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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 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. Employee Identification No.)
incorporation or organization)
1221 McKINNEY STREET,
SUITE 700, HOUSTON, TEXAS 77010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 652-7200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
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PART I
Items 1 and 2. Business and Properties
OVERVIEW
Equistar Chemicals, LP ("Equistar") is one of the largest chemical
producers in the world with total 1999 revenues of $5.4 billion and assets of
$6.7 billion at the end of 1999. 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 second largest producer of polyolefins in
North America.
Equistar's petrochemicals segment manufactures and markets olefins,
oxygenated chemicals and aromatics. Equistar's olefins products are primarily
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 and propylene oxide. Equistar's
oxygenated chemicals include ethylene oxide ("EO"), ethylene glycol ("EG"),
ethanol and methyl tertiary butyl ether ("MTBE"). 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. For
additional segment information, see Note 17 of Notes to Consolidated Financial
Statements.
Equistar was formed in December 1997 as a Delaware limited partnership
owned by Lyondell Chemical Company ("Lyondell") and Millennium Chemicals Inc.
("Millennium"). Lyondell contributed substantially all of the assets of its
petrochemicals and polymers business segments. Millennium contributed
substantially all of the assets of Millennium Petrochemicals' ethylene,
polyethylene and related products, performance polymers and ethyl alcohol
businesses. In May 1998, Lyondell, Millennium, Equistar and Occidental
Petroleum Corporation ("Occidental") consummated a series of transactions to
expand Equistar through the addition of Occidental's petrochemical assets.
Lyondell's aggregate interest in Equistar is 41%, and each of Millennium's and
Occidental's aggregate interest in Equistar is 29.5%. Millennium has publicly
announced its intention to sell its interest in Equistar and is actively seeking
qualified buyers. There can be no assurance that any such sale will be
consummated, but Equistar does not expect any such sale to affect its operations
or results.
If Lyondell, Millennium or Occidental or any of their affiliates desire to
initiate or pursue an opportunity to undertake, engage in, acquire or invest in
a business or activity or operation within the scope of Equistar's business, the
opportunity must first be offered to Equistar. Equistar has certain options to
participate in the opportunity, but if it determines not to participate, the
party offering the opportunity is free to pursue it on its own. If the
opportunity within Equistar's scope of business constitutes less than 25% of an
acquisition that is otherwise not within the scope of Equistar's business,
Lyondell, Millennium or Occidental, as the case may be, may make the
acquisition, provided that the portion within the scope of Equistar's business
is thereafter offered to Equistar.
Equistar's principal executive offices are located at 1221 McKinney Street,
Suite 700, Houston, Texas 77010 and its telephone number is (713) 652-7200.
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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. Equistar produces 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. Equistar's 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.
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%.
Equistar's Chocolate Bayou, Corpus Christi and two Channelview, Texas
olefins plants use petroleum liquids, including naphtha, condensates and gas
oils (collectively "petroleum liquids"), as raw materials to produce ethylene.
Assuming the co-products are recovered and sold, 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, Equistar believes its Channelview facility is the lowest
production cost ethylene facility in the United States. Its 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. A comprehensive pipeline system connects Equistar's plants along the
Gulf Coast with major olefins customers. Raw materials are sourced both
internationally and domestically and are shipped via vessel and pipeline.
Equistar produces ethylene oxide and its primary derivative, ethylene
glycol, at facilities located in Pasadena, Texas and through PD Glycol, a 50%
joint venture with E.I. DuPont de Nemours and Company, in Beaumont, Texas. The
Pasadena facility also produces other derivatives of ethylene oxide, principally
glycol ethers and ethanolamines. Ethylene glycol is used in antifreeze and in
polyester fibers, resins and films. Ethylene oxide and its derivatives are used
in many consumer and industrial end uses, such as detergents and surfactants,
brake fluids and polyurethane foams for seating and bedding.
Equistar produces 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 Equistar's primary petrochemical products,
annual processing capacity as of January 1, 2000, and the primary uses for these
products. Unless otherwise specified, in the table below, annual 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.
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<TABLE>
<CAPTION>
PRODUCT ANNUAL CAPACITY PRIMARY USES
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OLEFINS
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<S> <C> <C>
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 in films for food packaging and trash bags and in 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.
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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.
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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.
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OXYGENATED PRODUCTS
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Ethylene Oxide 1.1 billion pounds Ethylene oxide is used to produce surfactants, industrial cleaners,
ethylene oxide; cosmetics, emulsifiers, paint, heat transfer fluids and ethylene glycol
400 million pounds as (polyester fibers and film, polyethylene terephthalate ("PET") resin
pure ethylene oxide and antifreeze).
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Ethylene Glycol 1 billion pounds Ethylene glycol is used to produce polyester fibers and film, PET
resin, heat transfer fluids, paint and automobile antifreeze.
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Ethylene Oxide 225 million pounds Ethylene oxide derivatives are used to produce paint and coatings,
Derivatives polishes, solvents and chemical intermediates.
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MTBE 284 million gallons(b) MTBE is an octane enhancer and clean fuel additive in reformulated
gasoline.
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AROMATICS
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Benzene 300 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.
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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.
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SPECIALTY PRODUCTS
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Dicyclopentadiene 130 million pounds DCPD is a component of inks, adhesives and polyester resins for molded
("DCPD") parts such as tub and shower stalls and boat hulls.
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Isoprene 145 million pounds Isoprene is a component of premium tires, adhesive sealants and other
rubber products.
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Resin Oil 150 million pounds Resin oil is used in the production of hot-melt adhesives, inks,
sealants, paints and varnishes.
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Piperylenes 100 million pounds Piperylenes are used in the production of adhesives, inks and sealants.
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Hydrogen 44 billion cubic feet Hydrogen is used by refineries to remove sulfur from process gas in
heavy crude oil.
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Alkylate 337 million gallons(c) Alkylate is a premium blending component used by refiners to meet Clean
Air Act standards for reformulated gasoline.
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Ethyl Alcohol 50 million gallons Ethyl alcohol is used in the production of solvents as well as
household, medicinal and personal care products.
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Diethyl Ether 5 million gallons Diethyl ether is used in laboratory reagents, gasoline and diesel
engine starting fluid, liniments, analgesics and smokeless gun powder.
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</TABLE>
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(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 annual processing capacity of one billion pounds per year of
propylene.
(b) Includes up to 44 million gallons/year of capacity operated for the benefit
of LYONDELL-CITGO Refining LP ("LCR").
(c) Includes up to 172 million gallons/year of capacity operated for the benefit
of LCR.
RAW MATERIALS AND ETHYLENE PURCHASES
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, assuming the co-products are recovered and sold.
The primary raw materials 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."
Petroleum liquids have had a historical cost advantage over NGLs such as
ethane and propane, assuming the co-products are recovered and sold. For
example, using petroleum liquids typically generates between one and four cents
additional margin per pound of ethylene produced compared to using ethane.
Equistar has the capability to realize this margin advantage at the Channelview,
Corpus Christi and Chocolate Bayou facilities. This cost 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).
The Channelview facility is uniquely 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 subject to availability of NGLs. The
Chocolate Bayou facility processes 100% petroleum liquids. Equistar's four other
olefins facilities currently process only NGLs. Equistar's LaPorte facility can
process heavier NGLs, such as butane and natural gasoline.
The majority of Equistar's petroleum liquids requirements are purchased via
contractual arrangements from a variety of third-party domestic and foreign
sources. Equistar also purchases a minimal amount of petroleum liquids from
third-party domestic and foreign sources selling product via the spot market at
the market rate at time of purchase. Equistar purchases NGLs from a wide
variety of domestic sources. It obtains a portion of its olefins raw material
requirements from LCR at market-related prices.
In addition to producing its own ethylene, Equistar assumed certain
agreements of Millennium for the purchase of ethylene from Gulf Coast producers
at market prices. Ethylene purchase obligations under the assumed contracts will
decline at the end of 2000, although Equistar currently intends to continue
purchasing ethylene from third party sources as needed to meet its requirements.
MARKETING AND SALES
Ethylene produced by the LaPorte, Morris and Clinton facilities is
generally consumed as raw material by the polymers operations at those sites,
except for ethylene produced at LaPorte and sold to Millennium. 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 Equistar's Gulf Coast polymer and ethylene oxide glycol facilities
as well as to third parties. As of January 1, 2000, approximately 80% of the
ethylene Equistar produced was consumed internally or sold to its affiliates at
market-related prices. See "Item 13. Certain Relationships and Related
Transactions."
With respect to sales to third parties, Equistar sells 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 written
agreements that typically provide for: monthly negotiation of price; customer
purchase of a specified
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minimum quantity; and 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. No single unrelated third party customer
accounted for more than 10% of total petrochemical segment revenues in 1999.
Ethylene oxide and ethylene glycol are sold to third-party customers under
long-term contracts of three to five years' duration 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.
Equistar licenses MTBE technology under a license from an affiliate of
Lyondell and sells a significant portion of MTBE produced at one of its two
Channelview units to Lyondell at market-related prices. The production from the
second unit is consumed by LCR for gasoline blending. MTBE produced at Chocolate
Bayou is sold to third parties at market-related prices.
Worldwide demand for MTBE in 1999 was approximately 459,000 barrels per
day, based on published data. This demand had increased over the past several
years as a result of the Clean Air Act Amendments of 1990 (the "Clean Air Act
Amendments"), state and local regulations and the need for incremental octane
in gasoline in the United States and other countries. In the United States, the
Clean Air Act Amendments set minimum levels for oxygenates, such as MTBE, in
gasoline sold in areas not meeting specified air quality standards. However,
while studies by federal and state agencies and other organizations have shown
that MTBE is safe for use in gasoline and is effective in reducing automotive
emissions, the presence of MTBE in some water supplies in California and other
states due to gasoline leaking from underground storage tanks and in surface
water from recreational water craft has led to public concern that MTBE may
contaminate drinking water supplies, and thereby result in a possible health
risk.
Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict or
ban the use of MTBE. At the state level, the State of California has initiated
action, pursuant to an Executive Order of the Governor and supported by recent
legislation, to begin the process of reducing or limiting the use of MTBE by
December 31, 2002. Such action, to be effective, would require (i) a waiver of
the oxygenate mandate for California, (ii) Congressional action in the form of
an amendment to the Clean Air Act or (iii) California refiners to replace MTBE
with another oxygenate such as ethanol, a more costly and less widely available
additive. At the federal level, a blue ribbon panel appointed by the U.S.
Environmental Protection Agency (the "EPA") issued its report on July 27, 1999,
which recommended, among other things, reducing the use of MTBE in gasoline. The
EPA has recently announced its intent to seek legislative changes from Congress
to give EPA authority to ban MTBE over a three-year period. Such action would
only be granted through amendments to the Clean Air Act. Additionally, the
EPA is seeking a ban of MTBE utilizing rulemaking authority contained in the
Toxic Substance Control Act. It would take at least three years for such a rule
to issue. These initiatives or other governmental actions could result in a
significant reduction in Equistar's MTBE sales. Equistar has developed
technologies to convert its facilities to make alternate gasoline blending
components should it be necessary to reduce MTBE production in the future.
In Europe, MTBE is expected to benefit from new legislation in the 15-
nation European Union. The so-called "Auto/Oil Legislation" aimed at reducing
air pollution from vehicle emissions was enacted in 1998, and refineries have
increased consumption of MTBE to meet the new blending requirements. Several
European authorities, most notably in Denmark, have investigated possible MTBE
contamination of groundwater and have determined that the primary issue is to
control leaking underground storage tanks. While these authorities are
continuing to monitor governmental findings and actions in the United States, no
restrictive action with respect to MTBE is currently planned.
Equistar sells most of its aromatics production under contracts that have
initial terms ranging from two to three years and typically contain automatic
one-year term extension provisions. These contracts generally provide for
monthly or quarterly price adjustments based upon current market prices.
Equistar also markets aromatics produced by LCR, with the exception of benzene,
under contracts with similar terms. Benzene produced by LCR 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 Equistar owns and some
of which it leases, extends from Corpus Christi to Mont Belvieu to Port Arthur,
Texas as well as around the Lake Charles area. In
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addition, exchange agreements with other olefins producers allow access to
customers who are not directly connected to Equistar's pipeline system. Some
propylene is shipped by ocean-going vessel. Ethylene oxide is shipped by
railcar, and its derivatives are shipped by railcar, truck, isotank or ocean-
going vessel. Butadiene, aromatics and other petrochemicals are distributed by
pipeline, railcar, truck, barge or ocean-going vessel.
COMPETITION AND INDUSTRY CONDITIONS
The basis for competition in Equistar's petrochemicals products is price,
product quality, the ability to deliver product when and where the customer
wants and customer service. Equistar competes with other large domestic
producers of petrochemicals, including: BP Amoco Chemical Company; Chevron
Chemical Company; Dow Chemical Company ("Dow"); Exxon Mobil Chemical Company
("Exxon Mobil"); Huntsman Chemical Company, Phillips Petroleum Company
("Phillips"); Shell Chemical Company; and Union Carbide Corporation.
The combined capacity of Equistar's ethylene units at January 1, 2000 was
approximately 11.5 billion pounds of ethylene per year or approximately 17% of
total North American production capacity. Based on published rated production
capacities, Equistar believes it is the largest producer of ethylene in North
America. However, industry consolidation, including the combination of British
Petroleum and Amoco, Exxon and Mobil, the pending combination of Union Carbide
and Dow and the recently announced petrochemicals combination by Chevron and
Phillips, has concentrated the industry in fewer, although larger and stronger,
competitors. North American ethylene capacity at January 1, 2000 was
approximately 67 billion pounds per year. Of the total ethylene production
capacity in the United States, approximately 95% is located along the Gulf
Coast.
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, demand is a function of economic growth in the United
States and elsewhere in the world, which fluctuates. Capacity additions in
excess of annual growth also put pressure on margins. 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.
Equistar currently consumes or sells to downstream derivatives facilities owned
by it or one of its partners approximately 80% of its ethylene production, which
has the effect of reducing volatility.
Equistar's other major commodity chemical products also experience cyclical
market conditions similar to, although not necessarily coincident with, those of
ethylene.
POLYMERS SEGMENT
Through facilities located at ten plant sites in four states, Equistar's
polymers segment manufactures a wide variety of polyolefins, including
polyethylene, polypropylene and various performance polymers.
Equistar currently manufactures polyethylene using a variety of
technologies at six facilities in Texas and at its Morris, Illinois and Clinton,
Iowa 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.
Equistar produces performance polymer products, which include enhanced
grades of polyethylene and polypropylene, at several of its polymers facilities.
Equistar believes 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.
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Equistar produces 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.
The Morris, Illinois and Pasadena, Texas facilities manufacture
polypropylene using propylene produced as a co-product of Equistar's ethylene
production and propylene purchased from third parties. Polypropylene is sold for
various applications in the automotive, housewares and appliance industries.
The following table outlines Equistar's polymers and performance polymers
products, its annual processing capacity at January 1, 2000, the primary uses
for these products and their brand names. Unless otherwise specified in the
table below, annual 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.
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<TABLE>
<CAPTION>
ANNUAL
PRODUCT CAPACITY PRIMARY USES BRAND NAMES
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POLYETHYLENE and
POLYPROPYLENE
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<S> <C> <C> <C>
High-density 3.6 billion HDPE is used to manufacture grocery, merchandise and trash ALATHON(R)
Polyethylene ("HDPE") pounds (a)(b) bags; food containers for items from frozen desserts to Petrothene(R)
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.
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Low-density Polyethylene 1.7 billion LDPE is used to manufacture food packaging films; plastic Petrothene(R)
("LDPE") pounds (b) bottles for packaging food and personal care items; Acrythene(R)
dry-cleaning bags; ice bags; pallet shrink-wrap; heavy-duty (EMA)
bags for mulch and potting soil; boil-in-bag bags; coatings on Ultrathene(R)
flexible packaging products; and coating on paper board such as (EVA)
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.
