<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 333-76473
EQUISTAR CHEMICALS, LP
(Exact name of registrant as specified in its charter)
DELAWARE 76-0550481
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1221 MCKINNEY STREET, 77010
SUITE 700, HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (713) 652-7200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [X]
<PAGE>
PART I. FINANCIAL INFORMATION
EQUISTAR CHEMICALS, LP
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 10 $ 66
Accounts receivable:
Trade, net 498 345
Related parties 159 142
Receivables from partners 3 --
Inventories 518 549
Prepaid expenses and other current assets 23 25
------ ------
Total current assets 1,211 1,127
Property, plant and equipment, net 4,010 4,075
Investment in PD Glycol 53 55
Goodwill, net 1,128 1,151
Deferred charges and other assets 267 257
------ ------
Total assets $6,669 $6,665
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade $ 439 $ 331
Related parties 14 15
Payables to partners -- 6
Current maturities of long-term debt 42 150
Other accrued liabilities 125 133
------ ------
Total current liabilities 620 635
Obligations under capital leases -- 205
Long-term debt, less current maturities 2,169 1,865
Other liabilities and deferred credits 87 75
Commitments and contingencies
Partners' capital 3,793 3,885
------ ------
Total liabilities and partners' capital $6,669 $6,665
====== ======
See Notes to Financial Statements.
1
<PAGE>
EQUISTAR CHEMICALS, LP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------------- -------------------------------------
MILLIONS OF DOLLARS 1999 1998 1999 1998
- ------------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES:
Unrelated parties $1,193 $ 976 $3,128 $2,904
Related parties 278 173 655 359
------ ------- ------- -------
1,471 1,149 3,783 3,263
------ ------- ------- -------
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties 1,076 844 2,830 2,416
Related parties 247 158 567 325
Selling, general and administrative expenses 53 55 167 171
Research and development expense 11 11 31 30
Amortization of goodwill and other 8 8 25 24
intangibles
Restructuring and other unusual charges -- 4 -- 5
------ ------- ------- -------
1,395 1,080 3,620 2,971
------ ------- ------- -------
Operating income 76 69 163 292
Interest expense (43) (44) (132) (114)
Interest income 1 4 5 16
Other income, net 1 -- 47 --
------ ------- ------- -------
NET INCOME $ 35 $ 29 $ 83 $ 194
====== ======= ======= =======
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
EQUISTAR CHEMICALS, LP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30
------------------------
Millions of dollars 1999 1998
- ------------------- --------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 83 $ 194
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 222 201
Equity in losses of investment in PD Glycol 3 2
Net gain on sales of assets (40) --
Increase in accounts receivable (170) (99)
(Increase) decrease in receivables from partners (3) 150
Decrease in inventories 37 32
Increase in accounts payable 104 35
Decrease in payables to partners (6) (63)
Increase (decrease) in other accrued liabilities (12) 75
Net change in other working capital accounts 3 4
Other (30) (38)
--------- --------
Net cash provided by operating activities 191 493
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (112) (111)
Proceeds from sales of assets 73 --
Contributions and advances to affiliates (18) (10)
--------- --------
Net cash used in investing activities (57) (121)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 918 726
Payment of debt issuance costs (6) --
Repayments of long-term debt (722) (36)
Repayments of obligations under capital leases (205) --
Distributions to partners (175) (1,421)
Proceeds from payment of note receivable by Lyondell -- 345
--------- --------
Net cash used in financing activities (190) (386)
--------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (56) (14)
Cash and cash equivalents at beginning of period 66 41
--------- --------
Cash and cash equivalents at end of period $ 10 $ 27
========= ========
</TABLE>
See Notes to Financial Statements.
3
<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. For further information, refer to the financial statements and notes
thereto for the year ended December 31, 1998 included in the Equistar Chemicals,
LP ("Equistar" or "Partnership") Prospectus dated September 2, 1999, previously
filed with the Securities and Exchange Commission, relating to its Registration
Statement on Form S-4 (No. 333-76473). Certain amounts from prior periods have
been reclassified to conform to the current period presentation.
