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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K
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CURRENT REPORT
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PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) MAY 15, 1998
----------------
OCCIDENTAL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 1-9210 95-4035997
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
10889 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code:
(310) 208-8800
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Acquisition of Equity Interest in Equistar Chemicals, LP. As previously
disclosed, on May 15, 1998, Lyondell Petrochemical Company ("Lyondell"),
Millennium Chemicals Inc. ("Millennium"), Occidental Petroleum Corporation
("Occidental") and Equistar Chemicals, LP, a Delaware limited partnership
("Equistar"), consummated a series of transactions to expand Equistar through
the addition of certain Occidental petrochemical assets, including interest in
five olefins and derivatives plants and a related pipeline corridor
(collectively, "Occidental's Petrochemicals Business"). Equistar, which was
formed December 1, 1997, initially comprised the olefins and polymers businesses
of Lyondell and Millennium.
In exchange for the contribution of Occidental's Petrochemicals 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 percent (the "Equistar Interest"). With the
completion of the transaction, Lyondell holds a 41 percent ownership interest in
Equistar and Millennium and Occidental each hold a 29.5 percent ownership
interest through their respective subsidiaries. In addition, Equistar assumed
approximately $205 million of Occidental indebtedness and Equistar issued a
promissory note to an Occidental subsidiary for approximately $420 million. The
note, together with accrued interest thereon, was repaid with proceeds of a
financing consummated by Equistar on June 19, 1998.
In connection with these transactions, Equistar and Occidental also entered
into a long-term agreement for Equistar to supply the ethylene requirements for
certain U.S. facilities of Occidental Chemical Corporation and its affiliates.
Occidental's pro forma results of operations for the three months ended
March 31, 1998 included in Item 7 in this report do not reflect pretax gains of
$95 million recognized from the sale of an oil field development in Venezuela
and certain Oklahoma oil and gas properties.
ITEM 5. OTHER EVENTS
RECENT DEVELOPMENTS
Although the principal purpose of this report is to complete Occidental's
filing obligations with respect to the acquisition of the Equistar Interest,
Occidental hereby provides disclosure of certain other recent transactions which
may materially impact Occidental's financial statements. Accordingly, set forth
below is disclosure regarding significant recent developments which will
facilitate the understanding of the presentation in the pro forma financial
statements.
Acquisition of Elk Hills Naval Petroleum Reserve. On February 5, 1998,
Occidental acquired the U.S. government's approximate 78 percent interest (the
"Elk Hills Interest") in the Elk Hills Naval Petroleum Reserve oil and gas
fields (the "Elk Hills Field") for approximately $3.5 billion, as the successful
bidder in a competitive auction of the assets. Upon completion of the
acquisition, Occidental became the operator of the Elk Hills Field. Chevron
remains the other unit interest holder.
The acquisition of the Elk Hills Interest was funded using a portion of the
proceeds from the divestiture of Occidental's wholly-owned subsidiary, MidCon
Corp. ("MidCon"), as described below, together with the proceeds of commercial
paper borrowings. The commercial paper will eventually be repaid from the
proceeds of sales of other nonstrategic assets or the issuance of other debt
securities.
Sale of MidCon
Prior to the purchase of the Elk Hills Interest, Occidental sold all of the
common stock of MidCon, through which it engaged in interstate and intrastate
natural gas transmission and marketing. The sale of MidCon to KN Energy, Inc.
closed effective January 31, 1998, for net proceeds to Occidental of
approximately $3.1 billion after certain expenses. As a result of this
transaction, Occidental classified MidCon and its subsidiaries as a discontinued
operation and recorded in the fourth quarter of 1997 an estimated after-tax
charge against earnings of approximately $750 million. The closing of the sale
of
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MidCon is included in the historical statement of financial position included
in the pro forma statement of financial position set forth below in Item 7 of
this report.
Asset Sales and Redeployment Program
Occidental has undertaken the asset sales described below as part of a
larger $4.7 billion asset redeployment program. These asset sales are part of
Occidental's program to sell certain nonstrategic assets in order to: (i)
improve average return on assets, (ii) repay debt incurred in connection with
the acquisition of the Elk Hills Interest, and (iii) fund Occidental's stock
repurchase program described below in this report. As a result of these
nonstrategic asset sales and the acquisition of the Elk Hills Interest, it is
expected that the oil and gas production of Occidental in the United States will
increase significantly. Estimated average 1997 production attributable to the
nonstrategic assets sold and described below was approximately 44,000 barrels of
oil per day and 221 million cubic feet ("MMcf") of gas per day.
In February 1998, Occidental sold its entire interest in an oil field
development project in Venezuela to Union Texas Petroleum for approximately $205
million in cash plus contingent payments of up to $90 million over six years
(not to exceed $15 million in any one year) based on future oil prices. In March
1998, Occidental sold certain Oklahoma oil and gas properties to Anadarko
Petroleum Corporation for approximately $120 million. Occidental recorded pretax
gains on the two dispositions of approximately $95 million in the first quarter
of 1998. In April 1998, Occidental sold certain oil and gas properties in Texas
for approximately $68 million. Also in April 1998, Occidental sold the stock of
its MC Panhandle subsidiary, which owns certain natural gas interests in the
West Panhandle field in Texas, to Chesapeake Energy Corporation for
approximately $106 million and sold certain onshore properties in Louisiana and
Mississippi to Petro-Hunt L.L.C. for approximately $190 million. In May 1998,
Occidental sold certain oil properties in Kansas and Colorado to Murfin-Vess
Partners for approximately $71 million and certain gas properties in Kansas and
Oklahoma to Oneok Resources Company for approximately $126 million. Occidental
expects to record pretax gains on these five dispositions and other smaller
packages of asset sales, not included in the pro forma information in Item 7
below, of approximately $290 million in the second quarter of 1998. In July
1998, Occidental sold the stock of Occidental Netherlands, Inc. (its Dutch North
Sea holdings) to a subsidiary of TransCanada Pipelines Limited for approximately
$275 million, in cash and the assumption of debt, plus future contingent
payments. Occidental expects to record a pretax gain on the disposition of
approximately $145 million in the third quarter of 1998. The pro forma
information set forth below in Item 7 reflects the effects of these
transactions. Other smaller packages of asset sales that have closed or are
pending have not been included in the pro forma information in Item 7 below.
Preferred Stock Conversion
In February 1998, Occidental called for redemption of all 15,106,444
outstanding shares of its $3.875 voting and nonvoting Cumulative Convertible
Preferred Stock (the "Preferred Shares") on March 6, 1998, and March 13, 1998,
respectively. All the Preferred Shares were converted into approximately 33
million shares of common stock prior to the respective redemption dates. Since
dividends on the Preferred Shares were approximately $58 million per annum, the
conversion results in annual dividend savings to Occidental of approximately $25
million, assuming annual dividends of $1 per share on Occidental's common stock.
The effect of such conversion is reflected in the earnings per share computation
included in the pro forma results of operations set forth below in Item 7 of
this report.
Common Stock Repurchase Program
In October 1997, Occidental began a program to repurchase up to 40 million
shares of its common stock for approximately $1 billion. The repurchases are
made in the open market or in privately negotiated transactions at the
discretion of Occidental's management, depending upon financial and market
conditions or as otherwise provided by the Securities and Exchange Commission
and New York Stock Exchange rules and regulations. Since the commencement of the
program in October 1997, approximately 30.9 million shares have been
repurchased, of which 27 million have been repurchased in 1998, taking into
account purchases settled through July 15. The current program is expected to be
completed in 1998. The effect of subsequent stock repurchases have not been
included in the pro forma information in Item 7 below.
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<PAGE> 4
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired.
1. Lyondell Contributed Business Audited Financial Statements for the
eleven months ended November 30, 1997, together with the report of
PricewaterhouseCoopers LLP thereon (the "Lyondell Financial Statements")
(attached as Exhibit 99.1 hereto).
2. Millennium Contributed Business Audited Financial Statements for
the eleven months ended November 30, 1997, together with the report of
PricewaterhouseCoopers LLP thereon (the "Millennium Financial Statements")
(attached as Exhibit 99.2 hereto).
3. Equistar Chemicals, LP Audited Financial Statements for the one
month ended December 31, 1997, together with the report of Coopers &
Lybrand L.L.P. and Price Waterhouse LLP thereon (the "Equistar Financial
Statements") (attached as Exhibit 99.3 hereto).
4. Equistar Chemicals, LP Unaudited Financial Statements for the three
months ended March 31, 1998 (the "Equistar Interim Financial Statements")
(attached as Exhibit 99.4 hereto).
(b) Pro forma financial information.
Although the principal purpose of this report is to complete Occidental's
filing obligations with respect to the acquisition of the Equistar Interest, in
connection with the preparation of the pro forma financial statements reflecting
such acquisition, Occidental has also provided disclosure of other recent
developments which may materially impact Occidental's financial statements.
However, Occidental has not reflected in such pro forma financial information
those recent transactions that are not expected to have a material impact on
Occidental's financial statements. The following unaudited pro forma financial
information has been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission and gives effect to: (i) the closing of
the sale of Occidental's natural gas transmission and marketing business,
MidCon, to KN Energy, Inc. in January 1998; (ii) the purchase of the Elk Hills
Interest in February 1998; (iii) the contribution of Occidental's Petrochemicals
Business and acquisition of the Equistar Interest in May 1998; (iv) the sale of
several nonstrategic assets in 1998 for net cash proceeds of approximately
$1.061 billion; and (v) the conversion of the Preferred Shares. All of these
transactions have been reflected as if they had occurred for financial position
purposes on March 31, 1998, except for those transactions described in Item 5
above that had occurred prior to March 31, 1998 which are already reflected in
the historical financial position, and for results of operations purposes on
January 1, 1997. Occidental's historical and pro forma results of operations
include pretax charges for special items of $478 million for the year ended
December 31, 1997. Occidental's historical results of operations include pretax
benefits for special items of $105 million for the three months ended March 31,
1998. The historical financial information for Occidental has been derived from
Occidental's audited financial statements for the year ended December 31, 1997,
incorporated by reference in Occidental's Annual Report on Form 10-K for the
year ended December 31, 1997 (the "Form 10-K") and Occidental's unaudited
condensed financial statements for the three months ended March 31, 1998,
incorporated by reference in Occidental's Quarterly Report on Form 10-Q for the
period ended March 31, 1998 (the "Form 10-Q"). The historical financial
information for Equistar has been derived from the audited Lyondell and
Millennium historical financial statements, and the audited and unaudited
Equistar historical financial statements included in this filing. The unaudited
pro forma financial information should be read in conjunction with Occidental's
historical financial statements incorporated by reference in the Form 10-K and
Form 10-Q, and the Lyondell, Millennium and Equistar historical financial
statements. The pro forma information is not necessarily indicative of the
results that would have been obtained had the transactions actually occurred on
the dates specified. In addition, such pro forma information does not purport to
project Occidental's results of operations or financial position as of any
future date or for any future period.
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1. Unaudited Pro Forma Results of Operations of Occidental for
the year ended December 31, 1997 and the three months ended March 31, 1998,
reflecting the acquisition of the Equistar Interest and certain other recent
significant developments described therein.