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Linear low-density 1.1 billion LLDPE is used to manufacture garbage and lawn/leaf bags; Petrothene(R)
polyethylene pounds housewares; lids for coffee cans and margarine tubs; and large
("LLDPE") (rotomolded) toys like outdoor gym sets.
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Polypropylene 680 million Polypropylene is used to manufacture fibers for carpets, rugs KromaLon(R)
pounds and upholstery; housewares; automotive battery cases; Petrofil(R)
automotive fascia, running boards and bumpers; grid-type Petrothene(R)
flooring for sports facilities; fishing tackle boxes; and KromaLux(R)
bottle caps and closures. KromaTex(R)
Flexathene(R)
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PERFORMANCE
POLYMERS
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Wire and Cable Resins (c) Wire and cable resins and compounds are used to insulate copper Petrothene(R)
and Compounds and fiber optic wiring in power, telecommunication, computer
and automobile applications.
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Polymeric Powders (c) Polymeric powders are component products in structural and bulk Microthene(R)
molding compounds; and parting agents and filters for
appliance, automotive and plastics processing industries.
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Polymers for Adhesives, (c) Polymers are components in hot-metal-adhesive formulations for Petrothene(R)
Sealants and Coatings case, carton and beverage package sealing; glue sticks; Ultrathene(R)
automotive sealants; carpet backing; and adhesive labels.
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Reactive Polyolefins (c) Reactive polyolefins are functionalized polymers used to bond Plexar(R)
nonpolar and polar substrates in barrier food packaging; wire
and cable insulation and jacketing; automotive gas tanks; and
metal coating applications.
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Liquid Polyolefins (c) Liquid polyolefins are a diesel fuel additive to inhibit Vynathene(R)
freezing.
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</TABLE>
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(a) Includes a 480-million-pound HDPE resin expansion project at the Matagorda
facility which commenced operation in October 1999. Also includes the
impact of idling a single gas-phase reactor at the Port Arthur facility
effective March 31, 1999, which resulted in a decrease in capacity of 300
million pounds in 1999. Additionally, includes the impact of shutting down
two slurry reactors at the LaPorte, Texas facility effective April 30,
1999, resulting in a decrease of 100 million pounds in 1999.
(b) In the first quarter of 2000, Equistar idled two slurry reactors with a
total capacity of 300 million pounds per year of HDPE. Additionally two
autoclave reactors with annual capacity of 60 million pounds of LDPE were
idled. All of this capacity is at the LaPorte, Texas facility.
(c) These are enhanced grades of polyethylene and are included in the capacity
figures for HDPE, LDPE and LLDPE above, as appropriate.
RESEARCH AND DEVELOPMENT
Research and development for Equistar's polymers segment is conducted in
laboratories at its 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
With the exception of the Chocolate Bayou polyethylene plant, Equistar's
polyethylene and polypropylene production facilities can receive their ethylene
and propylene directly from Equistar's petrochemical facilities via its own
olefins pipeline system or from on-site production. The polyethylene plants at
Chocolate Bayou, LaPorte, Port Arthur and Pasadena are also 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 AND SALES
Equistar's 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
Equistar's customers. No single unrelated third party customer accounted for
more than 10% of total polymers segment revenues in 1999.
Polymers are primarily distributed via railcar. Equistar owns or leases,
under long-term lease arrangements, approximately 9,500 railcars for use in its
polymers business. Equistar sells its polymers products in the United States and
Canada primarily through its own sales organization. The sales organization
generally engages sales agents to market polymers products in the rest of the
world.
COMPETITION AND INDUSTRY CONDITIONS
The basis for competition in Equistar's polymers products is: price,
product performance; product quality; the ability to deliver product when and
where the customer wants it; and customer service. Equistar competes with other
large producers of polymers, including Chevron, Dow , Eastman Chemical Company,
Exxon Mobil, Formosa Plastics, Huntsman Chemical Company, Phillips, Solvay
Polymers, Total Fina, Union Carbide Corporation and Westlake Polymers. Industry
consolidation, including the 1998 combination of British Petroleum and Amoco,
the 1999 combinations of Exxon and Mobil and of Total and Fina, and the pending
combination of Union Carbide and Dow, has concentrated the industry in fewer,
although larger and stronger, competitors. 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, demand is a function of economic growth
in the United States and elsewhere in the world, which fluctuates.. 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.
10
<PAGE>
Based on published rated industry capacities, Equistar is the second
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 Equistar's polyethylene units
as of January 1, 2000 was approximately 6.45 billion pounds per year or
approximately 17% of total industry capacity in North America. There are
approximately 19 other North American producers of polyethylene, including
Chevron, Dow, Exxon Mobil, Phillips, Solvay Polymers and Union Carbide
Corporation. Equistar's polypropylene capacity, 680 million pounds per year as
of January 1, 2000, 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 Mobil, Montell Polyolefins BV and Total Fina.
PROPERTIES OWNED OR LEASED BY EQUISTAR
Equistar's 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)............... EG
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, Texas(c)....... HDPE
Chocolate Bayou, Texas(c)(d).... Ethylene, Propylene, Butadiene, Benzene, Toluene, DCPD, Isoprene,
Resin Oil and MTBE
LaPorte, Texas (e).............. Ethylene, Propylene, LDPE, LLDPE, HDPE and Liquid Polyolefins
Matagorda, Texas................ HDPE
Pasadena, Texas(f).............. Ethylene Oxide and Ethylene Glycol and other EO derivatives
Pasadena, Texas(f).............. Polypropylene and LDPE
Port Arthur, Texas(e)........... LDPE and HDPE
Victoria, Texas(d).............. HDPE
Lake Charles, Louisiana(g)...... Ethylene and Propylene
Morris, Illinois................ Ethylene, Propylene, LDPE, LLDPE and Polypropylene
Tuscola, Illinois............... Ethyl Alcohol, Diethyl Ether, Wire and Cable Resins and Compounds
and Polymeric Powders
Clinton, Iowa................... Ethylene, Propylene, LDPE and HDPE
Fairport Harbor, Ohio(g)........ Wire and Cable Resins and Compounds
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 E.I. 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. Equistar also operates 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) A substantial portion of the HDPE capacity of the Port Arthur facility was
idled on March 31, 1999. Additional HDPE and LDPE capacity at the LaPorte
facility was idled in the first quarter of 2000. These production units can
be restarted when market conditions warrant.
11
<PAGE>
(f) Occidental and Lyondell each contributed facilities located in Pasadena.
These facilities are primarily on contiguous property, and Equistar plans
to operate them as one site to the extent practicable. These facilities are
operated in conjunction with the LaPorte facility.
(g) The facilities and land are leased.
Equistar also owns 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. Equistar operates an additional 3 million
barrels of ethylene and propylene storage on leased property in Markham, Texas.
Equistar uses an extensive olefins pipeline system, some of which it owns
and some of which it leases, extending from Corpus Christi to Mont Belvieu to
Port Arthur and around the Lake Charles area. Equistar owns other pipelines in
connection with its Tuscola, Chocolate Bayou, Matagorda, Victoria, Corpus
Christi and LaPorte facilities. Equistar owns and leases several pipelines
connecting the Channelview facility, the refinery owned by LCR and the Mont
Belvieu storage facility; these pipelines are used to transport raw materials,
butylenes, hydrogen, butane, MTBE and unfinished gasolines. Equistar also owns 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. It owns or leases, under long-term lease arrangements,
approximately 11,400 railcars for use in its business.
Equistar subleases its executive offices and corporate headquarters from
Lyondell in downtown Houston, Texas. In addition, it owns facilities which house
the Morris and Cincinnati research operations. Equistar also leases 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
Equistar maintains 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 its
engineers and technicians to evaluate polyolefins products under conditions
similar to a customer's plant. Equistar also has additional research facilities
in Morris, Illinois, Matagorda, Texas and Plano, Texas. Product development
efforts are aimed at tailoring products to meet specific customer needs.
Equistar's research and development expenditures for 1999, 1998, and the period
December 1, 1997 (inception) through December 31, 1997 were $42 million, $40
million, and $3 million, respectively.
The Channelview facility employs proprietary technology owned by Lyondell
to convert ethylene and other light petrochemical streams into propylene.
Equistar is conducting a research project to investigate alternative olefin
feedstocks for use at the Channelview, Chocolate Bayou and/or Corpus Christi
facilities. These alternative olefin feedstocks 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 and higher margin
products. Equistar is conducting research and developing several non-
metallocene single-site catalysts (STARTM catalysts) for use in the production
of polyolefins resins. Equistar has several patents and patent applications
pending in connection with research and development efforts in this area.
Equistar does not believe that the loss of any individual patent or trade secret
would have a material adverse effect on its petrochemicals or polymers
businesses.
Equistar uses numerous technologies in its operations, many of which are
licensed from third parties. Significant licenses Equistar holds include (i) BP
Amoco fluid bed polyethylene process for the production of both LLDPE and HDPE;
(ii) Unipol process for the production of LLDPE; and (iii) other licenses for
the production of EO, EG, polyethylene and polypropylene. Equistar is not
dependent on the retention of any particular license and believes that the loss
of any individual license would not have a material adverse effect on
operations.
12
<PAGE>
Equistar acquired rights to numerous recognized brand names from Lyondell
and Millennium Petrochemicals Inc. in connection with the formation of Equistar.
The brand names are ALATHON(R), KromaLon(R), Petrothene(R), Ultrathene(R),
Vynathene(R) and Microthene(R). Its rights to use these trademarks are perpetual
as long as it actively uses the trademarks. Equistar is not dependent upon any
particular trademark and believes the loss of any individual trademark would not
have a material adverse effect on operations.
EMPLOYEE RELATIONS
As of December 31, 1999, Equistar employed approximately 4,500 full-time
employees. Equistar also uses the services of independent contractors in the
routine conduct of its business. Approximately 280 hourly workers were covered
by collective bargaining agreements. In connection with a November 1999
agreement with Equistar to expand the scope of shared administrative services
("Shared Services Agreement"), approximately 460 persons who had been employed
by Equistar in the areas of information technology, human resources, materials
management and raw material supply, customer supply chain, accounting, facility
services, and legal became employees of Lyondell effective January 1, 2000.
Equistar believes that its relations with its employees are good.
CYCLICALITY AND OVERCAPACITY IN THE PETROCHEMICAL AND POLYMER INDUSTRIES
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 Equistar's raw materials. These external factors can also cause
fluctuations in demand for Equistar's products and fluctuations in its prices
and margins. In addition, these external factors can magnify the impact of
economic cycles on its 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 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 have experienced 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. Currently, there is some overcapacity in the polymers industry, and a
number of Equistar's competitors in various segments of both the polymer and
petrochemical 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 capacity. Excess industry capacity may
lower Equistar's production rates and margins and its income and cash flow.
Furthermore, a number of Equistar's products are highly dependent on durable
goods markets, such as housing and automotive, that are themselves particularly
cyclical.
Also, due to the commodity nature of most of Equistar's products, it is not
necessarily able to protect its market position by product differentiation or
pass on cost increases to its 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.
ENVIRONMENTAL MATTERS
The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the EPA. As a result, a plan must be developed by
the Texas Natural Resource Conservation Commission ("TNRCC") to reach and
demonstrate compliance with the ozone standard by the year 2007. Ozone is a
product of the reaction between volatile organic compounds (VOCs) and nitrogen
oxides (NOx) in the presence of sunlight, and is a principal component of smog.
Because much has already been done to limit VOC emissions, the basis of the
proposed plans for meeting the ozone standard will now focus on significant
reductions in NOx emissions. It is expected that drastic cuts in industrial
sources of NOx will be required. These emission reduction controls must be
installed during the next several years, well in advance of the 2007 deadline.
This could result in increased capital investment and higher operating costs for
Equistar. Equistar is actively involved with a number of organizations that are
working with the TNRCC to help solve the ozone problem in the most cost-
effective manner.
13
<PAGE>
The Clean Air Act specified certain emissions standards for vehicles beginning
in the 1994 model year and required the EPA to study whether further emissions
reductions from vehicles were necessary starting no earlier than the 2004 model
year. In 1998, the EPA concluded that more stringent vehicle emission standards
were needed and that additional controls on gasoline were necessary to meet
these emission standards. These new standards were finalized in 1999 and will
require refiners to produce a low sulfur gasoline by 2004 with some allowances
for a conditional phase-in period that could extend final compliance until 2006.
This rule could negatively impact Equistar's olefins fuel business.
ITEM 3. LEGAL PROCEEDINGS
Equistar is, from time to time, a defendant in lawsuits, some of which are not
covered by insurance. Many of these suits make no specific claim for relief.
Although final determination of legal liability and the resulting financial
impact with respect to any such litigation cannot be ascertained with any degree
of certainty, Equistar does not believe that any ultimate uninsured liability
resulting from the legal proceedings in which it currently is involved (directly
or indirectly) will individually, or in the aggregate, have a material adverse
effect on its business or financial condition. See Note 16 of Notes to
Consolidated Financial Statements.
From time to time the Company receives notices from federal, state or local
governmental entities of alleged violations of environmental laws and
regulations pertaining to, among other things, the disposal, emission and
storage of chemical and petroleum substances, including hazardous wastes.
Although the Company has not been the subject of significant penalties to date,
such alleged violations may become the subject of enforcement actions or other
legal proceedings and may (individually or in the aggregate) involve monetary
sanctions of $100,000 or more (exclusive of interest and costs).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the partnership interests of
Equistar. See "Item 12. Security Ownership of Certain Beneficial Owners and
Management" for a listing of the holders of Equistar's partnership interests.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Financial Statements, including the related notes, and Management's Discussion
and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM DECEMBER 1,
FOR THE YEAR ENDED 1997
DECEMBER 31 (INCEPTION) TO
------------------------------------ DECEMBER 31,
MILLIONS OF DOLLARS 1999 1998(a) 1997
- ------------------- ------ -------- ------
<S> <C> <C> <C>
Results of Operations Data:
Sales and other operating revenues $5,436 $4,363 $ 365
Restructuring and other unusual charges (b) 96 14 42
Net income 32 143 7
Balance Sheet Data:
Total assets 6,736 6,665 4,600
Obligations under capital leases - - 205 - -
Long-term debt, less current maturities 2,169 1,865 1,512
</TABLE>
_________
(a) The financial information for 1998 includes the operating results of the
business contributed by Occidental prospectively from May 15, 1998, the date
of contribution. The Occidental contributed business was accounted for using
the purchase method of accounting.
(b) Restructuring and other unusual charges in 1999 were the result of decisions
to shut down polymer reactors at two Equistar sites and to consolidate
certain administrative functions between Lyondell and Equistar. During the
year ending December 31, 1998 and for the period from December 1, 1997
(inception) to December 31, 1997, restructuring and other unusual charges
were the result of the mergers and integration of the businesses contributed
by Lyondell, Millennium, and Occidental.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with information contained in
the financial statements and the notes thereto.
RESULTS OF OPERATIONS
SELECTED PRICING INFORMATION--The following graphs present selected industry
pricing information for the periods shown.
[GRAPHS APPEAR HERE]
Chart 1 - Month-end average spot price WTS low prices for Crude Oil as reported
by Platts Oilgram Price Report from January 1997 through December 1999. Chart
indicates decreasing prices 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. Prices rose rapidly in 1999, peaking at $24.82 per
barrel in December 1999 with an annual average of $17.04 per barrel. Selected
month-end prices are as follows; January 1997--$23.90 per barrel, December
1997--$17.13 per barrel, December 1998--$10.02 per barrel, December 1999--
$24.82 per barrel.
Chart 2 - Month-end average net transaction contract prices for Ethylene as
reported by CMAI Monomers Market Report from January 1997 through December 1999.
