<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________
COMMISSION FILE NUMBER 333-76473
----------
EQUISTAR CHEMICALS, LP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 76-0550481
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1221 MCKINNEY STREET, 77010
SUITE 700, HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 652-7200
----------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
<PAGE>
PART I. FINANCIAL INFORMATION
EQUISTAR CHEMICALS, LP
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ---------------------------------------
Millions of dollars 2000 1999 2000 1999
------------------- ------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES:
Unrelated parties $1,389 $ 997 $2,777 $1,926
Related parties 470 213 889 386
------------- -------------- ---------------- ----------------
1,859 1,210 3,666 2,312
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties 1,220 916 2,503 1,745
Related parties 374 180 738 327
Selling, general and administrative expenses 49 56 93 117
Research and development expense 10 10 19 20
Amortization of goodwill and other
intangibles 8 8 16 16
------------- -------------- ---------------- ----------------
1,661 1,170 3,369 2,225
------------- -------------- ---------------- ----------------
Operating income 198 40 297 87
Interest expense (45) (46) (91) (89)
Interest income 1 1 2 5
Other (expense) income, net (2) 46 - - 46
------------- -------------- ---------------- ----------------
NET INCOME AND COMPREHENSIVE INCOME $ 152 $ 41 $ 208 $ 49
============= ============== ================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
EQUISTAR CHEMICALS, LP
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
MILLIONS OF DOLLARS 2000 1999
------------------- ------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 70 $ 108
Accounts receivable:
Trade, net 580 491
Related parties 201 209
Inventories 563 520
Prepaid expenses and other current assets 23 32
--------- ----------
Total current assets 1,437 1,360
Property, plant and equipment, net 3,856 3,926
Investment in PD Glycol 52 52
Goodwill, net 1,103 1,119
Deferred charges and other assets 271 279
--------- ----------
Total assets $6,719 $6,736
========= ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade $ 535 $ 424
Related parties 22 35
Current maturities of long-term debt 70 92
Other accrued liabilities 141 233
--------- ----------
Total current liabilities 768 784
Long-term debt, less current maturities 2,169 2,169
Other liabilities and deferred credits 138 121
Commitments and contingencies
Partners' capital 3,644 3,662
--------- ----------
Total liabilities and partners' capital $6,719 $6,736
========= ==========
See Notes to Consolidated Financial Statements.
2
<PAGE>
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
MILLIONS OF DOLLARS 2000 1999
------------------- ----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 208 $ 49
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 152 147
Net loss (gain) on disposition of property, plant and equipment 2 (40)
Increase in accounts receivable (81) (54)
(Increase) decrease in inventories (43) 61
Increase (decrease) in accounts payable 98 (5)
(Decrease) increase in other accrued liabilities (90) 3
Net change in other working capital accounts 9 (5)
Other 4 (2)
-------- --------
Net cash provided by operating activities 259 154
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (48) (76)
Proceeds from sales of assets 3 72
-------- --------
Net cash used in investing activities (45) (4)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing (payments) under lines of credit 20 (552)
Borrowing of long-term debt - - 898
Payment of debt issuance costs - - (5)
Repayment of long-term debt (42) (150)
Repayment of obligations under capital leases - - (205)
Distributions to partners (230) (125)
-------- --------
Net cash used in financing activities (252) (139)
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (38) 11
Cash and cash equivalents at beginning of period 108 66
-------- --------
Cash and cash equivalents at end of period $ 70 $ 77
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments, consisting only of normal, recurring adjustments
considered necessary for a fair presentation, have been included. For further
information, refer to the consolidated financial statements and notes thereto
for the year ended December 31, 1999 included in the Equistar Chemicals, LP
("Equistar" or "Partnership") 1999 Annual Report on Form 10-K pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934. Certain amounts
from prior periods have been reclassified to conform to the current period
presentation.
2. COMPANY OPERATIONS
Equistar is a Delaware limited partnership, which commenced operations on
December 1, 1997. Equistar is owned 41% by Lyondell Chemical Company
("Lyondell"), 29.5% by Millennium Chemicals Inc. ("Millennium), and 29.5% by
Occidental Petroleum Corporation ("Occidental").
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 products. 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 products, all of which are used in the production of a
wide variety of consumer and industrial products. The performance polymers
include enhanced grades of polyethylene, including wire and cable resins, and
polymeric powders. The concentrates and compounds business, which was part of
performance polymers, was sold effective April 30, 1999 (see Note 3).
