 Indenture among Equistar Chemicals, LP, Equistar Funding
Corporation and The Bank of New York, as Trustee, dated as of
January 15, 1999
+4.2(a) First Supplemental Indenture dated as of February 16, 1999 among
Equistar Chemicals, LP, Equistar Funding Corporation and The Bank
of New York, Trustee
+4.2(b) Form of Note (attached as Exhibit A to the First Supplemental
Indenture dated as of February 16, 1999 among Equistar Chemicals,
LP, Equistar Funding Corporation and The Bank of New York,
Trustee)
*4.2(c) Form of Second Supplemental Indenture among Equistar Chemicals,
LP, Equistar Funding Corporation and The Bank of New York, as
Trustee
*4.2(d) Form of Note (attached as Exhibit A to the Form of Second
Supplemental Indenture among Equistar Chemicals, LP, Equistar
Funding Corporation and The Bank of New York, as Trustee, filed
herewith as Exhibit 4.2(c))
+4.3 $1.25 billion Revolving Credit Agreement among Equistar Chemicals,
LP, as Borrower, Millennium America Inc., as Guarantor, and the
Lenders party thereto dated November 25, 1997
+4.3(a) Amended and Restated Credit Agreement dated as of November 25,
1997, as amended and restated February 5, 1999, among Equistar
Chemicals, LP, as Borrower, Millennium America Inc., as Guarantor
and the Lenders party thereto
+4.4 Indenture between Lyondell Petrochemical Company and Texas
Commerce Bank National Association, as Trustee, dated as of May
31, 1989
+4.4(a) First Supplemental Indenture dated as of May 31, 1989 between
Lyondell Petrochemical Company and Texas Commerce Bank National
Association, Trustee, to the Indenture dated as of May 31, 1989
+4.4(b) Second Supplemental Indenture dated as of December 1, 1997 among
Lyondell Petrochemical Company, Equistar Chemicals, LP and Texas
Commerce Bank National Association, Trustee, to the Indenture
dated as of May 31, 1989
+4.5 Indenture between Lyondell Petrochemical Company and Continental
Bank, National Association, as Trustee, dated as of March 10, 1992
+4.5(a) First Supplemental Indenture dated as of March 10, 1992 between
Lyondell Petrochemical Company and Continental Bank, National
Association, as Trustee, to the Indenture dated as of March 10,
1992
</TABLE>
<PAGE>
<TABLE>
<C> <S>
+4.5(b) Second Supplemental Indenture dated as of December 1, 1997 among
Lyondell Petrochemical Company, Equistar Chemicals, LP and First
Trust National Association, Trustee, to the Indenture dated as of
March 10, 1992
+4.6 Indenture between Lyondell Petrochemical Company and Texas Commerce
Bank National Association, as Trustee, dated as of January 29, 1996
+4.6(a) First Supplemental Indenture dated as of February 15, 1996 between
Lyondell Petrochemical Company and Texas Commerce Bank National
Association, Trustee, to the Indenture dated as of January 29, 1996
+4.6(b) Second Supplemental Indenture dated as of December 1, 1997 among
Lyondell Petrochemical Company, Equistar Chemicals, LP and Texas
Commerce Bank National Association, Trustee, to the Indenture dated
as of January 29, 1996
Equistar is a party to several debt instruments under which the total amount of
securities authorized does not exceed 10% of the total assets of Equistar and
its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of
Item 601(b) of Registration S-K, Equistar agrees to furnish a copy of such
instruments to the Commission upon request.
*5 Exhibit 5 Opinion of Baker & Botts, L.L.P. with respect to the
legality of the new notes
EXECUTIVE COMPENSATION:
+10.1 Form of Severance Agreement between Lyondell Petrochemical Company
and Former Lyondell Executives
+10.2 Form of Severance Agreement between Millennium Petrochemicals Inc.
and Former Millennium Executives
*10.3 Equistar Chemicals, LP Bonus Plan
*10.4 Equistar Chemicals, LP Supplemental Executive Retirement Plan
*10.5 Equistar Chemicals, LP Long-Term Incentive Plan
+10.6 Summary Description of Equistar Chemicals, LP Executive
Supplementary Savings Plan
+10.7 Summary Description of Equistar Chemicals, LP Executive Medical
Plan
+10.8 Summary Description of Equistar Chemicals, LP Salary Deferral Plan
+10.9 Summary Description of Equistar Chemicals, LP Executive Disability
Plan
+10.10 Summary Description of Equistar Chemicals, LP Executive Life
Insurance Plan
OTHER MATERIAL CONTRACTS:
+10.11 Asset Contribution Agreement among Lyondell Chemical Company,
Lyondell Petrochemical LP and Equistar Chemicals, LP dated as of
December 1, 1997
+10.11(a) First Amendment dated as of May 15, 1998 to the Asset Contribution
Agreement among Lyondell Chemicals Company, Lyondell Petrochemicals
LP and Equistar Chemicals, LP dated as of December 1, 1997
+10.12 Asset Contribution Agreement among Millennium Petrochemicals Inc.,
Millennium LP and Equistar Chemicals, LP dated as of December 1,
1997
+10.12(a) First Amendment dated as of May 15, 1998 to the Asset Contribution
Agreement among Millennium Petrochemicals Inc., Millennium LP and
Equistar Chemicals, LP dated as of December 1, 1997
+10.13 Master Transaction Agreement among Equistar Chemicals, LP,
Occidental Petroleum Corporation, Lyondell Chemical Company and
Millennium Chemicals Inc. dated as of May 15, 1998
</TABLE>
<PAGE>
<TABLE>
<C> <S>
+10.14 Agreement and Plan of Merger and Asset Contribution among
Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner
2, Inc., Oxy Petrochemicals Inc., PDG Chemical Inc. and Equistar
Chemicals, LP dated as of May 15, 1998
+10.15 Amended and Restated Parent Agreement among Occidental Chemical
Corporation, Oxy CH Corporation, Occidental Petroleum Corporation,
Lyondell Petrochemical Company, Millennium Chemicals Inc. and
Equistar Chemicals, LP dated as of May 15, 1998
+10.15(a) First Amendment dated as of June 30, 1998 to the Amended and
Restated Parent Agreement among Occidental Chemical Corporation,
Oxy CH Corporation, Occidental Petroleum Corporation, Lyondell
Petrochemical Company, Millennium Chemicals Inc. and Equistar
Chemicals, LP dated as of May 15, 1998
+10.15(b) Assignment and Assumption Agreement with respect to the Amended and
Restated Parent Agreement executed as of June 19, 1998
10.16 Ethylene Sales Agreement between Equistar Chemicals, LP and
Occidental Chemical Corporation dated as of May 15, 1998
11 Statement Concerning Computation of Ratios
+21 Subsidiaries of Equistar Chemicals, LP
23.1 Consent of Arthur Andersen LLP
23.2 Consent of PricewaterhouseCoopers LLP
*23.3 Consent of Baker & Botts, L.L.P. (included in Exhibit 5 Opinion)
+24.1 Power of Attorney for Equistar Chemicals, LP
+24.2 Power of Attorney for Equistar Funding Corporation
+24.3 Power of Attorney for Lyondell Petrochemical GP Inc.
+24.4 Power of Attorney for Millennium Petrochemicals Inc.
+24.5 Power of Attorney for Occidental Petrochem Partner GP, Inc.
24.6 Power of Attorney for Equistar Chemicals, LP Partnership Governance
Committee
+25.1 T-1 Statement of Eligibility of Trustee for the 8 1/2% notes
+25.2 T-1 Statement of Eligibility of Trustee for the 8 3/4% notes
27 Financial Data Schedule
99.1 Form of Letter to Clients for Tender of Notes
99.2 Form of Letter to The Depository Trust Company Participants for
Tender of Notes
99.3 Form of Notice of Guaranteed Delivery
99.4 Form of Transmittal Letter for Tender of Notes
</TABLE>
- --------
+ Previously filed.
* To be filed by amendment.
<PAGE>
EXHIBIT 10.16
SALES AGREEMENT
Ethylene
THIS AGREEMENT, dated as of May 15, 1998 ("Effective Date") is entered into by
and between Equistar Chemicals, LP, hereinafter referred to as "Seller," and
Occidental Chemical Corporation, hereinafter referred to as "Buyer". Each of
Seller and Buyer is sometimes hereinafter referred to as a "party" and
collectively as the "parties".
WHEREAS, as of this same date, the parties have entered into the Asset
Contribution Agreement, in accordance with which Ethylene production assets are
transferred from Buyer to Seller;
WHEREAS, Buyer desires to purchase quantities of Ethylene from Seller, and
WHEREAS, Seller desires to sell quantities of Ethylene to Buyer;
NOW, THEREFORE, in consideration of the premises and the mutual promises
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS
"Affiliate(s)" means any person that directy or indirectly through one or
more intermediaries, controls or is controlled by or is under common control
with the party specified. For purposes of this definition, the term "control"
shall have the meaning as set forth in 17 C.F.R. 230-405 as in effect on the
date hereof.
"Agreement" means this Ethylene Supply Agreement.
"Annual Maximum" has the meaning set forth in Paragraph 2(a) of this
Agreement and the meaning ascribed in Paragraph 2(f) for the Phase Down
period.
"Annual Minimum" has the meaning set forth in Paragraph 2(a) of this
Agreement and the meaning ascribed in Paragraph 2(f) for the Phase Down
period.
"Asset Contribution Agreement" means the Agreement and Plan of Merger and
Asset Contribution, among Occidental Petrochem Partner 1, Inc., Occidental
Petrochem Partner 2, Inc., Oxy Petrochemicals Inc., PDG Chemical Inc. and
Equistar Chemicals, LP, executed on the same date as this Agreement.
"Bank Rate" means, with respect to any period for which interest is to be
calculated under this Agreement, the rate of interest publicly announced from
time to time by the Chase Manhattan Bank, NA (or its successor) at its
principal office as its prime commercial lending rate. Each change in this
rate resulting from a change in the prime rate shall take effect on the day
on which the announced rate changes.
"Buyer's U.S. Plants" means the manufacturing plants owned or operated by the
Buyer and set forth on Schedule 1, attached hereto. Schedule 1 also includes,
for each of Buyer's U.S. Plants, the current practical production capacity,
approximate ethylene use when operating at current practical production
capacities and actual 1997 ethylene utilization.
<PAGE>
"Delivery Point(s)" means the exit flange on the metering station measuring
Ethylene deliveries to each of the Buyer's U.S. Plants.
"Ethylene" means ethylene having the specifications set forth in Exhibit A to
this Agreement, or in the event of ethylene delivered to Buyer hereunder and
not conforming to such specifications, such ethylene as to which
specifications have been waived by Buyer in order to accept delivery.
"Monomers Market Report" means the monthly publication of the same title
published by Chemical Marketing Associates, Inc.
"Monthly Petrochemicals and Plastics Analysis" means the monthly publication
of the same title published by Chemical Data, Inc.
"OxyMar" means that certain Texas general partnership between subsidiaries of
Occidental Petroleum Corporation, a Delaware corporation, and Marubeni
Corporation, a Japanese corporation.
"OxyMar Plant" means that certain vinyl chloride monomer manufacturing
facility, owned by OxyMar and located at Highway 361, Gregory, Texas and
which is operated by OxyChem for the benefit of OxyMar.
"Phase Down" has the meaning set forth in Paragraph 2(f) of this Agreement.
"Phase Down Annual Maximum" has the meaning set forth in Paragraph 2(f) of
this Agreement.
"Phase Down Annual Minimum" has the meaning set forth in Paragraph 2(f) of
this Agreement.
"Phase Down Basis Quantity" has the meaning set forth in Paragraph 2(f) of
this Agreement.
"Phase Down Notice" has the meaning set forth in Paragraph 2(f) of this
Agreement.
"Reduction Event" means, as to each of Buyer's U.S. Plants, (i) a shut down
of such plant, (ii) a reduction in practical production capacity of such
plant, or (iii) the taking out of service (other than for maintenance or
repair) of all or any portion of the practical production capacity of such
plant.
"Superfund" means the assessment on the production and sale of Ethylene
imposed pursuant to the Comprehensive Environment Response, Compensation and
Liability Act, as the same may be from time to time amended or reauthorized
and in effect.
"Term" has the meaning set forth in Section 3 of this Agreement.
2. QUANTITY
(a) Requirements. Buyer shall buy from Seller and Seller shall sell to Buyer an
"Annual Minimum" quantity of Ethylene equal to 100% of the ethylene
feedstock requirements of Buyer's U.S. Plants, less any quantities up to
250 MM lbs. tolled in accordance with the provisions of Paragraph 2(e),
exclusively for internal use in production at Buyer's U.S. Plants (estimated
to be approximately 2,000 MM lbs./yr. currently) provided that, in any
calendar year, Seller has no obligation to supply more than 2,550 MM lbs. of
Ethylene ("Annual Maximum"). The Annual Maximum will be prorated for the
remaining days of the first calendar year after the start of performance
hereunder. Buyer shall not purchase Ethylene for resale from Seller or any
third party except for resales by Buyer to OxyMar for use in production at
the OxyMar Plant.
(b) Annual Maximum Adjustment. If a Reduction Event occurs, then the Annual
Maximum will be reduced by an amount equal to the reduction in ethylene use
attributable to the reduction in practical production capacity resulting
from such Reduction Event. If all or any portion of such practical
2
<PAGE>
production capacity is placed back into service, then the Annual Maximum
will be increased by the amount of the increased ethylene feedstock
requirements due to such capacity having been restored to service, subject
to the inclusions and exclusions of Paragraph 2(c) below. Any such changes
will be prorated for the remainder of any year in which such Reducton Event
occurs.
(c) Growth of Requirements. Any increase in the ethylene feedstock requirements
of the Buyer's U.S. Plants resulting from the installation of substantial
new production facilities (i.e. new plants or new trains) shall be excluded
from the calculation of the ethylene feedstock requirements of the Buyer's
U.S. Plants under this Agreement; provided that increased ethylene
feedstock requirements due to startup, debottlenecking, modernization or
other modifications of existing equipment will be included in ethylene
feedstock requirements which Buyer will be obligated to purchase hereunder.