UNAUDITED PRO FORMA RESULTS OF OPERATIONS*
(IN MILLIONS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
Lyondell Millennium
Contributed Contributed
Business Business
Occidental Historical Historical Equistar Occidental
Historical For the For the Historical Pro Forma
For the Eleven Eleven For the One For the
Year Ended Months Ended Months Ended Month Ended Pro Forma Year Ended
12/31/97 11/30/97 11/30/97 12/31/97 Adjustments 12/31/97
- ---------------------------------- ------------- ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 8,101 $ 2,715 $ 1,786 $ 367 $ (6,244)(1) $ 6,725
Costs and other deductions
Cost of sales 5,844 2,153 1,341 287 (5,260)(2) 4,365
Selling, general and
administrative, environmental
remediation, exploration
expense, and other operating
expenses 1,295 166 136 63 (398)(3) 1,262
Interest and debt expense, net 434 50 66 10 (76)(4) 484
------------- ------------- ------------ ------------- ------------ ------------
7,573 2,369 1,543 360 (5,734) 6,111
------------- ------------- ------------ ------------- ------------ ------------
Income(loss) from continuing
operations before taxes 528(5) 346 243 7 (510) 614(5)
Provision for domestic and
foreign income and other taxes 311 127 96 -- (195)(6) 339
------------- ------------- ------------ ------------- ------------ ------------
Income(loss) from continuing
operations 217 219 147 7 (315) 275
Preferred dividend requirements 88 -- -- -- (58)(7) 30
------------- ------------- ------------ ------------- ------------ ------------
Earnings(loss) from continuing
operations applicable to
common stock $ 129 $ 219 $ 147 $ 7 $ (257) $ 245
============= ============= ============ ============= ============ ============
Basic earnings(loss) per common
share from continuing
operations $ .39 $ .67
============= ============
Average shares outstanding (in
thousands) 334,341 367,528(7)
============= ============
Diluted earnings(loss) per common
share from continuing
operations $ .39 $ .67
============= ============
Average shares outstanding (in
thousands) 334,916 368,103(7)
================================= ============= ============
</TABLE>
* Does not include the effect of stock repurchases subsequent to
December 31, 1997.
(1) Reflects the inclusion of (a) $75 million of interest income on a $1.4
billion note received from KN Energy, Inc. in connection with the sale of
MidCon, (b) $475 million of Elk Hills historical revenues, (c) $222 million
of Occidental's equity share of Lyondell's, Millennium's and Equistar's
historical income with the inclusion of Occidental's contributed
Petrochemicals Business; and eliminates the historical revenues of (d)
$4.868 billion from Lyondell, Millennium and Equistar, (e) $1.803 billion
from Occidental's Petrochemicals Business, and (f) $345 million from
certain nonstrategic asset sales.
(2) Reflects the inclusion of (a) $110 million of Elk Hills historical cost of
sales, (b) $69 million of additional depreciation, depletion and
amortization expense to be recognized based on a purchase price allocation
for the purchase of the Elk Hills Interest and $38 million of property tax
expense expected to be incurred on the Elk Hills Interest; and eliminates
the historical cost of sales of (c) $3.781 billion from Lyondell,
Millennium and Equistar, (d) $1.53 billion from Occidental's Petrochemicals
Business, and (e) $166 million from certain nonstrategic asset sales.
(3) Reflects the inclusion of (a) $41 million of Elk Hills historical selling,
general and administrative and other operating expenses; and eliminates the
historical selling, general and administrative and other operating expenses
of (b) $365 million from Lyondell, Millennium and Equistar, (c) $43 million
from Occidental's Petrochemicals Business, and (d) $31 million from certain
nonstrategic asset sales.
(4) Reflects the inclusion of (a) the additional interest expected to be
incurred on long-term debt based on an estimated weighted average interest
rate of approximately 7.45 percent on all pro forma indebtedness and (b)
the elimination of historical interest of $126 million from Lyondell,
Millennium and Equistar.
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(5) Includes pretax charges for special items of $478 million.
(6) Reflects (a) an increase in income tax expense as a result of increased pro
forma pretax income in comparison to Occidental's historical pretax income
for the year ended December 31, 1997 and (b) the elimination of historical
provision for domestic and foreign income and other taxes of $223 million
for Lyondell and Millennium.
(7) Reflects the effect of the conversion of 15,106,444 outstanding shares of
Occidental's Preferred Shares in March 1998 into approximately 33 million
shares of common stock. Annual dividends on the Preferred Shares were
approximately $58 million.
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UNAUDITED PRO FORMA RESULTS OF OPERATIONS*
(IN MILLIONS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
Occidental Equistar Occidental
Historical Historical Pro Forma
For the Three For the Three For the Three
Months Ended Months Ended Pro Forma Months Ended
3/31/98 3/31/98 Adjustments 3/31/98
- ----------------------------------------------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 1,892 $ 1,027 $ (1,463)(1) $ 1,456
Costs and other deductions
Cost of sales 1,265 798 (1,134)(2) 929
Selling, general and administrative,
environmental remediation, exploration
expense, and other operating expenses 201 76 (83)(3) 194
Interest and debt expense, net 131 32 (42)(4) 121
-------------- --------------- -------------- --------------
1,597 906 (1,259) 1,244
-------------- --------------- -------------- --------------
Income(loss) from continuing operations before taxes 295(5) 121 (204) 212(5)
Provision for domestic and foreign income and
other taxes 156 -- (44)(6) 112
-------------- --------------- -------------- --------------
Income(loss) from continuing operations 139 121 (160) 100
Preferred dividend requirements 4 -- -- 4
-------------- --------------- -------------- --------------
Earnings(loss) from continuing operations
applicable to common stock $ 135 $ 121 $ (160) $ 96
============== =============== ============== ==============
Basic earnings(loss) per common share from
continuing operations $ .39 $ .28
============== ==============
Average shares outstanding (in thousands) 344,505 344,505
============== ==============
Diluted earnings(loss) per common share from
continuing operations $ .38 $ .28
============== ==============
Average shares outstanding (in thousands) 359,980 345,159
===================================================== ============== ==============
</TABLE>
* Does not include the effect of stock repurchases subsequent to
March 31, 1998.
(1) Reflects the inclusion of (a) $6 million of interest income, for the period
from January 1, 1998 to January 31, 1998 (the date of the sale of MidCon),
on a $1.4 billion note received from KN Energy, Inc. in connection with the
sale of MidCon, (b) $33 million of Elk Hills historical revenues, for the
period from January 1, 1998 to February 5, 1998 (the date of the
acquisition of the Elk Hills Interest), (c) $38 million of Occidental's
equity share of Equistar's historical income with the inclusion of
Occidental's contributed Petrochemicals Business; and eliminates the
historical revenues of (d) $1.027 billion from Equistar, (e) $354 million
from Occidental's Petrochemicals Business, (f) $64 million from certain
nonstrategic asset sales, and (g) eliminates $95 million in pretax gains
recognized from the sale of an oil field development in Venezuela and
certain Oklahoma oil and gas properties.
(2) Reflects the inclusion of (a) $11 million of Elk Hills historical cost of
sales, for the period from January 1, 1998 to February 5, 1998, (b) $6
million of additional depreciation, depletion and amortization expense, for
the period from January 1, 1998 to February 5, 1998, to be recognized based
on a purchase price allocation for the purchase of the Elk Hills Interest
and $3 million of property tax expense, for the period from January 1, 1998
to February 5, 1998, expected to be incurred on the Elk Hills Interest; and
eliminates the historical cost of sales of (c) $798 million from Equistar,
(d) $320 million from Occidental's Petrochemicals Business, and (e) $36
million from certain nonstrategic asset sales.
(3) Eliminates the historical selling, general and administrative and other
operating expenses of (a) $76 million from Equistar, (b) $4 million from
Occidental's Petrochemicals Business, and (c) $3 million from the sale of
certain nonstrategic assets.
(4) Reflects (a) the reduction in interest expected to be incurred on long-term
debt based on an estimated weighted average interest rate of approximately
7.45 percent on all pro forma indebtedness and (b) the elimination of
historical interest of $32 million from Equistar.
(5) Includes pretax benefits for special items of $105 million in Occidental's
historical three months ended. Occidental's pro forma three months ended,
however, excludes $95 million of these benefits as a result of the
elimination of pretax gains recognized from the sale of an oil field
development in Venezuela and certain Oklahoma oil and gas properties.
(6) Reflects a reduction in income tax expense as a result of decreased pro
forma pretax income in comparison to Occidental's historical pretax income
for the three months ended March 31, 1998.
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2. Unaudited Pro Forma Statement of Financial Position of Occidental
as at March 31, 1998, reflecting the acquisition of the Equistar Interest and
certain other recent significant developments.
UNAUDITED PRO FORMA STATEMENT OF FINANCIAL POSITION*
(IN MILLIONS)
<TABLE>
<CAPTION>
Occidental Equistar
Historical Historical Pro Forma Occidental
3/31/98 3/31/98 Adjustments Pro Forma
- ----------------------------------------------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Assets
Current assets $ 3,230 $ 1,158 $ (1,486)(1) $ 2,902
Long-term receivables, net 135 -- -- 135
Equity investments 916 -- 1,125 (2) 2,041
Property, plant and equipment, net 11,854 2,105 (4,260)(3) 9,699
Other assets 493 1,289 (1,319)(4) 463
-------------- --------------- -------------- --------------
$ 16,628 $ 4,552 $ (5,940) $ 15,240
============== =============== ============== ==============
Liabilities and Equity
Current liabilities $ 3,161 $ 369 $ (276)(5) $ 3,254
Long-term debt, net 5,931 1,713 (3,054)(6) 4,590
Deferred and other domestic and foreign
income taxes 871 -- (113)(7) 758
Other deferred credits and other liabilities 2,614 42 (333)(8) 2,323
Stockholders' equity 4,051 2,428 (2,164)(9) 4,315
-------------- --------------- -------------- --------------
$ 16,628 $ 4,552 $ (5,940) $ 15,240
===================================================== ============== =============== ============== ==============
</TABLE>
* Does not include the effect of stock repurchases subsequent to
March 31, 1998.
(1) Eliminates historical current assets of (a) $1.158 billion of Equistar, (b)
$191 million of Occidental's Petrochemicals Business, (c) $52 million of
certain nonstrategic asset sales, and (d) also includes other related
reclassifications.
(2) Reflects the inclusion of (a) $1.307 billion of Occidental's equity
interest in Equistar; and eliminates the historical equity investments of
(b) $86 million of Occidental's Petrochemicals Business, and (c) $96
million of certain nonstrategic asset sales.
(3) Eliminates historical net property, plant and equipment of (a) $2.105
billion of Equistar, (b) $1.807 billion of Occidental's Petrochemicals
Business, and (c) $348 million of certain nonstrategic asset sales.
(4) Eliminates historical other assets of (a) $1.289 billion of Equistar, (b)
$29 million of Occidental's Petrochemicals Business, and (c) $1 million of
certain nonstrategic asset sales.
(5) Reflects the inclusion of (a) $252 million for taxes on gains on the sales
of certain nonstrategic assets; and eliminates the historical current
liabilities of (b) $369 million of Equistar, (c) $131 million of
Occidental's Petrochemicals Business, and (d) $28 million of certain
nonstrategic asset sales.
