mch10k-032808.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
x
|
Annual
Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of
1934 for the Fiscal Year Ended December 31,
2007
|
|
o
|
Transition
Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of
1934
|
Commission
File No. 1-12091
MILLENNIUM
CHEMICALS INC.
(Exact
name of Registrant as specified in its charter)
|
Delaware
|
|
22-3436215
|
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer Identification No.)
|
|
incorporation
or organization)
|
|
|
|
|
|
|
|
Two
Greenville Crossing, 4001 Kennett Pike
Suite
238, Greenville, Delaware
|
|
19807
|
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (713)
652-7200
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes x No o
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes o No x
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the
Registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x Smaller
reporting company o
Indicate by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No x
There is
no established public trading market for the Registrant’s equity
securities. As of June 30, 2007, the last business day of the
Registrant’s most recently completed second fiscal quarter, all of the
Registrant’s equity securities were held by affiliates.
The
Registrant meets the conditions set forth in General Instructions I(1)(a) and
(b) of Form 10-K and, therefore, is filing this form with a reduced disclosure
format.
|
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
|
3
|
|
|
4
|
|
|
4
|
|
|
5
|
|
|
5
|
|
|
5
|
|
|
6
|
|
|
8
|
|
|
9
|
|
|
9
|
|
|
9
|
|
|
10
|
|
|
11
|
|
|
11
|
|
|
12
|
|
|
12
|
|
|
13
|
|
|
13
|
|
|
13
|
|
|
21
|
|
|
25
|
|
|
26
|
|
|
26
|
|
|
27
|
|
|
27
|
|
|
28
|
|
|
28
|
|
|
28
|
|
|
30
|
|
|
32
|
|
|
32
|
|
|
32
|
|
|
32
|
|
|
33
|
|
|
34
|
|
|
34
|
|
|
36
|
|
|
36
|
|
|
42
|
|
|
50
|
|
|
50
|
|
|
51
|
|
|
53
|
|
|
54
|
|
|
55
|
|
|
55
|
|
|
55
|
|
|
55
|
|
|
56
|
|
|
112
|
|
|
112
|
|
|
112
|
|
|
113
|
|
|
113
|
|
|
113
|
|
|
113
|
|
|
113
|
Millennium
Chemicals Inc. (together with its consolidated subsidiaries, “Millennium”) is a
manufacturer and marketer of chemicals, with 2007 revenues of $642 million and
assets of approximately $959 million as of December 31,
2007. On November 30, 2004, Lyondell Chemical Company (“Lyondell”)
acquired Millennium in a stock-for-stock business combination. On
December 20, 2007, an indirect wholly owned subsidiary of LyondellBasell
Industries AF S.C.A. (“LyondellBasell Industries,” formerly known as Basell AF
S.C.A.) merged with and into Lyondell, and Lyondell and Millennium both are now
indirect wholly owned subsidiaries of LyondellBasell
Industries.
Millennium
operates in one reportable business segment: chemicals. Millennium’s
chemicals business segment produces and markets: acetyls, which include vinyl
acetate monomer (“VAM”), acetic acid and methanol; and fragrance and flavors
chemicals.
Millennium
also owns an equity interest in Equistar Chemicals, LP (together with its
consolidated subsidiaries, “Equistar”), the balance of which is owned by
Lyondell through other subsidiaries. Millennium accounts for its
interest in Equistar using the equity method. In connection with
LyondellBasell Industries’ December 20, 2007 acquisition of Lyondell,
subsidiaries of Lyondell owning the portion of Equistar not held through
subsidiaries of Millennium made non-pro rata capital contributions to Equistar
and, as a result, Millennium’s indirect percentage ownership interest in
Equistar was reduced from approximately 29.5% to approximately
21%. Equistar operates in two reportable business
segments:
|
·
|
Equistar’s
chemicals business segment produces and markets ethylene, its co-products
and derivatives. Ethylene co-products include propylene,
butadiene and aromatics, which include benzene and
toluene. Derivatives of ethylene in this segment include
ethylene oxide (“EO”), ethylene glycol (“EG”) and other EO derivatives, as
well as ethanol. Equistar’s chemicals business segment also
produces gasoline blending components such as methyl tertiary butyl ether
(“MTBE”) and alkylate.
|
|
·
|
Equistar’s
polymers business segment produces and markets polyethylene (high density
polyethylene (“HDPE”), low density polyethylene (“LDPE”) and linear low
density polyethylene (“LLDPE”)) and
polypropylene.
|
On May
15, 2007, Millennium sold its worldwide inorganic chemicals business to The
National Titanium Dioxide Company Ltd (Cristal) in a transaction valued at
approximately $1.3 billion, including the acquisition of working capital and the
assumption of specified liabilities directly related to the
business. For a description of the sale, see Note 4 to the
Consolidated Financial Statements.
Prior to
Lyondell’s December 20, 2007 acquisition by LyondellBasell Industries,
Millennium operated in the following two business segments: ethylene,
co-products and derivatives; and fragrance and flavors chemicals. For
additional segment information and for geographic information for each of the
years in the three-year period ended December 31, 2007, see Note 21 to
the Consolidated Financial Statements.
Additional Information Available
Millennium
was incorporated under the laws of Delaware in 1996. Its principal
executive offices are located at Two Greenville Crossing, 4001 Kennett Pike,
Suite 238, Greenville, Delaware. Its telephone number is
(713) 652-7200 and its website address is
www.lyondellbasell.com. Millennium’s Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments
to those reports are available free of charge through www.lyondellbasell.com as
soon as reasonably practicable after those reports are electronically filed with
or furnished to the Securities and Exchange Commission.
In
addition, Millennium has adopted a “code of ethics,” as defined in Item 406(b)
of Regulation S-K. Millennium’s code of ethics, known as its Business
Ethics and Conduct Policy, is part of the overall Lyondell Business Ethics and
Conduct Policy. It applies to all officers and employees of
Millennium, including Millennium’s principal executive officer, principal
financial officer, principal accounting officer and controller. A
copy of the Business Ethics and Conduct Policy is available at
www.lyondellbasell.com free of charge. In addition, Millennium
intends to satisfy the disclosure requirements of Item 5.05 of Form 8-K
regarding any amendment to, or waiver from, a provision of the Business Ethics
and Conduct Policy that applies to Millennium’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 at
www.lyondellbasell.com.
Information
contained on Millennium’s website (www.lyondellbasell.com) or any other website
is not incorporated into this Annual Report and does not constitute a part of
this Annual Report.
Millennium’s
chemicals businesses produce and market: acetyls, including VAM, acetic
acid and methanol, which is a raw material for acetic acid; and fragrance and
flavors chemicals.
Millennium
produces VAM and acetic acid at facilities in La Porte,
Texas. Millennium also owns an 85% interest in La Porte Methanol
Company, which produces methanol at a plant in La Porte, Texas. The remaining 15%
interest is owned by Linde AG (“Linde”).
Millennium
also produces fragrance and flavors chemicals. The Brunswick, Georgia
and Jacksonville, Florida facilities manufacture terpene-based fragrance
ingredients and flavor ingredients, primarily for the oral care
markets. Millennium also supplies products for use in a number of
other applications, including chemical reaction agents, or initiators, for the
rubber industry and solvents and cleaners, such as pine oil, for the hard
surface cleaner markets.
The
following table outlines:
|
·
|
the
primary products of Millennium’s chemicals
segment;
|
|
·
|
annual
processing capacity as of December 31, 2007;
and
|
|
·
|
the
primary uses for those products.
|
See “Item
2. Properties” for the locations where Millennium produces the primary products
of its chemicals segment.
Unless
otherwise specified, annual processing capacity was calculated by estimating the
average number of days in a typical year that a production unit of a plant is
expected to operate, after allowing for downtime for regular maintenance, and
multiplying that number by an amount equal to the unit’s optimal daily output
based on the design raw material mix. Because the processing capacity
of a production unit is an estimated amount, actual production volumes may be
more or less than the capacities set forth below. Capacities shown
include 100% of the capacity of joint venture facilities.
|
Product
|
|
Annual
Capacity
|
|
Primary
Uses
|
|
|
|
|
|
|
|
Vinyl
Acetate Monomer (VAM)
|
|
820
million pounds
|
|
VAM
is a petrochemical product used to produce a variety of polymers products
used in adhesives, water-based paint, textile coatings and paper
coatings.
|
|
|
|
|
|
|
|
Acetic
Acid
|
|
1.2
billion pounds
|
|
Acetic
acid is a raw material used to produce VAM, terephthalic acid (used to
produce polyester for textiles and plastic bottles), industrial solvents
and a variety of other chemicals.
|
|
|
|
|
|
|
|
Methanol
|
|
190
million gallons (a)
|
|
Methanol
is a raw material used to produce acetic acid, MTBE, formaldehyde and
several other products.
|
|
|
|
|
|
|
|
Fragrance
and Flavors Chemicals
|
|
(b)
|
|
Fragrance
and flavors chemicals include terpene-based fragrance ingredients and
flavor ingredients, primarily for the oral care markets, and also include
products used in applications such as chemical reaction agents, or
initiators, for the rubber industry and solvents and cleaners, such as
pine oil, for the hard surface cleaner markets.
|
|
|
|
|
|
|
______________
|
(a)
|
Represents
100% of the methanol capacity at the La Porte, Texas facility, which is
owned by La Porte Methanol Company, a partnership owned 85% by Millennium
and 15% by Linde.
|
|
(b)
|
With
respect to fragrance and flavors chemicals, Millennium frequently works
closely with customers in developing products to satisfy the specific
requirements of those customers, and capacity varies
accordingly.
|
Sales of
VAM accounted for approximately 45% of Millennium’s total revenues in 2007, 48%
in 2006 and 51% in 2005. Sales of acetyls collectively accounted
for approximately 81% of Millennium’s total revenues in 2007 and 2006
and 83% in 2005. Sales of fragrance and flavors chemicals
collectively accounted for approximately 18% of Millennium’s revenues in 2007,
19% in 2006 and 16% in 2005.
VAM is
sold into domestic and export markets generally under multi-year contracts, and also on a
spot basis. Acetic acid that is not consumed internally for the
production of VAM is sold into domestic and export markets generally under
multi-year contracts, and also on a
spot basis. Contract pricing for sales of VAM and acetic acid
generally is determined by market-based negotiation, market index or cost-based
formulas. Millennium also sells VAM to Equistar and acetic acid to
both Lyondell and Equistar at market-based pricing. VAM and acetic
acid are shipped by barge, ocean-going vessel, pipeline, tank car and tank
truck. Millennium has bulk storage arrangements in Europe and South
America to better serve its customers’ requirements in those
regions. Sales are made through a direct sales force, agents and
distributors.
The La
Porte, Texas methanol facility is owned by La Porte Methanol Company,
Millennium’s 85%-owned joint venture with Linde. Each party to the
joint venture receives its respective share of the methanol
production. Millennium uses the methanol as a raw material for acetic
acid and also sells the methanol under annual contracts and on
a spot basis to large domestic customers. The product is shipped by
barge and pipeline.
Fragrance
ingredients are used primarily in the production of perfumes. The
major consumers of perfumes worldwide are soap and detergent
manufacturers. Millennium sells directly worldwide to major soap,
detergent and fabric conditioner producers. It also sells a
significant quantity of product to the major fragrance compounders and to
producers of cosmetics and toiletries. Millennium’s supply agreements
with customers are typically short-term in duration (up to one
year). Approximately 60% of Millennium’s 2007 fragrance and flavors
chemicals sales were made outside the United States. Sales are made
primarily by Millennium directly, while agents and distributors are used in
areas where volume does not justify full-time sales coverage.
No single
customer of Millennium’s chemicals segment accounted for 10% or more of
Millennium’s total revenues in 2007.
The
primary raw materials for the production of VAM are acetic acid and
ethylene. For VAM produced by Millennium, Millennium obtains its
entire requirements for acetic acid from its internal production and buys all of
its ethylene requirements from Equistar under a long-term supply contract based
on market prices. In 2007, Millennium used a large percentage of its
acetic acid production to produce VAM.
The
primary raw materials required for the production of acetic acid are carbon
monoxide and methanol. Millennium purchases its carbon monoxide from Linde
pursuant to a long-term contract under which pricing is based primarily on cost
of production. La Porte Methanol Company, Millennium’s 85%-owned
joint venture, supplies all of Millennium’s requirements for methanol
production. Natural gas is the primary raw material required for the
production of methanol.
Millennium’s
Jacksonville site has facilities for the fractionation of crude sulfate
turpentine (“CST”), the key raw material used by Millennium for the production
of fragrance ingredients. Through fractionation, the components of CST are
separated into relatively pure individual materials, which are then used to
ultimately produce a number of fragrance and flavors chemicals, including
synthetic pine oil, anethole, l-carvone and coolants. The Brunswick site
produces linalool, geraniol and dihydromyrcenol from the alpha-pinene component
of CST. Millennium believes it is the largest purchaser and distiller
of CST in the world, based on the amount of CST processed. CST is a
by-product of the kraft papermaking process. Millennium purchases CST
from approximately 35 pulp mills in North America. These purchases
are made under long-term contracts in order to ensure a stable supply of
CST. Additionally, Millennium purchases quantities of CST, gum
turpentine or derivatives from Indonesia, China, Europe and South America, as
business conditions dictate.
Competition and Industry Conditions
The bases
for competition in Millennium’s acetyls businesses are price, product
performance, product quality, product delivery, reliability of supply and
customer service. Millennium competes globally with other large
marketers and producers for sales of acetyls, including BP p.l.c., Celanese
Corporation (“Celanese”), The Dow Chemical Company (“Dow”), Eastman Chemical
Company, Methanex Corporation and Methanol Holdings Trinidad
Limited. Millennium is the second largest producer of VAM and acetic
acid in North America and the fourth largest producer of VAM and acetic acid
worldwide, based on 2007 published rated production capacity.
Millennium
competes in the fragrance and flavors chemicals businesses primarily on the
basis of price, quality, service and on its ability to produce its products to
the technical and quality specifications of its customers. Millennium
works closely with many of its customers in developing products to satisfy the
specific requirements of those customers. Since Millennium’s supply
agreements with customers are typically short-term in duration (up to one year),
Millennium’s fragrance and flavors chemicals businesses are substantially
dependent on long-term customer relationships based upon quality, innovation and
customer service. From time to time, a customer may change the
formulations of an end-product into which one of Millennium’s fragrance
ingredients is used, which may affect demand for that ingredient. The
major competitors with respect to fragrance and flavors chemicals are BASF SE,
Derives Resiniques Et Terpeniques (DRT), DSM, Kuraray Co. LTD and International
Flavors & Fragrances Inc.
Millennium
owns an approximately 21% interest in Equistar, a joint venture with
Lyondell. Millennium accounts for its interest in Equistar using the
equity method. The following is a description of Equistar’s two
reportable business segments: chemicals; and polymers.
Equistar’s
chemicals business segment produces ethylene, co-products and derivatives at ten
facilities located in four states in the U.S. Ethylene co-products
include propylene, butadiene and aromatics, which include benzene and
toluene. Ethylene derivatives include EO, EG and other EO
derivatives, as well as ethanol. Equistar also produces gasoline
blending components, such as MTBE and alkylate.
Ethylene
is the most significant petrochemical in terms of worldwide
production volume and is the key building block for polyethylene and a large
number of other chemicals, plastics and synthetics. Ethylene and its
co-products and derivatives are fundamental to many segments of the economy,
including the production of consumer products, packaging, housing and automotive
components and other durable and nondurable goods.
The
following table outlines:
|
·
|
the
primary products of Equistar’s chemicals
segment;
|
|
·
|
annual
processing capacity as of December 31, 2007;
and
|
|
·
|
the
primary uses for those products.
|
See “Item
2. Properties” for the locations where Equistar produces the primary products of
its chemicals segment.
Unless
otherwise specified, annual processing capacity was calculated by estimating the
average number of days in a typical year that a production unit of a plant is
expected to operate, after allowing for downtime for regular maintenance, and
multiplying that number by an amount equal to the unit’s optimal daily output
based on the design raw material mix. Because the processing capacity
of a production unit is an estimated amount, actual production volumes may be
more or less than the capacities set forth below. Capacities shown
include 100% of the capacity of joint venture facilities.
|
Products
|
|
Annual Capacity
|
|
Primary
Uses
|
|
Ethylene
|
|
10.8
billion pounds (a)
|
|
Ethylene
is used as a raw material to manufacture polyethylene, EO, ethanol,
ethylene dichloride, styrene and vinyl acetate monomer.
|
|
Ethylene
Co-Products:
|
|
|
|
|
|
Propylene
|
|
4.8
billion pounds (a)(b)
|
|
Propylene
is used to produce polypropylene, acrylonitrile and propylene
oxide.
|
|
Butadiene
|
|
1.2
billion pounds
|
|
Butadiene
is used to manufacture styrene-butadiene rubber and polybutadiene rubber,
which are used in the manufacture of tires, hoses, gaskets and other
rubber products. Butadiene is also used in the production of
paints, adhesives, nylon clothing, carpets, paper coatings and engineered
plastics.
|
|
Aromatics:
|
|
|
|
|
|
Benzene
|
|
310
million gallons
|
|
Benzene
is used to produce styrene, phenol and cyclohexane. These products are
used in the production of nylon, plastics, synthetic rubber and
polystyrene. Polystyrene is used in insulation, packaging and
drink cups.
|
|
Toluene
|
|
66
million gallons
|
|
Toluene
is used as an octane enhancer in gasoline, as a chemical raw material for
benzene and/or paraxylene production, and a core ingredient in toluene
diisocyanate, a compound used in urethane
production.
|
|
Products
|
|
Annual Capacity
|
|
Primary
Uses
|
|
Ethylene
Derivatives:
|
|
|
|
|
|
Ethylene
Oxide (EO)
|
|
1.5
billion pounds EO equivalents; 400 million pounds as pure EO
(c)
|
|
EO
is used to produce surfactants, industrial cleaners, cosmetics,
emulsifiers, paint, heat transfer fluids and ethylene glycol.
|
|
Ethylene
Glycol (EG)
|
|
1.4
billion pounds (c)
|
|
EG
is used to produce polyester fibers and film, polyethylene terephthalate
(“PET”) resin, heat transfer fluids and automobile
antifreeze.
|
|
Other
Ethylene Oxide
Derivatives
|
|
225
million pounds
|
|
EO
derivatives include ethylene glycol ethers and ethanolamines, and are used
to produce paint and coatings, polishes, solvents and chemical
intermediates.
|
|
Ethanol
|
|
50
million gallons
|
|
Ethanol
is used in the production of solvents as well as household, medicinal and
personal care products.
|
|
Gasoline
Blending Components:
|
|
|
|
|
|
Methyl
Tertiary Butyl Ether (MTBE)
|
|
284
million gallons
(18,500
barrels/day) (d)
|
|
MTBE
is a high octane gasoline blending component.
|
|
Alkylate
|
|
337
million gallons (e)
|
|
Alkylate
is a high octane gasoline blending component.
|
|
|
|
|
|
(a)
|
Excludes
850 million pounds/year of ethylene capacity and 200 million
pounds/year of propylene capacity at Equistar’s Lake Charles, Louisiana
ethylene and co-products facility, which has been idled since the first
quarter 2001. Although Equistar retains the physical ability to
restart or sell that facility, in the third quarter of 2006 Equistar
determined that it had no expectation of resuming production at that
facility.
|
|
(b)
|
Does
not include refinery-grade material from Lyondell’s refinery or production
from the product flexibility unit at the Channelview facility, which can
convert ethylene and other light petrochemicals into
propylene. These facilities have an annual processing capacity
of an additional one billion pounds/year of propylene.
|
|
(c)
|
Includes
700 million pounds/year of EO equivalents capacity and
800 million pounds/year of EG capacity at the Beaumont, Texas
facility, which represents 100% of the EO equivalents capacity and EG
capacity, respectively, at the facility. The Beaumont, Texas
facility is owned by PD Glycol, a partnership owned 50% by Equistar and
50% by E. I. du Pont de Nemours and Company (“DuPont”).
|
|
(d)
|
Includes
up to 44 million gallons/year of capacity produced for and returned
to Lyondell.
|
|
(e)
|
Includes
up to 172 million gallons/year of capacity produced for and returned
to Lyondell.
|
Equistar
produces ethylene at six sites located in three states. Ethylene produced
by Equistar generally is consumed internally as a raw material in the production
of derivatives and polymers, or is shipped by pipeline to
customers. For the year ended December 31, 2007,
approximately 72%
of Equistar’s ethylene, based on sales dollars, was used by Equistar’s ethylene
derivatives or polymers facilities or sold to related parties at market-related
prices. The sales to related parties during 2007 include significant
ethylene sales, pursuant to a long-term ethylene supply agreement, to Occidental
Chemical Corporation (a subsidiary of Occidental Petroleum Corporation (together
with its subsidiaries and affiliates, collectively,
“Occidental”)). Occidental owned 5.5% of Lyondell’s outstanding
common stock until selling the remainder of its Lyondell common stock in open
market transactions from May 2007 through July 2007. See Note 6 to
the Consolidated Financial Statements. Sales of ethylene accounted for
approximately 11% of Equistar’s total revenues in 2007, 12% in 2006 and 13% in
2005.
Ethylene
co-products are manufactured by Equistar primarily at four facilities in
Texas. The Morris, Illinois and Clinton, Iowa facilities also
produce moderate quantities of propylene.
Equistar
consumes propylene as a raw material for the production of polypropylene and
also sells propylene to Lyondell and other subsidiaries of LyondellBasell
Industries at market-related prices. Equistar’s propylene production
that is not consumed internally or sold to related parties generally is sold
under multi-year contracts. In addition, pursuant to a 15-year
propylene supply arrangement entered into in 2003 with a subsidiary of Sunoco,
Inc. (“Sunoco”), Equistar supplies 700 million pounds of propylene annually
to Sunoco. Under the arrangement, a majority of the propylene is
supplied under a cost-based formula and the balance is supplied on a
market-related basis. Sales of propylene accounted for
approximately 20% of Equistar’s total revenues in each of 2007
and 2006 and 18% in
2005.
Equistar
generally sells its butadiene under multi-year contracts. Equistar
sells benzene and toluene to Lyondell at market-related prices. Of
the benzene and toluene production that is not sold to related parties, most of
the benzene generally is sold under multi-year contracts and most of
the toluene is sold under annual contracts. Equistar also sells benzene
produced by Lyondell, which it purchases from Lyondell at market-related
prices. Equistar
serves as Lyondell’s sole agent to market toluene produced by Lyondell and
receives a marketing fee for such services. Sales of benzene and toluene
accounted for less than 10% of Equistar’s total revenues in 2007 and 2006 and
10% in 2005.
Equistar
at times purchases ethylene, propylene, benzene and butadiene for resale, when
necessary, to satisfy customer demand for these products above production
levels. Volumes of ethylene, propylene, benzene and butadiene
purchased for resale can vary significantly from period to
period. However, purchased volumes generally do not have a
significant impact on profitability.
Most of
the ethylene and propylene production of the Channelview, Chocolate Bayou,
Corpus Christi and La Porte facilities is shipped via a pipeline system
which has connections to numerous U.S. Gulf Coast consumers. This
pipeline system, some of which is owned and some of which is leased, extends
from Corpus Christi to Mont Belvieu to Port Arthur, Texas as well as around the
Lake Charles, Louisiana area. In addition, exchange agreements with
other ethylene and co-products producers allow access to customers who are not
directly connected to Equistar’s pipeline system. Some ethylene is
shipped by railcar from Clinton, Iowa to Morris, Illinois and also to
customers. A pipeline owned and operated by an unrelated party is
used to transport ethylene from Morris, Illinois to Tuscola,
Illinois. Some propylene is shipped by ocean-going
vessel. Butadiene, benzene, toluene and other products are
distributed by pipeline, railcar, truck, barge or ocean-going
vessel.
EO or EO
equivalents, and EO’s primary derivative, EG, are produced at the Bayport
facility located in Pasadena, Texas and through a 50/50 joint venture between
Equistar and DuPont in Beaumont, Texas. The Bayport facility also
produces other derivatives of EO, principally ethylene glycol ethers and
ethanolamines. EO and EG typically are sold under multi-year
contracts, with market-based pricing. Glycol ethers and ethanolamines
are sold primarily into the solvent and distributor markets at market
prices. EO is shipped by railcar, and its derivatives are shipped by
railcar, truck, isotank or ocean-going vessel. The vast majority of
the ethylene derivatives products are sold in North America, primarily through
Equistar’s sales organization. Sales agents are generally engaged to
market the ethylene derivatives products in the rest of the world.
MTBE and
alkylate are gasoline blending components. Equistar produces MTBE at
two facilities in Texas and produces alkylate at one facility in
Texas. MTBE and alkylate are produced as derivatives of the ethylene
co-products produced by Equistar.
MTBE
produced at one of the two Channelview units and at the Chocolate Bayou plant is
sold to Lyondell at market-related prices. MTBE is produced for
Lyondell at the second Channelview unit for a processing fee. Equistar
produces alkylate for and returns alkylate to Lyondell for a processing fee, and
also sells alkylate both under short-term contracts and on a spot
basis. MTBE and alkylate, whether individually or collectively,
accounted for less than 10% of Equistar’s total revenues in 2007, 2006 and
2005.
Other
than Lyondell, which accounted for approximately 13% of Equistar’s total
revenues in 2007, no single chemicals segment customer accounted for 10% or more
of Equistar’s total revenues in 2007.
Raw
material cost is the largest component of the total cost for the production of
ethylene and its co-products. The primary raw materials used are heavy liquids
and natural gas liquids (“NGLs”). Heavy liquids include crude
oil-based naphtha and gas oil, as well as condensate, a very light crude oil
resulting from natural gas production (collectively referred to as “heavy
liquids”). NGLs include ethane, propane and butane. The
use of heavy liquid raw materials results in the production of a significant
amount of co-products such as propylene, butadiene, benzene and toluene, as well
as gasoline blending components, while the use of NGLs results in the production
of a smaller amount of co-products, such as propylene.
The
flexibility to consume a wide range of raw materials has historically provided
plants with that flexibility with an advantage over plants that are restricted
in their raw material processing capability. Facilities using heavy
liquids historically have generated, on average, approximately four cents of
additional variable margin per pound of ethylene produced compared to facilities
restricted to using ethane. This margin advantage is based on an
average of historical data over a period of years and is subject to short-term
fluctuations, which can be significant. For example, published
reports indicated that during 2007 the advantage ranged from 2.6 cents to 5.5
cents. The costs of producing ethylene from heavy liquids and NGLs
can change daily, based on the relative values of crude oil and natural gas, as
well as the relative values of the products generated through the use of those
raw materials. As a result, there have been in the past, and could
continue to be in the future, periods of time when the use of heavy liquids does
not provide an advantage or is disadvantaged versus the use of
NGLs. Equistar has the capability to process heavy liquids at its
Channelview, Corpus Christi and Chocolate Bayou ethylene and co-products
facilities. Equistar’s Channelview and Corpus Christi facilities have
the greatest operational flexibility among Equistar’s facilities to process
significant quantities of either heavy liquids or NGLs, depending upon the
relative economic advantage of the alternative raw materials.
As
described above, management believes that this raw material flexibility is a key
advantage in the production of ethylene and co-products. As a result,
Equistar’s heavy liquids requirements for these businesses are sourced globally
via a mix of contractual and spot arrangements. Spot market purchases
are made in order to maintain raw material flexibility and to take advantage of
raw material pricing opportunities. A large portion of Equistar’s
NGLs requirements for these businesses are purchased via contractual
arrangements from a variety of sources, but NGLs also are purchased on the spot
market. Equistar also obtains a portion of its heavy liquids
requirements for these businesses from Lyondell’s refinery at market-related
prices. Heavy liquids generally are delivered by ship or barge, and
NGLs generally are delivered via pipeline.
Equistar
also purchases large amounts of natural gas to be used as energy for consumption
in its business via market-based contractual arrangements with a variety of
sources.
The
primary raw material for the ethylene derivatives products is
ethylene. Equistar’s ethylene derivatives facilities generally can
receive their ethylene directly from Equistar’s ethylene facilities via its
pipeline system, pipelines owned by unrelated parties or on-site
production.
MTBE and
alkylate are produced as derivatives of ethylene co-products produced by
Equistar. Equistar purchases all of its methanol requirements from
Lyondell at market-based prices.
The raw
materials for the chemicals segment are, in general, commodity chemicals with
numerous bulk suppliers and ready availability at competitive
prices. Historically, raw material availability has not been an
issue. For additional discussion regarding the effects of raw
material pricing and supply on recent operating results, see “Item
1A. Risk Factors—Risks Relating to the Businesses—Costs of raw
materials and energy, as well as reliability of supply, may result in increased
operating expenses and reduced results of operations” and “Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
Competition and Industry Conditions
With
respect to ethylene, its co-products and derivatives, competition is based on
price, product quality, product delivery, reliability of supply, product
performance and customer service. Industry consolidation has led to
fewer, although larger, competitors. Profitability is affected not only by
supply and demand for ethylene, its co-products and derivatives, but also by raw
material costs and price competition among producers, which may intensify due
to, among other things, the addition of new capacity. In general,
demand is a function of economic growth in the United States and elsewhere in
the world, which fluctuates. It is not possible to accurately predict
the changes in raw material costs, market conditions, capacity utilization and
other factors that will affect industry profitability in the
future. During the next five years, forecasts for the worldwide
average annual ethylene capacity additions are projected at approximately 5%,
with more than 90% of these additions in the Middle East and Northeast
Asia. The average worldwide demand growth is expected to lag this
rate by less than 1%. In the U.S., relatively stable ethylene supply
combined with sustained demand levels are projected to result in continued high
average operating rates through 2008. Capacity share figures for
Equistar and its competitors, discussed below, are based on completed production
facilities and, where appropriate, include the full capacity of joint venture
facilities and certain long-term supply arrangements.
Equistar
competes with other large domestic marketers and producers for sales of
ethylene, its co-products and derivatives, including Chevron Phillips
Chemical Company LP (“ChevronPhillips”), Dow, Eastman Chemical Company, Enterprise Products
Partners L.P., Exxon Mobil Corporation (“ExxonMobil”), Huntsman Corporation,
Ineos and Shell Chemical Company. Equistar’s ethylene rated capacity at
December 31, 2007 was approximately 10.8 billion pounds per year, or
approximately 14% of total North American ethylene production
capacity. Based on published rated production capacities, Equistar is
the second largest producer of ethylene in North America. North
American ethylene rated capacity at December 31, 2007 was approximately 78 billion pounds
per year, with approximately 76% of that North American capacity located along
the Gulf Coast.
The
markets for fuels products tend to be volatile as well as cyclical as a result
of changing crude oil and refined product prices. Crude oil prices are impacted
by worldwide political events, the economics of exploration and production and
refined products demand. Prices and demand for fuels products are influenced by
seasonal and short-term factors such as weather and driving patterns, as well as
by longer term issues such as the economy, energy conservation and alternative
fuels. Industry fuels products supply is dependent on industry
operating capabilities and on long-term refining capacity. Growth in
demand for fuels products without comparable growth in U.S. supply or imports
has led to tight fuels products supply conditions in the U.S. All of
the MTBE produced by Equistar is sold by Lyondell with Lyondell’s MTBE
production. The most significant MTBE competitor is Saudi Basic
Industries Corp. (“SABIC”). MTBE also faces competition from products
such as ethanol and other octane components. Equistar competes with
refiners and other olefins manufacturers for sales of alkylate.
Equistar’s
polymers business segment produces polyolefins, including polyethylene (high
density polyethylene (“HDPE”), low density polyethylene (“LDPE”) and linear low
density polyethylene (“LLDPE”)) and polypropylene. Equistar’s
polymers business is operated as part of the overall LyondellBasell Industries
polymers business.
Equistar
produces polymers at seven facilities located in four states in the
U.S. Equistar’s polymers products are used in consumer and industrial
applications ranging from food and beverage packaging to housewares and
construction materials.
The
following table outlines:
|
·
|
the
primary products of Equistar’s polymers
segment;
|
|
·
|
annual
processing capacity as of December 31, 2007;
and
|
|
·
|
the
primary uses for those products.
|
See “Item
2. Properties” for the locations where Equistar produces the primary products of
its polymers segment.
Unless
otherwise specified, annual processing capacity was calculated by estimating the
average number of days in a typical year that a production unit of a plant is
expected to operate, after allowing for downtime for regular maintenance, and
multiplying that number by an amount equal to the unit’s optimal daily output
based on the design raw material mix. Because the processing capacity
of a production unit is an estimated amount, actual production volumes may be
more or less than the capacities set forth below.
|
Product
|
|
Annual
Capacity
|
|
Primary
Uses
|
|
Polyethylene:
|
|
|
|
|
|
High
density
polyethylene
(HDPE)
|
|
3.1
billion pounds
|
|
HDPE
is used to manufacture grocery, merchandise and trash bags; food
containers for items from frozen desserts to margarine; plastic caps and
closures; liners for boxes of cereal and crackers; plastic drink cups and
toys; dairy crates; bread trays; pails for items from paint to fresh
fruits and vegetables; safety equipment such as hard hats; house wrap for
insulation; bottles for household and industrial chemicals and motor oil;
milk, water, and juice bottles; large (rotomolded) tanks for storing
liquids such as agricultural and lawn care chemicals; and
pipe.
|
|
Low
density
polyethylene
(LDPE)
|
|
1.5
billion pounds
|
|
LDPE
is used to manufacture food packaging films; plastic bottles for packaging
food and personal care items; dry cleaning bags; ice bags; pallet shrink
wrap; heavy-duty bags for mulch and potting soil; boil-in-bag bags;
coatings on flexible packaging products; and coatings on paper board such
as milk cartons. Ethylene vinyl acetate is a specialized form of LDPE used
in foamed sheets, bag-in-box bags, vacuum cleaner hoses, medical tubing,
clear sheet protectors and flexible binders.
|
|
Linear
low density
polyethylene
(LLDPE)
|
|
1.2
billion pounds
|
|
LLDPE
is used to manufacture garbage and lawn-leaf bags; industrial can liners;
housewares; lids for coffee cans and margarine tubs, dishpans, home
plastic storage containers, kitchen trash containers; large (rotomolded)
toys like outdoor gym sets; drip irrigation tubing; wire and cable
insulating resins and compounds used to insulate copper and fiber optic
wiring, and film; shrink wrap for multi-packaging canned food, bag-in-box
bags, produce bags, and pallet stretch wrap.
|
|
Polypropylene
|
|
280
million pounds
|
|
Polypropylene
is used to manufacture fibers for carpets, rugs and upholstery;
housewares; automotive battery cases; automotive fascia, running boards
and bumpers; grid-type flooring for sports facilities; fishing tackle
boxes; and bottle caps and closures.
|
Equistar
manufactures polyethylene using a variety of technologies at five facilities in
Texas and at the Morris, Illinois and Clinton, Iowa facilities. HDPE
accounted for approximately 12% of Equistar’s total revenues in
2007, 2006 and 2005, and polyethylene (HDPE, LDPE and LLDPE collectively)
accounted for approximately 21% of Equistar’s total revenues in each of
2007, 2006 and 2005.
Polyethylene products primarily are
sold to an extensive base of established customers. Approximately
two-thirds of Equistar’s domestic polyethylene product volumes are sold
to customers under annual or multi-year contracts. The
remainder of the polyethylene volume generally is sold under customary terms and
conditions without formal contracts. In either case, in most of the
continuous supply relationships, prices are subject to change upon mutual
agreement. Equistar also produces performance polymer products, which
include enhanced grades of polyethylene and polypropylene. Equistar
believes that, over a business cycle, average selling prices and profit margins
for performance polymers tend to be higher than average selling prices and
profit margins for higher-volume commodity polyethylenes.
Equistar
manufactures polypropylene at its Morris, Illinois
facility. Polypropylene is sold for various applications in the
automotive, housewares and appliance industries.
Polymers
primarily are distributed by railcar or truck. The vast majority of
Equistar’s polymers products are sold in North America, primarily through
Equistar’s sales organization. Sales agents are generally engaged to
market Equistar’s polymers products in the rest of the
world. Approximately 9% of Equistar’s polymers, based on sales
dollars, were exported from the United States during 2007, with 61% of those
export sales to Mexico, South America and Central America.
Other
than Lyondell, which accounted for approximately 13% of Equistar’s total
revenues in 2007, no single polymers segment customer accounted for 10% or more
of Equistar’s total revenues in 2007.
The
primary raw material for the production of polyethylene is
ethylene. Substantially all of the ethylene used in Equistar’s
polyethylene production is produced internally by Equistar’s ethylene facilities
in Equistar’s chemicals business segment. Equistar’s polyethylene
facilities generally can receive their ethylene directly from Equistar’s
ethylene facilities via its pipeline system, pipelines owned by unrelated
parties or on-site production. However, the polyethylene plants at
Chocolate Bayou, La Porte and Bayport, Texas are connected by pipeline to
unrelated parties and could receive ethylene via exchanges or
purchases.
The
primary raw material for the production of polypropylene is
propylene. The polypropylene facility at Morris, Illinois receives
propylene from Equistar’s propylene facilities located on-site, as well as
unrelated parties.
The raw
materials for polymers are, in general, commodity chemicals with numerous bulk
suppliers and ready availability at competitive prices. Historically,
raw material availability for polymers has not been an issue. For
additional discussion regarding the effects of raw material pricing and supply
on recent operating results, see “Item 1A. Risk Factors—Risks
Relating to the Businesses—Costs of raw materials and energy, as well as
reliability of supply, may result in increased operating expenses and reduced
results of operations” and “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Competition and Industry Conditions
Competition
in the polymers businesses is based on price, product quality, product delivery,
reliability of supply, product performance and customer
service. Industry consolidation has led to fewer, although larger,
competitors. Profitability is affected not only by supply and demand for
polymers, but also by raw material costs and price competition among producers,
which may intensify due to, among other things, the addition of new
capacity. In general, demand is a function of economic growth in the
United States and elsewhere in the world, which fluctuates. It is not
possible to accurately predict the changes in raw material costs, market
conditions, capacity utilization and other factors that will affect industry
profitability in the future. However, Equistar expects that global
polyethylene capacity additions over the next five years, primarily in the
Middle East and Northeast Asia, will exceed the average annual worldwide demand
growth by 1% per year. Over the next five years Equistar
expects that global polypropylene capacity additions will exceed the average
annual worldwide demand growth by slightly more than in the case of
polyethylene. Capacity share figures for Equistar and its
competitors, discussed below, are based on completed production
facilities.
Equistar
competes with other large marketers and producers for sales of polymers,
including ChevronPhillips, Dow, ExxonMobil, Formosa Plastics Corporation, Ineos,
NOVA Chemicals Corporation, TOTAL and Westlake Polymers. Based on
published rated industry capacities, Equistar is the third largest producer of
polyethylene in North America. The rated capacity of Equistar’s polyethylene
units as of December 31, 2007 was approximately 5.8 billion pounds per
year, or approximately 14% of total industry capacity in North
America.
