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, 2005
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.
The Registrant meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and, therefore, is filing this form with a reduced disclosure format.
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 |
2005 |
2004 |
||||||
| Sales and other operating revenues: |
||||||||
| Trade |
$ | 2,242 | $ | 1,490 | ||||
| Related parties |
619 | 472 | ||||||
| 2,861 | 1,962 | |||||||
| Operating costs and expenses: |
||||||||
| Cost of sales |
2,417 | 1,857 | ||||||
| Selling, general and administrative expenses |
47 | 41 | ||||||
| Research and development expenses |
8 | 7 | ||||||
| Gain on asset dispositions |
— | (4 | ) | |||||
| 2,472 | 1,901 | |||||||
| Operating income |
389 | 61 | ||||||
| Interest expense |
(56 | ) | (57 | ) | ||||
| Interest income |
2 | 2 | ||||||
| Other expense, net |
(3 | ) | (1 | ) | ||||
| Net income |
$ | 332 | $ | 5 | ||||
See Notes to the Consolidated Financial Statements.
1
EQUISTAR CHEMICALS, LP
CONSOLIDATED BALANCE SHEETS
| Millions of dollars |
March 31, 2005 |
December 31, 2004 |
||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 140 | $ | 39 | ||||
| Accounts receivable: |
||||||||
| Trade, net |
868 | 615 | ||||||
| Related parties |
239 | 211 | ||||||
| Inventories |
653 | 582 | ||||||
| Prepaid expenses and other current assets |
38 | 43 | ||||||
| Total current assets |
1,938 | 1,490 | ||||||
| Property, plant and equipment, net |
3,137 | 3,167 | ||||||
| Investments |
59 | 60 | ||||||
| Other assets, net |
351 | 357 | ||||||
| Total assets |
$ | 5,485 | $ | 5,074 | ||||
| LIABILITIES AND PARTNERS’ CAPITAL |
||||||||
| Current liabilities: |
||||||||
| Accounts payable: |
||||||||
| Trade |
$ | 601 | $ | 447 | ||||
| Related parties |
88 | 85 | ||||||
| Current maturities of long-term debt |
150 | 1 | ||||||
| Accrued liabilities |
204 | 273 | ||||||
| Total current liabilities |
1,043 | 806 | ||||||
| Long-term debt |
2,162 | 2,312 | ||||||
| Other liabilities and deferred revenues |
390 | 395 | ||||||
| Commitments and contingencies |
||||||||
| Partners’ capital: |
||||||||
| Partners’ accounts |
1,912 | 1,580 | ||||||
| Accumulated other comprehensive loss |
(22 | ) | (19 | ) | ||||
| Total partners’ capital |
1,890 | 1,561 | ||||||
| Total liabilities and partners’ capital |
$ | 5,485 | $ | 5,074 | ||||
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 |
2005 |
2004 |
||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 332 | $ | 5 | ||||
| Adjustments to reconcile net income to cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
79 | 76 | ||||||
| Deferred maintenance turnaround expenditures |
(2 | ) | (17 | ) | ||||
| Gain on asset dispositions |
— | (4 | ) | |||||
| Changes in assets and liabilities that provided (used) cash: |
||||||||
| Accounts receivable |
(268 | ) | — | |||||
| Inventories |
(71 | ) | (65 | ) | ||||
| Accounts payable |
149 | (12 | ) | |||||
| Accrued interest |
(17 | ) | (17 | ) | ||||
| Other assets and liabilities, net |
(68 | ) | (39 | ) | ||||
| Cash provided by (used in) operating activities |
134 | (73 | ) | |||||
| Cash flows from investing activities: |
||||||||
| Expenditures for property, plant and equipment |
(35 | ) | (19 | ) | ||||
| Proceeds from sales of assets |
3 | 4 | ||||||
| Cash used in investing activities |
(32 | ) | (15 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Repayment of long-term debt |
(1 | ) | — | |||||
| Cash used in financing activities |
(1 | ) | — | |||||
| Increase (decrease) in cash and cash equivalents |
101 | (88 | ) | |||||
| Cash and cash equivalents at beginning of period |
39 | 199 | ||||||
| Cash and cash equivalents at end of period |
$ | 140 | $ | 111 | ||||
See Notes to the Consolidated Financial Statements.
3
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
| 1. Basis of Preparation | 5 | |
| 2. Company Ownership | 5 | |
| 3. Anticipated Accounting Changes | 5 | |
| 4. Accounts Receivable | 5 | |
| 5. Inventories | 6 | |
| 6. Property, Plant and Equipment, Net | 6 | |
| 7. Deferred Revenues | 6 | |
| 8. Long-Term Debt | 7 | |
| 9. Pension and Other Postretirement Benefits | 7 | |
| 10. Commitments and Contingencies | 8 | |
| 11. Comprehensive Income | 9 | |
| 12. Segment and Related Information | 9 | |
4
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, 2004 included in the Equistar 2004 Annual Report on Form 10-K.