(6) Reflects the inclusion of the net effect of (a) net cash proceeds of $736
million from the sale of certain nonstrategic assets, (b) net cash proceeds
of $420 million from the contribution of Occidental's Petrochemicals
Business; and eliminates the historical long-term debt of (c) $100 million
of certain nonstrategic asset sales, (d) $1.713 billion of Equistar, and
(e) also includes other related reclassifications.
(7) Reflects (a) the inclusion of $74 million of deferred tax benefits on gains
on the sales of certain nonstrategic assets and (b) the elimination of
historical deferred and other domestic and foreign income taxes of $39
million on sales of certain nonstrategic assets.
(8) Eliminates historical other deferred credits and other liabilities of (a)
$42 million of Equistar, (b) $255 million of Occidental's Petrochemicals
Business, and (c) $36 million of certain nonstrategic asset sales.
(9) Reflects (a) the inclusion of a net after-tax gain of $264 million on the
sale of certain nonstrategic assets and (b) the elimination of historical
equity of $2.428 billion of Equistar.
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3. Certain pro forma information with respect to the contribution
of Occidental's Petrochemicals Business is also incorporated by reference from
the pro forma information included in Occidental's Current Report on Form 8-K,
dated February 10, 1998, which was filed with the SEC on April 21, 1998.
Although the principal purpose of such report was to complete Occidental's
filing obligations with respect to the acquisition of the Elk Hills Interest, in
connection with the preparation of the pro forma financial statements reflecting
such acquisition, Occidental has also provided disclosure therein of other
recent developments which may materially impact Occidental's financial
statements.
(c) Exhibits.
10.1 Master Transaction Agreement, dated May 15, 1998 (the "Closing
Date"), by and among Equistar Chemicals, LP ("Equistar"), Occidental Petroleum
Corporation ("OPC"), Lyondell Petrochemical Company ("Lyondell") and Millennium
Chemicals Inc. ("Millennium") (filed as Exhibit 10.1 of the Current Report on
Form 8-K of Occidental previously filed and also dated May 15, 1998 (Date of
earliest event reported), File No. 1-9210, and incorporated herein by this
reference).
10.2 Amended and Restated Limited Partnership Agreement of Equistar,
dated the Closing Date, by and among the partners named therein (filed as
Exhibit 10.2 of the Current Report on Form 8-K of Occidental previously filed
and also dated May 15, 1998 (Date of earliest event reported), File No. 1-9210,
and incorporated herein by this reference).
10.3 Agreement and Plan of Merger and Asset Contribution, dated as
of the Closing Date, by and among Equistar, Occidental Petrochem Partner 1,
Inc., Occidental Petrochem Partner 2, Inc., Oxy Petrochemicals Inc. and PDG
Chemical Inc. (filed as Exhibit 10.3 of the Current Report on Form 8-K of
Occidental previously filed and also dated May 15, 1998 (Date of earliest event
reported), File No. 1-9210, and incorporated herein by this reference).
10.4 Amended and Restated Parent Agreement, dated as of the Closing
Date, among Occidental Chemical Corporation, Oxy CH Corporation, OPC, Lyondell,
Millennium and Equistar (filed as Exhibit 10.4 of the Current Report on Form 8-K
of Occidental previously filed and also dated May 15, 1998 (Date of earliest
event reported), File No. 1-9210, and incorporated herein by this reference).
23.1 Consent of PricewaterhouseCoopers LLP, Houston, Texas.
23.2 Consent of PricewaterhouseCoopers LLP, Cincinnati, Ohio.
99.1 Lyondell Financial Statements.
99.2 Millennium Financial Statements.
99.3 Equistar Financial Statements.
99.4 Equistar Interim Financial Statements.
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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 hereunto duly authorized.
OCCIDENTAL PETROLEUM CORPORATION
(Registrant)
DATE: July 17, 1998 S.P. Dominick, Jr.
--------------------------------
S. P. Dominick, Jr.,
Vice President and Controller
(Chief Accounting and Duly
Authorized Officer)
10
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
23.1 Consent of PricewaterhouseCoopers LLP, Houston, Texas.
23.2 Consent of PricewaterhouseCoopers LLP, Cincinnati, Ohio.
99.1 Lyondell Financial Statements.
99.2 Millennium Financial Statements.
99.3 Equistar Financial Statements.
99.4 Equistar Interim Financial Statements.
</TABLE>
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-40054,
33-60492, 33-59395, 333-11897, 333-52053) and to the incorporation by reference
in the Registration Statements on Form S-8 (Nos. 33-5487, 33-5490, 33-14662,
33-23798, 33-44791, 33-47636, 33-64719, 333-17879) of Occidental Petroleum
Corporation of our report dated July 7, 1998 relating to the financial
statements of the Lyondell Contributed Business and our report dated
February 16, 1998, except as to the information presented in Note 18 which is
as of March 20, 1998, relating to the financial statements of Equistar
Chemicals, LP, which appear in the Current Report on Form 8-K of Occidental
Petroleum Corporation dated May 15, 1998.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
July 17, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-40054,
33-60492, 33-59395, 333-11897, 333-52053) and to the incorporation by reference
in the Registration Statements on Form S-8 (Nos. 33-5487, 33-5490, 33-14662,
33-23798, 33-44791, 33-47636, 33-64719, 333-17879) of Occidental Petroleum
Corporation of our report dated July 9, 1998 relating to the Millennium
Contributed Business statements of income and cash flows, which appear in the
Current Report on Form 8-K of Occidental Petroleum Corporation dated May 15,
1998.
PRICEWATERHOUSECOOPERS LLP
Cincinnati, Ohio
July 17, 1998
<PAGE> 1
EXHIBIT 99.1
LYONDELL CONTRIBUTED BUSINESS
AUDITED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
AS OF NOVEMBER 30, 1997
AND FOR THE ELEVEN MONTHS THEN ENDED
<PAGE> 2
LYONDELL CONTRIBUTED BUSINESS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants 2
Financial Statements:
Balance Sheet 3
Statement of Income and Invested Capital 4
Statement of Cash Flows 5
Notes to Financial Statements 6
</TABLE>
1
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Lyondell Petrochemical Company
In our opinion, the accompanying balance sheet and the related statements of
income and invested capital and of cash flows present fairly, in all material
respects, the financial position of the contributed petrochemicals and polymers
businesses of Lyondell Petrochemical Company ("Lyondell Contributed Business")
at November 30, 1997, and the results of its operations and its cash flows for
the eleven month period then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Lyondell Contributed Business's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
in accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
July 7, 1998
2
<PAGE> 4
LYONDELL CONTRIBUTED BUSINESS
BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
NOVEMBER 30
1997
-----------
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 1
Accounts receivable:
Trade 350
Related parties 31
Inventories 233
Prepaid expenses and other current assets 7
------
Total current assets 622
------
Property, plant and equipment 1,974
Less accumulated depreciation and amortization (1,148)
------
826
Deferred charges and other assets 84
------
Total assets $1,532
======
LIABILITIES AND INVESTED CAPITAL
Current liabilities:
Accounts payable:
Trade $ 153
Related parties 7
Current maturities of long-term debt 32
Other accrued liabilities 78
------
Total current liabilities 270
Long-term debt 713
Other liabilities and deferred credits 13
Commitments and contingencies (Note 8)
Total invested capital 536
------
Total liabilities and invested capital $1,532
======
</TABLE>
See notes to financial statements.
3
<PAGE> 5
LYONDELL CONTRIBUTED BUSINESS
STATEMENT OF INCOME AND INVESTED CAPITAL
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE ELEVEN
MONTHS ENDED
NOVEMBER 30
1997
--------------
<S> <C>
SALES AND OTHER OPERATING REVENUES:
Unrelated parties $2,183
Related parties 532
------
2,715
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties 1,662
Related parties 423
Depreciation and amortization 68
Selling, general and administrative expenses 166
------
2,319
------
Operating income 396
Interest expense, net 50
------
Income before income taxes 346
Provision for income taxes 127
------
NET INCOME 219
Invested capital at beginning of period 423
Net transactions with Lyondell (106)
------
INVESTED CAPITAL AT END OF PERIOD $ 536
======
</TABLE>
See notes to financial statements.
4
<PAGE> 6
LYONDELL CONTRIBUTED BUSINESS
STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE ELEVEN
MONTHS ENDED
NOVEMBER 30
1997
--------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 219
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 68
Increase in accounts receivable (26)
Increase in inventories (37)
Decrease in accounts payable (70)
Net change in other working capital accounts 19
Other (17)
-------
Net cash provided by operating activities 156
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (49)
-------
Net cash used in investing activities (49)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net transactions with parent (106)
-------
Net cash used in financing activities (106)
NET CHANGE IN CASH AND CASH EQUIVALENTS 1
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD --
-------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1
=======
</TABLE>
See notes to financial statements.
5
<PAGE> 7
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS
(IN MILLIONS)
NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF THE CONTRIBUTED BUSINESS
As of December 1, 1997, Lyondell Petrochemical Company ("Lyondell" or the
"Company") and Millennium Chemicals Inc. ("Millennium") formed a new joint
venture company named Equistar Chemicals, LP (the "Partnership") which is being
operated as a partnership. The Partnership owns and operates the existing
olefins and polymers businesses contributed by the two companies. The assets
of the Partnership consist of 13 manufacturing facilities on the US Gulf Coast
and in the US Midwest, producing ethylene, propylene, polyethylene (high-
density, low-density and linear low-density), polypropylene, ethyl alcohol,
butadiene, aromatics, methyl butyl tertiary ether ("MTBE") and other products
for sale to customers throughout the US. The Partnership has $1,745 of debt
including $745 face value of debt assumed from Lyondell and $750 under a new
credit facility, the proceeds of which will be used to repay debt assumed from
Millennium upon completion of the transaction, and a note receivable from
Lyondell of $345.
On March 20, 1998, Lyondell and Millennium announced an agreement to expand the
Partnership with the addition of the ethylene, propylene, and ethylene oxide and
derivative businesses of Occidental Chemical Corporation ("OxyChem"), a
subsidiary of Occidental Petroleum. Following the closing of the agreement on
May 15, 1998, Lyondell's percentage ownership in the Partnership decreased to
41% from 57%, with Millennium and OxyChem each owning a 29.5% share.
Lyondell contributed to the Partnership substantially all of the net assets and
operations comprising its petrochemicals and polymers segments. Lyondell
retained ownership of its 58.75% interest in LYONDELL-CITGO Refining Company
Ltd. ("LYONDELL-CITGO Refining") and its 75% interest in Lyondell Methanol
Company, L.P. ("Lyondell Methanol").
The accompanying financial statements include the results of operations, assets
and liabilities of the petrochemicals and polymers businesses currently owned by
Lyondell that will be contributed to the Partnership ("Contributed Business").
These financial statements are presented on a going concern basis and include
only the historical net assets and results of operations that are directly
related to the Contributed Business. Consequently, the financial position,
results of operations and cash flows may not be indicative of what would have
been reported if the Contributed Business had been a separate, stand-alone
entity or had been operated as a part of the Partnership.
Lyondell provided certain corporate, general and administrative services to the
Contributed Business, including legal, tax, treasury, risk management and other
services. The Contributed Business provided certain general and administrative
services to Lyondell, including computer, office lease and employee benefits
services. Charges for the services are believed to be reasonable and
substantially offset each other for the periods presented. In addition, Lyondell
has controlled, on a centralized basis, all cash receipts and disbursements
received or made by the Contributed Business. The net results of such
transactions are included in the balance sheet as invested capital.