3. SALE OF CONCENTRATES AND COMPOUNDS BUSINESS
Effective April 30, 1999, Equistar completed the sale of its concentrates and
compounds business. The transaction included two manufacturing facilities,
located in Heath, Ohio and Crockett, Texas, and related inventories. Equistar
recorded a net gain on the sale of approximately $42 million during the second
quarter 1999.
4
<PAGE>
4. INVENTORIES
The components of inventories consisted of the following:
JUNE 30, DECEMBER 31,
MILLIONS OF DOLLARS 2000 1999
------------------- ----- -----
Finished goods $ 302 $ 278
Work-in-process 17 10
Raw materials 147 137
Materials and supplies 97 95
----- -----
Total inventories $ 563 $ 520
===== =====
5. PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, at cost, and the related
accumulated depreciation consisted of the following:
JUNE 30, DECEMBER 31,
MILLIONS OF DOLLARS 2000 1999
------------------- ------ ------
Land $ 78 $ 78
Manufacturing facilities and equipment 5,705 5,656
Construction in progress 124 134
------ ------
Total property, plant and equipment 5,907 5,868
Less accumulated depreciation 2,051 1,942
------ ------
Property, plant and equipment, net $3,856 $3,926
====== ======
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
JUNE 30, DECEMBER 31,
MILLIONS OF DOLLARS 2000 1999
------------------- ------ ------
Accrued property taxes $ 51 $ 68
Accrued payroll costs 29 68
Accrued interest 46 50
Accrued severance and other employee-related costs 7 24
Other 8 23
----- -----
Other accrued liabilities $ 141 $ 233
===== =====
During the fourth quarter 1999, Equistar recorded a total charge of $96 million
associated with decisions to shut down certain polymer reactors and to
consolidate certain administrative functions between Lyondell and Equistar.
This included severance and other employee-related costs of $24 million related
to the elimination of approximately 500 employee positions. Through June 30,
2000, approximately 400 employees had been terminated and approximately $17
million of severance and other employee-related costs had been paid and charged
against the accrued liability. Equistar expects that the remainder of the
liability will be settled by the end of the current year.
5
<PAGE>
7. 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.
Equistar 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 Businesses prior to
December 1, 1997 up to $7 million each within the first seven years of the
Partnership, subject to certain terms of the Asset Contribution Agreements.
Equistar has also agreed to indemnify Occidental up to $7 million on a similar
basis relating to the operation of the Occidental Contributed Business prior to
May 15, 1998. During the six months ended June 30, 2000 and 1999, Equistar
incurred and paid $3 million and $2 million, respectively, in expenses for these
uninsured claims and liabilities. Equistar has cumulatively paid $14 million
for these uninsured claims and liabilities since its formation in December 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
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 June 30, 2000 and December 31, 1999.
In the opinion of management, any liability arising from the matters discussed
in this note is not expected to have a material adverse effect on the
consolidated 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.
6
<PAGE>
8. SEGMENT AND RELATED INFORMATION
Equistar has two reportable segments in which it operates: (i) petrochemicals;
and (ii) polymers. Summarized financial information concerning Equistar's
reportable segments is shown in the following table:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS PETROCHEMICALS POLYMERS UNALLOCATED ELIMINATIONS TOTAL
------------------- -------------- --------- ------------ ------------- --------
FOR THE THREE MONTHS ENDED JUNE 30, 2000:
Sales and other operating revenues:
<S> <C> <C> <C> <C> <C>
Customers $1,295 $ 564 $ - - $ - - $1,859
Intersegment 466 - - - - (466) - -
----------------------------------------------------------------------
Total sales and operating revenues 1,761 564 - - (466) 1,859
Operating income (loss) 267 (23) (46) - - 198
Interest expense - - - - (45) - - (45)
Interest income - - - - 1 - - 1
Other expense, net - - - - (2) - - (2)
Net income (loss) 267 (23) (92) - - 152
FOR THE THREE MONTHS ENDED JUNE 30, 1999:
Sales and other operating revenues:
Customers $ 733 $ 477 $ - - $ - - $1,210
Intersegment 312 - - - - (312) - -
----------------------------------------------------------------------
Total sales and operating revenues 1,045 477 - - (312) 1,210