2. COMPANY OPERATIONS
Pursuant to a partnership agreement ("Partnership Agreement"), Lyondell Chemical
Company ("Lyondell"), formerly Lyondell Petrochemical Company, 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% by Lyondell
and 43% by Millennium. Lyondell owns its interest in the Partnership through
two wholly owned subsidiaries, Lyondell Petrochemical G.P. Inc. and Lyondell
Petrochemical L.P. Inc. Millennium also owns its interest in the Partnership
through two wholly owned subsidiaries, Millennium Petrochemicals GP LLC 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
included the ethylene, propylene and ethylene oxide ("EO") and derivatives
businesses and certain pipeline assets held by Oxy Petrochemicals Inc. a former
subsidiary of Occidental ("Oxy Petrochemicals"), a 50% interest in a joint
venture between PDG Chemical Inc. and E.I. DuPont 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 and PDG Chemical Inc. are both 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 U.S. manufacturing plants.
4
<PAGE>
Upon completion of this transaction, the Partnership is now owned 41% by
Lyondell through wholly owned subsidiaries, 29.5% by Millennium through wholly
owned subsidiaries and 29.5% by Occidental through wholly owned subsidiaries.
The Partnership owns and operates the petrochemicals and polymers businesses
contributed by Lyondell, Millennium and Occidental ("Contributed Businesses")
which consist of 17 manufacturing facilities on the U.S. Gulf Coast and in the
U.S. 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 Company, L.P. ("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 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 concentrates and compounds business, which was part of the performance
polymers products, was sold effective April 30, 1999 (see Note 3).
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 upon their percentage ownership of the
Partnership. Distributions are made to the partners based upon their percentage
ownership of the Partnership. Additional contributions required by the
Partnership will also be based upon the partners' percentage ownership of the
Partnership.
3. SALE OF CONCENTRATES AND COMPOUNDS BUSINESS
Effective April 30, 1999, Equistar completed the sale of its concentrates and
compounds business. The transaction included two manufacturing facilities,
located in Heath, Ohio and Crockett, Texas, and related inventories. Equistar
recorded a net gain on the sale of approximately $42 million.
4. INVENTORIES
The components of inventories consisted of the following:
SEPTEMBER 30 DECEMBER 31
MILLIONS OF DOLLARS 1999 1998
- -------------------- ---------------- --------------
Finished goods $ 298 $ 301
Work-in-process 8 11
Raw materials 120 149
Materials and supplies 92 88
----- -----
Total inventories $ 518 $ 549
===== =====
5
<PAGE>
5. PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, at cost, and the related
accumulated depreciation consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------- -----------
<S> <C> <C>
Land $ 78 $ 78
Manufacturing facilities and equipment 5,625 5,349
Manufacturing equipment acquired under capital leases -- 236
Construction in progress 231 189
------ ------
Total property, plant and equipment 5,934 5,852
Less accumulated depreciation 1,924 1,777
------ ------
Property, plant and equipment, net $4,010 $4,075
====== ======
</TABLE>
6. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt at September 30, 1999 and December 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
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 (due 2000-2005) 163 163
10.00% Notes due 1999 -- 150
9.125 % Notes due 2002 100 100
8.50% Notes due 2004 300 --
6.50% Notes due 2006 150 150
8.75% Notes due 2009 598 --
7.55% Debentures due in 2026 150 150
------- ------
Total long-term debt 2,211 2,015
Less current maturities 42 150
------- ------
Long-term debt, net 2,169 1,865
Capital lease obligations (5.89% due in 2000) -- 205
------- ------
Total long-term debt and lease obligations $2,169 $2,070
======= ======
</TABLE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the nine months ended September 30, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
MILLIONS OF DOLLARS 1999 1998
- ------------------- -------- --------
<S> <C> <C>
Cash paid for interest $ 131 $ 105
====== ======
Noncash investing and financing activities:
Noncash adjustments to contributed capital $ -- $ 6
Other 2 --
Inventory transfer from PD Glycol 18 10
====== ======
</TABLE>
6
<PAGE>
8. 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 Businesses 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 nine months ended September 30, 1999 and 1998, the
Partnership incurred and paid $8 million and $3 million, respectively, in
expenses for these uninsured claims and liabilities. The Partnership has
cumulatively paid $13 million for these uninsured claims and liabilities since
its formation in December 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 has no reserves for environmental matters as
of September 30, 1999.