Chart indicates 1997 prices were relatively flat for the first six months and
slightly decreasing in the latter half of the year with an annual average of the
month-end prices of 24.70 cents per pound. 1998 prices declined steadily with an
annual average of the month-end prices of 17.81 cents per pound. Prices rose
rapidly in 1999, peaking at 27.00 cents per pound in December 1999 with an
annual average of the month-end prices of 22.03 cents per pound. Selected
month-end prices are as follows: January 1997--25.71 cents per pound, December
1997--22.67 cents per pound, December 1998--15.95 cents per pound, December
1999--27.00 cents per pound.
15
<PAGE>
OVERVIEW
The following tables present selected financial and operating information for
Equistar for the years ended December 31, 1999 and 1998, and for the combined
businesses for the year ended December 31, 1997. The combined businesses
consist of the Lyondell contributed business and the Millennium contributed
business for the eleven months ended November 30, 1997 and Equistar for the one
month ended December 31, 1997. For comparative purposes, income taxes are
excluded from the combined 1997 data, since Equistar, as a partnership, is not
subject to federal income tax. These combined results for the year ended
December 31, 1997 are not intended to, and do not, represent pro forma results
of Equistar. The combined data in these tables do not necessarily reflect the
results of operations of Equistar that would have resulted had the businesses
been combined as of January 1, 1997. The operating results of the business
contributed by Occidental Chemical Corporation are included prospectively from
May 15, 1998.
<TABLE>
<CAPTION>
EQUISTAR
-------------------------------------- COMBINED
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
MILLIONS OF DOLLARS
- -------------------
Sales and other operating revenues $5,436 $4,363 $4,866
Cost of sales 4,844 3,767 3,781
Other operating expenses 334 300 323
Restructuring and other unusual charges 96 14 42
---------------- ---------------- ----------------
Operating income 162 282 720
Interest expense, net (176) (139) (124)
Other income, net 46 - - - -
---------------- ---------------- ----------------
Net income $ 32 $ 143 $ 596
================ ================ ================
</TABLE>
NET INCOME--Equistar's net income of $32 million in 1999 decreased $111
million from net income of $143 million in 1998. The decrease was attributable
to restructuring and other unusual charges, which were $96 million in 1999
compared to $14 million in 1998, as well as lower polymers margins, higher
general and administrative expenses, and higher interest expense in 1999
compared with 1998. These were only partly offset by higher petrochemicals
sales volumes and gains on asset sales.
Equistar's net income of $143 million in 1998 decreased $453 million from
combined net income of $596 million in 1997. The decrease was primarily due to
lower prices and margins in both the petrochemicals and polymers segments. The
decline in prices and margins began in the fourth quarter 1997 and continued
throughout 1998. The decline was partially offset by increased sales volumes,
primarily as a result of the addition of the Occidental Contributed Business in
mid-May 1998.
FOURTH QUARTER 1999 COMPARED TO THIRD QUARTER 1999
Equistar reported a net loss of $51 million in the fourth quarter 1999.
Excluding $96 million of restructuring and other unusual charges, Equistar had
net income of $45 million compared to net income of $35 million in the third
quarter 1999. Operating results improved compared to the third quarter as
higher petrochemicals margins were only partly offset by lower polymers margins
and higher general and administrative expenses. Compared to the third quarter,
petrochemicals margins increased as higher selling prices for ethylene,
propylene and other co-products more than offset higher raw material costs.
Polymers margins decreased as increases in polymers sales prices did not keep
pace with increases in the cost of raw materials, primarily ethylene and
propylene. The $96 million of restructuring and other unusual charges in the
fourth quarter related to decisions to shut down certain polymer reactors and to
consolidate administrative functions between Lyondell and Equistar, resulting in
the write down of the related asset values and the incurrence of employee
severance costs.
16
<PAGE>
SEGMENT DATA
The following tables reflect selected actual and combined 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>
EQUISTAR
--------------------------------------- COMBINED
IN MILLIONS 1999 1998 1997
- ----------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
SELECTED PETROCHEMICALS PRODUCTS:
Olefins (pounds) 18,574 16,716 9,429
Aromatics (gallons) 367 271 193
POLYMERS PRODUCTS (pounds) 6,388 6,488 6,132
MILLIONS OF DOLLARS
- -------------------
SALES AND OTHER OPERATING REVENUES:
Petrochemicals segment $ 4,736 $ 3,463 $ 3,866
Polymers segment 2,024 2,058 2,513
Intersegment eliminations (1,324) (1,158) (1,513)
---------------- ---------------- ----------------
Total $ 5,436 $ 4,363 $ 4,866
================ ================ ================
COST OF SALES:
Petrochemicals segment $ 4,275 $ 3,132 $ 3,151
Polymers segment 1,893 1,793 2,143
Intersegment eliminations (1,324) (1,158) (1,513)
---------------- ---------------- ----------------
Total $ 4,844 $ 3,767 $ 3,781
================ ================ ================
OTHER OPERATING EXPENSES:
Petrochemicals segment $ 14 $ 12 $ 31
Polymers segment 80 88 137
Unallocated 240 200 155
---------------- ---------------- ----------------
Total $ 334 $ 300 $ 323
================ ================ ================
OPERATING INCOME:
Petrochemicals segment $ 447 $ 319 $ 684
Polymers segment 51 177 233
Unallocated (336) (214) (197)
---------------- ---------------- ----------------
Total $ 162 $ 282 $ 720
================ ================ ================
</TABLE>
PETROCHEMICALS SEGMENT
REVENUES--Revenues of $4.7 billion in 1999 increased 37% from $3.5 billion in
1998. The increase was due to both higher average sales prices and higher sales
volumes during 1999. As a result of rapidly rising prices throughout 1999,
which reflected stronger demand as well as increases in the underlying cost of
raw materials, average sales prices for 1999 were about 20% higher than average
sales prices for 1998. Sales volumes increased about 13% during 1999,
reflecting a full year of the Occidental Contributed Business.
Revenues of $3.5 billion in 1998 decreased 10% from combined sales revenues of
$3.9 billion in 1997. The decrease was due to significantly lower sales prices,
partly offset by higher sales volumes. Average sales prices in 1998 were
approximately 50% lower than average 1997 sales prices primarily due to
increased industry capacity and downward pressure on sales prices as a result of
the lower cost of raw materials. Sales volumes increased about 73% primarily as
a result of the addition of the Occidental Contributed Business in mid-May 1998.
COST OF SALES--Cost of sales of $4.3 billion for 1999 increased 36% compared
to cost of sales of $3.1 billion for 1998. This increase was partly due to
higher production levels as 1999 reflected twelve months of operations of the
Occidental Contributed Business. The balance of the increase was primarily due
to higher raw material costs.
17
<PAGE>
Higher maintenance costs associated with the Channelview olefins production unit
outages in 1999 also added to the higher costs. One of Equistar's two
Channelview olefins units, with an annual ethylene capacity of 1.9 billion
pounds, was shut down from April 1, 1999 to May 23, 1999 to repair a compressor.
Cost of sales was $3.1 billion in 1998 and a combined $3.2 billion in 1997.
Increased costs due to higher production levels were more than offset by lower
raw material costs. The higher production levels reflected the addition of the
Occidental Contributed Business in mid-May 1998. The decrease in the cost of
raw materials followed 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 the petrochemicals segment. Natural
gas prices also dropped in early 1998 and remained at lower levels throughout
1998.
OPERATING INCOME--Operating income of $447 million in 1999 increased 40%
compared to $319 million in 1998, while gross margin as a percent of sales was
flat. The benefit from increased sales volumes was only partly offset by the
effects of the production unit outages in 1999. Gross margin percentages were
flat as higher sales prices kept pace with higher raw material costs. The 1999
increase in sales volumes was primarily due to inclusion of a full year of
operations of the Occidental Contributed Business, which was added in mid-May
1998.
Operating income of $319 million in 1998 decreased 53% from a combined $684
million in 1997, while gross margin as a percent of sales decreased to 10% in
1998 from 18% in 1997. The decrease in operating income primarily reflected
lower margins partly offset by higher sales volumes. The lower margins were
due to lower sales prices, which decreased more than raw material costs, and
slightly higher fixed costs. The increased sales volumes primarily resulted from
the addition of the Occidental Contributed Business.
POLYMERS SEGMENT
REVENUES--Revenues of $2.0 billion in 1999 decreased slightly compared to
revenues of $2.1 billion in 1998 primarily due to lower sales volumes. Sales
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 in 1999. Industry sales prices began decreasing during the
fourth quarter 1997, continued in a downward trend throughout 1998, and
increased rapidly during 1999 as raw material costs increased.
Revenues of $2.1 billion in 1998 decreased 18% from a combined $2.5 billion in
1997. The decrease was primarily the result of decreases in industry sales
prices due to excess industry supply and lower raw material costs, partly offset
by higher sales volumes.
COST OF SALES--Cost of sales was $1.9 billion for 1999 and $1.8 billion for
1998. Higher 1999 average sales prices for ethylene and propylene, the primary
raw materials for polymers, were partly offset by lower sales volumes.
Cost of sales of $1.8 billion for 1998 decreased 16% from a combined $2.1
billion for 1997. 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.
OPERATING INCOME--Operating income of $51 million for 1999 decreased 71%
compared to $177 million in 1998. The decrease was primarily due to
substantially lower margins for 1999 compared to 1998 as raw material cost
increases outpaced sales price increases. Gross margin as a percent of sales
decreased to 6% in 1999 from 13% in 1998, reflecting the lower product margins.
Operating income of $177 million in 1998 decreased 24% from a combined $233
million in 1997. The decrease was a result of lower product margins in 1998.
Polymer sales prices decreased throughout 1998, but were partially offset by
lower raw material costs. Gross margin as a percent of sales decreased to 13%
in 1998 from 15% in 1997.
UNALLOCATED
The following discusses expenses that were not allocated to the petrochemicals
and polymers segments.
18
<PAGE>
OTHER OPERATING EXPENSES--This caption includes selling, general and
administrative expenses, research and development expense, and amortization of
goodwill and other intangibles. Unallocated expenses were $240 million in 1999,
$200 million in 1998 and a combined $155 million in 1997. The increase from
1997 to 1998 is offset by decreases in the expenses allocated to the segments.
The increase from 1998 to 1999 was primarily due to higher compensation and
employee benefit expenses and costs associated with Year 2000 preventive
measures.
RESTRUCTURING AND OTHER UNUSUAL CHARGES--Restructuring and other unusual
charges were $96 million in 1999, $14 million in 1998, and a combined $42
million in 1997. During the fourth quarter 1999, Equistar recorded a charge of
$96 million associated with a decision to shut down certain polymer reactors and
severance costs related to these shutdowns and consolidation of certain
administrative functions between Lyondell and Equistar. The decision to shut
down the polymer reactors was based on their high production costs, current
market conditions in the polyethylene industry and the flexibility to utilize
more efficient reactors to meet customer requirements. Approximately $72 million
of the total charge is an adjustment of the asset carrying values of the
reactors. The remaining $24 million represents severance and other employee-
related costs for approximately 500 employee positions that are being
eliminated. Equistar expects that the severance payments will be made in 2000.
The eliminated positions, primarily administrative functions, resulted from
opportunities to share such services between Lyondell and Equistar and, to a
lesser extent, positions associated with the shut down polymer reactors.
Equistar incurred restructuring charges related to the initial merger and
integration of the businesses contributed by Lyondell and Millennium upon the
formation of Equistar and with the addition of the Occidental Contributed
Business. Equistar recorded $42 million of restructuring charges in December
1997 and $14 million in 1998.
INTEREST EXPENSE, NET AND OTHER INCOME--Net interest expense was $176 million
in 1999, $139 million in 1998 and a combined $124 million in 1997. Interest
expense increased from 1997 to 1998 and 1999 due to higher levels of debt as a
result of the addition of the Occidental Contributed Business in mid-May 1998.
Interest expense also increased from 1998 to 1999 due to the February 1999
refinancing of $900 million of bank debt with senior unsecured notes, which
carried a higher fixed rate of interest. Other income of $46 million in 1999
primarily consisted of net gains on asset sales, including the sale of the
concentrates and compounds business in April 1999.
FINANCIAL CONDITION
OPERATING ACTIVITIES--Cash provided by operating activities totaled $368
million in 1999 compared to $846 million in 1998. The decrease in cash provided
by operating activities in 1999 primarily reflected a significant reduction in
working capital in 1998 as well as lower net income in 1999. While working
capital was also reduced in 1999, the benefit was mitigated by an increase in
receivables despite improved collection efficiency. The increase in receivables
reflected both higher sales prices and volumes in 1999. In addition to improved
efficiency, the level of working capital reductions in 1999 and 1998 also
generally reflected the effects of product price and raw material cost movements
during these periods. The 1998 working capital reduction also reflected $150
million of reimbursements from Equistar's partners for payment of their retained
accounts payable balances.
INVESTING ACTIVITIES--Equistar's capital expenditures were $157 million in
1999 and $200 million in 1998. The most significant capital expenditures in
1999 related to the 480-million-pound HDPE resin expansion project at the
Matagorda, Texas facility, which started up in the fourth quarter 1999. Capital
expenditures in 1999 were funded by cash flows from operations. Depreciation
and amortization in 1999 were $300 million. Equistar's capital budget for 2000
is $160 million.
In April 1999, Equistar completed the sale of its concentrates and compounds
business, which included the Heath, Ohio and Crockett, Texas facilities.
Proceeds from this transaction and other sales of assets totaled $75 million.
FINANCING ACTIVITIES--Net cash used in financing activities was $220 million
for 1999, including distributions to partners of $255 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
19
<PAGE>
$1.25 billion revolving credit facility, and the $150 million aggregate
principal amount of 10% notes, which became due on June 1, 1999.
LIQUIDITY AND CAPITAL RESOURCES-- Equistar has a $1.25 billion revolving
credit facility that extends until November 2002. At December 31, 1999,
Equistar had drawn $800 million, leaving $450 million available. Aggregate
maturities of long-term debt are $92 million in 2000; $90 million in 2001; $851
million in 2002; $29 million in 2003; and $1.2 billion thereafter. The credit
facility contains covenants relating to liens, sale and leaseback transactions,
debt incurrence, leverage and interest coverage ratios, sales of assets and
mergers and consolidations. As of December 31, 1999, Equistar was in compliance
with all such covenants. Management believes that business conditions will be
such that cash balances, cash flow from operations and availability under the
revolving credit facility will be adequate to meet Equistar's cash requirements
for scheduled debt repayments and to fund ongoing operations for the foreseeable
future.
CURRENT BUSINESS OUTLOOK
In the near term, Equistar expects operations to benefit from continued strong
demand for products in the petrochemicals and polymers segments, while a
resurgence in crude oil price increases early in 2000 has put pressure on
product margins. Equistar expects improved results if crude oil prices stabilize
at or below their current levels. Meanwhile, Equistar continues to take
aggressive actions to further reduce costs and increase cash flow. Over the
longer term, Equistar expects continued consolidation in the commodity chemical
industry, creating fewer but stronger competitors. Industry forecasts project a
continuing difficult business environment due to upcoming capacity additions,
which are expected to put pressure on product margins beginning late in 2000.
Management's priority in the current business environment is to enhance
Equistar's financial performance 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, achieving cost reductions and
employing a disciplined capital program.
YEAR 2000
Equistar did not experience any disruptions of its operations as a result of
either internal or third party Year 2000 problems. Year 2000 spending by
Equistar for the replacement or modification of both business and manufacturing
systems totaled $8 million. Spending was funded by cash generated from
operations. Approximately 9% of the spending qualified for capitalization.
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 7A. DISCLOSURE OF MARKET RISK
COMMODITY PRICE RISK
A substantial portion of Equistar's products and feedstocks are commodities
whose prices fluctuate as market supply/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
20
<PAGE>
business strategies. These include increasing the olefins plants' feedstock
flexibility, entering into multi-year processing and sales agreements, and
moving downstream into derivatives products whose pricing is more stable.