6
<PAGE> 8
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition Revenue from product sales is generally recognized upon
delivery of product to the customer.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less.
Accounts Receivable The Contributed Business sells its products primarily to
companies in the petrochemicals and polymers industries. The Contributed
Business performs ongoing credit evaluations of its customers' financial
condition and in certain circumstances requires letters of credit from them. The
Contributed Business's allowance for doubtful accounts, which is reflected in
the balance sheet as a reduction of accounts receivable, totaled $3 at November
30, 1997.
Inventories Inventories are stated at the lower of cost or market value. Cost is
determined on the last-in, first-out ("LIFO") basis, except for materials and
supplies, which are valued at average cost. Inventories valued on a LIFO basis
were approximately $44 less than the amount of such inventories valued at
current cost at November 30, 1997.
Inventories consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30
1997
-----------
<S> <C>
Petrochemicals $ 136
Polymers 74
Materials and supplies 23
-----
$ 233
=====
</TABLE>
Property, Plant and Equipment Property, plant and equipment are recorded at
cost. Depreciation of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the assets, generally 5
to 30 years for manufacturing facilities and equipment. Interest cost incurred
on debt during the construction of major projects that exceed one year is
capitalized. No interest was capitalized during the periods presented. Property,
plant and equipment consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30
1997
-----------
<S> <C>
Manufacturing facilities and equipment $ 1,868
Construction projects in progress 79
Land 27
-------
$ 1,974
=======
</TABLE>
Turnaround Maintenance and Repair Expenses The costs of repairs and maintenance
incurred in connection with turnarounds of major units at the Contributed
Business's manufacturing facilities exceeding $5 are deferred as incurred and
amortized on a straight-line basis until the next planned turnaround, which is
generally four to six years.
7
<PAGE> 9
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
Other Accrued Liabilities Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30
1997
-----------
<S> <C>
Payroll $ 24
Interest 19
Taxes other than income 24
Other 11
----
$ 78
====
</TABLE>
Accounts payable and certain accrued expenses were not contributed to the
Partnership at its formation.
Environmental Remediation Costs Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Accrued liabilities
are exclusive of claims against third parties (except where payment has been
received or the amount of liability or contribution by such other parties,
including insurance companies, has been agreed) and are not discounted. In
general, costs related to environmental remediation are charged to expense.
Environmental costs are capitalized if the costs increase the value of the
property and/or mitigate or prevent contamination from future operations.
Exchanges Finished product exchange transactions, which are of a homogeneous
nature of commodities in the same line of business and do not involve the
payment or receipt of cash, are not accounted for as purchases and sales. Any
resulting volumetric exchange balances are accounted for as inventory in
accordance with the normal LIFO valuation policy. Exchanges settled through
payment and receipt of cash are accounted for as purchases and sales.
Income Taxes Earnings of the Contributed Business have been included in the
consolidated federal income tax return filed by Lyondell. Pursuant to an
informal tax allocation agreement, income taxes have been allocated to the
Contributed Business based on applicable statutory tax rates applied to the
taxable earnings generated by such business. The effective income tax rate was
36.6% for the eleven months ended November 30. State income taxes were the
primary difference between the effective tax rates and the 35% federal statutory
rate. Liabilities for current and deferred income taxes have been and remain
the responsibility of Lyondell, and accordingly, have been included in the
balance sheet as invested capital.
As part of the transactions to consummate the Partnership, Lyondell entered into
tax sharing and indemnification agreements with the Partnership in which
Lyondell generally agreed to indemnify the Partnership for income tax
liabilities attributable to periods when the operations of the Contributed
Business were included in the consolidated tax return of Lyondell.
Research and Development The cost of research and development efforts is
expensed as incurred. Such costs aggregated $12 for the eleven months ended
November 30, 1997.
NOTE 3. FINANCIAL INSTRUMENTS
The fair value of all financial instruments included in current assets and
current liabilities, including cash and cash equivalents, accounts receivable,
accounts payable and notes payable, approximated their carrying value due to
their short maturity. Based on the borrowing rates currently available to the
Contributed Business for debt with terms and average maturities similar to the
Contributed Business's debt portfolio, the fair value of the Contributed
Business's long-term debt, including amounts due within one year, was $701 at
November 30, 1997.
The Contributed Business is party to various unconditional purchase obligation
contracts as a purchaser for product and services. At November 30, 1997,
future minimum payments under these contracts with noncancelable contract
terms in excess of one year were as follows.
8
<PAGE> 10
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
1998 $ 14
1999 14
2000 13
2001 11
2002 10
Thereafter 54
----
Total minimum contract payments $116
====
</TABLE>
The Contributed Business's total purchases under these agreements were $15 for
the eleven months ended November 30, 1997.
NOTE 4. RELATED PARTY TRANSACTIONS
Related party transactions with Atlantic Richfield Company ("ARCO") for the nine
months ended September 30, 1997, excluding sales to ARCO Chemical Company, and
LYONDELL-CITGO Refining for the eleven months ended November 30, 1997 are as
follows:
<TABLE>
<CAPTION>
FOR THE
ELEVEN
MONTHS ENDED
NOVEMBER 30
1997
------------
<S> <C>
Sales:
Products $ 319
Other 7
Business interruption recovery --
-----
$ 326
=====
Costs:
Product purchases $ 409
Transportation fees 19
Other, net (5)
Business interruption recovery --
-----
$ 423
=====
</TABLE>
The Company purchased 383,312 shares of common stock held by ARCO after the
conversion of the Exchangeable Notes on September 15, 1997 at a price of $25.66
per share, eliminating ARCO's ownership interest in the Contributed Business.
Therefore, as of September 30, 1997, ARCO is no longer considered a related
party of the Contributed Business.
Sales to ARCO Chemical Company, an ARCO affiliate, consisting primarily of
product sales, were $206 for the nine months ended September 30, 1997.
9
<PAGE> 11
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 30
1997
-----------
<S> <C>
10.00% Notes due in 1999 $ 150
9.125% Notes due in 2002 100
6.5% Notes due in 2006 150
7.55% Debentures due in 2026 150
Medium-term notes 195
745
Less current portion 32
-----
$ 713
=====
</TABLE>
Aggregate maturities of long-term debt during the five years subsequent to
November 30, 1997 are as follows: 1998 -- $32; 1999 -- $150, 2000 -- $42;
2001 -- $90; 2002 -- $101. After contribution to the Partnership, Lyondell will
continue to be liable on the above debt until its maturity.
The Notes due in 1999 and the medium-term notes contain provisions that would
allow the holders to require the Company to repurchase the debt upon the
occurrence of certain events together with specified declines in public ratings
on the Notes due in 1999. Certain events include acquisitions by persons other
than ARCO or the Company of more than 20% of the Company's common stock, any
merger or transfer of substantially all of the Company's assets, in connection
with which the Company's common stock is changed into or exchanged for cash,
securities or other property and payment of certain "special" dividends.
The medium-term notes mature at various dates from 1998 to 2005 and have a
weighted average interest rate at November 30, 1997 of 9.8%.
Interest paid was $59 for the eleven months ended November 30, 1997.
NOTE 6. PENSION AND OTHER POSTRETIREMENT BENEFITS
Defined Benefit Pension Plans -- All full-time regular employees of the
Contributed Business are covered by defined benefit pension plans sponsored by
Lyondell. Retirement benefits are based on years of service and the employee's
highest three consecutive years of compensation during the last ten years of
service. The funding policy for these plans is to make periodic contributions as
required by applicable law. The Contributed Business accrues pension costs based
on an actuarial valuation and funds the plans through contributions to the
Company, reflected in invested capital, which then contributes to pension trust
funds separate from Lyondell funds. The Contributed Business also has unfunded
supplemental nonqualified retirement plans which provide pension benefits for
certain employees in excess of the tax qualified plans' limits. The Contributed
Business recorded expense related to participation in these plans of $7 for the
eleven months ended November 30, 1997.
Defined Contribution Plans -- Effective July 1, 1995, Lyondell also maintains
voluntary defined contribution savings plans for eligible employees, including
those employed by the Contributed Business. Under provisions of the plans,
Lyondell contributes an amount equal to 160% of employee contributions up to a
maximum matching contribution of eight percent of the employee's base salary.
Prior to July 1, 1995, Lyondell had similar voluntary defined contribution
plans. The Contributed Business recorded expense related to participation in
these voluntary defined contribution savings plans totaled $6 for the eleven
months ended November 30, 1997.
10
<PAGE> 12
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
Other Postretirement Benefit Plans -- Lyondell sponsors unfunded postretirement
benefit plans other than pensions ("OPEB") for both salaried and non-salaried
employees, including those employed by the Contributed Business, which provide
medical and life insurance benefits. The postretirement health care plans are
contributory while the life insurance plans are non-contributory. Currently,
Lyondell pays approximately 80% of the cost of the health care plans but
reserves the right to modify the cost-sharing provisions at any time. The
Contributed Business recorded expense related to participation in these plans of
approximately $4 for the eleven months ended November 30, 1997. The actuarially
determined liability associated with the currently active employees of the
Contributed Business based on current plan provisions at November 30, 1997 was
$25.
NOTE 7. LEASES
At November 30, 1997, future minimum rental payments for operating leases with
noncancelable lease terms in excess of one year were as follows:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
1998 $ 85
1999 69
2000 54
2001 39
2002 29
Thereafter 351
-----
Total minimum contract payments $ 627
=====
</TABLE>
Operating lease net rental expenses were $42, $44, and $39 for the eleven months
ended November 30, 1997 and the years ended December 31, 1996, and 1995,
respectively.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Contributed Business has various purchase commitments for materials,
supplies and services incident to the ordinary conduct of business. In the
aggregate, such commitments are not at prices in excess of current market.
In connection with the transfer of assets and liabilities from ARCO to the
Company, the Company and ARCO entered into an agreement ("Cross-Indemnity
Agreement") whereby the Company agreed to defend and indemnify ARCO against
certain uninsured claims and liabilities which ARCO may incur relating to the
operation of the Company's integrated petrochemicals and petroleum processing
business prior to July 1, 1988, including certain liabilities which may arise
out of pending and future lawsuits. ARCO indemnified the Company under the
Cross-Indemnity Agreement with respect to other claims or liabilities and other
matters of litigation not related to the assets or business included in the
Company's consolidated financial statements. The Company has reached an
agreement-in-principle with ARCO to update the Cross-Indemnity Agreement
("Revised Cross-Indemnity Agreement"). The Cross-Indemnity Agreement and the
Revised Cross-Indemnity Agreement cover operations of the Company included in
the Contributed Business. Subject to the uncertainty inherent in all litigation,
management believes the resolution of the matters pursuant to the Revised
Cross-Indemnity Agreement will not have a material adverse effect upon the
financial statements or liquidity of the Contributed Business.
In addition to lawsuits for which the Company has indemnified ARCO, the Company
is also subject to various lawsuits and proceedings which may involve the
operations of the Contributed Business. Subject to the uncertainty inherent in
all litigation, management believes the resolution of these proceedings will not
have a material adverse effect upon the consolidated financial statements or
liquidity of the Contributed Business.