Certain federal and state governmental initiatives have sought either to rescind
the oxygenate requirement for reformulated gasoline or to restrict the use of
MTBE. These initiatives or other governmental actions could result in a
significant reduction in Equistar's MTBE sales.
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 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 liability.
7
<PAGE>
9. SEGMENT AND RELATED INFORMATION
Equistar has identified three reportable segments in which it operates: (i)
petrochemicals; and (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 SEPTEMBER 30,
1999:
Sales and other operating revenues:
Customers $ 938 $ 533 $1,471
Intersegment 362 $(362) --
-----------------------------------------------------------------------
Total sales and operating revenues $1,300 $ 533 $(362) $1,471
=======================================================================
Operating income $ 99 $ 26 $ (49) $ 76
Interest expense (43) (43)
Interest income 1 1
Other income, net 1 1
-----------------------------------------------------------------------
Net income $ 99 $ 26 $ (90) $ 35
=======================================================================
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998:
Sales and other operating revenues:
Customers $ 667 $ 482 $1,149
Intersegment 252 7 $(259) --
-----------------------------------------------------------------------
Total sales and operating revenues $ 919 $ 489 $(259) $1,149
=======================================================================
Operating income $ 84 $ 35 $ (50) $ 69
Interest expense (44) (44)
Interest income 4 4
-----------------------------------------------------------------------
Net income $ 84 $ 35 $ (90) $ 29
=======================================================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999:
Sales and other operating revenues:
Customers $2,318 $1,465 $3,783
Intersegment 932 $(932) --
-----------------------------------------------------------------------
Total sales and operating revenues $3,250 $1,465 $(932) $3,783
=======================================================================
Operating income $ 274 $ 46 $(157) $ 163
Interest expense (132) (132)
Interest income 5 5
Other income, net 47 47
-----------------------------------------------------------------------
Net income $ 274 $ 46 $(237) $ 83
=======================================================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998:
Sales and other operating revenues:
Customers $1,708 $1,555 $3,263
Intersegment 857 46 $(903) --
-----------------------------------------------------------------------
Total sales and operating revenues $2,565 $1,601 $(903) $3,263
=======================================================================
Operating income $ 281 $ 170 $(159) $ 292
Interest expense (114) (114)
Interest income 16 16
-----------------------------------------------------------------------
Net income $ 281 $ 170 $(257) $ 194
=======================================================================
</TABLE>
8
<PAGE>
The following table presents the details of "Operating income" as presented
above in the "Unallocated" column for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------------------- -------------------------------
MILLIONS OF DOLLARS 1999 1998 1999 1998
- ------------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Expenses not allocated to petrochemicals and polymers:
Principally general and administrative expenses $ (49) $ (46) $(157) $(154)
Restructuring and other unusual charges -- (4) -- (5)
------------ ------------ ------------- ------------
Total--Unallocated $ (49) $ (50) $(157) $(159)
============ ============ ============= ============
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Equistar is one of the largest chemical producers in the world with total 1998
revenues of $4.4 billion and total assets of $6.7 billion at the end of 1998.
It is one of the world's largest producers of ethylene, the world's most widely
used petrochemical. Equistar is also one of the largest producers of
polyethylene and propylene in North America. Equistar's operations are divided
into two separate business segments: Petrochemicals and Polymers.