(d) Forecasts. Buyer shall provide to Seller an annual forecast of quantities of
Ethylene expected to be purchased from Seller and shipment dates 90 days
prior to the start of each calendar year, supplemented by quarterly updates
30 days prior to the start of each calendar quarter. Such forecasts are for
planning purposes only and will not affect the obligations of either party.
(e) Tolls. In any year Buyer may receive up to 250 MM lbs. of Ethylene tolled
through Seller's pipeline system, provided Buyer nominates the next calendar
year quantity by notifying Seller of the quantity and parameters for
scheduling of such tolls by September 30 of the preceding calendar year. If
timely notice with respect to any calendar year is not received by Seller,
Buyer shall purchase from Seller 100% of Buyer's U.S. Plants' requirements,
without any toll quantity subtracted for that calendar year.
(f) Phase Down. Both parties have the right to elect to reduce the parties'
Ethylene quantity obligations so long as any such reduction is accomplished
in accordance with and subject to the following ("Phase Down"):
i. Either party may exercise its right of Phase Down by providing at
least 3 full calendar years irrevocable written notice (the "Phase Down
Notice") to the other party for each calendar year affected by such
Phase Down Notice, but in no event will Phase Down affect any calendar
year prior to the calendar year beginning January 1, 2009. The party
providing a Phase Down Notice shall state therein the Phase Down
quantity such party elects for any Phase Down year specified in such
Phase Down Notice. The timely delivery of the Phase Down Notice
specifying the Phase Down quantity is an essential term of this
Agreement.
ii. In order to effect the parties' intention that Phase Down of the
entire quantity hereunder could be completed in no less than 5 years
and that the Phase Down quantity in any year may never exceed the
quantity reduction that would occur in a 5 year uniform quantity Phase
Down, the parties agree that a Phase Down Basis Quantity will be the
basis for calculating the maximum Phase Down quantity in any year, as
set forth in Subparagraphs iii. and iv., below.
iii. As used herein, the "Phase Down Basis Quantity" will be the annual
average of the purchased Ethylene quantity hereunder (plus any quantity
Buyer may have been obligated to purchase but did not) for the 3
calendar years immediately preceding the first Phase Down year.
iv. As used herein, the "Phase Down Annual Minimum" will equal Buyer's
purchase obligation in the Phase Down period. In the first Phase Down
year the Phase Down Annual Minimum shall not be less than 83.33% of the
Phase Down Basis Quantity, and in any subsequent year, the reduction of
the Phase Down Annual Minimum for that year as compared to the previous
year may not exceed 16.67% of the Phase Down Basis Quantity. Subject to
Subparagraph 2(f) vii, the party exercising its right to reduce the
Ethylene quantity obligations under Paragraph 2(f) of this Agreement
may elect to reduce the Phase Down Annual Minimum by said 16.67% or any
lesser quantity. If a Reduction Event occurs during the Phase Down, the
Phase Down Annual Minimum for the year in which the Reduction Event
occurs and is continuing will be reduced by an amount equal to the
product of (A) the reduction in ethylene use attributable to the
3
<PAGE>
reduction in practical production capacity resulting from such Reduction
Event multiplied by (B) a fraction, the numerator of which is the Phase
Down Annual Minimum for such year without giving effect to reduction for
any Reduction Event and the denominator of which is the Phase Down Basis
Quantity. If all or any portion of the practical production capacity is
placed back in service, then, subject to Paragraph 2(c), the Phase Down
Annual Minimum will be increased by the same amount as it previously had
been reduced as a result of the reduction of such practical production
capacity. Any such changes will be prorated for the remainder of any year
in which such Reduction Event occurs.
v. As used herein, the "Phase Down Annual Maximum" will be, in each year,
115% of the Phase Down Annual Minimum for that year.
vi. Beginning with the first Phase Down year, the quantity obligations of the
parties will cease to be on a requirements basis for Buyer and on a 2,550
MM lbs. Annual Maximum basis (as may be reduced by a Reduction Event) for
Seller. Beginning with the first Phase Down year the quantity obligations
will apply in accordance with this Paragraph 2(f) in that the Annual
Minimum for any year will be the applicable Phase Down Annual Minimum and
the Annual Maximum for such year will be the applicable Phase Down Annual
Maximum.
vii. If one party has furnished the Phase Down Notice to the other, the other
party may elect to reduce the quantity in the affected year by a greater
amount, but not exceeding, in total reduction quantity, the upper limit
specified in Subparagraph 2(f) iv., provided that the election is made by
written notice at least 3 full calendar years prior to the affected Phase
Down year, or within 10 days after receipt of the Phase Down Notice,
whichever is later.
viii. There will be no automatic reduction of quantity unless the Phase Down
Notice for a given Phase Down year is provided at least 3 full calendar
years prior to such Phase Down year. Phase Down may be effected over any
number of years and this Agreement shall not be terminated in accordance
with Section 3 until the quantity is reduced to zero under the provisions
of this Paragraph 2(f).
An example of a Phase Down of the entire quantity in 5 consecutive years would
occur as follows:
Assuming a Phase Down Basis Quantity of 2,200 MM lbs.,
Phase Down Year Annual Minimum Annual Maximum
--------------- -------------- --------------
(MM lbs.) (MM lbs.)
1 1,833 2,108
2 1,467 1,687
3 1,100 1,265
4 733 844
5 367 422
6 0 0
(g) Audit of Books. Seller will have the right to have a third party
recognized national accounting firm audit Buyer's books and records for
any months hereunder for up to 2 years after such month, upon reasonable
prior nofice and during normal business hours, provided that the
designated auditor may not disclose to Seller the information examined in
the audit other than to corroborate compliance with the quantity
obligations hereunder according to the quantities of Ethylene ordered
hereunder as compared with requirements, growth of requirements and toll
quantities, in each case, for Buyer's U.S. Plants, and report the quantity
discrepancy and circumstances of any alternative supply or ethylene
feedstock consuming capacity or production changes for the relevant
period.
4
<PAGE>
3. TERM
The term of this Agreement (the "Term") will begin on the Effective Date and
will continue in effect until, and terminate on, such date as the Phase Down
Annual Minimum calculated as set forth in Paragraph 2(f) equals zero; it being
understood and agreed that in no event shall such Phase Down Annual Minimum
decline to zero prior to December 31, [redacted].
4. PRICE
(a) Price Computation for Purchases Not Deemed Export Support. All purchases
will be priced in accordance with this Paragraph 4(a), unless expressly
excluded under Paragraph 4(b), below. [redacted] In the month following each
calendar quarter, Seller shall adjust the preliminary prices for that
quarter to equal [redacted]. Seller shall furnish to Buyer an adjustment
invoice showing the total dollar charge or credit to Buyer for the entire
quarter resulting from the adjustments to arrive at a final price. An
example of the above pricing calculation is included as Exhibit B.
[redacted]
"Publication Price" means a derived price consisting of the sum of (i) 80%
of "large-buyer clearing price, pipeline delivered" for ethylene in the U.S.
Gulf Coast published in that month's Monthly Petrochemical and Plastics
Analysis, plus (ii) 20% of the "low spot price", published in the last issue
of the month of Monomers Market Report for ethylene in the U.S.
(b) Export Support Purchases. [redacted] Buyer shall annually certify export
quantifies by furnishing reasonable supporting data to Seller.
(c) Audit of Books. Buyer will have the right to have a third party recognized
national accounting firm audit Seller's books and records for any months
hereunder for up to 2 years after any such month, upon reasonable prior
notice and during normal business hours, provided that the designated
auditor may not disclose to Buyer the information examined in the audit
other than to corroborate accuracy according to the price terms hereunder
and report the dollar sum of the discrepancy for any month in which any
discrepancy was found. If either of the published prices referenced in
Paragraph 4(a) cease being published or is no longer representative of U.S.
Gulf Coast contract or spot ethylene prices, as applicable, then the parties
shall designate an alternate reference price method to apply after the
redesignation.
5
<PAGE>
5. DELIVERY
(a) Method of Delivery. Seller shall deliver Ethylene or cause Ethylene to be
delivered to the Delivery Points. Except as expressly provided in this
Agreement, Ethylene will be delivered free and clear of pipeline
transportation or other delivery charges, which are for Seller's account.
(b) Seller's Access to Pipelines and Equipment. Buyer shall provide such
easements of access onto the premises of Buyer's U.S. Plants as shall enable
the Seller to operate and maintain its pipelines and metering equipment for
the delivery and measurement of Ethylene provided to the Buyer, in
accordance with Seller's normal pipeline operating and maintenance
procedures.
(c) Monthly Delivery Instructions. Five days prior to the first day of each
month, Buyer shall furnish to Seller in writing a good faith estimate of the
quantities of Ethylene to be delivered to each of Buyer's U.S. Plants during
each of the next three months and such instructions and estimates for the
month immediately following such notice shall be final and binding, subject
to commercially reasonable variations due to fluctuations in the ordinary
course of operation of Buyer's U.S. Plants. The parties shall cooperate
reasonably to distribute deliveries of Ethylene in approximately equal daily
quantities during each year taking into consideration, however, fluctuations
in daily demand due to maintenance, turnarounds, or otherwise occurring in
the ordinary course of business.
(d) Title and Risk of Loss. Title to and risk of loss of Ethylene delivered
hereunder shall pass to Buyer at the Delivery Point(s).
(e) Capital Improvement Cost. Seller and Buyer shall cooperate reasonably to
continue effective utilization of delivery logistics systems affected by
this Agreement, including, without limitation, the pipeline systems operated
by Seller to deliver Ethylene to Buyer. The obligation of reasonable
cooperation pursuant to this Paragraph includes reasonable capital
improvement costs allocated between Buyer and Seller in accordance with then
current industry practice.
(f) Toll Ethylene. Buyer shall deliver, or cause to have delivered, toll
ethylene into Seller's pipeline system of like quality to Ethylene supplied
hereunder, at the pressure required by Seller and without Seller incurring
any fees or charges to third parties.
6. QUANTITY MEASUREMENT AND QUALITY TESTING
(a) Determination of Quantity. Seller, Seller's agent or Seller's carrier, as
applicable, shall own, operate and maintain metering equipment at the
Delivery Point where quantities of Ethylene delivered to Buyer shall be
measured and its temperature and pressure recorded. The primary device for
each meter installation shall be a metering tube constructed in accordance
with the specifications recommended by ANSI/API Report 2530 and AGA3/API
14.3, as amended or supplemented from time to time. Sharp-edged orifice
plates shall be retained with a standard orifice fitting (senior type)
equipped with flange type pressure taps. The diameter of the orifice in the
plate shall be in standard one-eighth inch increments. The density of the
Ethylene shall be determined by calculation performed continuously using API
Report 2565 "Density of Ethylene". The flowing temperature and pressure
determined from Seller's meters will be used for the calculation of density.
The volume of Ethylene delivered at the Delivery Point for each day shall be
determined by reference to an on-site Daniels electronic micro-processor
which shall receive the electronic signals from the primary metering device
and calculate pounds of Ethylene through the orifice meter using the latest
version of AGA3/API 14.3, as amended or supplemented from time to time. A
day shall be deemed the period from 7:00 a.m. on one day to 7:00 a.m. on the
next succeeding day. Correction factors and calibrations from such meter
readings for the purpose of determining daily quantities of Product
delivered will conform with procedures set forth below. If the parties are
unable to agree upon the quantity delivered, quantities will be determined
by a mutually agreed upon inspector. The parties will be bound by the
inspector's determination and will equally bear inspection costs. Buyer
shall provide, at its
6
<PAGE>
sole cost, quantities of steam, electricity, nitrogen, and instrument air
required for the operation of the metering equipment.
(b) Temperature Corrections. All quantities of Ethylene will be corrected for
temperature to sixty degrees Fahrenheit (60(degrees)F) in accordance with
current methods which are set forth in American Petroleum Institute Routine
Catalog Number 852-25650 (Chapter 11.3.2.1) or other method mutually agreed
to by both parties.
(c) Calibration of Measuring Equipment. Seiler shall calibrate flow meters,
pressure recorders and temperature recorders at least once each month and at
such other times as the parties may mutually agree. Seller shall provide
reasonable notice to Buyer of the time of calibrations and Buyer shall have
the right to witness the calibrations. If following a calibration, any
metering equipment is found to be inaccurate by one half percent or more,
then the quantity of Ethylene previously delivered shall be retroactively
adjusted at the rate of such inaccuracy for any period of inaccuracy which
is definitely known, provided, however, that if such period is not
definitely known and if the parties cannot otherwise mutually agree upon a
period of time for such retroactive adjustment, then such adjustment shall
be for a period of one-half the number of days from the last previous
calibration.
(d) Measuring Equipment Out of Service. If for any reason the metering equipment
is out of service so that the quantity of Ethylene delivered to the Delivery
Point through such equipment cannot be ascertained, Seller shall notify
Buyer and the quantity of Ethylene delivered through such equipment during
such period shall be estimated and agreed upon by the parties upon the basis
of the best available data, using, in order of preference, the following
methods:
(i) The registration of any check measuring equipment of Buyer, if
installed and properly operating; or
(ii) Any measurement equipment which Seller may have in the flowing stream
of Ethylene, if agreed upon by Buyer.
(e) Determination of Quality. Samples taken on mutually agreed occasions and at
mutually agreed input sampling points shall be the basis for determining
compliance with specifications for the quality of Ethylene delivered
hereunder. Subject to the remaining provisions of this section, Seller's
laboratory analysis, conducted in accordance with the provisions of Exhibit
A, shall conclusively determine whether Ethylene specifications have been
met. Seller shall retain analytical data for at least 90 days. Seller shall
monitor the quality of Ethylene introduced into the delivery pipelines to
each of the Delivery Points. If abnormalities occur in the operation of
Buyer's U.S. Plants supplied hereunder or in plant operations downstream of
any other mutually agreed upon Delivery Points, Buyer may provide notice
requiring Seller, for a reasonable period of time, to take three
representative samples of Ethylene from the relevant sampling point each
day. Two of such samples shall be delivered to Buyer and one shall be
retained by Seller for analysis in accordance with the provisions of Exhibit
A. Buyer shall arrange for analysis of one of the samples in its custody in
accordance with the provisions of Exhibit A. Seller and Buyer shall promptly
advise each other of the results of their respective analyses. If Buyer
deems there to be a material difference in the parties' analysis of their
respective samples and if such difference cannot be reconciled within one
week of Buyer's notice thereof, the remaining sample shall be submitted to a
nationally recognized independent testing laboratory, agreeable to both
Buyer and Seller, for analysis in accordance with the provisions of Exhibit
A. The parties will be bound by the independent laboratory's determination
and will equally bear the cost of such independent analysis.