As part of the transactions to consummate the Partnership, Lyondell agreed to
indemnify the Partnership for any present or future liabilities arising within a
seven-year period after the consummation of the Partnership which are
attributable to the Contributed Business operations prior to the Partnership's
formation in excess of $7.
11
<PAGE> 13
LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
The Contributed Business's policy is to be in compliance with all applicable
environmental laws. The Contributed Business is subject to extensive
environmental laws and regulations concerning emissions to the air, discharges
to surface and subsurface waters and the generation, handling, storage,
transportation, treatment and disposal of waste materials. Some of these laws
and regulations are subject to varying and conflicting interpretations. In
addition, the Contributed Business cannot accurately predict future
developments, such as increasingly strict requirements of environmental laws,
inspection and enforcement policies and compliance costs therefrom which might
affect the handling, manufacture, use, emission or disposal of products, other
materials or hazardous and non-hazardous waste.
As of November 30, 1997, the Contributed Business has accrued $2 related to
future regulatory agency assessment and remediation costs, of which $1 is
included in current liabilities at November 30, 1997 while the remaining amounts
are expected to be incurred over the next two to seven years. In the opinion of
management, there is currently no material range of loss in excess of the amount
recorded. However, it is possible that new information about the sites for which
the reserve has been established, new technology or future developments such as
involvement in other regulatory agency or other comparable state law
investigations could require the Contributed Business to reassess its potential
exposure related to environmental matters.
In the opinion of management, any liability arising from the matters discussed
in this Note will not have a material adverse effect on the consolidated
financial statements or liquidity of the Contributed Business. However, the
adverse resolution in any reporting period of one or more of these matters
discussed in this Note could have a material impact on the Contributed
Business's results of operations for that period without giving effect to
contribution or indemnification obligations of co-defendants or others, or to
the effect of any insurance coverage that may be available to offset the effects
of any such award.
12
<PAGE> 1
EXHIBIT 99.2
PRICEWATERHOUSECOOPERS [LOGO]
MILLENNIUM
CONTRIBUTED BUSINESS
STATEMENTS OF INCOME AND CASH FLOWS
FOR THE ELEVEN MONTHS ENDED
NOVEMBER 30, 1997
<PAGE> 2
PRICEWATERHOUSECOOPERS [LOGO]
Report of Independent Accountants
July 9, 1998
In our opinion, the accompanying statements of income and cash flows present
fairly, in all material respects, the financial results of the Millennium
Contributed Business for the eleven months ended November 30, 1997, in
conformity with generally accepted accounting principles. The statements of
income and cash flows are the responsibility of the Company's management; our
responsibility is to express an opinion on these statements of income and cash
flows based on our audit. We conducted our audit in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of income and cash
flows are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the statements of
income and cash flows, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall presentation. We
believe that our audit of the statements of income and cash flows provides a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
<PAGE> 3
MILLENNIUM CONTRIBUTED BUSINESS
STATEMENT OF INCOME
FOR THE ELEVEN MONTH PERIOD ENDED NOVEMBER 30, 1997
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOVEMBER 30,
1997
------------
<S> <C>
Net sales $ 1,785,620
Operating costs and expenses:
Cost of sales 1,341,115
Selling, general and administrative expenses 135,917
-----------
Operating income 308,588
Other income (expense):
Interest income 219
Interest expense (65,732)
-----------
Income before taxes 243,075
Provision for income taxes 96,422
-----------
Net income $ 146,653
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
MILLENNIUM CONTRIBUTED BUSINESS
STATEMENT OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1997
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOVEMBER 30,
1997
------------
<S> <C>
Cash flow from operating activities:
Net income $ 146,653
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant and equipment 70,990
Amortization of Goodwill 54,431
Changes in assets and liabilities:
Accounts receivable 230,560
Inventories 13,171
Accounts payable (53,000)
Accrued expenses (32,927)
Other 2,826
---------
Net cash provided by operating activities 432,704
Cash flows from investing activities:
Capital expenditures (41,245)
---------
Net cash used in investing activities (41,245)
Cash flows from financing activities:
Net transactions with parent (386,459)
Repayment of long-term debt (5,000)
---------
Net cash provided by (used in)
financing activities (391,459)
Net (decrease) increase in cash and cash equivalents --
Cash and cash equivalents at beginning of period --
---------
Cash and cash equivalents at end of period $ --
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
MILLENNIUM CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1 -- DESCRIPTION OF THE CONTRIBUTED BUSINESS AND OPERATIONS
Pursuant to a partnership agreement (the "Partnership Agreement"), Millennium
Chemicals Inc. ("Millennium") and Lyondell Petrochemical Company (Lyondell")
formed Equistar Chemicals, LP ("Equistar" or the "Partnership"), a Delaware
limited partnership, which commenced operations on December 1, 1997. Equistar is
57% owned by Lyondell and 43% owned by Millennium. The Lyondell interest is
owned through two wholly-owned subsidiaries, Lyondell Petrochemical G.P. Inc.
("Lyondell GP") and Lyondell Petrochemical L.P. Inc. ("Lyondell LP"). Millennium
also owns its interest in the Partnership through two wholly-owned subsidiaries,
Millennium Petrochemicals GP LLC ("Millennium GP") and Millennium Petrochemicals
LP LLC ("Millennium LP").
The Partnership owns and operates the petrochemical and polymer businesses
contributed by Millennium and Lyondell (the "Contributed Business"). The assets
of the Partnership consist of 15 manufacturing facilities on the U.S. Gulf Coast
and in the U.S. Midwest. The petrochemical segment produces products including
ethylene, propylene, ethyl alcohol, butadiene, aromatics and methyl tertiary
butyl ether ("MTBE"). These products are used primarily in the production of
other chemicals and products, including polymers, for sales to customers
throughout the U.S. The petrochemicals segment also includes sales of methanol
produced by Lyondell Methanol LP ("Lyondell Methanol"), which is owned 75% by
Lyondell and is operated by the Partnership. The polymers segment produces
products that include polyethylene (high-density, low-density and linear
low-density), and polypropylene, which are used in the production of a wide
variety of consumer and industrial products.
On March 20, 1998 Equistar announced Occidental Petroleum Corporation would be
joining the Partnership. The ownership percentages of Equistar will now be
Lyondell (41%), Millennium (29.5%) and Occidental (29.5%).
Millennium contributed to the Partnership substantially all of the net assets
and operations comprising its petrochemicals and polymers segments. Millennium
retained $250,000 of the accounts receivable of the Contributed Business.
The accompanying financial statements include the results of operations and cash
flows, for the eleven months ended November 30, 1997, of the petrochemicals and
polymers businesses currently owned by Millennium that were contributed to the
Partnership ("Contributed Business"). Consequently, the results of operations
and the cash flows may not accurately reflect what may have been reported had
the Contributed Business been a separate, stand-alone entity or operated as a
part of the Partnership.
4
<PAGE> 6
MILLENNIUM CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition. Revenue from product sales is generally recognized upon
shipment of product to the customer.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Environmental Remediation Cost. Environmental remediation costs are expensed or
capitalized in accordance with generally accepted accounting principles. In
October 1996, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP 96-1"), "Environmental Remediation Liabilities,"
which establishes new accounting and reporting standards for the recognition and
disclosure of environmental remediation liabilities. The adoption of SOP 96-1 in
1997 did not have a material impact on the results of operations.
Goodwill. Goodwill is being amortized using the straight-line method over forty
years. Management periodically reviews goodwill for impairment based on the
anticipated future cash flows attributable to the related operations. Expected
cash flows, on an undiscounted basis, are compared to the carrying value of the
tangible and intangible assets, and if impairment is indicated, the carrying
value of goodwill, and if necessary other related assets, is adjusted.
Management believes that no impairment exists at November 30, 1997.
Research and Development. The cost of research and development efforts is
expensed as incurred. Such costs aggregated $15,709 for the eleven month period
ended November 30, 1997.
Exchanges. Finished product exchange transactions, which are of a homogenous
nature of commodities in the same line of business and do not require payment or
receipt of cash, are not accounted for as purchases or sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance with
the normal LIFO valuation policy. Exchanges settled through payment and receipt
of cash are accounted for as purchases and sales.
Income Taxes. Earnings of the Contributed Business have been included in the
consolidated federal income tax return filed by its ultimate U.S. parent,
Millennium America Holdings Inc. Pursuant to an informal tax allocation
agreement, income taxes have been allocated to the Contributed Business based on
applicable statutory rates applied to the taxable earnings generated by such
business. State income tax was the primary difference between the effective tax
rates and the federal statutory rate.
5
<PAGE> 7
MILLENNIUM CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
As part of the transactions to consummate the Partnership, Millennium entered
into tax sharing and indemnification agreements with the Partnership in which
Millennium generally agreed to indemnify the Partnership for income tax
liabilities attributable to periods when the operations of the Contributed
Business were included in the consolidated tax return of Millennium. The
Partnership is not subject to federal income taxes as income is reportable
directly by the individual partners; therefore, going forward there will be no
provision for income taxes in the partnership's financial statements.
NOTE 3 -- RELATED PARTY TRANSACTIONS
Millennium provided certain corporate, general and administrative services to
the Contributed Business, including legal, financial, tax, risk management and
employee benefits services. Charges for these services are included in selling
and administration expenses. The Contributed Business also sells ethylene to an
affiliated business unit of Millennium for the manufacture of vinyl acetate
monomer. These sales are reflected at market price and have been included in the
accompanying income statement. All significant intercompany accounts and
transactions within the Contributed Business have been eliminated. Millennium
provides the Partnership with certain operational services, including waste
water treatment and barge dock access. The Partnership provides certain general
and administrative services to Millennium, including materials management,
certain utilities, office space, health, safety and environmental services and
computer services. The Partnership has also controlled certain cash receipts and
disbursements received or made by the Contributed Business.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
The Contributed Business is subject, among other things, to several proceedings
under the Federal Comprehensive Environmental Response Compensation and
Liability Act and other federal and state statutes. These proceedings are in
various stages ranging from initial investigation to active settlement
negotiations to implementation of clean-up remediation of sites. Additionally,
Millennium and/or its subsidiaries are defendants or plaintiffs in lawsuits that
have arisen in the normal course of business including those relating to
commercial transactions and product liability with respect to the Contributed
Business.
6
<PAGE> 8
MILLENNIUM CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
As part of the transactions to consummate the Partnership, Millennium agreed to
indemnify the Partnership for any present or future liabilities arising within a
seven year period after the consummation of the Partnership which are
attributable to the Contributed Business' operations prior to the Partnership's
formation in excess of $7,000.
The Contributed Business has various contractual obligations to purchase raw
materials used in its production of polyethylene. Commitments to purchase
ethylene used in the production of polyethylene are based on market prices and
expire from 1997 to 2001.