RESULTS OF OPERATIONS
THIRD QUARTER 1999 COMPARED TO SECOND QUARTER 1999
Equistar reported net income of $35 million in the third quarter 1999 compared
to $41 million in the second quarter 1999. Operating results improved compared
to the second quarter, which included net gains on asset sales of $40 million
partly offset by the net effect of production unit outages. The third quarter
operating improvement reflected higher margins for polymers products as price
increases more than offset raw materials cost increases. Petrochemicals margins
were relatively flat as higher prices were offset by higher raw materials costs.
Asset sales in the second quarter included the sale of Equistar's concentrates
and compounds business on April 30, 1999. The second quarter production outages
involved Equistar's Channelview olefins units during parts of April and May
1999.
1999 COMPARED TO 1998
NET INCOME--Equistar's net income of $35 million for the third quarter 1999
improved compared to net income of $29 million for the third quarter 1998
primarily due to higher petrochemicals product margins, which were partly offset
by lower polymers product margins and volumes in the 1999 period.
Equistar's net income of $83 million for the first nine months of 1999 was lower
than net income of $194 million for the first nine months of 1998. The decrease
was generally attributable to lower petrochemicals and polymers margins in the
first nine months of 1999 compared with the 1998 period, reflecting higher raw
material costs, as well as the net effects of olefins unit outages in the second
quarter 1999 and the scheduled LaPorte, Texas plant turnaround in the first
quarter 1999. These decreases were partly offset by the net gains on asset
sales in the second quarter 1999 and a full nine months of volume benefits in
the 1999 period from the addition of the Occidental Contributed Business in mid-
May 1998.
10
<PAGE>
SEGMENT DATA--The following tables reflect selected actual sales volume data,
including intersegment sales volumes, and summarized financial information for
Equistar's business segments. The addition of the Occidental Contributed
Business is reflected prospectively from May 15, 1998.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------------------- --------------------------------------
IN MILLIONS 1999 1998 1999 1998
- ----------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
SELECTED PETROCHEMICALS PRODUCTS:
Olefins (pounds) 4,760 4,692 13,795 12,061
Aromatics (gallons) 94 78 270 179
POLYMERS PRODUCTS (pounds) 1,541 1,654 4,804 4,858
MILLIONS OF DOLLARS
- -------------------
SALES AND OTHER OPERATING REVENUES:
Petrochemicals segment $1,300 $ 919 $ 3,250 $ 2,565
Polymers segment 533 489 1,465 1,601
Intersegment eliminations (362) (259) (932) (903)
--------- -------- --------- ----------
Total $1,471 $1,149 $ 3,783 $ 3,263
========= ======== ========= ==========
COST OF SALES:
Petrochemicals segment $1,198 $ 831 $ 2,967 $ 2,275
Polymers segment 487 430 1,362 1,369
Intersegment eliminations (362) (259) (932) (903)
--------- -------- --------- ----------
Total $1,323 $1,002 $ 3,397 $ 2,741
========= ======== ========= ==========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Petrochemicals segment $ 3 $ 4 $ 9 $ 9
Polymers segment 20 24 57 62
Unallocated 49 46 157 154
--------- -------- --------- ----------
Total $ 72 $ 74 $ 223 $ 225
========= ======== ========= ==========
OPERATING INCOME:
Petrochemicals segment $ 99 $ 84 $ 274 $ 281
Polymers segment 26 35 46 170
Unallocated (49) (50) (157) (159)
--------- -------- --------- ----------
Total $ 76 $ 69 $ 163 $ 292
========= ======== ========= ==========
</TABLE>
PETROCHEMICALS SEGMENT
REVENUES--Revenues for the third quarter 1999 of $1.3 billion increased 41% over
revenues of $919 million in the comparable 1998 period. The increase was
primarily due to higher average sales prices as volumes were relatively flat.
