Item 3. Legal Proceedings
Equistar is, from time to time, a defendant in lawsuits, some of which are not covered by insurance. Many of these suits make no specific claim for relief. Although final determination of legal liability and the resulting financial impact with respect to any such litigation cannot be ascertained with any degree of certainty, Equistar does not believe that any ultimate uninsured liability resulting from the legal proceedings in which it currently is involved (directly or indirectly) will individually, or in the aggregate, have a material adverse effect on its business or financial condition. However, the adverse resolution in any reporting period of one or more of these suits could have a material impact on Equistar’s results of operations for that period, which may be mitigated by contribution or indemnification obligations of co-defendants or others, or by any insurance coverage that may be available.
Although Equistar is involved in numerous and varied legal proceedings, a significant portion of its outstanding litigation arose in four contexts: (1) claims for personal injury or death allegedly arising out of exposure to the products produced by Equistar or located on Equistar’s premises; (2) claims for personal injury or death, and/or property damage allegedly arising out of the generation and disposal of chemical wastes at Superfund and other waste disposal sites; (3) claims for personal injury and/or property damage allegedly arising out of operations and air, noise and water pollution allegedly arising out of operations; and (4) employment related claims.
From time to time Equistar receives notices from federal, state or local governmental entities of alleged violations of environmental laws and regulations pertaining to, among other things, the disposal, emission and storage of chemical and petroleum substances, including hazardous wastes. Although Equistar has not been the subject of significant penalties to date, such alleged violations may become the subject of enforcement actions or other legal proceedings and may (individually or in the aggregate) involve monetary sanctions of $100,000 or more (exclusive of interest and costs).
In April 1997, the Illinois Attorney General’s Office filed a complaint in Grundy County, Illinois Circuit Court seeking monetary sanctions for releases into the environment at Millennium’s Morris, Illinois plant in alleged violation of state regulations. The Morris, Illinois plant was contributed to Equistar on December 1, 1997 in connection with the formation of Equistar. Equistar has reached a tentative settlement with the State of Illinois, which includes a civil penalty in the amount of $175,000, and is finalizing the settlement consent decree with the State of Illinois. Equistar does not believe that the ultimate resolution of this complaint will have a material adverse effect on the business or financial condition of Equistar.
In May 2003, the TCEQ notified Equistar that it is seeking a civil penalty of $167,000 in connection with alleged exceedances of permitted emissions at certain cooling towers at Equistar’s Channelview plant. Equistar does not believe that the ultimate resolution of this matter will have a material adverse effect on the business or financial condition of Equistar.
In August 2003, the EPA notified Equistar that it is seeking a civil penalty arising from a 1999 inspection relating to alleged violations of Clean Air Act regulations at Equistar’s Lake Charles plant. Equistar has reached a tentative settlement with the EPA, which includes a civil penalty in the amount of $195,000, and is finalizing the settlement consent decree with the EPA. Equistar does not believe that the ultimate resolution of this matter will have a material adverse effect on the business or financial condition of Equistar.
In connection with the formation of Equistar, Lyondell, Millennium Petrochemicals and Occidental each agreed to provide certain indemnifications or guarantees thereof to Equistar with respect to the petrochemicals and polymers businesses they each contributed to Equistar. In addition, Equistar agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are filed prior to December 1, 2004 as to Lyondell and Millennium Petrochemicals, and May 15, 2005 as to Occidental, to the extent the aggregate thereof does not exceed $7 million for each entity, subject to certain terms of the respective asset contribution agreements. As of December 31, 2003, Equistar had incurred approximately $7 million with respect to the indemnification baskets for the businesses contributed by each of Lyondell and Millennium Petrochemicals and approximately $6 million for the business contributed by Occidental. Pursuant to these indemnification arrangements, Equistar will assume all third party claims relating to the contributed businesses that are filed on or after December 1, 2004 as to Lyondell and Millennium Petrochemicals and May 15, 2005 as to Occidental. Lyondell, Millennium, Occidental and Equistar remain liable under these indemnification or guarantee arrangements
to the same extent as they were before Lyondell’s August 2002 acquisition of Occidental’s interest in Equistar. See “Item 13. Certain Relationships and Related Transactions-Asset Contributions by Lyondell and Affiliates of Millennium and Occidental” for more information regarding these indemnification obligations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Equistar does not have a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. There is no established public trading market for the partnership interests of Equistar. See “Item 12. Security Ownership of Certain Beneficial Owners and Management” for a listing of the holders of Equistar’s partnership interests.
Item 6.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the Consolidated Financial Statements, including the related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(a) The 2002 net loss includes a $1,053 million charge related to goodwill impairment.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion should be read in conjunction with information contained in the Consolidated Financial Statements and the notes thereto.
In addition to comparisons of annual operating results, Equistar Chemicals, LP (“Equistar”) has included certain “trailing quarter” comparisons of fourth quarter 2003 operating results to third quarter 2003 operating results. Equistar’s businesses are highly cyclical in addition to experiencing some less significant seasonal effects. Trailing quarter comparisons may offer important insight into the current business direction of Equistar.
References to industry benchmark prices or costs, including the weighted average cost of ethylene production, are generally to industry prices and costs reported by Chemical Marketing Associates, Incorporated (“CMAI”), except that crude oil and natural gas benchmark price references are to industry prices reported by Platts, a reporting service of The McGraw-Hill Companies.
Overview
Equistar produces and markets olefins, including ethylene, propylene, and butadiene; aromatics, including benzene and toluene; and oxygenated products, including ethylene oxide and derivatives, ethylene glycol, ethanol and methyl tertiary butyl ether (“MTBE”) in its petrochemicals segment. Additionally, Equistar produces and markets polyolefins, including high density polyethylene (“HDPE”), low density polyethylene (“LDPE”), linear-low density polyethylene (“LLDPE”) and polypropylene; and performance polymers products, including wire and cable insulating resins, and polymeric powders in its polymers segment.
In 2003, the chemical industry experienced high and volatile raw material and energy costs, continuing weak demand and ongoing excess industry capacity. Preliminary estimates by CMAI indicate that U.S. industry ethylene demand in 2003 decreased slightly compared to 2002.
Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of movement of raw material and energy costs for Equistar. Olefins are produced from two major raw material groups:
• crude oil-based liquids (“liquids”), including naphthas, condensates, and gas oils, the prices of which are generally related to crude oil prices; and
• natural gas liquids (“NGLs”), principally ethane and propane, the prices of which are generally affected by natural gas prices.
Equistar has the ability to shift its ratio of raw materials used in production of olefins to take advantage of the relative costs of liquids and NGLs.
The following table shows the average benchmark prices for crude oil and natural gas for the applicable periods, as well as benchmark sales prices for ethylene and co-product propylene, which Equistar produces and sells. The benchmark weighted average cost of ethylene production is based on the estimated average ratio of liquid and NGL raw materials used in U.S. ethylene production and is subject to revision by CMAI.
As indicated above, raw material and energy costs averaged significantly higher in 2003 than in 2002, putting upward pressure on raw material costs for the chemical industry, including Equistar. In response to the higher raw material and energy costs, Equistar implemented significant sales price increases in 2003 for substantially all of its petrochemicals and polymers products. Raw material and energy cost increases of nearly $1 billion were recovered through sales price increases in 2003. The magnitude of these price increases had a negative effect on product demand, and contributed to Equistar experiencing lower sales volumes, particularly in the second quarter 2003. Although demand recovered during the second half of 2003, sales volumes were lower for the year 2003 compared to 2002.
In 2003, Equistar issued $700 million of new senior unsecured notes, deferring debt maturities, restructured its credit facility and entered into a new receivables sales facility to maintain its liquidity. These actions resulted in $37 million of financing fees and related expenses in 2003.
In March 2003, Equistar completed transactions involving a 15-year propylene supply arrangement and the sale of its Bayport polypropylene production facility in Pasadena, Texas. Equistar received total cash proceeds of $194 million, including the value of the polypropylene inventory sold. Cash proceeds of $159 million of the total represented a partial prepayment under the long-term propylene supply arrangement. Equistar also took steps in 2003 to refocus its research and development (“R&D”) activities, resulting in the write off of an R&D facility and incurrence of employee severance costs.
Equistar also completed scheduled maintenance turnarounds at its two largest ethylene plants in 2003. While negatively impacting raw material flexibility in 2003, conclusion of these turnarounds increases Equistar’s future production flexibility.
In 2002, compared to 2001, the chemical industry experienced weak demand growth and ongoing excess capacity. For the year 2002, U.S. industry ethylene demand grew 2.8%, compared to 2001, which failed to absorb excess ethylene industry capacity. This continued to put downward pressure on industry prices and as a result, on product margins. Overall, Equistar experienced lower product margins in 2002 than in 2001.
RESULTS OF OPERATIONS
Net Loss-Equistar had a 2003 net loss of $339 million compared to a 2002 net loss of $246 million, before the cumulative effect of an accounting change in 2002. The $93 million higher loss in 2003 included $37 million of refinancing costs, a $12 million loss on the sale of the polypropylene plant, an $11 million charge for the write-off of a polymer R&D facility and $6 million of employee severance costs. The 2002 loss included the negative impact of certain fixed price natural gas and NGL purchase contracts. Equistar’s costs under these contracts were approximately $33 million higher than market-based costs would have been. The remaining $60 million decrease in operating results was primarily due to lower sales volumes, which were only partly offset by higher average product margins in 2003. In addition, selling, general and administrative expenses in 2003 were $27 million higher than in 2002, reflecting higher pension and medical benefit costs and a higher provision for doubtful accounts.
Equistar had a 2002 net loss of $246 million, before the cumulative effect of an accounting change, compared to a 2001 net loss of $283 million. The 2002 loss included the $33 million negative impact of the fixed price natural gas and NGL purchase contracts. The 2001 period included $33 million of goodwill amortization, $22 million of shutdown costs for Equistar’s Port Arthur, Texas polyethylene facility and a $35 million negative impact from the fixed price natural gas and NGL contracts. Apart from these items, the increase in the net loss primarily reflected a $129 million decrease in petrochemicals segment operating income, partly offset by a $112 million improvement in the polymers segment operating loss. Petrochemicals segment operating income decreased as sales prices decreased more than raw material costs, resulting in lower petrochemicals product margins in 2002 compared to 2001. The polymers segment operating loss was reduced as raw material costs, primarily ethylene and propylene, decreased more than the decreases in average polymers product sales prices, resulting in higher polymers product margins in 2002 compared to 2001.
Fourth Quarter 2003 versus Third Quarter 2003
Equistar had a net loss of $104 million in the fourth quarter 2003 compared to a net loss of $40 million in the third quarter 2003. Equistar’s fourth-quarter operations were negatively impacted by an increase in the cost of ethylene production driven by higher prices for raw materials and energy. Equistar responded with price increases, but the timing of the price increases was such that they were insufficient to fully offset the cost increases. The benchmark cost of ethylene production was over 2 cents per pound higher in the fourth quarter 2003 compared to the third quarter 2003, while benchmark ethylene sales prices increased by less than 1 cent per pound. Additionally, a scheduled maintenance turnaround at an ethylene plant during the fourth quarter 2003 had a modest negative impact on operations by affecting Equistar’s ability to optimize its raw material utilization. The fourth quarter 2003 included $18 million of finance charges and $6 million of severance costs, while the third quarter 2003 included the $11 million charge for the write-off of the polymer R&D facility.
Sales volumes continued to improve during the fourth quarter 2003 versus the third quarter 2003. Sales of ethylene and ethylene derivatives increased by approximately 2 percent. Sales volumes typically decrease in the fourth quarter versus the third quarter.
Segment Data
The following tables reflect selected sales volume data, including intersegment sales volumes, and summarized financial information for Equistar’s business segments.
Petrochemicals Segment
Revenues-Revenues of $6.0 billion in 2003 increased 22% compared to revenues of $5.0 billion in 2002 due to higher sales prices partly offset by lower segment sales volumes. Benchmark ethylene prices averaged 28% higher in 2003 compared to 2002 in response to significant increases in the cost of ethylene production, while benchmark propylene sales prices averaged 19% higher. Segment sales volumes decreased 3% in 2003 compared to 2002 due to lower sales to the polymers segment and lower co-product production in 2003. Lower co-product production reflected the scheduled maintenance turnarounds at two major ethylene plants in 2003.
Revenues of $5.0 billion in 2002 decreased 8% compared to revenues of $5.4 billion in 2001 as lower 2002 average sales prices were only partly offset by a 4% increase in sales volumes. Equistar’s sales prices in 2002 averaged 11% lower than in 2001, reflecting lower raw material costs and low demand growth coupled with excess industry capacity. Benchmark ethylene sales prices averaged 22.2 cents per pound in 2002, a 16% decrease
compared to 2001. These lower ethylene sales prices were slightly offset by higher 2002 propylene sales prices. Benchmark propylene sales prices averaged 3% higher in 2002 than in 2001.
Cost of Sales-Cost of sales of $5.9 billion in 2003 increased 23% compared to $4.8 billion in 2002 due to higher costs of liquid- and NGL-based raw materials and energy in 2003 compared to 2002. The benchmark cost of ethylene production averaged 32% higher in 2003 than in 2002, while benchmark natural gas costs averaged 63% higher.
Cost of sales of $4.8 billion in 2002 decreased 6% compared to $5.1 billion in 2001, or 2% less than the percent decrease in revenues. While the costs of natural gas and NGL raw materials decreased from historically high levels experienced in 2001, other raw material costs, such as heavy liquids, did not decrease similarly.
Operating Income-The operating income for the segment of $124 million in 2003 decreased $22 million compared to operating income of $146 million in 2002. Operating income for 2002 included the $33 million negative effect of the fixed price natural gas and NGL purchase contracts entered into in early 2001. The decrease in 2003 operating income was due to the negative effect of two scheduled maintenance turnarounds and 3% lower sales volumes.
Operating income of $146 million in 2002 decreased $129 million from $275 million in 2001 as sales prices decreased more than raw material costs, resulting in lower product margins. The effect of the lower 2002 product margins was only partly offset by the benefit of a 4% increase in sales volumes, which was in line with industry demand growth.
Polymers Segment
Revenues-Revenues of $2,023 million in 2003 increased 8% compared to revenues of $1,868 million in 2002. The increase was due to a 23% increase in average sales prices partly offset by a 12% decrease in sales volumes. Average sales prices increased in response to higher raw material costs, primarily ethylene, compared to 2002. The average benchmark price of ethylene increased 28% in 2003 compared to 2002. The lower polymers sales volumes reflected the negative effect of the higher sales prices on demand and, to a lesser extent, the sale of the Bayport polypropylene production facility in 2003.
Revenues of $1,868 million in 2002 decreased 6% compared to revenues of $1,980 million in 2001 due to a 9% decrease in average sales prices offset by a 4% increase in sales volumes. Lower sales prices in 2002 reflected generally lower raw material costs compared to 2001. Sales volumes increased due to stronger demand in 2002 compared to 2001.
Cost of Sales-Cost of sales of $2,006 million in 2003 increased 7% compared to $1,875 million in 2002. This increase reflected higher raw material costs, primarily ethylene, offset in part by the effect of the 12% decrease in sales volumes. Benchmark ethylene costs were 28% higher in 2003 compared to 2002.
Cost of sales of $1,875 million in 2002 decreased 10% compared to $2,088 million in 2001. The decrease during 2002 reflected lower raw material costs, primarily ethylene, and lower energy costs, partly offset by the 4% increase in sales volumes. Benchmark ethylene prices were 16% lower and were only partly offset by a 3% increase in benchmark propylene prices in 2002 compared to 2001.
Other Operating Expenses-Other operating expenses were $95 million in 2003 compared to $67 million in 2002. The 2003 increase was primarily due to an $11 million charge related to the write-off of a polymer R&D facility and a $12 million loss on the sale of the Bayport polypropylene production facility.
Operating Loss-The polymers segment had an operating loss of $78 million in 2003 compared to an operating loss of $74 million in 2002. The combined effects of the $11 million write-off and the $12 million loss on sale noted above, as well as the negative effect of the 12% decrease in sales volumes, was substantially offset by higher polymer product margins. Margins increased in 2003 compared to 2002 as higher average sales prices more than offset higher raw material costs.
The operating loss of $74 million in 2002 decreased $112 million compared to the operating loss of $186 million in 2001. The $112 million improvement was due to higher polymers product margins and, to a lesser extent, higher sales volumes. Margins improved in 2002 compared to 2001, as decreases in sales prices were less than the decreases in polymers raw material costs.
Unallocated Items
The following discusses costs and expenses that were not allocated to the petrochemicals or polymers segments.
Cost of Sales-Equistar discontinued production at its higher-cost Port Arthur, Texas polyethylene facility in February 2001 and shut down the facility. During 2001, Equistar recorded a $22 million charge, which included environmental remediation liabilities of $7 million, other exit costs of $3 million and severance and pension benefits of $7 million for approximately 125 people employed at the Port Arthur facility. The remaining $5 million balance primarily related to the write down of certain assets.
Other Operating Expenses-These include unallocated general and administrative expenses and, in 2001, goodwill amortization. Unallocated expenses were $135 million in 2003, $116 million in 2002 and $166 million in 2001. The increase from 2002 to 2003 was primarily due to an increase in general and administrative expenses due to higher pension and medical benefit costs and a higher provision for doubtful accounts. The decrease from 2001 to 2002 was primarily due to goodwill amortization of $33 million that ceased in 2002. See Note 2 to the Consolidated Financial Statements.
The following discusses items that are not included in operating income, but that affected Equistar’s net income. See Note 15 to the Consolidated Financial Statements.
Other Income (Expense), Net-Other income (expense), net was a net expense of $43 million in 2003 and net income of $2 million in 2002 and $5 million in 2001. The net expense in 2003 was primarily due to $37 million of charges related to refinancing. Equistar incurred a $3 million loss on early debt extinguishment in 2001, which was previously reported as an extraordinary item. See “Accounting and Reporting Changes” below.
Cumulative Effect of Accounting Change-Effective January 1, 2002, Equistar adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. 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. See Note 2 to the Consolidated Financial Statements.
FINANCIAL CONDITION
Operating Activities-Operating activities provided cash of $164 million in 2003, $55 million in 2002 and $230 million in 2001. The $109 million increase in operating cash flow in 2003 compared to 2002 reflects $159 million received by Equistar as a partial prepayment for propylene to be delivered over a period of 15 years in connection with the long-term propylene supply arrangement entered into in March 2003. The cash flow benefit of this prepayment was partially offset by a higher net loss in 2003, excluding the $1.1 billion cumulative effect of an accounting change in 2002.
Cash provided by a net reduction in the controllable components of working capital - accounts receivable, inventory and accounts payable-was comparable, in total, in 2003 to 2002. In 2003, in consideration of discounts offered to certain customers for early payment for product delivered in December 2003, some receivable amounts were collected in December 2003 that otherwise would have been expected to be collected in January 2004, including $41 million from Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”). Additionally, in December 2003, Equistar replaced its previous $100 million accounts receivable sales facility with a new $450 million, four-year, accounts receivable sales facility. The balance of Equistar’s accounts receivable sold under the new facility at December 31, 2003 was $102 million compared to $81 million at December 31, 2002 under the previous facility.
Operations in 2003 also included cash expenditures of $97 million for scheduled maintenance turnarounds at two of Equistar’s largest ethylene plants. Operations in 2002 and 2001 included expenditures of $49 million and $15 million, respectively, for scheduled maintenance turnarounds.
The $175 million decrease in operating cash flow in 2002 compared to 2001 was due to higher cash expenditures in 2002 for scheduled maintenance turnarounds, interest, employee benefits and railcar lease prepayments and a lower benefit from net reductions in the controllable components of working capital. These were partly offset by a $37 million lower loss, before the $1.1 billion cumulative effect of an accounting change in 2002.
Investing Activities-Investing activities used cash of $37 million, $124 million and $107 million in 2003, 2002 and 2001, respectively.