7
<PAGE>
7. PAYMENT AND CREDIT
Terms and Payment Default. Buyer shall pay Seller for Ethylene by wire transfer
into Seller's account, per Seller's instructions, net 20 days from last day of
the shipment month for purchases. Seller shall invoice promptly after the last
day of the month. Adjustment credits or debits shall be shown on the invoice
issued at the end of the month in which the adjustment was made net 10 days from
date of adjustment invoice. If Buyer fails to pay Seller in accordance with said
terms, Seller may either (i) suspend deliveries until all indebtedness is paid
in full, or (ii) place Buyer on a cash-in-advance status until arrangements are
made for security satisfactory to Seller or, at Seller's option, until all
indebtedness to Seller is paid in full. If Buyer, within 30 days of notice of
payment default, fails to make payment in full for all sums due and payable
which are not reasonably in dispute, Seller may terminate the Agreement
forthwith upon reasonable notice. All timely payments under this Agreement shall
be made without early payment discount. Any overdue balance owed shall accrue
daily interest charges at a rate equal to the greater of (i) 100% of the Bank
Rate (as in effect from time to time) calculated on the basis of a 360 day year
or (ii) the cost of borrowing of the non-defaulting party. If the invoice is
received after noon on one day, such invoice will be deemed received on the next
day. If the payment due date falls on a Saturday or a bank or federal holiday,
other than Monday, the payment shall be due on the past preceding business day.
If the payment due date falls on a Sunday or Monday bank or federal holiday, the
payment shall be due on the following business day. Any preexisting obligation
of Buyer to make payment for Product delivered hereunder shall survive
termination of this Agreement.
8. TAXES
(a) Pass Through. Any taxes, excises, fees, duties or other charges, or any
increase therein, now or hereafter imposed directly or indirectly by law
upon Ethylene, components of Ethylene, or raw material from which Ethylene
is derived, sold or delivered to Buyer under this Agreement, or on the
production, manufacture, storage, sale, transportation or delivery thereof,
which Seller is required to pay or collect, (including, without limitation,
Superfund, gasoline blendstocks and additives excise taxes) and any
retroactive impositions thereof or adjustments thereto ("Tax or Taxes"),
shall be passed on to Buyer as an explicit surcharge and shall be paid by
Buyer to Seller in addition to the price (including any interest thereon for
which Seller is liable) whether included in the applicable invoice, or added
retroactively to the price, provided, that the pass-through of any such Tax
is in accordance with then prevailing industry practice. If Buyer furnishes
Seller with a timely and valid resale or other exemption certificate or
proof of export acceptable to Seller, sufficient to support an exemption
from any Tax, then such Tax will not be added to the price of Ethylene,
provided, however, if Seller is ever liable for such Tax on the sale of
Ethylene hereunder, Buyer will promptly reimburse Seller from such Tax,
including any interest, penalties and attorneys' fees related thereto
provided, that the pass-through of any such Tax is in accordance with then
prevailing industry practice. Tax collection will be applied and
administered in the same manner as for the other Ethylene customers of
Seller.
(b) Duty Drawback. Seller reserves its rights to claim U.S. Customs duty
drawback and Buyer acknowledges and consents to such reservation. The
parties shall cooperate so as to facilitate Seller's ability to promptly
claim and/or so that Buyer may promptly claim and collect, duty drawbacks.
If Buyer uses Ethylene sold hereunder in a U.S. manufacturing process,
Seller may provide Buyer Certificates of Manufacture and Delivery for such
Ethylene. Buyer shall file a duty drawback entry for the maximum quantity of
eligible Ethylene covered by the Certificates furnished to Buyer and
promptly remit to Seller 50% of all duty drawback proceeds net of any filing
fees, obtained by Buyer with respect to such Ethylene and its derivatives.
9. WARRANTIES
(a) Seller's Warranty. SELLER'S SOLE AND EXCLUSIVE WARRANTY IS THAT THE ETHYLENE
COMPLIES WITH THE PHYSICAL AND CHEMICAL SPECIFICATIONS SET FORTH IN EXHIBIT
A TO THIS
8
<PAGE>
AGREEMENT AND THAT SELLER SHALL CONVEY TITLE THERETO FREE OF ANY LIENS OR
ENCUMBRANCES. SELLER MAKES NO OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED,
WHETHER WITH RESPECT TO ITS RECOMMENDATIONS, INSTRUCTIONS, OR OTHERWISE AND
SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES, WHETHER OF MERCHANTABILITY,
SUITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE.
(b) Patents. Seller's recommendations or instructions are not intended to
suggest operations which would infringe any patents and Seller assumes no
liability to Buyer of any kind or responsibility for any such infringement.
(c) Uses and Safe Handling. Buyer hereby acknowledges receipt of Seller's
material safety data sheet with respect to Ethylene. Buyer shall maintain
prudent safe handling and use procedures. Buyer will apprise its employees,
contractors and customers of the hazards, proper use and handling
requirements of Ethylene and shall comply with all applicable statutes,
rules and regulations pertaining thereto.
10. CLAIMS
Buyer shall be deemed to have waived all claims with respect to any Ethylene
sold hereunder for which Buyer's notice of insufficient quality has not been
given to Seller in writing within 90 days of Buyer's receipt of such
Ethylene. Any such claim which is not asserted as a claim, counterclaim,
defense or set-off in a judicial proceeding instituted within 2 years after
the cause of action arises shall be forever waived, barred and released.
11. LIMITATION ON DAMAGES
(a) Limitation on Certain Buyer Remedies. Buyer's exclusive remedy and the sole
liability of Seller or any Affiliate of Seller for any shortfall in delivery
of Ethylene or failure of any Ethylene to meet the specifications in Exhibit
A, including but not limited to claims for breach of warranty, breach of
contract, negligence or strict liability, shall be limited at Seller's sole
option, to (i) payment to Buyer of the cover cost to replace such Ethylene,
or (ii) Seller's replacement of the Ethylene in respect of which a valid
claim is made.
(b) No Special Damages. In no event shall Seller or Buyer or any Affiliate of
either be liable for indirect, consequential, special, incidental,
contingent or punitive damages, costs of litigation or for loss of business
or business opportunities.
12. LIABILITY AND RESPONSIBILITY
(a) Buyer's Obligation. Subject to the further provisions of this Paragraph,
Buyer assumes full responsibility for any liability arising out of the
receipt, unloading, discharge, storage, handling, use and disposal of any
Ethylene purchased hereunder, including the use of such Ethylene alone or in
combination with other substances and compliance or non-compliance with any
law or regulations relating thereto. Buyer agrees to indemnify, protect,
defend and hold Seller and/or any of its Affiliates, agents, officers,
directors, employees and representatives (the "Seller Group") harmless from
and against any and all claims, actions, liability, loss, cost and expense
(including reasonable attorney's fees) for damages to any private or public
property or resources, personal injury or death, fines or penalties
("Loss"), made against or incurred by Seller Group relating to Ethylene sold
or the performance of either party hereunder, or by the agents, servants,
employees or contractors of either party, where such Loss was caused by acts
or omissions that occurred at the time of or subsequent to the delivery of
Ethylene to the Buyer hereunder, or arose in any way out of violations of
any federal, state or local statute or governmental rule or regulation by
Buyer or its agents, servants, employees or contractors. IT IS THE EXPRESS
INTENTION OF THE PARTIES THAT THE
9
<PAGE>
INDEMNITY PROVIDED FOR IN THIS PARAGRAPH SHALL REQUIRE BUYER TO DEFEND, HOLD
HARMLESS AND INDEMNIFY THE SELLER GROUP AS PROVIDED ABOVE EXCEPT TO THE
PROPORTIONATE EXTENT THAT THE ACTIONABLE NEGLIGENCE OF THE SELLER GROUP IS
THE SOLE OR A CONCURRING CAUSE OF THE LOSS ALLEGED. FOR APPLICATION OF THE
PROVISIONS OF THIS PARAGRAPH, THE EXTENT OF ANY SUCH NEGLIGENCE OF SELLER
GROUP SHALL BE DETERMINED EXCLUSIVELY IN A SEPARATE ARBITRATION PROCEEDING
REQUESTED BY BUYER AND IN ACCORDANCE WITH MUTUALLY AGREED ARBITRATOR(S),
RULES AND VENUE IN ACCORDANCE WITH THE PROVISIONS OF EXHIBIT C, HEREOF. SUCH
ARBITRATION AND THE RESULTING ALLOCATION OF NEGLIGENCE TO SELLER GROUP WILL
TAKE PLACE AFTER BUYER HAS DEFENDED SELLER GROUP AGAINST AND FINALLY
RESOLVED SUCH THIRD PARTY CLAIMS BY JUDGMENT OR SETTLEMENT.
(b) Seller's Obligation. Seller agrees to indemnify, protect, defend and hold
Buyer and/or any of its Affiliates, agents, officers, directors, employees
and representatives (the "Buyer Group") harmless from and against any and
all Loss made against or incurred by Buyer Group relating to Ethylene sold
or the performance of either party hereunder, or by the agents, servants,
employees or contractors of either party, where such Loss was caused by acts
or omissions that occurred prior to the delivery of Ethylene to the Buyer
hereunder, or arose in any way out of violations of any federal, state or
local statute or governmental rule or regulation by Seller or its agents,
servants, employees or contractors. IT IS THE EXPRESS INTENTION OF THE
PARTIES THAT THE INDEMNITY PROVIDED FOR IN THIS PARAGRAPH SHALL REQUIRE
SELLER TO INDEMNIFY THE BUYER GROUP EXCEPT TO THE PROPORTIONATE EXTENT THAT
THE ACTIONABLE NEGLIGENCE OF THE BUYER GROUP IS THE SOLE OR A CONCURRING
CAUSE OF THE LOSS ALLEGED. FOR APPLICATION OF THE PROVISIONS OF THIS
PARAGRAPH THE EXTENT OF SUCH NEGLIGENCE SHALL BE DETERMINED EXCLUSIVELY IN A
SEPARATE ARBITRATION PROCEEDING REQUESTED BY SELLER AND IN ACCORDANCE WITH
MUTUALLY AGREED ARBITRATOR(S), RULES AND VENUE IN ACCORDANCE WITH THE
PROVISIONS OF EXHIBIT C, HEREOF. ANY SUCH ARBITRATION AND THE RESULTING
ALLOCATION OF NEGLIGENCE WILL TAKE PLACE AFTER SELLER HAS DEFENDED BUYER
GROUP AGAINST AND FINALLY RESOLVED SUCH THIRD PARTY CLAIMS BY JUDGMENT OR
SETTLEMENT.
13. EXCUSE OF PERFORMANCE
(a) Performance Excused. Continued performance of any obligation (except payment
of money due), may be suspended immediately to the extent made impossible by
any event or condition beyond the reasonable control of the party suspending
such performance (except its inability to discharge obligations of a
financial nature), including without limitation (to the extent beyond such
control) acts of God, fire, labor or trade disturbance, war, civil
commotion, compliance in good faith with any applicable legal requirements
(whether or not it later proves to be invalid), unavailability of materials,
or other event or condition whether similar or dissimilar to the foregoing
(a "Force Majeure Event").
(b) Notice and Cure. The party claiming suspension due to a Force Majeure Event
will give prompt notice to the other of the occurrence of the Force Majeure
Event giving rise to the suspension and of its nature and anticipated
duration, and said party will use its best efforts to promptly cure the
cause of the suspension, it being understood, however, that labor disputes
shall be a continuing cause of suspension, and settlement of the same shall
be entirely within the discretion of the party experiencing such difficulty.
The parties shall cooperate with each other to find alternative means and
methods for the provision of the suspended Ethylene shipments or receipts,
as applicable.
(c) Recommencement of Performance. Upon termination of the Force Majeure Event,
performance will recommence.
(d) No Extension of Term. The term of this Agreement shall not be extended by
the duration of any Force Majeure Event.
(e) Right to Terminate. If the Force Majeure Event continues for a period in
excess of three years, the party not claiming suspension due to the Force
Majeure Event may elect to terminate this Agreement
10
<PAGE>
with respect to the Ethylene so suspended upon written notice to the party
claiming suspension, which termination will be effective ten days after
receipt of such notice unless the Force Majeure Event has ceased and the
Ethylene shipments and receipts have recommenced within such ten day period.
(f) Allocation. If caused by any of the above stated causes, or if caused by any
other unanticipated shortage not due to Seller's negligence or mismanagement
of its ethylene business, the quantity of Ethylene available at Seller's (or
Seller's supplier's) plant ordinarily producing Ethylene and deliverable to
the agreed upon delivery location for sale hereunder should be insufficient
to fulfill Seller's Ethylene volume commitments, Seller has the right and
obligation to allocate its available supply of Ethylene equitably among all
term contract customers of Seller and Seller's (and Seller's affiliates')
own requirements during the period of such shortage. In order to achieve an
equitable allocation result, Seller shall consider its customers' supply
alternatives and if the allocation is expected to cause greater hardship to
Buyer due to its dependence on Seller as a sole supplier, then Seller's
allocation arrangements will reflect Buyer's and other sole sourced
customers' greater need for Seller's Ethylene. During any such period of
allocation in which Buyer is unable to satisfy its requirements, Buyer may
purchase ethylene from another supplier to the extent necessary to satisfy
such requirements. If a Force Majeure Event that reduces Buyer's capability
to accept ethylene occurs during the Phase Down, Buyer shall allocate its
purchases of ethylene among all of its suppliers equitably.
14. ASSIGNMENT
(a) Assignment and Consent. This Agreement shall bind the respective successors
and assigns of the parties hereto, provided however, that neither party may
assign or otherwise transfer or delegate its rights or obligations hereunder
to a third party without the prior written consent of the other party
hereto; provided further, that no such consent shall be required for
assignment to an Affiliate or for assignment to a successor to the business
in the case of transfer of all of Buyer's U.S. Plants or all of Seller's
ethylene production facilities in a single transaction, so long as such
assignee executes a written assumption of such party's obligations hereunder
with respect to the rights or obligations assigned in a form reasonably
satisfactory to the other party and delivers such written assumption to the
other party within a reasonable period of time after the effective date of
such assignment. Buyer represents that it shall assign all of its rights and
obligations under this Agreement only to a transferee of all of Buyer's U.S.