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 material 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.
As of December 31, 1999, the remaining over-the-counter "derivatives" and collar
agreements covered 2.4 million and 1.5 million barrels, respectively, matured in
January 2000, and covered approximately half of Equistar's crude-oil related raw
material requirements for this period. Based on year-end quoted market prices,
Equistar recorded a net asset of $7 million at December 31, 1999 for those
contracts. Assuming a hypothetical 15% decrease in crude oil prices from those
in effect at year end, the loss in earnings for the combined derivatives
contracts would not be significant. Sensitivity analysis was used for this
purpose. Crude oil prices varied by as much as 15% shortly after year end,
however, they generally increased, which benefited Equistar's derivative
contracts. The quantitative information about market risk is necessarily
limited because it does not take into account the effects of the underlying
operating transactions.
INTEREST RATE RISK
During the first quarter 1999, Equistar completed an offering of senior
unsecured notes in the principal amount of $900 million, which carry fixed rates
of interest. The proceeds were used to repay outstanding debt, including $537
million of variable-rate debt, reducing Equistar's exposure to interest rate
risk. Equistar continues to be exposed to interest rate risk with respect to
its variable-rate $1.25 billion credit facility. At December 31, 1999 the
outstanding balance under the credit facility was $800 million. Assuming a
hypothetical 10% increase in interest rates from those in effect at year end,
the increase in annual interest expense on the variable-rate debt would be
approximately $6 million. Sensitivity analysis was used for this purpose.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report are "forward-looking
statements" within the meaning of the federal securities laws. Although
Equistar believes the expectations reflected in such forward-looking statements
are reasonable, they do involve certain assumptions, risks and uncertainties,
and Equistar can give no assurance that such expectations will prove to have
been correct. Equistar's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the cyclical nature of the chemical industry, uncertainties associated
with the economy, current and potential governmental regulatory actions,
substantial chemical industry 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-K are qualified in their
entirety by the cautionary statements contained in this section and elsewhere in
this report.
21
<PAGE>
EQUISTAR CHEMICALS, LP
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Governance Committee
of Equistar Chemicals, LP
In our opinion, the accompanying consolidated balance sheets and the related
consolidated 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") and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1999 and for the period from
December 1, 1997 (inception) to December 31, 1997, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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 18, 2000
22
<PAGE>
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
DECEMBER 1,
FOR THE YEAR ENDED 1997
DECEMBER 31 (INCEPTION) TO
------------------------------------------- DECEMBER 31,
MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------------ ------------------ ------------------
SALES AND OTHER OPERATING REVENUES:
<S> <C> <C> <C>
Unrelated parties $4,352 $3,826 $ 334
Related parties 1,084 537 31
------------------ ------------------ ------------------
5,436 4,363 365
------------------ ------------------ ------------------
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties 3,915 3,276 256
Related parties 929 491 30
Selling, general and administrative expenses 259 229 16
Research and development expense 42 40 3
Amortization of goodwill and other intangibles 33 31 3
Restructuring and other unusual charges 96 14 42
------------------ ------------------ ------------------
5,274 4,081 350
------------------ ------------------ ------------------
Operating income 162 282 15
Interest expense (182) (156) (10)
Interest income 6 17 2
Other income, net 46 - - - -
------------------ ------------------ ------------------
NET INCOME AND COMPREHENSIVE INCOME $ 32 $ 143 $ 7
================== ================== ==================
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
EQUISTAR CHEMICALS, LP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
MILLIONS OF DOLLARS 1999 1998
- ------------------- -------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 108 $ 66
Accounts receivable:
Trade, net 491 345
Related parties 209 142
Inventories 520 549
Prepaid expenses and other current assets 32 25
-------------------- --------------------
Total current assets 1,360 1,127
Property, plant and equipment, net 3,926 4,075
Investment in PD Glycol 52 55
Goodwill, net 1,119 1,151
Deferred charges and other assets 279 257
-------------------- --------------------
Total assets $6,736 $6,665
==================== ====================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade $ 457 $ 311
Related parties 35 26
Payables to partners - - 6
Current maturities of long-term debt 92 150
Other accrued liabilities 200 142
-------------------- --------------------
Total current liabilities 784 635
Obligations under capital leases - - 205
Long-term debt, less current maturities 2,169 1,865
Other liabilities and deferred credits 121 75
Commitments and contingencies
Partners' capital 3,662 3,885
-------------------- --------------------
Total liabilities and partners' capital $6,736 $6,665
==================== ====================
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE>
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
DECEMBER 1,
FOR THE YEAR ENDED 1997
DECEMBER 31 (INCEPTION) TO
-------------------------------------------- DECEMBER 31,
MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 32 $ 143 $ 7
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 300 268 19
Equity in losses of investment in PD Glycol 4 3 - -
Net loss on disposition of assets 35 8 - -
(Increase) decrease in accounts receivable (213) 105 (100)
Decrease (increase) in receivables from - - 150 (101)
partners
Decrease (increase) in inventories 41 133 (5)
Increase in accounts payable 152 98 188
(Decrease) increase in payables to partners (6) (66) 54
Increase in other accrued liabilities 49 64 48
Net change in other working capital accounts (5) 2 (15)
Other (21) (62) 7
-------------- -------------- --------------
Net cash provided by operating activities 368 846 102
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (157) (200) (12)
Proceeds from sales of assets 75 3 - -
Contributions and advances to affiliates (24) (15) - -
-------------- -------------- --------------
Net cash used in investing activities (106) (212) (12)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 993 757 50
Payment of debt issuance costs (6) - - - -
Repayments of long-term debt (747) (290) - -
Repayments of obligations under capital leases (205) - - - -
Distributions to partners (255) (1,421) (100)
Proceeds from Lyondell note repayment - - 345 - -
Cash contributions from partners - - - - 1
-------------- -------------- --------------
Net cash used in financing activities (220) (609) (49)
-------------- -------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS 42 25 41
Cash and cash equivalents at beginning of period 66 41 - -
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 108 $ 66 $ 41
============== =============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE>
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 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
Net income 14 9 9 32
Distributions to partners (105) (75) (75) (255)
--------------- --------------- --------------- -------------
BALANCE AT DECEMBER 31, 1999 $ 522 $1,555 $1,585 $ 3,662
=============== =============== =============== =============
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION OF THE PARTNERSHIP AND OPERATIONS
Pursuant to a partnership agreement ("Partnership Agreement"), Lyondell Chemical
Company ("Lyondell") and Millennium Chemicals Inc. ("Millennium") formed
Equistar Chemicals, LP ("Equistar" or "Partnership"), a Delaware limited
partnership, which commenced operations on December 1, 1997. From December 1,
1997 to May 15, 1998, Equistar was owned 57% by Lyondell and 43% by Millennium.
Lyondell owns its interest in Equistar through two wholly owned subsidiaries,
Lyondell Petrochemical G.P. Inc. and Lyondell Petrochemical L.P. Inc. ("Lyondell
LP"). Millennium also owns its interest in Equistar through two wholly owned
subsidiaries, Millennium Petrochemicals GP LLC and Millennium Petrochemicals LP
LLC ("Millennium LP").
On May 15, 1998, Equistar was expanded with the contribution of certain assets
from Occidental Petroleum Corporation ("Occidental") (see Note 3). These assets
included the ethylene, propylene and ethylene oxide ("EO") and EO derivatives
businesses and certain pipeline assets held by Oxy Petrochemicals Inc. ("Oxy
Petrochemicals"), a former subsidiary of Occidental, a 50% interest in a joint
venture ("PD Glycol") between PDG Chemical Inc. and E.I. DuPont de Nemours and
Company, and a lease to Equistar of the Lake Charles, Louisiana olefins plant
and related pipelines held by Occidental Chemical Corporation ("Occidental
Chemical") (collectively, "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 Equistar 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 Equistar for an aggregate partnership interest of 29.5%.
In addition, Equistar assumed approximately $205 million of Occidental
indebtedness and Equistar issued a promissory note to an Occidental subsidiary
in the amount of $420 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, Equistar 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,
Equistar and Occidental also entered into a long-term agreement for Equistar to
supply the ethylene requirements for Occidental Chemical's U.S. manufacturing
plants.
Upon completion of this transaction, Equistar is now owned 41% by Lyondell,
29.5% by Millennium and 29.5% by Occidental, all through wholly owned
subsidiaries.
Equistar 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 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 ("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
27
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
enhanced grades of polyethylene, including wire and cable resins, and polymeric
powders. The concentrates and compounds business, which was part of performance
polymers products, was sold effective April 30, 1999 (see Note 18).
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 Equistar.
Distributions are made to the partners based upon their percentage ownership of
Equistar. Additional cash contributions required by the Partnership will also
be based upon the partners' percentage ownership of Equistar.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The consolidated financial statements include the
accounts of Equistar and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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. Equistar's
policy is to invest cash in conservative, highly rated instruments and limit the
amount of credit exposure to any one institution. Equistar performs periodic
evaluations of the relative credit standing of these financial institutions
which are considered in Equistar's investment strategy.
Equistar has no requirements for compensating balances in a specific amount at a
specific point in time. The Partnership does maintain compensating balances for
some of its banking services and products. Such balances are maintained on an
average basis and are solely at Equistar's discretion. As a result, none of
Equistar's cash is restricted.
Accounts Receivable--Equistar sells its products primarily to companies in the
petrochemicals and polymers industries. Equistar performs ongoing credit
evaluations of its customers' financial condition and, in certain circumstances,
requires letters of credit from them. The Partnership's allowance for doubtful
accounts, which is reflected in the accompanying Consolidated Balance Sheets as
a reduction of accounts receivable, totaled $6 million and $3 million at
December 31, 1999 and 1998, respectively.
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, Equistar removes the cost
of the assets and the related accumulated depreciation from the accounts and
reflects any resulting gains or losses in the Consolidated Statements of Income.
Equistar's policy is to capitalize interest cost incurred on debt during the
construction of major projects exceeding one year.
28
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Turnaround Maintenance and Repair Expenses--Cost of major repairs and
maintenance incurred in connection with substantial overhauls or maintenance
turnarounds of production units at Equistar'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, extend and improve the
operating capacity and efficiency rates of the production units. Equistar
amortized $25 million, $20 million and $2 million of deferred turnaround
maintenance and repair costs for the years ended December 31, 1999 and 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 a range of 3 to 10
years. Equistar amortized $12 million, $6 million and less than $1 million of
deferred software costs for the years ended December 31, 1999 and 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. Accumulated
amortization of goodwill was $199 million and $166 million at December 31, 1999
and 1998, respectively.
Investment in PD Glycol--Equistar holds a 50% interest in a joint venture with
E.I. DuPont de Nemours and Company that owns an ethylene glycol facility in
Beaumont, Texas. This investment was contributed by Occidental in 1998. The
investment in PD Glycol is accounted for using the equity method of accounting.
At December 31, 1999 and 1998, Equistar's underlying equity in the net assets of
PD Glycol exceeded the cost of the investment by $8 million. The excess is
being accreted into income on a straight-line basis over a period of 25 years.
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.
Exchanges--Inventory exchange transactions, which involve homogeneous
commodities in the same line of business and do not involve the payment or
receipt of cash, are not accounted for as purchases and sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance with
the normal LIFO valuation policy.
Income Taxes--The Partnership is not subject to federal income taxes as income
is reportable directly by the individual partners; therefore, there is no
provision for income taxes in the accompanying financial statements.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Comprehensive Income--Equistar had no items of other comprehensive income during
the years ended December 31, 1999 and 1998 and during the period from
December 1, 1997 (inception) to December 31, 1997.
Long-Lived Asset Impairment--In accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
Equistar reviews its long-lived assets, including goodwill, for impairment on an
exception basis whenever events or changes in circumstances indicate a potential
loss in utility. Impairment losses are recognized in "Restructuring and other
unusual charges" in the Consolidated Statements of Income.
29
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Derivatives--Equistar is currently evaluating the effect that implementing SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, will have
on the Consolidated Financial Statements. The statement is effective for
Equistar's calendar year 2001.
Reclassifications--Certain previously reported amounts have been restated to
conform to classifications adopted in 1999.
3. OCCIDENTAL CONTRIBUTED BUSINESS
On May 15, 1998, Equistar 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 Consolidated Statements of Income prospectively
from May 15, 1998. Occidental contributed assets and liabilities to Equistar
with a net fair value of $2.1 billion in exchange for a 29.5% interest in the
Partnership. Equistar 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 upon the estimated fair values of such assets and liabilities at the date
of the contribution. The fair value was determined based upon a combination of
internal valuations performed by Lyondell, Millennium and Occidental using the
income approach. The fair value of the assets contributed and liabilities
assumed by the Partnership on May 15, 1998 is as follows:
<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 Equistar as if the
Occidental Contributed Business had been contributed on January 1, 1998 is as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
Millions of dollars DECEMBER 31
- ------------------- 1998
------------------
<S> <C>
Sales and other operating revenues $4,869
Restructuring and other unusual charges 14
Operating income 320
Net income 154
</TABLE>
The unaudited pro forma data presented above are not necessarily indicative of
the results of operations of Equistar that would have occurred had such
transaction actually been consummated as of January 1, 1998, nor are they
necessarily indicative of future results.
30
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized as follows for the periods
presented:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
DECEMBER 1,
FOR THE YEAR ENDED 1997
DECEMBER 31 (INCEPTION) TO
------------------------------------------- DECEMBER 31,
MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C>
Cash paid for interest $ 146 $ 154 $ - -
Noncash investing and financing activities:
Inventory transfer from PD Glycol $ 24 $ 15 $ - -
Noncash adjustments to contributed capital - - 3 - -
Other 2 - - - -
</TABLE>
Historical cost of assets contributed and liabilities assumed by the Partnership
in December 1997 (inception):
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS
- -------------------
<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
Equistar does not buy or sell, or hold or issue financial instruments for
speculative trading purposes.
Beginning October 1999, Equistar entered into over-the-counter "derivatives" and
price collar agreements for crude oil with Occidental Energy Marketing, Inc., a
subsidiary of Occidental, to help manage its exposure to commodity price risk
with respect to crude-oil related raw materials purchases. At December 31,
1999, "derivatives" and collar agreements covering 2.4 million and 1.5 million
barrels, respectively, and maturing in January 2000, were outstanding. Both the
carrying value and fair market value of these derivative instruments at
December 31, 1999 represented an asset of $7 million and was based on quoted
market prices. Unrealized gains and losses on
31
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
"derivatives" and price collars are deferred until realized at which time they
are reflected in the cost of the purchased raw material.
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
Equistar for debt with terms and average maturities similar to Equistar's debt
portfolio, the fair value of Equistar's long-term debt, including amounts due
within one year, was approximately $2.2 billion and $2.3 billion at December 31,
1999 and 1998, respectively.
Equistar had issued letters of credit totaling $6 million and $3 million at
December 31, 1999 and 1998, respectively.
6. RELATED PARTY TRANSACTIONS
Product Transactions with Occidental Chemical--Equistar and Occidental Chemical
entered into a Sales Agreement, dated May 15, 1998 ("Ethylene Sales Agreement").
Under the terms of the Ethylene Sales Agreement, Occidental Chemical agreed to
purchase an annual minimum amount of ethylene from Equistar equal to 100% 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. Equistar'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, Equistar'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 cannot 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 based on market prices. In addition to ethylene,
Equistar sells methanol, ethers, and glycols to Occidental Chemical. During the
year ended December 31, 1999 and the period from May 15, 1998 to December 31,
1998, Equistar sold Occidental Chemical $435 million and $171 million,
respectively, of product, primarily under the Ethylene Sales Agreement.