Equistar’s capital expenditures were $106 million in 2003, $118 million in 2002 and $110 million in 2001. The 2003 and 2002 expenditures included $18 million and $47 million, respectively, for purchases of previously leased railcars. Equistar’s level of expenditures during the periods presented reflected reduced discretionary spending in view of the continuing poor business environment. Capital expenditures in these years primarily included reliability improvements and regulatory compliance projects. Equistar’s capital budget for 2004 is $148 million. The increase over 2003 spending is primarily to ensure compliance with new environmental regulations. See “Environmental Matters” below.
On March 31, 2003, concurrent with entering into the long-term propylene supply arrangement, Equistar sold a polypropylene production facility in Pasadena, Texas, for cash proceeds of $35 million. Also in 2003, Equistar sold certain railcars, which had been purchased in 2002, for a total of $34 million and leased the railcars from the buyers under operating lease agreements.
Financing Activities-Financing activities provided cash of $45 million in 2003, used cash of $106 million in 2002, and provided cash of $61 million in 2001. In December 2003, concurrent with entering into the new $450 million accounts receivable sales facility, Equistar entered into a new $250 million, four-year, inventory-based revolving credit facility, which replaced Equistar’s previous $354 million revolving credit facility. The new credit facility has no ratings triggers. At December 31, 2003, the interest rate under the new revolving credit facility was LIBOR plus 2.5%. The new revolving credit facility is secured by a lien on all inventory and certain personal property, including a pledge of accounts receivable.
In April 2003, Equistar issued $450 million of 10.625% senior unsecured notes due in 2011. The proceeds, net of related fees, were used to prepay $300 million of 8.5% notes due in the first quarter 2004, approximately $122 million of term loans under Equistar’s previous $354 million revolving credit facility and prepayment premiums of approximately $17 million. In September 2003, $29 million of Equistar’s medium term notes matured and were repaid using funds borrowed under Equistar’s revolving credit facility. In November 2003, Equistar issued $250 million of 10.625% senior unsecured notes due in 2011. The gross proceeds of $262 million, net of related fees, were used to prepay in full $173 million of the outstanding term loan under Equistar’s previous $354 million revolving credit facility and to repay borrowing under that revolving credit facility.
In March 2003 and March 2002, Equistar obtained amendments to its previous $354 million revolving credit facility that provided additional financial flexibility by generally making certain financial ratio requirements less restrictive.
Financing activities in 2002 included the scheduled retirement of $100 million of 9.125% notes.
In August 2001, Equistar completed a $1.5 billion debt refinancing. The refinancing included an amended credit facility consisting of a $500 million secured revolving credit facility and a $300 million secured term loan maturing in August 2007. The refinancing also included the issuance of $700 million of new unsecured 10.125% senior notes maturing in August 2008. The refinancing replaced a $1.25 billion credit facility, $820 million of which was outstanding. A portion of the net proceeds was also used to repay $90 million of Equistar’s medium-term notes that matured on August 30, 2001. The remaining net proceeds were used for general business purposes. The amended credit facility also made certain financial ratio requirements less restrictive. Equistar previously had amended its credit facility in March 2001, easing certain financial ratio requirements.
As a result of continuing adverse conditions in the industry and its debt service obligations, Equistar made no distributions to partners in 2003, 2002 and 2001.
Liquidity and Capital Resources-At December 31, 2003, Equistar’s long-term debt, including current maturities, totaled $2.3 billion, or approximately 59% of its total capitalization. Equistar had cash on hand of $199 million. In addition, the total amount available at December 31, 2003 under both the new $250 million inventory-based revolving credit facility and the new $450 million accounts receivable sales facility was approximately $430 million, which gives effect to the borrowing base less a $75 million unused availability requirement and is net of the $102 million sold under the accounts receivable facility and $18 million of outstanding letters of credit under the revolving credit facility. The borrowing base is determined using a formula applied to accounts receivable and inventory balances. The new revolving credit facility requires that the unused available amounts under that facility and the $450 million accounts receivable sales facility equal or exceed $75 million through March 30, 2005 and $50 million thereafter or $100 million thereafter if the interest coverage ratio, as defined, is less than 2:1. There was no borrowing under the revolving credit facility at December 31, 2003.
In November 2003, Moody’s Investors Service (“Moody’s”) lowered Equistar’s senior unsecured debt rating from B1 to B2. During 2003, Standard & Poor’s rating service (“S&P”) lowered Equistar’s senior unsecured debt rating from BB to BB-, and, in January 2004, S&P further lowered it from BB- to B+. S&P cited weaker than expected fourth quarter and full year 2003 operating results at Equistar. In January 2004, as a result of Equistar completing the new $250 million inventory-based revolving credit facility and the new $450 million accounts receivable sales facility, Moody’s and S&P revised Equistar’s outlook from negative to stable. The rating services cited the significant improvement in Equistar’s liquidity provided by these transactions due to the absence of financial covenants and ratings triggers and prudent steps taken by management to extend debt maturities and maintain liquidity in a difficult business environment.
One or more of the rating agencies may reduce Equistar’s ratings in the future, whether as the result of adverse developments affecting Equistar’s business, events beyond Equistar’s control or other reasons cited by the agencies. A downgrade in debt rating could affect Equistar’s trade terms, borrowing costs and its ability to refinance or restructure debt in the future.
Equistar’s ability to pay or refinance its debt will depend on future operating performance, which could be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond its control. Management believes that conditions will be such that cash balances, cash flow from operations, cash generated from higher utilization of the accounts receivable sales facility and funding under the credit facility will be adequate to meet anticipated future cash requirements, including scheduled debt repayments, other contractual obligations, necessary capital expenditures and ongoing operations. However, if future operating cash flows are less than currently anticipated due to raw material prices or other factors, Equistar may be forced to reduce or delay capital expenditures, sell assets, or reduce operating expenses.
Off-Balance Sheet Arrangements-The Securities and Exchange Commission (“SEC”) has described various characteristics to identify contractual arrangements that would fall within the SEC’s definition of off-balance sheet arrangements. Equistar is a party to the following accounts receivable sales facility that has some of those characteristics:
In December 2003, Equistar entered into a new $450 million, four-year, accounts receivable sales facility to replace its previous accounts receivable sales facility. Pursuant to the 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. The new accounts receivable sales facility is subject to substantially the same minimum unused availability requirements and covenant requirements as the new inventory-based revolving credit facility. See discussion of “Liquidity and Capital Resources” above and discussion of “Long-Term Debt” below. The breach of these covenants would permit the counterparty to the accounts receivable sales facility to terminate further purchases of Equistar’s accounts receivable. The new facility does not contain ratings triggers. At December 31, 2003 and 2002, the balance of Equistar’s accounts receivable sold under the facilities was $102 million and $81 million, respectively. The facility accelerates availability to the business of cash from product sales that otherwise would have been collected over the normal billing and collection cycle. The availability of the accounts receivable sales facility provides one element of Equistar’s ongoing sources of liquidity and capital resources. Upon termination of the facility, cash collections related to accounts receivable then in the pool would first be applied to the outstanding interest sold, but Equistar would in no event be required to repurchase such interest. See Note 4 to the Consolidated Financial Statements for additional accounts receivable information.
Contractual and Other Obligations-The following table summarizes, as of December 31, 2003, Equistar’s minimum payments for long-term debt, and contractual and other obligations for the next five years and thereafter.
Long-Term Debt-The new $250 million inventory-based revolving credit facility and the indentures governing Equistar’s senior notes contain covenants that, subject to certain exceptions, restrict lien incurrence, debt incurrence, sales of assets, investments, capital expenditures, certain payments, and mergers. The breach of these covenants would permit the lenders or noteholders to declare any outstanding debt immediately payable and would permit the lenders under Equistar’s new credit facility to terminate future lending commitments. The new credit facility is also subject to minimum unused availability requirements-see “Liquidity and Capital Resources” above. Equistar was in compliance with all covenants under these agreements as of December 31, 2003. See Note 9 to the Consolidated Financial Statements for descriptions of Equistar’s long-term debt and credit facility.
Pension and Other Postretirement Benefits-Equistar maintains several defined benefit pension plans and provides postretirement benefits, as described in Note 12 to the Consolidated Financial Statements. At December 31, 2003, the projected benefit obligation for Equistar’s plans exceeded the fair value of plan assets by $58 million. Subject to future actuarial gains and losses, as well as actual asset earnings, Equistar will be required to fund the $58 million, with interest, in future years. Pension contributions were $15 million, $18 million and $7 million for the years 2003, 2002 and 2001, and are estimated to be approximately $17 million for 2004 and 2005, $32 million in 2006 and $20 million in 2007 and 2008. Current projections indicate that contributions will have to be made quarterly, rather than annually, beginning in 2006, resulting in an acceleration of payments in 2006. Other postretirement benefits are unfunded and are paid by Equistar as incurred. Estimates of postretirement benefit payments through 2008 are included in the table above.
Advances from Customers-Equistar received advances from customers in 2003 and in 2002 in connection with long-term sales agreements under which Equistar is obligated to deliver product primarily at cost-based prices. These advances are treated as deferred revenue and will be amortized to earnings over the remaining terms of the respective contracts, which range from 8 to 14 years. The unamortized long-term portion of such advances totaled $156 million and $23 million as of December 31, 2003 and 2002, respectively. See Note 8 to the Consolidated Financial Statements.
Other Noncurrent Obligations-Other noncurrent obligations primarily include deferred compensation arrangements other than pension and postretirement benefits.
Purchase Obligations-Equistar is a party to various unconditional obligations to purchase products and services, as summarized in the above table. These primarily include commitments for steam and power from a new co-generation facility. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. See “Commitments” section of Note 13 to the Consolidated Financial Statements.
Operating Leases-Equistar leases various facilities and equipment, including railcars, under noncancelable operating lease arrangements for various periods. See Note 10 to the Consolidated Financial Statements for information on Equistar’s operating leases.
CURRENT BUSINESS OUTLOOK
The completion of scheduled maintenance turnarounds at three of Equistar’s largest ethylene plants has better positioned Equistar to take advantage of any recovery in 2004. A fourth ethylene plant will begin a scheduled maintenance turnaround in the first quarter of 2004. Thus far in 2004, Equistar has seen a continuation of the improvement in product sales volumes experienced in the second half of 2003. However, Equistar’s product margins are heavily dependent on hydrocarbons pricing, primarily crude oil and natural gas.
Thus far in 2004, hydrocarbon prices have remained high and volatile. Equistar has responded by implementing product price increases and announcing additional product price increases across the majority of its product lines. Because Equistar products have broad utilization across the economy, external factors, such as the pace of global economic growth, in addition to raw material pricing, will be important factors to Equistar’s financial performance during 2004.
RELATED PARTY TRANSACTIONS
Equistar makes significant sales of product to Lyondell, LYONDELL-CITGO Refining LP (“LCR”), affiliates of Millennium Chemicals Inc (“Millennium”) and affiliates of Occidental Petroleum Corporation, including Occidental Chemical Corporation and Oxy Vinyls, LP (“Oxy Vinyls”). Equistar also provides certain services and raw materials to Lyondell Methanol Company, L.P. (“LMC”), a wholly owned subsidiary of Lyondell. In turn, Equistar makes significant purchases of raw materials and products from LCR and receives significant administrative services from Lyondell.
Prior to August 22, 2002, Equistar was owned 41% by Lyondell, 29.5% by Millennium, and 29.5% by Occidental. On August 22, 2002, Lyondell completed the purchase of Occidental’s interest in Equistar, increasing its ownership interest in Equistar to 70.5%. As a result of this transaction, Occidental has two representatives on Lyondell’s board of directors and, as of December 31, 2003, Occidental Chemical Holding Corporation owned approximately 22% of Lyondell.
In view of Occidental’s relationship with Lyondell, which owns 70.5% of Equistar, Occidental’s transactions with Equistar subsequent to August 22, 2002 continue to be reported as related party transactions in Equistar’s Consolidated Statements of Income and Consolidated Balance Sheets.
Equistar believes that all such aforementioned related party transactions are effected on terms substantially no more or less favorable than those that would have been agreed upon by unrelated parties on an arm’s length basis. See “Item 13. Certain Relationships and Related Transactions” and Note 3 to the Consolidated Financial Statements for a description of related party transactions.
CRITICAL ACCOUNTING POLICIES
Equistar applies those accounting policies that management believes best reflect the underlying business and economic events, consistent with accounting principles generally accepted in the U.S. Equistar’s more critical accounting policies include those related to long-lived assets, including the costs of major maintenance turnarounds and repairs, and accruals for long-term employee benefit costs such as pension and postretirement costs. Inherent in such policies are certain key assumptions and estimates made by management. Management periodically updates its
estimates used in the preparation of the financial statements based on its latest assessment of the current and projected business and general economic environment. These critical accounting policies have been discussed with the Equistar Partnership Governance Committee. Equistar’s significant accounting policies are summarized in Note 2 to the Consolidated Financial Statements.
Long-Lived Assets-With respect to long-lived assets, key assumptions include the estimates of useful asset lives and the recoverability of the carrying values of fixed assets and intangible assets as well as the existence of any obligations associated with the retirement of fixed assets. Such estimates could be significantly modified and/or the carrying values of the assets could be impaired by such factors as new technological developments, new chemical industry entrants with significant raw material or other cost advantages, uncertainties associated with the U.S. and world economies, the cyclical nature of the chemical industry, and uncertainties associated with governmental regulatory actions.
Due to temporary decreases in demand for Equistar’s products, certain facilities may remain idle until market conditions improve. Assets that are temporarily idled are tested for impairment at the time they are temporarily idled. Fixed assets with a net book value of approximately $152 million were temporarily idled at December 31, 2003. Those assets continue to be depreciated over their remaining useful lives. No impairments were recorded in 2003, 2002 or 2001 for temporarily idled facilities. Charges of $11 million were recorded in 2003 for abandoned research and development facilities.
Equistar defers the costs of turnaround maintenance and repair activities in excess of $5 million, amortizing such costs over the period until the next expected major turnaround of the affected unit. During 2003, 2002 and 2001, cash expenditures of $97 million, $49 million and $15 million, respectively, were deferred and are being amortized, generally over a period of 5 to 7 years. Amortization in 2003, 2002 and 2001, of previously deferred turnaround costs was $30 million, $24 million and $20 million, respectively.
The estimated useful lives of long-lived assets range from 3 to 30 years. Depreciation and amortization of these assets, including amortization of deferred turnaround costs, under the straight-line method over their estimated useful lives totaled $307 million in 2003. If the useful lives of the assets were found to be shorter than originally estimated, depreciation charges would be accelerated.
Additional information on long-lived assets, deferred turnaround costs and related depreciation and amortization appears in Note 6 to the Consolidated Financial Statements.
Long-Term Employee Benefit Costs-The costs to Equistar of long-term employee benefits, particularly pension and postretirement medical and life insurance benefits, are incurred over long periods of time, and involve many uncertainties over those periods. The net periodic benefit cost attributable to current periods is based on several assumptions about such future uncertainties, and is sensitive to changes in those assumptions. It is management’s responsibility, often with the assistance of independent experts, to select assumptions that in its judgment represent its best estimates of the future effects of those uncertainties. It also is management’s responsibility to review those assumptions periodically to reflect changes in economic or other factors that affect those assumptions.
The current benefit service costs, as well as the existing liabilities, for pensions and other postretirement benefits are measured on a discounted present value basis. The discount rate is a current rate, related to the rate at which the liabilities could be settled. Equistar’s assumed discount rate is based on average rates published by Moody’s and Merrill Lynch for high-quality (Aa rating) ten-year fixed income securities. For the purpose of measuring the benefit obligations at December 31, 2003, Equistar lowered its assumed discount rate from 6.5% to 6.25%, reflecting the general decline in market interest rates during 2003. The 6.25% rate also will be used to measure net periodic benefit cost during 2004. A further one percentage point reduction in the assumed discount rate for Equistar would increase Equistar’s benefit obligation for pensions and postretirement benefits by approximately $50 million, and would reduce Equistar’s net income by approximately $7 million annually.
The benefit obligation and the periodic cost of postretirement medical benefits also are measured based on assumed rates of future increase in the per capita cost of covered health care benefits. As of December 31, 2003, the assumed rate of increase was 10.0% for 2004, 7.0% for 2005 through 2007 and 5.0% thereafter. A one percentage point change in the health care cost trend rate assumption would have no significant effect on either the benefit liability or the net periodic cost, due to limits on Equistar’s maximum contribution level under the medical plan.
The net periodic cost of pension benefits included in expense also is affected by the expected long-term rate of return on plan assets assumption. Investment returns that are recognized currently in net income represent the expected rate of return on plan assets applied to a market-related value of plan assets which, for Equistar, is defined as the market value of assets. The expected rate of return on plan assets is a longer term rate, and is expected to change less frequently than the current assumed discount rate, reflecting long-term market expectations, rather than current fluctuations in market conditions.
Prior to 2003, Equistar’s expected long-term rate of return on plan assets of 9.5% had been based on the average level of earnings that its independent pension investment advisor had advised could be expected to be earned over time. The expectation was based on an asset allocation of 50% U.S. equity securities (11% expected return), 20% non-U.S. equity securities (11.7% expected return), and 30% fixed income securities (6.5% expected return) that had been recommended by the advisor, and had been adopted for the plans. Over the three-year period ended December 31, 2003, Equistar’s actual return on plan assets averaged 0.9% per year. In 2003, Equistar reviewed its asset allocation and expected long-term rate of return assumptions, and obtained an updated asset allocation study from the independent pension investment advisor, including updated expectations for long-term market earnings rates for various classes of investments. Based on this review, Equistar reduced its expected long-term rate of return on plan assets to 8%, and did not significantly change its plan asset allocations.
The actual rate of return on plan assets may differ from the expected rate due to the volatility normally experienced in capital markets. Management’s goal is to manage the investments over the long term to achieve optimal returns with an acceptable level of risk and volatility. Based on the market value of plan assets at December 31, 2003, a one percentage point decrease in this assumption for Equistar would decrease Equistar’s net income by approximately $1 million annually.
Net periodic pension cost recognized each year includes the expected asset earnings, rather than the actual earnings or loss. As a result of asset earnings significantly below the expected return on plan assets rate over the last several years, the level of unrecognized investment losses, together with the net actuarial gains and losses, is $56 million at December 31, 2003. This unrecognized amount, to the extent it exceeds ten percent of the projected benefit obligation for the respective plan, will be recognized as additional net periodic benefit cost over the average remaining service period of the participants in each plan. This annual amortization charge will be approximately $4 million per year based on the December 31, 2003 unrecognized amount.
Additional information on the key assumptions underlying these benefit costs appears in Note 12 to the Consolidated Financial Statements.
ACCOUNTING AND REPORTING CHANGES
Effective January 1, 2003, Equistar implemented SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The primary impact of the statement on Equistar is the classification of gains or losses that result from the early extinguishment of debt as an element of income before extraordinary items. Previously, such gains and losses were classified as extraordinary items. The Consolidated Statements of Income reflect these changes for all periods presented. Equistar incurred a loss of $3 million on the early extinguishment of debt in the year ended December 31, 2001. See Note 2 to the Consolidated Financial Statements.
In December 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, effective December 31, 2003, and requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. SFAS No. 132 (Revised 2003) also requires Equistar to disclose pension and postretirement benefit costs in interim-period financial statements beginning in 2004. Equistar increased its pension disclosure to comply with SFAS No. 132 (Revised 2003). See Note 12 to the Consolidated Financial Statements.
In January 2004, the FASB issued FASB Staff Position (“FSP”) FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The FSP permits a sponsor of a retiree health benefit plan to make a one-time election to defer recognition of the effects of the new Medicare legislation in accounting for its plans under SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, or in making disclosures related to its plans required by SFAS No. 132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, until the FASB develops and issues authoritative guidance on accounting for subsidies provided by the Act. Such FASB guidance could require a change in currently reported information. Equistar elected to make the one-time deferral and is currently evaluating the effect of FSP FAS 106-1.
Effective January 1, 2003, Equistar adopted SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses obligations associated with the retirement of tangible long-lived assets, and SFAS No. 146, Accounting for Exit or Disposal Activities, which addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities and facility closings. Equistar’s adoption of the provisions of SFAS No. 143 and SFAS No. 146 had no material impact on its financial statements.