The increase in average sales prices reflects an upward trend in 1999 compared
to a downward trend in the 1998 period. U.S. market sales prices began
decreasing in the fourth quarter of 1997 and continued their downward trend
through most of 1998. Sales prices increased during the first nine months of
1999, due to tighter supplies and rising raw materials costs.
Revenues for the first nine months of 1999 of $3.3 billion increased 27% versus
revenues of $2.6 billion in the comparable 1998 period. The increase was due to
both higher sales volumes and higher average sales prices during the period.
Sales volumes increased about 14% during the period primarily as a result of the
addition of the Occidental Contributed Business in mid-May 1998. As a result of
rising prices during 1999 and declining prices during 1998, as noted above,
average sales prices for the first nine months of 1999 exceeded average sales
prices for the first nine months of 1998.
COST OF SALES--Cost of sales of $1.2 billion for the third quarter 1999
increased 44% compared to $831 million for the third quarter 1998. The increase
was primarily due to a significant increase in raw materials costs during the
1999 period. Cost of sales of $3.0 billion for the first nine months of 1999
increased 30% compared to cost of sales of $2.3 billion for the first nine
months of 1998. This increase was partly due to higher production levels as
1999
11
<PAGE>
reflected a full nine months of results with the Occidental Contributed
Business. The increase was also due to higher raw materials costs and higher
maintenance costs associated with the Channelview olefins production unit
outages in 1999.
OPERATING INCOME--Operating income of $99 million in the third quarter 1999
increased versus $84 million in the third quarter 1998 primarily due to higher
product margins. Margins improved in the third quarter 1999 compared to the
third quarter 1998 as average sales prices increased more than raw materials
costs. Operating income of $274 million in the first nine months of 1999
decreased slightly versus $281 million in the comparable 1998 period. The
effects of lower product margins and plant outages in 1999 were substantially
offset by the benefit of increased volumes in 1999. On a nine-month basis, 1999
margins were lower than 1998 margins, as average raw materials costs increased
more than average sales prices. The 1999 plant outages included the olefins
production unit outages in the second quarter 1999 and the scheduled LaPorte
plant turnaround completed in the first quarter 1999. The increase in sales
volumes was primarily a result of the addition of the Occidental Contributed
Business in mid-May 1998.
POLYMERS SEGMENT
REVENUES--Revenues of $533 million in the third quarter 1999 increased 9% versus
$489 million in the comparable 1998 period. The increase reflects higher
average industry sales prices in the third quarter 1999 compared to the third
quarter 1998, partly offset by lower sales volumes. Polymers sales prices have
increased throughout 1999 due to higher raw materials costs compared to a
downward trend in prices and raw materials costs in 1998. Volumes declined due
to the shut down of less efficient HDPE and other polymer product capacity,
plant maintenance and the sale of the concentrates and compounds business.
Equistar started up new HDPE capacity in the fourth quarter 1999.
Revenues of $1.5 billion in the first nine months of 1999 decreased versus $1.6
billion in the comparable 1998 period. The decrease was primarily due to lower
average industry sales prices, which began decreasing during the fourth quarter
1997 and continued in a downward trend throughout 1998. Although industry sales
prices increased throughout the first nine months of 1999, average sales prices
for the first nine months of 1999 were lower than the comparable 1998 period.
COST OF SALES--Cost of sales of $487 million in the third quarter 1999 increased
13% from $430 million in the third quarter 1998. This increase was due to
higher polymer raw material costs, primarily ethylene, in the third quarter 1999
compared to the third quarter 1998, partly offset by lower sales volumes. Cost
of sales was $1.4 billion for the first nine months of both 1999 and 1998.
Higher 1999 average sales prices for ethylene, the primary raw material for
polymers, were offset by lower sales volumes.
OPERATING INCOME--Operating income of $26 million for the third quarter 1999
decreased versus $35 million in the comparable 1998 period. The decrease was
due equally to lower margins and lower sales volumes. Margins were slightly
lower in third quarter 1999 than third quarter 1998, as average sales price
increases did not offset raw materials cost increases. Operating income of $46
million for the first nine months of 1999 decreased versus $170 million in the
comparable 1998 period. The decrease was primarily due to substantially lower
margins for the first nine months of 1999 compared to the first nine months of
1998 as raw materials cost increases outpaced sales price increases.