Equistar also purchases various products from Occidental Chemical. During the
year ended December 31, 1999 and the period from May 15, 1998 to December 31,
1998, purchases from Occidental Chemical totaled $2 million and $4 million,
respectively.
Product Transactions with Oxy Vinyls, LP--Occidental Chemical owns 76% of Oxy
Vinyls, LP ("Oxy Vinyls"), a joint venture company formed with an unrelated
party effective May 1, 1999. Ethylene sales to Oxy Vinyls totaled $93 million
for the period from May 1, 1999 to December 31, 1999 and were based upon market
prices.
Product Transactions with Millennium--Equistar 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% 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, 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. Equistar sold
Millennium $54 million, $41 million and $4 million of ethylene in 1999, 1998 and
December 1997, respectively.
32
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equistar purchases vinyl acetate monomer ("VAM") feedstock from Millennium at
formula-based market prices pursuant to an agreement entered into in connection
with the formation of Equistar. Under this agreement, Equistar is required to
purchase 100% of its VAM feedstock requirements for its LaPorte, Texas, Clinton,
Illinois, and Morris, Illinois plants (estimated to be 48 to 55 million pounds
per year), up to a maximum of 60 million pounds per year ("Annual Maximum") for
the production of ethylene vinyl acetate products at those locations. If
Equistar fails to purchase at least 42 million pounds of VAM in any calendar
year, Millennium has the right to reduce the Annual Maximum quantity by as much
as the total purchase deficiency for one or more successive years. In order to
reduce the Annual Maximum quantity, Millennium must notify Equistar within at
least 30 days prior to restricting the VAM purchases provided that the notice is
not later than 45 days after the year of the purchase deficiency. The initial
term of the contract expires December 31, 2000 and thereafter, renews annually.
Either party may terminate on one year's notice of termination. The initial
term will extend until December 31, 2002 if Millennium elects to increase the
amount of ethylene purchased under the Ethylene Sales Agreement. During the
years ending December 31, 1999 and 1998 and for the period December 1, 1997
(inception) to December 31, 1997, purchases from Millennium, primarily for vinyl
acetate monomer, were $12 million, $14 million, and $2 million, respectively.
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 Equistar.
Accordingly, certain refinery products are sold to Equistar as feedstocks, and
certain olefins by-products are sold to LCR for processing into gasoline. Sales
of product to LCR were $250 million, $223 million and $26 million and purchases
from LCR were $190 million, $131 million and $10 million for the years ended
December 31, 1999 and 1998 and for the period from December 1, 1997 (inception)
to December 31, 1997, respectively. Equistar also assumed certain processing
arrangements as well as storage obligations between Lyondell and LCR and
provides certain marketing and information processing services for LCR.
Aggregate charges under these various service agreements of $13 million, $15
million and $1 million were made to LCR by Equistar for the years ended December
31, 1999 and 1998 and for the period from December 1, 1997 (inception) to
December 31, 1997, respectively. All of the agreements between LCR and Equistar
are on terms generally representative of prevailing market prices.
Product Transactions with 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 $242 million and $89 million for the year
ended December 31, 1999 and for the period from August 1, 1998 to December 31,
1998, respectively. Purchases from Lyondell, primarily for normal butane,
totaled $6 million and $2 million for the year ended December 31, 1999 and for
the period from August 1, 1998 to December 31, 1998, respectively. Product
transactions between Equistar and Lyondell are based upon market prices.
Transactions with LMC--Lyondell Methanol Company, L.P. ("LMC") sells all of its
products to Equistar. For the years ending December 31, 1999 and 1998 and
during the period from December 1, 1997 (inception) to December 31, 1997,
purchases from LMC were $95 million, $103 million and $15 million, respectively.
Equistar sells natural gas to LMC at prices generally representative of its
cost. Purchases by LMC of natural gas feedstock from Equistar totaled $46
million, $44 million and $4 million for the years ended December 31, 1999 and
1998 and during the period from December 1, 1997 (inception) to December 31,
1997, respectively. Equistar provides operating and other services for LMC
under the terms of existing agreements that were assumed by Equistar from
Lyondell, including the lease to LMC by Equistar of the real property on which
its methanol plant is located. Pursuant to the terms of those agreements, LMC
pays Equistar a management fee and reimburses certain expenses of Equistar at
cost. Management fees charged by Equistar to LMC totaled $6 million during each
of the years ending December 31, 1999 and 1998 and less than $1 million during
the period from December 1, 1997 (inception) to December 31, 1997.
Shared Services Agreement with Lyondell--Lyondell provides certain corporate,
general and administrative services to Equistar, including tax, treasury, risk
management and other services pursuant to a shared services agreement.
33
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the years ended December 31, 1999 and 1998, Lyondell charged Equistar $9
million and $3 million for these services. During the period from December 1,
1997 (inception) to December 31, 1997, charges from Lyondell were less than $1
million. As part of the shared services agreement, Equistar provides certain
general and administrative services to Lyondell, such as health, safety and
environmental services, materials management services, human resource services,
information services and legal services. During the year ended December 31,
1999, Equistar charged Lyondell $8 million for these services. During the year
ended December 31, 1998 and for the period from December 1, 1997 (inception) to
December 31, 1997, Equistar charged Lyondell less than $1 million for these
services.
Shared Services and Shared-Site Agreements with Millennium--Equistar and
Millennium have entered into a variety of operating, manufacturing and technical
service agreements related to the business of Equistar and the businesses
retained by Millennium Petrochemicals. These agreements include the provision
by Equistar to Millennium Petrochemicals of materials management, certain
utilities, administrative office space, and health and safety services. During
the years ended December 31, 1999 and 1998, Equistar charged Millennium
Petrochemicals $3 million and $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 Equistar of certain operational
services, including barge dock access. During each of the years ended
December 31, 1999 and 1998 and during the period December 1, 1997 (inception)
to December 31, 1997, Millennium Petrochemicals charged Equistar less than
$1 million for these services.
Operating Agreement with Occidental Chemical--On May 15, 1998, Occidental
Chemical and Equistar entered into an Operating Agreement ("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.
The Operating Agreement terminated on June 1, 1998. During the term of the
Operating Agreement, Equistar paid Occidental Chemical an administrative fee of
$1 million.
Transition Services Agreement with Occidental Chemical--On June 1, 1998,
Occidental Chemical and Equistar entered into a Transition Services Agreement.
Under the terms of the Transition Services Agreement, Occidental Chemical agreed
to provide Equistar 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.
Predominantly all services under the Transition Services Agreement ceased in
June 1999 in accordance with the terms of the agreement. Health, safety, and
environmental services were extended until December 31, 1999 as permitted by the
Transition Services Agreement. During the year ended December 31, 1999 and the
period from June 1, 1998 to December 31, 1998, Equistar expensed $2 million and
$6 million, respectively, in connection with services provided pursuant to the
Transition Service Agreement.
Loans to Millennium and Occidental--In connection with Occidental's admission
into Equistar in May 1998, Equistar executed promissory notes to Millennium and
Occidental in the principal amounts of $75 million and $420 million,
respectively. Each of the notes provided for the annual accrual of interest at
a rate equal to LIBOR plus 0.6%. 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 Equistar in the form of a $345 million promissory note
("Lyondell Note"). The Lyondell Note bore interest at LIBOR plus a market
spread. The note was repaid in full by Lyondell in July 1998. Interest income
on the Lyondell Note totaled $13 million and $2 million during 1998 and during
the period from December 1, 1997 (inception) to December 31, 1997, respectively.
34
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. ACCOUNTS RECEIVABLE
In December 1998, Equistar entered into a purchase agreement with an independent
issuer of receivables-backed commercial paper. Under the terms of the
agreement, Equistar agreed to sell on an ongoing basis and without recourse,
designated accounts receivable. To maintain the balance of the accounts
receivable sold, Equistar is obligated to sell new receivables as existing
receivables are collected. The agreement was renewed through December 2000 on
predominantly the same terms.
At December 31, 1998 and 1999, Equistar's gross accounts receivable that had
been sold to the purchasers aggregated $130 million. Increases and decreases in
the amount have been reported as operating cash flows in the Consolidated
Statements of Cash Flows. Costs related to the sale are included in "Selling,
general and administrative expenses" in the Consolidated Statements of Income.
8. INVENTORIES
Inventories at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------- -------------------
<S> <C> <C>
Finished goods $ 278 $ 301
Work-in-process 10 11
Raw materials 137 149
Materials and supplies 95 88
- ------------------- ------------------- -------------------
Total inventories $ 520 $ 549
=================== ===================
</TABLE>
The excess of the current cost of inventories over book value was approximately
$109 million at December 31, 1999.
9. PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, at cost, and the related
accumulated depreciation at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------- -------------------
<S> <C> <C>
Land $ 78 $ 78
Manufacturing facilities and equipment 5,656 5,349
Manufacturing equipment acquired under capital leases - - 236
Construction in progress 134 189
------------------- -------------------
Total property, plant and equipment 5,868 5,852
Less accumulated depreciation 1,942 1,777
------------------- -------------------
Property, plant and equipment, net $3,926 $4,075
=================== ===================
</TABLE>
Depreciation expense for the years ending December 31, 1999 and 1998 and for the
period from December 1, 1997 (inception) to December 31, 1997 was $221 million,
$200 million and $15 million, respectively. At December 31, 1998, $10 million of
the accumulated depreciation reported in the accompanying Consolidated 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 accurately reflect
35
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the estimated periods during which such assets will remain in service, based
upon Equistar's actual experience 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, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------- -------------------
<S> <C> <C>
Deferred turnaround costs, net $ 74 $ 84
Deferred software costs, net 76 70
Deferred pension asset 32 30
Other 97 73
------------------- -------------------
Total deferred charges and other assets $ 279 $ 257
=================== ===================
</TABLE>
11. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------- -------------------
<S> <C> <C>
Accrued property taxes $ 68 $ 76
Accrued payroll costs 68 44
Accrued interest 50 18
Other 14 4
------------------- -------------------
Total other accrued liabilities $ 200 $ 142
=================== ===================
</TABLE>
12. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
In February 1999, Equistar 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 new notes.
The debt securities include $300 million of 8.50% Notes, which will mature on
February 15, 2004, and $600 million of 8.75% Notes, which will mature on
February 15, 2009. Equistar used the net proceeds from this offering (i) to
repay the $205 million outstanding under a capitalized lease obligation relating
to Equistar's Corpus Christi facility, (ii) to repay the outstanding balance
under the $500 million credit agreement, after which the $500 million credit
agreement was terminated, (iii) to repay the outstanding $150 million, 10.00%
Notes due in June 1999, and (iv) to the extent of the remaining net proceeds, to
reduce outstanding borrowing under the five-year credit facility and for
Partnership working capital purposes.
Equistar has a five-year, $1.25 billion credit facility with a group of banks
expiring November 2002. Borrowing under the facility bears interest at either
the Federal Funds rate plus 1/2 of 1%, LIBOR plus 1/2 of 1%, 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 upon the type of
borrowing made under the facility. Borrowing under the facility had a weighted
average interest rate of 6.0% and 5.8% at December 31, 1999 and 1998,
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
36
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
effect indefinitely, but at any time after December 31, 2004, Millennium America
Inc. may elect to terminate the guarantee if certain conditions are met
including financial ratios and covenants. In addition, Millennium America Inc.
may elect to terminate the guarantee if Millennium Petrochemicals Inc. sells its
interests in Millennium GP and Millennium LP or if those entities sell their
interests in Equistar, provided certain conditions are met including financial
ratios and covenants.
The terminated $500 million credit agreement was entered into on June 12, 1998.
Borrowing under the agreement bore interest at either the Federal Funds rate
plus 1/2 of 1%, LIBOR plus 0.625%, a fixed rate, offered by one of the
sponsoring banks or interest rates that were based on a competitive auction
feature. At December 31, 1998, the weighted average interest rate for borrowing
under the subsequently terminated $500 million credit agreement was 6.1%.
The credit facility is available for working capital and general Partnership
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.
Long-term debt at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------------- -------------------
Bank credit facilities:
<S> <C> <C>
5-year term credit facility $ 800 $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 2026 150 150
------------------- -------------------
Total long-term debt 2,261 2,015
Less current maturities 92 150
------------------- -------------------
Long-term debt, net 2,169 1,865
Capital lease obligations (5.89% due 2000) - - 205
------------------- -------------------
Total long-term debt and lease obligations $2,169 $2,070
=================== ===================
</TABLE>
Aggregate maturities of long-term debt during the five years subsequent to
December 31, 1999 are as follows: 2000-$92 million; 2001-$90 million; 2002-$851
million; 2003-$29 million; 2004-$300 million. A subsidiary of Millennium has
guaranteed $750 million of the credit facility. Lyondell remains an obligor on
the medium-term notes, the 9.125% Notes, the 6.5% Notes and the 7.55%
Debentures, all of which total $563 million. Occidental and Equistar are
parties to an agreement with respect to the 8.75% Notes due 2009 pursuant to
which Occidental has agreed, under certain limited circumstances, to contribute
to Equistar up to $420 million. The 8.75% Notes have a face amount of $600
million and are shown net of unamortized discount.
The medium-term notes mature at various dates from 2000 to 2005 and had a
weighted average interest rate of 10.0% and 9.9% at December 31, 1999 and 1998,
respectively.
13. RESTRUCTURING AND OTHER UNUSUAL CHARGES
During the fourth quarter 1999, Equistar recorded a charge of $96 million
associated with decisions to shut down certain polymer reactors and to
consolidate certain administrative functions between Lyondell and
37
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equistar. The decision to shut down the reactors was based on their high
production cost, current market conditions in the polyethylene industry and the
flexibility to utilize more efficient reactors to meet customer requirements.
Accordingly, Equistar recorded a charge of $72 million to adjust the asset
carrying values. The remaining $24 million of the total charge represents
severance and other employee-related costs for approximately 500 employee
positions that are being eliminated. The eliminated positions, primarily
administrative functions, resulted from opportunities to share such services
between Lyondell and Equistar and, to a lesser extent, positions associated with
the shut down polymer reactors. Through December 31, 1999, no employees had
been terminated nor were any payments made. Equistar expects that the majority
of severance payments will take place in the first quarter of 2000.
During 1997 and 1998, Equistar incurred restructuring charges related to the
initial merger and integration of the businesses contributed by Lyondell and
Millennium upon formation of the Partnership. Equistar recorded $42 million of
these costs in December 1997. These charges included severance and other
employee related termination costs of $21 million related to a workforce
reduction, which were substantially paid in 1998. The workforce reduction
included approximately 430 employees, primarily in duplicate corporate overhead
functions. All of these 430 employees were terminated in 1998. Additionally,
these restructuring charges included employee relocation costs of $6 million and
various other charges of $7 million, all of which were recorded and paid as
incurred during 1997. In 1997, Equistar also recorded and paid as incurred
$8 million of transaction closing costs.
In 1998, Equistar recorded and paid, as incurred, an additional $12 million in
restructuring charges related to the initial merger and integration of Equistar.
These costs included 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 and there were no other significant changes to
Equistar's original estimate of costs that were accrued as of December 31, 1997.
Equistar also incurred restructuring charges of $2 million related to the merger
and integration of the Occidental Contributed Business into the Partnership.
These charges were recorded and paid as incurred during 1998. There were no
amounts accrued as of December 31, 1998 related to the initial merger and
integration of Equistar or the merger and integration of the Occidental
Contributed Business. The restructuring actions related to the merger and
integration of the Occidental Contributed Business into Equistar were
substantially completed as of December 31, 1998. All restructuring charges were
included in the Unallocated segment (See Note 17).
14. LEASE COMMITMENTS
At December 31, 1999, future minimum lease payments relating to noncancelable
operating leases with lease terms in excess of one year were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS
-------------------
<S> <C>
2000 $ 94
2001 72
2002 58
2003 50
2004 44
Thereafter 482
------------------
Total minimum lease payments $800
==================
</TABLE>
Operating lease net rental expense was $112 million and $110 million for the
years ending December 31, 1999 and 1998, respectively, and $11 million for the
period from December 1, 1997 (inception) to December 31, 1997.