In December 2003, the FASB issued FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”), primarily to clarify the required accounting for interests in variable interest entities (“VIEs”). This standard replaces FIN 46, Consolidation of Variable Interest Entities, that was issued in January 2003 to address certain situations in which a company should include in its financial statements the assets, liabilities and activities of another entity. Equistar’s application of FIN 46R has no material impact on its consolidated financial statements.
Effective January 1, 2002, Equistar implemented SFAS No. 142, Goodwill and Other Intangible Assets. 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 to earnings 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 (earnings before interest, taxes, depreciation and amortization) for comparable companies as an indicator of fair value. As a result of implementing SFAS No. 142, income in 2002 and subsequent years is favorably affected by $33 million annually because of the elimination of goodwill amortization. See Note 2 to the Consolidated Financial Statements.
ENVIRONMENTAL MATTERS
Various environmental laws and regulations impose substantial requirements upon the operations of Equistar. Equistar’s policy is to be in compliance with such laws and regulations, which include, among others, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) as amended, the Resource Conservation and Recovery Act (“RCRA”) and the Clean Air Act Amendments. Equistar does not specifically track all recurring costs associated with managing hazardous substances and pollution in ongoing operations. Such costs are included in cost of sales. Equistar also makes capital expenditures to comply with environmental regulations. Such capital expenditures totaled approximately $38 million, $14 million and $16 million for 2003, 2002 and 2001, respectively. Capital expenditures increased in 2003 as a result of new emission reduction rules, discussed below, and Equistar currently estimates 2004 and 2005 expenditures at approximately $87 million and $82 million, respectively, including preliminary estimated expenditures for engineering studies related to emission control standards for highly reactive, volatile organic compounds (“HRVOC”). However, Equistar is still completing its assessment of the impact of the proposed HRVOC emission standards.
The eight-county Houston/Galveston region has been designated a severe non-attainment area under the one-hour ozone standard by the U.S. Environmental Protection Agency (“EPA”). As a result, in December 2000, the Texas Commission on Environmental Quality (“TCEQ”) submitted a plan to the EPA to reach and demonstrate compliance with the ozone standard by November 2007. Ozone is a product of the reaction between volatile organic compounds and nitrogen oxides (“NOx”) in the presence of sunlight, and is a principal component of smog. Emission reduction controls for NOx must be installed at each of Equistar’s six plants located in the Houston/Galveston region during the next several years. Revised rules adopted by the TCEQ in December 2002
changed the required NOx emission reduction levels from 90% to 80% while requiring new controls on emissions of HRVOCs, such as ethylene, propylene, butadiene and butylenes. The TCEQ plans to make a final review of these rules, with final rule revisions to be adopted by October 2004. These rules also still require approval by the EPA. Under the revised 80% standard, Equistar estimates that the incremental capital expenditures would range between $165 million and $200 million. Of these amounts, Equistar’s spending through December 31, 2003 totaled $69 million. However, the above estimate could be affected by increased costs for stricter proposed controls over HRVOCs. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. Equistar is still assessing the impact of the new HRVOC control requirements. There can be no guarantee as to the ultimate cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline.
In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or ban the use of MTBE. Equistar’s MTBE sales represented approximately 3% of its total revenues in 2003. At this time, Equistar cannot predict the impact that these initiatives will have on MTBE margins or volumes longer term, but any effect on Equistar’s financial position, liquidity, or the results of operations is not expected to be material.
Equistar’s accrued liability for environmental remediation as of December 31, 2003 was $1 million and primarily related to the Port Arthur facility, which was permanently shut down in February 2001. In the opinion of management, there is currently no material estimable range of loss in excess of the liability recorded for environmental matters.
Item 7A.
Item 7A. Disclosure of Market and Regulatory Risk
COMMODITY PRICE RISK
A substantial portion of Equistar’s products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. Accordingly, product margins and the level of Equistar’s profitability tend to fluctuate with changes in the business cycle. Equistar tries to protect against such instability through various business strategies. These include utilization of the olefins plants’ raw material flexibility and entering into multi-year processing and sales agreements.
In addition, Equistar at times enters into commodity derivative hedging transactions, primarily price swaps and call options, to help manage its exposure to commodity price risk with respect to purchases of natural gas and crude oil-related raw materials as well as product sales. Market risks created by these derivative instruments and the mark-to-market valuations of open positions are monitored using value at risk. During 2003, 2002 and 2001, the derivative transactions were not significant compared to Equistar’s overall inventory purchases and product sales. At December 31, 2003, the market value of outstanding derivatives and the related value at risk was not material.
INTEREST RATE RISK
During 2003, Equistar repaid its remaining variable rate debt that was outstanding at December 31, 2002, using proceeds of new fixed-rate debt offerings, and had no borrowing outstanding under its inventory-based revolving credit facility as of December 31, 2003. Accordingly, Equistar’s exposure to variable interest rate risk was minimal at December 31, 2003.
REGULATORY RISK
New air pollution standards promulgated by federal and state regulatory agencies in the U.S., including those specifically targeting the eight-county Houston/Galveston region, will affect a substantial portion of the operating facilities of Equistar. Compliance with these standards will result in increased capital investment during the next several years and higher annual operating costs for Equistar. Revised rules adopted by the regulatory agencies changed the required NOx, reduction levels from 90% to 80%. However, any potential resulting savings from this proposed revision could be offset by the costs of stricter proposed controls over HRVOCs. Equistar is still assessing the impact of these proposed regulations and there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. See “Clean Air Act” section of Note 13 to the Consolidated Financial Statements and “Environmental Matters” above.
Item 8.
Item 8. Financial Statements and Supplementary Data
Index to the Consolidated Financial Statements
REPORT OF INDEPENDENT AUDITORS
To the Partnership Governance Committee
of Equistar Chemicals, LP
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of partners’ capital and of cash flows present fairly, in all material respects, the financial position of Equistar Chemicals, LP (the “Partnership”) and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. 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 audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Partnership adopted Statement of Financial Accounting Standards No. 142, “Accounting for Goodwill and Other Intangible Assets.”
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 8, 2004
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF INCOME
See Notes to the Consolidated Financial Statements.
EQUISTAR CHEMICALS, LP
CONSOLIDATED BALANCE SHEETS
See Notes to the Consolidated Financial Statements.
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to the Consolidated Financial Statements.
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
See Notes to the Consolidated Financial Statements.
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Formation of the Partnership and Operations
Equistar Chemicals, LP (“Equistar” or “the Partnership”), a Delaware limited partnership which commenced operations on December 1, 1997, was formed by Lyondell Chemical Company and subsidiaries (“Lyondell”) and Millennium Chemicals Inc. and subsidiaries (“Millennium”). On May 15, 1998, Equistar was expanded with the contribution of certain assets from Occidental Petroleum Corporation and subsidiaries (“Occidental”). Until August 22, 2002, Equistar was owned 41% by Lyondell, 29.5% by Millennium and 29.5% by Occidental. On August 22, 2002, Lyondell purchased Occidental’s interest in Equistar and, as a result, Lyondell’s ownership interest in Equistar increased to 70.5%.
Equistar owns and operates the petrochemicals and polymers businesses originally contributed by Lyondell, Millennium and Occidental. The petrochemicals segment manufactures and markets olefins, oxygenated products, aromatics and specialty products. Olefins include ethylene, propylene and butadiene, and oxygenated products include ethylene oxide, ethylene glycol, ethanol and methyl tertiary butyl ether (“MTBE”). The petrochemicals segment also includes the production and sale of aromatics, including benzene and toluene. The polymers segment manufactures and markets polyolefins, including high-density polyethylene (“HDPE”), low-density polyethylene (“LDPE”), linear low-density polyethylene (“LLDPE”), polypropylene and performance polymers, all of which are used in the production of a wide variety of consumer and industrial products. The performance polymers include enhanced grades of polyethylene, including wire and cable insulating resins, and polymeric powders.
Equistar is governed by a Partnership Governance Committee consisting of six representatives, three appointed by each general partner. Most of the significant decisions of the Partnership Governance Committee require unanimous consent, including approval of the Partnership’s strategic plan, capital expenditures and annual budget, issuance of additional debt and the appointment of executive management of the Partnership. Distributions are made to the partners based upon their percentage ownership of Equistar. Additional cash contributions required by the Partnership are also based upon the partners’ percentage ownership of Equistar.
2. Summary of Significant Accounting Policies
Basis of Presentation-The consolidated financial statements include the accounts of Equistar and its wholly owned subsidiaries.
Revenue Recognition-Revenue from product sales is recognized as risk and title to the product transfer to the customer, which usually occurs when shipment is made.
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 maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates fair value. Equistar’s policy is to invest cash in conservative, highly rated instruments and to limit the amount of credit exposure to any one institution.
Equistar 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 Equistar’s discretion. As a result, none of Equistar’s cash is restricted.
Inventories-Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method, except for materials and supplies, which are valued using the average cost method.
Inventory exchange transactions, which involve fungible commodities 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.
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Property, Plant and Equipment-Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful asset lives, generally 25 years for major manufacturing equipment, 30 years for buildings, 10 to 15 years for light equipment and instrumentation, 15 years for office furniture and 3 to 5 years for information systems equipment. Upon retirement or sale, Equistar removes the cost of the assets and the related accumulated depreciation from the accounts and reflects any resulting gains or losses in the Consolidated Statements of Income. Equistar’s policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year.
Long-Lived Asset Impairment-Equistar evaluates long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell the assets.
Investments-Equistar’s investments primarily consist of a 50% interest in a joint venture that owns an ethylene glycol facility in Beaumont, Texas (“PD Glycol”). The investment in PD Glycol is accounted for using the equity method of accounting.
Turnaround Maintenance and Repair Costs-Costs of maintenance and repairs exceeding $5 million incurred in connection with turnarounds of major units at Equistar’s manufacturing facilities are deferred and amortized using the straight-line method over the period until the next planned turnaround, generally 5 to 7 years. These costs are necessary to maintain, extend and improve the operating capacity and efficiency rates of the production units.
Identifiable Intangible Assets-Costs to purchase and to develop software for internal use are deferred and amortized on a straight-line basis over periods of 3 to 10 years.
Other intangible assets are carried at amortized cost and primarily consist of deferred debt issuance costs, licensed technology and other long-term processing rights and costs. These assets are amortized using the straight-line method over their estimated useful lives or the term of the related agreement, if shorter.
Environmental Remediation Costs-Anticipated expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Estimated expenditures have not been discounted to present value.
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.
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, the 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.
Accounting and Reporting Changes-Effective January 1, 2003, Equistar implemented Statement of Financial Accounting Standards (“SFAS”) No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The primary impact of the statement on Equistar is the classification of gains or losses that result from the early extinguishment of debt as an element of income before extraordinary items. Previously, such gains and losses were classified as extraordinary items. The Consolidated Statements of Income reflect these changes for all periods presented. Equistar incurred a loss of $3 million on the early extinguishment of debt in the year ended December 31, 2001.
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In December 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, effective December 31, 2003, and requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. SFAS No. 132 (Revised 2003) also requires Equistar to disclose pension and postretirement benefit costs in interim-period financial statements beginning in 2004. Equistar increased its pension disclosure to comply with SFAS No. 132 (Revised 2003). See Note 12.
In January 2004, the FASB issued FASB Staff Position (“FSP”) FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The FSP permits a sponsor of a retiree health benefit plan to make a one-time election to defer recognition of the effects of the new Medicare legislation in accounting for its plans under SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, or in making disclosures related to its plans required by SFAS No. 132 (Revised 2003), until the FASB develops and issues authoritative guidance on accounting for subsidies provided by the Act. Such FASB guidance could require a change in currently reported information. Equistar elected to make the one-time deferral and is currently evaluating the effect of the FSP FAS 106-1.
Effective January 1, 2003, Equistar adopted SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses obligations associated with the retirement of tangible long-lived assets, and SFAS No. 146, Accounting for Exit or Disposal Activities, which addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities and facility closings. Equistar’s adoption of the provisions of SFAS No. 143 and SFAS No. 146 had no material impact on its financial statements.
In December 2003, the FASB issued FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”), primarily to clarify the required accounting for interests in variable interest entities (“VIEs”). This standard replaces FIN 46, Consolidation of Variable Interest Entities, that was issued in January 2003 to address certain situations in which a company should include in its financial statements the assets, liabilities and activities of another entity. Equistar’s application of FIN 46R has no material impact on its consolidated financial statements.
Effective January 1, 2002, Equistar implemented SFAS No. 142, Goodwill and Other Intangible Assets. 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 to earnings 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 (earnings before interest, taxes, depreciation and amortization) for comparable companies as an indicator of fair value.
As a result of implementing SFAS No. 142, income in 2002 and subsequent years is favorably affected by $33 million annually because of the elimination of goodwill amortization. The following table presents Equistar’s results of operations for all periods presented as adjusted to eliminate goodwill amortization.
EQUISTAR CHEMICALS, LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Reclassifications-Certain previously reported amounts have been reclassified to conform to classifications adopted in 2003.
3. Related Party Transactions
As a result of Lyondell’s August 2002 purchase of Occidental’s interest in Equistar (see Note 1), Occidental has two representatives on Lyondell’s board of directors and, as of December 31, 2003, Occidental owned approximately 22% of Lyondell. In view of Occidental’s representation on Lyondell’s Board of Directors and its ownership position with Lyondell, which owns 70.5% of Equistar, Occidental’s transactions with Equistar subsequent to August 22, 2002 will continue to be reported as related party transactions in Equistar’s Consolidated Statements of Income and Consolidated Balance Sheets.
Product Transactions with Lyondell-Lyondell purchases ethylene, propylene and benzene at market-related prices from Equistar under various agreements expiring in 2013 and 2014. With the exception of one pre-existing third-party product supply agreement expiring in 2015, Lyondell is required, under the agreements, to purchase 100% of its ethylene, propylene and benzene requirements for its Channelview and Bayport, Texas facilities from Equistar. Lyondell licenses MTBE technology to Equistar, and purchases a significant portion of the MTBE produced by Equistar at one of its two Channelview units at market-related prices. Lyondell also purchases natural gas used in its methanol facility from Equistar.
Through December 31, 2003, Equistar acted as sales agent for the methanol products of Lyondell. Equistar also provides operating and other services for Lyondell, including the lease to Lyondell by Equistar of the real property on which the methanol plant is located. Pursuant to the terms of those agreements, Lyondell paid Equistar a management fee and reimbursed certain expenses of Equistar at cost.
Product Transactions with Millennium-Equistar sells ethylene to Millennium at market-related prices pursuant to an agreement entered into in connection with the formation of Equistar. Under this agreement, Millennium is required to purchase 100% of its ethylene requirements for its LaPorte, Texas facility from Equistar. The initial term of the contract expired December 31, 2000. It continues thereafter for one-year periods unless either party serves notice twelve months in advance. The contract will continue, at a minimum, through December 31, 2005.
Also, under an agreement entered into in connection with the formation of Equistar, Equistar is required to purchase 100% of its vinyl acetate monomer raw material requirements at market-related prices from Millennium for the production of ethylene vinyl acetate products at its LaPorte, Texas; Clinton, Iowa and Morris, Illinois plants. This contract expired December 31, 2000 and renews annually. Equistar has provided notice to Millennium to terminate the vinyl acetate monomer agreement, effective December 31, 2004.
Product Transactions with Occidental-In connection with the contribution of Occidental assets to Equistar, Equistar and Occidental entered into a long-term agreement for Equistar to supply substantially all of the ethylene requirements for Occidental’s U.S. manufacturing plants at market-related prices. The ethylene is exclusively for internal use in production at these plants, less a specified quantity per year tolled in accordance with the provisions of the agreement. Either party has the option to “phase down” volumes over time. However, a “phase down” cannot begin until January 1, 2009 and the annual required minimum cannot decline to zero prior to December 31, 2013, unless certain specified force majeure events occur. In addition to ethylene, Equistar sells methanol, ethers and glycols to Occidental. Equistar also purchases various other products from Occidental at market-related prices.
Product Transactions with Oxy Vinyls, LP-During 2003, Equistar sold ethylene to Oxy Vinyls, LP (“Oxy Vinyls”), a joint venture partnership between Occidental and an unaffiliated party, for Oxy Vinyls’ LaPorte, Texas facility at market-related prices pursuant to an agreement that expired December 31, 2003.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Transactions with LYONDELL-CITGO Refining LP-Equistar has product sales and raw material purchase agreements with LYONDELL-CITGO Refining LP (“LCR”), a joint venture investment of Lyondell. Certain olefins by-products are sold by Equistar to LCR for processing into gasoline and certain refinery products are sold by LCR to Equistar as raw materials. Equistar also has processing and storage arrangements with LCR and provides certain marketing services for LCR. All of the agreements between LCR and Equistar are on terms generally representative of prevailing market prices.
Shared Services Agreement with Lyondell-Under a shared services agreement, Lyondell provides office space and various services to Equistar including information technology, human resources, sales and marketing, raw material supply, supply chain, health, safety and environmental, engineering, research and development, facility services, legal, accounting, treasury, internal audit and tax. Lyondell charges Equistar for Equistar’s share of the cost of such services. Direct costs, incurred exclusively for Equistar, also are charged to Equistar. Costs related to a limited number of shared services, primarily engineering, continue to be incurred by Equistar. In such cases, Equistar charges Lyondell for its share of such costs.
Shared Services and Shared-Site Agreements with Millennium-Equistar and Millennium have agreements under which Equistar provides utilities and fuel streams to Millennium. In addition, Millennium provides Equistar with certain operational services, including utilities, as well as barge dock access and related services.
Lease Agreements with Occidental-Equistar subleases certain railcars from Occidental. In addition, Equistar leases its Lake Charles facility and the land related thereto from Occidental - see “Leased Facility” section of Note 13.
Related party transactions are summarized as follows:
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Accounts Receivable
Equistar sells its products primarily to other chemical manufacturers in the petrochemicals and polymers industries. Equistar performs ongoing credit evaluations of its customers’ financial condition and, in certain circumstances, requires letters of credit from them. The Partnership’s allowance for doubtful accounts, which is reflected in the accompanying Consolidated Balance Sheets as a reduction of accounts receivable, totaled $12 million and $16 million at December 31, 2003 and 2002, respectively.
In December 2003, Equistar entered into a new $450 million, four-year, accounts receivable sales facility to replace Equistar’s previous $100 million accounts receivable sales facility. Pursuant to the 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 December 31, 2003 and 2002, the balance of Equistar’s accounts receivable sold under the facilities was $102 million and $81 million, respectively. Accounts receivable in the Consolidated Balance Sheets are reduced by the sales of interests in the pool. Upon termination of the facility, cash collections related to accounts receivable then in the pool would first be applied to the outstanding interest sold. Increases and decreases in the amount sold are reflected in operating activities in the Consolidated Statements of Cash Flows. Fees related to the sales are included in “Other income (expense), net” in the Consolidated Statements of Income. The new accounts receivable sales facility is subject to substantially the same minimum unused availability requirements and covenant requirements as the new inventory-based revolving credit facility, which is secured by a pledge of accounts receivable. See Note 9. The new facility does not contain ratings triggers.
5. Inventories
Inventories consisted of the following components at December 31:
The excess of the current cost of inventories over book value was approximately $101 million at December 31, 2003. In December 2003, Equistar entered into a $250 million, four-year, inventory-based revolving credit facility. See Note 9.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Property, Plant and Equipment and Other Assets
The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows at December 31:
During 2003, Equistar refocused certain polymer research and development (“R&D”) programs, resulting in a charge of $11 million to write off the net book value of certain R&D facilities at Equistar’s Morris, Illinois plant that was shutdown at the end of 2003. Also in 2003, Equistar sold a polypropylene production facility in Pasadena, Texas for a loss of $12 million. The effects of these transactions were included in “Losses on asset dispositions” in the Consolidated Statements of Income.
Equistar did not capitalize any interest during 2003, 2002 and 2001 with respect to construction projects.
The components of other assets, at cost, and the related accumulated amortization were as follows at December 31:
Scheduled amortization of these intangible assets for the next five years is estimated to be $58 million in 2004, $53 million in 2005, $49 million in 2006, $39 million in 2007 and $29 million in 2008.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Depreciation and amortization expense is summarized as follows:
In addition, amortization of debt issuance costs of $7 million, $7 million and $2 million in 2003, 2002 and 2001, respectively, is included in interest expense in the Consolidated Statements of Income.