INTEREST EXPENSE, INTEREST INCOME, AND OTHER INCOME
Interest expense of $43 million in the third quarter 1999 was comparable to
interest expense of $44 million in the third quarter 1998. Interest expense
increased to $132 million in the first nine months of 1999 from $114 million in
the first nine months of 1998. This increase primarily reflected the higher
levels of debt due to the addition of the Occidental Contributed Businesses in
mid-May 1998 and the refinancing of $900 million of debt through the issuance of
Equistar's senior unsecured notes in February 1999, which carry a higher fixed
rate of interest. Interest income decreased to $1 million in the third quarter
1999 from $4 million in the third quarter 1998. Interest income
12
<PAGE>
decreased to $5 million in the first nine months of 1999 from $16 million in the
first nine months of 1998. The decrease in interest income for both the three-
month and nine-month periods reflects payment in July 1998 of a note receivable
from Lyondell. Other income of $47 million in the first nine months of 1999
primarily consists of net gains on asset sales, including the sale of the
concentrates and compounds business on April 30, 1999.
FINANCIAL CONDITION
OPERATING ACTIVITIES--Cash provided by operating activities totaled $191 million
in the first nine months of 1999 compared to $493 million in the first nine
months of 1998. The decrease in cash provided by operating activities in the
1999 period was primarily due to lower income, while cash provided by operating
activities in the 1998 period included reimbursements from Equistar's partners
for payment of their retained accounts payable balances.
INVESTING ACTIVITIES--Equistar's capital expenditures were $112 million in the
first nine months of 1999. The most significant capital expenditures related to
the 480-million-pound HDPE resin expansion project at the Matagorda, Texas
facility, which started up in the fourth quarter 1999. Equistar's total 1999
capital budget is $170 million. Capital expenditures in 1999 were funded from
cash flows from operations.
In April 1999, Equistar completed the sale of its concentrates and compounds
business, which included the Heath, Ohio and Crockett, Texas facilities.
FINANCING ACTIVITIES--Net cash used in financing activities was $190 million for
the first nine months of 1999, including distributions to partners of $175
million. During the first quarter 1999, Equistar completed an offering of
senior unsecured notes in the principal amount of $900 million, consisting of
$300 million principal amount of 8.5% notes due February 2004 and $600 million
principal amount of 8.75% notes due February 2009. The proceeds were used to
repay the outstanding balance of $152 million under Equistar's $500 million
credit facility, which was subsequently terminated, $205 million of capital
lease obligations, $385 million of indebtedness outstanding under Equistar's
$1.25 billion revolving credit facility, and the $150 million aggregate
principal amount of 10% notes on June 1, 1999. Equistar also repaid an
additional $27 million of indebtedness during 1999.
CURRENT BUSINESS OUTLOOK
Equistar expects the current business environment of high raw materials costs
and significant consolidation in the commodity chemical industry to continue.
Raw materials cost increases have put pressure on margins in spite of strong
growth and favorable supply/demand conditions in 1999. Industry forecasts
project a continuing difficult business environment due to the upcoming capacity
additions. Management's priority in the current business environment is to
enhance Equistar's financial flexibility by actively managing its current
portfolio of assets and maximizing earnings and cash flow. While Equistar does
not control raw material costs or general market conditions, management plans to
maximize earnings and cash flow by focusing on the things that it can directly
influence such as continuing to reduce working capital, achieve cost reductions
and employ a disciplined capital program.
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 affected
by the "Year 2000 problem." The Year 2000 problem arises from computer programs
and computer and other equipment with embedded chips or processors that use two
digits rather than four to designate the year. Date-sensitive computer
operations may recognize a date using "00" as the year 1900 rather than the year
2000, resulting in system failures or miscalculations, which may cause
operational disruptions.
