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 March 31, 2004
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 incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 1221 McKinney Street, Suite 700, Houston, Texas |
77010 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (713) 652-7200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There is no established public trading market for the registrant’s equity securities.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF INCOME
| For the three months ended March 31, |
||||||||
| Millions of dollars |
2004 |
2003 |
||||||
| Sales and other operating revenues: |
||||||||
| Trade |
$ | 1,490 | $ | 1,227 | ||||
| Related parties |
472 | 414 | ||||||
| 1,962 | 1,641 | |||||||
| Cost of sales |
1,857 | 1,676 | ||||||
| Selling, general and administrative expenses |
41 | 40 | ||||||
| Research and development expenses |
7 | 9 | ||||||
| (Gain) loss on asset dispositions |
(4 | ) | 12 | |||||
| 1,901 | 1,737 | |||||||
| Operating income (loss) |
61 | (96 | ) | |||||
| Interest expense |
(57 | ) | (50 | ) | ||||
| Interest income |
2 | 1 | ||||||
| Other expense, net |
(1 | ) | (1 | ) | ||||
| Net income (loss) |
$ | 5 | $ | (146 | ) | |||
See Notes to the Consolidated Financial Statements.
1
EQUISTAR CHEMICALS, LP
CONSOLIDATED BALANCE SHEETS
| Millions of dollars |
March 31, 2004 |
December 31, 2003 |
||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 111 | $ | 199 | ||||
| Accounts receivable: |
||||||||
| Trade, net |
472 | 471 | ||||||
| Related parties |
136 | 137 | ||||||
| Inventories |
473 | 408 | ||||||
| Prepaid expenses and other current assets |
33 | 46 | ||||||
| Total current assets |
1,225 | 1,261 | ||||||
| Property, plant and equipment, net |
3,293 | 3,334 | ||||||
| Investments |
61 | 60 | ||||||
| Other assets, net |
387 | 373 | ||||||
| Total assets |
$ | 4,966 | $ | 5,028 | ||||
| LIABILITIES AND PARTNERS’ CAPITAL |
||||||||
| Current liabilities: |
||||||||
| Accounts payable: |
||||||||
| Trade |
$ | 468 | $ | 462 | ||||
| Related parties |
36 | 51 | ||||||
| Current maturities of long-term debt |
1 | — | ||||||
| Accrued liabilities |
183 | 241 | ||||||
| Total current liabilities |
688 | 754 | ||||||
| Long-term debt |
2,313 | 2,314 | ||||||
| Other liabilities and deferred revenues |
361 | 359 | ||||||
| Commitments and contingencies |
||||||||
| Partners’ capital: |
||||||||
| Partners’ accounts |
1,624 | 1,619 | ||||||
| Accumulated other comprehensive loss |
(20 | ) | (18 | ) | ||||
| Total partners’ capital |
1,604 | 1,601 | ||||||
| Total liabilities and partners’ capital |
$ | 4,966 | $ | 5,028 | ||||
See Notes to the Consolidated Financial Statements.
2
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the three months ended March 31, |
||||||||
| Millions of dollars |
2004 |
2003 |
||||||
| Cash flows from operating activities: |
||||||||
| Net income (loss) |
$ | 5 | $ | (146 | ) | |||
| Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities: |
||||||||
| Depreciation and amortization |
76 | 78 | ||||||
| Deferred revenues |
— | 159 | ||||||
| Deferred maintenance turnaround expenditures |
(17 | ) | (27 | ) | ||||
| (Gain) loss on asset dispositions |
(4 | ) | 12 | |||||
| Changes in assets and liabilities that (used) provided cash: |
||||||||
| Accounts receivable |
— | 62 | ||||||
| Inventories |
(65 | ) | (49 | ) | ||||
| Accounts payable |
(12 | ) | 60 | |||||
| Accrued interest |
(17 | ) | (45 | ) | ||||
| Other assets and liabilities, net |
(39 | ) | (37 | ) | ||||
| Cash (used in) provided by operating activities |
(73 | ) | 67 | |||||
| Cash flows from investing activities: |
||||||||
| Expenditures for property, plant and equipment |
(19 | ) | (13 | ) | ||||
| Proceeds from sales of assets |
4 | 35 | ||||||
| Cash (used in) provided by investing activities |
(15 | ) | 22 | |||||
| Cash flows from financing activities: |
||||||||
| Repayment of long-term debt |
— | (1 | ) | |||||
| Other |
— | (3 | ) | |||||
| Cash used in financing activities |
— | (4 | ) | |||||
| (Decrease) increase in cash and cash equivalents |
(88 | ) | 85 | |||||
| Cash and cash equivalents at beginning of period |
199 | 27 | ||||||
| Cash and cash equivalents at end of period |
$ | 111 | $ | 112 | ||||
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”) 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, 2003 included in the Equistar 2003 Annual Report on Form 10-K.