38
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equistar is party to various unconditional purchase obligation contracts as a
purchaser for product and services. At December 31, 1999, future minimum
payments under these contracts with noncancelable contract terms in excess of
one year were as follows:
MILLIONS OF DOLLARS
-------------------
2000 $ 33
2001 31
2002 28
2003 27
2004 25
Thereafter 147
-----------
Total minimum contract payments $291
===========
Equistar's total purchases under these agreements were $39 million and
$35 million for the years ending December 31, 1999 and 1998, respectively, and
$3 million during the period from December 1, 1997 (inception) to December 31,
1997.
15. PENSION AND OTHER POSTRETIREMENT BENEFITS
All full-time regular employees of the Partnership are covered by defined
benefit pension plans sponsored by Equistar. The plans became effective
January 1, 1998, except for union represented employees formerly employed by
Millennium, whose plans were contributed to Equistar on December 1, 1997, and
union represented employees formerly employed by Occidental, whose plans were
contributed to Equistar on May 15, 1998. In connection with the formation of
Equistar, there were no pension assets or obligations contributed to Equistar,
except for the union represented plans described above. Retirement benefits are
based upon years of service and the employee's highest three consecutive years
of compensation during the last ten years of service. Equistar accrues pension
costs based upon an actuarial valuation and funds the plans through periodic
contributions to pension trust funds as required by applicable law. Equistar
also has unfunded supplemental nonqualified retirement plans, which provide
pension benefits for certain employees in excess of the tax qualified plans'
limits.
In addition, Equistar sponsors unfunded postretirement benefit plans other than
pensions ("OPEB") for both salaried and non-salaried employees, which provide
medical and life insurance benefits. These postretirement health care plans are
contributory while the life insurance plans are noncontributory. Currently,
Equistar pays approximately 80% of the cost of the health care plans, but
reserves the right to modify the cost-sharing provisions at any time.
39
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table provides a reconciliation of benefit obligations, plan
assets and the funded status of these plans:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------------------- ---------------------------------------
MILLIONS OF DOLLARS 1999 1998 1999 1998
- ------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, January 1 $ 88 $ 21 $ 69 $ 50
Benefit obligation contributed by Occidental - - 46 - - 14
Service cost 22 16 4 3
Interest cost 7 5 6 4
Actuarial (gain) loss (8) 5 (2) (2)
Benefits paid (10) (5) - - - -
---------------- ---------------- ---------------- ----------------
Benefit obligation, December 31 99 88 77 69
---------------- ---------------- ---------------- ----------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets, January 1 88 40 - - - -
Fair value of plan assets contributed by
Occidental - - 51 - - - -
Actual return of plan assets 7 1 - - - -
Partnership contributions 16 1 - - - -
Benefits paid (10) (5) - - - -
---------------- ---------------- ---------------- ----------------
Fair value of plan assets, December 31 101 88 - - - -
---------------- ---------------- ---------------- ----------------
Funded status 2 - - (77) (69)
Unrecognized actuarial loss 5 13 13 16
Net amount recognized $ 7 $ 13 $ (64) $ (53)
================ ================ ================ ================
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS CONSIST OF:
Prepaid benefit cost $ 33 $ 30 $ - - $ - -
Accrued benefit liability (26) (17) (64) (53)
---------------- ---------------- ---------------- ----------------
Net amount recognized $ 7 $ 13 $ (64) $ (53)
================ ================ ================ ================
</TABLE>
The benefit obligation, accumulated benefit obligation and fair value of assets
for pension plans with benefit obligations in excess of plan assets were
$40 million, $26 million and $13 million, respectively, as of December 31, 1999
and $24 million, $17 million and $5 million, respectively, as of December 31,
1998.
Net periodic pension and other postretirement benefit costs included the
following components:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------- ------------------------------------
MILLIONS OF DOLLARS 1999 1998 1999 1998
- ------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 22 $ 16 $ 4 $ 3
Interest cost 7 5 6 4
Amortization of actuarial loss 1 - - 1 - -
Expected return of plan assets (8) (6) - - - -
--------------- --------------- --------------- ---------------
Net periodic benefit cost after settlement $ 22 $ 15 $ 11 $ 7
=============== =============== =============== ===============
</TABLE>
40
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------- -------------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
DECEMBER 31:
Discount rate 8.00% 6.75% 8.00% 6.75%
Expected return on plan assets 9.50% 9.50% - - - -
Rate of compensation increase 4.75% 4.75% 4.75% 4.75%
</TABLE>
The non-union plans became effective January 1, 1998; therefore, Equistar did
not recognize any net periodic pension cost during the period from December 1,
1997 (inception) to December 31, 1997. The accrued postretirement benefit
liabilities at December 31, 1997 were calculated and contributed as of December
31, 1997; therefore, there were 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, 1999 was 7.0% for 2000-
2001 and 5.0% thereafter. The health care cost trend rate assumption does not
have a significant effect on the amounts reported. To illustrate, increasing or
decreasing the assumed health care cost trend rates by one percentage point in
each year would change the accumulated postretirement benefit liability as of
December 31, 1999 by less than $2 million and would not have a material effect
on the aggregate service and interest cost components of the net periodic
postretirement benefit cost for the year then ended.
Equistar also maintains voluntary defined contribution savings plans for
eligible employees. Contributions to the plans by Equistar were $20 million,
$15 million and less than $1 million for the years ended December 31, 1999 and
1998 and during the period from December 1, 1997 (inception) to December 31,
1997, respectively.
16. COMMITMENTS AND CONTINGENCIES
Equistar 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. See also Note 6,
describing related party commitments.
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 Equistar.
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 years ended December 31, 1999 and 1998, Equistar
incurred $11 million and $5 million, respectively, 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.
Equistar's policy is to be in compliance with all applicable environmental laws.
Equistar 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, Equistar cannot accurately predict
41
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Equistar had no reserves
for environmental matters as of December 31, 1999 and 1998.
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 Equistar. 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 Equistar's results of operations for that period
without giving effect to contribution or indemnification obligations of co-
defendants or others, or to the effect of any insurance coverage that may be
available to offset the effects of any such award.
17. SEGMENT INFORMATION AND RELATED INFORMATION
Using the guidelines set forth in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, Equistar 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.
Aromatics include 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, and polymeric powders. The concentrates and compounds business,
which was part of performance polymers products, was sold effective April 30,
1999 (see Note 18).
No customer accounted for 10% or more of sales during the years ended
December 31, 1999 and 1998 or the one-month ended December 31, 1997.
The accounting policies of the segments are the same as those described in
"Summary of Significant Accounting Policies" (see Note 2).
42
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Summarized financial information concerning Equistar'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.
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS PETROCHEMICALS POLYMERS UNALLOCATED ELIMINATIONS CONSOLIDATED
- ------------------- -------------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1999:
Sales and other operating
operating revenues:
Customers $3,412 $2,024 $ - - $ - - $5,436
Intersegment 1,324 - - - - (1,324) - -
------------- ------------- ------------ ------------- -----------
$4,736 $2,024 $ - - $(1,324) $5,436
============= ============= ============ ============= ===========
Restructuring and other
unusual charges $ - - $ - - $ 96 $ - - $ 96
============= ============= ============ ============= ===========
Operating income $ 447 $ 51 $ (336) $ - - $ 162
============= ============= ============ ============= ===========
Total assets $3,671 $1,551 $1,514 $ - - $6,736
============= ============= ============ ============= ===========
Capital expenditures $ 61 $ 83 $ 13 $ - - $ 157
============= ============= ============ ============= ===========
Depreciation and
amortization expense $ 194 $ 53 $ 53 $ - - $ 300
============= ============= ============ ============= ===========
FOR THE YEAR ENDED DECEMBER 31, 1998:
Sales and other operating
operating revenues:
Customers $2,351 $2,012 $ - - $ - - $4,363
Intersegment 1,112 46 - - (1,158) - -
------------- ------------- ------------ ------------- -----------
$3,463 $2,058 $ - - $(1,158) $4,363
============= ============= ============ ============= ===========
Restructuring and other
unusual charges $ - - $ - - $ 14 $ - - $ 14
============= ============= ============ ============= ===========
Operating income $ 319 $ 177 $ (214) $ - - $ 282
============= ============= ============ ============= ===========
Total assets $3,625 $1,563 $1,477 $ - - $6,665
============= ============= ============ ============= ===========
Capital expenditures $ 71 $ 116 $ 13 $ - - $ 200
============= ============= ============ ============= ===========
Depreciation and
amortization expense $ 152 $ 65 $ 51 $ - - $ 268
============= ============= ============ ============= ===========
FOR THE PERIOD FROM DECEMBER 1, 1997
(INCEPTION) TO DECEMBER 31, 1997:
Sales and other
operating revenues:
Customers $ 179 $ 186 $ - - $ - - $ 365
Intersegment 105 - - - - (105) - -
------------- ------------- ------------ ------------- -----------
$ 284 $ 186 $ - - $ (105) $ 365
============= ============= ============ ============= ===========
Restructuring and other
unusual charges $ - - $ - - $ 42 $ - - $ 42
============= ============= ============ ============= ===========
Operating income $ 47 $ 22 $ (54) $ - - $ 15
============= ============= ============ ============= ===========
Total assets $1,668 $1,504 $1,428 $ - - $4,600
============= ============= ============ ============= ===========
Capital expenditures $ 7 $ 4 $ 1 $ - - $ 12
============= ============= ============ ============= ===========
Depreciation and
amortization expense $ 7 $ 7 $ 5 $ - - $ 19
============= ============= ============ ============= ===========
</TABLE>
43
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the details of "Operating income" as presented
above in the "Unallocated" column for the years ended December 31, 1999 and 1998
and for the period from December 1, 1997 (inception) to December 31, 1997:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Expenses not allocated to petrochemicals and polymers:
Principally general and administrative expenses $(240) $(200) $ (12)
Restructuring and other unusual charges (96) (14) (42)
------------- ------------- -------------
Total--Unallocated $(336) $(214) $ (54)
============= ============= =============
</TABLE>
The following table presents the details of "Total assets" as presented above in
the "Unallocated" column as of December 31, for the years indicated:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1999 1998 1997
- ------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Cash $ 108 $ 66 $ 41
Accounts receivable--trade and related parties 18 14 - -
Receivable with partners - - - - 150
Prepaids and other current assets 22 25 24
Property, plant and equipment, net 58 48 16
Goodwill, net 1,119 1,151 1,139
Deferred charges and other assets 189 173 58
------------- ------------- -------------
$1,514 $1,477 $1,428
============= ============= =============
</TABLE>
18. 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 reported in "Other
income, net" in the Consolidated Statements of Income.
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. MEMBERS OF THE PARTNERSHIP GOVERNANCE COMMITTEE AND EXECUTIVE OFFICERS
OF EQUISTAR
PARTNERSHIP GOVERNANCE COMMITTEE
A partnership governance committee (the "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 Committee,
subject to delegation to the executive officers discussed below. The 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. 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.
Matters requiring unanimous agreement by the representatives of Lyondell,
Millennium and Occidental include changes in the scope of Equistar's business,
the five year strategic plan (and annual updates thereof), the sale or purchase
of assets or capital expenditures of more than $30 million not contemplated by
the strategic plan, investments by Equistar's partners over certain amounts,
merging or combining with another business and certain other matters as
described in the partnership agreement. All decisions of the Partnership
Governance Committee that do not require unanimity among Lyondell, Millennium
and Occidental may be made by Lyondell's representatives alone.
The members of the Committee are
. Dan F. Smith, President and Chief Executive Officer of Lyondell
and Equistar and co-chairman of the Committee
. William M. Landuyt, Chairman and Chief Executive Officer of Millennium and
co-chairman of the Committee
. Dr. Ray R. Irani, Chairman and Chief Executive Officer of Occidental
Petroleum and co-chairman of the 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--Corporate Development and Chief
Financial Officer of Occidental
. J. Roger Hirl, President and Chief Executive Officer of Occidental Chemical
Corporation.
OFFICERS OF EQUISTAR
The Committee has delegated responsibility for day-to-day operations to the
executive officers of Equistar. The executive officers consist of a Chief
Executive Officer, a President and Chief Operating Officer and others as
determined from time to time by the Committee. Except for the Chief Executive
Officer or in certain other limited situations, the approval of at least two
representatives of each of Lyondell, Millennium and Occidental is required to
appoint or discharge executive officers, based upon the recommendation of the
Chief Executive Officer.
The Chief Executive Officer holds office for a five-year term, assuming he
does not resign or die and is not removed, and need not be an employee of
Equistar. The Chief Executive Officer may be removed at any time by action of
the Committee.
45
<PAGE>
The following table sets forth the names and ages of the executive officers of
Equistar as of March 1, 2000.
<TABLE>
<CAPTION>
NAME AGE PARTNERSHIP POSITION
------ --- ----------------------
<S> <C> <C>
Dan F. Smith............... 53 Chief Executive Officer
Eugene R. Allspach......... 53 President and Chief Operating Officer
John R. Beard.............. 47 Senior Vice President, Manufacturing
Kelvin R. Collard.......... 42 Vice President and Controller
J. R. Fontenot............. 47 Vice President, Research and Engineering
Brian A. Gittings.......... 53 Senior Vice President, Petrochemicals
Jeffrey L. Hemmer.......... 42 Vice President, Customer Supply Chain
Gerald A. O'Brien.......... 48 Vice President, General Counsel and Secretary
W. Norman Phillips, Jr. ... 45 Senior Vice President, Polymers
James W. Bayer............. 44 Vice President, Engineering and Health,
Safety and Environment
Leonard B. Halpern......... 56 Vice President, Feedstocks and Materials
Management
</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 ("ARCO"), 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. Allspach has served
as Executive Vice President of Lyondell since December 2, 1999.
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. Collard has served as Controller of Lyondell since July 1999 and
as Vice President of Lyondell since December 2, 1999.
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, Customer Supply Chain of Equistar since
May 1999 and previously was Vice President, Information Systems and Business
Process Development of Equistar from August 1998 to May 1999 and Director of
Business Process Improvement of Equistar from December 1997 to August 1998. Mr.
Hemmer had been Director, Engineering and Licensing for Millennium
Petrochemicals from October 1996 to
46
<PAGE>
December 1997. Before October 1996, he was manager of polyethylene process and
engineering technology for Exxon Chemical.
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. Mr. O'Brien has served as Vice President of Lyondell
since December 2, 1999.
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, and as Vice President of
Lyondell with responsibilities in the areas of marketing and operations from
1993 to January 1997.
Mr. Bayer was appointed to his current position on December 29, 1999 and has
served in the same capacity for Lyondell since July 1999. From December 1997 to
July 1999 he was Director, Gulf Coast Manufacturing for Arco Chemical. Prior to
December 1997, Mr. Bayer served as Channelview Plant Manager for Arco Chemical.
Mr. Halpern was appointed to his current position on December 29, 1999 and has
served in the same capacity for Lyondell since December 2, 1999. From July 1999
to December 1999, he was Vice President, Raw Materials Optimization for
Lyondell, and from September 1997 to July 1999, he was Director, Feedstock
Supply for Arco Chemical. Prior to that he was Business Manager, Oxygenated
Products for Arco Chemical.