7. Accrued Liabilities
Accrued liabilities consisted of the following components at December 31:
8. Deferred Revenues
In March 2003, Equistar received an advance of $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.
In December 2002, Equistar received a $25 million initial advance from a customer in connection with a long-term product supply agreement under which Equistar is obligated to deliver product at cost-based prices. Equistar will recognize this deferred revenue as the product is delivered, which is expected to be over 9 years.
Trade sales and other operating revenues included $12 million in 2003 and $2 million in 2002 representing deferred revenue earned in those periods.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9. Long-Term Debt
Long-term debt consisted of the following at December 31:
The term loan due 2007, which was paid in full in 2003, had a weighted-average interest rate of 4.80%, 5.25% and 6.26% during 2003, 2002 and 2001, respectively. The medium-term notes had a weighted-average interest rate of 9.51% at December 31, 2003 and 9.75% at December 31, 2002 and 2001.
The 6.5% notes and the 7.55% debentures were assumed by Equistar from Lyondell when Equistar was formed in 1997. As between Equistar and Lyondell, Equistar is primarily liable for this debt. Lyondell is a guarantor of the 6.5% notes and the 7.55% debentures. The consolidated financial statements of Lyondell are filed as an exhibit to Equistar’s Annual Report on Form 10-K for the year ended December 31, 2003.
Aggregate maturities of long-term debt during the next five years are $1 million in 2005; $150 million in 2006; $700 million in 2008 and $1.5 billion thereafter. There are no scheduled maturities of long-term debt in 2004 and 2007.
In December 2003, Equistar entered into a new $250 million, four-year, inventory-based revolving credit facility which replaced Equistar’s previous $354 million revolving credit facility. The total amount available at December 31, 2003 under both the new $250 million inventory-based revolving credit facility and the new $450 million accounts receivable sales facility (see Note 4) was approximately $430 million, which gives effect to the borrowing base less a $75 million unused availability requirement and is net of the $102 million sold under the accounts receivable facility and $18 million of outstanding letters of credit under the revolving credit facility. The borrowing base is determined using a formula applied to accounts receivable and inventory balances. The new revolving credit facility requires that the unused available amounts under that facility and the $450 million accounts receivable sales facility equal or exceed $75 million through March 30, 2005 and $50 million thereafter or $100 million thereafter if the interest coverage ratio, as defined, is less than 2:1. At December 31, 2003, the interest rate under the new inventory-based revolving credit facility was LIBOR plus 2.5%. The new revolving credit facility is secured by a lien on all inventory and certain personal property, including a pledge of accounts receivable. There was no borrowing under the new revolving credit facility at December 31, 2003.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In November 2003, Equistar issued $250 million of 10.625% senior unsecured notes due in 2011. The proceeds, net of related fees, were used to prepay in full $173 million of the outstanding term loan under Equistar’s previous credit facility and to repay borrowing under Equistar’s previous $354 million revolving credit facility. In September 2003, $29 million of Equistar’s medium term notes matured and were repaid using funds borrowed under Equistar’s revolving credit facility. In April 2003, Equistar issued $450 million of 10.625% senior unsecured notes due in 2011. The proceeds, net of related fees, were used to prepay $300 million of 8.5% notes due in the first quarter 2004, approximately $122 million of term loans under Equistar’s credit facility and prepayment premiums of approximately $17 million.
In March 2003 and 2002, Equistar obtained amendments to its previous $354 million revolving credit facility that provided additional financial flexibility by generally making certain financial ratio requirements less restrictive.
During October 2002, Equistar entered into an agreement to sell certain accounts receivable and received cash proceeds of $100 million. See Note 4. Equistar used the $100 million proceeds to reduce borrowing under the previous $354 million revolving credit facility and for general corporate purposes.
The new $250 million revolving credit facility and the indentures governing Equistar’s senior unsecured notes contain covenants that, subject to certain exceptions, restrict lien incurrence, debt incurrence, sales of assets, investments, capital expenditures, certain payments, and mergers. The new credit facility does not require Equistar to maintain specified financial ratios. The breach of these covenants would permit the lenders to declare any outstanding debt immediately payable, and would permit the lenders under Equistar’s credit facility to terminate future lending commitments. Equistar was in compliance with all such covenants as of December 31, 2003.
10. Lease Commitments
Equistar leases various facilities and equipment under noncancelable operating lease arrangements for various periods. Operating leases include leases of railcars used in the distribution of products in Equistar’s business.
At December 31, 2003, future minimum lease payments relating to noncancelable operating leases with lease terms in excess of one year were as follows:
Operating lease net rental expense was $106 million, $125 million and $110 million for the years ending December 31, 2003, 2002 and 2001, respectively. Net rental expense in 2002 included $21 million of amortization of lease prepayments related to certain railcar leases that were terminated as of December 31, 2003.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
11. Financial Instruments and Derivatives
The fair value of all nonderivative financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximated their carrying value due to their short maturity. Based on the borrowing rates currently available to Equistar for debt with terms and average maturities similar to Equistar’s debt portfolio, the fair value of Equistar’s long-term debt, including amounts due within one year, was approximately $2,459 million and $2,031 million at December 31, 2003 and 2002, respectively.
Equistar is exposed to credit risk with respect to accounts receivable. Equistar performs ongoing credit evaluations of its customers and, in certain circumstances, requires letters of credit from the customers. See Note 4.
12. Pension and Other Postretirement Benefits
All full-time regular employees are covered by defined benefit pension plans sponsored by Equistar. In connection with the formation of Equistar, no pension assets or obligations were contributed to Equistar, with the exception of union represented plans contributed by Occidental and Millennium.
Retirement benefits are based upon years of service and the employee’s highest three consecutive years of compensation during the last ten years of service. Equistar funds the plans through periodic contributions to pension trust funds. Equistar also has unfunded supplemental nonqualified retirement plans, which provide pension benefits for certain employees in excess of the U.S. tax-qualified plans’ limits. In addition, Equistar sponsors unfunded postretirement benefit plans other than pensions, which provide medical and life insurance benefits. The postretirement medical plans are contributory while the life insurance plans are, generally, noncontributory. The life insurance benefits are provided to employees who retired before July 1, 2002. The measurement date for Equistar’s pension and other postretirement benefit plans is December 31, 2003.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table provides a reconciliation of benefit obligations, plan assets and the funded status of these plans:
Pension plans with projected benefit obligations and accumulated benefit obligations in excess of the fair value of assets are summarized as follows at December 31:
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Net periodic pension and other postretirement benefit costs included the following components:
The assumptions used in determining the net benefit liability were as follows at December 31:
The assumptions used in determining net benefit cost were as follows at December 31:
Management’s goal is to manage pension investments over the long term to achieve optimal returns with an acceptable level of risk and volatility. Targeted asset allocations of 55% U.S. equity securities, 15% non-U.S. equity securities, and 30% fixed income securities were adopted in 2003 for the plans based on recommendations by its independent pension investment advisor. Investment policies prohibit investments in securities issued by Equistar or an affiliate, such as Lyondell or Millennium, or investment in speculative derivative instruments. The investments are marketable securities that provide sufficient liquidity to meet expected benefit obligation payments.
The expected rate of return on plan assets is a longer term rate, and is expected to change less frequently than the current assumed discount rate, reflecting long-term market expectations, rather than current fluctuations in market conditions. Prior to 2003, Equistar’s expected long-term rate of return on plan assets of 9.5% had been based on the average level of earnings that its independent pension investment advisor had advised could be expected to be
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
earned over time, using the expected returns for the above-noted asset allocations that had been recommended by the advisor, and had been adopted for the plans. Over the three-year period ended December 31, 2003, Equistar’s actual return on plan assets was a gain averaging 0.9% per year. In 2003, Equistar reviewed its asset allocation and expected long-term rate of return assumptions, and obtained an updated asset allocation study from the independent pension investment advisor, including updated expectations for long-term market earnings rates for various classes of investments. Based on this review, Equistar reduced its expected long-term rate of return on plan assets to 8%, and did not significantly change its plan asset allocations.
Equistar’s pension plan weighted-average asset allocations by asset category were as follows at December 31:
Equistar expects to contribute approximately $17 million to its pension plan in 2004.
As of December 31, 2003, future expected benefit payments, which reflect expected future service, as appropriate, were as follows:
The assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 2003 was 10.0% for 2004, 7.0% for 2005 through 2007 and 5.0% thereafter. The health care cost trend rate assumption does not have a significant effect on the amounts reported due to limits on Equistar’s maximum contribution level under the medical plan. To illustrate, increasing or decreasing the assumed health care cost trend rates by one percentage point in each year would change the accumulated postretirement benefit liability as of December 31, 2003 by less than $1 million and would not have a material effect on the aggregate service and interest cost components of the net periodic postretirement benefit cost for the year then ended.
Equistar also maintains voluntary defined contribution savings plans for eligible employees. Contributions to the plans by Equistar were $12 million, $13 million and $16 million for the years ended December 31, 2003, 2002 and 2001, respectively.
13. Commitments and Contingencies
Commitments-Equistar has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business, generally for quantities required for Equistar’s businesses and at prevailing market prices. See also Note 3, describing related party commitments.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Equistar is party to various unconditional purchase obligation contracts as a purchaser for products and services, principally for steam and power. At December 31, 2003, future minimum payments under those contracts with noncancelable contract terms in excess of one year and fixed minimum payments were as follows:
Equistar’s total purchases under these agreements were $244 million and $230 million for the years ended December 31, 2003 and 2002, respectively.
Leased Facility-Equistar’s Lake Charles facility has been idled since the first quarter of 2001, pending sustained improvement in market conditions. The facility and land, which are included in property, plant and equipment at a net book value of $152 million, are leased from Occidental. In May 2003, Equistar and Occidental entered into a new one-year lease, which has renewal provisions for two additional one-year periods at either party’s option.
Indemnification Arrangements-Lyondell, Millennium and Occidental have each agreed to provide certain indemnifications or guarantees thereof to Equistar with respect to the petrochemicals and polymers businesses they each contributed. In addition, Equistar has agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are filed prior to December 1, 2004 as to Lyondell and Millennium, and May 15, 2005 as to Occidental, to the extent the aggregate thereof does not exceed $7 million for each entity, subject to certain terms of the respective asset contribution agreements. From formation through December 31, 2003, Equistar had incurred a total of $20 million for these claims and liabilities. Lyondell, Millennium, Occidental and Equistar remain liable under these indemnification or guarantee arrangements to the same extent as they were before Lyondell’s August 2002 acquisition of Occidental’s interest in Equistar.
Environmental Remediation-Equistar’s accrued liability for environmental matters as of December 31, 2003 was $1 million and primarily related to the Port Arthur facility, which was permanently shut down in February 2001. In the opinion of management, there is currently no material estimable range of possible loss in excess of the liability recorded for environmental remediation.
Clean Air Act-The eight-county Houston/Galveston region has been designated a severe non-attainment area under the one-hour ozone standard by the U.S. Environmental Protection Agency (“EPA”). As a result, in December 2000, the Texas Commission on Environmental Quality (“TCEQ”) submitted a plan to the EPA to reach and demonstrate compliance with the ozone standard by November 2007. Ozone is a product of the reaction between volatile organic compounds and nitrogen oxides (“NOx”) in the presence of sunlight, and is a principal component of smog. Emission reduction controls for NOx must be installed at each of Equistar’s six plants located in the Houston/Galveston region during the next several years. Revised rules adopted by the TCEQ in December 2002 changed the required NOx emission reduction levels from 90% to 80% while requiring new controls on emissions of HRVOCs, such as ethylene, propylene, butadiene and butylenes. The TCEQ plans to make a final review of these rules, with final rule revisions to be adopted by October 2004. These rules also still require approval by the EPA. Under the revised 80% standard, Equistar estimates that the incremental capital expenditures would range between $165 million and $200 million. Of these amounts, Equistar’s spending through December 31, 2003 totaled $69 million. However, the above estimate could be affected by increased costs for stricter proposed controls over HRVOCs. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. Equistar is still assessing the impact of the new HRVOC control
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
requirements. There can be no guarantee as to the ultimate cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline.
General-Equistar is involved in 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 on the financial position, liquidity or results of operations of Equistar.
14. Supplemental Cash Flow Information
Supplemental cash flow information is summarized as follows for the periods presented:
15. Segment Information and Related Information
Equistar operates in two reportable segments, petrochemicals and polymers (see Note 1). The accounting policies of the segments are the same as those described in “Summary of Significant Accounting Policies” (see Note 2). No customer accounted for 10% or more of sales during any year in the three-year period ended December 31, 2003.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Summarized financial information concerning Equistar’s reportable segments is shown in the following table. Intersegment sales between the petrochemicals and polymers segments were based on current market prices.
The following table presents the details of “Operating income (loss)” as presented above in the “Unallocated” column for the years ended December 31, 2003, 2002 and 2001.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table presents the details of “Total assets” as presented above in the “Unallocated” column as of December 31, for the years indicated:
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Equistar performed an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer (principal executive officer) and Vice President and Controller (principal financial officer), of the effectiveness of Equistar’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of December 31, 2003. Based upon that evaluation, the Chief Executive Officer and the Vice President and Controller concluded that Equistar’s disclosure controls and procedures are effective.
There were no changes in Equistar’s internal control over financial reporting that occurred during Equistar’s last fiscal quarter (the fourth quarter of 2003) that have materially affected, or are reasonably likely to materially affect, Equistar’s internal control over financial reporting.
PART III
Item 10.
Item 10. Members of the Partnership Governance Committee and Executive Officers of Equistar
Partnership Governance Committee
A Partnership Governance Committee (the “Governance Committee”) manages and controls the business, property and affairs of Equistar, including the determination and implementation of Equistar’s strategic direction. The general partners exercise their authority to manage and control Equistar only through the Governance Committee, subject to delegation to the executive officers discussed below. The Governance Committee consists of six members, called representatives, three appointed by each general partner. The participation rights of any general partner’s representatives may be curtailed to the extent that the general partner or its affiliates cause a default under the partnership agreement. See “The Partnership Agreement” below.
The following biographical information is furnished with respect to each of the members of the Governance Committee. The information includes age as of March 1, 2004, present position, if any, with Equistar, period served as a member of the Governance Committee, and other business experience during at least the past five years.
Dan. F. Smith, 57
Mr. Smith has been a member and Co-Chairman of the Governance Committee since December 1997 and has been Chief Executive Officer of Equistar since December 1997. Mr. Smith has been a director of Lyondell since October 1988. He has been President of Lyondell since August 1994 and Chief Executive Officer of Lyondell since December 1996. Mr. Smith was Chief Operating Officer of Lyondell from May 1993 to December 1996. Prior thereto, Mr. Smith held various senior executive positions with Lyondell and Atlantic Richfield Company (“ARCO”), including Executive Vice President and Chief Financial Officer of Lyondell, Vice President, Corporate Planning of ARCO and Senior Vice President in the areas of management, manufacturing, control and administration for Lyondell and the Lyondell Division of ARCO. Mr. Smith is a director of Cooper Industries, Inc.
Robert E. Lee, 47
Mr. Lee has been a member and Co-Chairman of the Governance Committee since July 2003. Mr. Lee has served as President and Chief Executive Officer of Millennium since July 2003. He was Executive Vice
Audit Committee Financial Experts
The Governance Committee functions similar to a board of directors of a publicly-held corporation. In addition, because the Governance Committee does not have a separately designated audit committee, the entire Governance Committee performs the functions that generally would be performed by an audit committee of a publicly-held corporation. The Governance Committee has determined that Equistar has at least one “audit committee financial expert,” as defined in Item 401(h) of Regulation S-K, serving on the Governance Committee. The Governance Committee has determined that Messrs. DeNicola, Lee, Lushefski and Smith each qualify as an audit committee
financial expert. However, because Equistar is managed by its owners through their representation on the Governance Committee and because of the significant commercial relationships between Equistar and its owners, Messrs. DeNicola, Lee, Lushefski and Smith do not satisfy the definition of independence contained in Section 303A of the New York Stock Exchange listing standards. See “Item 13. Certain Relationships and Related Transactions” for a description of the commercial relationships between Equistar and its owners.
The Partnership Agreement
Equistar’s partnership agreement governs, among other things, Equistar’s management, ownership, cash distributions and capital contributions. The following is a summary of the material provisions of Equistar’s partnership agreement.
Actions Requiring Unanimous Voting
Unless approved by two or more representatives of each of Lyondell and Millennium, the Governance Committee may not take any actions that would permit or cause Equistar, any of its subsidiaries, or any person acting in the name of or on behalf of any of them, directly or indirectly, whether in a single transaction or a series of related transactions, to:
• engage, participate or invest in any business outside the scope of Equistar’s business as described in the partnership agreement;
• approve any strategic plan, as well as any amendments or updates to the strategic plan, including the annual update described under “-Strategic Plans and Preparation of an Annual Budget” below;
• authorize any disposition of assets having a fair market value exceeding $30 million in any one transaction or a series of related transactions not contemplated in an approved strategic plan;
• authorize any acquisition of assets or any capital expenditure exceeding $30 million that is not contemplated in an approved strategic plan;
• require capital contributions to Equistar within any fiscal year if the total of contributions required from the partners within that year would exceed $100 million, or if the total of contributions required from the partners within that year and the immediately preceding four years would exceed $300 million, other than contributions (1) contemplated by the asset contribution agreements for each of Lyondell and Millennium, (2) contemplated by an approved strategic plan or (3) required to achieve or maintain compliance with health, safety and environmental laws;
• authorize the incurrence of debt for borrowed money, unless (1) the debt is to refinance all or a portion of Equistar’s credit facility as contemplated below, (2) after giving effect to the incurrence of the debt and any related transactions, Equistar would be expected to have an “investment grade” debt rating by Moody’s and S&P or (3) the debt is incurred to refinance the public or bank debt assumed or incurred by Equistar as contemplated by documents relating to Equistar’s formation and the contribution of the Occidental contributed business or to refinance any such refinancing debt; and in the case of each of the three exceptions above, the agreement relating to the debt does not provide that the transfer by a partner of its partnership interests, or a change of control with respect to any partner or any of its affiliates, would either (1) constitute a default under the debt instruments, (2) otherwise accelerate the maturity of the debt or (3) give the lender or holder any “put rights” or similar rights with respect to the debt instrument;
however, unanimous consent is not required for Equistar to refinance any of its synthetic or capitalized leases in effect on March 31, 2002 with debt for borrowed money if the amount of the debt incurred does not in the aggregate exceed the amount required to terminate the synthetic or capitalized lease;
• make borrowings under one or more of Equistar’s bank credit facilities, uncommitted lines of credit or any credit facility or debt instruments that refinances all or any portion of Equistar’s credit facility or facilities, at any time, if, as a result of any such borrowing, the aggregate principal amount of all such borrowings outstanding at that time would exceed $1.75 billion;
• enter into interest rate protection or other hedging agreements, other than hydrocarbon hedging agreements in the ordinary course of business;
• enter into any capitalized lease or off-balance sheet financing arrangements involving payments, individually or in the aggregate, by Equistar in excess of $30 million in any fiscal year;
• cause Equistar or any of its subsidiaries to issue, sell, redeem or acquire any partnership interests in Equistar or other equity securities, or any rights to acquire, or any securities convertible into or exchangeable for, partnership interests or other equity securities;
• make cash distributions from Equistar in excess of Available Net Operating Cash, as defined below under “-Distribution of Available Net Operating Cash to Equistar’s Partners,” or to make non-cash distributions, except as provided in the partnership agreement in respect of a dissolution or liquidation;
• appoint or discharge executive officers, other than the Chief Executive Officer, based on the recommendation of the Chief Executive Officer;
• approve material compensation and benefit plans and policies, material employee policies and material collective bargaining agreements for Equistar’s employees;
• initiate or settle any litigation or governmental proceedings if the effect of the litigation or proceedings would be material to Equistar’s financial condition;
• change Equistar’s independent accountants;
• change Equistar’s method of accounting as adopted in the partnership agreement or make tax elections under the Internal Revenue Code of 1986, as amended, determined to be appropriate by the Governance Committee;
• create or change the authority of any auxiliary committee;
• merge, consolidate or convert Equistar or any of its subsidiaries with or into any other entity, other than a wholly owned subsidiary of Equistar;
• engage in certain bankruptcy and reorganization actions specified in the partnership agreement;
• exercise any of the powers or rights described below under “-Transactions with Affiliates” with respect to a business conflict involving either (1) LCR, its successors or assigns, (2) Lyondell Methanol Company, L.P. (“LMC”), its successors or assigns or (3) any other affiliate of any of the general partners, if the affiliate’s actions with respect to the conflict circumstance are not controlled by Lyondell or Millennium, other than a business conflict involving the exercise of any rights and remedies with respect to a default under any agreement that is the subject of the conflict; or
• repay any of Equistar’s long-term debt or any of its long-term synthetic leases that are treated as debt for purposes of federal income tax if, by doing so, the aggregate amount of all such indebtedness would be reduced below $1.825 billion prior to May 15, 2005, and thereafter, below $1.5 billion.
