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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2002
 
OR
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                 to            .
 
Commission file number 333-76473
 
 
EQUISTAR CHEMICALS, LP
(Exact name of registrant as specified in its charter)
 
 
Delaware
  
76-0550481
(State or other jurisdiction of
  
(I.R.S. Employer
incorporation or organization)
  
Identification No.)
1221 McKinney Street,
  
77010
Suite 700, Houston, Texas
  
(Zip Code)
(Address of principal executive offices)
    
 
Registrant’s telephone number, including area code: (713) 652-7200
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     x     No    ¨             
 
 
 
 

 
PART I. FINANCIAL INFORMATION
 
EQUISTAR CHEMICALS, LP
 
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
CONSOLIDATED STATEMENTS OF INCOME
 
    
For the three months ended
     
For the nine months ended
  
    
September 30,
     
September 30,
  
Millions of dollars
   
2002
     
2001
     
2002
     
2001
  
Sales and other operating revenues:
                                    
Unrelated parties
   
$
1,222
 
   
$
1,074
 
   
$
3,228
 
   
$
3,626
 
Related parties
   
 
286
 
   
 
277
 
   
 
878
 
   
 
1,098
 
    
  
  
  
    
 
1,508
 
   
 
1,351
 
   
 
4,106
 
   
 
4,724
 
Operating costs and expenses:
                                    
Cost of sales
   
 
1,386
 
   
 
1,328
 
   
 
3,938
 
   
 
4,573
 
Selling, general and administrative expenses
   
 
41
 
   
 
40
 
   
 
122
 
   
 
131
 
Research and development expense
   
 
10
 
   
 
9
 
   
 
28
 
   
 
29
 
Amortization of goodwill
   
 
—  
 
   
 
8
 
   
 
—  
 
   
 
25
 
Facility closing costs
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
22
 
    
  
  
  
    
 
1,437
 
   
 
1,385
 
   
 
4,088
 
   
 
4,780
 
    
  
  
  
Operating income (loss)
   
 
71
 
   
 
(34
)
   
 
18
 
   
 
(56
)
Interest expense
   
 
(51
)
   
 
(48
)
   
 
(154
)
   
 
(139
)
Interest income
   
 
—  
 
   
 
2
 
   
 
1
 
   
 
2
 
Other income, net
   
 
2
 
   
 
1
 
   
 
3
 
   
 
7
 
    
  
  
  
Income (loss) before extraordinary item and cumulative effect of accounting change
   
 
22
 
   
 
(79
)
   
 
(132
)
   
 
(186
)
Extraordinary loss on extinguishment of debt
   
 
—  
 
   
 
(3
)
   
 
—  
 
   
 
(3
)
    
  
  
  
Income (loss) before cumulative effect of accounting change
   
 
22
 
   
 
(82
)
   
 
(132
)
   
 
(189
)
Cumulative effect of accounting change
   
 
—  
 
   
 
—  
 
   
 
(1,053
)
   
 
—  
 
    
  
  
  
Net income (loss)
   
$
22
 
   
$
(82
)
   
$
(1,185
)
   
$
(189
)
    
  
  
  
 
See Notes to the Consolidated Financial Statements.

1

 
EQUISTAR CHEMICALS, LP
 
CONSOLIDATED BALANCE SHEETS
 
      
September 30,
     
December 31,
  
Millions of dollars
     
2002
     
2001
  
ASSETS
                    
Current assets:
                    
Cash and cash equivalents
     
$
19
 
   
$
202
 
Accounts receivable:
                    
Trade, net
     
 
619
 
   
 
440
 
Related parties
     
 
89
 
   
 
100
 
Inventories
     
 
507
 
   
 
448
 
Prepaid expenses and other current assets
     
 
37
 
   
 
36
 
      
  
Total current assets
     
 
1,271
 
   
 
1,226
 
Property, plant and equipment, net
     
 
3,569
 
   
 
3,705
 
Investment in PD Glycol
     
 
45
 
   
 
47
 
Goodwill, net
     
 
—  
 
   
 
1,053
 
Other assets, net
     
 
288
 
   
 
277
 
      
  
Total assets
     
$
5,173
 
   
$
6,308
 
      
  
LIABILITIES AND PARTNERS’ CAPITAL
                    
Current liabilities:
                    
Accounts payable:
                    
Trade
     
$
409
 
   
$
331
 
Related parties
     
 
29
 
   
 
29
 
Current maturities of long-term debt
     
 
32
 
   
 
104
 
Other accrued liabilities
     
 
189
 
   
 
197
 
      
  
Total current liabilities
     
 
659
 
   
 
661
 
Long-term debt
     
 
2,288
 
   
 
2,233
 
Other liabilities
     
 
174
 
   
 
177
 
Commitments and contingencies
                    
Partners’ capital:
                    
Partners’ accounts
     
 
2,072
 
   
 
3,257
 
Accumulated other comprehensive loss
     
 
(20
)
   
 
(20
)
      
  
Total partners’ capital
     
 
2,052
 
   
 
3,237
 
      
  
Total liabilities and partners’ capital
     
$
5,173
 
   
$
6,308
 
      
  
 
See Notes to the Consolidated Financial Statements.