Plants in a single transaction. Any permitted assignment shall not relieve
the assignor of its obligations hereunder. Any attempted assignment without
such consent as may be required by this provision shall be void.
(b) Transfer of Buyer's Plants. The parties acknowledge and agree that this
Agreement is integral to the operation of Buyer's U.S. Plants and therefore
in the event that Buyer shall sell, transfer, pledge, hypothecate or assign
("Transfer") any of Buyer's U.S. Plants to be supplied Ethylene in
accordance with this Agreement to any person ("Assignee") Buyer shall give
written notice to Seller of such Transfer and the identity of the proposed
Assignee as soon as the intended Transfer becomes known to Buyer, however in
no event less than 30 days prior to the date such Transfer becomes
effective. In connection with such Transfer, Buyer shall (i) assign the
rights and obligations of Buyer pursuant to this Agreement with respect to
such transferred Buyer's U.S. Plant(s) to the Assignee, and (ii) cause
Assignee to accept such assignment as if such Assignee was a party to this
Agreement as of the Effective Date, unless Seller shall provide Buyer
(within 10 business days after receiving notice pursuant to the previous
sentence) with written notice that it will not consent to such assignment,
in which event (i) Buyer may elect to proceed with the Transfer but without
assigning the rights and obligations of the Buyer pursuant to this Agreement
with respect to such of Buyer's U.S. Plants as are the subject of the
Transfer and (ii) if Buyer shall elect to proceed with such Transfer the
ethylene feedstock requirements of such of Buyer's U.S. Plants as are the
subject of the Transfer shall be removed from this Agreement.
11
<PAGE>
(c) Liquidated Damages. If Buyer fails to fulfill its obligations stated in
Paragraphs 14(a) or 14(b) to assign this Agreement (or a portion thereof)
to the transferee or successor to any or all of Buyer's U.S. Plants and to
cause such transferee or successor to accept such assignment and assume such
transferee's or successor's obligations under this Agreement, Buyer shall
pay Seller, as liquidated damages, and not as a penalty, for such failure,
4c/lb. multiplied by three multiplied by the three year average of the
quantity of Ethylene purchases, during the 36 month period preceding
Transfer, at Buyer's U.S. Plant(s) which were transferred. The parties agree
that the damages incurred by Seller from Buyer's failure to assign this
Agreement (or a portion thereof) are substantial but difficult to measure
and have therefore agreed upon this amount as a fair statement of damages
continuing for three years.
(d) Financial Responsibility for Transferee. With respect to the Ethylene
deliveries to be made to any of Buyer's U.S. Plants that are not owned by an
Affiliate of a partner in Seller, if, at any time, in the sole opinion of
Seller, the financial responsibility of the owner of such plant is impaired
or unsatisfactory, Seller shall have the right to restrict or suspend
Ethylene deliveries to such plant unless (i) such owner pays on a cash-in-
advance of delivery basis, (ii) such owner delivers to Seller a letter of
credit, in form and substance acceptable to Seller and from a financial
institution acceptable to Seller, or (iii) such owner and Seller agree upon
other arrangements to secure future deliveries of Ethylene to such plant.
15. MISCELLANEOUS
(a) Notices. Any notice required or permitted to be given pursuant to this
Agreement shall be in writing and shall be sufficiently given when duly
mailed, postage prepaid, and addressed as follows (or to such other address
or facsimile number as either party shall have specified by notice in
writing to the other party) or personally delivered or transmitted
electronically.
If to Buyer: Occidental Chemical Corporation
5005 LBJ Freeway
Dallas, Texas 75244
Attention: Director, Purchasing
Facsimile: (972) 404-3565
If to Seller: Equistar Chemicals, LP
One Houston Center
1221 McKinney, Suite 1600
Houston, Texas 77010
Attention: Roger Crose, Vice President,
Olefins Business Management
Facsimile: (713) 652-7383
(b) Jurisdiction; Dispute Resolution. THE PARTIES HERETO AGREE THAT ALL OF THE
PROVISIONS OF THIS AGREEMENT AND ANY QUESTIONS CONCERNING ITS
INTERPRETATION AND ENFORCEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE
STATE OF TEXAS AND THE EXECUTION AND DELIVERY OF THIS AGREEMENT SHALL BE
DEEMED TO BE THE TRANSACTION OF BUSINESS WITHIN THE STATE OF TEXAS FOR
PURPOSES OF CONFERRING JURISDICTION UPON COURTS LOCATED WITHIN THE STATE.
THE PARTIES AGREE THAT ANY LITIGATION ARISING OUT OF THIS AGREEMENT SHALL BE
BROUGHT ONLY IN THE FEDERAL OR STATE COURTS IN THE STATE OF TEXAS AND BOTH
PARTIES CONSENT TO THE JURISDICTION OF SAID COURTS. ALL DISPUTES UNDER THIS
AGREEMENT SHALL BE RESOLVED IN ACCORDANCE WITH THE "DISPUTE RESOLUTION
PROCEDURES" SET FORTH IN EXHIBIT C OF THIS AGREEMENT.
12
<PAGE>
(c) Confidentiality. Each of the parties hereto shall, and shall cause their
respective employees, agents and other representatives to, hold in strict
confidence and not utilize for any commercial or other purpose or disclose
to any other person, except with the prior written consent of the other
party hereto, which consent shall not be unreasonably withheld, any of the
terms and provisions of Section 2 - Quantity, Section 3 - Term, or Section
4 - Price, of this Agreement; provided, however, that the foregoing
obligation of confidentiality shall not apply to (i) any such information
that is or shall become generally available to the public other than as a
result of a disclosure by or on behalf of such party, (ii) any such
information that was available to a party on a non-confidential basis prior
to the Effective Date of this Agreement, (iii) any such information that
comes into a party's possession after the Effective Date of this Agreement
from a third party not under any obligation of confidentiality with respect
to such information, (iv) any such information disclosed to a third party
who has undertaken a written obligation of confidentiality with respect to
such information that is substantially the same as the obligation of
confidentiality contained in this section, or (v) any information that shall
be required to be disclosed by or on behalf of a party as a result of any
applicable law, rule or regulation of any governmental authority having
competent jurisdiction, provided that such party shall give the other party
30 day's prior written notice before making any such disclosure in
accordance with the provisions of this clause.
(d) Amendment. Neither party shall be bound by any change in, addition to or
waiver of any of the provisions hereof unless approved in writing by its
authorized representative.
(e) Waiver. Any waiver of any particular breach or default of this Agreement
shall be in writing and shall not constitute a continuing waiver or a waiver
of any other breach or default. The failure of either party to require
performance of any provision of this Agreement shall not affect either
party's right to full performance thereof at any time thereafter.
(f) Headings. Section headings or titles are included for ease of reference and
do not constitute any part of the text or affect its meaning or
interpretation.
(g) Counterparts. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original and all of which shall be
deemed to be one and the same instrument.
(h) Provisions of this Agreement to Control. With regard to Ethylene sales and
exchanges, the provisions of this Agreement shall supersede any inconsistent
provisions of the Asset Contribution Agreement and any other agreements
between the parties entered into to undertake the transaction to be
consummated thereunder.
13
<PAGE>
IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement, as of the
date first written above.
EQUISTAR CHEMICALS, LP OCCIDENTAL CHEMICAL CORPORATION
(SELLER) (BUYER)
By: /s/ Eugene R. Allspach By: /s/ R J Schuh
-------------------------- --------------------------
Print Name: Eugene R. Allspach Print Name: R J Schuh
------------------ ------------------
Title: President and Chief Title: Executive Vice President
Operating Officer ------------------------
-----------------------
(Signature Page of Sales Agreement - Ethylene]
14
<PAGE>
EXHIBIT 11
EQUISTAR CHEMICALS, LP
STATEMENT SETTING FORTH DETAIL FOR COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES - UNAUDITED
(Millions of Dollars)
<TABLE>
<CAPTION>
One Month Quarter
Ended Year Ended Year Ended Quarter Ended Quarter
December 31, December 31, December 31, Ended March March 31, Ended March
1997 1998 1998 31, 1999 1998 31, 1999
------------ ------------ ------------ ------------ ------------ -----------
(historical) (historical) (pro forma) (historical) (historical) (pro forma)
<S> <C> <C> <C> <C> <C> <C>
Income from operations
before income taxes.... $ 7 $143 $154 $ 7 $121 $(1)
Fixed charges:
Interest expense,
gross................ $10 $156 $186 $43 $ 32 $43
Portion of rentals
representative of
interest............. $ 4 $ 37 $ 38 $10 $ 8 $10
--- ---- ---- --- ---- ---
Total fixed charges..... $14 $193 $224 $53 $ 40 $53
--- ---- ---- --- ---- ---
Earnings................ $21 $336 $378 $60 $161 $52
Ratio of earnings to
fixed charges.......... 1.5 1.7 1.7 1.1 4.0 1.0
</TABLE>
<PAGE>
EQUISTAR CHEMICALS, LP
STATEMENT SETTING FORTH DETAIL FOR COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES - UNAUDITED
LYONDELL CONTRIBUTED BUSINESS
(Millions of Dollars)
<TABLE>
<CAPTION>
Eleven Year Ended
Months Ended December 31,
November 30, --------------
1997 1996 1995 1994
------------ ---- ---- ----
<S> <C> <C> <C> <C>
Historical Information:
Income from operations before income taxes........ $346 $158 $439 $215
Fixed charges:
Interest expense, gross........................... $ 50 $ 65 $ 76 $ 73
Portion of rentals representative of interest..... $ 14 $ 15 $ 13 $ 10
Total fixed charges................................. $ 64 $ 80 $ 89 $ 83
Earnings............................................ $410 $238 $528 $298
Ratio of earnings to fixed charges.................. 6.4 3.0 5.9 3.6
</TABLE>
<PAGE>
EQUISTAR CHEMICALS, LP
STATEMENT SETTING FORTH DETAIL FOR COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES - UNAUDITED
MILLENNIUM CONTRIBUTED BUSINESS
(Millions of Dollars)
<TABLE>
<CAPTION>
Eleven Year Ended
Months Ended December 31,
November 30, --------------
1997 1996 1995 1994
------------ ---- ---- ----
<S> <C> <C> <C> <C>
Historical Information:
Income from operations before income taxes........ $243 $168 $415 $130
Fixed charges:
Interest expense, gross........................... $ 66 $ 80 $ 80 $ 80
Portion of rentals representative of interest..... $ 13 $ 15 $ 14 $ 13
Total fixed charges................................. $ 79 $ 95 $ 94 $ 93
Earnings............................................ $322 $263 $509 $223
Ratio of earnings to fixed charges.................. 4.1 2.8 5.4 2.4
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
June 7, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
Equistar Chemicals, LP, of (1) our report dated February 26, 1999 relating to
the financial statements of Equistar Chemicals, LP at December 31, 1998 and
1997, for the year ended December 31, 1998 and for the period December 1, 1997
(inception) to December 31, 1997; (2) our report dated July 7, 1998 relating to
the contributed petrochemicals and polymers business of Lyondell Petrochemical
Company at November 30, 1997 and December 31, 1996, for the eleven month period
ended November 30, 1997 and for each of the two years in the period ended
December 31, 1996; and (3) our report dated July 9, 1998 relating to the
contributed business of Millennium Chemicals, Inc. at November 30, 1997 and
December 31, 1996, for the eleven month period ended November 30, 1997 and for
each of the two years in the period ended December 31, 1996 which appear in such
Registration Statement.
We also consent to the references to us under the headings "Experts", "Selected
Pro Forma and Historical Financial and Operating Data of Equistar", "Selected
Historical Financial and Operating Data of the Lyondell Contributed Business"
and "Selected Historical Financial and Operating Data of the Millennium
Contributed Business" in such Registration Statement. However, it should be
noted that PricewaterhouseCoopers LLP has not prepared or certified such
"Selected Historical Financial and Operating Data."
PricewaterhouseCoopers LLP
Houston, Texas
June 8, 1999
<PAGE>
EXHIBIT 24.6
POWER OF ATTORNEY
WHEREAS, Equistar Chemicals, LP, a Delaware limited partnership (the
"Partnership") has filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), a
Registration Statement on Form S-4 (Reg. No. 333-76473), including a prospectus,
with such amendment or amendments thereto, whether pre-effective or post-
effective, in each case as may be necessary or appropriate, together with any
and all exhibits and other documents having relation to said Registration
Statement (collectively, the "Registration Statement"), in connection with the
Partnership's proposal to offer to exchange up to $900,000 aggregate principal
amount of notes registered under the Act for a like aggregate principal amount
of outstanding notes;
NOW, THEREFORE, each of the undersigned, in his or her capacity as a member
of the Partnership Governance Committee of the Partnership (the "Committee"),
does hereby appoint Gerald A. O'Brien and Kelvin R. Collard, and each of them,
each of whom may act without the joinder of the others, as his or her true and
lawful attorneys-in-fact and agents with power to act and with full power of
substitution and resubstitution, to execute in his or her name, place and stead,
in his or her capacity as a member of the Committee, as the case may be, of the
Partnership, the Registration Statement, and all instruments necessary or
incidental in connection therewith, with such amendment or amendments thereto in
each case as said attorneys-in-fact and agents or any of them shall deem
necessary or appropriate, together with any and all exhibits and other documents
relating thereto as said attorneys-in-fact and agents or any of them shall deem
necessary or appropriate or incidental in connection therewith, and to file the
same or cause the same to be filed with the Commission. Said attorneys-in-fact
and agents shall have full power and authority to do and perform in the name and
on behalf of each of the undersigned, in any and all capacities, every act
whatsoever necessary or desirable to be done to the premises, as fully and to
all intents and purposes as each of the undersigned might or could do in person,
each of the undersigned hereby ratifying and approving the acts of said
attorneys-in-fact and agents or any of them or their substitutes.
IN WITNESS WHEREOF, each of the undersigned has executed this instrument on
this 9th day of June, 1999.