Operating income (loss) 83 9 (52) - - 40
Interest expense - - - - (46) - - (46)
Interest income - - - - 1 - - 1
Other income, net - - - - 46 - - 46
Net income (loss) 83 9 (51) - - 41
FOR THE SIX MONTHS ENDED JUNE 30, 2000:
Sales and other operating revenues:
Customers $2,526 $1,140 $ - $ - - $3,666
-
Intersegment 940 - - - - (940) - -
----------------------------------------------------------------------
Total sales and operating revenues 3,466 1,140 - - (940) 3,666
Operating income (loss) 439 (54) (88) - - 297
Interest expense - - - - (91) - - (91)
Interest income - - - - 2 - - 2
Net income (loss) 439 (54) (177) - - 208
FOR THE SIX MONTHS ENDED JUNE 30, 1999:
Sales and other operating revenues:
Customers $1,380 $ 932 $ - - $ - - $2,312
Intersegment 570 - - - - (570) - -
----------------------------------------------------------------------
Total sales and operating revenues 1,950 932 - - (570) 2,312
Operating income (loss) 175 20 (108) - - 87
Interest expense - - - - (89) - - (89)
Interest income - - - - 5 - - 5
Other income, net - - - - 46 - - 46
Net income (loss) 175 20 (146) - - 49
</TABLE>
The "Operating income (loss)" amounts presented above in the "Unallocated"
column consist of expenses not allocated to the petrochemicals and polymers
segments, principally general and administrative expenses.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
GENERAL-- Crude oil prices, which affect Equistar's raw material costs,
increased steadily throughout 1999 and peaked in early March 2000 as an OPEC
decision to increase production resulted in a temporary decline. A seasonal
increase in demand for gasoline during the second quarter 2000, however,
triggered a resurgence in crude oil price increases. While second quarter 2000
average benchmark crude oil prices were comparable to first quarter 2000, they
were 65% higher than the second quarter 1999. Prices for the first six months
of 2000 averaged over 90% higher than the comparable 1999 period. These crude
oil price increases put upward pressure on Equistar's raw material costs. In
response to the higher costs and facilitated by increased demand, Equistar
implemented a series of sales price increases. As a result, petrochemicals
segment margins improved in comparison to both the first quarter 2000 and to
1999. Polymers segment margins also improved compared to the first quarter
2000, however they were generally lower compared to 1999.
Unless otherwise indicated, the following analysis of operating results compares
the second quarter 2000 and the first six months 2000 to the comparable 1999
periods. An analysis comparing second quarter 2000 to first quarter 2000 is
also included.
NET INCOME--Equistar's net income of $152 million in the second quarter 2000
increased $111 million from $41 million in the second quarter 1999. Net income
of $208 million for the first six months of 2000 increased $159 million from $49
million for the first six months of 1999. The increases primarily reflected the
benefit of higher margins in Equistar's petrochemicals segment, particularly in
the second quarter 2000, which were only partly offset by lower margins and
volumes in the polymers segment and the effect of net gains on asset sales of
$41 million in the second quarter 1999. In the petrochemicals segment, sales
price increases for ethylene and co-product propylene outpaced cost increases
for raw materials, leading to improved margins. In the polymers segment, sales
price increases lagged behind raw material cost increases.
SECOND QUARTER 2000 VERSUS FIRST QUARTER 2000
Equistar reported net income of $152 million in the second quarter 2000 compared
to net income of $56 million in the first quarter 2000. The $96 million
increase primarily reflected improved petrochemicals and polymers margins, which
more than offset lower sales volumes for petrochemicals and polymers resulting
from a planned turnaround at Morris, Illinois, a major petrochemical and
polymers facility, and weaker demand late in the second quarter. The increase
in petrochemicals margins primarily resulted from higher product prices,
especially ethylene and co-product propylene. The contribution from co-products
was very significant in the second quarter. Average benchmark ethylene prices
increased 3 cents per pound, or 10%, while propylene prices increased 5 cents
per pound or 28%. Raw material costs were generally flat quarter to quarter.
Polymers operating results also improved as polymer prices increased more than
the cost of raw materials, primarily ethylene and propylene.