2

 
EQUISTAR CHEMICALS, LP
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
    
For the nine months ended
  
    
September 30,
  
Millions of dollars
   
2002
     
2001
  
Cash flows from operating activities:
                  
Net loss
   
$
(1,185
)
   
$
(189
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
                  
Cumulative effect of accounting change
   
 
1,053
 
   
 
—  
 
Depreciation and amortization
   
 
226
 
   
 
239
 
Extraordinary loss on extinguishment of debt
   
 
—  
 
   
 
3
 
Net gain on disposition of assets
   
 
—  
 
   
 
(3
)
                   
Changes in assets and liabilities that provided (used) cash:
                  
Accounts receivable
   
 
(133
)
   
 
104
 
Inventories
   
 
(59
)
   
 
4
 
Accounts payable
   
 
78
 
   
 
(36
)
Other assets and liabilities, net
   
 
(98
)
   
 
(3
)
    
  
Net cash (used in) provided by operating activities
   
 
(118
)
   
 
119
 
    
  
Cash flows from investing activities:
                  
Expenditures for property, plant and equipment
   
 
(43
)
   
 
(85
)
Other
   
 
(6
)
   
 
(3
)
    
  
Net cash used in investing activities
   
 
(49
)
   
 
(88
)
    
  
Cash flows from financing activities:
                  
Issuance of long-term debt
   
 
—  
 
   
 
1,000
 
Repayment of long-term debt
   
 
(103
)
   
 
(90
)
Net borrowing (repayment) under lines of credit
   
 
89
 
   
 
(820
)
Other
   
 
(2
)
   
 
(26
)
    
  
Net cash (used in) provided by financing activities
   
 
(16
)
   
 
64
 
    
  
(Decrease) increase in cash and cash equivalents
   
 
(183
)
   
 
95
 
Cash and cash equivalents at beginning of period
   
 
202
 
   
 
18
 
    
  
Cash and cash equivalents at end of period
   
$
19
 
   
$
113
 
    
  
 
See Notes to the Consolidated Financial Statements.

3

 
EQUISTAR CHEMICALS, LP
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
1.    Basis of Preparation
 
The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of Equistar Chemicals, LP (“Equistar” or the “Partnership”) in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments, considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2001 included in the Equistar 2001 Annual Report on Form 10-K.
 
2.    Company Ownership
 
Equistar is a Delaware limited partnership, which commenced operations on December 1, 1997. Prior to August 2002, Equistar was owned 41% by Lyondell Chemical Company (“Lyondell”), 29.5% by Millennium Chemicals Inc. (“Millennium”) and 29.5% by Occidental Petroleum Corporation (“Occidental”). On August 22, 2002, Lyondell completed the purchase of Occidental’s interest in Equistar and, as a result, Lyondell’s ownership interest in Equistar increased to 70.5%.
 
3.    Facility Closing Costs
 
Equistar shut down its Port Arthur, Texas polyethylene facility in February 2001. The asset values of the Port Arthur production units were previously adjusted as part of a $96 million restructuring charge recognized in 1999. During the first quarter 2001, Equistar recorded an additional $22 million charge, which included environmental remediation liabilities of $7 million, severance benefits of $5 million, pension benefits of $2 million and other exit costs of $3 million. The remaining $5 million of the charge related primarily to the write down of certain assets. The severance and pension benefits covered approximately 125 people employed at the Port Arthur facility. Payments of $5 million for severance, $3 million for exit costs and $3 million for environmental remediation were made through September 30, 2002. The pension benefits of $2 million will be paid from the assets of the pension plans. As of September 30, 2002, the remaining liability included $4 million for environmental remediation costs. See Note 9.
 
4.    Accounting Changes
 
Effective January 1, 2002, Equistar implemented Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Implementation of SFAS No. 141 and SFAS No. 144 did not have a material effect on the consolidated financial statements of Equistar.
 
Upon implementation of SFAS No. 142, Equistar reviewed goodwill for impairment and concluded that the entire balance of goodwill was impaired, resulting in a $1.1 billion charge that was reported as the cumulative effect of an accounting change as of January 1, 2002. The conclusion was based on a comparison to Equistar’s indicated fair value, using multiples of EBITDA (earnin