/s/ Dan F. Smith /s/ William M. Landuyt
- --------------------------------------- ---------------------------------------
Name: Dan F. Smith Name: William M. Landuyt
Title: Co-Chairman Title: Co-Chairman
Partnership Governance Committee Partnership Governance Committee
/s/ Jeffrey R. Pendergraft /s/ John E. Lushefski
- --------------------------------------- ---------------------------------------
Name: Jeffrey R. Pendergraft Name: John E. Lushefski
Title: Member Title: Member
Partnership Governance Committee Partnership Governance Committee
<PAGE>
/s/ T. Kevin DeNicola /s/ George Robbins
- --------------------------------------- ---------------------------------------
Name: T. Kevin DeNicola Name: George Robbins
Title: Member Title: Member
Partnership Governance Committee Partnership Governance Committee
/s/ Dr. Ray R. Irani /s/ Stephen I. Chazen
- --------------------------------------- ---------------------------------------
Name: Dr. Ray R. Irani Name: Stephen I. Chazen
Title: Co-Chairman Title: Member
Partnership Governance Committee Partnership Governance Committee
- ---------------------------------------
Name: J. Roger Hirl
Title: Member
Partnership Governance Committee
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001081158
<NAME> EQUISTAR CHEMICALS LP
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 118
<SECURITIES> 0
<RECEIVABLES> 426
<ALLOWANCES> (3)
<INVENTORY> 513
<CURRENT-ASSETS> 1,161
<PP&E> 5,898
<DEPRECIATION> (1,832)
<TOTAL-ASSETS> 6,702
<CURRENT-LIABILITIES> 574
<BONDS> 2,201
0
0
<COMMON> 0
<OTHER-SE> 3,842
<TOTAL-LIABILITY-AND-EQUITY> 6,702
<SALES> 1,104
<TOTAL-REVENUES> 1,104
<CGS> 980
<TOTAL-COSTS> 1,058
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> 7
<INCOME-TAX> 0
<INCOME-CONTINUING> 7
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EQUISTAR CHEMICALS, LP
EQUISTAR FUNDING CORPORATION
LETTER TO CLIENTS
FOR
TENDER OF ALL OUTSTANDING
8 1/2% NOTES DUE 2004 8 3/4% NOTES DUE 2009
IN EXCHANGE FOR REGISTERED IN EXCHANGE FOR REGISTERED
8 1/2% NOTES DUE 2004 8 3/4% NOTES DUE 2009
- --------------------------------------------------------------------------------
Each exchange offer will expire at 5:00 p.m., New York City time, on _________
___, 1999, unless extended (the "Expiration Date"). Outstanding notes tendered
in an exchange offer may be withdrawn at any time before 5:00 p.m., New York
City time, on the Expiration Date for that exchange offer.
- --------------------------------------------------------------------------------
To Our Clients:
We are enclosing with this letter a prospectus dated ______________
_________, 1999 of Equistar Chemicals, LP and Equistar Funding Corporation (the
"Issuers") and the related letter of transmittal. These two documents together
constitute the Issuers' offers to exchange their 8 1/2% Notes due 2004 and their
8 3/4% Notes due 2009 (collectively, the "New Notes"), the issuance of which has
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), for a like principal amount of their issued and outstanding 8 1/2% Notes
due 2004 and their 8 3/4% Notes due 2009 (collectively, the "Outstanding
Notes"), respectively, which offers consist of separate, independent offers to
exchange the New Notes of each series for Outstanding Notes of that series (each
an "Exchange Offer" and sometimes collectively referred to herein as the
"Exchange Offers").
No Exchange Offer for Outstanding Notes of a series is conditioned upon any
minimum aggregate principal amount of Outstanding Notes of that series being
tendered for exchanges or upon the consummation of any other Exchange Offer.
We are the holder of record of Outstanding Notes held by us for your own
account. A tender of your Outstanding Notes held by us can be made only by us as
the record holder according to your instructions. The letter of transmittal is
furnished to you for your information only and cannot be used by you to tender
Outstanding Notes held by us for your account.
We request instructions as to whether you wish to tender any or all of the
Outstanding Notes held by us for your account under the terms and conditions of
the Exchange Offers. We also request that you confirm that we may, on your
behalf, make the representations contained in the letter of transmittal.
Under the letter of transmittal, each holder of Outstanding Notes will
represent to the Issuers that
(i) any New Notes received are being acquired in the ordinary course of
business of the person receiving such New Notes,
(ii) that person does not have an arrangement or understanding with any
person to participate in the distribution of the Outstanding Notes or
the New Notes within the meaning of the Securities Act and
<PAGE>
(iii) that person is not an "affiliate," as defined in Rule 405 under the
Securities Act, of either of the Issuers or, if it is an affiliate,
it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
In addition, each holder of Outstanding Notes will represent to the Issuers
that
(i) if that person is not a broker-dealer, it is not engaged in, and does
not intend to engage in, a distribution of New Notes and
(ii) if that person is a broker-dealer that will receive New Notes for its
own account in exchange for Outstanding Notes that were acquired as a
result of market-making activities or other trading activities, it
will deliver a prospectus in connection with any resale of those New
Notes; however, by so acknowledging and by delivering a prospectus,
it will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
Very truly yours,
2
<PAGE>
PLEASE RETURN YOUR INSTRUCTIONS TO US IN THE ENCLOSED ENVELOPE WITHIN AMPLE
TIME TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF BEFORE THE APPLICABLE
EXPIRATION DATE.
INSTRUCTION TO
DTC TRANSFER PARTICIPANT
To Participant of The Depository Trust Company:
The undersigned hereby acknowledges receipt and review of the prospectus
dated ______ ___, 1999 of Equistar Chemicals, LP and Equistar Funding
Corporation (the "Issuers") and the related letter of transmittal. These two
documents together constitute the Issuers's offers to exchange their 8 1/2%
Notes due 2004 and their 8 3/4% Notes due 2009 (collectively, the "New Notes"),
the issuance of which has been registered under the Securities Act of 1933, as
amended (the "Securities Act"), for a like principal amount of their issued and
outstanding 8 1/2% Notes due 2004 and their 8 3/4% Notes due 2009 (collectively,
the "Outstanding Notes"), respectively, which offers consists of separate,
independent offers to exchange the New Notes of each series for Outstanding
Notes of that series (each, an "Exchange Offer" and sometimes collectively
referred to herein as the "Exchange Offers").
This will instruct you, the registered holder and DTC participant, as to
the action to be taken by you relating to the Exchange Offers for the
Outstanding Notes held by you for the account of the undersigned.
The aggregate principal amount of the Outstanding Notes of each series held
by you for the account of the undersigned is (fill in amount):
-------------------------------------------------------------------
Title of Series Principal Amount
-------------------------------------------------------------------
8 1/2% Notes due 2004
-------------------------------------------------------------------
8 3/4% Notes due 2009
-------------------------------------------------------------------
WITH RESPECT TO THE EXCHANGE OFFERS, THE UNDERSIGNED HEREBY INSTRUCTS YOU
(CHECK APPROPRIATE BOX):
[_] TO TENDER ALL OUTSTANDING NOTES HELD BY YOU FOR THE ACCOUNT OF THE
UNDERSIGNED.
[_] TO TENDER THE FOLLOWING AMOUNT OF OUTSTANDING NOTES HELD BY YOU FOR THE
ACCOUNT OF THE UNDERSIGNED:
-------------------------------------------------------------------
Title of Series Principal Amount Tendered
-------------------------------------------------------------------
8 1/2% Notes due 2004
-------------------------------------------------------------------
8 3/4% Notes due 2009
[_] NOT TO TENDER ANY OUTSTANDING NOTES HELD BY YOU FOR THE ACCOUNT OF THE
UNDERSIGNED.
IF NO BOX IS CHECKED, A SIGNED AND RETURNED INSTRUCTION TO DTC PARTICIPANT
WILL BE DEEMED TO INSTRUCT YOU TO TENDER ALL OUTSTANDING NOTES HELD BY YOU FOR
THE ACCOUNT OF THE UNDERSIGNED.
If the undersigned instructs you to tender the Outstanding Notes of a
series held by you for the account of the undersigned, it is understood that you
are authorized to make, on behalf of the undersigned (and the undersigned, by
its
3
<PAGE>
signature below, hereby makes to you), the representations contained in the
letter of transmittal that are to be made with respect to the undersigned as a
beneficial owner, including, but not limited to, the representations that
(i) any New Notes received are being acquired in the ordinary course of
business of the undersigned;
(ii) the undersigned does not have an arrangement or understanding with
any person to participate in the distribution of the Outstanding
Notes or the New Notes within the meaning of the Securities Act;
(iii) the undersigned is not an "affiliate," as defined in Rule 405 under
the Securities Act, of either of the Issuers or, if it is an
affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable;
(iv) if the undersigned is not a broker-dealer, it is not engaged in, and
does not intend to engage in, a distribution of New Notes and
(v) if the undersigned is a broker-dealer that will receive New Notes for
its own account in exchange for Outstanding Notes that were acquired
as a result of market-making activities or other trading activities,
it will deliver a prospectus in connection with any resale of those
New Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
SIGN HERE
Name of beneficial owner(s):
--------------------------------------------------
Signature(s):
-----------------------------------------------------------------
Name(s) (please print):
-------------------------------------------------------
Address:
----------------------------------------------------------------------
Telephone Number:
-------------------------------------------------------------
Taxpayer Identification or Social Security Number:
----------------------------
Date:
-------------------------------------------------------------------------
4
<PAGE>
EQUISTAR CHEMICALS, LP
EQUISTAR FUNDING CORPORATION
LETTER TO
DEPOSITORY TRUST COMPANY PARTICIPANTS
FOR
TENDER OF ALL OUTSTANDING
8 1/2% Notes Due 2004 8 3/4% Notes Due 2009
in exchange for registered in exchange for registered
8 1/2% Notes Due 2004 8 3/4% Notes Due 2009
- --------------------------------------------------------------------------------
EACH EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _________
___, 1999, UNLESS EXTENDED (THE "EXPIRATION DATE"). OUTSTANDING NOTES TENDERED
IN AN EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE 5:00 P.M., NEW YORK
CITY TIME, ON THE EXPIRATION DATE FOR THAT EXCHANGE OFFER.
- --------------------------------------------------------------------------------
To The Depository Trust Company Participants:
We are enclosing herewith the materials listed below relating to the offers
by Equistar Chemicals, LP and Equistar Funding Corporation (the "Issuers") to
exchange their 8 1/2% Notes due 2004 and their 8 3/4% Notes due 2009
(collectively, the "New Notes"), the issuance of which has been registered under
the Securities Act of 1933, as amended (the "Securities Act"), for a like
principal amount of their issued and outstanding 8 1/2% Notes due 2004 and their
8 3/4% Notes due 2009 (collectively, the "Outstanding Notes"), respectively,
which offers consists of separate, independent offers to exchange the New Notes
of each series for Outstanding Notes of that series (each, an "Exchange Offer"
and sometimes collectively referred to herein as the "Exchange Offers"), upon
the terms and subject to the conditions described in the Issuers' prospectus
dated _______________, 1999 and the related letter of transmittal.
We are enclosing copies of the following documents:
1. Prospectus dated _______ ___, 1999,
2. Letter of transmittal together with accompanying Substitute Form
W-9 Guidelines,
3. Notice of Guaranteed Delivery, and
4. Letter that may be sent to your clients for whose account you hold
Outstanding Notes in your name or in the name of your nominee, with space
provided for obtaining that client's instruction with regard to the
Exchange Offers.
We urge you to contact your clients promptly. Please note that each
Exchange Offer will expire at 5:00 p.m., New York City time, on _________ ___,
1999, unless extended.
No Exchange Offer for Outstanding Notes of a series is conditioned upon any
minimum aggregate principal amount of Outstanding Notes of such series being
tendered for exchange, or upon the consummation of any other Exchange Offer.
Under the letter of transmittal, each holder of Outstanding Notes will
represent to the Issuers that
(i) any New Notes received are being acquired in the ordinary course
of business of the person receiving those New Notes,
(ii) that person does not have an arrangement or understanding with
any person to participate in the distribution of the Outstanding
Notes or the New Notes within the meaning of the Securities Act
and
<PAGE>
(iii) that person is not an "affiliate," as defined in Rule 405 under
the Securities Act, of either of the Issuers or, if it is an
affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent
applicable.
In addition, each holder of Outstanding Notes will represent to the Issuers
that
(i) if that person is not a broker-dealer, it is not engaged in, and
does not intend to engage in, a distribution of New Notes and
(ii) if that person is a broker-dealer that will receive New Notes
for its own account in exchange for Outstanding Notes that were
acquired as a result of market-making activities or other
trading activities, it will deliver a prospectus in connection
with any resale of such New Notes; however, by so acknowledging
and by delivering a prospectus, it will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities
Act.
The enclosed letter to clients contains an authorization by the beneficial
owners of the Outstanding Notes for you to make the foregoing representations.
The Issuers will not pay any fee or commission to any broker or dealer or
to any other person other than the Exchange Agent, in connection with the
solicitation of tenders of Outstanding Notes under the Exchange Offers. The
Issuers will pay, or cause to be paid, any transfer taxes payable on the
transfer of Outstanding Notes to it, except as otherwise provided in Instruction
7 of the enclosed letter of transmittal.
Additional copies of the enclosed material may be obtained from us upon
request.
Very truly yours,
Equistar Chemicals, LP
2
<PAGE>
EQUISTAR CHEMICALS, LP
EQUISTAR FUNDING CORPORATION
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF ALL OUTSTANDING
8 1/2% NOTES DUE 2004 8 3/4% NOTES DUE 2009
IN EXCHANGE FOR REGISTERED IN EXCHANGE FOR REGISTERED
8 1/2% NOTES DUE 2004 8 3/4% NOTES DUE 2009
This form, or one substantially equivalent hereto, must be used by a
holder to accept the exchange offers of Equistar Chemicals, LP, and Equistar
Funding Corporation (together referred to herein as the "Issuers"), and to
tender the outstanding 8 1/2% Notes due 2004 and outstanding 8 3/4% Notes due
2009 (collectively, the "Outstanding Notes") to the exchange agent under the
guaranteed delivery procedures described in "The Exchange Offers--Guaranteed
Delivery Procedures" of the Issuers' prospectus, dated __________, 1999, and in
Instruction 2 to the related letter of transmittal. Any holder who wishes to
tender Outstanding Notes of a series under the guaranteed delivery procedures
must ensure that The Bank of New York, as exchange agent (the "Exchange Agent"),
receives this notice of guaranteed delivery, properly completed and duly
executed, before the Expiration Date (as defined below) of the Exchange Offer of
any series. Capitalized terms used but not defined herein have the meanings
ascribed to them in the prospectus or the letter of transmittal.