8
<PAGE>
SEGMENT DATA
The following tables reflect selected actual sales volume data and summarized
financial information for Equistar's business segments.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
IN MILLIONS 2000 1999 2000 1999
------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Selected petrochemicals products:
Olefins (pounds) 4,606 4,508 9,508 9,035
Aromatics (gallons) 109 91 211 176
POLYMERS PRODUCTS (pounds) 1,474 1,611 3,141 3,263
MILLIONS OF DOLLARS
-------------------
SALES AND OTHER OPERATING REVENUES:
Petrochemicals segment $1,761 $1,045 $3,466 $1,950
Polymers segment 564 477 1,140 932
Intersegment eliminations (466) (312) (940) (570)
------------- ------------- ------------- -------------
Total $1,859 $1,210 $3,666 $2,312
============= ============= ============= =============
COST OF SALES:
Petrochemicals segment $1,492 $ 959 $3,023 $1,769
Polymers segment 568 449 1,158 873
Intersegment eliminations (466) (312) (940) (570)
------------- ------------- ------------- -------------
Total $1,594 $1,096 $3,241 $2,072
============= ============= ============= =============
OTHER OPERATING EXPENSES:
Petrochemicals segment $ 2 $ 3 $ 4 $ 6
Polymers segment 19 19 36 39
Unallocated 46 52 88 108
------------- ------------- ------------- -------------
Total $ 67 $ 74 $ 128 $ 153
============= ============= ============= =============
OPERATING INCOME (LOSS):
Petrochemicals segment $ 267 $ 83 $ 439 $ 175
Polymers segment (23) 9 (54) 20
Unallocated (46) (52) (88) (108)
------------- ------------- ------------- -------------
Total $ 198 $ 40 $ 297 $ 87
============= ============= ============= =============
</TABLE>
PETROCHEMICALS SEGMENT
REVENUES--Revenues of $1.8 billion in the second quarter 2000 increased 68%
compared to second quarter 1999 revenues of $1.0 billion, primarily due to
higher sales prices. The increase in sales prices is in response to the
significant increases in raw material costs, which have risen steadily since the
first quarter 1999, and increased demand. Benchmark quoted ethylene prices
averaged 31.7 cents per pound in the second quarter 2000, a 55% increase over
the second quarter 1999. Average benchmark propylene prices increased over
130%. While sales volumes in the second quarter 2000 were affected by the
planned turnaround at the Morris plant, second quarter 1999 sales volumes were
affected by outages at the Channelview, Texas olefins production units.
Revenues of $3.5 billion for the first six months of 2000 increased 78% compared
to the first six months of 1999 revenues of $1.95 billion, primarily due to
higher sales prices. Sales volumes increased about 7% due to higher demand,
reflecting the ongoing strength of the U.S. economy.
COST OF SALES--Cost of sales of $1.5 billion in the second quarter 2000
increased 56% compared to $959 million for the second quarter 1999. Cost of
sales of $3.0 billion in the first six months of 2000 increased 71% compared to
$1.8 billion for the first six months of 1999. The increases primarily
reflected the significant increase in raw material costs and, to a lesser
extent, higher volumes.
9
<PAGE>
OPERATING INCOME--Operating income of $267 million in the second quarter 2000
more than tripled from $83 million in the second quarter 1999 due to higher
product margins, as sales prices increased more than raw material costs.
Industry data indicates that ethylene cash margins were 16.2 cents per pound in
the second quarter 2000 compared to 7.5 cents per pound in the second quarter
1999. Operating income of $439 million for the first six months of 2000
increased 150% from $175 million in the first six months of 1999 due primarily
to higher product margins and, to a lesser extent, higher sales volumes.
POLYMERS SEGMENT
REVENUES--Revenues of $564 million in the second quarter 2000 increased 18%
compared to $477 million in the second quarter 1999 as higher sales prices were
partly offset by an 8% decrease in volumes. The average benchmark price for
polyethylene in the second quarter 2000 increased about 30% from the comparable
prior year period. Revenues of $1.1 billion for the first six months of 2000
increased 22% compared to $932 million in the first six months of 1999 as higher
sales prices were partly offset by a 4% decrease in volumes. The sales price
increases reflect pressure from escalating raw material costs. The decreases in
volumes reflect the effect of the turnaround at the Morris, Illinois facility in
the second quarter 2000 and a slow down in demand late in the second quarter
2000.
COST OF SALES--Cost of sales of $568 million in the second quarter 2000
increased 26% compared to $449 million for the second quarter 1999, while cost
of sales of $1.2 billion in the first six months of 2000 increased 32% compared
to $873 million for the first six months of 1999. The increases primarily
reflected the significant increases in raw material costs, primarily ethylene
and propylene, partly offset by the decrease in volumes.
OPERATING INCOME--For the second quarter 2000, the polymers segment had an
operating loss of $23 million compared to operating income of $9 million in the
second quarter 1999. For the first six months of 2000, the operating loss was
$54 million compared to an operating profit of $20 million in the comparable
1999 period. The decreases were primarily due to lower polymers margins as
sales price increases lagged behind increases in polymers raw material costs.
UNALLOCATED ITEMS
The following discusses expenses that were not allocated to the petrochemicals
or polymers segments.
OTHER OPERATING EXPENSES, UNALLOCATED--These include general and administrative
expenses and amortization of goodwill and other intangibles. Unallocated
expenses were $46 million in the second quarter 2000 and $52 million in the
second quarter 1999. For the first six months of 2000, unallocated expenses
were $88 million compared to $108 million in the comparable 1999 period. The
decreases were primarily due to previously announced cost reduction measures
taken in the fourth quarter 1999. The first quarter 1999 also included
nonrecurring transition service costs related to the business contributed by
Occidental in May 1998 and system implementation costs.