ENVIRONMENTAL CAPITAL EXPENDITURES
Millennium
and its joint ventures (together with the industries in which they operate) are
subject to extensive national, state and local environmental laws and
regulations concerning, and are required to have permits and licenses
regulating, emissions to the air, discharges onto land or waters and the
generation, handling, storage, transportation, treatment and disposal of waste
materials. In some cases, compliance with environmental, health and
safety laws and regulations can only be achieved by capital
expenditures. Millennium spent less than $1 million in the years
ended December 31, 2007 and 2006 and approximately $2 million in the year
ended December 31, 2005, for environmentally related capital expenditures
at existing facilities. Millennium currently estimates that
environmentally related capital expenditures at its facilities will be less
than $1 million for 2008
and $1 million in 2009.
In the
years ended December 31, 2007, 2006 and 2005, Equistar spent approximately
$51 million, $60 million and $62 million, respectively, for environmentally
related capital expenditures at existing facilities. Equistar
currently estimates that environmentally related capital expenditures at its
facilities will be approximately $30 million for 2008 and $10 million in
2009. The high levels of capital expenditures in 2006 and 2005
reflected increased spending on projects related to air emission reductions and
wastewater management principally at Equistar’s Gulf Coast
plants. Under the Clean Air Act, the eight-county Houston/Galveston
region was designated a severe non-attainment area for ozone by the
Environmental Protection Agency (“EPA”). Emission reduction controls
were installed at each of Equistar’s six facilities in the Houston/Galveston
region to comply prior to the November 2007 deadline.
For
additional information regarding environmentally related capital expenditures,
see “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Environmental Matters.”
RESEARCH AND TECHNOLOGY; INTELLECTUAL PROPERTY
Millennium—Millennium
conducts fragrance and flavors chemicals research at its technology center in
Jacksonville, Florida, and acetyls research is conducted at Lyondell’s
technology center in Newtown Square, Pennsylvania. Millennium’s
research and development expenditures were $3 million in 2007, $4 million
in 2006 and $2 million in 2005.
Millennium
maintains an extensive patent portfolio and continues to file new patent
applications related to its acetyls and fragrance and flavors
businesses. As of December 31, 2007, Millennium owned
approximately 20 United States
patents and approximately 50 worldwide patents. Millennium owns
trademarks and trademark registrations in the United States and in other
countries, including the “Millennium” trade name. Millennium does not
regard its business as being materially dependent upon any single patent,
trademark or license.
Equistar—Equistar
conducts research and development principally at its technology centers in
Cincinnati, Ohio and Chocolate Bayou, Texas. Research also is
conducted at Lyondell’s technology center in Newtown Square,
Pennsylvania. Equistar’s research and development expenditures
were $37 million in 2007, $34 million in 2006 and
$33 million in
2005. In addition, as part of the acquisition of Lyondell by
LyondellBasell Industries, $22 million of the purchase price allocated by
LyondellBasell Industries to Equistar was assigned to in-process research and
development (“IPR&D”). Accordingly, Equistar’s results of
operations include a charge of $22 million of the value of the
IPR&D.
Equistar
maintains an extensive patent portfolio and continues to file new patent
applications related to its businesses. As of December 31, 2007,
Equistar owned approximately 255 United States patents and approximately 395
worldwide patents. Equistar owns trademarks and trademark
registrations in the United States and in other countries, including the
“Equistar” trade name. Equistar does not regard its business as being
materially dependent upon any single patent, trademark or license.
Millennium—At
December 31, 2007, Millennium had approximately 265 full-time and part-time
employees, none of which were represented by labor unions. In
addition to its own employees, Millennium uses the services of Lyondell and
Equistar employees, and may use the services of LyondellBasell Industries’
employees, pursuant to shared services and loaned employee arrangements and also
uses the services of independent contractors in the routine conduct of its
business. Millennium believes that its relations with its employees
are good.
Equistar—At
December 31, 2007, Equistar employed approximately 3,330 full-time and
part-time employees. Approximately 4% of Equistar’s employees are
covered by collective bargaining agreements. In addition to its own
employees, Equistar uses the services of Lyondell and Millennium employees, and
may use the services of LyondellBasell Industries’ employees, pursuant to shared
services and loaned employee arrangements and also uses the services of
independent contractors in the routine conduct of its
business. Equistar believes that its relations with its employees are
good.
There
are many factors that may affect the businesses and results of operations of
Millennium and its joint ventures. For additional discussion regarding factors
that may affect the businesses and operating results of Millennium and its joint
ventures, see “Item 1. Business,” “Item 3. Legal
Proceedings,” “Forward-Looking Statements,” “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Item 7A. Disclosure of Market Risk.” If one or more of these risks
actually occur, Millennium’s business, financial position or results of
operations could be materially and adversely affected.
Risks Relating to the Businesses
Costs
of raw materials and energy, as well as reliability of supply, may result in
increased operating expenses and reduced results of operations.
Millennium
and its joint ventures purchase large amounts of raw materials and energy for
their businesses. The cost of these raw materials and energy, in the
aggregate, represents a substantial portion of their operating
expenses. The costs of raw materials and energy used for acetyls and
Equistar’s products generally follow price trends of, and vary with the market
conditions for, crude oil and natural gas, which may be highly volatile and
cyclical. The costs of energy and certain raw materials remain at
high levels, and a weak U.S. dollar adds to the volatility in Millennium and its
joint ventures’ raw material costs. There have been, and will likely
continue to be, periods of time when Millennium and its joint ventures are
unable to pass raw material and energy cost increases on to customers quickly
enough to avoid adverse impacts on their results of
operations. Customer consolidation also has made it more difficult to
pass along cost increases to customers. The results of operations of
Millennium and its joint ventures have been, and could be in the future,
significantly affected by increases and volatility in these
costs. Cost increases also may increase working capital needs, which
could reduce liquidity and cash flow for Millennium and its joint
ventures. In addition, when raw material and energy costs increase
rapidly and are passed along to customers as product price increases, the credit
risks associated with certain customers can be compounded. To the
extent Millennium and its joint ventures increase their product sales prices to
reflect rising raw material and energy costs, demand for products may decrease
as customers reduce their consumption or use substitute products, which may have
an adverse impact on Millennium’s or its joint ventures’ results of
operations. See “Millennium and its joint ventures sell commodity
products in highly competitive global markets and face significant price
pressures” below.
In
addition, higher North American natural gas prices relative to natural gas
cost-advantaged regions, such as the Middle East, have diminished the ability of
many chemical producers to compete internationally since natural gas prices
affect a significant portion of the industry’s raw materials and energy sources.
This environment has in the past caused and may in the future cause a
reduction in Millennium’s or Equistar’s exports, and has in the past reduced and
may in the future reduce the competitiveness of U.S. and European producers.
It also has in the past increased the competition for product sales within
North America and Europe, as production that would otherwise have been sold in
other geographic regions was instead offered for sale in these regions,
resulting in excess supply and lower margins in North America and Europe, and
may do so in the future.
Furthermore,
for Millennium and its joint ventures, there are a limited number of suppliers
for some of their raw materials and utilities and, in some cases, the number of
sources for and availability of raw materials is specific to the particular
geographic region in which a facility is located. In addition, for
some products of Millennium and its joint ventures, the facilities and/or
distribution channels of raw material suppliers and Millennium and its joint
ventures form an integrated system. This is especially true in the
U.S. Gulf Coast where the infrastructure of the chemical and refining industries
is tightly integrated such that a major disruption of supply of a given
commodity can negatively affect numerous participants, including suppliers of
other raw materials. If one or more of Millennium’s or its joint
ventures’ significant suppliers were unable to meet its obligations under
present supply arrangements, raw materials become unavailable within the
geographic area from which they are otherwise sourced, or supplies are otherwise
disrupted, Millennium’s or its joint ventures’ businesses could suffer reduced
supplies or be forced to incur increased costs for their raw materials, which
would have a direct negative impact on plant operations. For example,
Hurricanes Katrina and Rita negatively affected crude oil and natural gas
supplies, as well as supplies of some of Millennium’s and its joint ventures’
other raw materials, contributing to increases in raw material prices during the
second half of 2005 and, in some cases, disrupting production. In
addition, hurricane-related disruption of rail and pipeline traffic in the U.S.
Gulf Coast area negatively affected shipments of raw materials and
product.
The cyclicality and volatility of
the chemical industry may cause significant fluctuations in Millennium’s and its
joint ventures’ operating results.
Millennium’s
and its joint ventures’ operating results are subject to the cyclical and
volatile nature of the supply-demand balance in the chemical industry, and their
future operating results are expected to continue to be affected by this
cyclicality and volatility. The chemical industry historically has
experienced alternating periods of capacity shortages leading to tight supply,
causing prices and profit margins to increase, followed by periods when
substantial capacity is added, resulting in oversupply, declining capacity
utilization rates and declining prices and profit margins. The
volatility this industry experiences occurs as a result of changes in the supply
and demand for products, changes in energy prices and changes in various other
economic conditions around the world. This cyclicality and volatility
results in significant fluctuations in profits and cash flow from period to
period and over the business cycles.
The
chemical industry experienced tight supply in many product areas and increased
demand as the global economy improved during the past several years. As a
result, profitability in the industry increased, even in a world of volatile raw
material and energy costs. However, it is uncertain whether business
conditions will remain positive. The global economic and political environment
continues to be uncertain, and a recession or other negative changes could
result in a decline in demand and place pressure on Millennium’s and its joint
ventures’ results of operations. In addition, new capacity additions by some
participants in the industry, especially those in the Middle East and Asia that
began in 2006 and are expected to continue, could lead to another period of
oversupply and poor profitability.
Millennium
and its joint ventures may reduce production at or idle a facility for an
extended period of time or exit a business because of an oversupply of a
particular product and/or a lack of demand for that particular product, or high
raw material prices, which makes production uneconomical. Any
decision to permanently close facilities or exit a business would result in
impairment and other charges to earnings. Temporary outages sometimes
last for several quarters or, in certain cases, longer, and could cause
Millennium and its joint ventures to incur costs, including the expenses of
maintaining and restarting these facilities. It is possible that
factors such as increases in raw material costs or lower demand in the future
will cause Millennium or its joint ventures to reduce operating rates, idle
facilities or exit uncompetitive businesses.
External
factors beyond Millennium’s or its joint ventures’ control can cause
fluctuations in demand for their products and in their prices and margins, which
may result in lower operating results.
External
factors beyond Millennium’s or its joint ventures’ control can cause volatility
in the price of raw materials and other operating costs, as well as significant
fluctuations in demand for their products and can magnify the impact of economic
cycles on their businesses. Examples of external factors
include:
|
·
|
supply
of and demand for raw materials;
|
|
·
|
changes
in customer buying patterns and demand for Millennium’s and its joint
ventures’ products;
|
|
·
|
general
economic conditions;
|
|
·
|
domestic
and international events and
circumstances;
|
|
·
|
governmental
regulation in the U.S. and abroad;
and
|
|
·
|
severe
weather and natural disasters.
|
Millennium
believes that global events have had an impact on its acetyls business and
Equistar’s businesses in recent years and may continue to do so. In
addition, a number of Millennium’s and its joint ventures’ products are highly
dependent on durable goods markets, such as the construction and automotive
markets, which also are cyclical and impacted by many of the external factors
referenced above. Many of Millennium’s and its joint ventures’
products are components of other chemical products that, in turn, are subject to
the supply-demand balance of the chemical industry and general economic
conditions. The volatility and elevated level of prices for crude oil
and natural gas have resulted in increased raw material costs, and the impact of
the factors cited above and others may once again cause a slowdown in the
business cycle, reducing demand and lowering operating rates and, ultimately,
reducing profitability.
Millennium
and its joint ventures sell commodity products in highly competitive global
markets and face significant price pressures.
Millennium
and its joint ventures sell their products in highly competitive global
markets. Due to the commodity nature of certain of their products,
competition in these markets is based primarily on price and to a lesser extent
on product performance, product quality, product deliverability, reliability of
supply and customer service. As a result, Millennium and its joint
ventures generally are not able to protect their market position for these
products by product differentiation and may not be able to pass on cost
increases to their customers.
In
addition, Millennium and its joint ventures face increased competition from
companies that may have greater financial resources and different cost
structures or strategic goals than Millennium and its joint ventures, such as
large integrated oil companies (many of which also have chemical businesses),
government-owned businesses, and companies that receive subsidies or other
government incentives to produce certain products in a specified geographic
region. Increased competition from these companies could limit
Millennium’s and its joint ventures’ ability to increase product sales prices in
response to raw material and other cost increases, or could cause Millennium and
its joint ventures to reduce product sales prices to compete effectively, which
could reduce their profitability.
Accordingly,
increases in raw material and other costs may not necessarily correlate with
changes in prices for these products, either in the direction of the price
change or in magnitude. In addition, their ability to increase
product sales prices, and the timing of those increases, are affected by the
supply-demand balances for their products, as well as the capacity utilization
rates for those products. Timing differences in pricing between
rising raw material costs, which may change daily, and contract product prices,
which in many cases are negotiated only monthly or less often, sometimes with an
additional lag in effective dates for increases, have reduced and may continue
to reduce profitability. Even in periods during which raw material
prices decline, Millennium and its joint ventures may suffer decreasing profits
if raw material reductions occur at a slower rate than decreases in the selling
prices of their products.
Further,
volatility in costs and pricing can result in commercial disputes with customers
and suppliers with respect to interpretations of complex contractual
arrangements. Significant adverse resolution of any such disputes also
could reduce profitability.
If
the Lyondell businesses (including Millennium’s businesses) are not successfully
integrated with the historical Basell businesses, unanticipated costs may be
incurred and operations may be disrupted.
The
process of effectively integrating Basell and Lyondell into one company will
require significant managerial and financial resources. The costs and
time required to integrate these businesses into one organization could cause
the interruption of, or a loss of momentum in, the activities of any one, or
several, of the operations of the constituent entities, including
Lyondell. A failure to successfully integrate Lyondell with Basell’s
legacy business operations within the expected time frame could adversely affect
the business, financial condition and results of operations of Lyondell and
Millennium. The acquisition also may expose Lyondell, and therefore
Millennium, to certain additional risks, including:
|
|
Ÿ
|
difficulties
arising from LyondellBasell Industries operating a significantly larger
and more complex organization and adding Lyondell’s operations (including
those of Millennium) to Basell’s legacy
operations;
|
|
|
Ÿ
|
difficulties
in the assimilation of the assets and operations of the Lyondell
businesses (including those of Millennium) with the assets and operations
of Basell, especially when the assets are in business segments not shared
historically by both companies or involve joint venture
partners;
|
| |
|
the loss of, or difficulty in
attracting, customers, business partners or key employees as a result of
uncertainties associated with the acquisition or
otherwise;
|
| |
|
customers and business partners
being unwilling to continue doing business with Millennium on the same or
similar terms as a result of the
acquisition;
|
|
|
Ÿ
|
challenges
associated with the implementation of changes in management in connection
with the acquisition and the integration of the combined company
management team;
|
|
|
Ÿ
|
difficulties
in consolidating the workforces;
|
|
|
Ÿ
|
the
diversion of attention from other business
concerns;
|
|
|
Ÿ
|
difficulties
arising from coordinating geographically disparate organizations, systems
and facilities;
|
|
|
Ÿ
|
difficulties
arising from coordinating and consolidating corporate and administrative
functions, including integration of internal controls and
procedures;
|
|
|
Ÿ
|
unforeseen
legal, regulatory, contractual, labor or other issues;
and
|
|
|
Ÿ
|
the
failure to realize expected profitability or
growth.
|
Further,
unexpected costs and challenges may arise whenever businesses with different
operations or management are combined.
Millennium’s
and its joint ventures’ operations and assets are subject to extensive
environmental, health and safety and other laws and regulations, which could
result in material costs or liabilities.
Millennium
and its joint ventures cannot predict with certainty the extent of future
liabilities and costs under environmental, health and safety and other laws and
regulations and whether liabilities and costs will be
material. Millennium and its joint ventures also may face liability
for alleged personal injury or property damage due to exposure to chemicals or
other hazardous substances at their current or former facilities or chemicals
that they manufacture, handle or own. In addition, because the
products of Millennium and its joint ventures are components of a variety of
other end-use products, Millennium and its joint ventures, along with other
members of the chemical industry, are inherently subject to potential claims
related to those end-use products. Although claims of the types
described above have not historically had a material impact on Millennium’s or
its joint ventures’ operations, a substantial increase in the success of these
types of claims could result in the expenditure of a significant amount of cash
by Millennium or its joint ventures to pay claims, and could reduce their
operating results.
Millennium
and its joint ventures (together with the industries in which they operate) are
subject to extensive national, state and local environmental laws and
regulations concerning, and are required to have permits and licenses
regulating, emissions to the air, discharges onto land or waters and the
generation, handling, storage, transportation, treatment and disposal of waste
materials. Many of these laws and regulations provide for substantial
fines and potential criminal sanctions for violations. Some of these
laws and regulations are subject to varying and conflicting
interpretations. In addition, some of these laws and regulations
require Millennium and its joint ventures to meet specific financial
responsibility requirements. Millennium cannot accurately predict
future developments, such as increasingly strict environmental laws, and
inspection and enforcement policies, as well as higher compliance costs, which
might affect the handling, manufacture, use, emission or disposal of products,
other materials or hazardous and non-hazardous waste. Some risk of
environmental costs and liabilities is inherent in Millennium’s and its joint
ventures’ operations and products, as it is with other companies engaged in
similar businesses, and there is no assurance that material costs and
liabilities will not be incurred. In general, however, with respect
to the costs and risks described above, Millennium does not expect that it or
its joint ventures will be affected differently than the rest of the chemical
industry where their facilities are located.
Environmental
laws may have a significant effect on the nature and scope of cleanup of
contamination at current and former operating facilities, the costs of
transportation and storage of raw materials and finished products and the costs
of the storage and disposal of wastewater. Also, U.S. “Superfund”
statutes may impose joint and several liability for the costs of remedial
investigations and actions on the entities that generated waste, arranged for
disposal of the wastes, transported to or selected the disposal sites and the
past and present owners and operators of such sites. All such
responsible parties (or any one of them, including Millennium and its joint
ventures) may be required to bear all of such costs regardless of fault, the
legality of the original disposal or ownership of the disposal site. In
addition, similar environmental laws and regulations that have been or may be
enacted in countries outside of the U.S. may impose similar liabilities and
costs upon Millennium.
Millennium
and its joint ventures have on-site solid-waste management units at several
facilities. It is anticipated that corrective measures will be
necessary to comply with federal and state requirements with respect to these
facilities. Millennium and its joint ventures also have liabilities
under the Resource Conservation and Recovery Act and various state and non-U.S.
government regulations related to several current and former plant
sites. Millennium and its joint ventures also are responsible for a
portion of the remediation of certain off-site waste disposal
facilities. Millennium and its joint ventures are contributing funds
to the cleanup of several waste sites throughout the U.S. under the
Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”)
and the Superfund Amendments and Reauthorization Act of 1986, including the
Kalamazoo River Superfund Site discussed below. Millennium and its
joint ventures also have been named as potentially responsible parties at
several other sites. Millennium’s policy is to accrue remediation
expenses when it is probable that such efforts will be required and the related
expenses can be reasonably estimated. Estimated costs for future
environmental compliance and remediation are necessarily imprecise due to such
factors as the continuing evolution of environmental laws and regulatory
requirements, the availability and application of technology, the identification
of presently unknown remediation sites and the allocation of costs among the
potentially responsible parties under applicable statutes. For
further discussion regarding Millennium’s and its joint ventures’ environmental
matters and related accruals (including those discussed in this risk factor),
and environmentally-related capital expenditures, see also Note 18 to the
Consolidated Financial Statements, “Item 1. Business—Environmental
Capital Expenditures,” “Item 3. Legal Proceedings – Environmental
Matters” and “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations–Environmental Matters.” If
actual expenditures exceed the amounts accrued, that could have an adverse
effect on Millennium’s and its joint ventures’ results of operations and
financial position.
Kalamazoo River Superfund Site—A Millennium subsidiary has
been identified as a Potential Responsible Party (“PRP”) with respect to the
Kalamazoo River Superfund Site. The site involves cleanup of river
sediments and floodplain soils contaminated with polychlorinated biphenyls,
cleanup of former paper mill operations, and cleanup and closure of landfills
associated with the former paper mill operations. Litigation
concerning the matter commenced in December 1987 but was subsequently
stayed and is being addressed under CERCLA.
In 2000,
the Kalamazoo River Study Group (the “KRSG”), of which the Millennium subsidiary
and other PRPs are members, submitted to the State of Michigan a Draft Remedial
Investigation and Draft Feasibility Study, which evaluated a number of remedial
options for the river. The estimated costs for these remedial options
ranged from $0 to $2.5 billion. Although the KRSG study
identified a broad range of remedial options, not all of those options would
represent reasonably possible outcomes. Management does not believe
that any single remedy among those options represented the highest-cost
reasonably possible outcome.
In 2004,
Millennium recognized a liability representing Millennium’s interim allocation
of 55% of the $73 million total of estimated cost of riverbank
stabilization, recommended as the preferred remedy in 2000 by the KRSG study,
and of certain other costs.
At the
end of 2001, the U.S. Environmental Protection Agency took lead responsibility
for the river portion of the site at the request of the State of
Michigan. In 2004, the EPA initiated a confidential process to
facilitate discussions among the agency, the Millennium subsidiary, other PRPs,
the Michigan Departments of Environmental Quality and Natural Resources, and
certain federal natural resource trustees about the need for additional
investigation activities and different possible approaches for addressing the
contamination in and along the Kalamazoo River. As these discussions
have continued, management has obtained new information about regulatory
oversight costs and other remediation costs, including a proposed remedy to be
applied to a specific portion of the river, and has been able to reasonably
estimate anticipated costs for certain other segments of the river, based in
part on experience to date with the remedy currently being applied to the one
portion of the river. As a result, Millennium recognized
$47 million during 2007 and $2 million in 2006 for additional
estimated probable future remediation costs.
As of
December 31, 2007, the probable additional future remediation spending
associated with the river cannot be determined with certainty but the amounts
accrued are believed to be the current best estimate of future costs, based on
information currently available. At December 31, 2007, the balance of
the liability related to the river was $98 million.
In
addition, Millennium has recognized a liability primarily related to
Millennium’s estimated share of remediation costs for two former paper mill
sites and associated landfills, which are also part of the Kalamazoo River
Superfund Site. At December 31, 2007, the balance of the liability
was $47 million. Although no final agreement has been reached as
to the ultimate remedy for these locations, Millennium has begun remediation
activity related to these sites.
Millennium’s
ultimate liability for the Kalamazoo River Superfund Site will depend on many
factors that have not yet been determined, including the ultimate remedies
selected, the determination of natural resource damages, the number and
financial viability of the other PRPs, and the determination of the final
allocation among the PRPs. Millennium’s ultimate liability for the
Kalamazoo River Superfund Site is not affected by the sale of the inorganic
chemicals business, which closed on May 15, 2007.
Other Regulatory
Requirements—In addition to the matters described above, Millennium and
its joint ventures are subject to other material regulatory requirements that
could result in higher operating costs, such as regulatory requirements relating
to the security of its facilities, and the transportation, exportation or
registration of its products. Although Millennium and its joint
ventures have compliance programs and other processes intended to ensure
compliance with all such regulations, Millennium and its joint ventures are
subject to the risk that their compliance with such regulations could be
challenged. Non-compliance with certain of these regulations could
result in the incurrence of additional costs, penalties or assessments that
could be significant.
Proceedings
related to the alleged exposure to lead-based paints and lead pigments could
require Millennium to spend material amounts in litigation and settlement costs
and judgments.
Together
with alleged past manufacturers of lead-based paint and lead pigments for use in
paint, Millennium has been named as a defendant in various legal proceedings
alleging personal injury, property damage, and remediation costs allegedly
associated with the use of these products. The plaintiffs include
individuals and governmental entities, and seek recovery under a variety of
theories, including negligence, failure to warn, breach of
warranty,
conspiracy, market share liability, fraud, misrepresentation and
nuisance. The majority of these legal proceedings assert unspecified
monetary damages in excess of the statutory minimum and, in certain cases,
equitable relief such as abatement of lead-based paint in
buildings. These legal proceedings are in various trial stages and
post-dismissal settings, some of which are on appeal. One legal
proceeding relating to lead pigment or paint was tried in 2002. On
October 29, 2002, the judge in that case declared a mistrial after the jury
declared itself deadlocked. The sole issue before the jury was
whether lead pigment in paint in and on Rhode Island buildings constituted a
“public nuisance.” The re-trial of this case began on November 1,
2005. On February 22, 2006, a jury returned a verdict in favor of the
State of Rhode Island finding that the cumulative presence of lead pigments in
paints and coatings on buildings in the state constitutes a public nuisance;
that a Millennium subsidiary, Millennium Holdings, LLC, and other defendants
either caused or substantially contributed to the creation of the public
nuisance; and that those defendants, including the Millennium subsidiary, should
be ordered to abate the public nuisance. On February 28, 2006,
the judge held that the state could not proceed with its claim for punitive
damages. On February 26, 2007, the court issued its decision denying the
post-verdict motions of the defendants, including Millennium, for a mistrial or
a new trial. The court concluded that it would enter an order of
abatement and appoint a special master to assist the court in determining the
scope of the abatement remedy. On March 16, 2007, the court entered a final
judgment on the jury’s verdict. On March 20, 2007, Millennium filed
its notice of appeal with the Rhode Island Supreme Court. On December 18,
2007, the trial court appointed two special masters to serve as “examiners” and
to assist the trial court in the proposed abatement
proceedings.
While
Millennium believes that it has valid defenses to all the lead-based paint and
lead pigment proceedings and is vigorously defending them, litigation is
inherently subject to many uncertainties. Additional lead-based paint
and lead pigment litigation may be filed against Millennium in the future
asserting similar or different legal theories and seeking similar or different
types of damages and relief, and any adverse court rulings or determinations of
liability, among other factors, could affect this litigation by encouraging an
increase in the number of future claims and proceedings. In addition,
from time to time, legislation and administrative regulations have been enacted
or proposed to impose obligations on present and former manufacturers of
lead-based paint and lead pigment respecting asserted health concerns associated
with such products or to overturn successful court
decisions. Millennium is unable to predict the outcome of lead-based
paint and lead pigment litigation, the number or nature of possible future
claims and proceedings, or the effect that any legislation and/or administrative
regulations may have on Millennium. In addition, Millennium cannot
reasonably estimate the scope or amount of the costs and potential liabilities
related to such litigation, or any such legislation and
regulations. Thus, any liability Millennium incurs with respect to
pending or future lead-based paint or lead pigment litigation, or any
legislation or regulations could, to the extent not covered or reduced by
insurance or other recoveries, have a material impact on Millennium’s results of
operations. In addition, Millennium has not accrued any liabilities
for judgments or settlements against Millennium resulting from lead-based paint
and lead pigment litigation. Any liability that Millennium may
ultimately incur with respect to lead-based paint and lead pigment litigation is
not affected by the sale of the inorganic chemicals business, which closed on
May 15, 2007. See “Item 3. Legal Proceedings—Litigation
Matters” for additional discussion regarding lead-based paint and lead pigment
litigation.
Interruptions
of operations at the facilities of Millennium and its joint ventures may result
in liabilities or lower operating results.
Millennium
and its joint ventures own and operate large-scale facilities, and their
operating results are dependent on the continued operation of their various
production facilities and the ability to complete construction and maintenance
projects on schedule. Material operating interruptions at
Millennium’s or its joint ventures’ facilities, including, but not limited to,
interruptions caused by the events described below, may materially reduce the
productivity and profitability of a particular manufacturing facility, or
Millennium as a whole, during and after the period of such operational
difficulties.
Although
Millennium and its joint ventures take precautions to enhance the safety of
their operations and minimize the risk of disruptions, their operations, along
with the operations of other members of the chemical industry, are subject to
hazards inherent in chemical manufacturing and the related storage and
transportation of raw materials, products and wastes. These potential
hazards include:
|
·
|
pipeline
leaks and ruptures;
|
|
·
|
severe
weather and natural disasters;
|
|
·
|
labor
shortages or other difficulties;
|
|
·
|
transportation
interruptions;
|
|
·
|
remediation
complications;
|
|
·
|
discharges
or releases of toxic or hazardous substances or
gases;
|
|
·
|
other
environmental risks; and
|
Some of
these hazards can cause personal injury and loss of life, severe damage to or
destruction of property and equipment and environmental damage, and may result
in suspension of operations, the shut down of affected facilities and the
imposition of civil or criminal penalties. Furthermore, Millennium
and its joint ventures also will continue to be subject to present and future
claims with respect to workplace exposure, exposure of contractors on its
premises as well as other persons located nearby, workers’ compensation and
other matters.
Millennium
and its joint ventures maintain property, business interruption and casualty
insurance that they believe are in accordance with customary industry practices,
but they are not fully insured against all potential hazards incident to their
businesses, including losses resulting from natural disasters, war risks or
terrorist acts. Changes in insurance market conditions have caused,
and may in the future cause, premiums and deductibles for certain insurance
policies to increase substantially and, in some instances, for certain insurance
to become unavailable or available only for reduced amounts of
coverage. If Millennium or its joint ventures were to incur a
significant liability for which they were not fully insured, that company might
not be able to finance the amount of the uninsured liability on terms acceptable
to it or at all, and might be obligated to divert a significant portion of its
cash flow from normal business operations.
Millennium
and its joint ventures obtain a portion of their raw materials from sources
outside the U.S., which subjects them to exchange controls, political risks and
other risks.
Millennium
and its joint ventures obtain a portion of their principal raw materials from
sources outside the U.S., which subjects them to risks such as transportation
delays and interruptions, political and economic instability and disruptions,
restrictions on the transfer of funds, the imposition of duties and tariffs,
import and export controls, changes in governmental policies, labor unrest and
current and changing regulatory environments. These events could
increase the prices at which Millennium and its joint ventures can obtain raw
materials or disrupt the supply of raw materials, which could reduce
Millennium’s or its joint ventures’ operating results. Although
Millennium and its joint ventures have compliance programs and processes
intended to ensure compliance with applicable customs, currency exchange control
regulations, transfer pricing regulations or any other laws or regulations to
which they may be subject, they are subject to the risk that their compliance
could be challenged.
Conflicts
of interest between LyondellBasell Industries, Lyondell, Equistar and/or
Millennium could be resolved in a manner that may be perceived to be adverse to
Millennium and/or Equistar.
Lyondell
owns approximately 79% of Equistar, and Millennium owns the remaining
approximately 21% of Equistar. Millennium and Equistar are indirect
wholly owned subsidiaries of Lyondell and, as a result of LyondellBasell
Industries’ December 20, 2007 acquisition of Lyondell, Lyondell, Equistar and
Millennium are indirect wholly owned subsidiaries of LyondellBasell
Industries. All executive officers of Lyondell, Millennium and
Equistar and all members of Lyondell’s Board of Directors, Equistar’s
Partnership Governance Committee and Millennium’s Board of Directors also serve
as officers of LyondellBasell Industries. Conflicts of interest may
arise between LyondellBasell Industries, Lyondell, Equistar and/or Millennium
when decisions arise that could have different implications for LyondellBasell
Industries, Lyondell, Equistar and/or Millennium, and conflicts of interest
could be resolved in a manner that may be perceived to be adverse to Millennium
and/or Equistar.
Millennium
and Equistar depend to a significant degree on Lyondell for the administration
of their businesses, and Equistar has product supply arrangements with its
owners. If those parties do not fulfill their obligations under the
arrangements, Millennium’s and/or Equistar’s revenues, margins and cash flow
could be adversely affected.
Lyondell
and Equistar and parties related to them have various agreements and
transactions with Millennium. For example, Millennium is party to
shared services, loaned employee and operating arrangements with Lyondell and
Equistar pursuant to which Lyondell, Equistar and Millennium provide many
administrative and operating services to each other. Lyondell
provides to Millennium and Equistar services that are essential to the
administration and management of Millennium’s and Equistar’s businesses, which
from time to time may include 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 services. Accordingly, Millennium
and Equistar depend to a significant degree on Lyondell for the administration
of their businesses. If Lyondell did not fulfill its obligations
under the shared services arrangement, it would disrupt Millennium’s and
Equistar’s businesses and could have a material adverse effect on their
businesses and results of operations. In addition, Equistar has
product supply agreements with Lyondell and Millennium pursuant to which
Equistar sells a substantial amount of its products. Equistar expects
to continue to derive a significant portion of its business from transactions
with these parties. If they are unable or otherwise cease to purchase
Equistar’s products, Equistar’s revenues and margins and, therefore,
Millennium’s cash flow could be adversely affected.
Millennium
pursues acquisitions, dispositions and joint ventures, which may not yield the
expected benefits.
Millennium
may purchase or sell assets or enter into contractual arrangements or joint
ventures in an effort to generate value. Although these transactions
may be expected to yield longer-term benefits if the expected efficiencies and
synergies of the transactions are realized, they could reduce the operating
results of Millennium or its joint ventures in the short term because of the
costs, charges and financing arrangements associated with such transactions or
the benefits of a transaction may not be realized to the extent
anticipated. Other transactions may advance future cash flows from
some of Millennium’s or its joint ventures’ businesses, thereby yielding
increased short-term liquidity, but consequently resulting in lower cash flows
from these operations over the longer term.
Millennium’s
available cash, access to additional capital and business and future prospects
could be limited by its significant amount of debt and other financial
obligations and the current weak condition of the capital markets.
At
December 31, 2007, Millennium had $328 million of consolidated debt, including
the current portion of long-term debt. Also at that date, Millennium
had guaranteed $18.3 billion and €1.8 billion of debt of related
parties. In addition, Equistar had $236 million of consolidated debt
(including $80 million owed to Millennium).
In
addition, Millennium has contractual commitments and ongoing pension and
post-retirement benefit obligations that will require cash contributions in 2008
and beyond as described in “—Contractual and Other Obligations” under “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operation.”
Millennium’s
level of debt and other obligations could have significant adverse consequences
on its business and its future prospects, including that it could:
|
|
Ÿ
|
make
Millennium more vulnerable to a downturn in its businesses, its industry
or the economy in general as a significant percentage of its cash flow
from operations is required to make payments on its indebtedness, making
it more difficult to react to changes in its business and in market or
industry conditions;
|
|
|
Ÿ
|
require
Millennium to dedicate a substantial portion of its future cash flow from
operations to the payment of principal and interest on indebtedness,
thereby reducing the availability of its cash flow to grow its business
and to fund working capital, capital expenditures, research and
development efforts and other general corporate
purposes;
|
|
|
Ÿ
|
constrain
its ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, debt service requirements or
other purposes, on satisfactory terms or at all, especially given the
current weak environment in the capital
markets;
|
|
|
Ÿ
|
make
it more difficult for it to satisfy its financial
obligations;
|
|
|
Ÿ
|
place
it at a competitive disadvantage as compared to competitors that have less
debt and lower debt service requirements;
and
|
|
|
Ÿ
|
make
it more vulnerable to increases in interest rates since part of its
indebtedness is, and any future debt may be, subject to variable interest
rates.
|
For a
discussion regarding Millennium’s ability to pay or refinance its debt, see the
“—Liquidity and Capital Resources” section under “Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
The
substantial level of indebtedness and other financial obligations of Millennium,
as well of LyondellBasell Industries generally, also increases the possibility
that Millennium, or another borrower whose obligations are guaranteed by
Millennium, may be unable to generate cash sufficient to pay, when due, the
principal of, interest on or other amounts due in respect of its indebtedness
and other financial obligations. If Millennium, or another borrower
for which Millennium or one of its subsidiaries is a guarantor, were unable to
pay principal and interest on debt, a default would exist under the terms of
that debt instrument, which could have significant adverse consequences for
Millennium. See “Failure to comply with debt covenants or to pay
principal and interest when due could result in an acceleration of
debt.”
Millennium
requires a significant amount of cash to service indebtedness, and the ability
of each to generate cash depends on many factors beyond their
control.
The
ability of Millennium to make payments on and refinance its indebtedness depends
on its ability to generate cash from its directly held businesses and on the
performance of its subsidiaries and Equistar and their ability to make
distributions. Because a substantial portion of Millennium’s
operations are conducted by its subsidiaries and Equistar, its cash flow and
ability to repay debt are dependent in part upon cash dividends and
distributions or other transfers from them. Equistar and Millennium’s
subsidiaries are separate and distinct legal entities. Payment of
dividends and distributions by them to Millennium may be subject to restrictions
under applicable law.
The
businesses of Millennium and its subsidiaries and Equistar may not generate
sufficient cash flow from operations to meet debt service obligations and
Millennium may not be able to refinance its indebtedness on reasonable terms, if
at all. Factors beyond the control of Millennium and its subsidiaries
and Equistar affect their economic performance and accordingly Millennium’s
ability to make these payments and refinancings. These factors are
discussed elsewhere in these “Risk Factors” and the “Forward-Looking Statements”
section.
Further,
the ability of Millennium and its subsidiaries to fund capital expenditures and
working capital may depend on the availability of funds from external
sources. Since Lyondell acquired Millennium, it has not contributed
additional cash to it. If that practice continues, Lyondell’s cash
flow would not be available to fund cash needs of Millennium. In
addition, Millennium and its subsidiaries do not currently have access as
borrowers to any lines of credit or other liquidity facilities. If,
in the future, sufficient cash is not generated from operations to meet debt
service obligations and funds are not available from Lyondell or under future
lines of credit or other liquidity facilities, if any, Millennium and its
subsidiaries may need to reduce or delay non-essential expenditures, such as
capital expenditures and research and development efforts. In
addition, they may need to refinance debt, obtain additional financing or sell
assets, which they may not be able to do on reasonable terms, if at
all.
Although
Millennium is highly leveraged, its parent may cause it to pay dividends for the
benefit of the parent and its affiliates. The debt agreements to
which Millennium is subject do not restrict its ability to pay
dividends. Cash used to pay dividends would not be available to pay
principal of or interest on Millennium's debt, to make capital expenditures or
for other uses in its business.
Millennium’s
variable rate obligations subject it to interest rate risk and in addition
interest rates under the Interim Loan are subject to increase for other reasons,
which could cause its debt service obligations to increase
significantly.
As of
December 31, 2007, Millennium was an obligor with respect to variable rate
borrowings under the Senior Secured Credit Facilities and the Interim Loan of
approximately $19,444 million. Although Millennium and its
co-obligors may have interest rate hedge arrangements in effect from time to
time, its interest expense could increase if interest rates increase, because
its variable rate obligations may not be fully hedged and they bear interest at
floating rates, generally equal to adjusted Euro Interbank Offered Rate
(“EURIBOR”) and LIBOR plus an applicable margin or, in the case of the Senior
Secured Credit Facilities, may instead bear interest at the alternate base rate
plus an applicable margin. Additionally, the Inventory-Based Credit
Facility bears interest at floating rates. In addition, the
applicable margin under the Interim Loan (and under any Extended Loan into which
it may be converted) will increase by an additional 0.50% on June 18, 2008 and
at the end of each three-month period thereafter. The applicable
margin under the Interim Loan (and any such Extended Loan) also is subject to
change based on the ratings assigned to indebtedness of LyondellBasell
Industries.