- --------------------------------------------------------------------------------
EACH EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
____________ ______, 1999, UNLESS EXTENDED (THE "EXPIRATION DATE"). OUTSTANDING
NOTES TENDERED IN AN EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE 5:00
P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE FOR THAT EXCHANGE OFFER.
- --------------------------------------------------------------------------------
The Exchange Agent for the Exchange Offers is:
THE BANK OF NEW YORK
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BY COURIER: BY MAIL (REGISTERED OR BY HAND:
CERTIFIED MAIL RECOMMENDED):
THE BANK OF NEW YORK THE BANK OF NEW YORK 101 BARCLAY ST.
101 BARCLAY ST. 101 BARCLAY ST., FLOOR 7E CORPORATE TRUST SERVICES WINDOW
CORPORATE TRUST SERVICES NEW YORK, NY 10286 GROUND LEVEL
WINDOW ATTN: REORG. DEPT. NEW YORK, NY 10286
GROUND LEVEL ATTN: REORG. DEPT.
NEW YORK, NY 10286
ATTN: REORG. DEPT.
</TABLE>
BY FACSIMILE TRANSMISSION (ELIGIBLE INSTITUTIONS ONLY):
(212) 815-6339 or (212) 815-4699
Attn: ___________________________
Confirm by Telephone:
-----------------------
-------------------------------------------
<PAGE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS STATED ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TO A NUMBER OTHER THAN THOSE LISTED
ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
NOTICE OF GUARANTEED DELIVERY SHOULD BE READ CAREFULLY BEFORE THE NOTICE OF
GUARANTEED DELIVERY IS COMPLETED.
This notice of guaranteed delivery is not to be used to guarantee
signatures. If a signature on a letter of transmittal is required to be
guaranteed by an "Eligible Institution" under the instructions thereto, that
signature guarantee must appear in the applicable space in the box provided on
the letter of transmittal for guarantee of signatures.
2
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to the Issuers, in accordance with the
Issuers' offers, upon the terms and subject to the conditions described in the
prospectus dated _________, 1999 and the related letter of transmittal, receipt
of which is hereby acknowledged, the principal amount of Outstanding Notes of
the series listed below under the guaranteed delivery procedures described in
the prospectus under the caption "The Exchange Offers--Guaranteed Delivery
Procedures" and in Instruction 2 of the related letter of transmittal.
The undersigned hereby tenders the Outstanding Notes of the series listed
below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Certificate Number(s) (if known) of
Outstanding Notes
Title of or Account Number at The Depository Aggregate Principal Aggregate Principal
Series * Trust Company Amount Represented Amount Tendered
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
PLEASE SIGN AND COMPLETE
--------------------------------------------------- --------------------------------------------------------
--------------------------------------------------- --------------------------------------------------------
Name(s) of Registered Holder(s) Signatures of Registered Holder(s) or Authorized
Signatory
---------------------------------------------------
---------------------------------------------------
Address
--------------------------------------------------- Dated , 1999
Area Code and Telephone Number(s) ----------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
* Either 8 1/2% Notes due 2004 or 8 3/4% Notes due 2009.
-------------------------------------------
</TABLE>
3
<PAGE>
THIS NOTICE OF GUARANTEED DELIVERY MUST BE SIGNED BY THE REGISTERED
HOLDER(S) OF OUTSTANDING NOTES EXACTLY AS THE NAME(S) OF SUCH PERSON(S)
APPEAR(S) ON CERTIFICATES FOR OUTSTANDING NOTES OR ON A SECURITY POSITION
LISTING AS THE OWNER OF OUTSTANDING NOTES, OR BY PERSON(S) AUTHORIZED TO BECOME
HOLDER(S) BY ENDORSEMENTS AND DOCUMENTS TRANSMITTED WITH THIS NOTICE OF
GUARANTEED DELIVERY. IF SIGNATURE IS BY A TRUSTEE, EXECUTOR, ADMINISTRATOR,
GUARDIAN, ATTORNEY-IN-FACT, OFFICER OR OTHER PERSON ACTING IN A FIDUCIARY OR
REPRESENTATIVE CAPACITY, SUCH PERSON MUST PROVIDE THE FOLLOWING INFORMATION:
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Capacity:
- --------------------------------------------------------------------------------
Address(es):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GUARANTEE
(not to be used for signature guarantee)
The undersigned, a firm which is a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or is a commercial bank or trust company having an office or correspondent in
the United States, or is otherwise an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, hereby
guarantees deposit with the Exchange Agent of the letter of transmittal (or
facsimile thereof or agent's message in lieu thereof), together with the
Outstanding Notes tendered hereby in proper form for transfer (or confirmation
of the book-entry transfer of such Outstanding Notes into the Exchange Agent's
account at DTC as described in the prospectus under the caption "The Exchange
Offers--Book-Entry Transfer" and in the related letter of transmittal) and any
other required documents, all by 5:00 p.m., New York City time, within three New
York Stock Exchange trading days following the Expiration Date of the Exchange
Offer for such series.
Name of Firm:
---------------------------- ------------------------------
(Authorized Signature)
Address: Name:
--------------------------------- -------------------------
(Include Zip Code) Title:
------------------------
(Please Type or Print)
Area Code and Telephone Number:
---------------------------- Date: , 1999
-------------------
DO NOT SEND OUTSTANDING NOTES WITH THIS FORM. ACTUAL SURRENDER OF
OUTSTANDING NOTES MUST BE MADE UNDER, AND BE ACCOMPANIED BY, A PROPERLY
COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED
DOCUMENTS.
4
<PAGE>
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed
and duly executed copy of this notice of guaranteed delivery (or facsimile
hereof or an agent's message and notice of guaranteed delivery in lieu hereof)
and any other documents required by this notice of guaranteed delivery with
respect to the Outstanding Notes of a series must be received by the Exchange
Agent at its address listed herein before the Expiration Date of the Exchange
Offer for any such series. THE METHOD OF DELIVERY OF THIS NOTICE OF GUARANTEED
DELIVERY AND ANY OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND SOLE RISK OF THE HOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY
WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. If delivery is by mail, registered
mail with return receipt requested, properly insured, is recommended. As an
alternative to delivery by mail, the holders may wish to consider using an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. For a description of the guaranteed delivery
procedures, see Instruction 2 of the related letter of transmittal.
2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY. If this notice of
guaranteed delivery (or facsimile hereof) is signed by the registered holder(s)
of the Outstanding Notes referred to herein, the signature(s) must correspond
exactly with the name(s) written on the face of the Outstanding Notes without
alteration, enlargement, or any change whatsoever. If this notice of guaranteed
delivery (or facsimile hereof) is signed by a participant of DTC whose name
appears on a security position listing as the owner of the Outstanding Notes,
the signature must correspond with the name shown on the security position
listing as the owner of the Outstanding Notes.
If this notice of guaranteed delivery (or facsimile hereof) is signed by a
person other than the registered holder(s) of any Outstanding Notes listed or a
participant of the DTC, this notice of guaranteed delivery must be accompanied
by appropriate bond powers, signed as the name(s) of the registered holder(s)
appear(s) on the Outstanding Notes or signed as the name(s) of the participant
shown on DTC's security position listing.
If this notice of guaranteed delivery (or facsimile hereof) is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation, or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing and submit with the letter of
transmittal evidence satisfactory to the Exchange Agent of such person's
authority to so act.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance and requests for additional copies of the prospectus and this
notice of guaranteed delivery may be directed to the Exchange Agent at the
address listed on the cover page hereof. Holders may also contact their broker-
dealer, commercial bank, trust company, or other nominee for assistance
concerning the Exchange Offers.
5
<PAGE>
EQUISTAR CHEMICALS, LP
EQUISTAR FUNDING CORPORATION
LETTER OF TRANSMITTAL
FOR
TENDER OF ALL OUTSTANDING
8 1/2% NOTES DUE 2004 8 3/4% NOTES DUE 2009
IN EXCHANGE FOR REGISTERED IN EXCHANGE FOR REGISTERED
8 1/2% NOTES DUE 2004 8 3/4% NOTES DUE 2009
- --------------------------------------------------------------------------------
EACH EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _________
___, 1999, UNLESS EXTENDED (THE "EXPIRATION DATE"). OUTSTANDING NOTES TENDERED
IN AN EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE 5:00 P.M., NEW YORK
CITY TIME, ON THE EXPIRATION DATE FOR THAT EXCHANGE OFFER.
- --------------------------------------------------------------------------------
DELIVER TO THE EXCHANGE AGENT:
THE BANK OF NEW YORK
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BY COURIER: BY MAIL (REGISTERED OR CERTIFIED BY HAND:
MAIL RECOMMENDED):
The Bank of New York The Bank of New York 101 Barclay St.
101 Barclay St. 101 Barclay St., floor 7E Corporate Trust Services Window
Corporate Trust Services Window New York, NY 10286 Ground Level
Ground Level Attn: Reorg. Dept. New York, NY 10286
New York, NY 10286 Attn: Reorg. Dept.
Attn: Reorg. Dept.
</TABLE>
BY FACSIMILE TRANSMISSION (ELIGIBLE INSTITUTIONS ONLY):
212-815-6339 or 212-815-4699
Attn: ________________________
Confirm by telephone:
______________________
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SHOWN ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
The undersigned hereby acknowledges receipt and review of the prospectus
dated _________ ________, 1999 of Equistar Chemicals, LP and Equistar Funding
Corporation (collectively referred to as the "Issuers") and this letter of
transmittal which together constitute the Issuers' offer to exchange their
8 1/2% notes due 2004 and their 8 3/4% notes due 2009 (collectively the "New
Notes"), the issuance of which has been registered under the Securities Act of
1933, as amended, for a like principal amount of their issued and outstanding
8 1/2% notes due 2004 and 8 3/4% notes due 2009 (collectively the "Outstanding
Notes"), respectively, which offer consists of separate, independent offers to
exchange the New Notes of each series for Outstanding Notes of that series (each
an "Exchange Offer" and sometimes collectively
<PAGE>
referred to herein as the "Exchange Offers"). Capitalized terms used but not
defined herein have the respective meaning given to them in the prospectus.
The Issuers reserve the right, at any time or from time to time, to extend
the period of time during which an Exchange Offer for the Outstanding Notes of a
series is open, at their discretion, in which event the term "Expiration Date"
with respect to such series shall mean the latest date to which such Exchange
Offer is extended. The Issuers reserve the right to extend such period for each
series independently. The Issuers shall notify The Bank of New York (the
"Exchange Agent") of any extension by oral or written notice and shall make a
public announcement thereof no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
Registered Holders of Exchange Notes on the relevant record date for the
first interest payment date following the consummation of an Exchange Offer will
receive interest accruing from February 16, 1999. Outstanding Notes accepted for
exchange will cease to accrue interest from and after the date of consummation
of an Exchange Offer. Holders whose Outstanding Notes are accepted for exchange
will not receive any payment in respect of accrued interest on such Outstanding
Notes.
This letter of transmittal is to be used by a holder of Outstanding Notes
of a series (i) if certificates of Outstanding Notes of such series are to be
forwarded herewith or (ii) if delivery of Outstanding Notes of such series is to
be made by book-entry transfer to the account maintained by the Exchange Agent
at The Depository Trust Company ("DTC") pursuant to the procedures set forth in
the prospectus under the caption "The Exchange Offers -- Book-Entry Transfer"
and an "agent's message" is not delivered as described in the prospectus under
the caption "The Exchange Offer -- Procedures for Tendering -- Tendering Through
DTC's Automated Tender Offer Program." Tenders by book-entry transfer may also
be made by delivering an agent's message pursuant to DTC's Automated Tender
Offer Program in lieu of this letter of transmittal. Holders of Outstanding
Notes of a series whose Outstanding Notes are not immediately available, or who
are unable to deliver their Outstanding Notes, this letter of transmittal and
all other documents required hereby to the Exchange Agent on or prior to the
Expiration Date for the Exchange Offer for that series, or who are unable to
complete the procedure for book-entry transfer on a timely basis, must tender
their Outstanding Notes according to the guaranteed delivery procedures set
forth in the prospectus under the caption "The Exchange Offers -- Guaranteed
Delivery Procedures." See Instruction 2 of this letter of transmittal. DELIVERY
OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The term "holder" with respect to an Exchange Offer for Outstanding Notes
of a series means any person in whose name such Outstanding Notes are registered
on the books of Equistar and Equistar Funding, any person who holds such
Outstanding Notes and has obtained a properly completed bond power from the
registered holder or any participant in DTC system whose name appears on a
security position listing as the holder of such Outstanding Notes and who
desires to deliver the Outstanding Notes by book-entry transfer at DTC. The
undersigned has completed, executed and delivered this letter of transmittal to
indicate the action the undersigned desires to take with respect to such
Exchange Offer. Holders who wish to tender their Outstanding Notes must complete
this letter of transmittal in its entirety (unless such Outstanding Notes are to
be tendered by book-entry transfer and an agent's message is delivered in lieu
hereof).
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Outstanding Notes of each series to which this letter of
transmittal relates. If the space below is inadequate, list the title of each
series, registered numbers and principal amounts on a separate signed schedule
and affix the list to this letter of transmittal.
2
<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION OF OUTSTANDING NOTES TENDERED
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Name(s) and Address(es) of Outstanding Note(s) Tendered
Registered Holder(s) Exactly as -------------------------------------------------------------------------------------
Name(s) Title of Registered Aggregate Principal Principal
Appear(s) on Outstanding Notes Series* Number(s)** Amount Amount
(Please Fill In, If Blank) Represented Tendered***
by Note(s)
- ------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Total
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Either "8 1/2% Notes due 2004" or "8 3/4% Notes due 2009."
** Need not be completed by book-entry holders.
** Unless otherwise indicated, any tendering holder of Outstanding Notes will
be deemed to have tendered the entire aggregate principal amount
represented by such Outstanding Notes. All tenders must be in integral
multiples of $1,000.
[_] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE ENCLOSED HEREWITH.