Although unanimous approval by all six members of the Governance Committee is never required, the requirements described above are referred to as “unanimous voting requirements” because two representatives of each of the general partners must agree on any action taken in respect of the enumerated matters.
Transactions with Affiliates
Except as described above under “-Actions Requiring Unanimous Voting,” if a business conflict caused by any transaction or dealing between Equistar, or any of its subsidiaries, and one or more of its general partners, or any of their affiliates, occurs, the other general partner will have sole and exclusive power, at Equistar’s expense, to both (1) control all decisions, elections, notifications, actions, exercises or non-exercises and waivers of all rights, privileges and remedies provided to, or possessed by, Equistar with respect to the conflict and (2) retain and direct legal counsel and to control, assert, enforce, defend, litigate, mediate, arbitrate, settle, compromise or waive any and all claims, disputes and actions if any potential, threatened or asserted claim, dispute or action about a conflict occurs. Any action by the Governance Committee with respect to such a conflict, except as described above under “-Actions Requiring Unanimous Voting,” will require the approval of at least two representatives of the uninvolved general partner, and the representatives of the interested general partner will have no votes.
Strategic Plans and Preparation of an Annual Budget
Equistar is managed under a five-year strategic business plan which is updated annually under the direction of the Chief Executive Officer and presented for approval by the Governance Committee no later than 90 days before the start of the first fiscal year covered by the updated plan. The strategic plan must be approved each year by at least two representatives of each of the general partners. The strategic plan establishes Equistar’s strategic direction, including: plans relating to capital maintenance and enhancement; geographic expansion, acquisitions and dispositions; new product lines; technology; long-term supply and customer arrangements; internal and external financing; environmental and legal compliance; and plans, programs and policies relating to compensation and industrial relations.
In addition, Equistar’s executive officers prepare an annual budget for each fiscal year. Each annual budget includes an operating budget and capital expenditure budget. Each annual budget must be consistent with the information for its fiscal year included in the most recently approved strategic plan. Unless otherwise provided in the most recently approved strategic plan, each annual budget utilizes a format and provides a level of detail consistent with Equistar’s previous annual budget.
Equistar’s executive officers have prepared the 2004 five-year strategic plan and the 2004 annual budget and presented these items to the Governance Committee for approval. The proposed 2004 annual budget incorporated amounts for shared services under the shared services arrangement consistent with the expected continuation of the shared service arrangement. See “Item 13. Certain Relationships and Related Transactions-Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium and Occidental.” As of the date of this filing, the Governance Committee has not taken action on the proposed 2004 five-year strategic plan or the 2004 annual budget. Pending Governance Committee action on these items, Equistar’s executive officers are using the proposed 2004 annual budget to track and manage Equistar’s current performance.
There is no assurance that the Governance Committee will approve the 2004 five-year strategic plan and the 2004 annual budget. If the Governance Committee determines not to approve a strategic plan and annual budget, the deadlock provisions described below under “Governance Committee Deadlock Over the Strategic Plan” will become applicable.
If for any fiscal year the Governance Committee fails to approve an updated strategic plan, for that year and each subsequent year before the approval of an updated strategic plan, Equistar’s executive officers will prepare and promptly furnish to the Governance Committee an annual budget consistent with the projections and other information for that year included in the strategic plan most recently approved. The Chief Executive Officer, acting in good faith, shall be entitled to modify any annual budget (1) to satisfy current contractual and compliance obligations and/or (2) to account for other changes in circumstances resulting from the passage of time or the occurrence of events beyond Equistar’s control.
The Chief Executive Officer is not authorized to cause Equistar to proceed with capital expenditures to accomplish capital enhancement projects except to the extent that the expenditures would enable Equistar to continue or complete any capital project reflected in the last strategic plan that was approved by the Governance Committee.
After a strategic plan and an annual budget have been approved by the Governance Committee, or an annual budget has been developed as described above in cases where an updated strategic plan has not yet been approved, the Chief Executive Officer is authorized, without further action by the Governance Committee, to cause Equistar to make expenditures consistent with the updated strategic plan and annual budget, provided that all internal control policies and procedures, including those regarding the required authority for expenditures, shall have been followed.
Governance Committee Deadlock Over the Strategic Plan
If the Governance Committee has not agreed upon and approved an updated strategic plan by 12 months after the beginning of the first fiscal year that would have been covered by the plan, then Equistar’s general partners are required to submit to a non-binding dispute resolution process. The general partners are required to continue the dispute resolution process until either (1) agreement is reached by the general partners, acting through their representatives, on an updated strategic plan or (2) at least 24 months have elapsed since the beginning of the first fiscal year that was to be covered by the first updated strategic plan for which agreement was not reached and one general partner determines and notifies the other general partner in writing that no agreement resolving the dispute is likely to be reached. Following receipt of notice described above, either general partner may elect to dissolve Equistar. There is no assurance that a Governance Committee deadlock would not have a material adverse effect on Equistar.
Distribution of Available Net Operating Cash to Equistar’s Partners
The partnership agreement provides that Equistar must distribute to the partners, as soon as practicable following the end of each month, all Available Net Operating Cash, as defined below.
“Available Net Operating Cash” is defined in the partnership agreement, at the relevant time of determination, as (1) all cash and cash equivalents on hand as of the most recent month’s end, plus the excess, if any, of Equistar’s targeted level of indebtedness over Equistar’s actual indebtedness as of that month’s end, less (2) the Projected Cash Requirements, if any, as of that month’s end, as determined by the executive officers. The targeted level of indebtedness is shown in the most recently updated strategic plan. The actual indebtedness is determined according to generally accepted accounting principles and represents all short term and long term debt.
“Projected Cash Requirements” means, for the 12-month period following any month’s end, the excess, if any, of the sum of Equistar’s:
• (1) forecast capital expenditures; (2) forecast cash payments for taxes, debt service, including principal and interest payment requirements and other non-cash credits to income; and (3) forecast cash reserves for future operations or other requirements;
over the sum of:
• (1) forecast net income; (2) forecast depreciation, amortization, other non-cash charges to income, interest expense and tax expenses, in each case to the extent deducted in determining net income; (3) forecast decreases in working capital or minus forecast increases in working capital; and (4) forecast cash proceeds of disposition of assets, net of expenses.
Equistar’s Projected Cash Requirements are calculated, subject to changes in certain circumstances, consistently with the most recently updated strategic plan.
Distributions to the partners of cash or property arising from Equistar’s liquidation would be made according to the capital account balances of the partners. Unless otherwise agreed by the general partners not involved with a business conflict as described under “-Transactions with Affiliates” above, any amount otherwise distributable to a partner as described above will be applied by Equistar to satisfy obligations to Equistar resulting from a partner’s or
its affiliate’s failure to (1) pay any interest or principal when due on any indebtedness for borrowed money to Equistar, (2) make any indemnification payment required by its asset contribution agreement that has been finally determined to be due or (3) make any capital contribution required by the partnership agreement, other than as required by the applicable asset contribution agreement.
Indemnification of Each Partner
Equistar has agreed, to the fullest extent permitted by applicable law, to indemnify, defend and hold harmless each partner, its affiliates and its respective officers, directors and employees. This indemnification is from, against and in respect of any liability which the indemnified person may sustain, incur or assume as a result of, or relative to, any third-party claim arising out of or in connection with Equistar’s business, property or affairs. This indemnification does not apply to the extent that it is finally determined that the third-party claim arose out of or was related to actions or omissions of the indemnified partner, its affiliates or any of their respective officers, directors or employees acting in those capacities constituting a breach of the partnership agreement or any related agreement. This indemnification obligation is not intended to, nor will it, affect or take precedence over the indemnity provisions contained in any related agreement. See “Item 13. Certain Relationships and Related Transactions-Asset Contributions by Lyondell and Affiliates of Millennium and Occidental.”
Transfers and Pledges of a Partner’s Interest in Equistar
Without the consent of the general partners, no partner may transfer less than all of its interest in Equistar, nor can any partner transfer its interest other than for cash. If one of the limited partners and its affiliated general partner desire to transfer, via a cash sale, all of their units, they must give written notice to Equistar and the other partners and the non-selling partners shall have the option, exercisable by delivering written acceptance notice of the exercise to the selling partners within 45 days after receiving notice of the proposed sale, to elect to purchase all of the partnership interests of the selling partners on the terms described in the initial notice. If all of the other non-selling partners deliver notice of acceptance, then all of the partnership interests shall be transferred in proportion to the partners’ current percentage interest unless otherwise agreed. If less than all of the non-selling partners deliver notice of acceptance, the partner who delivers notice of acceptance will have the option of purchasing all of the partnership interests up for sale. The notice of acceptance will set a date for closing the purchase which is not less than 30 nor more than 90 days after delivery of the notice of acceptance, subject to extension. The purchase price for the selling partners’ partnership interests will be paid in cash.
If the non-selling partners do not elect to purchase the selling partners’ partnership interests within 45 days after the receipt of initial notice of the proposed sale, the selling partners will have a further 180 days during which they may consummate the sale of their units to a third-party purchaser. The sale to a third-party purchaser must be at a purchase price and on other terms that are no more favorable to the purchaser than the terms offered to the non-selling partners. If the sale is not completed within the 180-day period, the initial notice will be deemed to have expired, and a new notice and offer shall be required before the selling partners may make any transfer of their partnership interests.
Before the selling partners may consummate a transfer of their partnership interests to a third party under the partnership agreement, the selling partners must demonstrate that the person willing to serve as the proposed purchaser’s guarantor must have outstanding indebtedness that is rated investment grade by Moody’s and S&P’s. If the proposed guarantor has no rated indebtedness outstanding, it shall provide an opinion from a nationally recognized investment banking firm that it could be reasonably expected to obtain suitable ratings. In addition, a partner may transfer its partnership interests only if, together with satisfying all other requirements (1) the transfer is accomplished in a nonpublic offering in compliance with, and exempt from, the registration and qualification requirements of all federal and state securities laws and regulations, (2) the transfer does not cause a default under any material contract to which Equistar is a party or by which Equistar or any of its properties is bound, (3) the transferee executes an appropriate agreement to be bound by the partnership agreement, (4) the transferor and/or the transferee bears all reasonable costs incurred by Equistar in connection with the transfer, (5) the guarantor of the transferee delivers an agreement to the ultimate parent entity of the non-selling partners and to Equistar substantially in the form of the parent agreement and (6) the proposed transferor is not in material default in the timely performance of any of its material obligations to Equistar.
A partner will not in any transaction or series of actions, directly or indirectly, pledge all or any part of its partnership interest. However, a partner may at any time assign its right to receive distributions from Equistar so long as the assignment does not purport to assign any (1) right of the partner to participate in or manage Equistar’s affairs, (2) right of the partner to receive any information or accounting of Equistar’s affairs, (3) right of the partner to inspect Equistar’s books or records or (4) other right of a partner under the partnership agreement or the Delaware Revised Uniform Limited Partnership Act.
In addition, except for any restrictions imposed by the parent agreement described below under “The Parent Agreement,” nothing in Equistar’s partnership agreement will prevent the transfer or pledge by the owner of any capital stock, equity ownership interests or other security of the partner or any affiliate of a partner.
The partnership agreement specifically provides for transfers of a partner’s partnership interest to an affiliate without consent of the other partners. A general partner may transfer all of its units in the partnership to another general partner that is its affiliate if this transfer would not cause Equistar’s dissolution. A limited partner may transfer its units as follows:
• up to 99% of its units may be transferred to a general partner that is its affiliate, whereupon the limited partner units so transferred will become general partner units;
• up to 99% of its units may be transferred to another limited partner that is its affiliate; and
• all of its units may be transferred to another limited partner that is its affiliate if this transfer would not cause Equistar’s dissolution.
In addition, any partner may transfer all of its partnership interest in Equistar to one of its wholly owned affiliates that is not at that time a partner if the transferee executes an instrument reasonably satisfactory to all of the general partners accepting the partnership agreement.
Business Opportunities Which Must be Offered to Equistar
Except as described below, each partner’s affiliates are free to engage in or possess an interest in any other business of any type and to avail themselves of any business opportunity available to it without having to offer Equistar or any partner the opportunity to participate in that business. If a partner’s affiliate desires to initiate or pursue an opportunity to undertake, engage in, acquire or invest in a “related business,” as defined in the partnership agreement, that partner or its affiliate will offer Equistar the business opportunity. A related business is any business related to (1) the manufacturing, marketing and distribution of the types of olefins, polyolefins, ethyl alcohol, ethyl ether and ethylene oxide, ethylene glycol and derivatives of ethylene oxide and ethylene glycol that are specifically set forth in the partnership agreement, (2) the purchasing, processing and disposing of raw materials in connection with the manufacturing, marketing and distributing of the chemicals identified in clause (1) above and (3) any research and development in connection with clauses (1) and (2) above.
When a proposing partner offers a business opportunity to Equistar, Equistar will elect to do one of the following within a reasonably prompt period: (1) acquire or undertake the business opportunity for its benefit as a whole, at its cost, expense and benefit or (2) permit the proposing partner to acquire or undertake the business opportunity for its own benefit and account without any duty to Equistar or the other partners.
If the business opportunity is in direct competition with Equistar’s then-existing business and Equistar does not elect to acquire or undertake the business opportunity for its own benefit, then the proposing partner and Equistar shall, if either so elects, seek to negotiate and implement an arrangement whereby Equistar would either (1) acquire or undertake the competing opportunity at the sole cost, expense and benefit of the proposing partner under a mutually acceptable arrangement or (2) enter into a management agreement with the proposing partner to manage the competing opportunity on behalf of the proposing partner on terms and conditions mutually acceptable to the proposing partner and Equistar. Under clause (1) above, the competing opportunity will be treated as a separate business within Equistar.
If Equistar and the proposing partner do not reach agreement as to an arrangement, the proposing partner may acquire or undertake the competing opportunity for its own benefit and account without any duty to Equistar or the other partners.
In addition, if the business opportunity constitutes less than 25% of an acquisition of or investment in assets, activities, operations or businesses that is not otherwise a related business, then a proposing partner may acquire or invest in a business opportunity without first offering it to Equistar. The 25% figure is based on annual revenues for the most recently completed fiscal year. After completion of the above acquisition or investment, the proposing partner must offer the business opportunity to Equistar under the terms described above. If Equistar elects to pursue the business opportunity, it will be acquired by Equistar at its fair market value as of the date of the acquisition.
If Equistar is presented with an opportunity to acquire or undertake a business opportunity that it determines not to acquire or undertake, and the representatives of one general partner, but not the other general partner, desires that Equistar acquire or undertake the business opportunity, then Equistar will permit the general partner and its affiliates to acquire or undertake such business opportunity, and the business opportunity shall be treated in the same manner as if the general partner and its affiliates were a proposing partner with respect to the business opportunity.
Amendment of Partnership Agreement
All waivers, modifications, amendments or alterations of the partnership agreement require the written approval of all of the partners in Equistar.
The Parent Agreement
Lyondell, Millennium and Equistar are parties to an amended and restated parent agreement dated November 6, 2002. The following is a summary of the material provisions of the parent agreement.
Guarantee of Obligations Under the Partnership Agreement and Related Party Agreements
Pursuant to the parent agreement, each of Lyondell and Millennium (the “Parents”) has guaranteed, undertaken and promised to cause the due and punctual payment and the full and prompt performance of all of the amounts to be paid and all of the terms and provisions under various agreements, including, without limitation, the partnership agreement and the asset contribution agreements, to be performed or observed by or on the part of certain of their respective subsidiaries, including subsidiaries that are Equistar’s partners, and any other direct or indirect subsidiary of any of the Parents that are parties to these agreements. These subsidiaries collectively are referred to as the “Affiliated Obligors.” The entities that are the limited partners and general partners collectively are referred to as the “Partner Subs.” Additionally, for purposes of agreements related to the partnership that predate August 22, 2002, the term “Affiliated Obligors” includes affiliates of any of Oxy CH Corporation, Occidental Chemical Corporation or Occidental Chemical Holding Corporation if any such affiliate was a party to those related agreements. Insofar as the provisions described in this subsection apply to agreements other than the partnership agreement and the parent agreement, the term “Affiliated Obligors” will not include Equistar or any partner of Equistar in its capacity as a partner. The parent agreement provides expressly that the parent guarantees inure solely to the benefit of the beneficiaries specified in the parent agreement, which consist of Equistar, Lyondell and Lyondell’s Affiliated Obligors and Millennium and Millennium’s Affiliated Obligors. The parent agreement also states that nothing in the agreement confers upon any other person any rights, benefits or remedies by reason of the parent agreement.
Conflict Circumstance
The partnership agreement includes definitions of “Conflict Circumstance,” “Conflicted General Partner” and “Nonconflicted General Partner” and provides that the Nonconflicted General Partners have some exclusive rights to control Equistar with respect to any Conflict Circumstance, generally involving a transaction between Equistar and an affiliate of one of its partners. The guarantee provisions described above do not apply to the parents of the general partners that direct Equistar in connection with these Conflict Circumstances, so that the parents of a Nonconflicted General Partner are not effectively guaranteeing Equistar’s performance of contracts with other parents. However, a parent of a Nonconflicted General Partner may have liability for Equistar’s failure to perform
in circumstances where that failure was caused by an act or failure to act of its Partner Sub. Without limiting the rights of the Partner Subs under the partnership agreement, and without prejudice to any rights, remedies or defenses Equistar may have in any other agreement or Conflict Circumstance, each Parent has agreed to cause each of its Partner Subs to both (1) cause Equistar to pay, perform and observe all of the terms and provisions of other agreements to be paid, performed or observed by or on the part of Equistar under the agreements, according to their terms to the extent that the Partner Sub is a Nonconflicted General Partner and is thereby entitled to cause the payment, performance and observance of the terms and provisions and (2) except to the extent inconsistent with its obligations above, abide by its obligations as a Nonconflicted General Partner with respect to any Conflict Circumstance arising in connection with any other agreement according to the terms of the partnership agreement that apply.
Nothing in the provisions described in this subsection shall require a Parent to make or cause a Partner Sub to either (1) cure or mitigate Equistar’s inability to make any payment or to perform or observe any terms and provisions under any other agreements, (2) cause Equistar to require from the Partner Subs any cash contributions in respect of any payment, performance or observance involving a Conflict Circumstance or (3) make any contribution to Equistar that the Partner Sub is not otherwise required to make under terms of the partnership agreement concerning required capital contributions. See “The Partnership Agreement-Transactions with Affiliates.”
Restrictions on Transfer of Partner Sub Stock
Without the consent of the other Parent, no Parent may transfer less than all of its interests in its Partner Subs (the “Partner Sub Stock”) except in compliance with the following provisions.
Each Parent may transfer all, but not less than all, of its Partner Sub Stock, without the consent of the other Parent, if the transfer is in connection with either (1) a merger, consolidation, conversion or share exchange of the transferring Parent or (2) a sale or other disposition of (A) the Partner Sub Stock, plus (B) other assets representing at least 50% of the book value of the transferring Parent’s assets excluding the Partner Sub Stock, as reflected on its most recent audited consolidated or combined financial statements.