2. Company Ownership
Equistar, a Delaware limited partnership which commenced operations on December 1, 1997, is owned 70.5% by Lyondell Chemical Company (“Lyondell”) and 29.5% by Millennium Chemicals Inc. (“Millennium”).
In late March 2004, Lyondell and Millennium executed a definitive agreement for Lyondell to acquire Millennium in a stock-for-stock business combination of the two companies. Upon completion of the transaction, Lyondell would, through subsidiaries of Lyondell and Millenium, own 100% of Equistar. The proposed transaction is subject to approval by both Lyondell and Millennium shareholders, the amendment of Lyondell’s and Millennium’s respective bank credit agreements and Lyondell’s accounts receivable sales facility and other customary conditions. The proposed transaction is expected to close during the third quarter of 2004; however, there can be no assurance that the proposed transaction will be completed.
3. Accounts Receivable
At March 31, 2004, the balance of Equistar’s accounts receivable sold under its $450 million, four-year accounts receivable sales facility was $217 million. The balance sold at December 31, 2003 was $102 million.
4. Inventories
Inventories consisted of the following:
| Millions of dollars |
March 31, 2004 |
December 31, 2003 | ||||
| Finished goods |
$ | 272 | $ | 223 | ||
| Work-in-process |
11 | 12 | ||||
| Raw materials |
102 | 83 | ||||
| Materials and supplies |
88 | 90 | ||||
| Total inventories |
$ | 473 | $ | 408 | ||
4
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
5. Property, Plant and Equipment, Net
The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows:
| Millions of dollars |
March 31, 2004 |
December 31, 2003 |
||||||
| Land |
$ | 77 | $ | 76 | ||||
| Manufacturing facilities and equipment |
6,036 | 6,015 | ||||||
| Construction in progress |
60 | 63 | ||||||
| Total property, plant and equipment |
6,173 | 6,154 | ||||||
| Less accumulated depreciation |
(2,880 | ) | (2,820 | ) | ||||
| Property, plant and equipment, net |
$ | 3,293 | $ | 3,334 | ||||
Depreciation and amortization is summarized as follows:
| For the three months ended March 31, | ||||||
| Millions of dollars |
2004 |
2003 | ||||
| Property, plant and equipment |
$ | 60 | $ | 63 | ||
| Turnaround costs |
9 | 7 | ||||
| Software costs |
4 | 4 | ||||
| Other |
3 | 4 | ||||
| Total depreciation and amortization |
$ | 76 | $ | 78 | ||
In addition, amortization of debt issuance costs of $1 million and $2 million for the three-month periods ended March 31, 2004 and 2003, respectively, is included in interest expense in the Consolidated Statements of Income.
6. Deferred Revenues
On March 31, 2003, Equistar received an advance of approximately $159 million, representing a partial prepayment for product to be delivered under a long-term product supply arrangement, primarily at cost-based prices. Equistar will recognize this deferred revenue over 15 years, as the associated product is delivered.
5
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
7. Long-Term Debt
Long-term debt consisted of the following:
| Millions of dollars |
March 31, 2004 |
December 31, 2003 | ||||
| Inventory-based revolving credit facility |
$ | — | $ | — | ||
| Other debt obligations: |
||||||
| Notes due 2006, 6.50% |
150 | 150 | ||||
| Senior Notes due 2008, 10.125% |
700 | 700 | ||||
| Notes due 2009, 8.75% |
600 | 600 | ||||
| Senior Notes due 2011, 10.625% |
700 | 700 | ||||
| Debentures due 2026, 7.55% |
150 | 150 | ||||
| Other |
4 | 4 | ||||
| Unamortized premium, net |
10 | 10 | ||||
| Total long-term debt |
2,314 | 2,314 | ||||
| Less current maturities |
1 | — | ||||
| Total long-term debt, net |
$ | 2,313 | $ | 2,314 | ||
Lyondell remains a guarantor of $300 million of Equistar debt, consisting of the 6.5% notes due 2006 and the 7.55% debentures due 2026. The unaudited consolidated financial statements of Lyondell are filed as an exhibit to Equistar’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004.
8. Pension and Other Postretirement Benefits
Net periodic pension and other postretirement benefit costs included the following components for the three months ended March 31:
| Pension Benefits |
Other Postretirement Benefits | |||||||||||||
| Millions of dollars |
2004 |
2003 |
2004 |
2003 | ||||||||||
| Components of net periodic benefit cost: |
||||||||||||||
| Service cost |
$ | 5 | $ | 4 | $ | 1 | $ | 1 | ||||||
| Interest cost |
3 | 3 | 2 | 2 | ||||||||||
| Recognized gain on plan assets |
(3 | ) | (2 | ) | — | — | ||||||||
| Actuarial and investment loss amortization |
1 | 2 | — | — | ||||||||||
| Net periodic benefit cost |
$ | 6 | $ | 7 | $ | 3 | $ | |||||||