Despite
current indebtedness levels, Millennium and its subsidiaries may still be able
to incur or guarantee substantially more debt. This could increase
the risks associated with its substantial level of financial
obligations.
Millennium
and its subsidiaries, as well as Equistar, may be able to incur or guarantee
substantial additional indebtedness in the future. Although
Millennium’s debt instruments contain restrictions on the incurrence of
additional indebtedness, these restrictions are subject to a number of
qualifications and exceptions, and the indebtedness incurred in compliance with
these restrictions could be substantial. Among other things,
Millennium may guarantee additional obligations to the extent there is available
capacity under the revolving credit facility portion of the Senior Secured
Credit Facilities or under the Inventory-Based Credit Facility. See
“—Liquidity and Capital Resources” section under “Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” If Millennium and its subsidiaries and/or Equistar incur
or guarantee additional financial obligations above the existing levels, the
risks associated with their substantial level of financial obligations would
increase.
The
terms of the Senior Secured Credit Facilities, the Interim Loan, the Basell
Notes due 2015, and the Asset Based Facilities may restrict Millennium’s current
and future operations, particularly its ability to respond to changes or to take
certain actions.
The
Senior Secured Credit Facilities, Interim Loan, Basell Notes due 2015 and
Asset-Based Facilities contain a number of restrictive covenants that impose
significant operating and financial restrictions on Millennium, as well as on
LyondellBasell Industries, and may limit Millennium’s ability to engage in acts
that may be in its long-term best interests. These include covenants
restricting, among other things, Millennium’s ability to: incur, assume or
permit to exist indebtedness or guarantees; incur, assume or permit to exist
liens; make loans and investments; engage in mergers, acquisitions, and other
business combinations; prepay, redeem or purchase certain indebtedness; amend or
otherwise alter terms of certain indebtedness, and other material agreements;
make dispositions of assets; engage in transactions with affiliates; enter into
or permit to exist contractual obligations limiting its ability to make
distributions or to incur or permit to exist liens; and alter the conduct of
business. In addition, the Senior Secured Credit Facilities and
Asset-Backed Facilities contain covenants that limit the level of capital
expenditures per year. The Senior Secured Credit Facilities also
require the maintenance by LyondellBasell Industries of specified financial
ratios: (1) a maximum First Lien Senior Secured Leverage Ratio (as defined) of
3.75:1.0 on a consolidated basis; and (2) a minimum Consolidated Debt Service
Ratio (as defined) of 1.1:1.0 on a consolidated basis. The
Asset-Based Facilities require that total excess availability under the
Asset-Based Facilities may not be less than $100 million for two or more
consecutive business days. The Asset-Based Facilities also provide
that if for any period of four consecutive fiscal quarters the Fixed Charge
Coverage Ratio (as defined) of LyondellBasell Industries, on a consolidated
basis, is less than 1.10:1.0, then during the next quarter, total excess
availability may not be less than $200 million for five consecutive business
days or more, unless, on each such day, total excess availability is at least
$150 million and total collateral availability is at least $275
million. The ability to meet those financial ratios and other
requirements can be affected by events beyond the control of Millennium and,
over time, these covenants may not be satisfied.
Failure
to comply with covenants or to pay principal and interest when due could result
in an acceleration of debt.
A breach
by Millennium or any other obligor of the covenants or the failure to pay
principal and interest when due under any of the Senior Secured Credit
Facilities, Interim Loan, Asset Based Facilities or other indebtedness of
Millennium or its affiliates could result in a default or cross-default under
all or some of those instruments. If any such default or
cross-default occurs, the applicable lenders may elect to declare all
outstanding borrowings, together with accrued interest and other amounts payable
thereunder, to be immediately due and payable. In such circumstances,
the lenders under the Senior Secured Credit Facilities and the Inventory-Based
Credit Facility also have the right to terminate any commitments they have to
provide further borrowings, and the counterparties under the Accounts Receivable
Securitization Facility may terminate further purchases of interests in accounts
receivable and receive all collections from previously sold interests until they
have collected on their interests in those receivables, thus reducing the
entity’s liquidity. In addition, following such an event of default,
the lenders under the Senior Secured Facilities and the Interim Loan and the
counterparties under the Asset-Based Inventory Facility have the right to
proceed against the collateral granted to them to secure the obligations, which
in some cases includes Millennium’s available cash. If the
obligations under the Senior Secured Credit Facilities, the Interim Loan, the
Asset Based Facilities or any other material financing arrangement were to be
accelerated, it is not likely that the obligors would have, or be able to
obtain, sufficient funds to make these accelerated payments, and as a result
Millennium or one or more of its subsidiaries could be forced into bankruptcy or
liquidation.
FORWARD-LOOKING STATEMENTS
Certain
of the statements contained in this report are “forward-looking statements”
within the meaning of the federal securities laws. Forward-looking
statements can be identified by words such as “estimate,” “believe,” “expect,”
“anticipate,” “plan,” “budget” or other words that convey the uncertainty of
future events or outcomes. Many of these forward-looking statements
have been based on expectations and assumptions about future events that may
prove to be inaccurate. While management considers these expectations
and assumptions to be reasonable, they are inherently subject to significant
business, economic, competitive, regulatory and other risks, contingencies and
uncertainties, most of which are difficult to predict and many of which are
beyond Millennium’s control. Millennium’s actual results (including
the results of its joint ventures) could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to:
|
·
|
the
availability, cost and price volatility of raw materials and
utilities,
|
|
·
|
the
supply/demand balances for Millennium’s and its joint ventures’ products,
and the related effects of industry production capacities and operating
rates,
|
|
·
|
operating
interruptions (including leaks, explosions, fires, weather-related
incidents, mechanical failure, unscheduled downtime, supplier disruptions,
labor shortages or other labor difficulties, transportation interruptions,
spills and releases and other environmental
risks),
|
|
·
|
legal,
tax and environmental proceedings,
|
|
·
|
uncertainties
associated with the U. S. and worldwide economies, including those due to
political tensions in the Middle East and
elsewhere,
|
|
·
|
the
cyclical nature of the chemical
industry,
|
|
·
|
current
and potential governmental regulatory actions in the U. S. and in other
countries,
|
|
·
|
terrorist
acts and international political
unrest,
|
|
·
|
risks
of doing business outside the U.S., including foreign currency
fluctuations,
|
|
·
|
Millennium’s
abilitiy to service its
indebtedness,
|
|
·
|
available
cash and access to capital markets,
|
|
·
|
competitive
products and pricing pressures,
|
|
·
|
technological
developments, and
|
|
·
|
Millennium’s
ability to implement its business strategies, including integration with
LyondellBasell Industries.
|
Any of
these factors, or a combination of these factors, could materially affect
Millennium’s future results of operations (including those of its joint
ventures) and the ultimate accuracy of the forward-looking
statements. These forward-looking statements are not guarantees of
future performance, and Millennium’s actual results (including those of its
joint ventures) and future developments may differ materially from those
projected in the forward-looking statements. Management cautions
against putting undue reliance on forward-looking statements or projecting any
future results based on such statements or present or prior earnings
levels.
All
forward-looking statements in this Form 10-K are qualified in their entirety by
the cautionary statements contained in this section and elsewhere in this
report. See “Item 1. Business,” “Item 1A. Risk
Factors,” “Item 3. Legal Proceedings,” “Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Item 7A. Disclosure of Market Risk” for
additional information about factors that may affect Millennium’s businesses and
operating results (including those of its joint ventures). These
factors are not necessarily all of the important factors that could affect
Millennium and its joint ventures. Use caution and common sense when
considering these forward-looking statements. Millennium does not
intend to update these statements unless securities laws require it to do
so.
In
addition, this report contains summaries of contracts and other
documents. These summaries may not contain all of the information
that is important to an investor, and reference is made to the actual contract
or document for a more complete understanding of the contract or document
involved.
INDUSTRY AND OTHER INFORMATION
The data
included or incorporated by reference in this report regarding the chemical
industry, product capacity and ranking, including Millennium’s and Equistar’s
respective capacity positions, the capacity positions of their competitors for
certain products and expected rates of demand, is based on independent industry
publications, reports from government agencies or other published industry
sources and estimates of Millennium and/or Equistar. These estimates
are based on information obtained from Millennium’s and/or Equistar’s customers,
distributors, suppliers, trade and business organizations and other contacts in
the markets in which Millennium and Equistar operate and managements’ knowledge
and experience. These estimates involve risks and uncertainties and
are subject to change based on various factors, including those discussed under
“Item 1A. Risk Factors” and “Forward-Looking
Statements.”
NON-GAAP FINANCIAL MEASURES
The body
of generally accepted accounting principles is commonly referred to as
“GAAP.” For this purpose, a non-GAAP financial measure is generally
defined by the Securities and Exchange Commission as one that purports to
measure historical or future financial performance, financial position or cash
flows but excludes or includes amounts that would not be so adjusted
in the most comparable U.S. GAAP measure. From time to time
Millennium discloses so-called non-GAAP financial measures, primarily EBITDA, or
earnings before interest, taxes, depreciation and amortization of long-lived
assets. The non-GAAP financial measures described herein or in other
documents issued by Millennium are not a substitute for the GAAP measures of
earnings, for which management has responsibility.
Millennium
sometimes uses EBITDA in its communications with investors, financial analysts
and the public. This is because EBITDA is perceived as a useful and
comparable measure of operating performance and the contribution of operations
to liquidity. For example, interest expense is dependent on the
capital structure and credit rating of a company. However, debt
levels, credit ratings and, therefore, the impact of interest expense on
earnings vary in significance between companies. Similarly, the tax
positions of individual companies can vary because of their differing abilities
to take advantage of tax benefits, with the result that their effective tax
rates and tax expense can vary considerably. Finally, companies
differ in the age and method of acquisition of productive assets, and thus the
relative costs of those assets, as well as in the depreciation (straight-line,
accelerated, units of production) method, which can result in considerable
variability in depreciation and amortization expense between
companies. Thus, for comparison purposes, management believes that
EBITDA can be useful as an objective and comparable measure of operating
profitability and the contribution of operations to liquidity because it
excludes these elements of earnings that do not provide information about the
current operations of existing assets. Accordingly, management
believes that disclosure of EBITDA can provide useful information to investors,
financial analysts and the public in their evaluation of companies’ operating
performance and the contribution of operations to liquidity.
Millennium
also sometimes reports adjusted net income (loss) or adjusted EBITDA, excluding
specified items that are unusual in nature or are not comparable from period to
period and that are included in GAAP measures of earnings. Management
believes that excluding these items may help investors compare operating
performance between two periods. Such adjusted data is always
reported with an explanation of the items that are excluded.
As a
result of Lyondell’s acquisition by LyondellBasell Industries AF S.C.A.,
Millennium’s assets and liabilities were revalued to reflect the values assigned
in accounting for the purchase of Lyondell. To recognize the
application of a different basis of accounting following the acquisition, the
consolidated financial statements present separately the periods prior to the
acquisition (“Predecessor”) and the 11-day period after the acquisition
(“Successor”). For purposes of presenting Management’s Discussion and
Analysis of Financial Condition and the Results of Operations, management
believes that combining the 2007 Successor and Predecessor periods results in a
more meaningful comparison of 2007 and 2006 results of operations and cash
flows. Where appropriate, such as the impact of the step up to fair
value on depreciation and amortization expense and the impact of
acquisition-related debt on interest expense, the purchase accounting effects
are addressed. A discussion of the 11-day Successor period results
and cash flows is also presented.
Principal Manufacturing Facilities
The
principal manufacturing facilities are set forth below, and are identified by
the principal Millennium or Equistar segment or segments using the
facility. The facilities are wholly owned, except as otherwise noted
below.
|
Location
|
|
Segment
|
|
Principal
Products
|
|
Millennium
Facilities
|
|
|
|
|
|
|
|
|
|
|
|
Brunswick,
Georgia
|
|
Chemicals
|
|
Fragrance
and Flavors Chemicals
|
|
|
|
|
|
|
|
Jacksonville,
Florida
|
|
Chemicals
|
|
Fragrance
and Flavors Chemicals
|
|
|
|
|
|
|
|
La
Porte, Texas
†
|
|
Chemicals
|
|
VAM
and Acetic Acid
|
|
|
|
|
|
|
|
La
Porte, Texas
(a)
|
|
Chemicals
|
|
Methanol
|
|
|
|
|
|
|
|
Equistar
Facilities
|
|
|
|
|
|
|
|
|
|
|
|
Bayport
(Pasadena), Texas †*
|
|
Chemicals
|
|
EO,
EG and other EO Derivatives
|
|
|
|
|
|
|
|
Bayport
(Pasadena), Texas (b)†
|
|
Polymers
|
|
LDPE
|
|
|
|
|
|
|
|
Beaumont,
Texas
(c)†
|
|
Chemicals
|
|
EG
|
|
|
|
|
|
|
|
Channelview,
Texas (d)†*
|
|
Chemicals
|
|
Ethylene,
Propylene, Butadiene, Benzene, Toluene, Alkylate and
MTBE
|
|
|
|
|
|
|
|
Chocolate
Bayou, Texas (e)(f)†
|
|
Chemicals
|
|
Ethylene,
Propylene, Butadiene, Benzene, Toluene and MTBE
|
|
|
|
|
|
|
|
Chocolate
Bayou, Texas (e) †*
|
|
Polymers
|
|
HDPE
|
|
|
|
|
|
|
|
Clinton,
Iowa
†*
|
|
Chemicals
|
|
Ethylene
and Propylene
|
|
|
|
Polymers
|
|
LDPE
and HDPE
|
|
|
|
|
|
|
|
Corpus
Christi, Texas †*
|
|
Chemicals
|
|
Ethylene,
Propylene, Butadiene and Benzene
|
|
|
|
|
|
|
|
Fairport
Harbor, Ohio *
|
|
Polymers
|
|
Performance
Polymers
|
|
|
|
|
|
|
|
La
Porte, Texas
†*
|
|
Chemicals
|
|
Ethylene
and Propylene
|
|
|
|
Polymers
|
|
LDPE
and LLDPE
|
|
|
|
|
|
|
|
Lake
Charles, Louisiana (g)
|
|
Chemicals
|
|
Ethylene
and Propylene
|
|
|
|
|
|
|
|
Matagorda,
Texas
†*
|
|
Polymers
|
|
HDPE
|
|
|
|
|
|
|
|
Morris,
Illinois
†*
|
|
Chemicals
|
|
Ethylene
and Propylene
|
|
|
|
Polymers
|
|
LDPE,
LLDPE and Polypropylene
|
|
|
|
|
|
|
|
Newark,
New
Jersey
|
|
Chemicals
|
|
Denatured
Alcohol
|
|
|
|
|
|
|
|
Tuscola,
Illinois
†
|
|
Chemicals
|
|
Ethanol
|
|
|
|
|
|
|
|
Victoria,
Texas
(f)†*
|
|
Polymers
|
|
HDPE
|
|
|
_________________________
|
|
†
|
Facilities
which received the OSHA Star Certification, which is the highest safety
designation issued by the U.S. Department of
Labor.
|
|
*
|
The
facility, or portions of the facility, as applicable, owned by Equistar
are mortgaged as collateral for Lyondell’s credit
facility.
|
|
(a)
|
The
facility is owned by La Porte Methanol Company, a partnership owned 15% by
an unrelated party.
|
|
(b)
|
The
facility is located on leased land. The facility is owned by
Equistar and operated by an unrelated
party.
|
|
(c)
|
The
Beaumont facility is owned by PD Glycol, a partnership owned 50% by
Equistar and 50% by an unrelated party. The facility is located
on leased land.
|
|
(d)
|
The
Channelview facility has two ethylene processing units owned by
Equistar. An unrelated party owns an idled facility at the site
on land leased from Equistar. Equistar also operates a styrene
maleic anhydride unit and a polybutadiene unit, which are owned by an
unrelated party and are located on property leased from Equistar within
the Channelview facility.
|
|
(e)
|
Millennium
and Occidental each contributed to Equistar a facility located at the
Chocolate Bayou site. These facilities are not on contiguous
property.
|
|
(f)
|
The facility is located on
leased land.
|
|
(g)
|
The
Lake Charles facility has been idled since the first quarter of
2001. Although Equistar retains the physical ability to restart
or sell that facility, in the third quarter of 2006 Equistar
determined that it had no expectation of resuming production at that
facility. The facility and land are leased from Occidental under a lease
that expires in May 2009.
|
Other Locations and Properties
Millennium—Lyondell
provides office space to Millennium in Greenville, Delaware as part of a shared
services arrangement. Millennium also has barge docking facilities
and related equipment for loading and unloading raw materials and
products. Millennium leases railcars for use in its
businesses.
Equistar—Equistar
owns storage capacity for NGLs, ethylene, propylene and other hydrocarbons in
caverns within a salt dome in Mont Belvieu, Texas. There are
additional ethylene
and propylene storage facilities with related brine facilities operated by
Equistar on leased property in Markham, Texas.
Equistar
uses an extensive pipeline system, some of which it owns and some of which it
leases, extending from Corpus Christi to Mont Belvieu to Port Arthur and around
the Lake Charles area. Equistar owns other pipelines in connection
with its Chocolate Bayou, Corpus Christi, La Porte, Matagorda and Victoria
facilities. Equistar uses a pipeline owned and operated by an
unaffiliated party to transport ethylene from its Morris facility to its Tuscola
facility. Equistar owns and leases several pipelines connecting the
Channelview facility, Lyondell’s refinery and the Mont Belvieu storage facility,
which are used to transport raw materials, butylenes, hydrogen, butane, MTBE and
unfinished gasolines. Equistar also has barge docking facilities and
related terminal equipment for loading and unloading raw materials and products.
Equistar owns and leases railcars for use in its businesses.
Lyondell
provides office space to Equistar for its executive offices in downtown Houston,
Texas as part of a shared services arrangement. In addition, Equistar
owns facilities that house its research operations. Equistar also
leases various sales facilities and storage facilities, primarily in the U.S.
Gulf Coast area, for the handling of products.
Millennium
and its joint ventures are, from time to time, defendants 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, Millennium does not believe
that any ultimate uninsured liability resulting from the legal proceedings in
which it or its joint ventures currently are involved (directly or indirectly)
will individually, or in the aggregate, have a material adverse effect on the
business or financial position of Millennium. However, the adverse
resolution in any reporting period of one or more of these suits could have a
material impact on Millennium’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
Millennium and its joint ventures are involved in numerous and varied legal
proceedings, a significant portion of their outstanding litigation arose in five
contexts: (1) claims for personal injury or death allegedly arising out of
exposure to the products produced by or located on the premises of the
respective entities; (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,
property damage and/or air, noise and water pollution allegedly arising out of
operations; (4) employment and benefits related claims; and (5) commercial
disputes.
In 2004,
Millennium received requests from the staff of the Northeast Regional Office of
the Securities and Exchange Commission for the voluntary production of documents
in connection with an informal inquiry into the previously disclosed restatement
of Millennium’s financial statements for the years 1998 through 2002 and for the
first quarter of 2003. Millennium has complied with all such requests
received. On November 26, 2007, Millennium was notified that the
Securities and Exchange Commission had completed its investigation and did not
intend to recommend any enforcement action.
Together
with alleged past manufacturers of lead-based paint and lead pigments for use in
paint, Millennium has been named as a defendant in various legal proceedings
alleging personal injury, property damage, and remediation costs allegedly
associated with the use of these products. The plaintiffs include
individuals and governmental entities, and seek recovery under a variety of
theories, including negligence, failure to warn, breach of warranty, conspiracy,
market share liability, fraud, misrepresentation and nuisance. The
majority of these legal proceedings assert unspecified monetary damages in
excess of the statutory minimum and, in certain cases, seek equitable relief
such as abatement of lead-based paint in buildings. Legal proceedings
relating to lead pigment or paint are in various trial stages and post-dismissal
settings, some of which are on appeal.
Millennium’s
defense costs to date for lead-based paint and lead pigment litigation largely
have been covered by insurance. Millennium has not accrued any
liabilities for any lead-based paint and lead pigment
litigation. Millennium has insurance policies that potentially
provide approximately $1 billion in indemnity coverage for lead-based paint and
lead pigment litigation. Millennium’s ability to collect under the
indemnity coverage would depend upon, among other things, the resolution of
certain potential coverage defenses that the insurers are likely to assert and
the solvency of the various insurance carriers that are part of the coverage
block at the time of such a request. As a result of insurance
coverage litigation initiated by Millennium, an Ohio trial court issued a
decision in 2002 effectively requiring certain insurance carriers to resume
paying defense costs in the lead-based paint and lead pigment
cases. Indemnity coverage was not at issue in the Ohio court’s
decision. On February 23, 2006, certain Lloyd’s, London insurance
underwriters filed a declaratory judgment action in the Supreme Court of the
State of New York (trial court) against several of their policyholders,
including Millennium, contesting their responsibility to provide insurance
coverage for all of the lead-based paint and lead pigment cases, including the
Rhode Island case discussed below. On March 7, 2006, Millennium
filed an amended complaint in the Ohio case referenced above that revived its
Ohio state court litigation, seeking, among other relief, a declaratory judgment
as to the responsibility of all of its insurance carriers for any judgments or
settlements in connection with any lead-based paint and lead pigment litigation
involving Millennium. On April 26, 2006, the judge in the Ohio
case granted Millennium’s motion to amend the complaint to include all insurance
carriers. On March 14, 2006, Millennium filed a motion to dismiss the
New York case in favor of the pre-existing Ohio action, and on August 8, 2006,
the Supreme Court of the State of New York dismissed the declaratory judgment
action as to all carriers except those that asserted cross claims against
Millennium, which cross claims were stayed. On or about October 5,
2006, Lloyd’s, London filed a notice of appeal of the New York trial court’s
decision. This appeal was heard by the New York Supreme Court
Appellate Division on October 3, 2007. On October 25, 2007, the
Appellate Division upheld the trial court’s dismissal of Lloyd’s, London’s
declaratory judgment action. In addition to the declaratory judgment
action initiated by certain Lloyd’s, London underwriters, certain excess
carriers filed cross-claims in New York seeking similar declaratory
relief. These claims were initially stayed and were subsequently
dismissed on September 18, 2007. On December 28, 2007, some, but not
all, of these excess carriers filed a notice of appeal of the trial court’s
dismissal. The insurance carriers have in the past and may in the
future attempt to deny indemnity coverage if there is ever a settlement or a
final, non-appealable adverse judgment in any lead-based paint or lead pigment
case.
After
owning the Glidden Paints business for six months, in 1986, a predecessor of a
current subsidiary of Millennium sold, through a stock sale, its Glidden Paints
business. As part of that sale, the seller and purchaser agreed to
provide indemnification to each other against certain claims made during the
first eight years after the sale, and the purchaser agreed to fully indemnify
the seller against such claims made after the eight-year period. With
the exception of two cases described below, all pending lead-based paint and
lead pigment litigation involving Millennium, including the Rhode Island case,
were filed after the eight-year period. Accordingly, Millennium
believes that it is entitled to full indemnification from the purchaser against
lead-based paint and lead pigment cases filed after the eight-year
period. The purchaser disputes that it has such an indemnification
obligation, and claims that the seller must indemnify it. As
Millennium has not paid either a settlement or any judgment, its indemnification
claims have not been finally resolved. The only two remaining cases
originally filed within the eight-year period following the 1986 sale of the
Glidden Paints business include as parties a current Millennium
subsidiary
and an alleged predecessor company. One case filed by the New York
City Housing Authority remains inactive. The other matter is a
personal injury case in Ohio. On January 25, 2007, the Ohio Court of Appeals
affirmed summary judgment in favor of Millennium and its co-defendants and, on
June 20, 2007, the Ohio Supreme Court declined to hear plaintiff’s
appeal.
Millennium
believes that it has valid defenses to all pending lead-based paint and lead
pigment proceedings and is vigorously defending them. However,
litigation is inherently subject to many uncertainties. Additional
lead-based paint and lead pigment litigation may be filed against Millennium in
the future asserting similar or different legal theories and seeking similar or
different types of damages and relief, and any adverse court rulings or
determinations of liability, among other factors, could affect the litigation by
encouraging an increase in the number of future claims and
proceedings. In addition, from time to time, legislation and
administrative regulations have been enacted or proposed to impose obligations
on present and former manufacturers of lead-based paint and lead pigment
respecting asserted health concerns associated with such products or to overturn
successful court decisions. Millennium is unable to predict the
outcome of lead-based paint and lead pigment litigation, the number or nature of
possible future claims and proceedings, or the effect that any legislation
and/or administrative regulations may have on Millennium. In
addition, management cannot reasonably estimate the scope or amount of the costs
and potential liabilities related to such litigation, or any such legislation
and regulations. Accordingly, Millennium has not accrued any amounts
for such litigation.
Since the
beginning of 2007, 29 cases have been dismissed either voluntarily, upon
defendants’ motion, or tried to a jury verdict favorable to defendants,
including Millennium. Millennium currently remains named a defendant
in 26 cases arising from Glidden’s manufacture of lead
pigments. These cases are in various stages of the litigation
process. Of the 26 cases, most seek damages for personal injury and
are brought by individuals, and four of the cases seek damages and abatement
remedies based on public nuisance and are brought by states, cities and/or
counties in three states (California, Ohio and Rhode Island).
On
October 29, 2002, after a trial in which the jury deadlocked, the court in State of Rhode Island v. Lead
Industries Association, Inc., et al. (which commenced in the Superior
Court of Providence, Rhode Island, on October 13, 1999) declared a
mistrial. The sole issue before the jury was whether lead pigment in
paint in and on public and private Rhode Island buildings constituted a “public
nuisance.” The new trial in this case began on November 1,
2005. On February 22, 2006, a jury returned a verdict in favor of the
State of Rhode Island finding that the cumulative presence of lead pigments in
paints and coatings on buildings in the state constitutes a public nuisance;
that a Millennium subsidiary and other defendants either caused or substantially
contributed to the creation of the public nuisance; and that those defendants,
including the Millennium subsidiary, should be ordered to abate the public
nuisance. On February 28, 2006, the judge held that the state
could not proceed with its claim for punitive damages. On February 26, 2007, the
court issued its decision denying the post-verdict motions of the defendants,
including Millennium, for a mistrial or a new trial. The court
concluded that it would enter an order of abatement and appoint a special master
to assist the court in determining the scope of the abatement remedy. On March
16, 2007, the court entered a final judgment on the jury’s
verdict. On March 20, 2007, Millennium filed its notice of appeal
with the Rhode Island Supreme Court. On December 18, 2007, the trial
court appointed two special masters to serve as “examiners” and to assist the
trial court in the proposed abatement proceedings.
From time
to time Millennium and its joint ventures receive notices or inquiries 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. Any such alleged violations may become the subject
of enforcement actions, settlement negotiations or other legal proceedings and
may (individually or in the aggregate) involve monetary sanctions of $100,000 or
more (exclusive of interest and costs).
Millennium’s
accrued liability for future environmental remediation costs at current and
former plant sites and other remediation sites totaled $181 million as of
December 31, 2007. The remediation expenditures are expected to
occur over a number of years, and not to be concentrated in any single
year. In the opinion of management, there is no material estimable
range of reasonably possible loss in excess of the liabilities recorded for
environmental remediation. However, it is possible that new
information about the sites for which the accrual has been established, new
technology or future developments such as involvement in investigations by
regulatory agencies, could require Millennium to reassess its potential exposure
related to environmental matters. The liabilities for individual
sites range from less than $1 million to $145 million. The
$145 million liability relates to the Kalamazoo River Superfund
Site. For additional information regarding environmental matters,
including the liability related to the Kalamazoo River Superfund Site, see “Item
1A. Risk Factors—Risks Relating to the Businesses—Millennium’s and
its joint ventures’ operations and assets are subject to extensive
environmental, health and safety and other laws and regulations, which could
result in material costs or liabilities,” “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Environmental Matters” and Note 18 to the Consolidated Financial
Statements.
A
Millennium subsidiary has been identified as a PRP with respect to the Kalamazoo
River Superfund Site. The site involves cleanup of river sediments
and floodplain soils contaminated with polychlorinated biphenyls, cleanup of
former paper mill operations, and cleanup and closure of landfills associated
with the former paper mill operations. Litigation concerning the
matter commenced in December 1987 but was subsequently stayed and is being
addressed under CERCLA. Millennium’s ultimate liability for the
Kalamazoo River Superfund Site will depend on many factors that have not yet
been determined, including the ultimate remedy selected, the determination of
natural resource damages, the number and financial viability of the other PRPs,
and the determination of the final allocation among the PRPs.
In
December 2006, the State of Texas filed a lawsuit in the District Court, Travis
County, Texas, against Equistar and its owners, Lyondell and Millennium,
alleging past violations of various environmental regulatory requirements at
Equistar’s Channelview, Chocolate Bayou and La Porte, Texas facilities and
Millennium’s La Porte, Texas facility, and seeking an unspecified amount of
damages. The previously disclosed Texas Commission on Environmental
Quality (“TCEQ”) notifications alleging noncompliance of emissions monitoring
requirements at Millennium’s La Porte facility and Equistar’s Channelview
facility and seeking civil penalties of $179,520 and $167,000, respectively,
have been included as part of this lawsuit. Millennium and Equistar
do not believe that the ultimate resolution of this matter will have a material
adverse effect on their respective businesses, financial positions, liquidity or
results of operations.
Equistar—In May 2007, the TCEQ
notified Equistar that it is seeking a civil penalty of $160,843 in connection
with alleged noncompliance during 2002, 2005 and 2006 with various air pollution
regulations at the Channelview facility and that it is seeking a civil penalty
of $153,330 in connection with alleged noncompliance during 2005 and 2006 with
various air pollution regulations at the Channelview facility. These
matters were later combined with a similar small matter at Channelview and
resolved in December 2007 for a penalty of $182,316.
In
October 2007, the TCEQ notified Equistar that it is seeking a penalty of
$129,400 in connection with alleged exceedances of permitted emissions at
Equistar’s Chocolate Bayou plant. In December 2007, the penalty was
reduced to $126,400 in resolution of this matter.
Millennium
and its joint ventures are parties to various indemnification arrangements,
including arrangements entered into in connection with acquisitions,
divestitures and the formation of joint ventures. For example,
Millennium entered into indemnification arrangements in connection with its
demerger from Hanson plc, and Equistar and its owner companies (including
Millennium) entered into indemnification arrangements in connection with the
formation of Equistar. Pursuant to these arrangements, Millennium and
its joint ventures provide indemnification to and/or receive indemnification
from other parties in connection with liabilities that may arise in connection
with the transactions and in connection with activities prior to completion of
the transactions. These indemnification arrangements typically
include provisions pertaining to third party claims relating to environmental
and tax matters and various types of litigation. As of
December 31, 2007, Millennium has not accrued any significant amounts for
such indemnification obligations and is not aware of other circumstances that
would be likely to lead to significant future indemnification claims against
Millennium. Millennium cannot determine with certainty the potential amount of
future payments under the indemnification arrangements until events arise that
would trigger a liability under the arrangements.
Item 4. Submission of Matters to a Vote of
Security Holders
Omitted
pursuant to General Instruction I of Form 10-K.
Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Millennium
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 common stock of Millennium. As a result of Lyondell’s
acquisition of Millennium and LyondellBasell Industries’ acquisition of
Lyondell, Millennium is an indirect wholly owned subsidiary of LyondellBasell
Industries.
Millennium
did not pay dividends on its common stock during 2006 and 2007.
The
following selected financial data should be read in conjunction with the
Consolidated Financial Statements and the notes thereto and “Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
|
|
|
Sucessor
|
|
|
Predecessor
|
|
|
|
|
For
the
period
from
December
21
through
December
31,
2007
(a)
|
|
|
For
the
period
from
January
1
through
December 20,
2007
(a)
|
|
|
For
the Year Ended December 31,
|
|
|
Millions of
dollars
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Results
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and other operating revenues
|
|
$ |
26 |
|
|
$ |
616 |
|
|
$ |
602 |
|
|
$ |
610 |
|
|
$ |
559 |
|
|
$ |
515 |
|
|
Income
(loss) from equity investment in Equistar after push down
debt
|
|
|
-
- |
|
|
|
(64 |
) |
|
|
181 |
|
|
|
221 |
|
|
|
81 |
|
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations after push down debt
(b)
|
|
|
(6 |
) |
|
|
(7 |
) |
|
|
108 |
|
|
|
45 |
|
|
|
(5 |
) |
|
|
(78 |
) |
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
959 |
|
|
|
|
|
|
|
2,414 |
|
|
|
2,532 |
|
|
|
2,584 |
|
|
|
2,398 |
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Push
down debt
|
|
|
350 |
|
|
|
|
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Debt
of Millennium
|
|
|
170 |
|
|
|
|
|
|
|
767 |
|
|
|
859 |
|
|
|
1,382 |
|
|
|
1,445 |
|
|
Cash
Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
33 |
|
|
|
(264 |
) |
|
|
193 |
|
|
|
275 |
|
|
|
195 |
|
|
|
(92 |
) |
|
Investing
activities
|
|
|
(1 |
) |
|
|
1,005 |
|
|
|
(65 |
) |
|
|
(60 |
) |
|
|
(41 |
) |
|
|
(48 |
) |
|
Financing
activities
|
|
|
(1 |
) |
|
|
(843 |
) |
|
|
(290 |
) |
|
|
(272 |
) |
|
|
(38 |
) |
|
|
205 |
|
|
(a)
|
As
a result of the acquisition of Lyondell by LyondellBasell Industries on
December 20, 2007, Millennium’s assets and liabilities were revalued to
reflect the value assigned in LyondellBasell Industries’ accounting for
the purchase of Lyondell, resulting in a new basis of
accounting. To indicate the application of a different basis of
accounting for the period subsequent to the acquisition, the 2007
financial statements present separately the period prior to the
acquisition (“Predecessor”) and the 11-day period after the acquisition
(“Successor”). The effects of recording Millennium’s share of
Equistar’s push down debt resulted in a $1,666 million reduction to
zero of Millennium’s investment in Equistar. In addition,
Millennium recorded $350 million of push down debt for which
Millennium is not the primary obligor, but which it has guaranteed and
which was used by LyondellBasell Industries in the acquisition of Lyondell
(“push-down debt”). See Notes 7 and 13 to Millennium’s
Consolidated Financials.
|
|
(b)
|
The
Predecessor 2007 period included after-tax benefits of $62 million related
to settlements of income tax issues. In 2006 and 2005,
Millennium recognized an after-tax benefit of $25 million and an after-tax
change of $19 million, respectively, related to change in estimates for
prior year income tax items. The 2004 loss before cumulative
effect of accounting change included after-tax business combination costs
of $33 million.
|
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
This
discussion should be read in conjunction with the information contained in the
Consolidated Financial Statements of Millennium Chemicals Inc., together with
its consolidated subsidiaries (collectively, “Millennium” or “the Company”), and
the notes thereto.
In
addition to comparisons of annual operating results, Millennium has included, as
additional disclosure, certain “trailing quarter” comparisons of fourth quarter
2007 operating results to third quarter 2007 operating
results. Millennium’s businesses are highly cyclical, in addition to
experiencing some less significant seasonal effects. Trailing quarter
comparisons may offer important insight into current business
directions.
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 and naphtha benchmark price references are to industry prices
operated by Platts, a reporting service of The McGraw-Hill
Companies.
On
December 20, 2007, Basell AF S.C.A. (“Basell”) indirectly acquired the
outstanding common shares of Lyondell Chemical Company (“Lyondell”) and, as a
result, Lyondell became an indirectly wholly owned subsidiary of Basell and
Basell was renamed LyondellBasell Industries AF S.C.A. (together with its
consolidated subsidiaries, “LyondellBasell Industries” and without Lyondell, the
“Basell Group”). On November 30, 2004, Lyondell acquired Millennium
in a stock-for-stock business combination. As a result, Millennium is a wholly
owned subsidiary of Lyondell.
From
December 20, 2007, Millennium’s consolidated financial statements reflect a
revaluation of Millennium’s assets and liabilities to the values assigned in
LyondellBasell Industries’ accounting for the purchase of
Lyondell. In addition, Millennium has recognized in its financial
statements $350 million of debt for which it is not the primary obligor,
but which it has guaranteed, and which was used by LyondellBasell Industries in
the acquisition of Lyondell, and the effects of its share of debt similarly
guaranteed by Equistar (collectively, “push down debt”) through a reduction to
zero of the carrying value of its investment in Equistar. As a
result, Millennium’s equity interest in Equistar’s loss during the 11-day
Successor period was offset by adjustment to return Millennium’s investment in
Equistar to zero. For the foreseeable future, Millennium’s investment
in Equistar will be similarly adjusted for Millennium’s interest in Equistar
profit or loss.
Millennium
recognized pushdown debt to the extent allowed under the indenture governing
Millennium’s 7.625% Senior Debentures due 2026. Under the indenture,
Millennium may not incur additional indebtedness in excess of 15% of
Millennium’s Consolidated Net Tangible Assets (“CNTA”), as
defined. .
While the
accompanying consolidated financial statements present separately the period
prior to the acquisition (“Predecessor”) and the 11-day period after the
acquisition (“Successor”) to recognize the application of a different basis of
accounting, management believes that combining the 2007 Successor and
Predecessor periods results in a more meaningful comparison of 2007 and 2006
results of operations and cash flows. Where appropriate, such as the
impact of the step up to fair value on depreciation and amortization expense and
the impact of acquisition-related debt on interest expense, the purchase
accounting effects are addressed. A discussion of the 11-day
Successor period results and cash flows is also presented.