[_] CHECK HERE AND COMPLETE THE FOLLOWING IF TENDERED OUTSTANDING NOTES ARE
BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY
THE EXCHANGE AGENT WITH DTC (FOR USE BY ELIGIBLE INSTITUTIONS ONLY):
Name of Tendering
Institution:
--------------------------------------------------------------------
DTC Account
Number(s):
--------------------------------------------------------------------
Transaction Code
Number(s):
--------------------------------------------------------------------
[_] CHECK HERE AND COMPLETE THE FOLLOWING IF TENDERED OUTSTANDING NOTES ARE
BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY EITHER ENCLOSED
HEREWITH OR PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT (COPY ATTACHED) (FOR
USE BY ELIGIBLE INSTITUTIONS ONLY):
Name(s) of Registered Holder(s)
of Outstanding Notes:
-----------------------------------------------------------
3
<PAGE>
Date of Execution of Notice of
Guaranteed Delivery:
------------------------------------------------------------
Window Ticket Number
(if available):
-----------------------------------------------------------------
Name of Eligible Institution that
Guaranteed Delivery:
------------------------------------------------------------
DTC Account Number(s) (if delivered
by book-entry transfer):
--------------------------------------------------------
Transaction Code Number (if delivered
by book-entry transfer):
--------------------------------------------------------
Name of Tendering Institution (if
delivered by book-entry transfer):
----------------------------------------------
[_] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OUTSTANDING
NOTES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER(S) SET FORTH
ABOVE (FOR USE BY ELIGIBLE INSTITUTIONS ONLY).
[_] CHECK HERE AND COMPLETE THE FOLLOWING IF YOU ARE A BROKER-DEALER AND WISH
TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY
AMENDMENTS OR SUPPLEMENTS THERETO:
Name:
---------------------------------------------------------------------------
Address:
------------------------------------------------------------------------
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of New
Notes. If the undersigned is a broker-dealer that will receive New Notes for its
own account in exchange for Outstanding Notes that were acquired as a result of
market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes; however, by so acknowledging and
by delivering a prospectus, the undersigned will not be deemed to have admitted
that it is an "underwriter" within the meaning of the Securities Act.
4
<PAGE>
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Issuers for exchange the principal amount of Outstanding
Notes indicated above. Subject to and effective upon the acceptance for exchange
of the principal amount of Outstanding Notes of any series tendered in
accordance with this letter of transmittal, the undersigned hereby exchanges,
assigns and transfers to, or upon the order of, the Issuers all right, title and
interest in and to the Outstanding Notes tendered for exchange hereby, including
all rights to accrued and unpaid interest thereon as of the Expiration Date. The
undersigned hereby irrevocably constitutes and appoints the Exchange Agent as
the true and lawful agent and attorney-in-fact for the undersigned (with full
knowledge that said Exchange Agent also acts as the agent for the Issuers in
connection with the Exchange Offer) with respect to the tendered Outstanding
Notes with full power of substitution to
(i) deliver such Outstanding Notes, or transfer ownership of such
Outstanding Notes on the account books maintained by DTC, to the
Issuers and deliver all accompanying evidences of transfer and
authenticity, and
(ii) present such Outstanding Notes for transfer on the books of the
Issuers and receive all benefits and otherwise exercise all rights
of beneficial ownership of such Outstanding Notes, all in accordance
with the terms of an Exchange Offer.
The power of attorney granted in this paragraph shall be deemed to be
irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, assign and transfer the
Outstanding Notes tendered hereby and to acquire the New Notes issuable upon the
exchange of such tendered Outstanding Notes, and that the Issuers will acquire
good and unencumbered title thereto, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim, when the same are
accepted for exchange by the Issuers.
The undersigned acknowledges that an Exchange Offer is being made in
reliance upon interpretations set forth in no-action letters issued to third
parties by the staff of the Securities and Exchange Commission (the "SEC"),
including Exxon Capital Holdings Corporation (available May 13, 1988), Morgan
Stanley & Co. Incorporated (available June 5, 1991), Mary Kay Cosmetics, Inc.
(available June 1, 1991), Sherman & Sterling (available July 2, 1993) and
similar no-action letters (the "Prior No-Action Letters"), that the New Notes
issued in exchange for Outstanding Notes pursuant to an Exchange Offer may be
offered for resale, resold and otherwise transferred by holders thereof (other
than any such holder that is an "affiliate" of the Issuers within the meaning of
Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"),
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and that such holders are not engaging in, do
not intend to engage in and have no arrangement or understanding with any person
to participate in a distribution of such New Notes. The SEC has not, however,
considered an Exchange Offer in the context of a no-action letter, and there can
be no assurance that the staff of the SEC would make a similar determination
with respect to an Exchange Offer as in other circumstances.
The undersigned hereby further represents to the Issuers that
(i) any New Notes received are being acquired in the ordinary course of
business of the person receiving such New Notes, whether or not the
undersigned,
(ii) neither the undersigned nor any such other person has an arrangement
or understanding with any person to participate in the distribution
of the Outstanding Notes or the New Notes within the meaning of the
Securities Act and
5
<PAGE>
(iii) neither the holder nor any such other person is an "affiliate," as
defined in Rule 405 under the Securities Act, of either of the
Issuers or, if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities
Act to the extent applicable.
If the undersigned is not a broker-dealer, the undersigned represents that it is
not engaged in, and does not intend to engage in, a distribution of New Notes.
If the undersigned is a broker-dealer that will receive the New Notes for its
own account in exchange for Outstanding Notes that were acquired as a result of
market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes. By so acknowledging and by
delivering a prospectus, however, the undersigned will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act.
The undersigned acknowledges that if the undersigned is tendering
Outstanding Notes in the Exchange Offer with the intention of participating in
any manner in a distribution of the New Notes
(i) the undersigned cannot rely on the position of the staff of the SEC
set forth in the Prior No-Action Letters and, in the absence of an
exemption therefrom, must comply with the registration and
prospectus delivery requirements of the Securities Act in connection
with the resale transaction of the New Notes, in which case the
registration statement must contain the selling security holder
information required by Item 507 or Item 508, as applicable, of
Regulation S-K of the SEC, and
(ii) failure to comply with such requirements in such instance could
result in the undersigned incurring liability for which the
undersigned is not indemnified by the Issuers.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Issuers to be necessary or
desirable to complete the exchange, assignment and transfer of the Outstanding
Notes tendered hereby, including the transfer of such Outstanding Notes on the
account books maintained by DTC.
For purposes of the Exchange Offer, the Issuers shall be deemed to have
accepted for exchange validly tendered Outstanding Notes of such series when, as
and if the Issuers give oral or written notice thereof to the Exchange Agent.
Any tendered Outstanding Notes that are not accepted for exchange pursuant to
such Exchange Offer for any reason will be returned, without expense, to the
undersigned at the address shown below or at a different address as may be
indicated herein under "Special Delivery Instructions" as promptly as
practicable after the Expiration Date for such Exchange Offer.
All authority conferred or agreed to be conferred by this letter of
transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this letter of
transmittal shall be binding upon the successors, assigns, heirs, executors,
administrators, trustees in bankruptcy and legal representatives. This tender
may be withdrawn only in accordance with the procedures set forth in the section
of the prospectus entitled "The Exchange Offers -- Withdrawal of Tenders."
The undersigned acknowledges that the Issuers' acceptance of properly
tendered Outstanding Notes pursuant to the procedures described under the
caption "The Exchange Offers -- Procedures for Tendering" in the prospectus and
in the instructions hereto will constitute a binding agreement between the
undersigned and the Issuers upon the terms and subject to the conditions of the
Exchange Offers. The undersigned further agrees that acceptance of any tendered
Outstanding Notes by the Issuers and the issuance of New Notes in exchange
therefor shall constitute performance in full by the Issuers of their
obligations under the exchange and registration rights agreement and that the
Issuers shall have no further obligations or liabilities thereunder for the
registration of the Outstanding Notes or the New Notes.
The Exchange Offers are subject to certain conditions set forth in the
prospectus under the caption "The Exchange Offers -- Conditions to the Exchange
Offers." The undersigned recognizes that as a result of these conditions (which
may be waived, in whole or in part, by the Issuers), the Issuers may not be
required to exchange any of the Outstanding Notes tendered hereby. In such
event, the Outstanding Notes not exchanged will be returned to the undersigned
at the address shown below the signature of the undersigned.
6
<PAGE>
Unless otherwise indicated under "Special Issuance Instructions," please
issue the New Notes issued in exchange for the Outstanding Notes accepted for
exchange and return any Outstanding Notes not tendered or not exchanged, in the
name(s) of the undersigned (or, in the case of a book-entry delivery of
Outstanding Notes, please credit the account indicated above maintained at DTC).
Similarly, unless otherwise indicated under "Special Delivery Instructions,"
please mail or deliver the New Notes issued in exchange for the Outstanding
Notes accepted for exchange and any Outstanding Notes not tendered or not
exchanged (and accompanying documents, as appropriate) to the undersigned at the
address shown below the undersigned's signature(s). In the event that both
"Special Issuance Instructions" and "Special Delivery Instructions" are
completed, please issue the New Notes issued in exchange for the Outstanding
Notes accepted for exchange in the name(s) of, and return any Outstanding Notes
not tendered or not exchanged to, the person(s) so indicated. The undersigned
recognizes that the Issuers have no obligation pursuant to the "Special Issuance
Instructions" and "Special Delivery Instructions" to transfer any Outstanding
Notes from the name of the registered holder(s) thereof if the Issuers do not
accept for exchange any of the Outstanding Notes so tendered for exchange.
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 5 AND 6) (SEE INSTRUCTIONS 5 AND 6)
To be completed ONLY (i) if Outstanding Notes in a To be completed ONLY if Outstanding Notes in a
principal amount not tendered, or New Notes issued in principal amount not tendered, or New Notes issued, in
exchange for Outstanding Notes accepted for exchange for Outstanding Notes accepted for exchange,
exchange, are to be issued in the name of someone are to be mailed or delivered to someone other than the
other than the undersigned, or (ii) if Outstanding undersigned, or to the undersigned at an address other
Notes tendered by book-entry transfer which are not than that shown below the undersigned's signature.
exchanged are to be returned by credit to an account Mail or deliver New Notes and/or Old Notes to:
maintained at DTC other than the DTC Account
Number set forth above. Issue New Notes and/or
Outstanding Notes to:
Name: ______________________________________________ Name: ________________________________________________
Address: ___________________________________________ Address: _____________________________________________
____________________________________________________ ______________________________________________________
(include Zip Code) (include Zip Code)
____________________________________________________ ______________________________________________________
(Tax Identification or Social Security Number) (Tax Identification or Social Security Number)
(Please Type or Print) (Please Type or Print)
</TABLE>
[_] Credit unexchanged Outstanding Notes delivered by book-entry transfer to
the DTC account number set forth below:
DTC Account Number:
________________________________________________________________________________
8
<PAGE>
IMPORTANT
PLEASE SIGN HERE WHETHER OR NOT
OUTSTANDING NOTES ARE BEING PHYSICALLY TENDERED HEREBY
(Complete Accompanying Substitute Form W-9 Below)
X
------------------------------------------------------------------------------
X
------------------------------------------------------------------------------
(Signature(s) of Registered Holder(s) of Outstanding Notes)
Dated _____________________________, 1999
(The above lines must be signed by the registered holder(s) of Outstanding Notes
as you/their name(s) appear(s) on the Outstanding Notes or on a security
position listing, or by person(s) authorized to become registered holder(s) by a
properly completed bond power from the registered holder(s), a copy of which
must be transmitted with this letter of transmittal. If Outstanding Notes to
which this letter of transmittal relate are held of record by two or more joint
holders, then all such holders must sign this letter of transmittal. If
signature is by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or representative
capacity, then such person must (i) set forth his or her full title below and
(ii) unless waived by the Issuers, submit evidence satisfactory to the Issuers
of such person's authority to so act. See Instruction 5 regarding the completion
of this letter of transmittal, printed below.)
Name(s):
-----------------------------------------------------------------------
(Please Type or Print)
Capacity (Full Title):
---------------------------------------------------------
Address:
-----------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number:
------------------------------------------------
Taxpayer Identification or Social Security Number:
-----------------------------
MEDALLION SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 5)
Certain signatures must be guaranteed by an Eligible Institution.
Signature(s) Guaranteed by an
Eligible Institution:
----------------------------------------------------------
(Authorized Signature)
- -------------------------------------------------------------------------------
(Title)
- -------------------------------------------------------------------------------
(Name of Firm)
- -------------------------------------------------------------------------------
(Address, Including Zip Code)
- -------------------------------------------------------------------------------
(Area Code and Telephone Number)
Dated: , 1999
-------------------------------------------------------------------
9
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OUTSTANDING NOTES OR AGENT'S
MESSAGE AND BOOK-ENTRY CONFIRMATIONS. All physically delivered Outstanding Notes
of a series or any confirmation of a book-entry transfer to the Exchange Agent's
account at DTC of Outstanding Notes of a series tendered by book-entry transfer
(a "Book-Entry Confirmation"), as well as a properly completed and duly executed
copy of this letter of transmittal or facsimile hereof (or an agent's message in
lieu hereof pursuant to DTC's Automated Tender Offer Program), and any other
documents required by this letter of transmittal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date for the Exchange Offer for such series, or the
tendering holder must comply with the guaranteed delivery procedures set forth
below. Outstanding Notes tendered hereby must be in denominations of principal
amount of $1,000 and any integral multiple thereof. THE METHOD OF DELIVERY OF
THE TENDERED OUTSTANDING NOTES, THIS LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER AND, EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE
ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. INSTEAD OF
DELIVERY BY MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND
DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT TO THE ISSUERS.
All questions as to the validity, form, eligibility (including time of
receipt) or acceptance of tendered Outstanding Notes and withdrawal of tendered
Outstanding Notes will be determined by the Issuers in their sole discretion,
which determination will be final and binding. The Issuers reserve the absolute
right to reject any and all Outstanding Notes not properly tendered or any
Outstanding Notes the Issuers' acceptance of which would, in the opinion of
counsel for the Issuers, be unlawful. The Issuers also reserve the right to
waive any defects, irregularities or conditions of tender as to particular
Outstanding Notes. The Issuers' interpretation of the terms and conditions of an
Exchange Offer (including the instructions in this letter of transmittal) shall
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Outstanding Notes must be cured
within such time as the Issuers shall determine. Neither the Issuers, the
Exchange Agent nor any other person shall be under any duty to give notification
of defects or irregularities with respect to tenders of Outstanding Notes, nor
shall any of them incur any liability for failure to give such notification.