7
<PAGE> 1
EXHIBIT 99.3
Equistar Chemicals, LP
Financial Statements
As of and for the one month ended December 31, 1997
<PAGE> 2
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants 2
Financial Statements:
Statement of Income 3
Balance Sheet 4
Statement of Partners' Capital 5
Statement of Cash Flows 6
Notes to Financial Statements 7
</TABLE>
1
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Governance Committee
of Equistar Chemicals, LP:
We have audited the accompanying balance sheet of Equistar Chemicals, LP (the
"Partnership") as of December 31, 1997, and the related statements of income,
partners' capital, and cash flows for the period from December 1, 1997
(inception) to December 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Equistar Chemicals, LP as of
December 31, 1997, and the results of its operations and its cash flows for the
period from December 1, 1997 (inception) to December 31, 1997 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P. PRICE WATERHOUSE LLP
Houston, Texas Morristown, New Jersey
February 16, 1998 February 16, 1998
(Except as to the information (Except as to the information
presented in Note 18, for which presented in Note 18, for which
the date is March 20, 1998) the date is March 20, 1998)
2
<PAGE> 4
EQUISTAR CHEMICALS, LP
STATEMENT OF INCOME
FOR THE PERIOD FROM DECEMBER 1, 1997 (INCEPTION) TO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS
- -------------------
<S> <C>
SALES AND OTHER OPERATING REVENUES:
Unrelated parties $338
Related parties 27
----
365
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties 261
Related parties 26
Selling, general and administrative expenses 21
Unusual charges 42
----
350
Operating income 15
Interest expense (10)
Interest income 2
----
NET INCOME $ 7
====
</TABLE>
See notes to financial statements.
3
<PAGE> 5
EQUISTAR CHEMICALS, LP
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS
- -------------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41
Accounts receivable:
Trade 445
Related parties 36
Receivable from partners 150
Inventories 513
Prepaid expenses and other current assets 24
-------
Total current assets 1,209
-------
Property, plant and equipment 3,678
Less accumulated depreciation and amortization (1,560)
-------
2,118
Goodwill, net 1,139
Deferred charges and other assets 151
------
Total assets $ 4,617
=======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade $ 171
Related parties 18
Payable to partners 63
Other accrued liabilities 65
Current maturities of long-term debt 36
-------
Total current liabilities 353
-------
Long-term debt 1,512
Other liabilities and deferred credits 34
Commitments and contingencies
Partners' capital:
Partners' capital 3,063
Note receivable from Lyondell LP (345)
-------
Total partners' capital 2,718
-------
Total liabilities and partners' capital $ 4,617
=======
</TABLE>
See notes to financial statements.
4
<PAGE> 6
EQUISTAR CHEMICALS, LP
STATEMENT OF PARTNERS' CAPITAL
FOR THE PERIOD FROM DECEMBER 1, 1997 (INCEPTION) TO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS LYONDELL MILLENNIUM TOTAL
- ------------------- -------- ---------- -----
<S> <C> <C> <C>
Balance at December 1, 1997 $ -- $ -- $ --
(inception)
Capital contributions at inception:
Net assets, at historical cost 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
====== ====== ======
</TABLE>
See notes to financial statements.
5
<PAGE> 7
EQUISTAR CHEMICALS, LP
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 1, 1997 (INCEPTION) TO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS
- -------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19
Increase in accounts receivable (100)
Increase in receivable from partners (101)
Increase in inventories (5)
Increase in accounts payable 188
Increase in payable to partners 54
Increase in other accrued liabilities 48
Net change in other working capital accounts (15)
Other 7
-----
Net cash provided by operating activities 102
-----
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (12)
-----
Net cash used in investing activities (12)
-----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 50
Cash contributions from partners 1
Distributions to partners (100)
-----
Net cash used in financing activities (49)
-----
INCREASE IN CASH AND CASH EQUIVALENTS 41
Cash and cash equivalents at beginning of period --
-----
Cash and cash equivalents at end of period $ 41
=====
</TABLE>
See notes to financial statements.
6
<PAGE> 8
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS
1. FORMATION OF THE COMPANY AND OPERATIONS
Pursuant to a partnership agreement (the "Partnership Agreement") Lyondell
Petrochemical Company ("Lyondell") and Millennium Chemicals, Inc. ("Millennium")
formed Equistar Chemicals, LP ("Equistar" or the "Partnership"), a Delaware
limited partnership, which commenced operations on December 1, 1997 (See note 11
for related discussion). The Partnership is owned 57 percent by Lyondell and 43
percent by Millennium. Lyondell owns its interest in the Partnership through two
wholly-owned subsidiaries, Lyondell Petrochemical G.P. Inc. ("Lyondell GP") and
Lyondell Petrochemical L.P. Inc. ("Lyondell LP"). Millennium also owns its
interest in the Partnership through two wholly-owned subsidiaries, Millennium
Petrochemicals GP LLC ("Millennium GP") and Millennium Petrochemicals LP LLC
("Millennium LP").
The Partnership owns and operates the petrochemicals and polymers businesses
contributed by Lyondell and Millennium (the "Contributed Businesses") which
consist of 15 manufacturing facilities on the US Gulf Coast and in the US
Midwest. The petrochemicals segment produces products including ethylene,
propylene, ethyl alcohol, butadiene, aromatics and methyl tertiary butyl ether
("MTBE"). These products are used primarily in the production of other chemicals
and products, including polymers. The petrochemicals segment also includes sales
of methanol produced by Lyondell Methanol LP ("Lyondell Methanol"), which is
owned 75 percent by Lyondell. The Partnership operates the Lyondell Methanol
facility. The polymers segment produces products that include polyethylene
(high-density, low-density and linear low-density) and polypropylene, which are
used in the production of a wide variety of consumer and industrial products.
The Partnership Agreement provides that Equistar is governed by a Partnership
Governance Committee consisting of six representatives, three appointed by each
partner. Most of the significant decisions of the Partnership Governance
Committee require unanimous consent, including approval of the Partnership's
Strategic Plan and annual updates thereof.
Pursuant to the Partnership Agreement, net income is allocated among the
partners on a pro rata basis based on their percentage ownership of the
Partnership. Distributions are made to the partners based on their percentage
ownership of the Partnership. Additional contributions required by the
Partnership will also be based on the partners' percentage ownership of the
Partnership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition -- Revenue from product sales is generally recognized upon
shipment of products to the customer.
Cash and Cash Equivalents -- Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. The Partnership's
policy is to invest cash in conservative, highly rated instruments and limit the
amount of credit exposure to any one institution. The Partnership performs
periodic evaluations of the relative credit standing of these financial
institutions which are considered in the Partnership's investment strategy.
The Partnership has no requirements for compensating balances in a specific
amount at a specific point in time. The Partnership does maintain compensating
balances for some of its banking services and products. Such balances are
maintained on an average basis and are solely at the Partnership's discretion.
As a result, none of the Partnership's cash is restricted.
7
<PAGE> 9
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Management determines the appropriate classification of investments in debt
securities as trading, available-for-sale or held-to-maturity at the time of
purchase and reevaluates such designation as of each balance sheet date.
Accounts Receivable -- The Partnership sells its products primarily to companies
in the petrochemicals and polymers industries. The Partnership performs ongoing
credit evaluations of its customers' financial condition and in certain
circumstances requires letters of credit from them.
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,
generally 5 to 25 years.
Upon retirement or sale, the Partnership removes the cost of the assets and the
related accumulated depreciation from the accounts and reflects any resulting
gains or losses in income. The Partnership's policy is to capitalize interest
cost incurred on debt during the construction of major projects exceeding one
year.
Turnaround Maintenance and Repair Expenses -- Cost of major repairs and
maintenance incurred in connection with turnarounds of units at the
Partnership's manufacturing facilities are deferred and amortized on a
straight-line basis until the next planned turnaround, generally four to six
years.
Goodwill -- Goodwill, which was contributed by Millennium, is being amortized
using the straight-line method over forty years. Management periodically
evaluates goodwill for impairment based on the anticipated future cash flows
attributable to the related operations. Such expected cash flows, on an
undiscounted basis, are compared to the carrying value of the tangible and
intangible assets, and if impairment is indicated, the carrying value of
goodwill, and if necessary other related assets, is adjusted. Management
believes that no impairment exists at December 31, 1997. The Partnership
amortized $3 million of goodwill during the period from December 1, 1997
(inception) to December 31, 1997.
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.
In October 1996 the American Institute of Certified Public Accountants issued
Statement of Position 96-1 ("SOP 96-1"), "Environmental Remediation
Liabilities," which establishes new accounting and reporting standards for the
recognition and disclosure of environmental remediation liabilities. The effect
of adoption of SOP 96-1 in 1997 did not have a material impact on the
Partnership's financial position or results of operations.
Exchanges -- Finished product exchange transactions, which are of a homogeneous
nature of commodities in the same line of business and do not involve the
payment or receipt of cash, are not accounted for as purchases and sales. Any
resulting volumetric exchange balances are accounted for as inventory in
accordance with the normal LIFO valuation policy. Exchanges settled through
payment and receipt of cash are accounted for as purchases and sales.
Income Taxes -- 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.
8
<PAGE> 10
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
3. FINANCIAL INSTRUMENTS
The fair value of all financial instruments included in current assets and
current liabilities, including cash and cash equivalents, accounts receivable,
accounts payable and notes payable, approximated their carrying value due to
their short maturity. Based on the borrowing rates currently available to the
Partnership for debt with terms and average maturities similar to the
Partnership's debt portfolio, the fair value of the Partnership's long-term
debt, including amounts due within one year, was $1.506 billion at December 31,
1997.
At December 31, 1997, the Partnership had issued letters of credit totaling $4
million.
4. RELATED PARTY TRANSACTIONS
Lyondell provides certain corporate, general and administrative services to the
Partnership, including legal, tax, treasury, risk management and other services
pursuant to a shared services agreement. The Partnership provides certain
general and administrative services to Lyondell, including computer, office
lease and employee benefits services. During the period from December 1, 1997
(inception) to December 31, 1997, billings for these services were less than $1
million.
The Partnership also provides certain general and administrative services to
Millennium, including materials management, certain utilities, office space,
health, safety and environmental services and computer services. Millennium
provides the Partnership with certain operational services, including waste
water treatment and barge dock access. During the period from December 1, 1997
(inception) to December 31, 1997, billings for these services were less than $1
million.
The Partnership has several feedstock and product sales agreements with
Lyondell-CITGO Refining Company Ltd. ("LCR"), a joint venture investment of
Lyondell. Sales to LCR were $27 million and cost of sales to LCR were $26
million for the period from December 1, 1997 (inception) to December 31, 1997.
The Partnership has a feedstock, product sales and other services agreement with
Lyondell Methanol. Lyondell Methanol sells all of its products to Equistar.
Purchases from Lyondell Methanol were $15 million for the period from December
1, 1997 (inception) to December 31, 1997. Lyondell Methanol purchased $4 million
of natural gas feedstock from the Partnership during the period from December 1,
1997 (inception) to December 31, 1997. Lyondell Methanol also pays a business
management fee to Equistar which was less than $1 million during the period from
December 1, 1997 (inception) to December 31, 1997.
9
<PAGE> 11
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
5. INVENTORIES
The categories of inventory and their book values at December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS
-------------------
<S> <C>
Petrochemicals $ 183
Polymers 264
Materials and supplies 66
-----
Total inventories $ 513
=====
</TABLE>
For the period from December 1, 1997 (inception) to December 31, 1997, the
Partnership increased cost of sales by approximately $1 million associated with
the reduction in LIFO inventories. The excess of the current cost of inventories
over book value was approximately $103 million at December 31, 1997.
6. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment and their gross value at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS
-------------------
<S> <C>
Manufacturing facilities and $ 3,477
equipment
Construction projects in progress 127
Land 74
-------
Total property, plant and
equipment $ 3,678
=======
</TABLE>
7. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS
-------------------
<S> <C>
Deferred turnaround costs, net $ 66
Deferred software costs, net 44
Deferred pension asset 23
Other 18
-----
Total deferred charges and
other assets $ 151
=====
</TABLE>
8. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS
-------------------
<S> <C>
Accrued severance and other costs related
to formation of the Partnership $ 27
Accrued interest 10
Other 28
----
Total other accrued liabilities $ 65
====
</TABLE>
10
<PAGE> 12
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
9. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt at December 31, 1997 was comprised of the following:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS
-------------------
<S> <C>
10.00% Notes due in 1999 $ 150
9.125% Notes due in 2002 100
5-year term credit facility 800
Medium-term notes (1998-2005) 194
6.5% Notes due in 2006 150
7.55% Debentures due in 2026 150
Other 4
-------
1,548
Less current portion 36
-------
Total long-term debt $ 1,512
=======
</TABLE>
Aggregate maturities of long-term debt during the five years subsequent to
December 31, 1997 are as follows: 1998--$36 million; 1999--$150 million;
2000--$42 million; 2001--$90 million; 2002--$901 million. All of the above debt
is guaranteed by the Partners.
The medium-term notes mature at various dates from 1998 to 2005 and have a
weighted average interest rate at December 31, 1997 of 9.83 percent.
The Partnership has a five-year, $1.25 billion credit facility ("Facility") with
a group of banks expiring November 2002. Borrowings under the Facility bear
interest at either the Federal Funds rate plus 1/2 of 1 percent, LIBOR, which
was 5.7 percent at December 31, 1997, a fixed rate offered by one of the
sponsoring banks or rates that are based on a competitive auction feature
wherein the interest rate can be established by competitive bids submitted by
the sponsoring banks, depending on the type of borrowing made under the
Facility. The Facility is available for working capital and general purposes as
needed and 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, 1997, the Partnership
was in compliance with the covenants of the Facility.
10. NOTE RECEIVABLE FROM LYONDELL LP
Upon formation of the Partnership, Lyondell LP also contributed capital to the
Partnership in the form of a $345 million promissory note (the "Lyondell Note").
The Lyondell Note bears interest at LIBOR plus a market spread. The Lyondell
Note will be repaid to the Partnership at the earlier of 3 years from the date
the Partnership commenced operations or 30 days after a financing at LCR, a
joint venture investment of Lyondell, which results in the repayment of LCR's
existing $450 million 5-year term loan and a distribution to Lyondell of at
least $345 million. During the period from December 1, 1997 (inception) to
December 31, 1997, the Partnership accrued $1.75 million of interest income
related to the Lyondell Note.
11. UNUSUAL CHARGES
In December 1997, the Partnership recorded $42 million of unusual charges
related to the formation of the Partnership. These charges included severance
and other costs related to a workforce reduction (approximately 430 employees)
that resulted from the consolidation of the businesses contributed to the
Partnership ($30 million), various closing costs ($6 million), and various other
charges ($6 million). Approximately $15 million of these charges were paid in
1997 and $27 million are included in other accrued liabilities in the
accompanying balance sheet and will be paid during 1998.
11
<PAGE> 13
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
12. SUPPLEMENTAL CASH FLOW INFORMATION
The historical cost of the net assets contributed to the Partnership at
inception are summarized as follows (in millions of dollars):
<TABLE>
<CAPTION>
AMOUNT
-------
<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>
13. LEASES
At December 31, 1997, future minimum rental payments for operating leases with
noncancelable lease terms in excess of one year were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS AMOUNT
------------------- ------------
<S> <C>
1998 $ 128
1999 111
2000 80
2001 56
2002 42
Thereafter 369
-----
Total minimum lease payments $ 786
=====
</TABLE>
Operating lease net rental expense was $11 million for the period from December
1, 1997 (inception) to December 31, 1997.
The Partnership is party to various unconditional purchase obligation contracts
as a purchaser for product and services. At December 31, 1997, future minimum
payments under these contracts with noncancelable contract terms in excess of
one year were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS AMOUNT
------------------- ------
<S> <C>
1998 $ 30
1999 29
2000 29
2001 26
2002 26
Thereafter 189
----
Total minimum contract payments $329
====
</TABLE>
12
<PAGE> 14
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Partnership's total purchases under these agreements were $3 million during
the period from December 1, 1997 (inception) to December 31, 1997.
14. RETIREMENT PLANS
All full-time regular employees of the Partnership are covered by defined
benefit pension plans sponsored by the Partnership. The plans became effective
on January 1, 1998, except for union represented employees, whose plans were
contributed to the Partnership at formation. In connection with the formation of
the Partnership, there were no pension assets or obligations contributed to the
Partnership, except for the union represented plans. Retirement benefits are
based on years of service and the employee's highest three consecutive years of
compensation during the last ten years of service. The funding policy for these
plans is to make periodic contributions as required by applicable law. The
Partnership accrues pension costs based on an actuarial valuation and funds the
plans through contributions to pension trust funds. The Partnership also has
unfunded supplemental nonqualified retirement plans which provide pension
benefits for certain employees in excess of the tax qualified plans' limits.
The following table sets forth the funded status of the union represented plans
at December 31, 1997 (the other plans are unfunded as of December 31, 1997):
<TABLE>
<CAPTION>
PLANS WITH
ASSETS IN
EXCESS OF
ABO
-----------
MILLIONS OF DOLLARS
- -------------------
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 19
====
Accumulated benefit obligation ("ABO") $ 20
====
Projected benefit obligation $ 21
Plan assets at fair value, primarily stocks
and bonds $ 40
Plan assets in excess of projected benefit
obligation 19
Unrecognized net loss 4
----
Net pension asset $ 23
====
</TABLE>
As the non-union plans became effective on January 1, 1998, the Partnership did
not recognize any net periodic pension cost during the period from December 1,
1997 (inception) to December 31, 1997.
The assumptions used at December 31, 1997 in determining the net pension
liability shown above were as follows:
<TABLE>
<CAPTION>
PERCENT
-------
<S> <C>
Discount rate 7.25
Rate of salary progression 4.75
Long-term rate of return on assets 9.00
</TABLE>
Effective January 1, 1998, the Partnership also maintains voluntary defined
contribution savings plans for eligible employees. Under provisions of the
plans, the Partnership contributes an amount equal to 160 percent of employee
contributions up to a maximum matching contribution of eight percent of the
employee's base salary.
13
<PAGE> 15
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Partnership sponsors unfunded postretirement benefit plans other than
pensions ("OPEB") for both salaried and non-salaried employees, which provide
medical and life insurance benefits. The postretirement health care plans are
contributory while the life insurance plans are non-contributory. Currently, the
Partnership pays approximately 80 percent of the cost of the health care plans,
but reserves the right to modify the cost-sharing provisions at any time. In
connection with the formation of the Partnership, the Partners contributed $31
million of accrued postretirement benefit liabilities for employees that
transferred to the Partnership.
The following table sets forth the plans' separate postretirement benefit
liabilities at December 31, 1997:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS MEDICAL LIFE
- ------------------- ------- ----
<S> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees $ -- $ --
Fully eligible active plan
participants (11) (3)
Other active plan participants (25) (11)
---- ----
(36) (14)
Unrecognized prior service cost -- --
Unrecognized net loss 14 5
==== ====
Accrued postretirement benefit liability $(22) $ (9)
==== ====
</TABLE>
The accrued postretirement benefit liabilities were calculated and contributed
as of December 31, 1997; therefore, there was no net periodic postretirement
benefit costs for the period from December 1, 1997 (inception) to December 31,
1997.
For measurement purposes, the assumed annual rate of increase in the per capita
cost of covered health care benefits as of December 31, 1997 was 7 percent for
1998-2001 and 5 percent thereafter. The health care cost trend rate assumption
does not have a significant effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit liability as of
December 31, 1997 by less than $1 million.
The accumulated postretirement benefit obligation was calculated utilizing a
weighted-average discount rate of 7.25 percent at December 31, 1997 and an
average rate of salary progression of 4.75 percent. The Partnership's current
policy is to fund the postretirement health care and life insurance plans on a
pay-as-you-go basis.
16. COMMITMENTS AND CONTINGENCIES
The Partnership has various purchase commitments for materials, supplies and
services incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market.
The Partnership is also subject to various lawsuits and proceedings. Subject to
the uncertainty inherent in all litigation, management believes the resolution
of these proceedings will not have a material adverse effect upon the financial
statements or liquidity of the Partnership.
Equistar has agreed to indemnify and defend Lyondell and Millennium,
individually, against certain uninsured claims and liabilities which Equistar
may incur relating to the operation of the Contributed Business prior to
December 1, 1997 up to $7 million each within the first seven years of the
partnership, subject to certain terms of the Asset Contribution Agreements.
14
<PAGE> 16
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Partnership's policy is to be in compliance with all applicable
environmental laws. The Partnership is subject to extensive environmental laws
and regulations concerning emissions to the air, discharges to surface and
subsurface waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. Some of these laws and regulations
are subject to varying and conflicting interpretations. In addition, the
Partnership cannot accurately predict future developments, such as increasingly
strict requirements of environmental laws, inspection and enforcement policies
and compliance costs therefrom which might affect the handling, manufacture,
use, emission or disposal of products, other materials or hazardous and
non-hazardous waste.
In the opinion of management, any liability arising from the matters discussed
in this Note is not expected to have a material adverse effect on the financial
statements or liquidity of the Partnership. However, the adverse resolution in
any reporting period of one or more of these matters discussed in this Note
could have a material impact on the Partnership's results of operations for that
period without giving effect to contribution or indemnification obligations of
co-defendants or others, or to the effect of any insurance coverage that may be
available to offset the effects of any such award.
17. SEGMENT INFORMATION
The petrochemicals segment consists of olefins, including ethylene, propylene,
butadiene, butylenes and specialty products; aromatics, including benzene and
toluene; and MTBE. The polymers segment consists of polyolefins including
polypropylene, high-density polyethylene, low-density polyethylene and linear
low-density polyethylene.
Summarized below is the segment data for the Partnership. Intersegment sales
between the petrochemicals and polymers segments were made at prices based on
current market values.
<TABLE>
<CAPTION>
PETROCHEMICALS POLYMERS
MILLIONS OF DOLLARS SEGMENT SEGMENT UNALLOCATED ELIMINATIONS CONSOLIDATED
- ------------------- -------------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales and other
operating revenues:
Customers $ 179 $ 186 $ 365
Intersegment 105 -- $ (105) --
------- ------- ------- -------
284 186 (105) 365
Cost of sales 236 156 (105) 287
Selling, general and
administrative
expenses 1 8 $ 12 -- 21
Unusual charges -- -- 42 -- 42
------- ------- ------- ------- -------
Operating income $ 47 $ 22 $ (54) -- $ 15
======= ======= ======= ======= =======
Depreciation and
amortization expense $ 7 $ 7 $ 5 -- $ 19
======= ======= ======= ======= =======
Capital expenditures $ 7 $ 4 $ 1 -- $ 12
======= ======= ======= ======= =======
Identifiable assets $ 1,679 $ 1,510 $ 1,428 $ -- $ 4,617
======= ======= ======= ======= =======
</TABLE>
15
<PAGE> 17
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
18. SUBSEQUENT EVENT
On March 20, 1998, Lyondell and Millennium announced an agreement to expand
Equistar with the addition of the ethylene, propylene, ethylene oxide and
derivatives businesses of Occidental Chemical Corporation ("Occidental"), a
subsidiary of Occidental Petroleum Corporation. The transaction, which is
subject to regulatory approval, is expected to close by mid-year 1998. After the
close of the transaction, Lyondell will have 41 percent ownership interest of
the Partnership and Millennium and Occidental will each have 29.5 percent
ownership interests.