In May 1997, before the formation of Equistar, Lyondell commenced the first
major use of new software for business information systems it subsequently
contributed to Equistar. The new systems, based on enterprise software from SAP
America, Inc. ("SAP"), replaced older business systems and allow employees at
different locations to share financial and operating information more
effectively. Equistar completed company-wide implementation of its SAP project
in the second quarter 1999. The new systems and software are Year 2000
compliant, thus addressing the majority of Equistar's Year 2000 business system
requirements.
Equistar has a Year 2000 Steering Committee and along with Lyondell and
LYONDELL-CITGO Refining LP, another Delaware limited partnership of which
Lyondell is a partner, has appointed representatives to Lyondell's
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Year 2000 Executive Sponsor Team. The Executive Sponsor Team provides oversight
to each member's steering committee.
Equistar's steering committee has completed an assessment of the state of
readiness of its IT and non-IT systems. This assessment process consisted of an
inventory of Year 2000 sensitive equipment, an assessment of the impact of
possible failures, determination of the required remediation actions, and
testing and implementation of solutions. The assessments covered both
manufacturing systems, including laboratory information systems and field
instrumentation, and significant third party vendor and supplier systems,
including employee compensation and benefit plan maintenance systems. The
inventory, assessment and remediation phases have been completed. Testing and
final implementation for critical systems is complete. Year 2000 simulation
drills were successfully conducted at various sites, and the results and
recommendations thereof communicated to and implemented at those and other sites
of Equistar. Equistar anticipates that testing and implementation of non-
critical systems will be complete by year-end 1999. The progress of these
phases as of September 30, 1999 is summarized as follows:
Chart showing the percentage of completion of the inventory, assessment,
remediation, testing and implementation phases of the Year 2000 assessment
process for Equistar. The percentage of completion is indicated in the table
below:
Equistar Chemicals, LP
Year 2000 Readiness
As of September 30, 1999
<TABLE>
<CAPTION>
Inventory Assessment Remediation Testing Implementation
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equistar 99% 99% 99% 95% 94%
- ---------------------------------------------------------------------------------------
</TABLE>
As of September 30, 1999, Year 2000 spending by Equistar for the replacement or
modification of both IT and non-IT systems is summarized as follows:
MILLIONS OF DOLLARS
-------------------
Spending through September 30, 1999... $ 7
Estimated additional spending......... 3
---
Total estimated spending.......... $10
===
The estimated amount does not include costs incurred in connection with the
implementation of SAP-related software. Spending is funded by cash generated
from operations. Approximately 19% of the estimated spending could qualify for
capitalization. Management believes that all significant systems controlled by
Equistar will be Year 2000 ready by year-end 1999.
Equistar's steering committee has also substantially completed an assessment of
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
Equistar's business. While the results of the assessment to date do not
indicate that any critical suppliers of raw materials, utilities or
transportation will fail to be Year 2000 compliant by December 31, 1999, there
can be no assurance that third parties with whom Equistar has a significant
business relationship will successfully test, reprogram, and replace all of
their IT and non-IT systems on a timely basis. A Year 2000 failure by one of
Equistar's key suppliers could interfere with its ability to make and cause
delivery of products, utilities or transportation, and this, in turn, could
cause disruptions in Equistar's operations. These potential disruptions could
make it necessary to seek alternative sources of supply, which may be more
expensive or difficult to obtain.
Equistar has substantially completed contingency plan preparation with the
assistance of an outside consultant. These plans are intended to avoid material
interruption of core business operations through the year 2000 and
14
<PAGE>
beyond, while ensuring safe operations and responsible financial performance.
The contingency planning involved an analysis of critical business processes, an
identification of the most likely threats (internal or external) to these
processes, and development of solutions and alternatives to minimize the
likelihood or potential adverse effects of these threats. Final testing of these
plans is nearing completion.