In addition, any transfer of Partner Sub Stock by any Parent described above is only permitted if the acquiring, succeeding or surviving entity, if any, both (1) succeeds to and is substituted for the transferring Parent with the same effect as if it had been named in the parent agreement and (2) executes an instrument agreeing to be bound by the obligations of the transferring Parent under the parent agreement, with the same effect as if it had been named in the instrument.
The transferring Parent may be released from its guarantee obligations under the parent agreement after the successor parent agrees to be bound by the Parent’s obligations.
Unless a transfer is permitted under the provisions described above, any Parent desiring to transfer all of its Partner Sub Stock to any person, including another Parent or any affiliate of a Parent, may only transfer its Partner Sub Stock for cash consideration and will give a written right of first option to Equistar and the other Parent. The offeree Parent will have the option to elect to purchase all of the Partner Sub Stock of the selling Parent, on the terms described in the right of first offer. If the offeree Parent does not elect to purchase all of the selling Parent’s Partner Sub Stock within 45 days after the receipt of the initial notice, the selling Parent will have a further 180 days during which it may, subject to the provisions of the following paragraph, consummate the sale of its Partner Sub Stock to a third-party purchaser at a purchase price and on other terms that are no more favorable to the purchaser than the initial terms offered to the offeree Parent. If the sale is not completed within the further 180-day period, the right of first offer will be deemed to have expired and a new right of first offer shall be required before the selling Parent may make any transfer of its Partner Sub Stock.
Before the selling Parent may consummate a transfer of its Partner Sub Stock to a third party under the provisions described in the preceding paragraph, the selling parent shall demonstrate to the other Parent that the proposed purchaser, or the person willing to serve as its guarantor as contemplated by the terms of the parent agreement, has outstanding indebtedness that is rated investment grade by either Moody’s or S&P. If such proposed purchaser or the other person has no rated indebtedness outstanding, that person shall provide an opinion from Moody’s, S&P or from a nationally recognized investment banking firm that it could be reasonably expected to obtain a suitable rating. Moreover, a Parent may transfer its Partner Sub Stock, under the previous paragraph, only if all of the following occur:
• the transfer is accomplished in a nonpublic offering in compliance with, and exempt from, the registration and qualification requirements of all federal and state securities laws and regulations;
• the transfer does not cause a default under any material contract which has been approved unanimously by the Governance Committee and to which Equistar is a party or by which Equistar or any of its properties is bound;
• the transferee executes an appropriate agreement to be bound by the parent agreement;
• the transferor and/or transferee bears all reasonable costs incurred by Equistar in connection with the transfer;
• the transferee, or the guarantor of the obligations of the transferee, delivers an agreement to the other Parent and Equistar substantially in the form of the parent agreement; and
• the proposed transferor is not in default in the timely performance of any of its material obligations to Equistar.
In no event may any Parent transfer the Partner Sub Stock of any of the subsidiaries that hold the direct interests in Equistar to any person unless the transferring Parent simultaneously transfers the Partner Sub Stock of all of its subsidiaries that hold the direct interests in Equistar to that person or a wholly owned affiliate of that person or a common parent.
Competing Business by Owners of Equistar or Their Affiliates
If any of Lyondell, Millennium, Occidental Petroleum Corporation, Occidental Chemical Corporation, Oxy CH Corporation or Occidental Chemical Holding Corporation or any of their affiliates desires to initiate or pursue any opportunity to undertake, engage in, acquire or invest in a business opportunity of the type described under “The Partnership Agreement-Business Opportunities Which Must be Offered to Equistar,” it shall agree to offer that business opportunity to Equistar under the terms and conditions in the partnership agreement as if it were the “proposing partner,” as described in such section. Equistar will have the rights and obligations arising from the offer of the business opportunity granted by the partnership agreement. See “The Partnership Agreement-Business Opportunities Which Must be Offered to Equistar.”
Executive Officers
The Governance Committee has delegated responsibility for day-to-day operations to the executive officers of Equistar. The executive officers consist of a Chief Executive Officer and others as determined from time to time by the Governance Committee. Except for the Chief Executive Officer, the approval of at least two representatives of each of Lyondell and Millennium is required to appoint or discharge executive officers, based upon the recommendation of the Chief Executive Officer.
The Chief Executive Officer holds office for a five-year term, assuming he does not resign or die and is not removed, and need not be an employee of Equistar. Mr. Smith was re-appointed for a five-year term in January 2003. The Chief Executive Officer may be removed at any time by action of the Governance Committee. Lyondell has the right to designate Equistar’s Chief Executive Officer, provided the person designated is reasonably acceptable to Millennium.
The following table sets forth the names and ages of the executive officers of Equistar as of March 1, 2004.
Name
Age
Partnership Position
Dan F. Smith
Chief Executive Officer
Morris Gelb
Chief Operating Officer
James W. Bayer
Senior Vice President, Manufacturing
Edward J. Dineen
Senior Vice President, Chemicals and Polymers
W. Norman Phillips, Jr.
Senior Vice President, Fuels and Raw Materials
John A. Hollinshead
Vice President, Human Resources
Mr. Smith has been Chief Executive Officer of Equistar since December 1997. Mr. Smith has been a director of Lyondell since October 1988. He has been President of Lyondell since August 1994 and Chief Executive Officer of Lyondell since December 1996. Mr. Smith was Chief Operating Officer of Lyondell from May 1993 to December 1996. Prior thereto, Mr. Smith held various senior executive positions with Lyondell and ARCO, including Executive Vice President and Chief Financial Officer of Lyondell, Vice President, Corporate Planning of ARCO and Senior Vice President in the areas of management, manufacturing, control and administration for Lyondell and the Lyondell Division of ARCO. Mr. Smith is a director of Cooper Industries, Inc. and is a member of the Governance Committee of Equistar.
Mr. Gelb was appointed Chief Operating Officer of Equistar in March 2002. Mr. Gelb has served as Executive Vice President and Chief Operating Officer of Lyondell since December 1998. Previously, he served as Senior Vice President, Manufacturing, Process Development and Engineering of Lyondell from July 1998 to December 1998. He was named Vice President for Research and Engineering of ARCO Chemical Company in 1986 and Senior Vice President of ARCO Chemical Company in July 1997. Mr. Gelb also serves as a member of the Partnership Governance Committee of LCR.
Mr. Bayer was appointed Senior Vice President, Manufacturing of Equistar in September 2000. Mr. Bayer has served as Senior Vice President, Manufacturing of Lyondell since October 2000. He previously was the Vice President of Health, Safety, Environmental and Engineering of Lyondell. From December 1997 to July 1999 he was Director, Gulf Coast Manufacturing for ARCO Chemical Company. Prior to December 1997, Mr. Bayer served as Channelview Plant Manager for ARCO Chemical Company.
Mr. Dineen was appointed Senior Vice President, Chemicals and Polymers of Equistar in March 2002 and Senior Vice President, Chemicals and Polymers of Lyondell in May 2002. Prior thereto, he served as Senior Vice President, Intermediates and Performance Chemicals of Lyondell since May 2000. Prior to this position, he served as Senior Vice President, Urethanes and Performance Chemicals of Lyondell since July 1998. He served as Vice President, Performance Products and Development for ARCO Chemical Company beginning in June 1997, and served as Vice President, Planning and Control for ARCO Chemical European Operations from 1993 until his appointment as Vice President, Worldwide CoProducts and Raw Materials in 1995.
Mr. Phillips was appointed Senior Vice President, Fuels and Raw Materials of Equistar in March 2002 and Senior Vice President, Fuels and Raw Materials of Lyondell in May 2002. Prior thereto, he served as Senior Vice President, Polymers of Equistar since August 1998. He was previously Vice President, Petrochemicals of Equistar from December 1997 to August 1998. Mr. Phillips also has served as a Senior Vice President of Lyondell since October 2000. He previously served as Vice President, Polymers of Lyondell from January 1997 to December 1997, and as Vice President of Lyondell with responsibilities in the areas of marketing and operations from 1993 to January 1997. Mr. Phillips also serves as a member of the Partnership Governance Committee of LCR.
Mr. Hollinshead was appointed Vice President, Human Resources of Equistar in November 2000. Mr. Hollinshead has served as Vice President, Human Resources of Lyondell since July 1998. Prior to his appointment as Vice President, Human Resources of Lyondell, he was Director, Human Resources, Manufacturing and Engineering for Equistar and, until 1997, was Manager, Human Resources for Lyondell.
Code of Ethics
Equistar has adopted a “code of ethics,” as defined in Item 406(b) of Regulation S-K. Equistar’s code of ethics, known as its Business Ethics and Conduct Policy, applies to all officers and employees of Equistar, including Equistar’s principal executive officer, principal financial officer, principal accounting officer and controller. Equistar has posted its Business Ethics and Conduct Policy on its website, www.equistarchem.com. In addition, Equistar intends to satisfy the disclosure requirements of Item 10 of Form 8-K regarding any amendment to, or waiver from, a provision of the Business Ethics and Conduct Policy that applies to Equistar’s principal executive officer, principal financial officer, principal accounting officer or controller and relates to any element of the definition of code of ethics set forth in Item 406(b) of Regulation S-K by posting such information on its website, www.equistarchem.com.
Item 11.
Item 11. Executive Compensation
Summary Compensation Table
The table below provides information regarding the compensation awarded to or earned by Equistar’s Chief Executive Officer and the next most highly compensated executive officer (collectively, the “named executive officers”) during the fiscal years ended December 31, 2003, 2002 and 2001. Messrs. Gelb, Bayer, Dineen and Hollinshead provide services to Equistar pursuant to a shared services arrangement, but are employed and compensated by Lyondell. Therefore, they are not considered for inclusion in the following table. See “Item 13. Certain Relationships and Related Transactions - Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium and Occidental.”
(a) Based on the formula used to calculate the bonus, as a result of Equistar’s results due to the prolonged adverse business conditions in the industry, no annual cash bonus was paid to Mr. Phillips with respect to 2003. The bonus amounts shown for Mr. Phillips for 2003 and 2002 were calculated based on the economic value of the entire Lyondell enterprise (including Equistar). The bonus amount shown for Mr. Phillips for 2001 was calculated solely with reference to Equistar.
(b) Amounts for Mr. Phillips include imputed income in respect of Equistar’s Long-Term Disability Plan and tax gross-ups (the additional reimbursement paid to a recipient to cover the federal income tax obligations associated with the underlying benefit, including an additional amount based on maximum applicable income tax rates) in respect of financial counseling reimbursements, as set forth below:
(c) The amount shown for 2003 represents 7,309 “restricted Equistar shares” awarded to Mr. Phillips under the Incentive Plan during 2003, as described under “Equistar’s Incentive Plan” below. The restricted Equistar shares give participants the right to receive a cash payment equal to the value of a predetermined number of units whose value is determined by the composite market values of the common stock of Equistar’s owners, weighted in proportions set by Equistar’s Compensation Committee. The weighting factors set by the Compensation Committee are: (1) Lyondell, 60%, and (2) Millennium, 40%. However, the Incentive Plan provides that the Compensation Committee has discretion to change the weighting factors. The awards vest in annual one-third increments, beginning February 7, 2004. At the time of vesting, each participant receives a cash payment equal to two times the value of the participant’s vested restricted Equistar shares. The valuation in the table of the 7,309 restricted Equistar shares granted to Mr. Phillips in February 2003 was calculated using the weighted composite market values of the common stock of Equistar’s owners on the date of grant, which was $11.574 per composite unit. The value of these unvested restricted Equistar shares at December 31, 2003, based on the weighted composite market values of the common stock of Equistar’s owners on December 31, 2003 of $15.24 per composite unit, was $111,389. Each participant with unvested restricted Equistar shares receives quarterly dividend equivalent payments in cash, the amount of which is determined by multiplying the quarterly cash dividend paid by each of the owner companies on their respective shares of common stock (weighted in accordance with the weighting factors set forth above) by the number of unvested restricted Equistar shares held by such participant at the time.
(d) The amount shown for 2003 represents “Equistar options” awarded under the Incentive Plan during 2003, as further described in the Option Grants in 2003 table below. Amounts shown for 2002 and 2001 represent Equistar options awarded under the Incentive Plan during 2002 and 2001, respectively. The Equistar options give participants the right to receive a cash payment equal to the increase in value of a predetermined number of units whose value is determined by the composite market values of the common stock of Equistar’s owners, weighted in proportions set by Equistar’s Compensation Committee. When the 2001 and 2002 grants were initially made, Equistar was owned by Lyondell, Millennium and Occidental. The initial weighting factors set by the Compensation Committee for the 2001 and 2002 grants were: (1) Lyondell, 45%, (2) Millennium, 45%, and (3) Occidental, 10%. However, the Incentive Plan provides that the Compensation Committee has discretion to change the weighting factors. In August 2002, Lyondell purchased Occidental’s interest in Equistar. As a result, the Compensation Committee revised the weighting factors and, based on the revised weighting factors, adjusted the size and exercise price of the 2001 and 2002 grants to reflect the new ownership of Equistar. The revised weighting factors are: (1) Lyondell, 60%, and (2) Millennium, 40%. The amounts shown for 2001 and 2002 reflect the Equistar options awarded during 2001 and 2002, respectively, as revised by the Compensation Committee to reflect the new ownership of Equistar. The amount shown for 2003 also reflects the new ownership of Equistar and the new weighting factors.
(e) Prior to 2001, awards were made to Mr. Phillips under Equistar’s previous bonus plan, known as the Equistar Bonus Plan, which awards entitle him to deferred cash payments made in three annual installments. See “Equistar’s Bonus Plan” below for a description of these awards. The amount shown for 2001 represents the initial one third of the amount earned with respect to 1999 and the second one third of the amount earned with respect to 1998. The amount shown for 2002 represents the initial one third of the amount earned with respect to 2000, the second one third of the amount earned with respect to 1999 and the final one third of the amount earned with respect to 1998. The amount shown for 2003 represents the second one third of the amount earned with respect to 2000 and the final one third of the amount earned with respect to 1999.
(f) The amount shown for Mr. Phillips includes contributions to the Executive Supplementary Savings Plan, incremental executive medical plan premiums, financial counseling reimbursements and amounts in respect of the Executive Life Insurance Plan, as follows:
(g) Mr. Smith serves as the Chief Executive Officer of both Lyondell and Equistar. Mr. Smith does not receive any compensation from Equistar. Equistar pays a fee to Lyondell in recognition of Mr. Smith’s services. See “Item 13. Certain Relationships and Related Transactions-Agreement Regarding Services of Equistar’s Chief Executive Officer.”
Equistar’s Bonus Plan
Prior to 2001, Equistar provided performance-driven, annual and long-term incentive compensation to executive officers through the Equistar Bonus Plan. The Bonus Plan integrated current and deferred (or long-term) components. Awards were based on whether Equistar reached its performance and financial goals in critical areas, primarily economic value added. Economic value added was used to measure Equistar’s cash flow performance in excess of a capital charge, which was calculated by multiplying the capital invested in Equistar by Equistar’s weighted average cost of capital.
Awards consisted of a combination of annual (or current cash) and long-term (or deferred cash) compensation. The relative percentages of current cash and deferred cash components were based on the market value of the Bonus Plan participant’s position, with the percentage of deferred cash compensation increasing as compared with current cash compensation as the market value of the Bonus Plan participant’s position increased. The deferred cash portion of each award is paid out over three consecutive years, one-third each year, beginning approximately one year from the payment of the related annual cash component, and is reflected in the “Long-Term Incentive Payouts” column of the Summary Compensation Table. The payout amounts for the deferred compensation component could be adjusted upward, with no cap, or downward, with an 80% floor, based on Equistar’s ongoing results over the three-year period covered by the deferred cash component. The Bonus Plan remains in effect. However, in 2001, Equistar adopted a new Incentive Plan.
Equistar’s Incentive Plan
In 2001, Equistar adopted a new Incentive Plan and began granting incentive awards to executive officers under this Incentive Plan. Equistar believes that the grants of incentive awards under the Incentive Plan are comparable in value to grants of incentive awards in prior years. The 2001 and 2002 awards were made in three forms:
• Annual cash awards, which reward management for economic value added and financial and operational performance based on other measures selected by Equistar’s Compensation Committee.
• Equistar options, which give participants the right to receive a cash payment equal to the increase in the value of a predetermined number of units whose value is determined by the composite market values of the common stock of Equistar’s owners, weighted in proportions set by Equistar’s Compensation Committee. The awards have a strike price equal to the weighted composite market value of the current owner companies, vest in annual one-third increments and generally have a term of ten years.
• Equistar performance shares, which allow participants to receive a cash payment equal to the value of a number of units, which varies with the achievement of performance criteria. The value of each unit is determined by the composite market values of the common stock of Equistar’s current owners, weighted in proportions set by Equistar’s Compensation Committee. The cash payment actually made to participants will depend on the weighted composite total shareholder return for Equistar’s owners over a three-year period.
Beginning in 2003, Equistar’s Compensation Committee added a fourth type of award, known as restricted Equistar shares. Restricted Equistar shares give participants the right to receive a cash payment equal to the value of a predetermined number of units whose value is determined by the composite market values of the common stock of Equistar’s owners, weighted in proportions set by Equistar’s Compensation Committee. The awards vest in annual one-third increments. At the time of vesting, the participant receives a cash payment equal to two times the value of the vested restricted Equistar shares. The awards are subject to forfeiture on employment termination other than for death, disability or retirement.
Equistar believes that the Incentive Plan allows Equistar’s Compensation Committee to make awards that provide appropriate performance and retention incentives to management.
Option Grants in 2003
(a) Mr. Smith serves as the Chief Executive Officer of both Lyondell and Equistar. Mr. Smith does not receive any compensation from Equistar. Equistar pays a fee to Lyondell in recognition of Mr. Smith’s services. See “Item 13. Certain Relationships and Related Transactions-Agreement Regarding Services of Equistar’s Chief Executive Officer.”
(b) The award to Mr. Phillips represents Equistar options granted by Equistar pursuant to the Incentive Plan. The Equistar options give participants the right to receive a cash payment equal to the increase in the value of a predetermined number of units whose value is determined by the composite market values of the common stock of Equistar’s owners, weighted in proportions set by Equistar’s Compensation Committee. The weighting factors set by the Compensation Committee are: (1) Lyondell, 60%, and (2) Millennium, 40%. However, the Incentive Plan provides that the Compensation Committee has discretion to change the weighting factors. The Equistar options have an exercise price equal to the weighted composite market value of the common stock of the owner companies on the grant date, and vest in one-third annual increments, with the first third vesting on February 7, 2004. The Equistar options are subject to early vesting under certain specified conditions. The grant date present value per unit of Equistar options granted was estimated using the Black-Scholes option-pricing model, on a three-year basis for each of Equistar’s owners, and based on certain assumptions for each of Equistar’s owners. The Black-Scholes values for the owner companies were then weighted in accordance with the weighting factors set forth above to estimate the grant date present value per unit of Equistar options. The following assumptions were used with respect Lyondell: fair value per share-$3.02; dividend yield-6.37%; expected volatility-42.16%; risk-free interest rate-4.23%; and maturity in years-10. The following assumptions were used with respect to Millennium: fair value per share-$3.33; dividend yield-4.12%; expected volatility-44.84%; risk-free interest rate-4.23%; and maturity in years-10.
No Equistar options were exercised during 2003 by any named executive officers. The following table shows the number of composite units represented by outstanding Equistar options held by each of the named executive officers as of December 31, 2003, including the value of “in-the-money” Equistar options, which represents the positive spread between the exercise price of any such Equistar option and the year end weighted composite market value.
Option Values at December 31, 2003
(a) Mr. Smith serves as the Chief Executive Officer of both Lyondell and Equistar. Mr. Smith does not receive any compensation from Equistar. Equistar pays a fee to Lyondell in recognition of Mr. Smith’s services. See “Item 13. Certain Relationships and Related Transactions-Agreement Regarding Services of Equistar’s Chief Executive Officer.”