The
combined Predecessor and Successor period results for 2007, which are discussed
in these “Results of Operations,” are presented in the following
table:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
|
|
|
period
from
|
|
|
period
from
|
|
|
|
|
|
|
|
|
|
|
December
21
|
|
|
January
1
|
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
through
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
|
December
31,
|
|
|
December
20,
|
|
|
For
the year ended December 31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Sales
and other operating revenues
|
|
$ |
26 |
|
|
$ |
616 |
|
|
$ |
642 |
|
|
$ |
602 |
|
|
$ |
610 |
|
|
Cost
of sales
|
|
|
35 |
|
|
|
515 |
|
|
|
550 |
|
|
|
537 |
|
|
|
541 |
|
|
Selling,
general and administrative expenses
|
|
|
-
- |
|
|
|
99 |
|
|
|
99 |
|
|
|
50 |
|
|
|
78 |
|
|
Research
and development expenses
|
|
|
-
- |
|
|
|
3 |
|
|
|
3 |
|
|
|
4 |
|
|
|
2 |
|
|
Other
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
1 |
|
|
Operating
income (loss)
|
|
|
(9 |
) |
|
|
(1 |
) |
|
|
(10 |
) |
|
|
11 |
|
|
|
(12 |
) |
|
Interest
expense
|
|
|
4 |
|
|
|
(2 |
) |
|
|
2 |
|
|
|
(67 |
) |
|
|
(115 |
) |
|
Interest
income
|
|
|
-
- |
|
|
|
23 |
|
|
|
23 |
|
|
|
4 |
|
|
|
4 |
|
|
Other
expense, net
|
|
|
-
- |
|
|
|
(13 |
) |
|
|
(13 |
) |
|
|
(4 |
) |
|
|
(22 |
) |
|
Income
(loss) from equity investment in
Equistar Chemicals, LP
|
|
|
(14 |
) |
|
|
(64 |
) |
|
|
(78 |
) |
|
|
181 |
|
|
|
221 |
|
|
Effect
of push-down debt on loss from equity investment in
Equistar
Chemicals, LP
|
|
|
14 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
Provision
for (benefit from) income taxes
|
|
|
-
- |
|
|
|
(50 |
) |
|
|
(50 |
) |
|
|
17 |
|
|
|
31 |
|
|
Income
(loss) from continuing operations
|
|
|
(5 |
) |
|
|
(7 |
) |
|
|
(12 |
) |
|
|
108 |
|
|
|
45 |
|
|
Income
(loss) from discontinued operations, net of tax
|
|
|
-
- |
|
|
|
292 |
|
|
|
292 |
|
|
|
51 |
|
|
|
(17 |
) |
|
Loss
before push down debt
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense on push-down debt
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(6 |
) |
|
$ |
285 |
|
|
$ |
279 |
|
|
$ |
159 |
|
|
$ |
28 |
|
General—Millennium, a
manufacturer and marketer of chemicals, primarily acetyls and fragrance and
flavors chemicals, is a wholly owned subsidiary of Lyondell Chemical Company
(“Lyondell”). As a result of the acquisition of Lyondell by
LyondellBasell Industries AF S.C.A. (“LyondellBasell Industries”),
Millennium reassessed segment reporting based on the current management
structure, including the impact of the integration of Millennium’s businesses
into the LyondellBasell Industries portfolio of businesses. Based on
this analysis, Millennium concluded that it operates in, and management is
focused on, one reportable segment, the chemicals segment.
Millennium
has an ownership interest in Equistar Chemicals, LP (together with its
consolidated subsidiaries, “Equistar”), which is accounted for by Millennium
using the equity method. Other subsidiaries of Lyondell hold the
remaining interest in Equistar. Equistar’s results of operations are
reviewed below on a 100% basis.
On May
15, 2007, Millennium completed the sale of its worldwide inorganic chemicals
business in a transaction valued at approximately $1.3 billion, including the
acquisition of working capital and the assumption of specified liabilities
directly related to the business (see Note 4 to the Consolidated Financial
Statements). Substantially all of the inorganic chemicals business
segment is being reported as a discontinued operation, including comparative
periods presented. Unless otherwise indicated, the following
discussion of Millennium’s operating results relates only to Millennium’s
continuing operations.
2007 Versus 2006—In 2007
compared to 2006, Millennium’s results were primarily impacted by a loss from
its equity investment in Equistar. During 2007 compared to 2006, U.S.
ethylene markets experienced lower profitability despite operating rates in the
mid-90% range and stronger polyethylene demand in export
markets. Equistar experienced lower profitability as higher average
sales prices were more than offset by the combined effect of higher average raw
material and other costs, including higher incentive compensation
expense.
Acetyls
products benefited from higher product margins primarily as a result of higher
average sales prices and lower per unit costs for vinyl acetate monomer
(“VAM”). The lower 2007 VAM per unit costs reflected higher capacity
utilization rates and the reduction of outside processing costs as a result of
the termination of a VAM processing agreement at the end of 2006. The
business environment for fragrance and flavors chemicals in 2007 was comparable
to 2006; however, 2007 results reflected the effects of outages and
maintenance.
2006 Versus 2005—In 2006
compared to 2005, the acetyls business benefited from higher market sales prices
for methanol. Overall raw material and energy costs were higher in
2006 compared to 2005 due to higher average market prices for ethylene, which
were only partly offset by lower average market prices for natural
gas. Fragrance and flavors chemicals continued to show stable
performance.
During
2006 and 2005, the markets for Equistar’s ethylene products generally continued
to experience favorable supply and demand conditions. Equistar’s operating
results for 2006 reflected the benefits of higher sales prices, including
significantly higher co-product and polyethylene sales prices, which were
substantially offset by higher costs, primarily higher raw material costs,
compared to 2005. Equistar’s results for 2006 included a pretax
charge of $135 million, of which Millennium’s proportionate share was $40
million, related to impairment of the net book value of Equistar’s idled Lake
Charles, Louisiana ethylene facility.
Revenues—Millennium’s revenues
were $642 million in 2007, $602 million in 2006 and $610 million
in 2005. The 7% increase in revenues in 2007 compared to 2006 was
primarily due to the effect of higher average sales prices partially offset by
2% lower sales volumes. The 1% decrease in 2006 revenues compared to
2005 primarily reflected the effects of lower average sales prices.
Cost of Sales—Millennium’s
cost of sales was $550 million in 2007, $537 million in 2006 and
$541 million in 2005. The 2% increase in 2007 compared to 2006
was primarily due to higher raw material and energy costs as well as costs
related to planned and unplanned maintenance. Cost of sales of
$537 million in 2006 and 2005 was comparable to $541 million in
2005.
SG&A Expenses—SG&A
expenses were $99 million in 2007, $50 million in 2006 and $78 million in
2005. The $49 million increase in SG&A expenses in 2007 compared
to 2006 was primarily due to higher provisions of $39 million for estimated
environmental remediation costs and higher legal expenses in
2007. The $28 million decrease in SG&A expenses in 2006 compared
to 2005 was principally due to $31 million of lower provisions for environmental
remediation costs in 2006. Higher compensation and employee benefit
costs in 2006 were substantially offset by lower legal expenses and other costs
compared to 2005.
Operating Income—Millennium
had an operating loss of $10 million in 2007 compared to operating income
of $11 million in 2006. The $21 million decrease in 2007
reflected the higher estimated environmental remediation costs and legal fees,
partially offset by higher product margins for the chemicals business segment as
higher average sales prices more than offset the increase in raw material and
other costs.
Millennium
had operating income of $11 million in 2006 compared to an operating loss
of $12 million in 2005. The increase in 2006 compared to 2005
was primarily the result of the $31 million of lower provisions for
estimated environmental remediation costs, partially offset by lower product
margins. The lower product margins in 2006 reflected the effect of
higher energy and raw material costs, which were only partially offset by higher
average sales prices.
Interest Expense—Interest
expense for 2007, excluding the effect of $1 million of interest expense on
push-down debt, was a credit of $2 million in 2007, while interest expense
was $67 million in 2006 and $115 million in 2005. Interest
expense in the 2007 period reflected a $49 million reversal of interest
accruals related to the settlement of prior year income tax
issues. The remaining decreases in 2007 and 2006 reflected repayments
of debt since May 2005 of $1,086 million, of which $483 million was in
2007. See the “Financing Activities” section of “Financial Condition”
below for a description of the repayment of debt during 2007, 2005 and
2006.
Other Income (Expense),
net—Millennium had other expense, net, of $13 million in 2007, $4 million
in 2006 and $22 million in 2005. Other expense, net, in 2007, 2006
and 2005 included charges related to debt prepayments of $15 million,
$7 million and $10 million, respectively; while other expense, net, in 2005
also included $9 million of charges related to other investments.
Income (loss) from Equity Investment
in Equistar—Millennium’s equity investment in Equistar, excluding the
effect of Millennium’s share of Equistar’s push down debt, resulted in a loss of
$78 million in 2007 and income of $181 million and $221 million
in 2006 and 2005, respectively. As a result of push-down debt,
Millennium’s $14 million loss from its equity investment in Equistar in the
Successor period was reduced to zero, decreasing the 2007 loss from
$78 million to $64 million. See Note 7 to the
Consolidated Financial Statements. Equistar’s operating results are
reviewed in the discussion of the Income (loss) from Equity Investment
below.
Income Taxes—In 2007, after
giving effect to push-down debt, Millennium had a benefit from income taxes of
$50 million on a pretax loss of $63 million. The push-down debt
resulted in reductions in the benefit from income taxes and pretax loss of
$5 million and $13 million, respectively. Millennium’s
effective income tax rates were 81% in 2007, 13% in 2006 and 41% in 2005 and
reflected changes in estimates for prior year items in each of the
years. These included reductions in estimates of $30 million and $25
million during 2007 and 2006, respectively, and a $19 million increase in
estimate in 2005.
Income (loss) from Continuing
Operations—Millennium reported a loss from continuing operations of
$21 million in 2007 and income of $108 million and $45 million,
respectively, in 2006 and 2005. As a result of push-down debt,
Millennium’s loss from continuing operations was reduced from $21 million
to $13 million. The $121 million decrease in profitability
in 2007 compared to 2006 primarily reflected after-tax decreases of
$159 million in income from Millennium’s equity investment in Equistar
partly offset by a $44 million after-tax decrease in interest
expense. The remaining net decrease reflected the higher SG&A and
debt prepayment expenses, partly offset by favorable tax
adjustments.
The
$63 million improvement in 2006 compared to 2005 reflected a
$31 million benefit from income tax effects and after-tax increases
totaling $46 million related to lower interest expense and higher operating
income. These improvements were partly offset by the $26 million
after-tax decrease in income from Millennium’s equity investment in
Equistar.
Income (Loss) from Discontinued
Operations, Net of Tax—Millennium had income from discontinued
operations, net of taxes, of $292 in 2007 and $51 million in 2006 and a
loss of $17 million in 2005. The income in 2007 was primarily due to the
May 15, 2007 sale of the discontinued operations, which resulted in a $289
million after-tax gain. See Note 4 to the Consolidated Financial
Statements for additional Information. The $68 million increase
in profitability in 2006 primarily reflected a $71 million benefit from
income tax effects and an after-tax increase in other income (expense), net, of
$18 million, partially offset by lower operating income of
$16 million, after-tax.
Net income (loss)—Millennium’s
net income, excluding the effect of debt push down, was $271 million in
2007, $159 million in 2006 and $28 million in 2005. As a result
of debt push down, Millennium’s 2007 net income increased from $271 million
to $279 million reflecting the after-tax effect of reducing Millennium’s
loss from equity investment in Equistar in the Successor period to
zero. The remaining increases in net income are described above in
the “Income (Loss) From Continuing Operations” and “Income (Loss) from
Discontinued Operations, Net of Tax” sections.
Fourth Quarter 2007 versus Third
Quarter 2007—Millennium had a net loss from continuing operations,
excluding the effect of debt push down, of $19 million in the fourth
quarter 2007 compared to net income of $9 million in the third quarter
2007. As a result of the effect of debt push down described above,
Millennium’s fourth quarter 2007 loss was reduced from $19 million to
$11 million. The fourth quarter 2007 reflected after-tax
decreases of $53 million in income from Millennium’s equity investment in
Equistar and $25 million due to the higher provisions for estimated
environmental remediation costs, partially offset by $37 million
attributable to favorable income tax effects and lower net interest expense,
after tax. The decrease in Equistar’s fourth quarter 2007 results
compared to the third quarter 2007 reflected lower product margins, as higher
raw material costs were only partly offset by higher average sales prices, the
negative effect of a longer than planned outage for a maintenance turnaround at
a Gulf Coast ethylene plant and, to a lesser extent, the effect of lower sales
volumes.
Income
(Loss) from Equity Investment in Equistar
The
following review of Equistar’s operating results is on a 100%
basis.
General—Equistar manufactures
and markets ethylene and its co-products, primarily propylene, butadiene and
aromatics, which include benzene and toluene. Equistar also
manufactures and markets ethylene derivatives, primarily polyethylene (including
high density polyethylene (“HDPE”), low density polyethylene (“LDPE”) and linear
low density polyethylene (“LLDPE”), ethylene glycol, ethylene oxide (“EO”) and
other EO derivatives, and ethanol; and gasoline blending components, such as
methyl tertiary butyl ether (“MTBE”) and alkylate, as well as
polypropylene. As a result of the acquisition of Lyondell by
LyondellBasell Industries, Equistar reassessed segment reporting based on the
current management structure, including the impact of the integration of
Equistar’s businesses into the LyondellBasell Industries portfolio of
businesses. Based on this analysis, Equistar concluded that
management is focused on the chemicals segment and the polymers
segment.
2007 Versus 2006—During 2007
compared to 2006, U.S. ethylene markets experienced lower profitability despite
operating rates in the mid-90% range and stronger polyethylene demand in export
markets. Ethylene and polyethylene sales prices decreased more than
raw material costs late in 2006, and did not increase as rapidly as raw material
costs during 2007. As discussed below, prices of both crude oil-based
liquid raw materials and natural gas liquids-based raw materials averaged higher
in 2007, reaching record levels late in 2007. In 2007 compared to
2006, U.S. market demand for ethylene increased an estimated 2.5% and U.S.
domestic and export demand for polyethylene increased an estimated
3.2%.
Equistar
experienced lower profitability as higher average co-product sales prices were
more than offset by the combined effect of higher average raw material and other
costs, including higher incentive compensation expense, and lower average
ethylene and polyethylene sales prices during 2007. Results for 2006
included a charge of $135 million related to impairment of the net book
value of the idled Lake Charles, Louisiana ethylene facility.
2006 Versus 2005—During 2006
and 2005, the markets for Equistar’s ethylene products generally continued to
experience favorable supply and demand conditions. Raw material costs
averaged higher in 2006 compared to the already high levels experienced in 2005,
resulting primarily from the effect of higher average crude oil
prices. Despite increased volatility during 2006 and a decrease late
in the year, crude oil prices averaged higher in 2006 compared to
2005. U.S. market demand increased an estimated 4.2% for ethylene and
an estimated 6.1% for polyethylene in 2006 compared to 2005.
Equistar’s
operating results for 2006 reflected the benefits of higher sales prices,
including significantly higher co-product and polyethylene sales prices, which
were substantially offset by higher costs, primarily higher raw material costs,
compared to 2005. Results for 2006 included the impairment charge of
$135 million.
Benchmark Indicators—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. Ethylene and its co-products are produced from two major
raw material groups:
|
·
|
crude
oil-based liquids (“liquids” or “heavy 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 the production of
ethylene and its co-products to take advantage of the relative costs of heavy
liquids and NGLs. Although the prices of these raw materials are
generally related to crude oil and natural gas prices, during specific periods
the relationships among these materials and benchmarks may vary
significantly.
The
following table shows the average U.S. benchmark prices for crude oil and
natural gas for the applicable three-year period, as well as benchmark U.S.
sales prices for ethylene, propylene, benzene and HDPE, which Equistar produces
and sells. The benchmark weighted average cost of ethylene
production, which is reduced by co-product revenues, is based on CMAI’s
estimated ratio of heavy liquid raw materials and NGLs used in U.S. ethylene
production and is subject to revision.
|
|
|
Average
Benchmark Price for the Year and
Percent
Change Versus Prior Year Average
|
|
|
|
|
2007
|
|
|
Percent
Increase
|
|
|
2006
|
|
|
Percent
Increase
(Decrease)
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude
oil – dollars per barrel
|
|
|
72.23 |
|
|
|
9 |
% |
|
|
66.03 |
|
|
|
17 |
% |
|
|
56.44 |
|
|
Natural
gas – dollars per million BTUs
|
|
|
6.81 |
|
|
|
4 |
% |
|
|
6.53 |
|
|
|
(14 |
)% |
|
|
7.58 |
|
|
NWE
Naphtha – dollars per barrel
|
|
|
75.91 |
|
|
|
21 |
% |
|
|
62.70 |
|
|
|
19 |
% |
|
|
52.79 |
|
|
Weighted
average cost of ethylene
production
– cents per pound
|
|
|
37.98 |
|
|
|
22 |
% |
|
|
31.05 |
|
|
|
5 |
% |
|
|
29.58 |
|
|
Ethylene
– cents per pound
|
|
|
48.75 |
|
|
|
1 |
% |
|
|
48.08 |
|
|
|
9 |
% |
|
|
44.21 |
|
|
Propylene
– cents per pound
|
|
|
50.41 |
|
|
|
10 |
% |
|
|
45.83 |
|
|
|
12 |
% |
|
|
40.75 |
|
|
Benzene
– cents per gallon
|
|
|
361.67 |
|
|
|
11 |
% |
|
|
326.33 |
|
|
|
13 |
% |
|
|
289.88 |
|
|
HDPE
– cents per pound
|
|
|
73.25 |
|
|
|
3 |
% |
|
|
71.42 |
|
|
|
6 |
% |
|
|
67.29 |
|
For crude
oil, the table above reflects the average quoted price for West Texas
Intermediate (“WTI”) crude oil. During the first half of 2007, the
WTI crude oil price was lower relative to other benchmark crude oil prices, such
as Brent crude oil, and, therefore, was not indicative of the rate of increase
in crude oil-based raw material costs. As a result, the benchmark
price of Northwest Europe (“NWE”) naphthas, which is representative of trends in
certain market prices, is included in the table above. Prices for WTI
crude oil realigned with other benchmark crude oil prices during the latter half
of 2007. WTI crude oil prices increased from $58 per barrel in early
January 2007, to $96.01 per barrel at the end of December 2007.
Similarly,
while natural gas prices were relatively stable, ethane prices rose
significantly during 2007, reaching record levels. These increases
were indicative of the pressure on the cost of Lyondell’s raw materials, both
crude oil-based and NGL-based.
Although
benchmark crude oil prices decreased late in 2006, benchmark crude oil prices
averaged higher in 2006 compared to 2005. Natural gas prices,
which affect energy costs in addition to NGL-based raw materials, averaged lower
in 2006 compared to 2005. Despite the 2006 decrease in natural gas
prices, NGL-based raw material prices averaged higher in 2006 than in
2005. As a result, raw material costs averaged higher in 2006
compared to 2005.
Successor Period—The
$122 million net loss in the Successor period was primarily due to
$57 million of interest on push-down debt and a $22 million charge for
acquisition-related in-process research and development (“IPR&D”), sales of
inventory carried at fair value as a result of the acquisition. The
IPR&D charge was not tax deductible.
Revenues—Equistar’s revenues
of $13,494 million in 2007 were 6% higher compared to revenues of
$12,765 million in 2006. The higher revenues in 2007 reflected
the effects of higher average sales prices for gasoline blending components and
for co-products, principally benzene compared to 2006. Sales volumes
in 2007 were comparable to 2006. Revenues of $12,765 million in 2006
increased 9% compared to revenues of $11,686 million in
2005. The higher revenues in 2006 reflected the effects of higher
average sales prices compared to 2005. Sales volumes in 2006 were
comparable to 2005.
Net Income (Loss)—Equistar had
a net loss of $338 million in 2007 compared to net income of
$614 million in 2006. The decrease was primarily attributable to
the lower operating income compared to 2006, charges totaling $109 million
related to debt prepayments in 2007 and $57 million of interest expense on
push-down debt for which Equistar is not the primary obligor.
Equistar
had net income of $614 million in 2006 compared to $748 million in
2005. The $134 million decrease was primarily attributable to the
$135 million impairment charge. Operationally, higher 2006 sales prices were
substantially offset by higher costs, primarily higher raw material
costs.
Fourth Quarter
2007 versus Third Quarter 2007—Equistar had a net loss of
$379 million in the fourth quarter 2007 compared to net income of
$22 million in the third quarter 2007. Fourth quarter 2007
operating results included $57 million of interest expense on push-down debt for
which Equistar is not the primary obligor. Fourth quarter 2007
underlying operating results reflected lower product margins, as higher raw
material costs were only partly offset by higher average sales prices, the
negative effect of a longer than planned outage for a maintenance turnaround at
a Gulf Coast ethylene plant and, to a lesser extent, the effect of lower sales
volumes. Fourth quarter 2007 sales volumes for chemicals and polymers
products decreased 7% compared to the third quarter 2007 partly due to the
maintenance turnaround.
Segment
Analysis
The
following table reflects summarized financial information for Millennium’s
chemicals segment. Other operating loss includes income and expense
not identified with the chemicals business, including certain of Millennium’s
environmental remediation costs and employee-related costs from predecessor
businesses.
|
|
|
For
the year ended December 31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Sales
and other operating revenues:
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$ |
639 |
|
|
$ |
593 |
|
|
$ |
599 |
|
|
Other
|
|
|
3 |
|
|
|
9 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$ |
69 |
|
|
$ |
43 |
|
|
$ |
48 |
|
|
Other
|
|
|
(79 |
) |
|
|
(32 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
segment sales volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acetyls:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl
Acetate Monomer (VAM) (pounds)
|
|
|
604 |
|
|
|
644 |
|
|
|
712 |
|
|
Acetic
acid (pounds)
|
|
|
598 |
|
|
|
589 |
|
|
|
546 |
|
|
Methanol
(gallons)
|
|
|
49 |
|
|
|
52 |
|
|
|
64 |
|
|
Fragrance
and flavors chemicals (pounds)
|
|
|
50 |
|
|
|
48 |
|
|
|
42 |
|
Chemicals
Segment
Revenues—Chemicals revenues of
$639 million in 2007 were 8% higher compared to revenues of
$593 million in 2006. The increase in 2007 was primarily due to
the effects of higher average sales prices and higher sales volumes for acetic
acid.
Chemicals
revenues of $593 million in 2006 were 1% lower compared to revenues of
$599 million in 2005, primarily due to lower sales volumes that were
substantially offset by the effects of higher average sales
prices. The decrease in sales volumes in 2006 compared to 2005
primarily reflected 10% lower sales volumes for VAM reflecting lower sales to
U.S. and Asian markets. The increase in average sales prices was
primarily due to higher average sales prices for methanol.
Operating Income—The chemicals
segment had operating income of $69 million in 2007 compared to
$43 million in 2006. The increase in 2007 was primarily
attributable to higher product margins, which primarily reflected the effects of
higher average sales prices and the termination, in 2006, of the VAM processing
agreement.
Operating
income was $43 million in 2006 compared to $48 million in
2005. The $5 million decrease was primarily due to lower sales
volumes in 2006, which had a $4 million negative effect.
Other
Other
operations include Millennium’s unallocated operating expenses that are not
identified with the reportable chemicals business segment, including certain of
Millennium’s environmental remediation costs and employee-related costs from
predecessor businesses.
Other
operating losses were $79 million in 2007, $32 million in 2006 and $60
million in 2005. Other operating losses included $51 million of
accruals for estimated environmental remediation costs and $16 million of legal
fees in 2007; $12 million of accruals for estimated environmental
remediation costs in 2006; and $43 million of accruals for estimated
environmental remediation costs and $13 million of charges related to other
investments in 2005.
Operating,
investing, and financing activities of continuing operations for the combined
Predecessor and Successor periods of 2007, which are discussed below, are
presented in the following table:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
|
|
|
period
from
|
|
|
period
from
|
|
|
|
|
|
|
|
|
|
|
December
21
|
|
|
January
1
|
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
through
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
|
December
31,
|
|
|
December
20,
|
|
|
For
the year ended December 31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Source
(use) of cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
33 |
|
|
$ |
(139 |
) |
|
$ |
(106 |
) |
|
$ |
154 |
|
|
$ |
211 |
|
|
Investing
activities
|
|
|
(1 |
) |
|
|
(173 |
) |
|
|
(174 |
) |
|
|
(51 |
) |
|
|
262 |
|
|
Financing
activities
|
|
|
(1 |
) |
|
|
(767 |
) |
|
|
(768 |
) |
|
|
(256 |
) |
|
|
(361 |
) |
Operating Activities—Operating
activities of continuing operations used cash of $106 million in 2007 and
provided cash of $154 million in 2006 and $211 million in
2005. The $260 million change in 2007 compared to 2006 primarily
reflected $170 million of lower distributions of earnings from Equistar and the
effects of income tax payments. As reflected in “Other, net,”
payments to Lyondell for U.S. federal income tax were $135 million in 2007
compared to net refunds of $24 million in 2006. Changes in the main
components of working capital used cash of $1 million in 2007 and $40 million in
2006.
The
$57 million decrease in operating cash flow in 2006 compared to 2005 was
primarily due to increased cash usage related to the main components of working
capital – accounts receivable and inventories, net of accounts payable - and $44
million of lower distributions of earnings from Equistar. Although
higher compared to 2005, net income in 2006 included reversals of previous
tax-related liabilities, which did not provide cash.
A net
increase in the main components of working capital used cash of $40 million
in 2006 compared to a net decrease in 2005 that provided cash of
$47 million. The increase in 2006 was primarily due to a
$35 million increase in cash used by accounts payable, and a
$13 million increase in cash used by accounts receivable. The
cash used to reduce accounts payable primarily reflected the timing of payments
for shared services provided by Equistar.
Operating
activities of discontinued operations used cash of $125 million in 2007 and
provided cash of $39 million in 2006 and $64 million in
2005. The change in 2007 was primarily due to increases in working
capital and lower operating results in 2007.
Investing Activities—Investing
activities of continuing operations used cash of $174 million in 2007,
$51 million in 2006 and provided cash of $262 million in
2005. The increase in cash used in 2007 primarily reflected net
advances of $80 million to Equistar under revolving loan agreements executed in
June 2007, using proceeds from the sale of the inorganic chemicals business
discussed below, and a $64 million increase in net payments to discontinued
operations for operating cash flow purposes in 2007 discussed
above.
The cash
provided in 2005, primarily reflected net payments and distributions from the
inorganic chemicals business of $269 million related to the repatriation of
earnings of non-U.S. subsidiaries. See discussion of discontinued
operations below.
Capital
expenditures were $23 million in 2007, $12 million in 2006 and
$7 million in 2005. Millennium’s capital expenditures for this
three-year period primarily included replacement capital projects and certain
environmental, cost reduction, and yield-improvement
projects. Planned capital spending in 2008 is projected to be
approximately $7 million, primarily for base asset support and projects to
improve manufacturing efficiency.
Net cash
provided by investing activities in 2007 included the $1,089 million of
cash proceeds from the sale of Millennium’s worldwide inorganic chemicals
business, which were used to reduce debt and for the above-noted advances to
Equistar. See Note 4 to the Consolidated Financial Statements and
“Financing Activities” below.
Investing
activities of discontinued operations provided cash of $89 million in 2007
and used cash of $14 million in 2006 and $322 million in
2005. During the 2007 period, advances of funds from continuing
operations increased $64 million, while capital expenditures of
discontinued operations decreased $38 million compared to the 2006
period. The cash used in 2005 primarily reflected $269 million
of payments and distributions to affiliates included in the continuing
operations of Lyondell. See discussion of continuing operations
above.
Financing Activities—Financing
activities of Millennium’s continuing operations used cash of $768 million
in 2007, $256 million in 2006 and $361 million in 2005. The
cash used in the three-year period ended December 31, 2007 primarily
reflected repayments of long-term debt.
In
connection with the acquisition of Lyondell by LyondellBasell Industries,
Millennium repaid $106 million principal amount of its 4% Senior
Convertible Debentures using a combination of Lyondell common stock and cash
valued at $380 million. Pursuant to the indenture governing the
Debentures, the Debentures were convertible at a conversion rate of 75.7633
Lyondell shares of common stock per one thousand dollar principal amount of the
Debentures. The remaining $44 million principal amount of the
Debentures outstanding at December 31, 2007 was converted into cash of
$158 million and paid in January 2008.
Also in
2007, Millennium repaid the remaining $373 million principal amount of its 9.25%
Senior Notes due 2008, paying a premium of $13 million. In addition,
Millennium repaid $4 million principal amount of its 7.625% Senior Debentures
due 2026.
In 2006,
Millennium purchased $158 million principal amount of its 7% Senior Notes
due 2006, paying a premium of $2 million, and purchased $85 million
principal amount of 9.25% Senior Notes due 2008, paying a premium of
$5 million.
In 2005,
Millennium purchased $342 million principal amount of its 7% Senior Notes due
2006, $13 million of the 9.25% Senior Notes due 2008 and $1 million of the
7.625% Senior Debentures due 2026, paying a total premium of
$10 million. See “Liquidity and Capital Resources” below
regarding the May 2005 credit facility amendment, which permitted the purchases,
and other amendments to the Millennium credit facility. Additionally
in 2005, Millennium paid a cash dividend totaling $6 million to minority
interests and received a contribution of $6 million from
Lyondell.
The
repayment of debt upon the May 15, 2007 sale of the discontinued operations used
cash of $99 million. In connection with the sale, Millennium repaid
and terminated its revolving credit facilities of $125 million in the U.S., $25
million in Australia, €60 million in the United Kingdom (“U.K.”) and the term
loan in Australia. The outstanding balances under the Australian term
loan and the credit facility in the U.K. were $50 million and $49 million,
respectively, at May 15, 2007.
Financing
activities of discontinued operations provided cash of $23 million in 2007, used
cash of $34 million in 2006 and provided cash of $89 million in
2005. During the 2007 period and prior to the May 15, 2007 sale of
the worldwide inorganic chemicals business, $49 million was drawn on the €60
million credit facility in the U.K., while repayments included $20 million of
the term loan in Australia and $6 million of other debt. The 2005 and
2006 activity primarily reflects borrowing of $100 million in 2005 under the
Australian senior term loan and related repayments of $29 million in
2006.
Liquidity and Capital
Resources—As of December 31, 2007, total debt, including current
maturities, under which Millennium is the primary obligor, was
$328 million. In addition, as a result of the December 20,
2007 acquisition of Lyondell by LyondellBasell Industries, Millennium recognized
in its financial statements $350 million of acquisition-related or
push-down debt for which it is a guarantor, as described below, but is not the
primary obligor, and reduced its investment in Equistar by $1,666 million
to zero to reflect the push down by Equistar of debt of LyondellBasell
Industries guaranteed by Equistar in excess of its partners’ capital (see Notes
1, 7 and 13 to the Consolidated Financial Statements). Millennium
does not expect that it will be required to fund the push-down debt in the
foreseeable future.
At
December 31, 2007, Millennium had $51 million of cash on
hand. Millennium has outstanding letters of credit of
$10 million at December 31, 2007. Related cash collateral of
$3 million is included in “Other assets, net” at December 31,
2007.
Millennium
is a limited guarantor of certain debt of the Basell Group and
Lyondell. Millennium’s guarantee is limited by formula to
approximately 15% of Millennium’s Consolidated Net Tangible Assets, as
defined.
The
guaranteed Basell Group debt includes an $8,000 million Interim Loan and
8.375% High Yield Notes due 2015, comprising borrowings of $615 million and
€500 million ($736 million). The Interim Loan, together
with proceeds of other borrowings, was used to finance the acquisition of
Lyondell. If not repaid, prior to the 12 months tenure, the Interim
Loan converts to a senior secured loan in December 2008 and is due December
2015. The Interim Loan bears interest at LIBOR plus a margin that
increases by 0.5% for each three-month period beginning in June
2008.
In
addition, Millennium is a limited guarantor under a Senior Secured Credit
Facility and a senior secured inventory-based credit facility entered into on
December 20, 2007, in connection with the acquisition of Lyondell by
LyondellBasell Industries. Lyondell and other subsidiaries of the
Basell Group are borrowers under the Senior Secured Credit Facility, which
includes a six-year $2,000 million term loan A facility due 2013; a
seven-year $7,550 million and €1,300 million term loan B facility due
2014; and a six-year $1,000 million multicurrency revolving credit facility
due 2013. Lyondell, Equistar and a subsidiary of the Basell Group are
borrowers under the five-year $1,000 million inventory-based credit
facility. Under the indenture for Millennium’s 7.625% Senior
Debentures due 2026, Millennium may not incur additional indebtedness in excess
of 15% of Millennium Consolidated Net Tangible Assets, as defined, which was
$2,331 million at December 31, 2007.
At
December 31, 2007 amounts borrowed by the Basell Group under the Senior Secured
Credit Facility consisted of $500 million borrowed under term loan A and
€1,287 million ($1,894 million) under term loan B, and Lyondell
borrowings included $1,500 million borrowed under term loan A and
$7,475 million under term loan B. At December 31, 2007,
borrowings of $100 million were outstanding under the inventory-based
credit facility, all on the part of Lyondell.
Subsequent
to the acquisition of Lyondell, LyondellBasell Industries manages the cash and
liquidity of Millennium and its other subsidiaries as a single group and a
global cash pool. Substantially all of the group’s cash is managed
centrally, with operating subsidiaries participating through an intercompany
uncommitted revolving credit facility. The majority of the operating
subsidiaries of LyondellBasell Industries, including Millennium and Equistar,
have provided guarantees or collateral for the new debt of various
LyondellBasell Industries subsidiaries totaling approximately $20 billion
that was used primarily to acquire Lyondell. Accordingly, the major
bond rating agencies have assigned a corporate rating to LyondellBasell
Industries as a group relevant to such borrowings. Management believes this
corporate rating is reflective of the inherent credit for Millennium, as well as
for the group as a whole.
In view
of the interrelated nature of the credit and liquidity position of
LyondellBasell Industries and its subsidiaries, and pursuant to Staff Accounting
Bulletin Topic 5(j) of the Securities and Exchange Commission, Millennium has
recognized debt of $350 million for which it is not the primary obligor, but
which it has guaranteed (the push-down debt), that was used in the acquisition
of Lyondell by LyondellBasell Industries.
In
November 2007, Moody’s Investors Service (“Moody’s”) lowered its ratings
for LyondellBasell Industries to B1 to reflect the substantial amount of debt
assumed by LyondellBasell Industries in its acquisition of Lyondell on
December 20, 2007. The Standard & Poor’s Rating Services
(“S&P”) corporate rating for LyondellBasell Industries is B+.
Historically,
Millennium has financed its operations primarily through cash generated from its
operations, cash distributions from Equistar, and debt
financing. Cash generated from operations is, to a large extent,
dependent on economic, financial, competitive and other factors affecting
Millennium’s businesses and the timing and amount of cash distributions from
Equistar. With the sale of the inorganic chemicals business,
Millennium could become more reliant on cash distributions from
Equistar. The amount of cash distributions received from Equistar is
affected by Equistar’s results of operations and current and expected future
cash flow requirements. Millennium received $30 million, $170
million and $214 million, respectively, of distributions from Equistar during
2007, 2006 and 2005. Subsequent to December 31, 2007,
LyondellBasell Industries’ operating cash flows have been reduced by a number of
significant but anticipated requirements, including the usual first quarter
seasonality patterns such as annual rebate settlements and bonus payments,
coupled with scheduled one-time compensation and other payments in connection
with the acquisition of Lyondell by LyondellBasell Industries, as well as costs
associated with the closing of LyondellBasell Industries’ acquisition of
Solvay’s engineering plastics business and the expected closing of
LyondellBasell Industries’ acquisition of Shell’s refinery at Berre, France as
of April 1, 2008. First quarter operating cash flows of
LyondellBasell Industries have been further impacted by the unanticipated
increase in raw material prices, which increased net working capital, and the
somewhat weaker operating performance of Equistar’s ethylene-related products
business.
To
enhance the Company’s liquidity position on March 27, 2008, LyondellBasell
Industries entered into a $750 million committed revolving facility with an
affiliate of Access Industries. Borrowings under the line are
available to Lyondell and a subsidiary of the Basell Group.
Millennium
believes that conditions will be such that its cash balances, cash generated
from operating activities and cash distributions from Equistar, funds from lines
of credit and cash generated from funding under various liquidity facilities
available to Equistar through Lyondell and LyondellBasell Industries, will be
adequate to meet anticipated future cash requirements, including scheduled debt
repayments, necessary capital expenditures and ongoing operations.
Millennium’s
indenture contains certain covenants; however Millennium is no longer prohibited
from making certain restricted payments, including dividends to Lyondell, nor is
it required to maintain financial ratios as a result of the repayment in June
2007 of its 9.25% Senior Notes due 2008. The remaining covenants are
described in Note 13 to Millennium’s Consolidated Financial
Statements.
On May
15, 2007, Millennium completed the sale of its worldwide inorganic chemicals
business in a transaction valued at approximately $1.3 billion, including the
acquisition of working capital and the assumption of certain liabilities
directly related to the business. The inorganic chemicals business’
2006 annual sales were approximately $1.4 billion and total assets at
December 31, 2006 were $1.4 billion, of which $55 million was
goodwill.
Effects of a breach—A breach
by Millennium or any other obligor of the covenants or the failure to pay
principal and interest when due under any of the Senior Secured Credit Facility,
Interim Loan, inventory-based credit facility, Accounts Receivable
Securitization Facility or other indebtedness of Millennium or its affiliates
could result in a default or cross-default under all or some of those
instruments. If any such default or cross-default occurs, the
applicable lenders may elect to declare all outstanding borrowings, together
with accrued interest and other amounts payable thereunder, to be immediately
due and payable. In such circumstances, the lenders under the Senior
Secured Credit Facility and the inventory-based credit facility also have the
right to terminate any commitments they have to provide further borrowings, and
the counterparties under the Accounts Receivable Securitization Facility may
terminate further purchases of interests in accounts receivable and receive all
collections from previously sold interests until they have collected on their
interests in those receivables, thus reducing the entity’s
liquidity. In addition, following such an event of default, the
lenders under the Senior Secured Credit Facility and the Interim Loan and the
counterparties under the inventory-based credit facility have the right to
proceed against the collateral granted to them to secure the obligations, which
in some cases includes Millennium’s available cash. If the
obligations under the Senior Secured Credit Facility, the Interim Loan, the
inventory-based facility, Accounts Receivable Securitization Facility or any
other material financing arrangement were to be accelerated, it is not likely
that the obligors would have, or be able to obtain, sufficient funds to make
these accelerated payments, and as a result Millennium or one or more of its
subsidiaries could be forced into bankruptcy or liquidation.
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. Millennium is not a party to any such contractual
arrangements.
Other
obligations that do not give rise to liabilities that would be reflected in
Millennium’s balance sheet are described below under “Purchase Obligations” and
“Operating Leases.”