OTHER INCOME (EXPENSE), NET--Other income of $46 million in the second quarter
1999 primarily consisted of net gains on asset sales, including the sale of
Equistar's concentrates and compounds business.
FINANCIAL CONDITION
OPERATING ACTIVITIES--Operating activities provided cash of $259 million in the
first six months of 2000 compared to $154 million in the comparable 1999 period.
The increase in 2000 primarily reflected higher income from operations, partly
offset by a significant reduction in accrued liabilities and a net increase in
other components of working capital. The decrease in accrued liabilities
reflected the timing of severance and other compensation-related payments as
well as a change in the timing of interest payments due to the February 1999
refinancing. An increase in payables in 2000 only partly offset increases in
receivables and inventories. Receivables and inventory increased, despite
improved receivables collection efficiency and higher inventory turnover, due to
higher product prices and raw material costs.
10
<PAGE>
INVESTING ACTIVITIES--Equistar's capital expenditures were $48 million in the
first six months of 2000 and $76 million in the first six months of 1999.
Capital expenditures in 2000 decreased due to the timing of projects and
primarily include low-cost, incremental capacity expansions. The most
significant capital expenditures in 1999 related to the 480-million-pound HDPE
resin expansion project at the Matagorda, Texas facility, which started
operating in the fourth quarter 1999. Equistar expects capital expenditures to
total $160 million in 2000.
FINANCING ACTIVITIES--Net cash used in financing activities was $252 million in
the first six months of 2000, including $230 million of distributions to
partners and $42 million of scheduled debt repayment. Equistar had net
borrowing of $20 million under its credit facility.
LIQUIDITY AND CAPITAL RESOURCES--Equistar has a $1.25 billion revolving credit
facility that extends until November 2002. At June 30, 2000, Equistar had drawn
$820 million, leaving $430 million available. 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 June 30, 2000, Equistar was in compliance with all such
covenants. Management believes that business conditions will be such that cash
balances, cash flow from operations and funds available 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
Equistar experienced a slowdown in demand for products in both the
petrochemicals and polymers segments late in the second quarter, however it
believes that the slowdown was primarily driven by a combination of seasonal
effects and industry inventory reduction in anticipation of lower prices.
Industry forecasts project pressure on product margins due to industry capacity
additions in late 2000 and 2001 until demand growth absorbs the new capacity.
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. This includes ongoing efforts to
effectively manage working capital, achieve further cost reductions and employ a
disciplined capital spending program.
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. In June 2000 the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities,
amending certain provisions of SFAS No. 133. The statements are effective for
Equistar's calendar year 2001 with early adoption permitted. SFAS No. 133, as
amended by SFAS No. 138, 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 SFAS No.
133 implementation will have on its financial statements.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB") No. 101, Revenue Recognition in
Financial Statements. SAB No. 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in the
financial statements. The statement is effective for Equistar's fourth quarter
of 2000 with early adoption encouraged. Equistar is currently evaluating the
effect SAB No. 101 implementation will have on its financial statements.
11
<PAGE>
ITEM 3. DISCLOSURE OF MARKET RISK.
Equistar's exposure to market risks is described in Item 7a of its Annual Report
on Form 10-K for the year ended December 31, 1999. During the second quarter
2000, Equistar entered into over-the-counter "derivative" contracts 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 and for a specified period of time, the
prices that Equistar will pay for the volumes to which the hedge relates.
As of June 30, 2000, the outstanding over-the-counter "derivative" contracts
totaled 2.2 million barrels. They mature from July through December 2000, and
cover approximately 30% of Equistar's raw material requirements that are exposed
to crude oil price fluctuations during this period. Based on quoted market
prices as of June 30, 2000, Equistar recorded an asset of $3 million at June
30, 2000 for those contracts. Assuming a hypothetical 30% decrease in crude oil
prices from those in effect at June 30, 2000 the loss in earnings for the
derivatives contracts would be approximately $20 million. Sensitivity analysis
was used for this purpose. Crude oil prices varied by as much as 30% during the
six months ended June 30, 2000. The quantitative information about market risk
is necessarily limited because it does not take into account the effects of the
underlying operating transactions.
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-Q are qualified in their entirety
by the cautionary statements contained in this section.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments with respect to Equistar's legal
proceedings previously reported in the 1999 Annual Report on Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Equistar Chemicals, LP
Dated: August 14, 2000 /s/ KELVIN R. COLLARD
----------------------------
Kelvin R. Collard
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
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