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”). Equistar became a wholly owned subsidiary of Lyondell as a result of Lyondell’s acquisition of Millennium on November 30, 2004. The consolidated financial statements of Equistar reflect its historical cost basis, and, accordingly, do not reflect any purchase accounting adjustments related to the acquisition by Lyondell of Millennium and Millennium’s interest in Equistar.
3. Anticipated Accounting Changes
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 153, Exchanges of Nonmonetary Assets (“SFAS No. 153”), which amends Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary Transactions, to eliminate the exception for nonmonetary exchanges of similar productive assets, which is replaced with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange is defined to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Equistar will be required to adopt SFAS No. 153 no later than the third quarter 2005 with prospective application. Equistar is currently evaluating the impact, if any, that implementation of SFAS No. 153 will have on its financial statements.
In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47. “Accounting for Conditional Asset Retirement Obligations,” which clarifies the term conditional asset retirement obligation as used in SFAS No. 143, “Accounting for Conditional Asset Retirement Obligations,” as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of Equistar. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. Equistar is currently evaluating the impact of adopting this interpretation.
Equistar has a four-year, $450 million accounts receivable sales facility. Pursuant to this facility, Equistar sells, through a wholly owned bankruptcy remote subsidiary, on an ongoing basis and without recourse, an interest in a pool of accounts receivable to financial institutions participating in the facility. Equistar is responsible for servicing the receivables. At March 31, 2005, there were no outstanding accounts receivable that had been sold under Equistar’s accounts receivable sales facility. The amount of outstanding accounts receivable that had been sold under the facility as of December 31, 2004 was $200 million.
In consideration of discounts offered to certain customers for early payment for product, some receivable amounts were collected in March 2005 and 2004 that otherwise would have been expected to be collected in April of the respective years. This included collections of $71 million and $39 million in March 2005 and 2004, respectively, from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”).
5
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Inventories consisted of the following:
| Millions of dollars |
March 31, 2005 |
December 31, 2004 | ||||
| Finished goods |
$ | 404 | $ | 355 | ||
| Work-in-process |
12 | 13 | ||||
| Raw materials |
135 | 117 | ||||
| Materials and supplies |
102 | 97 | ||||
| Total inventories |
$ | 653 | $ | 582 | ||
6. 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, 2005 |
December 31, 2004 |
||||||
| Land |
$ | 77 | $ | 77 | ||||
| Manufacturing facilities and equipment |
6,088 | 6,079 | ||||||
| Construction in progress |
88 | 64 | ||||||
| Total property, plant and equipment |
6,253 | 6,220 | ||||||
| Less accumulated depreciation |
(3,116 | ) | (3,053 | ) | ||||
| Property, plant and equipment, net |
$ | 3,137 | $ | 3,167 | ||||
Depreciation and amortization is summarized as follows:
| For the three months ended March 31, | ||||||
| Millions of dollars |
2005 |
2004 | ||||
| Property, plant and equipment |
$ | 63 | $ | 60 | ||
| Turnaround costs |
9 | 9 | ||||
| Software costs |
4 | 4 | ||||
| Other |
3 | 3 | ||||
| Total depreciation and amortization |
$ | 79 | $ | 76 | ||
Deferred revenues at March 31, 2005 of $150 million represent advances from customers for partial prepayments for products to be delivered under long-term product supply contracts. Trade sales and other operating revenues include $4 million in each of the three-month periods ended March 31, 2005 and 2004, respectively, of such previously deferred revenues.
6
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consisted of the following:
| Millions of dollars |
March 31, 2005 |
December 31, 2004 | ||||
| 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 |
3 | 4 | ||||
| Unamortized premium, net |
9 | 9 | ||||
| Total long-term debt |
2,312 | 2,313 | ||||
| Less current maturities |
150 | 1 | ||||
| Total long-term debt, net |
$ | 2,162 | $ | 2,312 | ||
Amortization of debt issuance costs of $1 million for each of the three-month periods ended March 31, 2005 and 2004 is included in interest expense in the Consolidated Statements of Income.
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, 2005.
9. 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 |
2005 |
2004 |
2005 |
2004 | ||||||||||
| Components of net periodic benefit cost: |
||||||||||||||
| Service cost |
$ | 5 | $ | 5 | $ | 1 | $ | 1 | ||||||
| Interest cost |
3 | 3 | ||||||||||||