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 during the fiscal years ended December 31, 1999
and 1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)(a) COMPENSATION ($)(b)
---------------------------- ------ ---------- --------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Dan F. Smith.......................... 1999 (c) (c) (c) (c)
Chief Executive Officer 1998 (c) (c) (c) (c)
Eugene R. Allspach.................... 1999 413,088 480,300 13,926 60,737
President & Chief Operating Officer 1998 335,531 321,600 11,344 48,641
Brian Gittings (d).................... 1999 269,516 268,600 9,259 50,998
Senior Vice President 1998 137,130 95,760 --- 19,708
W. Norman Phillips, Jr. .............. 1999 278,720 277,800 10,519 49,047
Senior Vice President 1998 256,188 185,640 9,845 39,039
John R. Beard......................... 1999 263,900 263,000 6,092 43,375
Senior Vice President 1998 237,128 161,800 5,491 31,347
</TABLE>
_____________
(a) Includes imputed income in respect of Equistar's Long-Term Disability Plan
and tax gross-ups (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)
in respect of financial counseling reimbursements.
(b) 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.
YEAR ALLSPACH GITTINGS PHILLIPS BEARD
------ -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Executive Supplementary Savings Plan......... 1999 $33,047 $21,561 $22,298 $21,102
Incremental Medical Plan Premiums............ 1999 15,600 15,600 15,600 15,600
Financial Counseling Reimbursement........... 1999 6,514 11,742 7,107 ---
Executive Life Insurance Plan................ 1999 5,576 2,095 4,042 6,673
</TABLE>
47
<PAGE>
(c) 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
"Item 13. Related Transactions--Agreement Regarding Services of Equistar's
Chief Executive Officer."
(d) Mr. Gittings joined Equistar in May 1998.
EQUISTAR'S LONG-TERM INCENTIVE PLAN
In 1999, Equistar offered a performance-driven, annual and long-term incentive
plan, the Equistar Bonus Plan, to selected key employees. The Plan integrates
current and deferred (or long-term) components. Awards are based on whether
Equistar reaches its performance and financial goals in critical areas,
primarily 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 (i) aligning and
improving the efficiency of processing units for improved processing time and
increased capacity capability, (ii) maximizing the value of raw material and
olefins co-products, (iii) lowering distribution costs, (iv) reducing the cost
of raw materials and other purchasing costs, and (v) reducing the amount of
staffing services required by each contributed business.
The Committee has discretion to make awards based on its assessment of
Equistar's operating performance in the areas of synergy attainment and economic
value added.
Equistar currently assigns each Plan participant a target award percentage for
the year based on that participant's position and any other factors Equistar
deems appropriate. Each Plan participant's award for the year is determined by
multiplying his/her target award percentage by an award multiple determined by
the Committee, the product of which is multiplied by his/her base pay. The award
multiple for 1999 was based on the achievement of a five-year rolling average
economic value added of $42 million and the achievement of net synergies of $280
million.
Awards will generally be paid only to Plan participants who are actually
employed at year-end. Those Plan 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 are
subject to forfeiture of their award. Plan 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 Plan participant's salary range. The percentage of
deferred cash compensation as compared with current cash compensation increases
as the Plan participant's salary range 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. In 1999, the payout amounts for the deferred
compensation component could 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 could be adjusted one percentage point for
every percentage point of synergy gained or lost during the award period.
48
<PAGE>
The following table details the amount of the deferred compensation component
of the 1999 award to the four most highly paid executive officers as well as
their estimated future payouts resulting from such award under the Plan.
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERFORMANCE
SHARES, OR OTHER ESTIMATED FUTURE PAYOUTS UNDER
UNITS OR PERIOD UNTIL NON-STOCK PRICE-BASED PLANS
OTHER MATURATION -----------------------------------------
NAME RIGHTS ($)(a) OR PAYOUT THRESHOLD ($) TARGET ($) ACTUAL ($)(b)
----- -------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Dan F. Smith (c) --- --- --- --- ---
Eugene R. Allspach 1,303,700 (d) 392,450 784,900 1,303,700
Brian Gittings 604,300 (d) 181,900 363,800 604,300
W. Norman Phillips, Jr. 624,900 (d) 188,100 376,300 624,900
John R. Beard 591,800 (d) 178,150 356,700 591,800
</TABLE>
__________
(a) Amounts represent deferred compensation component of the 1999 award as
finally determined by the Equistar partnership committee based on
Equistar's actual economic value added and annual synergies for 1999.
Equistar's 1999 performance resulted in incentive compensation being paid
out at 166.1% of the targeted amounts. The target award established by the
partnership committee at the beginning of 1999 is set forth in the "Target"
column above. The current portion of the 1999 award is disclosed under the
"Bonus" column of the Summary Compensation Table above.
(b) This amount represents the deferred compensation component for 1999 based
on Equistar's actual results for 1999. The sum of the amounts ultimately
payable in 2001, 2002 and 2003 with respect to this deferred component of
the 1999 award may differ from this amount depending on Equistar's ongoing
results in those years with respect to synergies.
(c) 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."
(d) Long-term compensation awards with respect to 1999 will be paid in annual
increments of one-third beginning in March 2001.
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PENSION BENEFITS
The following table shows estimated annual pension benefits payable to
Equistar's employees, including the named executive officers (other than Mr.
Smith), upon retirement at age 65 based on credited service as of January 1,
2000, under the provisions of the Equistar Retirement Plan and the Equistar
Supplementary Executive Retirement Plan (together, the "Equistar Retirement
Plan").
PENSION PLAN TABLE
<TABLE>
<CAPTION>
AVERAGE FINAL EARNINGS (BASE
SALARY PLUS ANNUAL BONUS) APPROXIMATE ANNUAL BENEFIT FOR YEARS OF MEMBERSHIP SERVICE INDICATED
HIGHEST THREE CONSECUTIVE --------------------------------------------------------------------
YEARS OUT OF LAST 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- -------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$1,200,000 $256,172 $341,562 $426,953 $512,344 $597,734
1,100,000 234,824 313,099 391,374 469,648 547,923
1,000,000 213,477 284,635 355,794 426,953 498,112
900,000 192,129 256,172 320,215 384,258 448,301
800,000 170,781 227,708 284,635 341,562 398,490
700,000 149,434 199,245 249,056 298,867 348,678
600,000 128,086 170,781 213,477 256,172 298,867
500,000 106,738 142,318 177,897 213,477 249,056
400,000 85,391 113,854 142,318 170,781 199,245
300,000 64,043 85,391 106,738 128,086 149,434
200,000 42,695 56,927 71,159 85,391 99,622
</TABLE>
____________
(a) As of December 31, 1999, each of the participating named executive officers
had two years of credited service (rounded to the nearest whole number)
under the Equistar Retirement Plan.
The amounts shown in the above table are necessarily based upon certain
assumptions, including retirement of the employee at age 65, based on credited
services as of January 1, 2000, and payment of the benefit under the basic form
of allowance provided under the Equistar Retirement Plan (payment for the life
of the employee only). The amounts will change if the payment is made under any
other form of allowance permitted by the respective retirement plan, or if an
employee's actual retirement occurred after January 1, 2000, since the "annual
covered compensation level" of such employee (one of the factors used in
computing the annual retirement benefits) may change during the employee's
subsequent years of membership service. The covered compensation for which
retirement benefits are computed under the Equistar Retirement Plan is the
average of the participant's highest three consecutive years out of the last ten
years of base salary plus annual bonus. Base salary and annual bonus amounts are
set forth under the "Salary" and "Bonus" headings in the Summary Compensation
Table. The benefits shown are not subject to deduction for Social Security
benefits or other offset amounts. The plans, however, provide a higher level of
benefits for the portion of compensation above the compensation levels on which
Social Security benefits are based.
EXECUTIVE SEVERANCE ARRANGEMENTS
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 term of the severance agreements
with the Lyondell executives who joined Equistar expired January 1, 2000.
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 (i) by Equistar without cause or (ii) 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: (i) assigns him to any duties or responsibilities not
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comparable to his duties or responsibilities when he joined Equistar or reduces
his responsibilities or position; (ii) 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; (iii) 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; (iv) 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; or (v) 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:
(i) 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; (ii) additional pension benefits by crediting Mr. Allspach with three
additional years of age and service; (iii) 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; (iv) continuation of insurance and other benefits for 36
months following termination; (v) financial counseling for a period of one year;
(vi) out-placement services and assistance, not to exceed $40,000; and (vii) 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.
COMPENSATION OF PARTNERSHIP GOVERNANCE COMMITTEE MEMBERS
Members of the Committee do not receive any compensation from Equistar for
their service.
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, Equistar did not have a compensation committee or any other
committee (other than the partnership governance committee) that performs
equivalent functions. During the year ended December 31, 1999, no officer or
employee of Equistar (with the exception of Messrs. Smith and Allspach)
participated in deliberations of the Committee concerning executive officer
compensation.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 March 1, 2000.
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS OF NATURE OF PARTNERSHIP
BENEFICIAL OWNER BENFICIAL 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 owned
by Lyondell under its bank credit facility. Millennium indirectly owns 100% of
the 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.
LYONDELL
Lyondell is a global chemical company with revenues of $3.7 billion for the
year ended December 31, 1999. Lyondell had $9.5 billion of assets at
December 31, 1999. 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 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.
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. Methanol. Lyondell owns 75% of Lyondell Methanol Company, 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 $1.5 billion for the year ended December 31, 1999, and
approximately $3.3 billion of assets at December 31, 1999. 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
and vinyls, including polyvinyl chloride resins and vinyl chloride monomer.
Occidental conducts its principal operations through its oil and gas and
chemical subsidiaries. Occidental also has an interest in petrochemicals through
its 29.5% ownership interest in Equistar. Occidental had net sales of
approximately $7.6 billion for the year ended December 31, 1999, and
approximately $14.1 billion of assets at December 31, 1999.
EFFECT OF ANY POTENTIAL CHANGE IN OWNERSHIP
Any one or more of Lyondell, Millennium or Occidental may transfer control of
their interests in Equistar or 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. A
direct or indirect transfer of an interest in Equistar generally may only occur
if the other owners are first offered the opportunity to purchase the interest
and the transferee has an "investment grade" debt rating. However, if
interests in Equistar are transferred in a merger or sale of a majority of the
other assets of Lyondell, Millennium or specified subsidiaries of Occidental,
the other owners do not have a right of first option and the investment grade
requirement is not applicable.
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, no assurance can be given that Equistar's assets would
be sufficient to fund a repayment of the indebtedness under the $1.25 billion
revolving credit facility.
Millennium has publicly announced its intention to sell its interest in
Equistar and is actively seeking qualified buyers. There can be no assurance
that any such sale will be consummated, but Equistar does not expect any such
sale to affect its operations or results. Millennium America, an indirect
wholly owned subsidiary of Millennium, provides a limited guarantee under
Equistar's $1.25 billion revolving credit facility, which is described under
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations." If Millennium were to transfer its interest in
Equistar, Millennium America would be able to terminate its guarantee if
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.
Millennium's successor would not be required to assume the limited guarantee.
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<PAGE>
PART III
Item 13. CERTAIN RELATIONSHIPS AND 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:
(i) 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;
(ii) 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;
(iii) obligations for $745 million of Lyondell indebtedness, of which
$563 million remains outstanding;
(iv) a $750 million intercompany obligation of Millennium Petrochemicals
to an indirect subsidiary of Millennium, which was since repaid;
(v) the lease intended for security relating to the Corpus Christi
facility contributed by Occidental, which was since repaid;
(vi) 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;
(vii) 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;
(viii) in the case of the Millennium Petrochemicals asset contribution
agreement, future maintenance and maintenance turnaround costs
related to the Millennium contributed business;
(ix) 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:
(i) the transfer of intellectual property of Lyondell, Millennium
Petrochemicals and the Occidental Subsidiaries related to the
businesses each contributed to Equistar;
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<PAGE>
(ii) 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;
(iii) 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.
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.
TRANSACTIONS WITH LMC
Equistar provides operating and other services for LMC under the terms of
existing agreements that were assumed by Equistar from Lyondell, including the
lease to LMC by Equistar of the real property on which its methanol plant is
located. Under the terms of those agreements, LMC pays Equistar a management fee
of $6 million per year and will reimburse certain expenses of Equistar at cost.
Equistar sells natural gas to LMC at prices generally representative of
Equistar's cost. Equistar sales of natural gas to LMC were $46 million in 1999.
LMC sells all of its product to Equistar, which amounted to $95 million in 1999.
All of the foregoing agreements with LMC are expected to continue on terms
similar to those described above.
TRANSACTIONS WITH LCR
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 LCR were assigned to Equistar. Accordingly, refinery products,
including propane, butane, naphthas, heating oils and gas oils, are sold by LCR
to Equistar as raw materials, and some olefins by-products are sold by Equistar
to LCR for processing into gasoline. Net payments from LCR to Equistar in
connection with these product sales and raw material purchase agreements were
$60 million for 1999.
Equistar and LCR are also parties to (i) tolling arrangements under which
some of LCR's coproducts are transmitted to Equistar and processed by Equistar,
with the resulting product being returned to LCR, (ii) terminaling and storage
obligations, and (iii) agreements for Equistar to perform some marketing
services for LCR. Aggregate payments under these various services agreements of
$13 million were made by Equistar to LCR with respect to 1999.
All of the agreements between LCR and Equistar are on terms generally
representative of prevailing market prices.
SERVICES AND SHARED-SITE AGREEMENTS WITH LYONDELL AND AFFILIATES OF MILLENNIUM
AND OCCIDENTAL
Lyondell provides certain corporate, general and administrative services,
including tax, treasury, risk management and other services, and subleases
office space to Equistar pursuant to a shared services agreement. During 1999,
Lyondell charged Equistar $9 million for these services. As part of the shared
services agreement, Equistar provided certain general and administrative
services to Lyondell, such as health, safety and environmental services,
materials management services, human resource services, information services and
legal services, for which it charged Lyondell $8 million in 1999. In connection
with a November 1999 agreement with Lyondell to increase the scope of shared
administrative services, approximately 460 persons who had been employed by
Equistar in the areas of information technology, human resources, materials
management and raw material supply, customer supply chain, accounting, facility
services, and legal became employees of Lyondell effective January 1, 2000.
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
55
<PAGE>
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 $3 million with respect to
1999. 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. During the year ended
December 31, 1999, Equistar purchased $12 million 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 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 (i) pay
Occidental Chemical a fixed fee for their services according to the terms of the
transition services agreement or (ii) reimburse Occidental Chemical for all
reasonable, direct, out-of-pocket costs that are incurred by Occidental Chemical
in connection with providing their services. During 1999, Equistar incurred
charges of $2 million in connection with services provided under the agreement.
The transition services agreement expired by its terms on June 1, 1999, and
Equistar (or Lyondell), through the Shared Services Agreement is now providing
these services directly.
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 Chemical'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, although the fee may be adjusted based on a price
index. During 1999, Equistar paid Occidental Chemical $431 thousand under the
agreement. The initial term of the agreement ends on December 31, 2001, but will
continue from year to year unless terminated by either party upon 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 this agreement, 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 U.S.
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 calendar year under the ethylene sales agreement is
2.55 billion pounds. Upon three years' notice from either party to the other,
the ethylene sales agreement may be "phased down" over a period not less than
five years. No phase down may commence before January 1, 2009. The ethylene
sales agreement provides for sales of ethylene at market-related prices. During
1999, Equistar received aggregate payments from Occidental Chemical of $435
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
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<PAGE>
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 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 between Equistar and
Occidental Chemical. Millennium Petrochemicals paid $54 million to Equistar for
ethylene during 1999.
PRODUCT SALES AGREEMENTS WITH LYONDELL
Lyondell has purchased benzene, ethylene, propylene and other products at
market-based prices from Equistar since Lyondell's acquisition of ARCO Chemical
Company in July 1998. Lyondell and Equistar contemplate entering into agreements
concerning sales by Equistar to Lyondell of ethylene, propylene, benzene, 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.
Lyondell also purchases a significant portion of the MTBE produced by Equistar
at one of its two Channelview units at market-related prices. Product sales to
Lyondell in 1999 were $242 million.