16
<PAGE> 1
EXHIBIT 99.4
EQUISTAR CHEMICALS, LP
BALANCE SHEET
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
3/31/98 12/31/97 CHANGE
----------- ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents $ 6,336 $ 41,425 $ (35,089)
Accounts receivable-trade 541,391 445,175 96,216
Accounts receivable-related parties 54,215 35,954 18,261
Receivable from owners 8,150 149,365 (141,215)
Inventories 527,413 512,271 15,142
Prepaid expenses and other current assets 20,829 24,213 (3,384)
----------- ----------- -----------
Total current assets 1,158,334 1,208,403 (50,069)
Property, plant and equipment 3,706,407 3,677,909 28,498
Less accumulated depreciation and amortization (1,601,648) (1,559,900) (41,748)
----------- ----------- -----------
2,104,759 2,118,009 (13,250)
Goodwill, net 1,130,950 1,138,914 (7,964)
Deferred charges and other assets 157,890 151,252 6,638
----------- ----------- -----------
Total assets $ 4,551,933 $ 4,616,578 $ (64,645)
Accounts payable-trade $ 242,713 $ 169,953 $ 72,760
Accounts payable-related parties 11,324 17,370 (6,046)
Payable to owners 63,360 (63,360)
Current maturities of long-term debt 32,245 36,490 (4,245)
Other current liabilities 82,920 64,843 18,077
----------- ----------- -----------
Total current liabilities 369,202 352,016 17,186
Long-term debt 1,712,515 1,512,496 200,019
Other liabilities and deferred credits 42,081 33,567 8,514
Owners' capital
Contributed capital-Lyondell 1,107,195 1,107,195 --
Contributed capital-Millennium 2,056,674 2,049,518 7,156
Note receivable from Lyondell (345,000) (345,000) --
Distributions (518,491) (100,000) (418,491)
Retained earnings 127,757 6,786 120,971
----------- ----------- -----------
Total owners' capital 2,428,135 2,718,499 (290,364)
----------- ----------- -----------
Total liabilities and owners' capital $ 4,551,933 $ 4,616,578 $ (64,645)
</TABLE>
<PAGE> 2
EQUISTAR CHEMICALS, LP
INCOME STATEMENT
(AMOUNTS IN THOUSANDS)
QUARTER ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
Sales and other operating revenues $ 1,020,919
Cost of sales 798,296
-----------
Gross profit 222,623
Selling expenses 19,704
General and administrative expenses 56,710
-----------
Operating income 146,209
Interest expense (31,505)
Interest income 6,267
-----------
Net income $ 120,971
===========
</TABLE>
<PAGE> 3
EQUISTAR CHEMICALS, LP
STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 120,971
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 57,704
(Increase) decrease in accounts receivable (114,477)
Decrease in receivables from owners 141,215
(Increase) decrease in inventories (15,142)
Increase (decrease) in accounts payable 66,714
Decrease in payables to owners (63,360)
Increase in other current liabilities 18,077
Net change in other working capital accounts 3,384
Other (6,453)
---------
Net cash provided by operating activities 208,633
Cash flows from investing activities:
Additions to property, plant and equipment (20,999)
---------
Net cash used in investing activities (20,999)
Cash flows from financing activities:
Borrowings of long-term debt 200,013
Repayments of long-term debt (4,245)
Distributions to owners (418,491)
---------
Net cash used in financing activities: (222,723)
---------
Decrease in cash and cash equivalents (35,089)
Cash and cash equivalents at beginning of period 41,425
---------
Cash and cash equivalents at end of period $ 6,336
=========
SUPPLEMENTAL CASH FLOW INFORMATION:
Noncash investing and financing activities:
Increase in net property, plant & equipment through contribution
of assets from owner $ 7,156
=========
</TABLE>
<PAGE> 4
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PREPARATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting only of normal,
recurring adjustments considered necessary for a fair presentation, have been
included.
In the first quarter of 1998, Equistar Chemicals, LP (the "Partnership" or
"Equistar") adopted Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements. SFAS
No. 131 requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders and
establishes standards for related disclosures about products and services,
geographic areas, and major customers.
2. COMPANY OPERATIONS
Pursuant to a partnership agreement (the "Partnership Agreement") Lyondell
Petrochemical Company ("Lyondell") and Millennium Chemicals, Inc. ("Millennium")
formed Equistar Chemicals, LP, a Delaware limited partnership, which commenced
operations on December 1, 1997. The Partnership is owned 57 percent by Lyondell
and 43 percent by Millennium. Lyondell owns its interest in the Partnership
through two wholly-owned subsidiaries, Lyondell Petrochemical G.P. Inc.
("Lyondell GP") and Lyondell Petrochemical L.P. Inc. ("Lyondell LP"). Millennium
also owns its interest in the Partnership through two wholly-owned subsidiaries,
Millennium Petrochemicals GP LLC ("Millennium GP") and Millennium Petrochemicals
LP LLC ("Millennium LP").
The Partnership owns and operates the petrochemicals and polymers businesses
contributed by Lyondell and Millennium (the "Contributed Businesses") which
consist of 15 manufacturing facilities on the US Gulf Coast and in the US
Midwest. The petrochemicals segment produces products including ethylene,
propylene, ethyl alcohol, butadiene, aromatics and methyl tertiary butyl ether
("MTBE"). These products are used primarily in the production of other chemicals
and products, including polymers. The petrochemicals segment also includes sales
of methanol produced by Lyondell Methanol LP ("Lyondell Methanol"), which is
owned 75 percent by Lyondell. The Partnership operates the Lyondell Methanol
facility. The polymers segment produces products that include polyethylene
(high-density, low-density and linear low-density) and polypropylene, which are
used in the production of a wide variety of consumer and industrial products.
The Partnership Agreement provides that Equistar is governed by a Partnership
Governance Committee consisting of six representatives, three appointed by each
partner. Most of the significant decisions of the Partnership Governance
Committee require unanimous consent, including approval of the Partnership's
Strategic Plan and annual updates thereof.
Pursuant to the Partnership Agreement, net income is allocated among the
partners on a pro rata basis based on their percentage ownership of the
Partnership. Distributions are made to the partners based on their percentage
ownership of the Partnership. Additional contributions required by the
Partnership will also be based on the partners' percentage ownership of the
Partnership.
1
<PAGE> 5
3. INVENTORIES
The categories of inventory and their book values at March 31, 1998 and December
31, 1997 were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1998 1997
------------------- --------- -------
<S> <C> <C>
Petrochemicals $ 156 $ 183
Polymers 304 264
Materials and supplies 67 66
========= =======
Total inventories $ 527 $ 513
========= =======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Partnership has various purchase commitments for materials, supplies and
services incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market.
The Partnership is also subject to various lawsuits and proceedings. Subject to
the uncertainty inherent in all litigation, management believes the resolution
of these proceedings will not have a material adverse effect upon the financial
statements or liquidity of the Partnership.
Equistar has agreed to indemnify and defend Lyondell and Millennium,
individually, against certain uninsured claims and liabilities which Equistar
may incur relating to the operation of the Contributed Business prior to
December 1, 1997 up to $7 million each within the first seven years of the
partnership, subject to certain terms of the Asset Contribution Agreements.
The Partnership's policy is to be in compliance with all applicable
environmental laws. The Partnership is subject to extensive environmental laws
and regulations concerning emissions to the air, discharges to surface and
subsurface waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. Some of these laws and regulations
are subject to varying and conflicting interpretations. In addition, the
Partnership cannot accurately predict future developments, such as increasingly
strict requirements of environmental laws, inspection and enforcement policies
and compliance costs therefrom which might affect the handling, manufacture,
use, emission or disposal of products, other materials or hazardous and
non-hazardous waste.
In the opinion of management, any liability arising from the matters discussed
in this Note is not expected to have a material adverse effect on the financial
statements or liquidity of the Partnership. However, the adverse resolution in
any reporting period of one or more of these matters discussed in this Note
could have a material impact on the Partnership's results of operations for that
period without giving effect to contribution or indemnification obligations of
co-defendants or others, or to the effect of any insurance coverage that may be
available to offset the effects of any such award.
5. SUBSEQUENT EVENT
On May 15, 1998, the Partnership was expanded with the contribution of certain
assets from Occidental Petroleum Corporation ("Occidental"). These assets
include the ethylene, propylene and ethylene oxide ("EO") and derivatives
businesses and certain pipeline assets held by Oxy Petrochemicals Inc. ("Oxy
Petrochemicals"), a 50% interest in a joint venture between PDG Chemical Inc. ("
PDG Chemical") and du Pont de Nemours and Company, and a lease to the
Partnership of the Lake Charles, Louisiana olefins plant and related pipelines
held by Occidental Chemical Corporation ("Occidental Chemical") (collectively,
the "Occidental Contributed Business"). Occidental Chemical, Oxy Petrochemicals
and PDG Chemical are all wholly owned, indirect subsidiaries of Occidental. The
2
<PAGE> 6
Occidental Contributed Business included olefins plants at Corpus Christi and
Chocolate Bayou, Texas; EO/ethylene glycol ("EG") and EG derivatives businesses
located at Bayport, Texas, Occidental's 50% ownership of PD Glycol, which
operates EO/EG plants at Beaumont, Texas, 950 miles of owned and leased
ethylene/propylene pipelines and the lease to the Partnership of the Lake
Charles, Louisiana olefins plant and related pipelines.
In exchange for the Occidental Contributed Business, two subsidiaries of
Occidental were admitted as limited partners and a third subsidiary was admitted
as a general partner in the Partnership for an aggregate partnership interest of
29.5%. In addition, the Partnership assumed approximately $205 million of
Occidental indebtedness and the Partnership issued a promissory note to an
Occidental subsidiary in the amount of $419.7 million. In connection with the
contribution of the Occidental Contributed Business and the reduction of
Millennium's and Lyondell's ownership interests in the Partnership, the
Partnership also issued a promissory note to Millennium LP in the amount of $75
million. The consideration paid for the Occidental Contributed Business was
determined based upon arms-length negotiations between Lyondell, Millennium and
Occidental. In connection with the transaction, the Partnership and Occidental
also entered into a long-term agreement for the Partnership to supply the
ethylene requirements for Occidental Chemical's U.S. manufacturing plants
Upon completion of this transaction, the Partnership will be owned 41% by
Lyondell, 29.5% by Millennium and 29.5% by Occidental, through its wholly-owned
subsidiaries PDG Chemical Inc. ("Occidental GP"), Occidental Petrochem Partner
1, Inc. ("Occidental LP1") and Occidental Petrochem Partner 2, Inc. ("Occidental
LP2").
3