Contractual and Other
Obligations—The following table summarizes as of December 31, 2007,
Millennium’s minimum payments for long-term debt, and contractual and other
obligations for the next five years and thereafter.
|
|
|
|
|
Payments
Due By Period
|
|
|
Millions of
dollars
|
|
Total
|
|
2008
|
|
|
2009
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Push-down
debt
|
|
$ |
350 |
|
$ |
- - |
|
|
$ |
- - |
|
$ |
- - |
|
|
$ |
- - |
|
|
$ |
- - |
|
|
$ |
350 |
|
|
Debt
of Millennium
|
|
|
328 |
|
|
158 |
|
|
|
-
- |
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
170 |
|
|
Interest
on long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Push-down
debt
|
|
|
347 |
|
|
18 |
|
|
|
19 |
|
|
18 |
|
|
|
19 |
|
|
|
18 |
|
|
|
255 |
|
|
Interest
on long-term
debt
of Millennium
|
|
|
297 |
|
|
37 |
|
|
|
37 |
|
|
37 |
|
|
|
37 |
|
|
|
37 |
|
|
|
112 |
|
|
Pension
benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PBO
|
|
|
521 |
|
|
37 |
|
|
|
36 |
|
|
34 |
|
|
|
34 |
|
|
|
34 |
|
|
|
346 |
|
|
Assets
|
|
|
(510 |
) |
|
-
- |
|
|
|
-
- |
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(510 |
) |
|
Funded
status
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
postretirement benefits
|
|
|
21 |
|
|
2 |
|
|
|
2 |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
11 |
|
|
Other
|
|
|
206 |
|
|
-
- |
|
|
|
19 |
|
|
19 |
|
|
|
19 |
|
|
|
19 |
|
|
|
130 |
|
|
Deferred
income taxes
|
|
|
221 |
|
|
30 |
|
|
|
36 |
|
|
39 |
|
|
|
39 |
|
|
|
40 |
|
|
|
37 |
|
|
Other
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
obligations
|
|
|
98 |
|
|
14 |
|
|
|
9 |
|
|
9 |
|
|
|
9 |
|
|
|
9 |
|
|
|
48 |
|
|
Operating
leases
|
|
|
14 |
|
|
8 |
|
|
|
4 |
|
|
2 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Total
|
|
$ |
1,893 |
|
$ |
304 |
|
|
$ |
162 |
|
$ |
160 |
|
|
$ |
159 |
|
|
$ |
159 |
|
|
$ |
949 |
|
Long-Term Debt—Millennium’s
long term debt includes debt obligations under which Millennium is the primary
obligor. The push-down debt of $350 million represents debt for
which Millennium is not the primary obligor, but which it has guaranteed, and
which was used by LyondellBasell Industries in the acquisition of
Lyondell. Millennium does not anticipate that it will be required to
fund the push-down debt in the foreseeable future. See Note 13 to the
Consolidated Financial Statements for a discussion of covenant requirements
under the indentures and additional information regarding long-term
debt.
Interest—The long-term debt
agreements contain provisions for the payment of either monthly or semi-annual
interest at a stated rate of interest over the term of the
debt. These payment obligations, including interest on push-down debt
for which Millennium is not the primary obligor, are reflected in the table
above. Millennium does not anticipate that it will be required to
fund the obligation related to push-down debt.
Pension Benefits—Millennium
maintains several defined benefit pension plans as described in Note 16 to the
Consolidated Financial Statements. At December 31, 2007, the
projected benefit obligation for Millennium’s pension plans exceeded the fair
value of plan assets by $11 million. Subject to future actuarial
gains and losses, as well as actual asset earnings, Millennium, together with
its consolidated subsidiaries, will be required to fund the $11 million,
with interest, in future years. Millennium’s pension contributions,
including contributions for discontinued operations, were $14 million in
2007, $24 million in 2006 and $28 million in 2005. Required
contributions for continuing operations are expected to be approximately
$1 million for 2008. Estimates of pension benefit payments
through 2012 are included in the table above.
Other Postretirement
Benefits—Millennium provides other postretirement benefits, as described
in Note 16 to the Consolidated Financial Statements. Other
postretirement benefits are unfunded and are paid by Millennium as
incurred.
Other—Other primarily
consists of liabilities for environmental remediation costs, and
$10 million related to unrecognized tax benefits, which are not scheduled
during the first five years. Actual cash tax payments, if any, are
subject to the timing of audits by tax authorities and subsequent negotiation
and arbitration of disputed items.
Deferred Income Taxes—The
scheduled settlement of the deferred tax liabilities shown in the table is based
on the scheduled reversal of the underlying temporary differences, all of which
would be fully offset during the first five years by Millennium’s tax loss carry
forwards. Actual cash tax payments will vary depending upon future
taxable income.
Purchase Obligations—In the
ordinary course of business, Millennium enters into contractual obligations to
purchase raw materials, utilities and services for fixed or minimum
amounts. See the “Commitments” section of Note 18 to the
Consolidated Financial Statements for a description of Millennium’s commitments
and contingencies, including these purchase obligations.
Operating Leases—Millennium
leases various facilities and equipment under noncancelable lease arrangements
for various periods. See Note 14 to the Consolidated Financial
Statements for related lease disclosures.
Equistar Liquidity and Capital
Resources—At
December 31, 2007, total debt, including current maturities of
$27 million and related party notes payable of $80 million, under which
Equistar is the primary obligor was $236 million. In addition,
as a result of the December 20, 2007 acquisition of Lyondell by
LyondellBasell Industries, Equistar recognized in its financial statements a
total of $17,692 million of acquisition-related or push-down debt for which
it is a guarantor, as described below, but is not the primary
obligor. As a result of recognizing in its financial statements the
push-down debt, Equistar has a $9.6 billion deficit in partners’ capital;
however, Equistar does not expect that it will be required to fund a substantial
portion of the push-down debt.
At
December 31, 2007, Equistar had cash on hand of
$60 million. Total unused availability under various liquidity
facilities available to Equistar through Lyondell was $634 million as of
December 31, 2007 after giving effect to a total minimum unused
availability requirement of $100 million under the Accounts Receivable
Securitization Facility and the senior secured inventory-based credit facility,
and included the following:
|
·
|
$150 million
under Lyondell’s $1,150 million Accounts Receivable Securitization
Facility, which matures in December 2012. The agreement
currently permits the sale of up to $1,150 million of total interest in
domestic accounts receivable of Lyondell, including Equistar and Houston
Refining. The outstanding amount of accounts receivable sold
under the Accounts Receivable Securitization Facility was
$1,000 million at December 31,
2007.
|
|
·
|
$584 million
in total under a five-year $1,000 million senior secured
inventory-based credit facility of Lyondell and a subsidiary of the Basell
Group, after giving effect to the borrowing base net of $316 million
of outstanding letters of credit under the inventory-based credit facility
as of December 31, 2007. The borrowing base is determined using
a formula applied to inventory balances. At December 31, 2007,
the outstanding borrowing under the inventory-based credit facility was
$100 million, all on the part of
Lyondell.
|
The
Accounts Receivable Securitization Facility and the senior secured
inventory-based credit facility, at the option of Lyondell, and in the case of
the senior secured inventory-based credit facility, Lyondell and a subsidiary of
the Basell Group, may be increased, provided that the total aggregate amount of
increase in the Accounts Receivable Securitization Facility and the senior
secured inventory-based credit facility does not exceed
$600 million.
Equistar
is a guarantor of certain debt of the Basell Group and Lyondell. The
Basell Group debt includes an $8,000 million Interim Loan and 8.375% High
Yield Notes due 2015, comprising borrowings of $615 million and
€500 million ($736 million). The Interim Loan, together
with proceeds of other borrowings, was used to finance the acquisition of
Lyondell. If not repaid prior to the 12 months tenure, the Interim
Loan converts to a senior secured loan in December 2008 and is due
December 2015. The Interim Loan bears interest at LIBOR plus a
margin that increases by 0.5% for each three-month period beginning in June
2008.
Equistar
is also committed to lend amounts to Lyondell under a $2,000 million revolving
loan agreement, which had $44 million outstanding at December 31, 2007, and
through the accounts receivable sales facility with Lyondell. Under
the accounts receivable sales facility with Lyondell, Equistar sells
substantially all of its domestic accounts receivable to a subsidiary of
Lyondell in exchange for, at the option of Lyondell, a combination of cash and
promissory notes from the subsidiary. It is anticipated that Equistar
and Lyondell will replace the $2,000 million revolving loan agreement with a
current account agreement for an indefinite period, under which Equistar may
deposit excess cash balances with the Lyondell subsidiary and have access to
uncommitted revolving lines of credit in excess of deposits.
In
addition, Equistar is a guarantor under the Senior Secured Credit Facility
entered into on December 20, 2007, in connection with the acquisition of
Lyondell by LyondellBasell Industries. Lyondell and other
subsidiaries of the Basell Group are borrowers under the Senior Secured Credit
Facility, which includes a six-year $2,000 million term loan A facility due
2013; a seven-year $7,550 million and €1,300 million term loan B
facility due 2014; and a six-year $1,000 million multicurrency revolving
credit facility due 2013. Equistar is also a guarantor for amounts
borrowed under the senior secured inventory-based credit facility by Lyondell
and other subsidiaries of Lyondell and a U.S.-based subsidiary of the Basell
Group.
At
December 31, 2007, amounts borrowed by the Basell Group under the Senior Secured
Credit Facility consisted of $500 million borrowed under term loan A and
€1,287 million ($1,894 million) under term loan B, and Lyondell
borrowings included $1,500 million borrowed under term loan A and
$7,475 million under term loan B. At December 31, 2007,
borrowings of $100 million were outstanding under the inventory-based credit
facility, all on the part of Lyondell.
Subsequent
to the acquisition of Lyondell, LyondellBasell Industries manages the cash and
liquidity of Equistar and its other subsidiaries as a single group and a global
cash pool. Substantially all of the group’s cash is managed
centrally, with operating subsidiaries participating through an intercompany
uncommitted revolving credit facility. The majority of the operating
subsidiaries of LyondellBasell Industries, including Equistar, have provided
guarantees or collateral for the new debt of various LyondellBasell Industries
subsidiaries totaling approximately $20 billion that was used primarily to
acquire Lyondell. Accordingly, the major bond rating agencies have
assigned a corporate rating to LyondellBasell Industries as a group relevant to
such borrowings. Management believes this corporate rating is reflective of the
inherent credit for Equistar, as well as for the group as a whole.
In view
of the interrelated nature of the credit and liquidity position of
LyondellBasell Industries and its subsidiaries, and pursuant to Staff Accounting
Bulletin Topic 5(j) of the Securities and Exchange Commission, Equistar has
recognized debt of $17,692 million for which it is not the primary obligor, but
which it has guaranteed (the push-down debt), that was used in the acquisition
of Lyondell by LyondellBasell Industries.
The
Senior Secured Credit Facility, Accounts Receivable Securitization Facility,
senior secured inventory-based credit facility and the Senior Secured Interim
Loan contain restrictive covenants, including covenants that establish maximum
levels of annual capital expenditures and require the maintenance of specified
financial ratios by LyondellBasell Industries on a consolidated
basis. These covenants, as well as debt guarantees, are described in
Note 13 to Equistar’s Consolidated Financial Statements. See “Effects
of a Breach” below for discussion of the potential impact of a breach of these
covenants.
The
indenture governing Equistar’s 7.55% Notes due 2026 contains restrictive
covenants. These covenants are described in Note 13 to Equistar’s
Consolidated Financial Statements.
Equistar’s
future operating performance could be affected by general economic, financial,
competitive, legislative, regulatory, business and other factors, many of which
are beyond its control. Equistar believes that conditions will be
such that cash balances, cash generated from operating activities, cash
generated from funding under various liquidity facilities available to Equistar
through Lyondell and LyondellBasell Industries will be adequate to meet
anticipated future cash requirements, including scheduled debt repayments,
necessary capital expenditures and ongoing operations.
Subsequent
to December 31, 2007, LyondellBasell Industries’ operating cash flows have
been reduced by a number of significant but anticipated requirements, including
the usual first quarter seasonality patterns such as annual rebate settlements
and bonus payments, coupled with scheduled one-time compensation and other
payments in connection with the acquisition of Lyondell by LyondellBasell
Industries, as well as costs associated with the closing of LyondellBasell
Industries’ acquisition of Solvay’s engineering plastics business and the
expected closing of LyondellBasell Industries’ acquisition of Shell’s refinery
at Berre, France as of April 1, 2008. First quarter operating cash
flows have been further impacted by the unanticipated increase in raw material
prices, which increased net working capital, and the somewhat weaker operating
performance of Equistar’s ethylene-related products business.
To
enhance the Company’s liquidity position, on March 27, 2008, LyondellBasell
Industries entered into a $750 million committed revolving line of credit
with an affiliate of Access Industries. Borrowings under the line are
available to Lyondell and a subsidiary of the Basell Group.
Equistar
believes that its cash balances, cash generated from operating activities, funds
from lines of credit and cash generated from funding under various liquidity
facilities available to Equistar through LyondellBasell Industries will be
adequate to meet anticipated future cash requirements, including scheduled debt
repayments, necessary capital expenditures and ongoing
operations.
Millennium’s
income from its equity investment in Equistar in the near term will be subject
to the level and volatility of crude oil and chemical raw material costs and
their impact on Equistar’s profitability. Acetyls products should
continue to benefit from continuing favorable market conditions, including
strong global demand, planned and unplanned outages in the industry and delays
in capacity additions. Acetyls results could be reduced negatively
affected by anticipated declines in methanol margins. Fragrance and
flavors chemical products are expected to continue to show stable
performance.
RELATED PARTY TRANSACTIONS
Millennium
conducts transactions with Occidental Petroleum Corporation (together with its
subsidiaries and affiliates, collectively “Occidental”), which was considered a
related party during the 2007 Predecessor period as a result of Occidental’s
representation on Lyondell’s Board of Directors.
Millennium
purchases products from Equistar, a joint venture with Lyondell, and Occidental
at market-related prices and, sells products to Equistar and Lyondell at
market-based prices. As a result of the acquisition of Millennium by
Lyondell on November 30, 2004, Millennium and Lyondell entered into an agreement
for the provision of administrative services by Lyondell to Millennium, as well
as a tax-sharing agreement.
During
2007, Millennium received interest-bearing promissory notes and made advances to
Equistar under loan agreements that mature on February 16, 2008.
Millennium
believes that such 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 Note 6 to the Consolidated Financial
Statements for further discussion of related party transactions.
CRITICAL ACCOUNTING POLICIES
Millennium
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. Millennium’s more critical accounting
policies include those related to liabilities for anticipated expenditures to
comply with environmental regulations, accruals for taxes based on income, the
equity interest in Equistar, long-lived assets, including the costs of major
maintenance turnarounds and repairs, the valuation of goodwill, and accruals for
long-term employee benefit costs such as pension and other 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 Millennium’s Board of Directors. Millennium’s significant
accounting policies are summarized in Note 2 to the Consolidated Financial
Statements.
Basis of Presentation—As a
result of the acquisition of Lyondell by LyondellBasell Industries on
December 20, 2007, Millennium’s assets and liabilities were revalued
to reflect the values assigned by LyondellBasell Industries to Millennium in
LyondellBasell Industries’ accounting for the purchase of Lyondell, resulting in
a new basis of accounting. The values assigned involved the use of
assumptions, estimates and judgments based on known conditions as of the
acquisition date and available information at the time of the preparation of
these consolidated financial statements. As the acquisition occurred
on December 20, 2007, information is still being acquired and analyzed to
finalize the allocation of the purchase price to assets and liabilities
acquired. Accordingly, the purchase price allocation is
preliminary. Subsequent adjustment to finalize the purchase price
allocation is not expected to be material.
Liabilities for Environmental
Remediation Costs—Anticipated expenditures related to investigation and
remediation of contaminated sites, which include current and former plant sites
and other remediation sites, are accrued when it is probable a liability has
been incurred and the amount of the liability can be reasonably
estimated. Only ongoing operating and monitoring costs, the timing of
which can be determined with reasonable certainty are discounted to present
value. Future legal costs associated with such matters, which
generally are not estimable, are not included in these liabilities.
As of
December 31, 2007, Millennium’s accrued liability for future environmental
remediation costs at current and former plant sites and other remediation sites
totaled $181 million. The liabilities for individual sites range from
less than $1 million to $145 million, and remediation expenditures are
expected to occur over a number of years, and not to be concentrated in any
single year. In the opinion of management, there is no material
estimable range of reasonably possible loss in excess of the liabilities
recorded for environmental remediation. However, it is possible that
new information about the sites for which the accrual has been established, new
technology or future developments such as involvement in investigations by
regulatory agencies, could require Millennium to reassess its potential exposure
related to environmental matters. See Note 18 to the
Consolidated Financial Statements for further discussion of environmental
remediation matters.
Accruals for Taxes Based on
Income—Uncertainties exist with respect to interpretation of complex U.S.
federal and non-U.S. tax regulations. Management expects that
Millennium’s interpretations will prevail. Millennium believes it is
more likely than not that the amounts of deferred tax assets in excess of the
related valuation reserves will be realized. Further details on
Millennium’s income taxes appear in Note 17 to the Consolidated Financial
Statements.
Equity Interest in
Equistar—Millennium evaluated the carrying value of its investment in
Equistar at December 31, 2007 using fair value estimates prepared by
LyondellBasell Industries in connection with LyondellBasell Industries’
accounting for its acquisition of Lyondell, and by third
parties. Based on those estimates, Millennium determined that the
fair value exceeded Millennium’s carrying value for its Equistar
investment. Before giving effect to Millennium share of Equistar
push-down debt, the carrying value of Millennium’s investment in Equistar at
December 31, 2007 was $1,652 million. Millennium’s pro rata
share of Equistar’s push down debt exceeded its investment in Equistar;
therefore, Millennium reduced to zero its equity investment in
Equistar.
Long-Lived Assets—With
respect to long-lived assets, key assumptions include the estimates of useful
asset lives and the recoverability of carrying values of fixed assets and other
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 and refining
industries, and uncertainties associated with governmental actions.
The
estimated useful lives of long-lived assets range from 5 to 40
years. Depreciation and amortization of these assets, including
amortization of deferred turnaround costs, under the straight-line method over
their estimated useful lives totaled $29 million, $24 million and $26
million in 2007, 2006 and 2005, respectively. If the useful lives of
the assets were found to be shorter than originally estimated, depreciation and
amortization charges would be accelerated over the revised useful
life.
Millennium
defers the costs of major periodic maintenance and repair activities
(“turnarounds”) amortizing such costs over the period until the next expected
major turnaround of the affected unit. During 2007 and 2006, cash
expenditures of approximately $14 million and $1 million, respectively,
were deferred and are being amortized, generally over 18 months to 3
years. There were no cash expenditures in
2005. Amortization of previously deferred turnaround costs was $1
million in each of 2007, 2006 and 2005.
Additional
information on long-lived assets, deferred turnaround costs and related
depreciation and amortization appears in Note 10 to the Consolidated Financial
Statements.
Goodwill—Goodwill represents
the excess of purchase price paid over the fair value assigned to the net
tangible and identifiable intangible assets of acquired
businesses. Millennium evaluates the carrying value of goodwill
annually or more frequently if events or changes in circumstances indicate that
the carrying amount may exceed fair value. Recoverability is
determined by comparing the estimated fair value of the reporting unit to which
the goodwill applies to the carrying value, including goodwill, of that
reporting unit.
Long-Term Employee Benefit
Costs—The costs to Millennium of long-term employee benefits,
particularly pension and other 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. Millennium’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 U.S. benefit obligations at December 31, 2007,
Millennium increased its assumed discount rate from 5.75% to 6.25%, reflecting
market interest rates at December 31, 2007. The 6.25% rate also will
be used to measure net periodic benefit cost during 2008. A one
percentage point reduction in the assumed discount rate would increase
Millennium’s benefit obligation for pensions and other postretirement benefits
by approximately $59 million, and would reduce Millennium’s net income by
approximately $2 million.
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, 2007, the assumed
rate of increase was 8% for 2008, decreasing 1% per year to 5% in 2012 and
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.
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 long-term rate of return on plan assets applied to
a market-related value of plan assets which, for Millennium, 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.
Millennium’s
expected long-term rate of return on U.S. plan assets of 8% is 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 is
based on an asset allocation of 55% U.S. equity securities (8.9% expected
return), 15% non-U.S. equity securities (9% expected return), 25% fixed income
securities (6% expected return) and 5% real estate (8.37% expected return)
recommended by the advisor, and has been adopted for the plans. The
actual return on plan assets in 2007 was 9%.
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, 2007, a one percentage point decrease
in this assumption for Millennium would decrease Millennium’s net income by
approximately $3 million.
Additional
information on the key assumptions underlying these benefit costs appears in
Note 16 to the Consolidated Financial Statements.
ACCOUNTING AND REPORTING CHANGES
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment to ARB No. 51, which
establishes new accounting and disclosure requirements for noncontrolling, or
minority, interests, including their classification as a separate component of
equity and the adjustment of net income to include amounts attributable to
minority interests. SFAS No. 160 also establishes new accounting
standards requiring recognition of a gain or loss upon deconsolidation of a
subsidiary. SFAS No. 160 will be effective for Millennium beginning
in 2009, with earlier application prohibited.
Also in
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, which
requires an acquiring entity to recognize all assets acquired and liabilities
assumed in a transaction at the acquisition-date at fair value with limited
exceptions. SFAS No. 141 (revised 2007) will change the accounting
treatment for certain specific items, including: expensing of most acquisition
and restructuring costs; recording acquired contingent liabilities, in-process
research and development and noncontrolling, or minority, interests at fair
value; and recognizing changes in income tax valuations and uncertainties after
the acquisition date as income tax expense. SFAS No. 141 (revised
2007) also includes new disclosure requirements. For Millennium, SFAS
No. 141 (revised 2007) will apply to business combinations with acquisition
dates beginning in 2009. Earlier adoption is prohibited.
Although
certain past transactions, including the acquisition of Lyondell by
LyondellBasell Industries, would have been accounted for differently under SFAS
No. 160 and SFAS No. 141 (revised 2007), application of these statements in 2009
will not affect historical amounts.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115, which permits election of fair value to measure many
financial instruments and certain other items. SFAS No. 159 is
effective for Millennium beginning in 2008. Millennium does not
expect the application of SFAS No. 159 to have a material effect on its
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. The new standard defines fair value, establishes
a framework for its measurement and expands disclosures about such
measurements. In February 2008, the FASB issued FASB Staff Position
FAS 157-2, delaying the effective date of SFAS No. 157 for nonfinancial
assets and nonfinancial liabilities. The effective date for
Millennium would be at the beginning of 2009. Millennium is currently
evaluating the effect of SFAS No. 157 on its consolidated financial
statements.
Millennium
adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income
Taxes, on
January 1, 2007. As a result of
the implementation of FIN No. 48, Millennium recognized a $47 million
increase in the liability related to uncertain income tax positions, a
$4 million increase in deferred tax assets and a $43 million increase
of the January 1, 2007 balance of retained deficit (see Note 17 to the
Consolidated Financial Statements).
Effective
December 31, 2006, Millennium adopted the provisions of SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans- An Amendment of FASB Statements
No. 87, 88, 106, and 132R, which primarily requires an employer to
recognize in its statement of financial position an asset for a plan’s
overfunded status or a liability for a plan’s underfunded status through
comprehensive income in the year in which changes occur. Millennium’s
application of SFAS No. 158 as of December 31, 2006 to its continuing
operations resulted in increases of $4 million and $71 million in its
current and long-term benefit liabilities, respectively, a decrease of
$4 million in other assets, a decrease of $28 million in deferred tax
liabilities and an increase of $51 million in accumulated other
comprehensive loss in its consolidated balance sheet as of December 31,
2006 (see Note 16 to the Consolidated Financial Statements).
Various
environmental laws and regulations impose substantial requirements upon the
operations of Millennium. Millennium’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 (“Clean Air Act”). Millennium 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.
Millennium’s
accrued liability for future environmental remediation costs at current and
former plant sites and other remediation sites totaled $181 million as of
December 31, 2007. The remediation expenditures are expected to occur
over a number of years, and not to be concentrated in any single
year. In the opinion of management, there is no material estimable
range of reasonably possible loss in excess of the liabilities recorded for
environmental remediation. However, it is possible that new
information about the sites for which the accrual has been established, new
technology or future developments such as involvement in investigations by
regulatory agencies, could require Millennium to reassess its potential exposure
related to environmental matters. The liabilities for individual
sites range from less than $1 million to $145 million. The
$145 million liability relates to the Kalamazoo River Superfund
Site. See “Critical Accounting Policies” above and the “Environmental
Remediation” section of Note 18 to the Consolidated Financial Statements for
additional discussion of Millennium’s liabilities for environmental remediation,
including the liability related to the Kalamazoo River Superfund
Site.
Millennium
also makes capital expenditures to comply with environmental
regulations. Capital expenditures for regulatory compliance totaled
less than $1 million in 2007 and 2006 and approximately $2 million in
2005. Millennium currently estimates that environmentally-related
capital expenditures at its facilities will be less than $1 million in for
2008 and approximately $1 million in 2009.
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk
See Note
15 to the
Consolidated Financial Statements for discussion of Millennium’s management of
commodity price risk, foreign currency exposure and interest rate risk through
its use of derivative instruments and hedging activities.
A
substantial portion of Millennium’s products and raw materials are commodities
whose prices fluctuate as market supply and demand fundamentals
change. Accordingly, product margins and the level of Millennium’s
profitability tend to fluctuate with changes in the business cycle.
Millennium
selectively entered into commodity derivative hedging transactions, primarily
price swaps, options, and futures, to help manage the exposure to commodity
price risk with respect to purchases of raw materials and product
sales. The net loss recognized in earnings in 2005 was less than $1
million. During 2005 the derivative transactions were not significant
compared to Millennium’s overall inventory purchases and product sales; there
were no derivative transactions in 2007 and 2006. Millennium had no
outstanding commodity derivative transactions at December 31, 2007, 2006 and
2005.
Millennium
markets its products in a number of countries throughout the world and, as a
result, is exposed to changes in foreign currency exchange
rates. Millennium’s export sales account for approximately 49% of
consolidated revenues. Millennium has selectively utilized forward,
swap and option derivative contracts with terms normally lasting less than three
months to protect against the adverse effect that exchange rate fluctuations may
have on foreign currency denominated trade receivables and trade
payables. These derivatives generally are not designated as hedges
for accounting purposes. There were no outstanding foreign currency
forward, swap and option contracts at December 31, 2007 and
2006.
As a
result of foreign currency transactions, Millennium had net gains of
$3 million and $2 million, respectively, in 2007 and 2006, and a net
loss of $3 million in 2005.
Derivative
instruments have been used selectively to manage the ratio of fixed- to
variable-rate debt at Millennium. In 2007, Millennium terminated all
of its outstanding interest rate swap agreements upon repayment of the
underlying debt and recorded a loss of $2 million. Accordingly,
at December 31, 2007, there were no outstanding interest rate swap
agreements. At December 31, 2006, interest rate swap agreements
in the notional amount of $175 million were outstanding, which were
designated as fair-value hedges of underlying fixed-rate
obligations. The fair value of these interest rate swap agreements
was an obligation of $3 million at December 31, 2006, resulting
in a decrease in the carrying value of long-term debt and the recognition of a
corresponding liability. The net gains and losses resulting from
adjustment of both the interest rate swaps and the hedged portion of the
underlying debt to fair value were recorded in interest expense.
Item 8. Financial Statements and
Supplementary Data
Index to the Consolidated Financial Statements
|
|
Page
|
|
MILLENNIUM
CHEMICALS INC.
|
|
|
|
57
|
|
|
58
|
|
Consolidated
Financial Statements:
|
|
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The
management of Millennium is responsible for establishing and maintaining
adequate internal control over financial reporting. Millennium’s
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.
Millennium
management assessed the effectiveness of Millennium’s internal control over
financial reporting as of December 31, 2007. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated
Framework. Based on its assessment, Millennium’s management
has concluded that Millennium’s internal control over financial reporting was
effective as of December 31, 2007 based on those criteria.
The
effectiveness of Millennium’s internal control over financial reporting as of
December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears
herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholder
of
Millennium Chemicals Inc.:
In our
opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income, of stockholder's equity and cash flows present
fairly, in all material respects, the financial position of Millennium Chemicals
Inc. and its subsidiaries at December 31, 2007,
and the results of their operations and their cash flows for the period from
December 21, 2007 to December 31, 2007 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management's
Report on Internal Control over Financial Reporting. Our
responsibility is to express opinions on these financial statements and on the
Company's internal control over financial reporting based on our integrated
audit. We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audit of the financial
statements included 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. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Houston,
Texas
March 27,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholder
of
Millennium Chemicals Inc.:
In our
opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders’ equity and cash flows
present fairly, in all material respects, the financial position of Millennium
Chemicals Inc. and its subsidiaries at December 31,
2006, and the results of their operations and their cash flows for the
period January 1 to December 20, 2007, and the years ended
December 31, 2006 and 2005 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the
Company’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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, 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, the Company
changed the manner in which it accounts for defined benefit pension and other
postretirement plans in 2006 and the manner in which it accounts for uncertain
tax positions in 2007.
/s/
PricewaterhouseCoopers LLP
Houston,
Texas
March 27,
2008
MILLENNIUM
CHEMICALS INC.
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
period
from
|
|
|
period
from
|
|
|
|
|
|
|
|
December
21
|
|
|
January
1
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
For
the year ended
|
|
|
|
|
December
31,
|
|
|
December
20,
|
|
|
December
31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Sales
and other operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$ |
23 |
|
|
$ |
557 |
|
|
$ |
535 |
|
|
$ |
565 |
|
|
Related
parties
|
|
|
3 |
|
|
|
59 |
|
|
|
67 |
|
|
|
45 |
|
|
|
|
|
26 |
|
|
|
616 |
|
|
|
602 |
|
|
|
610 |
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
35 |
|
|
|
515 |
|
|
|
537 |
|
|
|
541 |
|
|
Selling,
general and administrative expenses
|
|
|
-
- |
|
|
|
99 |
|
|
|
50 |
|
|
|
78 |
|
|
Research
and development expenses
|
|
|
-
- |
|
|
|
3 |
|
|
|
4 |
|
|
|
2 |
|
|
Other
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
1 |
|
|
|
|
|
35 |
|
|
|
617 |
|
|
|
591 |
|
|
|
622 |
|
|
Operating
income (loss)
|
|
|
(9 |
) |
|
|
(1 |
) |
|
|
11 |
|
|
|
(12 |
) |
|
Interest
expense
|
|
|
4 |
|
|
|
(2 |
) |
|
|
(67 |
) |
|
|
(115 |
) |
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
party
|
|
|
-
- |
|
|
|
16 |
|
|
|
-
- |
|
|
|
-
- |
|
|
Other
|
|
|
-
- |
|
|
|
7 |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
-
- |
|
|
|
(13 |
) |
|
|
(4 |
) |
|
|
(22 |
) |
|
Income
(loss) before equity investment
and income taxes
|
|
|
(5 |
) |
|
|
7 |
|
|
|
(56 |
) |
|
|
(145 |
) |
|
Income
(loss) from equity investment in
Equistar Chemicals, LP
|
|
|
(14 |
) |
|
|
(64 |
) |
|
|
181 |
|
|
|
221 |
|
|
Effect
of push-down debt on loss from equity investment in Equistar Chemicals,
LP
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before
income taxes
|
|
|
(5 |
) |
|
|
(57 |
) |
|
|
125 |
|
|
|
76 |
|
|
Provision
for (benefit from) income taxes
|
|
|
-
- |
|
|
|
(50 |
) |
|
|
17 |
|
|
|
31 |
|
|
Income
(loss) from continuing operations
|
|
|
(5 |
) |
|
|
(7 |
) |
|
|
108 |
|
|
|
45 |
|
|
Income
(loss) from discontinued operations, net of tax
|
|
|
-
- |
|
|
|
292 |
|
|
|
51 |
|
|
|
(17 |
) |
|
Loss
before push-down debt
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense on push-down debt
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(6 |
) |
|
$ |
285 |
|
|
$ |
159 |
|
|
$ |
28 |
|
See Notes
to the Consolidated Financial Statements.
MILLENNIUM
CHEMICALS INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
December
31,
2007
|
|
|
December
31,
2006
|
|
|
Millions of
dollars
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
51 |
|
|
$ |
76 |
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
|
|
Trade,
net
|
|
|
106 |
|
|
|
96 |
|
|
Related
parties
|
|
|
17 |
|
|
|
15 |
|
|
Inventories
|
|
|
104 |
|
|
|
87 |
|
|
Prepaid
expenses and other current assets
|
|
|
73 |
|
|
|
13 |
|
|
Deferred
tax assets
|
|
|
9 |
|
|
|
62 |
|
|
Notes
receivable from Equistar Chemicals, LP
|
|
|
80 |
|
|
|
-
- |
|
|
Current
assets held for sale
|
|
|
-
- |
|
|
|
661 |
|
|
Total
current assets
|
|
|
440 |
|
|
|
1,010 |
|
|
Property,
plant and equipment, net
|
|
|
310 |
|
|
|
129 |
|
|
Investment
in Equistar Chemicals, LP:
|
|
|
|
|
|
|
|
|
|
Prior
to debt push down
|
|
|
1,652 |
|
|
|
470 |
|
|
Effect
of push down debt
|
|
|
(1,652 |
) |
|
|
-
- |
|
|
Net
investment in Equistar Chemicals, LP
|
|
|
-
- |
|
|
|
470 |
|
|
Other
investments and long-term receivables
|
|
|
16 |
|
|
|
-
- |
|
|
Goodwill,
net
|
|
|
-
- |
|
|
|
49 |
|
|
Other
assets, net
|
|
|
193 |
|
|
|
62 |
|
|
Long-term
assets held for sale
|
|
|
-
- |
|
|
|
694 |
|
|
Total
assets
|
|
$ |
959 |
|
|
$ |
2,414 |
|
|
|
|
|
|
|
|
|
|
|
See Notes
to the Consolidated Financial Statements.
MILLENNIUM
CHEMICALS INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
December
31,
2007
|
|
|
December
31,
2006
|
|
|
Millions of
dollars
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDER’S EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$ |
158 |
|
|
$ |
- - |
|
|
Accounts
payable:
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
79 |
|
|
|
84 |
|
|
Related
parties
|
|
|
23 |
|
|
|
18 |
|
|
Accrued
liabilities
|
|
|
75 |
|
|
|
72 |
|
|
Deferred
income taxes
|
|
|
4 |
|
|
|
-
- |
|
|
Current
liabilities associated with assets held for sale
|
|
|
-
- |
|
|
|
335 |
|
|
Total
current liabilities
|
|
|
339 |
|
|
|
509 |
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
Push
down
|
|
|
350 |
|
|
|
-
- |
|
|
Debt
of Millennium
|
|
|
170 |
|
|
|
767 |
|
|
Other
liabilities
|
|
|
238 |
|
|
|
381 |
|
|
Deferred
income taxes
|
|
|
221 |
|
|
|
248 |
|
|
Long-term
liabilities associated with assets held for sale
|
|
|
-
- |
|
|
|
361 |
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
7 |
|
|
|
5 |
|
|
Stockholder’s
equity:
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value,
1,000
shares authorized, 661 shares issued
|
|
|
-
- |
|
|
|
-
- |
|
|
Additional
paid-in capital
|
|
|
1,745 |
|
|
|
1,176 |
|
|
Retained
deficit
|
|
|
(6 |
) |
|
|
(840 |
) |
|
Push
down debt
|
|
|
(2,015 |
) |
|
|
|
|
|
Accumulated
other comprehensive loss
|
|
|
-
- |
|
|
|
(103 |
) |
|
Treasury
stock, at cost, 48 shares issued
|
|
|
(90 |
) |
|
|
(90 |
) |
|
Total
stockholder’s equity
|
|
|
(366 |
) |
|
|
143 |
|
|
Total
liabilities and stockholder’s equity
|
|
$ |
959 |
|
|
$ |
2,414 |
|
See Notes
to the Consolidated Financial Statements.
MILLENNIUM
CHEMICALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
period
from
|
|
|
period
from
|
|
|
|
|
|
|
|
December
21
|
|
|
January
1
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
For
the year ended
|
|
|
|
|
December
31,
|
|
|
December
20,
|
|
|
December
31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(6 |
) |
|
$ |
285 |
|
|
$ |
159 |
|
|
$ |
28 |
|
|
Loss
(income) from discontinued operations, net of tax
|
|
|
-
- |
|
|
|
(292 |
) |
|
|
(51 |
) |
|
|
17 |
|
|
Adjustments
to reconcile net income (loss) to
net
cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2 |
|
|
|
27 |
|
|
|
24 |
|
|
|
26 |
|
|
Equity
investment in Equistar
Chemicals, LP -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
included in net (income) loss
|
|
|
14 |
|
|
|
64 |
|
|
|
(181 |
) |
|
|
(221 |
) |
|
Distributions
of earnings
|
|
|
-
- |
|
|
|
-
- |
|
|
|
170 |
|
|
|
214 |
|
|
Debt
push-down
|
|
|
(14 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Other
effects of push down debt
|
|
|
6 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Deferred
income taxes
|
|
|
(6 |
) |
|
|
(8 |
) |
|
|
(38 |
) |
|
|
(21 |
) |
|
Debt
prepayment premiums and charges
|
|
|
-
- |
|
|
|
15 |
|
|
|
7 |
|
|
|
11 |
|
|
Changes
in assets and liabilities that provided (used) cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(11 |
) |
|
|
(1 |
) |
|
|
(13 |
) |
|
|
9 |
|
|
Inventories
|
|
|
13 |
|
|
|
-
- |
|
|
|
8 |
|
|
|
(14 |
) |
|
Accounts
payable
|
|
|
4 |
|
|
|
(6 |
) |
|
|
(35 |
) |
|
|
52 |
|
|
Other,
net
|
|
|
31 |
|
|
|
(223 |
) |
|
|
104 |
|
|
|
110 |
|
|
Net
cash provided by (used in) operating activities – continuing
operations
|
|
|
33 |
|
|
|
(139 |
) |
|
|
154 |
|
|
|
211 |
|
|
Net
cash provided by (used in) operating activities – discontinued
operations
|
|
|
-
- |
|
|
|
(125 |
) |
|
|
39 |
|
|
|
64 |
|
|
Net
cash provided by (used in) operating activities
|
|
|
33 |
|
|
|
(264 |
) |
|
|
193 |
|
|
|
275 |
|
See Notes
to the Consolidated Financial Statements.