(b) Equistar options were awarded pursuant to the Incentive Plan. The awards have an exercise price equal to the composite market value on the date of grant of the common stock of Equistar’s owner companies, as weighted in proportions set by Equistar’s Compensation Committee. The weighting factors set by the Compensation Committee are: (1) Lyondell, 60%, and (2) Millennium, 40%. However, the Incentive Plan provides that the Compensation Committee has discretion to change the weighting factors. The composite market value of the common stock of Equistar’s owner companies on December 31, 2003, as weighted in proportions set by the Compensation Committee, was $15.24 per composite unit.
Long-Term Incentive Plans-Awards in 2003
(a) Amounts in this column are the payout “target” number of units. Up to two times this amount may pay out as the “maximum” payout described in this table.
(b) Mr. Smith serves as the Chief Executive Officer of both Lyondell and Equistar. Mr. Smith does not receive any compensation from Equistar. Equistar pays a fee to Lyondell in recognition of Mr. Smith’s services. See “Item 13. Certain Relationships and Related Transactions-Agreement Regarding Services of Equistar’s Chief Executive Officer.”
(c) The award granted to Mr. Phillips is a performance share award pursuant to the Incentive Plan. Equistar performance share awards allow participants to receive a cash payment equal to the value of a number of units, which varies with the achievement of performance criteria. The value of each unit is determined by the composite market value of the common stock of Equistar’s owners, weighted in proportions set by Equistar’s Compensation Committee. The weighting factors set by the Compensation Committee are: (1) Lyondell, 60%, and (2) Millennium, 40%. However, the Incentive Plan provides that the Compensation Committee has discretion to change the weighting factors. Equistar performance share awards may only be paid in cash. The cash amount actually paid to participants will depend on the weighted composite total shareholder return for the owner companies over the 2003-2005 performance cycle. The performance target is to achieve total shareholder return (defined as the change in composite fair market value of a unit plus composite dividend yield
measured over the course of the performance cycle) during the performance cycle of at least the fiftieth percentile, as compared to the companies in the peer group. In order for any performance shares to be earned, a total shareholder return ranking of at least the thirtieth percentile (the threshold amount) must be achieved; and total shareholder return in the eightieth percentile will result in the maximum payment set forth above. Shareholder returns between the thirtieth and fiftieth percentile, or between the fiftieth and eightieth percentile will be interpolated between the values listed above. The companies composing the peer group are all chemical or specialty chemical companies.
Pension Benefits
The following table shows estimated annual pension benefits payable to Equistar’s employees, including the named executive officers (other than Mr. Smith, who does not receive any compensation from Equistar), upon retirement at age 65 based on credited service as of January 1, 2004, under the provisions of the Equistar Retirement Plan and the Equistar Supplementary Executive Retirement Plan (together, the “Equistar Retirement Plan”).
Pension Plan Table
(a) As of December 31, 2003, Mr. Phillips had six years of credited service (rounded to the nearest whole number) under the Equistar Retirement Plan.
The amounts shown in the above table are necessarily based upon certain assumptions, including retirement of the employee at age 65, based on credited services as of January 1, 2004, and payment of the benefit under the basic form of allowance provided under the Equistar Retirement Plan (payment for the life of the employee only). The amounts will change if the payment is made under any other form of allowance permitted by the respective retirement plan, or if an employee’s actual retirement occurred after January 1, 2004, since the “annual covered compensation level” of such employee (one of the factors used in computing the annual retirement benefits) may change during the employee’s subsequent years of membership service. The covered compensation for which retirement benefits are computed under the Equistar Retirement Plan is the average of the participant’s highest three consecutive years out of the last ten years of base salary plus annual bonus. Base salary and annual bonus amounts are set forth under the “Salary” and “Bonus” headings in the Summary Compensation Table. The benefits shown are not subject to deduction for Social Security benefits or other offset amounts.
Executive Severance Arrangements and Change in Control
The Lyondell Chemical Company Executive Severance Pay Plan (the “Severance Plan”) generally applies to all executive officers of Lyondell, including Mr. Smith, and certain other key members of management that are designated by the Chief Executive Officer of Lyondell. The Severance Plan also covers executive officers and other key members of management (as designated by the Chief Executive Officer of Lyondell) of Lyondell’s subsidiaries and Equistar. The Severance Plan provides for the payment of certain benefits to covered employees upon certain terminations following a Change in Control of Lyondell. Under the Severance Plan, a “Change in Control” of Lyondell means any one of the following events:
• the incumbent directors of Lyondell (directors as of February 1, 1999 or individuals recommended or approved by a majority of the then incumbent directors other than as a result of either an actual or threatened election contest) cease to constitute at least a majority of Lyondell’s Board of Directors,
• the shareholders of Lyondell approve a merger, consolidation, or recapitalization of Lyondell, or a sale of substantially all Lyondell’s assets, unless immediately after the consummation of the transaction, the shareholders of Lyondell immediately prior to the transaction would own 80% or more of the then outstanding equity interests and combined voting power of the then outstanding voting securities of the resulting entity, and the incumbent directors at the time of initial approval of the transaction would, immediately after the transaction, constitute a majority of the Board of Directors or similar managing group of such resulting entity,
• the shareholders of Lyondell approve any plan for the liquidation or dissolution of Lyondell,
• any person shall become the beneficial owner of more than 20% of the outstanding common stock of Lyondell or combined voting power of all voting securities of Lyondell, unless such person exceeds 20% ownership solely as a result of (A) Lyondell acquiring securities and correspondingly reducing the number of shares or other voting securities outstanding, (B) an acquisition of securities directly from Lyondell except for any conversion of a security that was not acquired directly from Lyondell or (C) a direct or indirect acquisition by Occidental or Millennium (or an affiliate) of beneficial ownership of securities representing (x) in the case of Occidental and its affiliates, no more than 40%, (y) in the case of Millennium and its affiliates, no more than 40%, and (z) in the case of Occidental and Millennium and their respective affiliates in the aggregate, no more than 49% of either the then outstanding common stock or combined voting power of the then outstanding voting securities of Lyondell, as contemplated by any agreement between Lyondell and Occidental and/or Millennium or their affiliates where, as a result of the transaction or series of related transactions, Lyondell or the resulting entity owns a greater percentage equity interest in Equistar than Lyondell owned immediately prior to the transactions. If a person referred to in either (A) or (B) of this clause shall thereafter become the beneficial owner of additional shares of Lyondell’s common stock or other ownership interests representing 1% or more of the outstanding shares of Lyondell’s common stock or 1% or more of the combined voting power of Lyondell (other than by stock split, stock dividend or similar transaction or as a result of an event described in (A), (B) or (C) of this clause), then a Change in Control will be deemed to have occurred.
A Change in Control will not be deemed to occur under the second bullet of the paragraph above if each of the following conditions is met: (1) the transaction is between Lyondell and/or its affiliates and Millennium and/or its affiliates, (2) Lyondell or an entity that was a wholly owned subsidiary of Lyondell prior to the transaction has a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, immediately after the transaction, (3) Millennium or an entity that was a wholly owned subsidiary of Millennium prior to the transaction has a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, immediately after the transaction, and (4) as a result of the transaction, Lyondell or its affiliates own a greater percentage equity interest in Equistar than Lyondell owned immediately prior to the transaction.
If an employee covered under the Severance Plan is terminated by his or her employer without cause or by the employee for good reason (which includes certain “constructive” terminations) within two years following a Change in Control, the employee will be entitled to receive from Lyondell a payment equal to one times to three times
annual earnings, depending on the employee’s position with his or her employer. Annual earnings for this purpose is generally the sum of an employee’s base pay plus target annual bonus. Mr. Smith would receive from Lyondell a payment equal to three times his annual earnings. Mr. Phillips would receive from Lyondell a payment equal to two times his annual earnings. Outstanding Lyondell option awards, if any, to covered employees will be automatically vested. Covered employees will also receive, at Lyondell’s expense: (1) eligibility to commence vested early retirement benefits under Lyondell’s or a subsidiary’s retirement plans, actuarially reduced for early commencement, and retiree medical coverage; (2) continuation of welfare benefit coverages for a period of two years following termination; and (3) outplacement services for a period of one year, at a cost not to exceed $40,000. In addition, covered employees will receive from Lyondell a gross-up payment for the amount of the excise tax liability, if any, imposed pursuant to Code Section 4999 with respect to any benefits paid in connection with the Change in Control. In order to receive benefits under the Severance Plan, a covered employee must sign a general release of claims against Lyondell and its affiliates. Upon a Change in Control, if applicable, Lyondell will also deposit into its Supplemental Executive Benefit Plans Trust any additional assets necessary to fully fund the benefits due under its Supplementary Executive Retirement Plan and Executive Deferral Plan. The Severance Plan may be amended or terminated at any time prior to a Change in Control or, if earlier, prior to the date that a third party submits a proposal to the Board of Directors that is reasonably calculated, in the judgment of Lyondell’s compensation committee, to effect a Change in Control. The Severance Plan may not be amended to deprive a covered employee of benefits after a Change in Control.
Compensation of Partnership Governance Committee Members
Members of the Governance Committee do not receive any compensation from Equistar for their service.
Compensation Committee Interlocks and Insider Participation
The members of Equistar’s Compensation Committee are John A. Hollinshead and John E. Lushefski. Mr. Smith, Equistar’s Chief Executive Officer, is also President, Chief Executive Officer and a director of Lyondell. Mr. Hollinshead, Vice President, Human Resources of Lyondell and Equistar, is an executive officer of Lyondell and Equistar. Mr. Lushefski, Senior Vice President and Chief Financial Officer of Millennium, is an executive officer of Millennium. Mr. Smith does not receive any compensation from Equistar for his services. Mr. Smith’s compensation is determined by Lyondell’s Compensation Committee. Accordingly, neither the Governance Committee nor the Compensation Committee of Equistar determines Mr. Smith’s compensation.
Lyondell, Millennium and other parties related to Lyondell and Millennium have various agreements and transactions with Equistar. For a description of these agreements and transactions, see “Item 13. Certain Relationships and Related Transactions.”
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Equistar is wholly owned by subsidiaries of Lyondell and Millennium. Lyondell’s subsidiaries own 70.5% of Equistar’s equity and Millennium’s subsidiaries own 29.5%. Lyondell’s interest increased from 41% to 70.5% on August 22, 2002 when it acquired the equity of entities that were previously subsidiaries of Occidental. Lyondell and Millennium each file reports and other information with the SEC, and you may read and copy any document filed by Lyondell or Millennium at the SEC’s public reference room or on the SEC’s website located at www.sec.gov. Information Lyondell and Millennium file with the SEC is not incorporated by reference into this Annual Report and does not constitute a part of this Annual Report. The following information is given with respect to the owners’ interests in Equistar as of March 1, 2004.
Lyondell directly or indirectly owns 100% of the outstanding capital stock of each of Lyondell Petrochemical L.P. Inc., Lyondell (Pelican) Petrochemical L.P.1, Inc., Lyondell (Pelican) Petrochemical L.P.2, Inc., Lyondell LP3 Partners, LP and Lyondell Petrochemical G.P. Inc. (collectively, the “Lyondell Owner Subsidiaries”). Lyondell has pledged its interests in each of the Lyondell Owner Subsidiaries under its bank credit facility. Millennium indirectly owns 100% of the outstanding equity interests of each of Millennium Petrochemicals LP LLC and Millennium Petrochemicals GP LLC (collectively, the “Millennium Owner Subsidiaries”). Millennium has pledged its interest in each of the Millennium Owner Subsidiaries under its bank credit facility. None of the general partners holds any significant assets other than its partnership interest.
Lyondell
Lyondell is a global chemical company. Lyondell had revenues of approximately $3.8 billion for the year ended December 31, 2003, and approximately $7.6 billion of assets at December 31, 2003. Lyondell is vertically integrated into its key raw materials through its equity ownership in Equistar. Lyondell operates in the following businesses:
• Intermediate Chemicals and Derivatives. Lyondell is a leading producer of propylene oxide, commonly referred to as PO, and a leading worldwide producer and marketer of PO derivatives. Lyondell also is a leading supplier of toluene diisocyanate and a major producer and marketer of styrene monomer and tertiary butyl alcohol, co-products of Lyondell’s proprietary PO technology.
• Petrochemicals and Polymers. Lyondell operates in these businesses through its ownership interest in Equistar.
• Refining. Lyondell owns 58.75% of LCR, which owns one of the largest crude oil refineries in the United States processing heavy Venezuelan crude oil. The refinery is located in Houston, Texas and is a full conversion refinery with heavy crude oil processing capability of approximately 268,000 barrels per day of 17 degree API gravity crude oil.
Millennium
Millennium is a major international chemical company, with leading market positions in a broad range of commodity, industrial, performance and specialty chemicals. Millennium had revenues of approximately $1.7 billion for the year ended December 31, 2003, and approximately $2.4 billion of assets at December 31, 2003. In addition to its interest in Equistar, Millennium operates in three business segments: Titanium Dioxide and Related Products; Acetyls; and Specialty Chemicals.
Millennium has leading market positions in the United States and the world:
• Through its Titanium Dioxide and Related Products business segment, Millennium is the second-largest producer of titanium dioxide in the world. Millennium is also the largest merchant seller of titanium tetrachloride and a major producer of zirconia, silica gel and cadmium-based pigments;
• Through its Acetyls business segment, Millennium is the second-largest producer of vinyl acetate monomer and acetic acid in North America;
• Through its Specialty Chemicals business segment, Millennium is a leading producer of terpene-based fragrance and flavor chemicals;
• Through its 29.5% interest in Equistar, Millennium is a partner in the second-largest producer of ethylene and the third-largest producer of polyethylene in North America, and a leading producer of performance polymers, oxygenated chemicals, aromatics and specialty petrochemicals.
Item 13.
Item 13. Certain Relationships and Related Transactions
Until August 2002, Equistar, a limited partnership, was wholly owned by subsidiaries of each of Lyondell, Millennium and Occidental. On August 22, 2002, Lyondell purchased Occidental’s 29.5% ownership interest in Equistar by purchasing all of the outstanding stock of the Occidental subsidiaries that were owners of Equistar. As a result, Occidental no longer owns an interest in Equistar and Lyondell’s ownership interest in Equistar increased from 41% to 70.5%. Millennium owns the remaining 29.5% interest in Equistar. Based on the most recent Statement on Schedule 13G or 13D, Form 5 or amendments thereto filed with the Securities and Exchange Commission, as of March 1, 2004, Occidental beneficially owned 2,700,000 shares of Lyondell’s original common stock, 36,823,421 shares of Lyondell’s Series B common stock and warrants to purchase five million shares of
Lyondell’s original common stock, representing in the aggregate approximately 25% of all of Lyondell’s outstanding common stock. In addition, two Occidental executives, Dr. Ray R. Irani, Chairman and Chief Executive Officer, and Stephen I. Chazen, Chief Financial Officer and Executive Vice President, serve as members of Lyondell’s Board of Directors.
The following summary describes transactions among Equistar and its current owners and their affiliates. In addition, as a result of Occidental’s beneficial ownership interest in Lyondell and its representation on Lyondell’s Board of Directors, the following summary also describes transactions among Equistar and Occidental and its affiliates. Equistar believes that the related party transactions described below were obtained on terms substantially no more or less favorable than those that would have been agreed upon by third parties on an arm’s length basis.
Asset Contributions by Lyondell and Affiliates of Millennium and Occidental
Both Lyondell and Millennium Petrochemicals entered into separate asset contribution agreements on December 1, 1997, providing for the contribution of the Lyondell and Millennium contributed businesses. Wholly owned subsidiaries of Occidental (the “Occidental Subsidiaries”) entered into an asset contribution agreement with Equistar on May 15, 1998, with respect to the transfer of the Occidental contributed business, a portion of which transfer was accomplished through a merger of an Occidental Subsidiary with and into Equistar. Among other things, the asset contribution agreements required representations and warranties by the contributor regarding the transferred assets and indemnification of Equistar by the contributor. These agreements also provide for the assumption by Equistar of, among other things:
• third-party claims that are related to contingent liabilities arising prior to the contribution transactions that are filed before December 1, 2004 as to Lyondell and Millennium Petrochemicals, or before May 15, 2005 as to the Occidental Subsidiaries, to the extent the aggregate amount does not exceed, in the case of each of Lyondell, Millennium and the Occidental Subsidiaries, $7 million;
• third-party claims related to contingent liabilities arising prior to the contribution transactions that are filed for the first time after December 1, 2004 as to Lyondell and Millennium Petrochemicals, or after May 15, 2005 as to the Occidental Subsidiaries;
• obligations for $745 million of Lyondell indebtedness, of which $301 million remains outstanding as of December 31, 2003;
• a $750 million intercompany obligation of Millennium Petrochemicals to an indirect subsidiary of Millennium, which has been repaid;
• the lease intended for security relating to the Corpus Christi facility contributed by Occidental, which has been repaid;
• liabilities for products sold after December 1, 1997 as to Lyondell and Millennium Petrochemicals, or after May 15, 1998 as to the Occidental Subsidiaries, regardless of when manufactured;
• certain post-retirement benefits related to the applicable contributed business or to certain Lyondell employees who became employees of Equistar;
• in the case of the Millennium Petrochemicals asset contribution agreement, future maintenance and maintenance turnaround costs related to the Millennium contributed business;
• in the case of each of the Millennium Petrochemicals and the Occidental Subsidiaries asset contribution agreements, obligations under railcar leases under which Equistar is the lessee.
As of September 30, 2001, Equistar, Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries amended these asset contribution agreements to clarify the treatment of, and procedures pertaining to the management of, certain claims arising under the asset contribution agreements. Equistar believes that these amendments do not materially change the asset contribution agreements.
Lyondell, Millennium Petrochemicals and Occidental Chemical Corporation, a subsidiary of Occidental (“Occidental Chemical”), entered into Master Intellectual Property Agreements and other related agreements with respect to intellectual property with Equistar. These agreements provide for all of the following:
• the transfer of intellectual property of Lyondell, Millennium Petrochemicals and Occidental Chemical related to the businesses each contributed to Equistar;
• the grant of irrevocable, non-exclusive, royalty-free licenses to Equistar (without the right to sublicense) with respect to intellectual property retained by Lyondell, Millennium Petrochemicals or Occidental Chemical that is related to Equistar’s business; and
• the grant of irrevocable, non-exclusive, royalty-free licenses (without the right to sublicense) from Equistar to Lyondell, Millennium Petrochemicals and Occidental Chemical with respect to intellectual property each contributed to Equistar.
Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries each entered into various other conveyance documents with Equistar to effect their asset contributions as provided for in their respective contribution agreements.
Transactions with LMC
Equistar provides operating and other services for LMC (which is wholly owned by Lyondell) under the terms of existing agreements that were assumed by Equistar from Lyondell, including the lease to LMC by Equistar of the real property on which LMC’s methanol plant is located. Under the terms of those agreements, LMC paid Equistar a management fee of approximately $7 million in 2003 and reimbursed certain expenses of Equistar at cost. The natural gas for LMC’s plant is purchased by Equistar as agent for LMC under Equistar master agreements with various third party suppliers, which master agreements are administered by Lyondell personnel. These sales of natural gas to LMC were approximately $98 million in 2003.
Transactions with LCR
In connection with the formation of Equistar, substantially all of Lyondell’s rights and obligations under the terms of its product sales and raw material purchase agreements with LCR were assigned to Equistar. Accordingly, refinery products, including propane, butane, naphthas, heating oils and gas oils, are sold by LCR to Equistar as raw materials, and some olefins by-products are sold by Equistar to LCR for processing into gasoline. LCR billed Equistar approximately $227 million in 2003 in connection with these product sales and Equistar billed LCR approximately $447 million in 2003 in connection with these raw material purchases.
Equistar and LCR are also parties to:
• tolling arrangements under which some of LCR’s co-products are transferred to Equistar and processed by Equistar, with the resulting product being returned to LCR,
• terminaling and storage obligations,
• an arrangement under which LCR performs some marine chartering services, and
• an arrangement under which Equistar performs some marketing services for LCR.
Equistar billed LCR approximately $23 million under these agreements in 2003 and LCR billed Equistar approximately $300,000 under these agreements in 2003. All of the agreements between LCR and Equistar are on terms generally representative of prevailing market prices.
Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium and Occidental
Lyondell and Equistar have an agreement to share office space and utilize shared services over a broad range, including information technology, human resources, sales and marketing, raw material supply, supply chain, health, safety and environmental, engineering and research and development, facility services, legal, accounting, treasury, internal audit, and tax (the “Shared Services Agreement”). Employee-related and indirect costs are allocated between the two companies in the manner prescribed in the Shared Services Agreement while direct third party costs, incurred exclusively for either Lyondell or Equistar, are charged directly to that entity. In addition, Lyondell and Equistar have an agreement for Lyondell to provide sales services for Equistar outside of North America for EO derivatives (the “International Sales Services Agreement”). During 2003, Lyondell charged Equistar approximately $152 million collectively for services provided under the Shared Services Agreement and the International Sales Services Agreement. During 2003, Equistar charged Lyondell approximately $11 million for the shared services, research and development services and barge and dock usage and related services that it provided to Lyondell under the Shared Services Agreement.
Equistar and Millennium Petrochemicals are parties to a variety of operating, manufacturing and technical service agreements. Agreements currently in effect include the provision by Equistar to Millennium Petrochemicals of utilities and fuel streams. These agreements also include the provision by Millennium Petrochemicals to Equistar of operational services, including utilities as well as barge dock access and related services. As a consequence of services provided by Equistar to Millennium Petrochemicals, Equistar billed Millennium Petrochemicals approximately $8 million in 2003. As a consequence of services provided by Millennium Petrochemicals to Equistar, Millennium Petrochemicals billed Equistar approximately $15 million in 2003. In the case of services and utilities, prices usually are based on cost recovery or an allocation of costs according to anticipated relative usage. In the case of product sales, prices generally are market-related. These agreements are expected to continue on terms similar to those described above.
Equistar also purchases vinyl acetate monomer and glacial acetic acid from Millennium Petrochemicals pursuant to agreements with Millennium Petrochemicals. Under the vinyl acetate monomer agreement, Equistar is required to purchase 100% of its vinyl acetate monomer raw materials requirements for its LaPorte, Texas; Clinton, Iowa; and Morris, Illinois plants for the production of ethylene vinyl acetate products at those locations. The initial term of the vinyl acetate monomer agreement expired December 31, 2000. The agreement automatically renewed annually, subject to termination by either party on one year’s notice. Equistar has provided notice to Millennium Petrochemicals to terminate the vinyl acetate monomer agreement, effective December 31, 2004. Equistar also has provided notice to Millennium Petrochemicals to terminate the glacial acetic acid agreement, effective December 31, 2004. During 2003, Equistar purchased an aggregate of approximately $10 million of vinyl acetate monomer and glacial acetic acid from Millennium Petrochemicals under these agreements.
Equistar subleases certain railcars from Occidental Chemical, for which Occidental Chemical charged Equistar approximately $7 million in 2003. In addition, Equistar leased its Lake Charles facility and the land related thereto from Occidental Chemical for $100,000 per year under a lease that expired in May 2003. At that time, Equistar entered into a new, one-year lease with Occidental Chemical that has renewal provisions for two additional one-year periods at either party’s option. Under the new lease, Equistar pays Occidental Chemical rent in an amount equal to $100,000 per year if Equistar is operating the facility or $60,000 per year if Equistar is not operating the facility. The Lake Charles facility has been idled since the first quarter of 2001, pending sustained improvement in market conditions.
Product Transactions with Occidental Chemical
Equistar and Occidental Chemical entered into an ethylene sales agreement dated effective May 15, 1998. Under the terms of this agreement, Occidental Chemical agreed to purchase an amount of ethylene from Equistar equal to 100% of the ethylene raw material requirements of Occidental Chemical’s U.S. plants, other than its LaPorte, Texas plant. The ethylene raw material is exclusively for internal use in production at these plants less a specified quantity per year tolled according to the provisions of the agreement. Either party has the option to “phase down” volumes over a period time. However, a “phase down” cannot begin until January 1, 2009 and the annual minimum requirements set forth in the agreement cannot decline to zero prior to December 31, 2013, unless specified force majeure events occur. The ethylene sales agreement provides for sales of ethylene at market-related prices. In addition to sales of ethylene under the agreement described above, from time to time Equistar has made sales of methanol, ethers and glycols to Occidental Chemical. During 2003, Occidental Chemical paid Equistar an aggregate of approximately $448 million for product purchases.
Also, from time to time, Equistar has entered into over-the-counter derivatives, primarily price swap contracts, related to crude oil with Occidental Energy Marketing, Inc., a subsidiary of Occidental Chemical, to help manage its exposure to commodity price risk with respect to crude oil-related raw material purchases. During 2003, Equistar and Occidental Energy Marketing, Inc. settled approximately $300,000 of price swap contracts. There were no outstanding price swap contracts as of December 31, 2003. Equistar purchased various other products from Occidental Chemical at market-related prices totaling approximately $900,000 in 2003.
Ethylene Sales Agreement with Millennium Petrochemicals
Equistar sells ethylene to Millennium Petrochemicals at market-related prices under an agreement entered into in connection with the formation of Equistar. Under this agreement, Millennium Petrochemicals is required to purchase 100% of its ethylene requirements for its La Porte, Texas facility from Equistar. The pricing terms under this agreement between Equistar and Millennium Petrochemicals are similar to the pricing terms under the ethylene sales agreement between Equistar and Occidental Chemical. The initial term of this agreement expired December 31, 2000. The agreement automatically renews annually, subject to termination by either party on one year’s notice. Neither party has provided notice of termination of the agreement. Millennium Petrochemicals paid approximately $46 million to Equistar for ethylene during 2003.
Product Transactions with Lyondell
Equistar sells ethylene, propylene and benzene to Lyondell at market-related prices pursuant to agreements dated effective as of October 1998, August 1999 and January 1999, respectively. Under the agreements, Lyondell is required to purchase 100% of its benzene, ethylene and propylene requirements for its Channelview and Bayport, Texas facilities, with the exception of quantities of one product that Lyondell is obligated to purchase under a supply agreement with an unrelated third party entered into prior to 1999 and expiring in 2015. The pricing terms under the agreements between Equistar and Lyondell are similar to the pricing terms under the ethylene sales agreement between Equistar and Occidental Chemical. The initial term of each of those agreements between Equistar and Lyondell expires on December 31, 2013 in the case of the ethylene sales agreement, and December 31, 2014 in the case of the propylene and benzene sales agreements. After the initial term, each of the agreements automatically renews for successive one-year periods and either party may terminate any of the agreements on one year’s notice. In addition, a wholly owned subsidiary of Lyondell licenses MTBE technology to Equistar. Lyondell also purchases a significant portion of the MTBE produced by Equistar at one of its two Channelview units at market-related prices. Product sales from Equistar to Lyondell in 2003 were approximately $610 million. Equistar also purchases by-products from Lyondell at market-related prices. Product sales from Lyondell to Equistar in 2003 were approximately $5 million.
Product Transactions with Oxy Vinyls, LP
During 2003, Equistar sold ethylene to Oxy Vinyls, LP (“Oxy Vinyls”), a joint venture partnership between Occidental Chemical and an unaffiliated third party, for Oxy Vinyls’ LaPorte, Texas facility at market-related prices pursuant to an agreement that expired on December 31, 2003. Equistar made ethylene sales to Oxy Vinyls totaling approximately $55 million in 2003.
Agreement Regarding Services of Equistar’s Chief Executive Officer
Dan F. Smith serves as the Chief Executive Officer of both Lyondell and Equistar and is a director of Lyondell. Mr. Smith receives no compensation from Equistar. Under an agreement between Equistar and Lyondell, Equistar paid $1,415,244 to Lyondell as compensation for the services rendered by Mr. Smith as part of the shared services provided by Lyondell during 2003. See “Item 11. Executive Compensation.”
Indemnity Agreement with Millennium America
Effective August 22, 2002 and in connection with Lyondell’s purchase of Occidental’s interest in Equistar, an indemnity agreement between Equistar and Millennium America was terminated. Millennium America (or its affiliate) may, in its sole discretion, elect to execute another indemnity agreement in favor of Equistar whereby Millennium America (or its affiliate) may be required to contribute to Equistar an amount equal to up to $300 million of any indebtedness for borrowed money that Millennium America elects at the time the indemnity agreement is executed. The existence of the indemnity would not prevent Equistar from repaying the indemnified amount at any time, and would not create any right in any lender or holder of outstanding notes or any person other than Equistar and its owners.
Debt Instruments of Lyondell Assumed by Equistar
Upon its formation, Equistar assumed $745 million of Lyondell indebtedness, of which $301 million remained outstanding as of December 31, 2003. Lyondell was not released as an obligor at the time of the assumption and, until November 2000, Lyondell remained as a co-obligor on the indebtedness, although as between Equistar and Lyondell, Equistar was primarily liable. In November 2000, Lyondell was added as a guarantor on $400 million of the indebtedness and subsequently the consent of the holders of the indebtedness was obtained to the release of Lyondell as a primary obligor (but not as a guarantor) on such $400 million of indebtedness, of which $300 million remained outstanding at December 31, 2003. Lyondell remains a co-obligor on the remaining $1 million of indebtedness, which matures in March 2005.
Item 14.
Item 14. Principal Accountant Fees and Services
Audit and Non-Audit Fees
The following table presents fees for audit services rendered by PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) for the audit of Equistar’s annual financial statements for the years ended December 31, 2002 and December 31, 2003, and fees billed for audit-related, tax and all other services rendered by PricewaterhouseCoopers during those periods. Certain amounts for 2002 have been reclassified to conform to the 2003 presentation, in accordance with SEC rules enacted during 2003.
(a) Audit fees consist of the aggregate fees billed for professional services rendered by PricewaterhouseCoopers for the audit of Equistar’s annual financial statements, the review of financial statements included in Equistar’s Form 10-Qs or for services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years. Amounts include fees for the 2001 audit of the annual financial statements paid in 2002 of $78,000 and fees for the 2002 audit of the annual financial statements paid in 2003 of $185,000.
(b) Audit-related fees consist of the aggregate fees billed for assurance and related services by PricewaterhouseCoopers that are reasonably related to the performance of the audit or review of Equistar’s financial statements. This category includes fees related to: the performance of audits of Equistar’s benefit plans; agreed-upon or expanded audit procedures relating to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and consultations as to the accounting or disclosure treatment of transactions or events and/or the actual or potential impact of final or proposed rules, standards or interpretations by regulatory or standard setting bodies.
(c) Tax fees consist of the aggregate fees billed for professional services rendered by PricewaterhouseCoopers for state sales and use tax compliance.
(d) All other fees consist of the aggregate fees billed for products and services provided by PricewaterhouseCoopers, other than the services described in notes (a) through (c) above.
Pre-Approval Policy
The Governance Committee serves as Equistar’s Audit Committee, and is directly responsible for appointing, setting compensation and overseeing the work of the independent auditors. In 2003, the Governance Committee established a policy requiring the Governance Committee to pre-approve all audit and non-audit services to be performed for Equistar by the independent auditors (including affiliates or related member firms) to ensure that the provision of such services does not impair the auditors’ independence.
A centralized service request procedure is used for all requests for the independent auditors to provide services to Equistar. Under this procedure, all requests for the independent auditors to provide services to Equistar initially are submitted to Equistar’s Vice President and Controller. Each such request must include a detailed description of the services to be rendered. If the proposed services have not already been pre-approved by the Governance Committee, the Vice President and Controller will submit the request and a detailed description of the proposed services to the Governance Committee. Requests to provide services that require pre-approval by the Governance Committee also must include a statement as to whether, in the Vice President and Controller’s view, the request is consistent with the SEC’s rules on auditor independence.
The Governance Committee has designated Equistar’s Vice President and Controller to monitor the performance of all services provided by the independent auditors and to review compliance with the pre-approval policy. The Vice President and Controller will report to the Governance Committee periodically on the results of the monitoring.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following exhibits are filed as a part of this report:
Exhibit No.
Description
3.1
Certificate of Limited Partnership of Equistar Chemicals, LP dated as of October 17, 1997 (1)
3.1(a)
Certificate of Amendment to the Certificate of Limited Partnership of Equistar Chemicals, LP dated as of May 15, 1998 (1)
3.1(b)
Certificate of Amendment to the Certificate of Limited Partnership of Equistar Chemicals, LP dated as of October 31, 2002 (8)
3.2
Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP dated as of November 6, 2002 (7)
4.1
Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, dated as of January 15, 1999 (1)
4.1(a)
Form of First Supplemental Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, Trustee (1)
4.1(b)
Form of Note (attached as Exhibit A to the Form of First Supplemental Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, Trustee, filed herewith as Exhibit 4.1(a)) (1)
4.1(c)
Form of Second Supplemental Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee (1)
4.1(d)
Form of Note (attached as Exhibit A to the Form of Second Supplemental Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, filed herewith as Exhibit 4.1(c)) (1)
4.2
Credit Agreement dated as of December 17, 2003 among Equistar Chemicals, LP, the subsidiaries of Equistar Chemicals, LP party thereto, the lenders party thereto and Bank One, NA, Credit Suisse First Boston and JP Morgan Chase Bank as Co-Documentation Agents, Bank of America, N.A. and Citicorp USA, Inc. as Co-Collateral Agents, and Citicorp USA, Inc. as Administrative Agent (11)
4.3
Indenture between Lyondell Petrochemical Company and Continental Bank, National Association, as Trustee, dated as of March 10, 1992 (1)
4.3(a)
First Supplemental Indenture dated as of March 10, 1992, between Lyondell Petrochemical Company and Continental Bank, National Association, as Trustee, to the Indenture dated as of March 10, 1992 (1)
4.3(b)
Second Supplemental Indenture dated as of December 1, 1997, among Lyondell Petrochemical Company, Equistar Chemicals, LP and First Trust National Association, Trustee, to the Indenture dated as of March 10, 1992 (1)
4.3(c)
Third Supplemental Indenture dated as of November 3, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and U.S. Bank Trust, National Association, Trustee, to the Indenture dated as of March 10, 1992 (3)
4.3(d)
Fourth Supplemental Indenture dated as of November 17, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and U.S. Bank Trust, National Association, Trustee, to the Indenture dated as of March 10, 1992 (3)
4.4
Indenture between Lyondell Petrochemical Company and Texas Commerce Bank National Association, as Trustee, dated as of January 29, 1996 (1)
4.4(a)
First Supplemental Indenture dated as of February 15, 1996, between Lyondell Petrochemical Company and Texas Commerce Bank National Association, Trustee, to the Indenture dated as of January 29, 1996 (1)
4.4(b)
Second Supplemental Indenture dated as of December 1, 1997, among Lyondell Petrochemical Company, Equistar Chemicals, LP and Texas Commerce Bank National Association, Trustee, to the Indenture dated as of January 29, 1996 (1)
4.4(c)
Third Supplemental Indenture dated as of November 3, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and The Chase Manhattan Bank, Trustee, to the Indenture dated as of January 29, 1996 (3)
4.4(d)
Fourth Supplemental Indenture dated as of November 17, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and The Chase Manhattan Bank, Trustee, to the Indenture dated as of January 29, 1996 (3)
4.5
Indenture dated as of August 24, 2001 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee (2)
4.5(a)
Form of Note dated as of August 24, 2001 (attached as Exhibit A to the Indenture dated as of August 24, 2001 among Equistar Chemical, LP, Equistar Funding and The Bank of New York, as Trustee, filed herewith as Exhibit 4.5) (2)
4.6
Indenture dated as of April 22, 2003 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee (9)
4.6(a)
Form of Note dated as of April 22, 2003 (attached as Exhibit A to the Indenture dated as of April 22, 2003 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, filed herewith as Exhibit 4.6) (9)
4.6(b)
First Supplemental Indenture dated as of November 21, 2003 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, to the Indenture dated as of April 22, 2003 (10)
4.7
Security Agreement dated as of December 17, 2003 among Equistar Chemicals, LP, the other borrowers and guarantors party thereto, and Citicorp USA, Inc. as Administrative Agent (11)
4.8
Receivables Purchase Agreement dated as of December 17, 2003 among Equistar Receivables II, LLC as the seller, Equistar Chemicals, LP as the servicer, the banks and other financial institutions party thereto as purchasers, Bank One, NA, Credit Suisse First Boston and JP Morgan Chase Bank as Co-Documentation Agents, Citicorp USA, Inc. and Bank of America, N.A. as Co-Asset Agents, Citicorp USA, Inc., as Administrative Agent, and Citigroup Global Markets Inc. and Banc of America Securities LLC as Joint Lead Arrangers and Joint Bookrunners (11)
4.9
Undertaking Agreement dated as of December 17, 2003 by Equistar Chemicals, LP (11)
Equistar is a party to several debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of Equistar and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Registration S-K, Equistar agrees to furnish a copy of such instruments to the Commission upon request.
(1) Filed as an exhibit to Registrant’s Registration Statement on Form S-4 (No. 333-76473) and incorporated herein by reference.
(2) Filed as an exhibit to Registrant’s Registration Statement on Form S-4 (No. 333-70048) and incorporated herein by reference.
(3) Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
(4) Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference.
(5) Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.
(6) Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference.
(7) Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference.
(8) Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.
(9) Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference.
(10) Filed as an exhibit to Registrant’s Registration Statement on Form S-4 (No. 333-111134) and incorporated herein by reference.
(11) Filed as an exhibit to Registrant’s Current Report on Form 8-K dated December 17, 2003 and incorporated herein by reference.
Copies of exhibits will be furnished upon prepayment of 25 cents per page. Requests should be addressed to the Secretary.
(b) Consolidated Financial Statements and Financial Statement Schedules
(1) Consolidated Financial Statements
Report of Independent Accountants
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Partners’ Capital
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedules
Financial statement schedules are omitted because they are not applicable or the required information is contained in the Financial Statements or notes thereto.
(c) Reports on Form 8-K
The following Current Reports on Form 8-K were filed or furnished during the quarter ended December 31, 2003 and through the date hereof:
Date of Report
Item Nos.
Financial Statements
October 7, 2003
9 and 12
No
November 17, 2003
5, 7 and 9
No
November 18, 2003
5 and 7
No
December 17, 2003
5 and 7
No
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 11th day of March, 2004.
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 11th, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 11th day of March, 2004.
EQUISTAR CHEMICALS, LP,
by its General Partner
MILLENNIUM PETROCHEMICALS GP LLC
By:
Millennium Petrochemicals Inc.
By:
/s/ ROBERT E. LEE
Robert E. Lee
President and Chief Executive Officer
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 11th, 2004.
Name
Title (Millennium Petrochemicals Inc.)
/s/ ROBERT E. LEE
Director, President and Chief Executive Officer
Robert E. Lee
(Principal Executive Officer)
/s/ JOHN E. LUSHEFSKI
Senior Vice President
John E. Lushefski
(Principal Financial and Accounting Officer)
/s/ C. WILLIAM CARMEAN
Director, Senior Vice President, General Counsel and
Secretary
C. William Carmean
/s/ TIMOTHY E. DOWDLE
Director and Senior Vice President
Timothy E. Dowdle
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 11th day of March, 2004.
Name
Title
/s/ DAN F. SMITH
Chief Executive Officer, Equistar Chemicals, LP,
Co-Chairman, Partnership Governance Committee
Dan F. Smith
(Principal Executive Officer)
/s/ CHARLES L. HALL
Vice President and Controller, Equistar Chemicals, LP
Charles L. Hall
(Principal Financial and Accounting Officer)
/s/ T. KEVIN DENICOLA
Member, Partnership Governance Committee
T. Kevin DeNicola
/s/ KERRY A. GALVIN
Member, Partnership Governance Committee
Kerry A. Galvin
/s/ ROBERT E. LEE
Co-Chairman, Partnership Governance Committee
Robert E. Lee
/s/ JOHN E. LUSHEFSKI
Member, Partnership Governance Committee
John E. Lushefski
/s/ C. WILLIAM CARMEAN
Member, Partnership Governance Committee
C. William Carmean
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
Neither an annual report covering the Registrant’s last fiscal year nor proxy materials with respect to any annual or other meeting of security holders have been sent to security holders.