Because of the inherent uncertainty due to possible unanticipated failures by
third-party customers and suppliers, Equistar is unable to accurately assess the
extent and resulting materiality of the impact of possible Year 2000 failures.
In the most reasonably likely worst case scenario, controlled plant shutdowns
using Equistar's standard shutdown procedures might be necessitated by failures
of utility providers or suppliers affecting plant operability. In such event,
Equistar would evaluate the need to reroute or reschedule the production at
another Equistar facility or find alternative suppliers for its customers.
These events could adversely affect Equistar's operations. However, management
believes that the completion of Equistar's Year 2000 assessment process has
significantly reduced the probability of any significant disruptions of
operations from internal sources, that the contingency plans should mitigate the
potential impact of unanticipated failures by third party customers and
suppliers, and that the Year 2000 problem will likely not have a material
adverse effect on Equistar's results of operations, liquidity or financial
position.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. Subsequently, the FASB delayed the
effective date by one year. The statement is effective for Equistar's calendar
year 2001 with early adoption 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
is currently evaluating the effect of SFAS No. 133.
ITEM 3. DISCLOSURE OF MARKET RISK
Reference is made to the disclosure of market risk included in Equistar's
Prospectus dated September 2, 1999, previously filed with the Securities and
Exchange Commission, relating to its Registration Statement on Form S-4 (No.
333-76473). During October 1999, Equistar entered into over-the-counter
derivatives and price collar agreements for crude oil to help manage its
exposure to commodity price risk with respect to crude-oil related raw materials
purchases. These hedging arrangements have the effect of locking in, at
predetermined prices or ranges of prices and for a specified period of time, the
prices that Equistar will pay for the volumes to which the hedge relates. As a
result, while these hedging arrangements are structured to reduce its exposure
to increases in price associated with the hedged commodity, they also limit the
benefit Equistar might otherwise receive from any price decreases associated
with the hedged commodity. The derivatives and collar agreements covered 7
million and 10 million barrels, respectively, mature in November and December
1999 and January 2000, and cover approximately half of Equistar's crude-oil
related raw material requirements for this period. Equistar does not engage in
any derivatives trading activities.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report are "forward-looking
statements" within the meaning of the federal securities laws. Although
Equistar believes the expectations reflected in such forward-looking statements
are reasonable, they do involve certain assumptions, risks and uncertainties,
and Equistar can give no assurance that
15
<PAGE>
such expectations will prove to have been correct. Equistar's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the cyclical nature of the
chemical and refining industries, uncertainties associated with the economy,
current and potential governmental regulatory actions, substantial chemical and
refinery capacity additions resulting in oversupply and declining prices and
margins, raw material costs or supply arrangements, Equistar's ability to
implement cost reductions, and operating interruptions (including leaks,
explosions, fires, mechanical failure, unscheduled downtime, labor difficulties,
transportation interruptions, spills and releases and other environmental
risks). Many of such factors are beyond Equistar's ability to control or
predict. Management cautions against putting undue reliance on forward-looking
statements or projecting any future results based on such statements or present
or prior earnings levels.
All forward-looking statements in this Form 10-Q are qualified in their entirety
by the cautionary statements contained in this section and elsewhere in this
report.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments with respect to the Company's
legal proceedings previously reported in the Equistar Chemicals, LP
Prospectus dated September 2, 1999, previously filed with the Securities
and Exchange Commission relating to its Form S-4 (No. 333-76473).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Equistar Chemicals, LP
Dated: November 15, 1999 /s/ KELVIN R. COLLARD
-------------------------------------
Kelvin R. Collard
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
18
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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<ALLOWANCES> 5
<INVENTORY> 518
<CURRENT-ASSETS> 1,211
<PP&E> 5,934
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<BONDS> 2,169
0
0
<COMMON> 0
<OTHER-SE> 3,793
<TOTAL-LIABILITY-AND-EQUITY> 6,669
<SALES> 3,783
<TOTAL-REVENUES> 3,783
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