MILLENNIUM
CHEMICALS INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS – (Continued)
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
period
from
|
|
|
period
from
|
|
|
|
|
|
|
|
December
21
|
|
|
January
1
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
For
the year ended
|
|
|
|
|
December
31,
|
|
|
December
20,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
advances under loan agreements to Equistar Chemicals, LP
|
|
|
-
- |
|
|
|
(80 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
Expenditures
for property, plant and equipment
|
|
|
(1 |
) |
|
|
(22 |
) |
|
|
(12 |
) |
|
|
(7 |
) |
|
Payments
and distributions from (to) discontinued operations
|
|
|
-
- |
|
|
|
(104 |
) |
|
|
(40 |
) |
|
|
269 |
|
|
Distribution
from affiliates in excess of earnings
|
|
|
-
- |
|
|
|
30 |
|
|
|
-
- |
|
|
|
-
- |
|
|
Other
|
|
|
-
- |
|
|
|
3 |
|
|
|
1 |
|
|
|
-
- |
|
|
Net
cash provided by (used in) investing activities – continuing
operations
|
|
|
(1 |
) |
|
|
(173 |
) |
|
|
(51 |
) |
|
|
262 |
|
|
Net
proceeds from sale of discontinued operations before required repayment of
debt
|
|
|
-
- |
|
|
|
1,089 |
|
|
|
-
- |
|
|
|
-
- |
|
|
Other
net cash provided by (used in) investing activities – discontinued
operations
|
|
|
-
- |
|
|
|
89 |
|
|
|
(14 |
) |
|
|
(322 |
) |
|
Net
cash provided by (used in) investing activities
|
|
|
(1 |
) |
|
|
1,005 |
|
|
|
(65 |
) |
|
|
(60 |
) |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
|
-
- |
|
|
|
(770 |
) |
|
|
(254 |
) |
|
|
(366 |
) |
|
Contribution
from affiliate
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
6 |
|
|
Other
|
|
|
(1 |
) |
|
|
3 |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
Net
cash used in financing activities – continuing operations
|
|
|
(1 |
) |
|
|
(767 |
) |
|
|
(256 |
) |
|
|
(361 |
) |
|
Debt
required to be repaid upon sale of discontinued operations
|
|
|
-
- |
|
|
|
(99 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
Other
net cash provided by (used in) financing activities – discontinued
operations
|
|
|
-
- |
|
|
|
23 |
|
|
|
(34 |
) |
|
|
89 |
|
|
Net
cash used in financing activities
|
|
|
(1 |
) |
|
|
(843 |
) |
|
|
(290 |
) |
|
|
(272 |
) |
|
Effect
of exchange rate changes on cash
|
|
|
-
- |
|
|
|
1 |
|
|
|
4 |
|
|
|
(8 |
) |
|
Increase
(decrease) in cash and cash equivalents
|
|
|
31 |
|
|
|
(101 |
) |
|
|
(158 |
) |
|
|
(65 |
) |
|
Cash
and cash equivalents at beginning of period
|
|
|
20 |
|
|
|
121 |
|
|
|
279 |
|
|
|
344 |
|
|
Cash
and cash equivalents at end of period
|
|
|
51 |
|
|
|
20 |
|
|
|
121 |
|
|
|
279 |
|
|
Less: Cash
and cash equivalents at end of period – discontinued
operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
45 |
|
|
|
50 |
|
|
Cash
and cash equivalents at end of period – continuing
operations
|
|
$ |
51 |
|
|
$ |
20 |
|
|
$ |
76 |
|
|
$ |
229 |
|
See Notes
to the Consolidated Financial Statements.
MILLENNIUM
CHEMICALS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
|
|
|
Common
Stock
|
|
|
Additional
Paid
In
|
|
|
Retained
|
|
|
Push
Down of
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Stockholder’s
Equity
|
|
|
Comprehensive
|
|
|
Millions of
dollars
|
|
Issued
|
|
|
Treasury
|
|
|
Capital
|
|
|
Deficit
|
|
|
Parent
Debt
|
|
|
Loss
|
|
|
(Deficit)
|
|
|
Income
(Loss)
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2005
|
|
$ |
- - |
|
|
$ |
(94 |
) |
|
$ |
1,170 |
|
|
$ |
(1,026 |
) |
|
$ |
- - |
|
|
$ |
(105 |
) |
|
$ |
(55 |
) |
|
|
|
|
Net
income
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
28 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
28 |
|
|
$ |
28 |
|
|
Foreign
currency translation
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(24 |
) |
|
|
(24 |
) |
|
|
(24 |
) |
|
Minimum
pension liability,
net
of tax of $4 million
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
|
Capital
contribution
from
Lyondell
|
|
|
-
- |
|
|
|
-
- |
|
|
|
6 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
6 |
|
|
|
-
- |
|
|
Shares
sold by employee
benefit
plan trust
|
|
|
-
- |
|
|
|
4 |
|
|
|
-
- |
|
|
|
(1 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
|
3 |
|
|
|
-
- |
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8 |
|
|
Balance,
December 31, 2005
|
|
$ |
- - |
|
|
$ |
(90 |
) |
|
$ |
1,176 |
|
|
$ |
(999 |
) |
|
$ |
- - |
|
|
$ |
(125 |
) |
|
$ |
(38 |
) |
|
|
|
|
|
Net
income
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
159 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
159 |
|
|
$ |
159 |
|
|
Foreign
currency translation
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
32 |
|
|
|
32 |
|
|
|
32 |
|
|
Minimum
pension liability, net
of
tax of $24 million
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
47 |
|
|
|
47 |
|
|
|
47 |
|
|
Change
in accounting
for
employee benefit plans,
net
of tax of $27 million
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(57 |
) |
|
|
(57 |
) |
|
|
-
- |
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
238 |
|
|
Balance,
December 31, 2006
|
|
$ |
- - |
|
|
$ |
(90 |
) |
|
$ |
1,176 |
|
|
$ |
(840 |
) |
|
$ |
- - |
|
|
$ |
(103 |
) |
|
$ |
143 |
|
|
|
|
|
|
Change
in accounting for income taxes
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(43 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
|
(43 |
) |
|
$ |
- - |
|
|
Net
income
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
285 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
285 |
|
|
|
285 |
|
|
Foreign
currency translation
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
15 |
|
|
|
15 |
|
|
|
15 |
|
|
Amortization
of actuarial and investment loss included in net periodic benefit cost,
net of
tax of $3 million
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
6 |
|
|
|
6 |
|
|
|
6 |
|
|
Sales
of discontinued operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(63 |
) |
|
|
(63 |
) |
|
|
-
- |
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
306 |
|
|
Balance,
December 20, 2007
|
|
$ |
- - |
|
|
$ |
(90 |
) |
|
$ |
1,176 |
|
|
$ |
(598 |
) |
|
$ |
- - |
|
|
$ |
(145 |
) |
|
$ |
343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
- - |
|
|
$ |
(90 |
) |
|
$ |
1,745 |
|
|
$ |
- - |
|
|
$ |
- - |
|
|
$ |
- - |
|
|
$ |
1,655 |
|
|
|
|
|
|
Effects
of push down debt
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(2,015 |
) |
|
|
-
- |
|
|
|
(2,015 |
) |
|
$ |
- - |
|
|
Net
loss
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(6 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
|
(6 |
) |
|
|
(6 |
) |
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(6 |
) |
|
Balance,
December 31, 2007
|
|
$ |
- - |
|
|
$ |
(90 |
) |
|
$ |
1,745 |
|
|
$ |
(6 |
) |
|
$ |
(2,015 |
) |
|
$ |
- - |
|
|
$ |
(366 |
) |
|
|
|
|
See Notes
to the Consolidated Financial Statements.
MILLENNIUM
CHEMICALS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
TABLE
OF CONTENTS
Page
|
1.
|
|
67
|
|
2.
|
|
68
|
|
3.
|
|
71
|
|
4.
|
|
72
|
|
5.
|
|
74
|
|
6.
|
|
75
|
|
7.
|
|
76
|
|
8.
|
|
78
|
|
9.
|
|
78
|
|
10.
|
|
79
|
|
11.
|
|
80
|
|
12.
|
|
81
|
|
13.
|
|
81
|
|
14.
|
|
83
|
|
15.
|
|
84
|
|
16.
|
|
85
|
|
17.
|
|
90
|
|
18.
|
|
94
|
|
19.
|
|
98
|
|
20.
|
|
99
|
|
21.
|
|
99
|
|
22.
|
|
102
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Millennium
Chemicals Inc., together with its consolidated subsidiaries (collectively,
“Millennium”) is a manufacturer and marketer of chemicals. The
consolidated financial statements include the accounts of Millennium Chemicals
Inc. and its consolidated subsidiaries. Investments in joint ventures
where Millennium exerts a certain level of management control, but lacks full
decision making ability over all major issues, are accounted for using the
equity method.
On
November 30, 2004, Lyondell Chemical Company (“Lyondell”) acquired Millennium in
a stock-for-stock business combination. As a result of the business
combination, Millennium is a wholly owned subsidiary of Lyondell.
On
December 20, 2007, LyondellBasell Industries AF S.C.A. (formerly known as
Basell AF S.C.A.) indirectly acquired all of the shares of Lyondell common
stock. As a result, Lyondell and Millennium both became indirect,
wholly owned subsidiaries of LyondellBasell Industries AF S.C.A. (together with
its consolidated subsidiaries “LyondellBasell Industries” and without Lyondell,
the “Basell Group”).
On May
15, 2007, Millennium completed the sale of its worldwide inorganic chemicals
business in a transaction valued at approximately $1.3 billion, including
the acquisition of working capital and assumption of certain liabilities related
directly to the business (see Note 4).
As a
result of the acquisition of Lyondell by LyondellBasell Industries on December
20, 2007, Millennium’s assets and liabilities were revalued to reflect the
values assigned in LyondellBasell Industries’ accounting for the purchase of
Lyondell, resulting in a new basis of accounting. In addition,
Millennium has recognized in its financial statements $350 million of debt
for which is not the primary obligor, but which it has guaranteed, and which was
used by LyondellBasell Industries in the acquisition of Lyondell, and the
effects of its share of debt similarly guaranteed by Equistar (collectively,
“push down debt”) through a reduction to zero of the carrying value of its
investment in Equistar.
In Staff
Accounting Bulletin (“SAB”), Topic 5J, Push Down Basis of Accounting
Required in Certain Limited Circumstances, the Securities and Exchange
Commission requires, among other things, that, in situations where debt is used
to acquire substantially all of an acquiree’s common stock and the acquiree
guarantees the debt or pledges its assets as collateral for the debt, the debt
and related interest expense and debt issuance costs be reflected in, or “pushed
down” to, the acquiree’s financial statements. Millennium and
Equistar guarantee $350 million and $17,692 million of debt,
respectively, but under which Millennium and Equistar are not primary
obligors.
Although
this presentation may not reflect the likely future demands on Millennium
resources for servicing the debt of LyondellBasell Industries, it provides an
indication of that financial position after considering the maximum possible
demand on Millennium resources relating to the debt of LyondellBasell
Industries. To facilitate an understanding of the impact on these
consolidated financial statements, the effects of push down debt are
segregated.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
1. Basis of
Presentation – (Continued)
The
consolidated statements of income for the 11-day period subsequent to the
acquisition reflect depreciation and amortization expense based on the new value
of the related assets; therefore, the financial information for the periods
prior to and subsequent to the acquisition is not generally
comparable. To indicate the application of a different basis of
accounting for the period subsequent to the acquisition, the 2007 financial
statements and certain notes to the consolidated financial statements present
separately the period prior to the acquisition (“Predecessor”) and the 11-day
period after the acquisition (“Successor”). If not so indicated,
information in the notes to the consolidated financial statements is presented
on a full year basis.
Prior to
the December 20, 2007 acquisition of Lyondell by LyondellBasell Industries,
Millennium owned 29.5% of Equistar, which is a joint venture with
Lyondell. As part of the acquisition, Lyondell made a contribution to
Equistar of $1,703 million (see Note 7), resulting in a decrease in Millennium’s
ownership interest to 21%. Equistar manufactures and markets ethylene
and its co-products, primarily propylene, butadiene, aromatics and fuel
products. Equistar also manufactures and markets ethylene
derivatives, primarily ethylene oxide, ethylene glycol and
polyethylene. Millennium accounts for its interest in Equistar using
the equity method.
2. Summary of Significant Accounting Policies
Revenue Recognition—Revenue
from product sales is recognized at the time of transfer of title and risk of
loss to the customer, which usually occurs at the time of
shipment. Revenue is recognized at the time of delivery if Millennium
retains the risk of loss during shipment. Costs incurred in shipping
products sold are included in cost of sales. Billings to customers
for shipping costs are included in sales revenue.
Millennium’s
policy is to invest cash in conservative, highly rated instruments and to limit
the amount of credit exposure to any one institution.
Millennium
has no requirements for compensating balances in a specific amount at a specific
point in time. Millennium does maintain compensating balances for
some of its banking services and products. Such balances are
maintained on an average basis and are solely at Millennium’s
discretion.
Allowance for Doubtful
Accounts—Millennium establishes provisions for doubtful accounts
receivable based on management’s estimates of amounts that it believes are
unlikely to be collected. Collectability of receivables is reviewed
and the allowance for doubtful accounts is adjusted at least quarterly, based on
aging of specific accounts and other available information about the associated
customers.
Inventories—Inventories are
stated at the lower of cost or market. Cost is determined using the
first-in, first-out method for substantially all inventories, except for
materials and supplies, which are valued using the average cost
method.
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 20 to 40 years for buildings and 5
to 25 years for machinery and equipment. Upon retirement or sale,
Millennium removes the cost of the asset and the related accumulated
depreciation from the accounts and reflects any resulting gain or loss in the
consolidated statement of income. Millennium’s policy is to
capitalize interest cost incurred on debt during the construction of major
projects exceeding one year.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2. Summary
of Significant Accounting Policies – (Continued)
Long-Lived Asset
Impairment—Millennium 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.
Goodwill—Goodwill prior to
December 20, 2007 represents the excess of purchase price paid over the
fair value assigned to the net tangible and identifiable intangible assets of
businesses previously acquired by Lyondell. Goodwill is reviewed for
impairment at least annually.
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 7
years.
Costs of
major maintenance and repairs incurred as part of substantial overhauls or
turnarounds of major units at Millennium’s manufacturing facilities are deferred
and amortized using the straight-line method over the period until the next
planned turnaround, predominantly 18 months to 3 years. These costs
are necessary to maintain, extend and improve the operating capacity and
efficiency rates of the production units.
Other
intangible assets are carried at cost or amortized cost and primarily consist of
precious metals and technology costs. These assets are amortized
using the straight-line method over their estimated useful lives or over the
term of the related agreement, if shorter.
Environmental Remediation
Costs—Anticipated expenditures related to investigation and remediation
of contaminated sites, which include current and former plant sites and other
remediation sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Only
ongoing operating and monitoring costs, the timing of which can be determined
with reasonable certainty, are discounted to present value. Future
legal costs associated with such matters, which generally are not estimable, are
not included in these liabilities.
Legal Costs—Millennium
expenses legal costs, including those incurred in connection with loss
contingencies, as incurred.
Income Taxes—Deferred income
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, as well as the net tax effects of net
operating loss carryforwards. Valuation allowances are provided
against deferred tax assets when it is more likely than not that some portion or
all of the deferred tax asset will not be realized.
Minority Interest—Minority
interest represents the interests of unaffiliated investors in a partnership
that owns the LaPorte Methanol Company plant in LaPorte, Texas.
Derivative Instruments—Gains
and losses on derivative instruments are classified in the same category as the
item being hedged.
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 amounts of revenues and expenses during the reporting
periods. Actual results could differ from those
estimates.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2. Summary
of Significant Accounting Policies – (Continued)
Reclassifications—Certain
previously reported amounts have been reclassified to conform to classifications
adopted in 2006.
Accounting and Reporting
Changes—In December 2007, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 160,
Noncontrolling Interests in
Consolidated Financial Statements – an amendment to ARB No. 51, which
establishes new accounting and disclosure requirements for noncontrolling, or
minority, interests, including their classification as a separate component of
equity and the adjustment of net income to include amounts attributable to
minority interests. SFAS No. 160 also establishes new accounting
standards requiring recognition of a gain or loss upon deconsolidation of a
subsidiary. SFAS No. 160 will be effective for Millennium beginning
in 2009, with earlier application prohibited.
Also in
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, which
requires an acquiring entity to recognize all assets acquired and
liabilities assumed in a transaction at the acquisition-date at fair value with
limited exceptions. SFAS No. 141 (revised 2007) will change the
accounting treatment for certain specific items, including: expensing of most
acquisition and restructuring costs; recording acquired contingent liabilities,
in-process research and development and noncontrolling, or minority, interests
at fair value; and recognizing changes in income tax valuations and
uncertainties after the acquisition date as income tax expense. SFAS
No. 141 (revised 2007) also includes new disclosure requirements. For
Millennium, SFAS No. 141 (revised 2007) will apply to business combinations
with acquisition dates beginning in 2009. Earlier adoption is
prohibited.
Although
certain past transactions, including the acquisition of Lyondell by
LyondellBasell Industries, would have been accounted for differently under SFAS
No. 160 and SFAS No. 141 (revised 2007), application of these statements in 2009
will not affect historical amounts.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115, which permits election of fair value to measure many
financial instruments and certain other items. SFAS No. 159 is
effective for Millennium beginning in 2008. Millennium does not
expect the application of SFAS No. 159 to have a material effect on its
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. The new standard defines fair value, establishes
a framework for its measurement and expands disclosures about such
measurements. In February 2008, the FASB issued FASB Staff Position
FAS 157-2, delaying the effective date of SFAS No. 157 for nonfinancial
assets and nonfinancial liabilities. The effective date for
Millennium would be at the beginning of 2009. Millennium is currently
evaluating the effect of SFAS No. 157 on its consolidated financial
statements.
Millennium
adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income
Taxes, on
January 1, 2007. As a result of
the implementation of FIN No. 48, Millennium recognized a $47 million
increase in the liability related to uncertain income tax positions, a
$4 million increase in deferred tax assets and a $43 million increase
of the January 1, 2007 balance of retained deficit (see Note
17).
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2. Summary of
Significant Accounting Policies – (Continued)
Effective
December 31, 2006, Millennium adopted the provisions of SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans- An Amendment of FASB Statements
No. 87, 88, 106, and 132R, which primarily requires an employer to
recognize in its statement of financial position an asset for a plan’s
overfunded status or a liability for a plan’s underfunded status through
comprehensive income in the year in which changes occur. Millennium’s
application of SFAS No. 158 as of December 31, 2006 to its continuing
operations resulted in increases of $4 million and $71 million in its
current and long-term benefit liabilities, respectively, a decrease of
$4 million in other assets, a decrease of $28 million in deferred tax
liabilities and an increase of $51 million in accumulated other
comprehensive loss in its consolidated balance sheet as of December 31,
2006 (See Note 16.)
3. Acquisition of Lyondell by LyondellBasell Industries
On
December 20, 2007, LyondellBasell Industries indirectly acquired the outstanding
common shares of Lyondell and, as a result, Lyondell and Millennium became
indirect wholly owned subsidiaries of LyondellBasell Industries.
From
December 20, 2007, Millennium’s consolidated financial statements reflect a
revaluation of Millennium’s assets and liabilities, to reflect the values
assigned in LyondellBasell Industries’ accounting for the purchase of
Lyondell. In addition, Millennium recognized in its financial
statements $350 million of debt for which it is not the primary obligor,
but which it has guaranteed, and which was used by LyondellBasell Industries in
the acquisition of Lyondell, and the effects of its share of debt similarly
guaranteed by Equistar through a reduction to zero of the carrying value of its
investment in Equistar. Millennium’s pro rata share of Equistar’s
push down debt exceeded its investment in Equistar at December 20, 2007;
therefore, Millennium reduced to zero its investment in Equistar and also,
Millennium recorded push-down debt to the extent allowed under the indenture
governing Millennium’s 7.625% Senior Debentures due 2026. Under the
indenture, Millennium may not incur additional indebtedness in excess of 15% of
Millennium’s Consolidated Net Tangible Assets (“CNTA”), as
defined. As a result, Millennium recognized $350 million of push
down debt.
The
following table reflects the preliminary adjustments to Millennium’s assets and
liabilities as of December 31, 2007, resulting from the
$1,312 million purchase price allocated by LyondellBasell Industries to
Millennium.
|
Millions of
dollars
|
|
|
|
|
Allocated
purchase price
|
|
$ |
1,655 |
|
|
Book
value of Millennium net assets acquired
|
|
|
343 |
|
|
Excess
purchase price to allocate
|
|
|
1,312 |
|
|
|
|
|
|
|
|
Allocation
of excess purchase price to assets and liabilities:
|
|
|
|
|
|
Inventories
|
|
|
30 |
|
|
Plant,
property and equipment
|
|
|
180 |
|
|
Investments
and joint ventures
|
|
|
1,291 |
|
|
Predecessor
goodwill
|
|
|
(49 |
) |
|
Other
identifiable intangibles
|
|
|
119 |
|
|
Accumulated
other comprehensive income
|
|
|
(217 |
) |
|
Deferred
taxes
|
|
|
(153 |
) |
|
Other,
net
|
|
|
111 |
|
|
Goodwill
|
|
$ |
- - |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
3. Acquisition
of Lyondell by LyondellBasell Industries – (Continued)
The
purchase price allocation used in the preparation of these financial statements
is preliminary due to the continuing analyses relating to the determination of
the fair values of the assets acquired and liabilities assumed. Any
changes to the fair value of net assets acquired, based on information as of the
acquisition date, would result in a corresponding adjustment to
goodwill. Management does not expect the finalization of these
matters to have a material effect on the allocation.
The
following unaudited pro forma historical results of Millennium assume the
acquisition was consummated as of the beginning of each period
presented:
|
Millions of
dollars
|
|
For
the
period
from
January 1
through
December 20,
2007
|
|
|
For
the year
ended
December 31,
2006
|
|
|
Sales
and other operating revenues
|
|
$ |
616 |
|
|
$ |
602 |
|
|
Operating
loss
|
|
|
(17 |
) |
|
|
(9 |
) |
|
Net
income
|
|
|
319 |
|
|
|
36 |
|
The
unaudited pro forma data presented above are not necessarily indicative of the
results of operations of Millennium that would have occurred had the transaction
actually been consummated as of the beginning of the respective periods, nor are
they necessarily indicative of future results.
4. Discontinued Operations
On May
15, 2007, Millennium completed the sale of its worldwide inorganic chemicals
business in a transaction valued at approximately $1.3 billion, including
the acquisition of working capital and assumption of certain liabilities
directly related to the business.
The
following represent the elements of cash flow for the year ended
December 31, 2007 related to the sale of the inorganic chemicals
business:
|
Millions of
dollars
|
|
Predecessor
|
|
|
Gross
sales proceeds
|
|
$ |
1,143 |
|
|
Cash
and cash equivalents sold
|
|
|
(37 |
) |
|
Costs
related to the sale
|
|
|
(17 |
) |
|
Net
proceeds from sale of discontinued operations
before
required repayment of debt
|
|
|
1,089 |
|
|
Debt
required to be repaid
|
|
|
(99 |
) |
|
Net
proceeds from sale of discontinued operations
|
|
$ |
990 |
|
The
operations of the inorganic chemicals business have been classified as
discontinued operations in the consolidated statements of income and cash flows
and the assets and associated liabilities have been classified as held for sale
in the consolidated balance sheets. Unless otherwise indicated,
information presented in the notes to the financial statements relates only to
Millennium’s continuing operations.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4. Discontinued
Operations – (Continued)
Amounts
included in income from discontinued operations for all periods presented are
summarized as follows:
|
|
|
Predecessor
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Sales
and other operating revenues
|
|
$ |
514 |
|
|
$ |
1,346 |
|
|
$ |
1,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of discontinued operations
|
|
|
333 |
|
|
|
-
- |
|
|
|
-
- |
|
|
Other
income from discontinued operations
|
|
|
18 |
|
|
|
17 |
|
|
|
24 |
|
|
Provision
for (benefit from) income taxes
|
|
|
59 |
|
|
|
(36 |
) |
|
|
36 |
|
|
Minority
interest
|
|
|
-
- |
|
|
|
(2 |
) |
|
|
(5 |
) |
|
Income
(loss) from discontinued operations, net of tax
|
|
$ |
292 |
|
|
$ |
51 |
|
|
$ |
(17 |
) |
The final
amount that Millennium will receive in compensation for working capital has not
been determined. Unresolved amounts totaling less than $30 million
are subject to possible arbitration proceedings.
The 2007
provision for income taxes primarily reflects the effect of a higher tax basis
in the stock of a subsidiary included in the sale, which resulted in a lower
taxable gain. Income taxes payable related to the sale were
$48 million.
Millennium’s
evaluation of strategic alternatives for its worldwide inorganic chemicals
business, which resulted in the May 15, 2007 sale of the inorganic chemicals
business, indicated that the carrying value of certain software costs associated
with the inorganic chemicals business was impaired at December 31, 2006, based
on the then pending sale and the value to be received for the
business. Accordingly, Millennium’s 2006 loss from discontinued
operations reflected a pretax charge of $7 million to recognize the
impairment of the carrying value of the software costs.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4. Discontinued
Operations – (Continued)
The
assets and liabilities of the inorganic chemicals business classified as held
for sale are summarized as follows at December 31, 2006 (Predecessor
period):
|
|
|
|
|
|
Millions of
dollars
|
|
|
|
|
Cash
|
|
$ |
45 |
|
|
Inventories
|
|
|
353 |
|
|
Other
current assets
|
|
|
263 |
|
|
Total
current assets
|
|
|
661 |
|
|
Property,
plant and equipment, net
|
|
|
522 |
|
|
Goodwill,
net
|
|
|
55 |
|
|
Other
noncurrent assets, net
|
|
|
117 |
|
|
Total
long-term assets
|
|
|
694 |
|
|
Total
assets
|
|
$ |
1,355 |
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$ |
4 |
|
|
Other
current liabilities
|
|
|
331 |
|
|
Total
current liabilities
|
|
|
335 |
|
|
Long-term
debt
|
|
|
82 |
|
|
Other
noncurrent liabilities
|
|
|
239 |
|
|
Minority
interest
|
|
|
40 |
|
|
Total
long-term liabilities
|
|
|
361 |
|
|
Total
liabilities
|
|
$ |
696 |
|
See Note
13 for a description of the long-term debt included above.
Additionally,
stockholder’s equity includes accumulated other comprehensive loss of $6 million
at December 31, 2006 associated with discontinued operations.
During
2005, two major hurricanes impacted the chemical and related industries in the
coastal and off-shore regions of the Gulf of Mexico. Net income in
2005, including Millennium’s equity interest in Equistar, reflected charges
totaling $14 million, before tax, representing Millennium’s exposure to
industry losses expected to be underwritten by industry insurance consortia,
primarily resulting from hurricane damages.
As a
result of Hurricane Rita, Millennium and Equistar also incurred various costs
that are subject to insurance reimbursements. Such costs include
those incurred in conjunction with suspending operations at substantially all of
Millennium’s and Equistar’s Gulf Coast plants, minor damage to facilities, and
costs to restore operations. Net income in 2005 included
$6 million of such costs, including Millennium’s share of Equistar’s costs
of $19 million, of which all but a $5 million deductible
under the relevant insurance policies are subject to reimbursement through
insurance. Millennium recognized benefits from insurance
reimbursements of less than $1 million in 2006. There were no
such reimbursements in 2007 and 2005.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Related Party Transactions
Millennium
conducts transactions with Lyondell and Equistar, both of which are considered
related parties. Millennium is a wholly owned subsidiary of Lyondell
and owns 21% of Equistar (see Notes 1 and 7). Millennium also
conducts transactions with Occidental Petroleum Corporation (together with its
subsidiaries and affiliates, collectively “Occidental”), which was considered a
related party during the 2007 Predecessor period as a result of Occidental’s
representation on Lyondell’s Board of Directors prior to December 20,
2007.
Product Transactions with
Equistar—Millennium purchases ethylene from Equistar 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,
and it continues thereafter for one-year periods unless either party serves
notice of termination twelve months in advance. Also, Millennium
sells vinyl acetate monomer (“VAM”) to Equistar under an agreement that requires
Equistar to purchase 100% of its VAM 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, and 100% of its
glacial acetic acid requirements at market-related prices from Millennium for
the production of glycol ether acetate at its Bayport, Texas
plant. The initial term of these agreements expired December 31, 2005
and continues year-to-year thereafter unless terminated by either
party.
Product Transactions with
Lyondell—Millennium sells VAM and glacial acetic acid to Lyondell at
market-related prices under various agreements. The initial one-year
term of these agreements expired in 2006 and continues year-to-year thereafter,
unless terminated by either party.
Product Transactions with
Occidental—Millennium purchases 100% of its domestic sodium silicate
requirements at market-related prices pursuant to an agreement with
Occidental. The sodium silicate business, including obligations under
the agreement, was sold in 2007.
Shared Services and Shared-Site
Agreements with Lyondell—Under a shared services
agreement, Lyondell provides office space and various services to Millennium
including information technology, sales and marketing, supply chain, and other
administrative and support services. Lyondell charges Millennium for
Millennium’s share of the cost of such services. Direct costs,
incurred exclusively for Millennium, also are charged to
Millennium.
Shared Services and Shared-Site
Agreements with Equistar—Millennium and Equistar provide operating
services, utilities and raw materials to each other at common
locations. Millennium and Equistar have various operating,
manufacturing and technical service agreements under which Millennium bills
Equistar for certain operational services, including utilities, plant-related
transportation and other services, and Equistar bills Millennium for utilities
and fuel streams.
Notes Receivable from
Equistar—In 2007, Millennium and Equistar entered into loan agreements
permitting Equistar to borrow up to $600 million from Millennium. In
connection with the acquisition of Lyondell by LyondellBasell Industries (see
Note 3), the maturity of the notes was extended to February 16, 2008 from
December 21, 2007, or earlier upon demand. The notes bear
interest, which is due quarterly, at the London Interbank Offered Rate (“LIBOR”)
plus 1.75%. The balance of the notes outstanding at December 31, 2007
was $80 million, and was collected in January 2008.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Related Party
Transactions – (Continued)
Related
party transactions are summarized as follows:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
period
from
|
|
|
period
from
|
|
|
|
|
|
|
|
December
21
|
|
|
January
1
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
For
the year ended
|
|
|
|
|
December
31,
|
|
|
December
20,
|
|
|
December
31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Millennium billed
related parties for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of products and processing services–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lyondell
|
|
$ |
3 |
|
|
$ |
50 |
|
|
$ |
58 |
|
|
$ |
37 |
|
|
Equistar
|
|
|
-
- |
|
|
|
9 |
|
|
|
9 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shared
services and shared site agreements–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equistar
|
|
|
-
- |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
- Equistar
|
|
|
-
- |
|
|
|
16 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millennium was billed
by related parties for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of products and processing services–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lyondell
|
|
$ |
- - |
|
|
$ |
3 |
|
|
$ |
- - |
|
|
$ |
- - |
|
|
Equistar
|
|
|
4 |
|
|
|
93 |
|
|
|
40 |
|
|
|
53 |
|
|
Occidental
|
|
|
-
- |
|
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shared
services, transition and lease agreements–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lyondell
|
|
|
1 |
|
|
|
25 |
|
|
|
11 |
|
|
|
-
- |
|
|
Equistar
|
|
|
1 |
|
|
|
25 |
|
|
|
15 |
|
|
|
26 |
|
Prior to
December 20, 2007, Equistar was owned 70.5% by Lyondell and 29.5% by
Millennium. As part of the December 20, 2007 acquisition of Lyondell
by LyondellBasell Industries, Lyondell made a contribution to Equistar of $1,703
million, which was used to repay certain Equistar debt, resulting in an increase
of Lyondell’s direct ownership interest to 79% and a corresponding decrease in
Millennium’s ownership interest to 21%. As a result of Lyondell’s
November 30, 2004 acquisition of Millennium, Millennium and Equistar are wholly
owned subsidiaries of Lyondell. Millennium accounts for its
investment in Equistar using the equity method. As a partnership,
Equistar is not subject to federal income taxes.
As a
result of the acquisition of Lyondell by LyondellBasell Industries on December
20, 2007, Equistar’s assets and liabilities were revalued to reflect the values
assigned in LyondellBasell Industries’ accounting for the purchase of Lyondell,
resulting in a new basis of accounting. In addition, Equistar
recorded $17,692 million of debt for which it is not the primary obligor
and $340 million of related debt issuance costs. Millennium’s
pro rata share of Equistar’s push down debt exceeded the carrying value of its
investment in Equistar at December 20, 2007; therefore, Millennium reduced
to zero the carrying value of its investment.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
7. Investment in
Equistar Chemicals, LP – (Continued)
Summarized
financial information for Equistar follows:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2006
|
|
|
BALANCE
SHEETS
|
|
|
|
|
|
|
|
Total
current assets
|
|
$ |
2,012 |
|
|
$ |
2,158 |
|
|
Property,
plant and equipment, net
|
|
|
5,116 |
|
|
|
2,846 |
|
|
Goodwill
|
|
|
750 |
|
|
|
-
- |
|
|
Debt
issuance costs on push down debt
|
|
|
334 |
|
|
|
-
- |
|
|
Investments
and other assets, net
|
|
|
1,860 |
|
|
|
355 |
|
|
Total
assets
|
|
$ |
10,072 |
|
|
$ |
5,359 |
|
|
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt:
|
|
|
|
|
|
|
|
|
|
Push
down debt
|
|
$ |
146 |
|
|
$ |
- - |
|
|
Other
|
|
|
27 |
|
|
|
-
- |
|
|
Related
party borrowings – push down
|
|
|
717 |
|
|
|
-
- |
|
|
Other
current liabilities
|
|
|
1,541 |
|
|
|
1,217 |
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
Push
down debt
|
|
|
16,829 |
|
|
|
-
- |
|
|
Other
|
|
|
129 |
|
|
|
2,160 |
|
|
Other
liabilities and deferred revenues
|
|
|
295 |
|
|
|
378 |
|
|
Partners’
capital (deficit)
|
|
|
(9,612 |
) |
|
|
1,604 |
|
|
Total
liabilities and partners’ capital
|
|
$ |
10,072 |
|
|
$ |
5,359 |
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
period
from
|
|
|
period
from
|
|
|
|
|
|
|
|
December
21
|
|
|
January
1
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
For
the year ended
|
|
|
|
|
December
31,
|
|
|
December
20,
|
|
|
December
31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
STATEMENTS
OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and other operating revenues
|
|
$ |
457 |
|
|
$ |
13,037 |
|
|
$ |
12,765 |
|
|
$ |
11,686 |
|
|
Cost
of sales
|
|
|
495 |
|
|
|
12,656 |
|
|
|
11,562 |
|
|
|
10,487 |
|
|
Asset
impairment
|
|
|
-
- |
|
|
|
-
- |
|
|
|
135 |
|
|
|
-
- |
|
|
Selling,
general and administrative expenses
|
|
|
6 |
|
|
|
263 |
|
|
|
210 |
|
|
|
198 |
|
|
Research
and development expense
|
|
|
-
- |
|
|
|
37 |
|
|
|
34 |
|
|
|
33 |
|
|
Purchased
in-process research and
development
|
|
|
22 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Operating
income (loss)
|
|
|
(66 |
) |
|
|
81 |
|
|
|
824 |
|
|
|
968 |
|
|
Interest
expense, net
|
|
|
1 |
|
|
|
(190 |
) |
|
|
(210 |
) |
|
|
(218 |
) |
|
Other
expense, net
|
|
|
-
- |
|
|
|
(107 |
) |
|
|
-
- |
|
|
|
(2 |
) |
|
Income
(loss) before interest on push down debt
|
|
|
(65 |
) |
|
|
(216 |
) |
|
|
614 |
|
|
|
748 |
|
|
Interest
expense on push down debt
|
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(122 |
) |
|
$ |
(216 |
) |
|
$ |
614 |
|
|
$ |
748 |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
7. Investment in
Equistar Chemicals, LP – (Continued)
Equistar’s
2007 net loss for the 2007 Successor period included a $22 million charge
for the value of the purchase price allocated by LyondellBasell Industries to
Equistar’s in-process research and development and $57 million of interest
expense on push down debt of $17,692 million.
Equistar’s
2006 earnings reflect a charge of $135 million for impairment of the net
book value of its idled Lake Charles, Louisiana ethylene facility. In
the third quarter of 2006, Equistar undertook a study of the feasibility, cost
and time required to restart the Lake Charles ethylene facility. As a
result, management determined that restarting the facility would not be
justified. The remaining net book value of the related assets of
$10 million represents an estimate, based on probabilities, of
alternative-use value. Equistar does not expect to incur any
significant future costs with respect to the facility.
Millennium
sells its products primarily to other industrial concerns in the petrochemicals
industry and to manufacturers of consumer products. Millennium
performs ongoing credit evaluations of its customers’ financial condition and,
in certain circumstances, requires letters of credit from
them. Millennium’s allowance for doubtful accounts receivable, which
is reflected in the Consolidated Balance Sheets as a reduction of accounts
receivable, totaled $1 million and $2 million, respectively at December 31,
2007 and 2006. The Consolidated Statements of Income included
provisions for doubtful accounts of less than $1 million in 2006 and 2005,
and none in 2007.
Inventories
consisted of the following components at December 31:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2006
|
|
|
Finished
goods
|
|
$ |
65 |
|
|
$ |
63 |
|
|
Work-in-process
|
|
|
21 |
|
|
|
15 |
|
|
Raw
materials
|
|
|
3 |
|
|
|
4 |
|
|
Materials
and supplies
|
|
|
15 |
|
|
|
5 |
|
|
Total
inventories
|
|
$ |
104 |
|
|
$ |
87 |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
10. 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:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$ |
11 |
|
|
$ |
2 |
|
|
Manufacturing
facilities and equipment
|
|
|
277 |
|
|
|
342 |
|
|
Construction
in progress
|
|
|
23 |
|
|
|
16 |
|
|
Total
property, plant and equipment
|
|
|
311 |
|
|
|
360 |
|
|
Less
accumulated depreciation
|
|
|
(1 |
) |
|
|
(231 |
) |
|
Property,
plant and equipment, net
|
|
$ |
310 |
|
|
$ |
129 |
|
The
increases in property, plant and equipment, goodwill and other assets and in
related depreciation and amortization expense in 2007 are due to the revaluation
of the related assets to reflect the values assigned in the accounting for the
acquisition of Lyondell by LyondellBasell Industries.
Maintenance
and repair expenses were $19 million in each of the years ended December
31, 2007 and 2006 and $18 million in the year ended December 31,
2005. No interest was capitalized to property, plant and equipment
during the three-year period ended December 31, 2007.