PRODUCT TRANSACTIONS WITH OXY VINYLS, LP
Occidental Chemical owns 76% of Oxy Vinyls, LP ("Oxy Vinyls"), a joint venture
company formed with an unrelated party effective May 1, 1999. Equistar made
ethylene sales to Oxy Vinyls totaling $93 million for the period from May 1,
1999 to December 31, 1999, which were based upon market prices.
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 paid $1
million as compensation to Lyondell for the services rendered by Mr. Smith as
part of the shared services provided by Lyondell during 1999. See "Item 12.
Executive Compensation."
INDEMNITY AGREEMENT WITH OCCIDENTAL CHEMICAL
Equistar and Occidental Chemical have entered into an indemnity agreement
pursuant to which Occidental Chemical agrees to contribute to Equistar an amount
equal to up to the lesser of approximately $420 million or the principal amount
of the notes due 2009 then outstanding, together with interest. Occidental
Chemical is only required to pay this amount to Equistar if the holders of the
notes due 2009 have not been able to obtain payment after the holders of the
notes due 2009 have pursued and exhausted all their remedies to compel payment
by Equistar and Equistar Funding, including the liquidation of assets. The
indemnity expressly does not create any right in the holders of the notes due
2009 or any person other than Occidental Chemical, Equistar and the partners in
Equistar. The indemnity may be terminated without the consent of the holders of
the notes due 2009.
The indemnity will remain in effect indefinitely, but at any time after
June 14, 2005, Occidental Chemical may elect to terminate the indemnity if all
of the following conditions exist:
(i) 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;
(ii) Equistar's ratio of earnings before interest, 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;
(iii) 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;
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(iv) 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 Occidental GP, Occidental LP1 and Occidental LP2 sell all
of their respective interests in Equistar to an unaffiliated third party at any
time, or if Occidental Chemical Holding Corporation sells all of its interests
in Occidental GP, Occidental LP1 and Occidental LP2, Occidental Chemical may
elect to terminate its indemnity, 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.
If Occidental sells its interest in Equistar, Occidental may terminate the
indemnity if 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.
Occidental Chemical may assign its rights or obligations under the
indemnity to Occidental at any time without the consent of Equistar. Following
such an assignment, Occidental Chemical may terminate the indemnity at any time
if Equistar ceases to be an affiliate of Occidental.
58
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
3.1 Certificate of Limited Partnership of Equistar Chemicals, LP dated as of October 17, 1997 (1)
3.2 Certificates of Amendment to the Certificate of Limited Partnership of Equistar Chemicals, LP
dated as of May 15, 1998 (1)
3.3(a) First Amendment to Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP
dated as of June 30, 1998 (1)
3.3(b) Second Amendment to Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP
dated as of February 16, 1999 (1)
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 (1)
4.2 Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York,
as Trustee, dated as of January 15, 1999 (1)
4.2(a) Form of Second Supplemental Indenture among Equistar Chemicals, LP, Equistar Funding Corporation
and The Bank of New York, as Trustee (1)
4.2(b) 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(a)) (1)
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 (1)
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 (1)
4.4 Indenture between Lyondell Petrochemical Company and Texas Commerce Bank National Association,
as Trustee, dated as of May 31, 1989 (1)
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
(1)
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 (1)
4.5 Indenture between Lyondell Petrochemical Company and Continental Bank, National Association, as
Trustee, dated as of March 10, 1992 (1)
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 (1)
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 (1)
4.6 Indenture between Lyondell Petrochemical Company and Texas Commerce Bank National Association,
as Trustee, dated as of January 29, 1996 (1)
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
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 (1)
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 (1)
</TABLE>
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.
EXECUTIVE COMPENSATION:
<TABLE>
<CAPTION>
<C> <S>
10.1 Form of Severance Agreement between Lyondell Petrochemical Company and Former Lyondell
Executives (1)
10.2 Form of Severance Agreement between Millennium Petrochemicals Inc. and Former Millennium
Executives accepted and agreed by Equistar Chemicals LP (1)
10.3 Equistar Chemicals, LP Bonus Plan (included in the Summary Description of Equistar Chemicals, LP
Long-Term Incentive Plan filed herewith as Exhibit 10.5)
10.4 Summary Description of Equistar Chemicals, LP Supplemental Executive Retirement Plan (1)
10.5 Summary Description of Equistar Chemicals, LP Long-Term Incentive Plan (1)
10.6 Summary Description of Equistar Chemicals, LP Executive Supplementary Savings Plan (1)
10.7 Summary Description of Equistar Chemicals, LP Executive Medical Plan (1)
10.8 Summary Description of Equistar Chemicals, LP Salary Deferral Plan (1)
10.9 Summary Description of Equistar Chemicals, LP Executive Disability Plan (1)
10.10 Summary Description of Equistar Chemicals, LP Executive Life Insurance Plan (1)
</TABLE>
OTHER MATERIAL CONTRACTS:
<TABLE>
<C> <S>
10.11 Asset Contribution Agreement among Lyondell Chemical Company, Lyondell Petrochemical LP and
Equistar Chemicals, LP dated as of December 1, 1997 (1)
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 (1)
10.12 Asset Contribution Agreement among Millennium Petrochemicals Inc., Millennium LP and Equistar
Chemicals, LP dated as of December 1, 1997 (1)
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 (1)
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 (1)
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 (1)
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 (1)
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 (1)
10.15(b) Assignment and Assumption Agreement with respect to the Amended and Restated Parent Agreement
executed as of June 19, 1998 (1)
10.16 Ethylene Sales Agreement between Equistar Chemicals, LP and Occidental Chemical Corporation
dated as of May 15, 1998 (1)
12 Statement Concerning Computation of Ratios
21 Subsidiaries of Equistar Chemicals, LP (1)
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
24.1 Power of Attorney for Millennium Petrochemicals Inc.
24.2 Power of Attorney for Occidental Petrochem Partner GP, Inc.
24.3 Power of Attorney for Equistar Chemicals, LP Partnership Governance Committee
27 Financial Data Schedule
</TABLE>
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-4
(No. 333-76473) and incorporated herein by reference.
(b) Consolidated Financial Statements and Financial Statement Schedules
(1) Consolidated Financial Statements
Report of Independent Accountants
Consolidated Statements of Income.
Consolidated Balance Sheets.
Consolidated Statements of Cash Flows.
Consolidated Statements of Partners' Capital
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Financial statement schedules are omitted because they are not
applicable or the required information is contained in the Financial
Statements or notes thereto.
Copies of exhibits will be furnished upon prepayment of 25 cents per page.
Requests should be addressed to the Secretary.
(c) Reports on Form 8-K
NONE
61
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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, by its General Partner
LYONDELL PETROCHEMICAL G.P. INC.
By: /s/ JEFFREY R. PENDERGRAFT
------------------------------
Name: Jeffrey R. Pendergraft
----------------------------
Title: Executive Vice President
---------------------------
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ DAN F. SMITH President and Chief Executive Officer
- ------------------------------ and Director March 29, 2000
Dan F. Smith
/s/ JEFFREY R. PENDERGRAFT
- ------------------------------ Executive Vice President and Director March 29, 2000
Jeffrey R. Pendergraft
/s/ T. KEVIN DeNICOLA
- ------------------------------ Executive Vice President and Director March 29, 2000
T. Kevin DeNicola
</TABLE>
62
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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, 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
--------------------------
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
* Director March 29, 2000
- ------------------------------
William M. Landuyt
* Director March 29, 2000
-----------------------------
George H. Hempstead, III
* Director, President and Chief Executive March 29, 2000
- ------------------------------ Officer
Peter P. Hanik
* Vice President, Principal Accounting March 29, 2000
- ------------------------------ Officer and Principal Financial Officer
Charles F. Daly
*By: /s/ C. WILLIAM CARMEAN
----------------------------------------
(C. William Carmean, as Attorney-in-fact)
</TABLE>
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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, by its General Partner
OCCIDENTAL PETROCHEM PARTNER GP, INC.
By: /s/ J.R. HAVERT
----------------------------
Name: J.R. Havert
--------------------------
Title: Assistant Treasurer
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
* Executive Vice President, Chief Financial March 29, 2000
- -------------------------------- Officer and Director (Principal Accounting
Richard A. Lorraine (Officer)
* President and Director March 29, 2000
- ---------------------------------
J. Roger Hirl
* Secretary, Senior Vice President and Director March 29, 2000
- ---------------------------------
Keith McDole
</TABLE>
*By: /s/ SCOTT A. KING
-------------------------------------
(Scott A. King, as Attorney-in-fact)
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ DAN F. SMITH
- -------------------------------------
Dan F. Smith Chief Executive Officer, Equistar Chemicals, March 29, 2000
(Chief Executive Officer) LP, Co-Chairman, Partnership Governance
Committee
/s/ KELVIN R. COLLARD
- -------------------------------------
Kelvin R. Collard Vice President and Controller, Equistar March 29, 2000
(Principal Financial and Accounting Officer) Chemicals, LP
/s/ JEFFREY R. PENDERGRAFT
- -------------------------------------
Jeffrey R. Pendergraft Member, Partnership Governance Committee March 29, 2000
/s/ T. KEVIN DeNICOLA
- -------------------------------------
T. Kevin DeNicola Member, Partnership Governance Committee March 29, 2000
*
- -------------------------------------
William M. Landuyt Co-Chairman, Partnership Governance March 29, 2000
Committee
*
- -------------------------------------
John E. Lushefski Member, Partnership Governance Committee March 29, 2000
*
- -------------------------------------
George Robbins Member, Partnership Governance Committee March 29, 2000
*
- -------------------------------------
Dr. Ray R. Irani Co-Chairman, Partnership Governance March 29, 2000
Committee
*
- -------------------------------------
Stephen I. Chazen Member, Partnership Governance Committee March 29, 2000
*
- -------------------------------------
J. Roger Hirl Member, Partnership Governance Committee March 29, 2000
*By: /s/ KELVIN R. COLLARD
-------------------------------------
(Kelvin R. Collard, as Attorney-in-fact)
</TABLE>
65
<PAGE>
STATEMENT SETTING FORTH DETAIL FOR COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
(Millions of Dollars)
EXHIBIT 12
<TABLE>
<CAPTION>
For the
period
December
1, 1997
(inception)
to
Year Ended December 31 December 31,
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C> <C>
Income from continuing operations before income taxes........... A $ 32 $ 143 $ 7
Fixed charges:
Interest expense, gross....................................... 182 156 10
Portion of rentals representative of interest................. 37 37 4
----- ----- -----
Total fixed charges before capitalized interest............ B 219 193 14
Capitalized interest.......................................... -- -- --
----- ----- -----
Total fixed charges including capitalized interest......... C 219 193 14
----- ----- -----
Earnings (A+B).................................................. D $ 251 $ 336 $ 21
Ratio of earnings to fixed charges (D/C)........................ 1.1 1.7 1.5
===== ===== =====
</TABLE>
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
WHEREAS, Millennium Petrochemicals Inc., a Virginia corporation (the
"Manager"), is the sole member and the manager of Millennium Petrochemicals
GPLLC, a Delaware limited liability company (the "General Partner"), which is a
general partner of Equistar Chemicals, LP, a Delaware limited partnership (the
"Partnership"); and
WHEREAS, the Partnership intends to file with the Securities and Exchange
Commission (the "Commission") under the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the year ended December 31, 1999,
with such amendment or amendments thereto, in each case as may be necessary or
appropriate, together with any and all exhibits and other documents relating
thereto (the "Form 10-K");
NOW, THEREFORE, each of the undersigned, in his or her capacity as a
director or officer, or both, as the case may be, of the Manager, does hereby
appoint George H. Hempstead, III, John E. Lushefski, and C. William Carmean, and
each of them, 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 director or
officer or both, as the case may be, of the Manager, the Form 10-K, and all
instruments necessary or incidental in connection therewith as said attorneys-
in-fact and agents or any of them shall deem necessary or appropriate
IN WITNESS WHEREOF, each of the undersigned has executed this instrument on
this 29th day of March, 2000.
/s/ William M. Landuyt
--------------------------------
William M. Landuyt
Director
/s/ George H. Hempstead, III
-----------------------------------
George H. Hempstead, III
Director
/s/ Peter P. Hanik
------------------------------------
Peter P. Hanik
Director, President & Chief Executive Officer
/s/ Charles F. Daly
------------------------------
Charles F. Daly
Vice President, Principal Accounting and
Financial Officer
<PAGE>
EXHIBIT 24.2
POWER OF ATTORNEY
WHEREAS, Occidental Petrochem Partner GP, Inc., a Delaware corporation (the
"General Partner"), is a general partner of Equistar Chemicals, LP, a Delaware
limited partnership (the "Partnership"); and
WHEREAS, the Partnership intends to file with the Securities and Exchange
Commission (the "Commission") under the Securities Exchange Act of 1934, as
amended, an Annual Report on Form 10-K for the year ended December 31, 1999,
with such amendment or amendments thereto, in each case as may be necessary or
appropriate, together with any and all exhibits and other documents relating
thereto (the "Form 10-K");
NOW, THEREFORE, each of the undersigned, in his or her capacity as a
director or officer, or both, as the case may be, of the General Partner, does
hereby appoint Dennis F. Blake, John L. Hurst, Scott A. King and Joseph R.
DeMartino, and each of them, 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
director or officer or both, as the case may be, of the General Partner, the
Form 10-K, and all instruments necessary or incidental in connection therewith
as said attorneys-in-fact and agents or any of them shall deem necessary or
appropriate
IN WITNESS WHEREOF, each of the undersigned has executed this instrument on
this 29th day of March, 2000.
/s/ J. Roger Hirl
--------------------------
J. Roger Hirl
President and Director
/s/ Richard A. Lorraine
--------------------------
Richard A. Lorraine
Executive Vice President, Chief Financial
Officer and Director
/s/ Keith McDole
--------------------------
Keith McDole
Secretary, Senior Vice President and Director
<PAGE>
EXHIBIT 24.3
POWER OF ATTORNEY
WHEREAS, Equistar Chemicals, LP, a Delaware limited partnership (the
"Partnership"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended, an Annual
Report on Form 10-K for the year ended December 31, 1999, with such amendment or
amendments thereto, in each case as may be necessary or appropriate, together
with any and all exhibits and other documents relating thereto (the
"Form 10-K");
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,
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 Form 10-K, and all instruments
necessary or incidental in connection therewith as said attorneys-in-fact and
agents or any of them shall deem necessary or appropriate
IN WITNESS WHEREOF, each of the undersigned has executed this instrument on
this 29th day of March, 2000.
William M. Landuyt
---------------------------------
William M. Landuyt
John E. Lushefski
---------------------------------
John E. Lushefski
George Robbins
---------------------------------
George Robbins
Dr. Ray R. Irani
---------------------------------
Dr. Ray R. Irani
Stephen I. Chazen
---------------------------------
Stephen I. Chazen
J. Roger Hirl
---------------------------------
J. Roger Hirl
Dan F. Smith
---------------------------------
Dan F. Smith
Jeff Pendergraft
---------------------------------
Jeff Pendergraft
Kevin DeNicola
---------------------------------
Kevin DeNicola
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 108
<SECURITIES> 0
<RECEIVABLES> 706
<ALLOWANCES> 6
<INVENTORY> 520
<CURRENT-ASSETS> 1,360
<PP&E> 5,868
<DEPRECIATION> 1,942
<TOTAL-ASSETS> 6,736
<CURRENT-LIABILITIES> 784
<BONDS> 2,169
0
0
<COMMON> 0
<OTHER-SE> 3,662
<TOTAL-LIABILITY-AND-EQUITY> 6,736
<SALES> 5,436
<TOTAL-REVENUES> 5,436
<CGS> 4,844
<TOTAL-COSTS> 4,844
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 182
<INCOME-PRETAX> 32
<INCOME-TAX> 0
<INCOME-CONTINUING> 32
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