Tenders of Outstanding Notes will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any Outstanding Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned by
the Exchange Agent to the tendering holders of Outstanding Notes, unless
otherwise provided in this letter of transmittal, as soon as practicable
following the Expiration Date.
See "The Exchange Offers" section of the prospectus.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their
Outstanding Notes and (a) whose Outstanding Notes are not immediately available,
or (b) who cannot deliver their Outstanding Notes (or tender by book-entry
transfer), this letter of transmittal or any other documents required hereby to
the Exchange Agent prior to the applicable Expiration Date or (c) who are unable
to comply with the applicable procedures under DTC's Automated Tender Offer
Program on a timely basis, must tender their Outstanding Notes according to the
guaranteed delivery procedures set forth in the prospectus. Pursuant to such
procedures:
(i) such tender must be made by or through a firm which is a member of a
registered national securities exchange or of the office or
correspondent in the United States or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange
Act (an "Eligible Institution");
(ii) prior to the applicable Expiration Date, the Exchange Agent must have
received from the Eligible Institution a properly completed and duly
executed notice of guaranteed delivery (by facsimile transmission,
mail or hand delivery) or a properly transmitted agent's message and
notice of guaranteed delivery setting forth the name and address of
the holder of the Outstanding Notes, [the series of the Outstanding
Notes,] the registration number(s) of such Outstanding Notes and the
total principal amount of Outstanding Notes tendered, stating that
the tender is being made thereby and guaranteeing that, within three
New York Stock Exchange trading days after such Expiration Date,
this
10
<PAGE>
letter of transmittal (or facsimile hereof or an agent's message in
lieu hereof) together with the Outstanding Notes in proper form for
transfer (or a Book-Entry Confirmation) and any other documents
required by this letter of transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(iii) this letter of transmittal (or a facsimile hereof or an agent's
message in lieu hereof) together with the certificates for all
physically tendered Outstanding Notes in proper form for transfer (or
Book-Entry Confirmation, as the case may be) and all other documents
required hereby are received by the Exchange Agent within three New
York Stock Exchange trading days after such Expiration Date.
Any holder of Outstanding Notes who wishes to tender Outstanding Notes
pursuant to the guaranteed delivery procedures described above must ensure that
the Exchange Agent receives the notice of guaranteed delivery prior to 5:00
p.m., New York City time, on the applicable Expiration Date. Upon request of the
Exchange Agent, a notice of guaranteed delivery will be sent to holders who wish
to tender their Outstanding Notes according to the guaranteed delivery
procedures set forth above.
See "The Exchange Offers -- Guaranteed Delivery Procedures" section of the
prospectus.
3. TENDER BY HOLDER. Only a holder of Outstanding Notes may tender such
Outstanding Notes in the Exchange Offer. Any beneficial holder of Outstanding
Notes who is not the registered holder and who wishes to tender should arrange
with the registered holder to execute and deliver this letter of transmittal on
his behalf or must, prior to completing and executing this letter of transmittal
and delivering his Outstanding Notes, either make appropriate arrangements to
register ownership of the Outstanding Notes in such holder's name or obtain a
properly completed bond power from the registered holder.
4. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS WHO TENDER BY BOOK-ENTRY
TRANSFER). Tenders of Outstanding Notes will be accepted only in integral
multiples of $1,000. If less than the entire principal amount of any Outstanding
Notes is tendered, the tendering holder should fill in the principal amount
tendered in the third column of the box entitled "Description of Outstanding
Notes Tendered" above. The entire principal amount of Outstanding Notes
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated. If the entire principal amount of all Outstanding Notes is
not tendered, then Outstanding Notes for the principal amount of Outstanding
Notes not tendered and New Notes issued in exchange for any Outstanding Notes
accepted will be returned to the holder as promptly as practicable after the
Outstanding Notes are accepted for exchange.
5. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
MEDALLION GUARANTEE OF SIGNATURES. If this letter of transmittal (or facsimile
hereof) is signed by the record holder(s) of the Outstanding Notes tendered
hereby, the signature(s) must correspond exactly with the name(s) as written on
the face of the Outstanding Notes without alteration, enlargement or any change
whatsoever. If this letter of transmittal (or facsimile hereof) is signed by a
participant in DTC, the signature must correspond with the name as it appears on
the security position listing as the holder of the Outstanding Notes.
If any tendered Outstanding Notes are owned of record by two or more joint
owners, all of such owners must sign this letter of transmittal.
If this letter of transmittal (or facsimile hereof) is signed by the
registered holder(s) of Outstanding Notes listed and tendered hereby and the New
Notes issued in exchange therefor are to be issued (or any untendered principal
amount of Outstanding Notes is to be reissued) to the registered holder(s), the
said holder(s) need not and should not endorse any tendered Outstanding Notes,
nor provide a separate bond power. In any other case, such holder(s) must either
properly endorse the Outstanding Notes tendered or transmit a properly completed
separate bond power with this letter of transmittal, with the signatures on the
endorsement or bond power guaranteed by an Eligible Institution.
If this letter of transmittal (or facsimile hereof) or any Outstanding
Notes or bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and, unless waived by the Issuers, evidence satisfactory to the Issuers
of their authority to act must be submitted with this letter of transmittal.
11
<PAGE>
NO SIGNATURE GUARANTEE IS REQUIRED IF (I) THIS LETTER OF TRANSMITTAL (OR
FACSIMILE HEREOF) IS SIGNED BY THE REGISTERED HOLDER(S) OF THE OUTSTANDING NOTES
TENDERED HEREIN (OR BY A PARTICIPANT IN DTC WHOSE NAME APPEARS ON A SECURITY
POSITION LISTING AS THE OWNER OF THE TENDERED OUTSTANDING NOTES), AND THE NEW
NOTES ARE TO BE ISSUED DIRECTLY TO SUCH REGISTERED HOLDER(S) (OR, IF SIGNED BY A
PARTICIPANT IN DTC, DEPOSITED TO SUCH PARTICIPANT'S ACCOUNT AT DTC), AND NEITHER
THE BOX ENTITLED "SPECIAL DELIVERY INSTRUCTIONS" NOR THE BOX ENTITLED "SPECIAL
REGISTRATION INSTRUCTIONS" HAS BEEN COMPLETED, OR (II) SUCH OUTSTANDING NOTES
ARE TENDERED FOR THE ACCOUNT OF AN ELIGIBLE INSTITUTION. IN ALL OTHER CASES, ALL
SIGNATURES ON THIS LETTER OF TRANSMITTAL (OR FACSIMILE HEREOF) MUST BE
GUARANTEED BY AN ELIGIBLE INSTITUTION.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders should
indicate, in the applicable box or boxes, the name and address to which New
Notes or substitute Outstanding Notes for principal amounts not tendered or not
accepted for exchange are to be issued or sent, if different from the name and
address of the person signing this letter of transmittal. In the case of
issuance in a different name, the taxpayer identification or social security
number of the person named must also be indicated. Holders tendering Outstanding
Notes by book-entry transfer may request that Outstanding Notes not exchanged be
credited to such account maintained at DTC as such noteholder may designate
hereon. If no such instructions are given, such Outstanding Notes not exchanged
will be returned to the name and address (or account number) of the person
signing this letter of transmittal.
7. TRANSFER TAXES. The Issuers will pay all transfer taxes, if any,
applicable to the exchange of Outstanding Notes pursuant to an Exchange Offer.
If, however, New Notes or Outstanding Notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered holder of the
Outstanding Notes tendered hereby, or if tendered Outstanding Notes are
registered in the name of any person other than the person signing this letter
of transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Outstanding Notes pursuant to an Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with this letter
of transmittal, the amount of such transfer taxes will be billed directly to
such tendering holder and the Exchange Agent will retain possession of an amount
of Exchange Notes with a face amount at least equal to the amount of such
transfer taxes due by such tendering holder pending receipt by the Exchange
Agent of the amount of such taxes.
8. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a
holder of any Outstanding Notes or New Notes must provide the Issuers (as payor)
with its correct taxpayer identification number ("TIN"), which, in the case of a
holder who is an individual, is his or her social security number. If the
Issuers are not provided with the correct TIN, the holder or payee may be
subject to a $50 penalty imposed by Internal Revenue Service and backup
withholding of 31% on interest payments on the New Notes.
To prevent backup withholding, each tendering holder and each prospective
holder must provide such holder's correct TIN by completing the Substitute Form
W-9 set forth herein, certifying that the TIN provided is correct (or that such
holder is awaiting a TIN), and that (i) the holder has not been notified by the
Internal Revenue Service that such holder is subject to backup withholding as a
result of failure to report all interest or dividends or (ii) the Internal
Revenue Service has notified the holder that such holder is no longer subject to
backup withholding. If the New Notes will be registered in more than one name or
will not be in the name of the actual owner, consult the instructions on
Internal Revenue Service Form W-9, which may be obtained from the Exchange
Agent, for information on which TIN to report.
Certain foreign individuals and entities will not be subject to backup
withholding or information reporting if they submit a Form W-8, signed under
penalties of perjury, attesting to their foreign status. A Form W-8 can be
obtained from the Exchange Agent.
If such holder does not have a TIN, such holder should consult the
instructions on Form W-9 concerning applying for a TIN, check the box in Part 3
of the Substitute Form W-9, write "applied for" in lieu of its TIN and sign and
date the form and the Certificate of Awaiting Taxpayer Identification Number.
Checking this box, writing "applied for" on the form and signing such
certificate means that such holder has already applied for a TIN or that such
holder intends to apply for one in the near future. If such holder does not
provide its TIN to the Issuers within 60 days, backup withholding will begin and
continue until such holder furnishes its TIN to the Issuers.
12
<PAGE>
The Issuers reserve the right in their sole discretion to take whatever
steps are necessary to comply with the Issuers's obligations regarding backup
withholding.
9. VALIDITY OF TENDERS. All questions as to the validity, form,
eligibility (including time of receipt), acceptance and withdrawal of tendered
Outstanding Notes will be determined by the Issuers in their sole discretion,
which determination will be final and binding. The Issuers reserve the absolute
right to reject any and all Outstanding Notes not properly tendered or any
Outstanding Notes the Issuers' acceptance of which might, in the opinion of the
Issuers or their counsel, be unlawful. The Issuers also reserve the absolute
right to waive any conditions of an Exchange Offer or defects or irregularities
of tenders as to particular Outstanding Notes. The Issuers' interpretation of
the terms and conditions of an Exchange Offer (including this letter of
transmittal and the instructions hereto) shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Outstanding Notes must be cured within such time as the Issuers shall
determine. Neither the Issuers, the Exchange Agent nor any other person shall be
under any duty to give notification of defects or irregularities with respect to
tenders of Outstanding Notes nor shall any of them incur any liability for
failure to give such notification.
10. WAIVER OF CONDITIONS. The Issuers reserve the absolute right to waive,
in whole or part, any of the conditions to an Exchange Offer set forth in the
prospectus.
11. NO CONDITIONAL TENDER. No alternative, conditional, irregular or
contingent tender of Outstanding Notes will be accepted.
12. MUTILATED, LOST, STOLEN OR DESTROYED OUTSTANDING NOTES. Any holder
whose Outstanding Notes have been mutilated, lost, stolen or destroyed should
contact the Exchange Agent at the address indicated above for further
instructions. This letter of transmittal and related documents cannot be
processed until the procedures for replacing lost, stolen or destroyed
Outstanding Notes have been followed.
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance
or for additional copies of the prospectus or this letter of transmittal may be
directed to the Exchange Agent at the address or telephone number set forth on
the cover page of this letter of transmittal. Holders may also contact their
broker, dealer, commercial bank, trust Issuers or other nominee for assistance
concerning an Exchange Offer.
14. WITHDRAWAL. Tenders may be withdrawn only pursuant to the limited
withdrawal rights set forth in the prospectus under the caption "The Exchange
Offers -- Withdrawal of Tenders."
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE HEREOF OR
AN AGENT'S MESSAGE IN LIEU THEREOF (TOGETHER WITH THE OUTSTANDING NOTES
DELIVERED BY BOOK-ENTRY TRANSFER OR IN ORIGINAL HARD COPY FORM) MUST BE RECEIVED
BY THE EXCHANGE AGENT, OR THE NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY
THE EXCHANGE AGENT, PRIOR TO THE EXPIRATION DATE.
13
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Substitute Part 1 -- Please Provide Your Tin in the Box at Right _______________________________
Form W-9 and Certify By Signing and Dating Below Social Security Number
or
______________________________
Employer Identification Number
- ------------------------------------------------------------------------------------------------------------------------------------
Part 2 -- Certification -- Under penalties of perjury, I Part 3 --
certify that:
(1) The number shown on this form is my correct Awaiting TIN [_]
Taxpayer Identification Number (or I have checked the
box in part 3 and executed the certificate of awaiting
taxpayer identification number below) and
- -----------------------------
Name (2) I am not subject to back withholding either because Please Complete the Certificate of
I have not been notified by the Internal Revenue Service Awaiting Taxpayer Identification
- ----------------------------- ("IRS") that I am subject to backup withholding as a Number below.
Address (Number and Street) result of failure to report all interest or dividends,
or because the IRS has notified me that I am no longer
- ----------------------------- subject to backup withholding.
City, State and Zip Code --------------------------------------------------------------------------------------------------
Department of the Treasury
Internal Revenue Service
Payor's Request for Taxpayer Certificate Instructions -- You must cross out item (2) in Part 2 above if you have been notified
Identification Number (TIN) by the IRS that you are subject to backup withholding because of underreporting interest or
dividends on your tax return. However, if after being notified by the IRS that you are subject to
backup withholding you received another notification from the IRS stating that you are no longer
subject to backup withholding, do not cross out item (2).
SIGNATURE_________________________________ DATE________________________, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU WITH RESPECT TO THE NEW NOTES.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED
THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number to the payor within 60
days, 31% of all reportable payments made to me thereafter will be withheld
until I provide a number.
- -------------------------------- -----------------------------, 1999
Signature Date
- --------------------------------------------------------------------------------
14