The
components of other assets, at cost, and the related accumulated amortization
were as follows at December 31:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Millions of
dollars
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Identifiable
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turnaround
costs
|
|
$ |
14 |
|
|
$ |
- - |
|
|
$ |
14 |
|
|
$ |
4 |
|
|
$ |
(3 |
) |
|
$ |
1 |
|
|
Technology
|
|
|
50 |
|
|
|
-
- |
|
|
|
50 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Software
costs
|
|
|
1 |
|
|
|
-
- |
|
|
|
1 |
|
|
|
7 |
|
|
|
(7 |
) |
|
|
-
- |
|
|
Debt
issuance costs
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
22 |
|
|
|
(15 |
) |
|
|
7 |
|
|
Catalyst
costs
|
|
|
7 |
|
|
|
-
- |
|
|
|
7 |
|
|
|
24 |
|
|
|
(14 |
) |
|
|
10 |
|
|
Other
|
|
|
4 |
|
|
|
-
- |
|
|
|
4 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Total
intangible assets
|
|
$ |
76 |
|
|
$ |
- - |
|
|
|
76 |
|
|
$ |
57 |
|
|
$ |
(39 |
) |
|
|
18 |
|
|
Pension
assets
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
Precious
metals
|
|
|
|
|
|
|
|
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
Total
other assets, net
|
|
|
|
|
|
|
|
|
|
$ |
193 |
|
|
|
|
|
|
|
|
|
|
$ |
62 |
|
Amortization
of these identifiable intangible assets for the next five years is expected to
be $16 million in 2008, $13 million in 2009, $11 million in 2010,
$8 million in 2011, and $7 million in 2012.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
10. Property,
Plant and Equipment and Other Assets – (Continued)
Depreciation
and amortization expense is summarized as follows:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
period
from
|
|
|
period
from
|
|
|
|
|
|
|
|
December
21
|
|
|
January
1
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
For
the year ended
|
|
|
|
|
December
31,
|
|
|
December
20,
|
|
|
December
31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Property,
plant and equipment
|
|
$ |
1 |
|
|
$ |
21 |
|
|
$ |
17 |
|
|
$ |
18 |
|
|
Turnaround
costs
|
|
|
-
- |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
Software
costs
|
|
|
-
- |
|
|
|
-
- |
|
|
|
1 |
|
|
|
1 |
|
|
Other
|
|
|
1 |
|
|
|
5 |
|
|
|
5 |
|
|
|
6 |
|
|
Total
depreciation and amortization
|
|
$ |
2 |
|
|
$ |
27 |
|
|
$ |
24 |
|
|
$ |
26 |
|
In
addition to the depreciation and amortization expense shown above, amortization
of debt issuance costs included in interest expense in the Consolidated
Statements of Income was $1 million and less than $1 million, for the
Successor and Predecessor periods, respectively, in 2007, $4 million in 2006 and
$3 million in 2005.
Millennium
believes that there are asset retirement obligations associated with some of its
facilities, but that the present value of those obligations normally is not
material in the context of an indefinite expected life of the
facilities. Millennium continually reviews the optimal future
alternatives for its facilities. Any decision to retire one or more
facilities would result in an increase to the present value of such
obligations. At December 31, 2007 and December 31, 2006, no liability
had been recognized for asset retirement obligations.
Accounts
payable at December 31, 2007 and 2006 included liabilities in the amount of
$3 million and $1 million, respectively, for checks issued in excess
of associated bank balances but not yet presented for collection.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accrued
liabilities consisted of the following at December 31:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Payroll
and benefits
|
|
$ |
5 |
|
|
$ |
4 |
|
|
Pension
and other postretirement benefits
|
|
|
4 |
|
|
|
4 |
|
|
Income
taxes
|
|
|
32 |
|
|
|
35 |
|
|
Product
sales rebates
|
|
|
3 |
|
|
|
3 |
|
|
Environmental
costs
|
|
|
15 |
|
|
|
15 |
|
|
Accrued
interest
|
|
|
2 |
|
|
|
4 |
|
|
Taxes
other than income taxes
|
|
|
4 |
|
|
|
3 |
|
|
Other
|
|
|
10 |
|
|
|
4 |
|
|
Total
accrued liabilities
|
|
$ |
75 |
|
|
$ |
72 |
|
The
carrying amounts of accrued liabilities were not changed in accounting for the
acquisition of Lyondell by LyondellBasell Industries.
As a
result of the December 20, 2007 acquisition of Lyondell by LyondellBasell
Industries, Millennium recorded $350 million of push down debt for which it
is not the primary obligor, but which it has guaranteed, and which was used by
LyondellBasell Industries in the acquisition of Lyondell (see Notes 1, 3, 7 and
19).
Long-term
debt under which Millennium is the primary obligor consisted of the following at
December 31:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2006
|
|
|
Senior
Notes due 2008, 9.25% ($2 million of premium)
|
|
$ |
- - |
|
|
$ |
375 |
|
|
Senior
Debentures due 2026, 7.625% ($72 million of discount)
|
|
|
170 |
|
|
|
245 |
|
|
Convertible
Senior Debentures due 2023, 4%
|
|
|
158 |
|
|
|
150 |
|
|
Other
|
|
|
-
- |
|
|
|
(3 |
) |
|
Total
|
|
|
328 |
|
|
|
767 |
|
|
Less
current maturities
|
|
|
(158 |
) |
|
|
-
- |
|
|
Total
long-term debt, net
|
|
$ |
170 |
|
|
$ |
767 |
|
Aggregate
maturities of all long-term debt are $158 million in 2008 and $170 million
in 2026.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
13. Long-Term
Debt – (Continued)
In 2007,
prior to Lyondell’s acquisition by LyondellBasell Industries $106 million
principal of the Debentures due 2023 were repaid using a combination of Lyondell
common stock and cash valued at $380 million. Pursuant to the
indenture governing the Debentures due 2023 and subsequent to the acquisition,
the Debentures were convertible at a conversion rate of 75.7633 shares of
Lyondell common stock per one thousand dollar principal amount of the
Debentures. The $44 million principal amount of the Debentures
outstanding at December 31, 2007 was converted into cash of
$158 million and paid in January 2008.
Also in
2007, Millennium repaid the remaining $373 million principal amount of its 9.25%
Senior Notes due 2008, paying a premium of $13 million and $4 million principal
amount of its 7.625% Senior Debentures due 2026. In connection with
the repayment of the 9.25% Senior Notes, Millennium terminated interest rate
swap agreements in the notional amount of $175 million and recorded a loss of $2
million.
During
2006, Millennium obtained an amendment to its then-existing $150 million senior
secured revolving credit facility and to the indenture governing the 4%
Convertible Senior Debentures primarily to exclude a subsidiary of Millennium,
Millennium Holdings, LLC and its subsidiaries (collectively “Millennium
Holdings”), from events-of-default provisions that could be triggered in
connection with judgments against Millennium Holdings. See
“Litigation” section of Note 18.
Also
during 2006, a U.K. subsidiary of Millennium entered into a new €60 million,
five-year, revolving credit facility, which, subject to permitted liens, was
generally secured by the subsidiary’s inventory, accounts receivable and certain
other assets. At December 31, 2006, there was no outstanding
borrowing and there were no letters of credit under the facility. The
U.K. subsidiary was part of the inorganic chemicals business and any borrowing
under the facility was repaid and terminated by Millennium during 2007, as
required, using proceeds of the sale of that business.
During
2006, Millennium purchased $158 million principal amount of its 7% Senior Notes
due 2006, paying a premium of $2 million, and purchased $85 million
principal amount of the 9.25% Senior Notes due 2008, paying a premium of
$5 million.
During
2005, Millennium purchased $342 million principal amount of its 7% Senior
Notes due 2006, $13 million of the 9.25% Senior Notes due 2008 and
$1 million of the 7.625% Senior Debentures due 2026, paying total premiums
of $10 million.
Millennium’s
former $125 million senior secured revolving credit facility in the U.S.
and $25 million senior secured revolving credit facility and $100 million senior
secured term loan in Australia, all of which would have matured in August 2010
were variously secured by equity interests in and assets of Millennium’s
worldwide inorganic chemicals business, and were repaid and terminated by
Millennium, as required, using proceeds of the sale of that
business. At December 31, 2006, the outstanding balance under the
Australian term loan was $70 million. There were $22 million of
outstanding letters of credit under the U.S. revolving credit facility and none
outstanding under the Australian revolving credit facility as of
December 31, 2006. There were no outstanding borrowings under
either revolving credit facility as of December 31, 2006. See
Note 4 for debt of discontinued operations.
Also in 2005,
Millennium obtained an amendment to its previous $150 million senior
secured credit facility to allow for the unrestricted repurchase of indebtedness
in the form of bonds, debentures, notes or similar instruments. On
February 2, 2005, as a result of certain adjustments and charges related to
the February 2005 restatement of Millennium’s financial statements, Millennium
entered into an amendment and waiver to its previous $150 million credit
facility, which amended the credit facility definition of EBITDA and waived any
and all defaults or events of default that may have occurred on or prior to the
amendment and waiver.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
13. Long-Term
Debt – (Continued)
The
indenture for Millennium’s 7.625% Senior Debentures contains covenants that,
subject to exceptions, restrict, among other things, debt incurrence by
subsidiaries, lien incurrence, sale and leaseback transactions and mergers. Pursuant to these
provisions, Millennium is no longer prohibited from making certain restricted
payments, including dividends to Lyondell, nor is it required to maintain
financial ratios as a result of the repayment of its 9.25% Senior Notes due
2008.
Millennium’s
7.625% Senior Debentures were issued by Millennium America Inc. (“Millennium
America”), a subsidiary of Millennium and are fully and unconditionally
guaranteed by Millennium. Millennium’s 4% Convertible Senior
Debentures were issued by Millennium and were guaranteed fully and
unconditionally by Millennium America while outstanding.
Millennium
is a guarantor of certain debt borrowed by Lyondell under the LyondellBasell
Industries Senior Secured Credit Facility, including $1,500 million and
$7,550 million, respectively, under the term loans A and B facilities; and
certain LyondellBasell Industries debt, including an $8,000 million Interim
loan, 8.375% High Yield Notes due 2015, comprising borrowings of
$615 million and €500 million ($736 million), and amounts borrowed by
the Basell Group under the Senior Secured Credit Facility, consisting of
$500 million borrowed under term loan A and €1,287 million
($1,894 million) under term loan B. Millennium is also is a
guarantor for amounts borrowed under the senior secured inventory-based credit
facility by other Lyondell subsidiaries and a U.S.-based subsidiary of the
Basell Group.
Millennium
leases various facilities and equipment under noncancelable operating lease
arrangements for varying periods. As of December 31, 2007, future
minimum lease payments for the next five years and thereafter, relating to all
noncancelable operating leases with terms in excess of one year were as
follows:
|
Millions of
dollars
|
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
8 |
|
|
2009
|
|
|
4 |
|
|
2010
|
|
|
2 |
|
|
2011
|
|
|
-
- |
|
|
2012
|
|
|
-
- |
|
|
Thereafter
|
|
|
-
- |
|
|
Total
minimum lease payments
|
|
$ |
14 |
|
Net
rental expense was $9 million in each of 2007and 2006, and $8 million
in 2005.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
15. Financial Instruments and Derivatives
Millennium
is exposed to market risk, such as changes in commodity pricing, currency
exchange rates and interest rates. To manage the volatility related
to these exposures, Millennium selectively enters into derivative transactions
pursuant to Millennium’s policies. Designation of the derivatives as
fair-value or cash-flow hedges is performed on a specific exposure
basis. Hedge accounting may not be elected with respect to certain
short-term exposures. The changes in fair value of these hedging instruments are
offset in part or in whole by corresponding changes in the fair value or cash
flows of the underlying exposures being hedged. Millennium does not
hold or issue derivative financial instruments for speculative or trading
purposes.
Foreign Currency Exposure
Management—Millennium markets its products in a number of countries
throughout the world and, as a result, is exposed to changes in currency
exchange rates.
As a
result of foreign currency transactions, Millennium had a net gain of
$3 million in 2007, a net gain of $2 million in 2006, and a net loss
of $3 million in 2005, net of gains or losses on related hedge
transactions, which were not significant.
Interest Rate Risk
Management—Millennium selectively used derivative instruments to manage
the ratio of fixed to variable-rate debt. At December 31, 2006,
Millennium had outstanding interest rate swap agreements in the notional amount
of $175 million, which were designated as fair-value hedges of underlying
fixed-rate obligations. The fair value of these interest rate swap
agreements was an obligation of $3 million at December 31, 2006, resulting
in a decrease in the carrying value of long-term debt and the recognition of a
corresponding liability. The net gains and losses resulting from
adjustment of both the interest rate swaps and the hedged portion of the
underlying debt to fair value were recorded in interest expense. In
2007, Millennium terminated all of its outstanding interest rate swap agreements
upon repayment of the underlying debt and recorded a loss of
$2 million. Accordingly, at December 31, 2007, there
were no outstanding interest rate swap agreements.
Commodity Price Risk
Management—Millennium is exposed to commodity price volatility related to
anticipated purchases of natural gas and raw materials, and to product
sales.
The
carrying value and the estimated fair value of Millennium’s non-current,
non-derivative financial instruments as of December 31, 2007 and 2006 are shown
in the table below:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Millions of
dollars
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Investments
and long-term receivables
|
|
$ |
16 |
|
|
$ |
2,138 |
|
|
$ |
470 |
|
|
$ |
1,330 |
|
|
Long-term
debt, including current maturities
|
|
|
328 |
|
|
|
352 |
|
|
|
767 |
|
|
|
905 |
|
Long-term
debt, including amounts due within one year, was valued based upon the borrowing
rates currently available to Millennium for debt with terms and average
maturities similar to Millennium’s debt portfolio except that, for the 4%
Convertible Senior Debentures, the converted cash value was used. The
investment in Equistar Chemicals, LP, was valued using current financial and
other available information. As a result of the acquisition of
Lyondell by LyondellBasell Industries on December 20, 2007, Millennium’s pro
rata share of Equistar’s $17,692 million of push down debt exceeded the
carrying value of its investment in Equistar at December 20, 2007:
therefore, Millennium reduced to zero the carrying value of its
investment.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
15. Financial
Instruments and Derivatives – (Continued)
The fair
value of all non-derivative financial instruments included in current assets and
current liabilities, including cash and cash equivalents, other short-term
investments, accounts and notes receivable, and accounts payable, approximated
their carrying value due to their short maturity.
Financial
instruments that potentially subject Millennium to significant concentrations of
credit risk consist principally of accounts receivable. Millennium
sells a broad range of commodity, industrial, performance and specialty
chemicals to a diverse group of customers operating throughout the
world. Accordingly, there is no significant concentration of risk in
any one particular country. Credit limits, ongoing credit evaluation,
and account-monitoring procedures are utilized to minimize credit
risk. Collateral is generally not required, but may be used under
certain circumstances or in certain markets, particularly in lesser-developed
countries of the world. Credit losses to customers operating in this
industry have not been material.
16. Pension and Other Postretirement Benefits
Millennium
has defined benefit pension plans, which cover employees in the United States
and, for its discontinued operations, a number of other
countries. Retirement benefits are generally based on years of
credited service and average compensation as defined under the respective plan
provisions. Millennium funds the plans through contributions to
pension trust funds, generally subject to minimum funding requirements as
provided by applicable law. In addition, Millennium sponsors
postretirement benefit plans other than pensions, which provide medical and life
insurance to most employees and their dependents.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16. Pension
and Other Postretirement Benefits – (Continued)
The
following table provides a reconciliation of projected benefit obligations, plan
assets and the funded status of Millennium’s U.S. and non-U.S. pension plans for
continuing and discontinued operations.
|
|
|
2007
|
|
|
2006
|
|
|
Millions of
dollars
|
|
U.S.
|
|
|
U.S.
|
|
|
Non-U.S.
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation, January 1
|
|
$ |
578 |
|
|
$ |
741 |
|
|
$ |
228 |
|
|
Service
cost
|
|
|
4 |
|
|
|
8 |
|
|
|
7 |
|
|
Interest
cost
|
|
|
33 |
|
|
|
38 |
|
|
|
12 |
|
|
Actuarial
gain
|
|
|
(35 |
) |
|
|
(30 |
) |
|
|
(4 |
) |
|
Benefits
paid
|
|
|
(59 |
) |
|
|
(56 |
) |
|
|
(12 |
) |
|
Foreign
exchange effects
|
|
|
-
- |
|
|
|
-
- |
|
|
|
29 |
|
|
Benefit
obligation, December 31
|
|
|
521 |
|
|
|
701 |
|
|
|
260 |
|
|
Less
benefit obligation of discontinued
operations, December 31
|
|
|
-
- |
|
|
|
123 |
|
|
|
260 |
|
|
Benefit
obligation of continuing
operations, December 31
|
|
|
521 |
|
|
|
578 |
|
|
|
-
- |
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets, January 1
|
|
|
500 |
|
|
|
588 |
|
|
|
142 |
|
|
Actual
return on plan assets
|
|
|
53 |
|
|
|
67 |
|
|
|
14 |
|
|
Company
contributions
|
|
|
14 |
|
|
|
3 |
|
|
|
21 |
|
|
Benefits
paid
|
|
|
(59 |
) |
|
|
(56 |
) |
|
|
(12 |
) |
|
Foreign
exchange effects
|
|
|
-
- |
|
|
|
-
- |
|
|
|
19 |
|
|
Other
|
|
|
2 |
|
|
|
-
- |
|
|
|
-
- |
|
|
Fair
value of plan assets, December 31
|
|
|
510 |
|
|
|
602 |
|
|
|
184 |
|
|
Less:
Fair value of plan assets of discontinued
operations, December 31
|
|
|
-
- |
|
|
|
102 |
|
|
|
184 |
|
|
Fair
value of plan assets of continuing
operations, December 31
|
|
|
510 |
|
|
|
500 |
|
|
|
-
- |
|
|
Funded
status of continuing
operations, December 31
|
|
$ |
(11 |
) |
|
$ |
(78 |
) |
|
$ |
- - |
|
|
Amounts
not recognized in the benefit costs of continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial
and investment loss
|
|
|
-
- |
|
|
|
247 |
|
|
|
-
- |
|
|
Prior
service cost
|
|
|
-
- |
|
|
|
4 |
|
|
|
-
- |
|
|
Net
amount recognized in benefit costs of
continuing operations
|
|
$ |
(11 |
) |
|
$ |
173 |
|
|
$ |
- - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in the Consolidated Balance Sheets
relating to continuing operations consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
benefit cost
|
|
$ |
27 |
|
|
$ |
23 |
|
|
$ |
- - |
|
|
Accrued
benefit liability, current
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
-
- |
|
|
Accrued
benefit liability, long-term
|
|
|
(37 |
) |
|
|
(100 |
) |
|
|
-
- |
|
|
Funded
status, December 31
|
|
|
(11 |
) |
|
|
(78 |
) |
|
|
-
- |
|
|
Accumulated
other comprehensive loss-pretax
|
|
|
-
- |
|
|
|
251 |
|
|
|
-
- |
|
|
Net
amount recognized in benefit costs of continuing
operations
|
|
$ |
(11 |
) |
|
$ |
173 |
|
|
$ |
- - |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16. Pension
and Other Postretirement Benefits – (Continued)
The
following additional information is presented for the pension plans of
Millennium’s continuing operations:
|
Millions of
dollars
|
|
2007
|
|
|
2006
|
|
|
Accumulated
benefit obligation for defined benefit plans, December 31
|
|
$ |
482 |
|
|
$ |
519 |
|
|
Decrease
in minimum liability, prior to application of SFAS No. 158, included in
other comprehensive loss
|
|
|
-
- |
|
|
|
(50 |
) |
The
following table provides a reconciliation of benefit obligations of Millennium’s
unfunded other postretirement benefit plans for continuing and discontinued
operations.
|
Millions of
dollars
|
|
2007
|
|
|
2006
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
Benefit
obligation, January 1
|
|
$ |
20 |
|
|
$ |
33 |
|
|
Interest
cost
|
|
|
2 |
|
|
|
2 |
|
|
Actuarial
(gain) loss
|
|
|
2 |
|
|
|
(3 |
) |
|
Benefits
paid
|
|
|
(3 |
) |
|
|
(3 |
) |
|
Benefit
obligation, December 31
|
|
|
21 |
|
|
|
29 |
|
|
Less
benefit obligation of discontinued operations, December 31
|
|
|
-
- |
|
|
|
9 |
|
|
Benefit
obligation of continuing operations, December 31
|
|
|
21 |
|
|
|
20 |
|
|
Funded
status of continuing operations, December 31
|
|
$ |
(21 |
) |
|
$ |
(20 |
) |
|
Amounts
not recognized in benefit costs of
continuing
operations:
|
|
|
|
|
|
|
|
|
|
Actuarial
loss
|
|
|
-
- |
|
|
|
-
- |
|
|
Prior
service benefit
|
|
|
-
- |
|
|
|
(37 |
) |
|
Net
amount recognized in benefit costs
of
continuing operations
|
|
$ |
(21 |
) |
|
$ |
(57 |
) |
|
Amounts
recognized in the Consolidated
Balance
Sheets relating to continuing operations consist of:
|
|
|
|
|
|
|
|
|
|
Accrued
benefit liability, current
|
|
$ |
(3 |
) |
|
$ |
(2 |
) |
|
Accrued
benefit liability, long-term
|
|
|
(18 |
) |
|
|
(18 |
) |
|
Funded
status, December 31
|
|
|
(21 |
) |
|
|
(20 |
) |
|
Accumulated
other comprehensive income - pretax
|
|
|
-
- |
|
|
|
(37 |
) |
|
Net
amount recognized in benefit cost of continuing operations
|
|
$ |
(21 |
) |
|
$ |
(57 |
) |
As a
result of the sale of the inorganic chemicals business, pension and other
postretirement benefit obligations and assets related to the discontinued
operations totaling $377 million and $284 million, respectively, were
transferred from Millennium’s plans to the buyer’s plans in 2007.
Pension
plans of continuing operations with projected benefit obligations and
accumulated obligations in excess of the fair value of assets are summarized as
follows at December 31:
|
Millions of
dollars
|
|
2007
|
|
|
2006
|
|
|
Projected
benefit obligations
|
|
$ |
8 |
|
|
$ |
562 |
|
|
Accumulated
benefit obligations
|
|
|
7 |
|
|
|
503 |
|
|
Fair
value of assets
|
|
|
-
- |
|
|
|
461 |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16. Pension and Other
Postretirement Benefits – (Continued)
The
following table provides the components of net periodic pension costs allocated
to continuing operations:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
period
from
|
|
|
period
from
|
|
|
|
|
|
|
|
December
21
|
|
|
January
1
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
For
the year ended
|
|
|
|
|
December
31,
|
|
|
December
20,
|
|
|
December
31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net
periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
- - |
|
|
$ |
3 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
Interest
cost
|
|
|
1 |
|
|
|
29 |
|
|
|
32 |
|
|
|
33 |
|
|
Actual
return on plan assets
|
|
|
(2 |
) |
|
|
(51 |
) |
|
|
(55 |
) |
|
|
(39 |
) |
|
Less-return
in excess of (less
than) expected return
|
|
|
1 |
|
|
|
14 |
|
|
|
19 |
|
|
|
(1 |
) |
|
Expected
return on plan assets
|
|
|
(1 |
) |
|
|
(37 |
) |
|
|
(36 |
) |
|
|
(40 |
) |
|
Prior
service cost amortization
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
1 |
|
|
Actuarial
and investment loss amortization
|
|
|
-
- |
|
|
|
11 |
|
|
|
15 |
|
|
|
13 |
|
|
Net
periodic pension cost
|
|
$ |
- - |
|
|
$ |
6 |
|
|
$ |
17 |
|
|
$ |
13 |
|
As a
result of purchase accounting, there are no defined benefit pension plan
actuarial losses or prior service costs included in Accumulated Other
Comprehensive Income (“AOCI”) at December 2007.
The
following table provides the components of net periodic other postretirement
benefit costs allocated to continuing operations:
|
|
|
Predecessor
|
|
|
|
|
For
the
|
|
|
|
|
|
|
|
period
from
|
|
|
|
|
|
|
|
January
1
|
|
|
|
|
|
|
|
through
|
|
|
For
the year ended
|
|
|
|
|
December
20,
|
|
|
December
31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net
periodic other postretirement benefit costs:
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
Unrecognized
net loss amortization
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
Prior
service benefit amortization
|
|
|
(5 |
) |
|
|
(6 |
) |
|
|
(5 |
) |
|
Net
periodic benefit income
|
|
$ |
(3 |
) |
|
$ |
(4 |
) |
|
$ |
(3 |
) |
Amounts
for the Successor period from December 20 to December 31, 2007 were
immaterial.
As a
result of purchase accounting, there are no defined benefit other postretirement
plan actuarial losses or prior service benefits included in AOCI at December 31,
2007.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16. Pension
and Other Postretirement Benefits – (Continued)
The
assumptions used in determining the net benefit liabilities for Millennium’s
pension and other postretirement benefit plans for continuing operations were as
follows at December 31:
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average
assumptions
as of December 31:
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.25 |
% |
|
|
5.75 |
% |
|
Rate
of compensation increase
|
|
|
4.50 |
% |
|
|
4.50 |
% |
The
assumptions used in determining net benefit costs for Millennium’s pension plans
for continuing operations were as follows for the year ended December
31:
|
|
2007
|
|
2006
|
|
2005
|
|
Weighted-average
assumptions for the year:
|
|
|
|
|
|
|
Discount
rate
|
5.75%
|
|
5.50%
|
|
5.75%
|
|
Expected
return on plan assets
|
8.00%
|
|
8.00%
|
|
8.00%
|
|
Rate
of compensation increase
|
4.50%
|
|
4.50%
|
|
4.50%
|
The
discount rates used in determining the U.S. net postretirement benefit cost were
5.75% for 2007, 5.5% for 2006, and 5.75% for 2005.
The
assumed annual rate of increase in the per capita cost of covered health care
benefits as of December 31, 2007 was 8% for 2008, decreasing 1% per year to 5%
in 2012 and thereafter. At December 31, 2007, similar cost escalation
assumptions were used. A one percentage increase or decrease in the
assumed health care cost trend rates in each year would change the accumulated
other postretirement benefit liability as of December 31, 2007 by less than
$1 million and would not have a material effect on the aggregate service
and interest components of the net periodic other postretirement benefit cost
for the year then ended.
Management’s
goal is to manage pension investments over the long term to achieve optimal
returns with an acceptable level of risk and volatility. Investment
policies limit the concentration of investments in one industry to 20% and in
one company to 5%. Total plan assets at December 31, 2006 did
not include any Lyondell common stock. The investments except for
real estate, are marketable securities that provide sufficient liquidity to meet
expected benefit obligation payments.
Millennium’s
pension plan weighted-average asset allocations by asset category for its
pension plans generally are as follows at December 31:
|
Asset
Category
|
|
2007
Policy
|
|
|
2007
|
|
|
2006
|
|
|
U.S.
equity securities
|
|
|
55 |
% |
|
|
56 |
% |
|
|
56 |
% |
|
Non-U.S.
equity securities
|
|
|
15 |
% |
|
|
16 |
% |
|
|
17 |
% |
|
Fixed
income securities
|
|
|
25 |
% |
|
|
24 |
% |
|
|
27 |
% |
|
Real
estate investments
|
|
|
5 |
% |
|
|
4 |
% |
|
|
-
- |
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16. Pension
and Other Postretirement Benefits – (Continued)
Required
contributions to Millennium’s pension plans are expected to be approximately
$1 million in 2008.
As of
December 31, 2007, future expected benefit payments by the plans for
continuing operations, which reflect expected future service, as appropriate,
were as follows:
|
Millions of
dollars
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
37 |
|
|
$ |
2 |
|
|
2009
|
|
|
36 |
|
|
|
2 |
|
|
2010
|
|
|
34 |
|
|
|
2 |
|
|
2011
|
|
|
34 |
|
|
|
2 |
|
|
2012
|
|
|
34 |
|
|
|
2 |
|
|
2013
through 2017
|
|
|
166 |
|
|
|
8 |
|
Millennium
also maintains voluntary defined contribution savings plans for eligible
employees. Contributions to these plans by Millennium were
$1 million in each of 2007, 2006 and 2005.
Under a
tax-sharing agreement between Millennium and Lyondell, Millennium’s U.S. federal
income tax is substantially the same as it would have been had Millennium not
been included in Lyondell’s consolidated U.S. income tax return, but had filed a
separate return. Any resulting receivable or payable is settled with
Lyondell. The agreement provides for the calculation of the current
U.S. tax considering all statutory limitations on the utilization of
carryforward benefits resulting from the acquisition transaction
itself. In addition, any current cash benefit resulting from
utilization of certain carryforward attributes with respect to which benefits
had not been recognized for financial reporting purposes was remitted to
Millennium when the related issues were resolved with the appropriate taxing
authority, which occurred in 2007. The same principles apply to tax
sharing for unitary, consolidated and combined state income taxes.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
17. Income
Taxes – (Continued)
The
significant components of the provision for income taxes relating to continuing
operations were as follows for the years ended December 31:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
period
from
|
|
|
period
from
|
|
|
|
|
|
|
|
December
21
|
|
|
January
1
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
For
the year ended
|
|
|
|
|
December
31,
|
|
|
December
20,
|
|
|
December
31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
- - |
|
|
$ |
(38 |
) |
|
$ |
47 |
|
|
$ |
49 |
|
|
Non-U.S.
|
|
|
-
- |
|
|
|
(1 |
) |
|
|
2 |
|
|
|
1 |
|
|
State
|
|
|
-
- |
|
|
|
(3 |
) |
|
|
5 |
|
|
|
2 |
|
|
Total
current
|
|
|
-
- |
|
|
|
(42 |
) |
|
|
54 |
|
|
|
52 |
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
- |
|
|
|
(6 |
) |
|
|
(29 |
) |
|
|
(23 |
) |
|
Non-U.S.
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
State
|
|
|
-
- |
|
|
|
(2 |
) |
|
|
(8 |
) |
|
|
2 |
|
|
Total
deferred
|
|
|
-
- |
|
|
|
(8 |
) |
|
|
(37 |
) |
|
|
(21 |
) |
|
Provision
for (benefit from) income taxes before tax effects of other comprehensive
income
|
|
|
-
- |
|
|
|
(50 |
) |
|
|
17 |
|
|
|
31 |
|
|
Tax
effects of elements of other comprehensive income
- pension liability
|
|
|
-
- |
|
|
|
3 |
|
|
|
17 |
|
|
|
-
- |
|
|
Total
income tax expense (benefit) in comprehensive
income
|
|
$ |
- - |
|
|
$ |
(47 |
) |
|
$ |
34 |
|
|
$ |
31 |
|
Income
tax expenses related to discontinued operations are discussed in Note
4.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
17. Income Taxes –
(Continued)
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, as well as the net tax effects of
operating loss carryforwards. Significant components of Millennium’s
deferred tax liabilities and assets were as follows as of December
31:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2006
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Accelerated
tax depreciation
|
|
$ |
107 |
|
|
$ |
42 |
|
|
Investment
in Equistar
|
|
|
181 |
|
|
|
329 |
|
|
Fair
value of debt acquired
|
|
|
25 |
|
|
|
-
- |
|
|
Goodwill
and other intangibles
|
|
|
13 |
|
|
|
-
- |
|
|
Inventory
and inventory reserves
|
|
|
9 |
|
|
|
-
- |
|
|
Other
liabilities
|
|
|
19 |
|
|
|
28 |
|
|
Total
deferred tax liabilities
|
|
|
354 |
|
|
|
399 |
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
|
-
- |
|
|
|
32 |
|
|
Employee
benefit plans
|
|
|
14 |
|
|
|
49 |
|
|
Environmental
remediation liabilities
|
|
|
63 |
|
|
|
67 |
|
|
AMT
credits
|
|
|
49 |
|
|
|
41 |
|
|
Other
|
|
|
12 |
|
|
|
24 |
|
|
Total
deferred tax assets
|
|
|
138 |
|
|
|
213 |
|
|
Deferred
tax asset valuation allowances
|
|
|
-
- |
|
|
|
-
- |
|
|
Net
deferred tax assets
|
|
|
138 |
|
|
|
213 |
|
|
Net
deferred tax liabilities
|
|
$ |
216 |
|
|
$ |
186 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet classifications:
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets - current
|
|
$ |
9 |
|
|
$ |
62 |
|
|
Deferred
income taxes – current
|
|
|
4 |
|
|
|
-
- |
|
|
Deferred
income taxes – long-term
|
|
|
221 |
|
|
|
248 |
|
|
Net
deferred tax liabilities
|
|
$ |
216 |
|
|
$ |
186 |
|
During
2007, Millennium utilized $32 million of U.S. federal tax loss
carryforwards. The federal AMT credits of $49 million have no
expiration date.
Certain
of Millennium’s income tax returns are currently under examination by the
Internal Revenue Service (“IRS”) and various other non-U.S. and state tax
authorities. In many cases, these audits may result in proposed
assessments by the tax authorities. Millennium believes that its tax
positions comply with applicable tax law and intends to defend its positions
through appropriate administrative and judicial processes.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
17. Income
Taxes – (Continued)
Tax
benefits totaling $173 million relating to uncertain tax positions taken in
prior years, including $44 million pertaining to discontinued operations,
were unrecognized as of January 1, 2007 (see Note 4). The
following table presents a reconciliation of the beginning and ending amounts of
unrecognized tax benefits for the year ended December 31,
2007:
|
Millions of
dollars
|
|
|
|
|
Balance
at January 1, 2007
|
|
$ |
173 |
|
|
Reductions
for tax positions of prior years
|
|
|
(45 |
) |
|
Settlements
|
|
|
(118 |
) |
|
Balance
at December 31, 2007
|
|
$ |
10 |
|
As a
result of the sale of the inorganic chemicals business, unrecognized tax
benefits for tax positions in prior years decreased by
$44 million.
A
substantial portion of the uncertainties at January 1, 2007 were related to
passive foreign income for the years 1997 to 2001 and resulting capital loss
benefits that were subsequently recognized. IRS audit examination and
appeal of the matter was completed during 2007, and resulted in the
$118 million decrease in the amount of unrecognized tax benefits during
2007, consisting of payments of $10 million, reductions of deferred tax assets
of $78 million and increases in the benefit from income taxes of
$30 million.
The
remaining amount of unrecognized tax benefits, if recognized, would not affect
the effective tax rate. Millennium is no longer subject to any
significant income tax examinations by tax authorities for years prior to 2005
and does not anticipate any significant changes in the amount of unrecognized
tax benefits within the next twelve months.
Millennium
recognizes interest related to uncertain income tax positions in interest
expense. During the period from January 1 through
December 20, 2007, Millennium paid interest of $26 million and reversed
$43 million of interest accrued with respect to the uncertain tax positions
settled during 2007. During the years ended December 31, 2006 and
2005, Millennium accrued $2 million and $29 million of interest
expense, respectively. Millennium’s accrued liability for interest
expense was $17 million and $86 million at December 31, 2007 and
2006, respectively.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
17. Income
Taxes – (Continued)
The U.S.
and non-U.S. components of income (loss) before income taxes and a
reconciliation of the income tax provision (benefit) to theoretical income tax
computed by applying the U.S. federal statutory tax rate are as
follows:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
period
from
|
|
|
period
from
|
|
|
|
|
|
|
|
December
21
|
|
|
January
1
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
For
the year ended
|
|
|
|
|
December
31,
|
|
|
December
20,
|
|
|
December
31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income
(loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
to effects of push down debt
|
|
$ |
(19 |
) |
|
$ |
(53 |
) |
|
$ |
125 |
|
|
$ |
101 |
|
|
Effects
of push down debt
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
|
|
|
-
- |
|
|
|
(4 |
) |
|
|
-
- |
|
|
|
(25 |
) |
|
Total
|
|
$ |
(6 |
) |
|
$ |
(57 |
) |
|
$ |
125 |
|
|
$ |
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical
income tax at U.S. statutory rate
|
|
$ |
(2 |
) |
|
$ |
(20 |
) |
|
$ |
44 |
|
|
$ |
26 |
|
|
Increase
(reduction) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
income taxes, net of federal
|
|
|
-
- |
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
Changes
in estimates for prior year items
|
|
|
-
- |
|
|
|
(30 |
) |
|
|
(25 |
) |
|
|
19 |
|
|
Repatriation
of non-U.S. earnings and
returns of investment
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(9 |
) |
|
Other,
net
|
|
|
2 |
|
|
|
1 |
|
|
|
-
- |
|
|
|
(3 |
) |
|
Provision
for (benefit from) income taxes
|
|
$ |
- - |
|
|
$ |
(50 |
) |
|
$ |
17 |
|
|
$ |
31 |
|
|
Effective
income tax rate
|
|
|
-
- |
% |
|
|
87.7 |
% |
|
|
13.2 |
% |
|
|
41.1 |
% |
18. Commitments and Contingencies
Commitments—Millennium has
various agreements for the purchase of raw materials, utilities and services
with various terms extending through 2019. At December 31, 2007,
estimated future minimum payments under these contracts with noncancelable
contract terms in excess of one year were as follows:
|
Millions of
dollars
|
|
Total
|
|
|
2008
|
|
$ |
14 |
|
|
2009
|
|
|
9 |
|
|
2010
|
|
|
9 |
|
|
2011
|
|
|
9 |
|
|
2012
|
|
|
9 |
|
|
Thereafter
through 2019
|
|
|
48 |
|
|
Total
|
|
$ |
98 |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
18. Commitments
and Contingencies – (Continued)
Millennium’s
total purchases under these agreements were $35 million, $37 million
and $77 million, respectively, in 2007, 2006 and 2005.
Environmental
Remediation— Millennium’s accrued liability for future environmental
remediation costs at current and former plant sites and other remediation sites
totaled $181 million and $148 million, respectively, as of December 31,
2007 and December 31, 2006. The remediation expenditures are expected
to occur over a number of years, and not to be concentrated in any single
year. In the opinion of management, there is no material estimable
range of reasonably possible loss in excess of the liabilities recorded for
environmental remediation. However, it is possible that new
information about the sites for which the accrual has been established, new
technology or future developments such as involvement in investigations by
regulatory agencies, could require Millennium to reassess its potential exposure
related to environmental matters.
The
following table summarizes the activity in Millennium’s accrued environmental
liability for the years ended December 31:
|
Millions of
dollars
|
|
2007
|
|
|
2006
|
|
|
Balance
at January 1
|
|
$ |
148 |
|
|
$ |
145 |
|
|
Additional
provisions
|
|
|
52 |
|
|
|
13 |
|
|
Amounts
paid
|
|
|
(19 |
) |
|
|
(10 |
) |
|
Balance
at December 31
|
|
$ |
181 |
|
|
$ |
148 |
|
The
additional provisions in 2005 for estimated remediation costs were $35
million. The liabilities for individual sites range from less than
$1 million to $145 million. The $145 million liability
relates to the Kalamazoo River Superfund Site.
A
Millennium subsidiary has been identified as a Potential Responsible Party
(“PRP”) with respect to the Kalamazoo River Superfund Site. The site
involves cleanup of river sediments and floodplain soils contaminated with
polychlorinated biphenyls, cleanup of former paper mill operations, and cleanup
and closure of landfills associated with the former paper mill
operations.
In 2000,
the Kalamazoo River Study Group (the “KRSG”), of which the Millennium subsidiary
and other PRPs are members, submitted to the State of Michigan a Draft Remedial
Investigation and Draft Feasibility Study, which evaluated a number of remedial
options for the river. The estimated costs for these remedial options
ranged from $0 to $2.5 billion. Although the KRSG study
identified a broad range of remedial options, not all of those options would
represent reasonably possible outcomes. Management does not believe
that it can identify a single remedy among those options that would represent
the highest-cost reasonably possible outcome.
In 2004,
Millennium recognized a liability representing Millennium’s interim allocation
of 55% of the $73 million total of estimated cost of riverbank
stabilization, recommended as the preferred remedy in 2000 by the KRSG study,
and of certain other costs.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
18. Commitments
and Contingencies – (Continued)
At the
end of 2001, the U.S. Environmental Protection Agency (“EPA”) took lead
responsibility for the river portion of the site at the request of the State of
Michigan. In 2004, the EPA initiated a confidential process to
facilitate discussions among the agency, the Millennium subsidiary, other PRPs,
the Michigan Departments of Environmental Quality and Natural Resources, and
certain federal natural resource trustees about the need for additional
investigation activities and different possible approaches for addressing the
contamination in and along the Kalamazoo River. As these discussions
have continued, management has obtained new information about regulatory
oversight costs and other remediation costs, including a proposed remedy to be
applied to a specific portion of the river, and has been able to reasonably
estimate anticipated costs for certain other segments of the river, based in
part on experience to date with the remedy currently being applied to the one
portion of the river. As a result, Millennium recognized
$47 million in 2007 and $2 million in 2006 for additional estimated
probable future remediation costs.
As of
December 31, 2007, the probable additional future remediation spending
associated with the river cannot be determined with certainty but the amounts
accrued are believed to be the current best estimate of future costs, based on
information currently available. At December 31, 2007, the balance of
the liability related to the river was $98 million.
In
addition, Millennium has recognized a liability primarily related to
Millennium’s estimated share of remediation costs for two former paper mill
sites and associated landfills, which are also part of the Kalamazoo River
Superfund Site. At December 31, 2007, the balance of the liability
was $47 million. Although no final agreement has been reached as
to the ultimate remedy for these locations, Millennium has begun remediation
activity related to these sites.
Millennium’s
ultimate liability for the Kalamazoo River Superfund Site will depend on many
factors that have not yet been determined, including the ultimate remedies
selected, the determination of natural resource damages, the number and
financial viability of the other PRPs, and the determination of the final
allocation among the PRPs.
The
balance, at December 31, 2007, of remediation liabilities related to Millennium
sites other than the Kalamazoo River Superfund Site was
$36 million.
Litigation—Together with
alleged past manufacturers of lead-based paint and lead pigments for use in
paint, Millennium has been named as a defendant in various legal proceedings
alleging personal injury, property damage, and remediation costs allegedly
associated with the use of these products. The majority of these
legal proceedings assert unspecified monetary damages in excess of the statutory
minimum and, in certain cases, equitable relief such as abatement of lead-based
paint in buildings. Legal proceedings relating to lead pigment or
paint are in various trial stages and post-dismissal settings, some of which are
on appeal.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
18. Commitments
and Contingencies – (Continued)
One legal
proceeding relating to lead pigment or paint was tried in 2002. On
October 29, 2002, the judge in that case declared a mistrial after the jury
declared itself deadlocked. The sole issue before the jury was
whether lead pigment in paint in and on Rhode Island buildings constituted a
“public nuisance.” The re-trial of this case began on November 1,
2005. On February 22, 2006, a jury returned a verdict in favor of the
State of Rhode Island finding that the cumulative presence of lead pigments in
paints and coatings on buildings in the state constitutes a public nuisance;
that a Millennium subsidiary, Millennium Holdings, LLC, and other defendants
either caused or substantially contributed to the creation of the public
nuisance; and that those defendants, including the Millennium subsidiary, should
be ordered to abate the public nuisance. On February 28, 2006, the
judge held that the state could not proceed with its claim for punitive
damages. On February 26, 2007, the court issued its decision denying
the post-verdict motions of the defendants, including Millennium, for a mistrial
or a new trial. The court concluded that it would enter an order of
abatement and appoint a special master to assist the court in determining the
scope of the abatement remedy. On March 16, 2007, the court
entered a final judgment on the jury’s verdict. On
March 20, 2007, Millennium filed its notice of appeal with the Rhode
Island Supreme Court. On December 18, 2007, the trial court appointed
two special masters to serve as “examiners” and to assist the trial court in the
proposed abatement proceedings.
Millennium’s
defense costs to date for lead-based paint and lead pigment litigation largely
have been covered by insurance. Millennium has insurance policies
that potentially provide approximately $1 billion in indemnity coverage for
lead-based paint and lead pigment litigation. Millennium’s ability to
collect under the indemnity coverage would depend upon, among other things, the
resolution of certain potential coverage defenses that the insurers are likely
to assert and the solvency of the various insurance carriers that are part of
the coverage block at the time of such a request.
While
Millennium believes that it has valid defenses to all the lead-based paint and
lead pigment proceedings and is vigorously defending them, litigation is
inherently subject to many uncertainties. Any liability that
Millennium may ultimately incur, net of any insurance or other recoveries,
cannot be estimated at this time.
Guarantees—Millennium
continues to guarantee certain obligations related to the sold inorganic
chemicals business until such time as the buyer completes certain procedures to
replace Millennium as guarantor. The guarantees, principally with
respect to leases of offices, research facilities and railcars, have a total
potential obligation of approximately $50 million over their remaining
term. Millennium does not expect that any payments will be required
under these guarantees.
Indemnification—Millennium
and its joint ventures are parties to various indemnification arrangements,
including arrangements entered into in connection with acquisitions,
divestitures and the formation of joint ventures. For example,
Millennium entered into indemnification arrangements in connection with its
demerger from Hanson plc, and Equistar and its owner companies (including
Millennium) entered into indemnification arrangements in connection with the
formation of Equistar. Pursuant to these arrangements, Millennium and
its joint ventures provide indemnification to and/or receive indemnification
from other parties in connection with liabilities that may arise in connection
with the transactions and in connection with activities prior to completion of
the transactions. These indemnification arrangements typically
include provisions pertaining to third party claims relating to environmental
and tax matters and various types of litigation. As of December 31,
2007, Millennium has not accrued any significant amounts for such
indemnification obligations, and is not aware of other circumstances that would
be likely to lead to significant future indemnification claims against
Millennium. Millennium cannot determine with certainty the potential
amount of future payments under the indemnification arrangements until events
arise that would trigger a liability under the arrangements.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
18. Commitments
and Contingencies – (Continued)
Other—Millennium and its
joint ventures are, from time to time, defendants in lawsuits and other
commercial disputes, some of which are not covered by insurance. Many
of these suits make no specific claim for relief. Although final
determination of any liability and resulting financial impact with respect to
any such matters cannot be ascertained with any degree of certainty, management
does not believe that any ultimate uninsured liability resulting from these
matters in which it, its subsidiaries or its joint ventures currently are
involved will, individually or in the aggregate, have a material adverse effect
on the financial position, liquidity or results of operations of
Millennium.
General—In the opinion of
management, the matters discussed in this note, other than potential future
liabilities for environmental remediation which amounts cannot be estimated, are
not expected to have a material adverse effect on the financial position or
liquidity of Millennium. However, the adverse resolution in any
reporting period of one or more of the matters discussed in this note could have
a material impact on Millennium’s results of operations for that period, which
may be mitigated by contribution or indemnification obligations of others, or by
any insurance coverage that may be available.
Preferred Stock—In 2006, the
reverse stock split discussed below removed the authorized 1,000 shares of $.01
par value preferred stock.
Common Stock— In 2006, the
Board of Directors of Millennium approved a 1 for 100,000 reverse stock split of
the common stock of Millennium, reducing the authorized shares from 100,000,000
shares to 1,000 shares and the issued and outstanding shares from 70,935,510
shares to 709 shares. The 709 shares include 48 shares held by
Millennium America, a Millennium subsidiary, which are accounted for as treasury
stock in the Consolidated Balance Sheets. Millennium retained the
current par value of $.01 per share of common stock. The financial
statements reflect the effect of the reverse stock split for all periods
presented, resulting in a decrease in common stock and an increase in additional
paid-in capital of approximately $1 million.
Accumulated Other Comprehensive
Income (Loss)—There were no balances of accumulated other comprehensive
income at December 31, 2007. The components of accumulated other
comprehensive loss were as follows at December 31, 2006:
|
Millions of
dollars
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
|
Total
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
$ |
50 |
|
|
$ |
37 |
|
|
$ |
87 |
|
|
Pension
and postretirement liabilities
after
application of SFAS No. 158
|
|
|
(147 |
) |
|
|
(43 |
) |
|
|
(190 |
) |
|
Total
|
|
$ |
(97 |
) |
|
$ |
(6 |
) |
|
$ |
(103 |
) |
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
20. Supplemental Cash Flow Information
Supplemental
cash flow information is summarized as follows:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
period
from
|
|
|
period
from
|
|
|
|
|
|
|
|
December
21
|
|
|
January
1
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
For
the year ended
|
|
|
|
|
December
31,
|
|
|
December
20,
|
|
|
December
31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash
paid for interest and taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest,
net
|
|
$ |
- - |
|
|
$ |
42 |
|
|
$ |
65 |
|
|
$ |
100 |
|
|
Taxes,
net
|
|
$ |
- - |
|
|
$ |
135 |
|
|
$ |
(24 |
) |
|
$ |
20 |
|
In 2007,
2006 and 2005, taxes were paid to Lyondell pursuant to a tax-sharing agreement
between Millennium and Lyondell (see Note 17).
21. Segment and Related Information
At the
time of the acquisition of Lyondell by LyondellBasell Industries, Millennium
established a new business segment through which its operations are managed as
part of LyondellBasell Industries.
Millennium,
a wholly owned subsidiary of Lyondell, operates in one reportable
segment. Millennium’s chemical business segment produces and
markets: acetyls, which include VAM, acetic acid and methanol; and
fragrance and flavors chemicals.
On May
15, 2007, Millennium completed the sale of its worldwide inorganic chemicals
business (see Note 3) and substantially all of the inorganic chemicals segment
was reclassified as a discontinued operation.
The
accounting policies of the chemicals segment are the same as those described in
“Summary of Significant Accounting Policies” (see Note 2). No
customer accounted for 10% or more of consolidated sales during any year in the
three year period ended December 31, 2007.
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
21. Segment
and Related Information – (Continued)
Summarized
financial information concerning reportable segments is shown in the following
table.
|
Millions of
dollars
|
|
Chemicals
|
|
|
Other
|
|
|
Total
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Sales
and other operating revenues
|
|
$ |
639 |
|
|
$ |
3 |
|
|
$ |
642 |
|
|
Operating
income (loss)
|
|
|
69 |
|
|
|
(79 |
) |
|
|
(10 |
) |
|
Capital
expenditures
|
|
|
22 |
|
|
|
1 |
|
|
|
23 |
|
|
Depreciation
and amortization expense
|
|
|
24 |
|
|
|
5 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and other operating revenues
|
|
$ |
593 |
|
|
$ |
9 |
|
|
$ |
602 |
|
|
Operating
income (loss)
|
|
|
43 |
|
|
|
(32 |
) |
|
|
11 |
|
|
Capital
expenditures
|
|
|
12 |
|
|
|
-
- |
|
|
|
12 |
|
|
Depreciation
and amortization expense
|
|
|
23 |
|
|
|
1 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and other operating revenues
|
|
$ |
599 |
|
|
$ |
11 |
|
|
$ |
610 |
|
|
Operating
income (loss)
|
|
|
48 |
|
|
|
(60 |
) |
|
|
(12 |
) |
|
Capital
expenditures
|
|
|
7 |
|
|
|
-
- |
|
|
|
7 |
|
|
Depreciation
and amortization expense
|
|
|
25 |
|
|
|
1 |
|
|
|
26 |
|
Operating
income (loss) in the “Other” column above includes a business that is not a
reportable segment and costs not allocated to Millennium’s chemicals segment,
including costs from predecessor businesses.
The 2007
data above comprises the following:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Total
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
period
from
|
|
|
period
from
|
|
|
|
|
|
|
|
December
21
|
|
|
January
1
|
|
|
For
the year
|
|
|
|
|
through
|
|
|
through
|
|
|
ended
|
|
|
|
|
December
31,
|
|
|
December
20,
|
|
|
December
31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
Sales
and other operating revenues
|
|
$ |
26 |
|
|
$ |
616 |
|
|
$ |
642 |
|
|
Operating
loss
|
|
|
(9 |
) |
|
|
(1 |
) |
|
|
(10 |
) |
|
Capital
expenditures
|
|
|
1 |
|
|
|
22 |
|
|
|
23 |
|
|
Depreciation
and amortization
|
|
|
2 |
|
|
|
27 |
|
|
|
29 |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
21. Segment
and Related Information – (Continued)
Long-lived
assets of continuing operations are summarized and reconciled to consolidated
total assets in the following table:
|
Millions of
dollars
|
|
Chemicals
|
|
|
Other
|
|
|
Total
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$ |
308 |
|
|
$ |
2 |
|
|
$ |
310 |
|
|
Goodwill
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$ |
123 |
|
|
$ |
6 |
|
|
$ |
129 |
|
|
Goodwill
|
|
|
49 |
|
|
|
-
- |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$ |
125 |
|
|
$ |
8 |
|
|
$ |
133 |
|
|
Goodwill
|
|
|
49 |
|
|
|
-
- |
|
|
|
49 |
|
Millennium’s
continuing operations are primarily conducted in the U.S. Non-U.S.
sales are made via exports, including sales to other Lyondell subsidiaries on
terms similar to those of its third-party distributors. The following
geographic data for revenues are based upon the delivery location of the
product.
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
period
from
|
|
|
period
from
|
|
|
|
|
|
|
|
December
21
|
|
|
January
1
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
For
the year ended
|
|
|
|
|
December
31,
|
|
|
December
20,
|
|
|
December
31,
|
|
|
Millions of
dollars
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United
States
|
|
$ |
14 |
|
|
$ |
311 |
|
|
$ |
321 |
|
|
$ |
357 |
|
|
Non-U.S.
|
|
|
12 |
|
|
|
305 |
|
|
|
281 |
|
|
|
253 |
|
|
Total
|
|
$ |
26 |
|
|
$ |
616 |
|
|
$ |
602 |
|
|
$ |
610 |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Millennium
America Inc., a 100% owned indirect subsidiary of Millennium (“Millennium
America”), is a holding company for all of Millennium’s continuing and, prior to
May 15, 2007, discontinued operating subsidiaries other than its
discontinued operations in the United Kingdom, France, Brazil and
Australia. Millennium America is the issuer of the 7.625% Senior
Debentures. Millennium is the issuer of the 4% Convertible Senior
Debentures. Millennium America fully and unconditionally guaranteed
all obligations under the 4% Convertible Senior Debentures, while
outstanding. The 7.625% Senior Debentures are fully and
unconditionally guaranteed by Millennium. The following condensed
consolidating financial information present supplemental information for
Millennium Chemicals Inc., the parent, and Millennium America as of December 31,
2007 and 2006 and for each of the three years in the period ended December 31,
2007.
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
As
of December 31, 2007
|
Millions of
dollars
|
|
Millennium
Chemicals
Inc.
|
|
|
Millennium
America
Inc.
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Millennium
Chemicals
Inc.
and
Subsidiaries
|
|
|
BALANCE
SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$ |
- - |
|
|
$ |
- - |
|
|
$ |
104 |
|
|
$ |
- - |
|
|
$ |
104 |
|
|
Notes
receivable from Equistar
Chemicals, LP
|
|
|
80 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
80 |
|
|
Other
current assets
|
|
|
3 |
|
|
|
24 |
|
|
|
229 |
|
|
|
-
- |
|
|
|
256 |
|
|
Property,
plant and equipment, net
|
|
|
-
- |
|
|
|
-
- |
|
|
|
310 |
|
|
|
-
- |
|
|
|
310 |
|
|
Investment
in Equistar Chemicals, LP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
to push-down debt
|
|
|
-
- |
|
|
|
-
- |
|
|
|
1,652 |
|
|
|
-
- |
|
|
|
1,652 |
|
|
Effect
of push-down debt
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(1,652 |
) |
|
|
-
- |
|
|
|
(1,652 |
) |
|
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Investment
in subsidiaries
|
|
|
68 |
|
|
|
355 |
|
|
|
16 |
|
|
|
(423 |
) |
|
|
16 |
|
|
Other
assets, net
|
|
|
2 |
|
|
|
1 |
|
|
|
190 |
|
|
|
-
- |
|
|
|
193 |
|
|
Due
from parent and affiliates, net
|
|
|
-
- |
|
|
|
163 |
|
|
|
-
- |
|
|
|
(163 |
) |
|
|
-
- |
|
|
Total
assets
|
|
$ |
153 |
|
|
$ |
543 |
|
|
$ |
849 |
|
|
$ |
(586 |
) |
|
$ |
959 |
|
|
Current
maturities of
long-term debt
|
|
$ |
44 |
|
|
$ |
- - |
|
|
$ |
114 |
|
|
$ |
- - |
|
|
$ |
158 |
|
|
Other
current liabilities
|
|
|
115 |
|
|
|
2 |
|
|
|
64 |
|
|
|
-
- |
|
|
|
181 |
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Push-down
debt
|
|
|
350 |
|
|
|
350 |
|
|
|
-
- |
|
|
|
(350 |
) |
|
|
350 |
|
|
Debt
of Millennium
|
|
|
-
- |
|
|
|
170 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
170 |
|
|
Other
liabilities
|
|
|
-
- |
|
|
|
-
- |
|
|
|
238 |
|
|
|
-
- |
|
|
|
238 |
|
|
Deferred
income taxes
|
|
|
-
- |
|
|
|
-
- |
|
|
|
221 |
|
|
|
-
- |
|
|
|
221 |
|
|
Due
to parent and affiliates, net
|
|
|
10 |
|
|
|
-
- |
|
|
|
153 |
|
|
|
(163 |
) |
|
|
-
- |
|
|
Total
liabilities
|
|
|
519 |
|
|
|
522 |
|
|
|
790 |
|
|
|
(513 |
) |
|
|
1,318 |
|
|
Minority
interest
|
|
|
-
- |
|
|
|
-
- |
|
|
|
7 |
|
|
|
-
- |
|
|
|
7 |
|
|
Stockholder’s
equity
|
|
|
(366 |
) |
|
|
21 |
|
|
|
52 |
|
|
|
(73 |
) |
|
|
(366 |
) |
|
Total
liabilities and stockholder’s equity
|
|
$ |
153 |
|
|
$ |
543 |
|
|
$ |
849 |
|
|
$ |
(586 |
) |
|
$ |
959 |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
For
the period from December 21 through December 31, 2007
|
Millions of
dollars
|
|
Millennium
Chemicals
Inc.
|
|
|
Millennium
America
Inc.
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Millennium
Chemicals
Inc.
and
Subsidiaries
|
|
|
STATEMENT
OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and other operating revenues
|
|
$ |
- - |
|
|
$ |
- - |
|
|
$ |
26 |
|
|
$ |
- - |
|
|
$ |
26 |
|
|
Cost
of sales
|
|
|
-
- |
|
|
|
-
- |
|
|
|
35 |
|
|
|
-
- |
|
|
|
35 |
|
|
Operating
loss
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(9 |
) |
|
|
-
- |
|
|
|
(9 |
) |
|
Interest
expense
|
|
|
-
- |
|
|
|
8 |
|
|
|
(4 |
) |
|
|
-
- |
|
|
|
4 |
|
|
Loss
from equity
investment in Equistar
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(14 |
) |
|
|
-
- |
|
|
|
(14 |
) |
|
Effect
of push-down debt on loss from equity investment in
Equistar
|
|
|
-
- |
|
|
|
-
- |
|
|
|
14 |
|
|
|
-
- |
|
|
|
14 |
|
|
Equity
in income (loss) of subsidiaries
|
|
|
(5 |
) |
|
|
15 |
|
|
|
-
- |
|
|
|
(10 |
) |
|
|
-
- |
|
|
(Provision
for) benefit
from income taxes
|
|
|
-
- |
|
|
|
(6 |
) |
|
|
6 |
|
|
|
-
- |
|
|
|
-
- |
|
|
Income
(loss) before push-down debt
|
|
|
(5 |
) |
|
|
17 |
|
|
|
(7 |
) |
|
|
(10 |
) |
|
|
(5 |
) |
|
Interest
expense on push-down debt
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
-
- |
|
|
|
1 |
|
|
|
(1 |
) |
|
Provision
for income
taxes
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Net
income (loss)
|
|
$ |
(6 |
) |
|
$ |
16 |
|
|
$ |
(7 |
) |
|
$ |
(9 |
) |
|
$ |
(6 |
) |
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
For
the period from January 1 through December 20, 2007
|
Millions of
dollars
|
|
Millennium
Chemicals
Inc.
|
|
|
Millennium
America
Inc.
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Millennium
Chemicals
Inc.
and
Subsidiaries
|
|
|
STATEMENT
OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and other operating revenues
|
|
$ |
- - |
|
|
$ |
- - |
|
|
$ |
616 |
|
|
$ |
- - |
|
|
$ |
616 |
|
|
Cost
of sales
|
|
|
-
- |
|
|
|
-
- |
|
|
|
515 |
|
|
|
-
- |
|
|
|
515 |
|
|
Selling,
general and
administrative expenses
|
|
|
-
- |
|
|
|
-
- |
|
|
|
99 |
|
|
|
-
- |
|
|
|
99 |
|
|
Research
and development expenses
|
|
|
-
- |
|
|
|
-
- |
|
|
|
3 |
|
|
|
-
- |
|
|
|
3 |
|
|
Operating
loss
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(1 |
) |
|
|
-
- |
|
|
|
(1 |
) |
|
Interest
income (expense), net
|
|
|
1 |
|
|
|
78 |
|
|
|
(58 |
) |
|
|
-
- |
|
|
|
21 |
|
|
Income
(loss) from equity
investment in Equistar
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(64 |
) |
|
|
-
- |
|
|
|
(64 |
) |
|
Equity
in income of subsidiaries
|
|
|
298 |
|
|
|
774 |
|
|
|
-
- |
|
|
|
(1,072 |
) |
|
|
-
- |
|
|
Other
income (expense), net
|
|
|
(51 |
) |
|
|
5 |
|
|
|
33 |
|
|
|
-
- |
|
|
|
(13 |
) |
|
(Provision
for) benefit
from income taxes
|
|
|
37 |
|
|
|
(63 |
) |
|
|
76 |
|
|
|
-
- |
|
|
|
50 |
|
|
Income
(loss) from continuing operations
|
|
|
285 |
|
|
|
794 |
|
|
|
(14 |
) |
|
|
(1,072 |
) |
|
|
(7 |
) |
|
Income
(loss) from discontinued operations, net of tax
|
|
|
-
- |
|
|
|
-
- |
|
|
|
292 |
|
|
|
-
- |
|
|
|
292 |
|
|
Net
income
|
|
$ |
285 |
|
|
$ |
794 |
|
|
$ |
278 |
|
|
$ |
(1,072 |
) |
|
$ |
285 |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
For
the period from December 21 through December 31, 2007
|
Millions of
dollars
|
|
Millennium
Chemicals
Inc.
|
|
|
Millennium
America
Inc.
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Millennium
Chemicals
Inc.
and
Subsidiaries
|
|
|
STATEMENT
OF
CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
– continuing operations
|
|
$ |
3 |
|
|
$ |
18 |
|
|
$ |
12 |
|
|
$ |
- - |
|
|
$ |
33 |
|
|
Expenditures
for property,
plant and equipment
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(1 |
) |
|
|
-
- |
|
|
|
(1 |
) |
|
Net
cash used in investing activities – continuing operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(1 |
) |
|
|
-
- |
|
|
|
(1 |
) |
|
Net
cash used in investing activities
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(1 |
) |
|
|
-
- |
|
|
|
(1 |
) |
|
Other
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(1 |
) |
|
|
-
- |
|
|
|
(1 |
) |
|
Net
cash used in financing activities – continuing operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(1 |
) |
|
|
-
- |
|
|
|
(1 |
) |
|
Net
cash used in financing activities
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(1 |
) |
|
|
-
- |
|
|
|
(1 |
) |
|
Effect
of exchange rate changes on cash
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Increase
in cash and cash equivalents
|
|
|
3 |
|
|
|
18 |
|
|
|
10 |
|
|
|
-
- |
|
|
|
31 |
|
|
Cash
and cash equivalents at
beginning of period
|
|
|
-
- |
|
|
|
6 |
|
|
|
14 |
|
|
|
-
- |
|
|
|
20 |
|
|
Cash
and cash equivalents at end of period
– continuing operations
|
|
$ |
3 |
|
|
$ |
24 |
|
|
$ |
24 |
|
|
$ |
- - |
|
|
$ |
51 |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
For
the period from January 1, through December 20, 2007
|
Millions of
dollars
|
|
Millennium
Chemicals
Inc.
|
|
|
Millennium
America
Inc.
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Millennium
Chemicals
Inc.
and
Subsidiaries
|
|
|
STATEMENT
OF
CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used
in) operating activities – continuing
operations
|
|
$ |
190 |
|
|
$ |
129 |
|
|
$ |
(458 |
) |
|
$ |
- - |
|
|
$ |
(139 |
) |
|
Net
cash used by operating activities – discontinued
operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(125 |
) |
|
|
-
- |
|
|
|
(125 |
) |
|
Net
cash provided by (used
in) operating activities
|
|
|
190 |
|
|
|
129 |
|
|
|
(583 |
) |
|
|
-
- |
|
|
|
(264 |
) |
|
Net
advances under loan agreements to Equistar Chemicals, LP
|
|
|
(80 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(80 |
) |
|
Expenditures
for property,
plant and equipment
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(22 |
) |
|
|
-
- |
|
|
|
(22 |
) |
|
Payments
and distributions to discontinued
operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(104 |
) |
|
|
-
- |
|
|
|
(104 |
) |
|
Distributions
from affiliates in excess of earnings
|
|
|
-
- |
|
|
|
-
- |
|
|
|
30 |
|
|
|
-
- |
|
|
|
30 |
|
|
Other
|
|
|
-
- |
|
|
|
-
- |
|
|
|
3 |
|
|
|
-
- |
|
|
|
3 |
|
|
Net
cash used in investing activities – continuing operations
|
|
|
(80 |
) |
|
|
-
- |
|
|
|
(93 |
) |
|
|
-
- |
|
|
|
(173 |
) |
|
Net
proceeds from sale of discontinued operations
before required repayment of debt
|
|
|
-
- |
|
|
|
-
- |
|
|
|
1,089 |
|
|
|
-
- |
|
|
|
1,089 |
|
|
Other
net cash provided by investing activities – discontinued
operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
89 |
|
|
|
-
- |
|
|
|
89 |
|
|
Net
cash provided by (used in) investing activities
|
|
|
(80 |
) |
|
|
-
- |
|
|
|
1,085 |
|
|
|
-
- |
|
|
|
1,005 |
|
|
Repayment
of long-term debt
|
|
|
(106 |
) |
|
|
(390 |
) |
|
|
(274 |
) |
|
|
-
- |
|
|
|
(770 |
) |
|
Intercompany
|
|
|
(4 |
) |
|
|
205 |
|
|
|
(201 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
Other
|
|
|
-
- |
|
|
|
-
- |
|
|
|
3 |
|
|
|
-
- |
|
|
|
3 |
|
|
Net
cash used in financing activities – continuing operations
|
|
|
(110 |
) |
|
|
(185 |
) |
|
|
(472 |
) |
|
|
-
- |
|
|
|
(767 |
) |
|
Debt
required to be repaid upon sale of discontinued operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(99 |
) |
|
|
-
- |
|
|
|
(99 |
) |
|
Other
net cash provided financing activities – discontinued
operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
23 |
|
|
|
-
- |
|
|
|
23 |
|
|
Net
cash used in financing activities
|
|
|
(110 |
) |
|
|
(185 |
) |
|
|
(548 |
) |
|
|
-
- |
|
|
|
(843 |
) |
|
Effect
of exchange rate changes on cash
|
|
|
-
- |
|
|
|
-
- |
|
|
|
1 |
|
|
|
-
- |
|
|
|
1 |
|
|
Decrease
in cash and cash equivalents
|
|
|
-
- |
|
|
|
(56 |
) |
|
|
(45 |
) |
|
|
-
- |
|
|
|
(101 |
) |
|
Cash
and cash equivalents at
beginning of period
|
|
|
-
- |
|
|
|
62 |
|
|
|
59 |
|
|
|
-
- |
|
|
|
121 |
|
|
Cash
and cash equivalents
at end of period
|
|
|
-
- |
|
|
|
6 |
|
|
|
14 |
|
|
|
-
- |
|
|
|
20 |
|
|
Cash
and cash equivalents at end of period
– continuing operations
|
|
$ |
- - |
|
|
$ |
6 |
|
|
$ |
14 |
|
|
$ |
- - |
|
|
$ |
20 |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
As
of December 31, 2006
|
Millions of
dollars
|
|
Millennium
Chemicals
Inc.
|
|
|
Millennium
America
Inc.
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Millennium
Chemicals
Inc.
and
Subsidiaries
|
|
|
BALANCE
SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$ |
- - |
|
|
$ |
- - |
|
|
$ |
87 |
|
|
$ |
- - |
|
|
$ |
87 |
|
|
Other
current assets
|
|
|
-
- |
|
|
|
62 |
|
|
|
200 |
|
|
|
-
- |
|
|
|
262 |
|
|
Current
assets held for sale
|
|
|
-
- |
|
|
|
-
- |
|
|
|
661 |
|
|
|
-
- |
|
|
|
661 |
|
|
Property,
plant and equipment, net
|
|
|
-
- |
|
|
|
-
- |
|
|
|
129 |
|
|
|
-
- |
|
|
|
129 |
|
|
Investment
in Equistar Chemicals, LP
|
|
|
-
- |
|
|
|
-
- |
|
|
|
470 |
|
|
|
-
- |
|
|
|
470 |
|
|
Investment
in subsidiaries
|
|
|
310 |
|
|
|
497 |
|
|
|
-
- |
|
|
|
(807 |
) |
|
|
-
- |
|
|
Goodwill,
net
|
|
|
-
- |
|
|
|
-
- |
|
|
|
49 |
|
|
|
-
- |
|
|
|
49 |
|
|
Other
assets, net
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
66 |
|
|
|
-
- |
|
|
|
62 |
|
|
Due
from parent and affiliates, net
|
|
|
-
- |
|
|
|
368 |
|
|
|
-
- |
|
|
|
(368 |
) |
|
|
-
- |
|
|
Long-term
assets held for sale
|
|
|
-
- |
|
|
|
-
- |
|
|
|
694 |
|
|
|
-
- |
|
|
|
694 |
|
|
Total
assets
|
|
$ |
308 |
|
|
$ |
925 |
|
|
$ |
2,356 |
|
|
$ |
(1,175 |
) |
|
$ |
2,414 |
|
|
Current
liabilities
|
|
$ |
1 |
|
|
$ |
4 |
|
|
$ |
169 |
|
|
$ |
- - |
|
|
$ |
174 |
|
|
Current
liabilities associated with
assets
held for sale
|
|
|
-
- |
|
|
|
-
- |
|
|
|
335 |
|
|
|
-
- |
|
|
|
335 |
|
|
Long-term
debt
|
|
|
150 |
|
|
|
617 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
767 |
|
|
Other
liabilities
|
|
|
-
- |
|
|
|
3 |
|
|
|
378 |
|
|
|
-
- |
|
|
|
381 |
|
|
Deferred
income taxes
|
|
|
-
- |
|
|
|
-
- |
|
|
|
248 |
|
|
|
-
- |
|
|
|
248 |
|
|
Due
to parent and affiliates, net
|
|
|
14 |
|
|
|
-
- |
|
|
|
354 |
|
|
|
(368 |
) |
|
|
-
- |
|
|
Long-term
liabilities associated
with
assets held for sale
|
|
|
-
- |
|
|
|
-
- |
|
|
|
361 |
|
|
|
-
- |
|
|
|
361 |
|
|
Total
liabilities
|
|
|
165 |
|
|
|
624 |
|
|
|
1,845 |
|
|
|
(368 |
) |
|
|
2,266 |
|
|
Minority
interest
|
|
|
-
- |
|
|
|
-
- |
|
|
|
5 |
|
|
|
-
- |
|
|
|
5 |
|
|
Stockholder’s
(deficit) equity
|
|
|
143 |
|
|
|
301 |
|
|
|
506 |
|
|
|
(807 |
) |
|
|
143 |
|
|
Total
liabilities and
stockholder’s equity
|
|
$ |
308 |
|
|
$ |
925 |
|
|
$ |
2,356 |
|
|
$ |
(1,175 |
) |
|
$ |
2,414 |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
For
the year ended December 31, 2006
|
Millions of
dollars
|
|
Millennium
Chemicals
Inc.
|
|
|
Millennium
America
Inc.
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Millennium
Chemicals
Inc.
and
Subsidiaries
|
|
|
STATEMENT
OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and other operating revenues
|
|
$ |
- - |
|
|
$ |
- - |
|
|
$ |
602 |
|
|
$ |
- - |
|
|
$ |
602 |
|
|
Cost
of sales
|
|
|
-
- |
|
|
|
-
- |
|
|
|
537 |
|
|
|
-
- |
|
|
|
537 |
|
|
Selling,
general and
administrative expenses
|
|
|
-
- |
|
|
|
-
- |
|
|
|
50 |
|
|
|
-
- |
|
|
|
50 |
|
|
Research
and development expenses
|
|
|
-
- |
|
|
|
-
- |
|
|
|
4 |
|
|
|
-
- |
|
|
|
4 |
|
|
Operating
income
|
|
|
-
- |
|
|
|
-
- |
|
|
|
11 |
|
|
|
-
- |
|
|
|
11 |
|
|
Interest
expense, net
|
|
|
(9 |
) |
|
|
(53 |
) |
|
|
(1 |
) |
|
|
-
- |
|
|
|
(63 |
) |
|
Intercompany
interest
income
(expense), net
|
|
|
(1 |
) |
|
|
110 |
|
|
|
(109 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
Income
from equity
investment in Equistar
|
|
|
-
- |
|
|
|
-
- |
|
|
|
181 |
|
|
|
-
- |
|
|
|
181 |
|
|
Equity
in income of subsidiaries
|
|
|
169 |
|
|
|
180 |
|
|
|
-
- |
|
|
|
(349 |
) |
|
|
-
- |
|
|
Other
expense, net
|
|
|
-
- |
|
|
|
13 |
|
|
|
(17 |
) |
|
|
-
- |
|
|
|
(4 |
) |
|
(Provision
for) benefit
from income taxes
|
|
|
-
- |
|
|
|
9 |
|
|
|
(26 |
) |
|
|
-
- |
|
|
|
(17 |
) |
|
Income
from continuing operations
|
|
|
159 |
|
|
|
259 |
|
|
|
39 |
|
|
|
(349 |
) |
|
|
108 |
|
|
Income
from discontinued operations, net
of tax
|
|
|
-
- |
|
|
|
-
- |
|
|
|
51 |
|
|
|
-
- |
|
|
|
51 |
|
|
Net
income
|
|
$ |
159 |
|
|
$ |
259 |
|
|
$ |
90 |
|
|
$ |
(349 |
) |
|
$ |
159 |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
For
the year ended December 31, 2006
|
Millions of
dollars
|
|
Millennium
Chemicals
Inc.
|
|
|
Millennium
America
Inc.
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Millennium
Chemicals
Inc.
and Subsidiaries
|
|
|
STATEMENT
OF
CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used
in) operating activities – continuing
operations
|
|
$ |
(7 |
) |
|
$ |
174 |
|
|
$ |
(13 |
) |
|
$ |
- - |
|
|
$ |
154 |
|
|
Net
cash provided by operating activities –
discontinued operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
39 |
|
|
|
-
- |
|
|
|
39 |
|
|
Net
cash provided by (used
in) operating activities
|
|
|
(7 |
) |
|
|
174 |
|
|
|
26 |
|
|
|
-
- |
|
|
|
193 |
|
|
Expenditures
for property,
plant and equipment
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(12 |
) |
|
|
-
- |
|
|
|
(12 |
) |
|
Payments
and distributions to discontinued
operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(40 |
) |
|
|
-
- |
|
|
|
(40 |
) |
|
Other
|
|
|
-
- |
|
|
|
-
- |
|
|
|
1 |
|
|
|
-
- |
|
|
|
1 |
|
|
Net
cash used in investing activities –
continuing operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(51 |
) |
|
|
-
- |
|
|
|
(51 |
) |
|
Net
cash used in investing activities – discontinued
operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(14 |
) |
|
|
-
- |
|
|
|
(14 |
) |
|
Net
cash used in investing activities
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(65 |
) |
|
|
-
- |
|
|
|
(65 |
) |
|
Repayment
of long-term debt
|
|
|
-
- |
|
|
|
(250 |
) |
|
|
(4 |
) |
|
|
-
- |
|
|
|
(254 |
) |
|
Intercompany
|
|
|
7 |
|
|
|
(73 |
) |
|
|
66 |
|
|
|
-
- |
|
|
|
-
- |
|
|
Other
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(2 |
) |
|
|
-
- |
|
|
|
(2 |
) |
|
Net
cash provided by (used in) financing activities
– continuing operations
|
|
|
7 |
|
|
|
(323 |
) |
|
|
60 |
|
|
|
-
- |
|
|
|
(256 |
) |
|
Net
cash used in financing activities –
discontinued operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(34 |
) |
|
|
-
- |
|
|
|
(34 |
) |
|
Net
cash provided by (used
in) financing activities
|
|
|
7 |
|
|
|
(323 |
) |
|
|
26 |
|
|
|
-
- |
|
|
|
(290 |
) |
|
Effect
of exchange rate changes on cash
|
|
|
-
- |
|
|
|
-
- |
|
|
|
4 |
|
|
|
-
- |
|
|
|
4 |
|
|
Decrease
in cash
and cash equivalents
|
|
|
-
- |
|
|
|
(149 |
) |
|
|
(9 |
) |
|
|
-
- |
|
|
|
(158 |
) |
|
Cash
and cash equivalents at
beginning of period
|
|
|
-
- |
|
|
|
211 |
|
|
|
68 |
|
|
|
-
- |
|
|
|
279 |
|
|
Cash
and cash equivalents
at end of period
|
|
|
-
- |
|
|
|
62 |
|
|
|
59 |
|
|
|
-
- |
|
|
|
121 |
|
|
Less: Cash
and cash equivalents at end of
period – discontinued operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
45 |
|
|
|
-
- |
|
|
|
45 |
|
|
Cash
and cash equivalents at end of period
– continuing operations
|
|
$ |
- - |
|
|
$ |
62 |
|
|
$ |
14 |
|
|
$ |
- - |
|
|
$ |
76 |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
For
the year ended December 31, 2005
|
Millions of
dollars
|
|
Millennium
Chemicals
Inc.
|
|
|
Millennium
America
Inc.
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Millennium
Chemicals
Inc.
and Subsidiaries
|
|
|
STATEMENT
OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and other operating revenues
|
|
$ |
- - |
|
|
$ |
- - |
|
|
$ |
610 |
|
|
$ |
- - |
|
|
$ |
610 |
|
|
Cost
of sales
|
|
|
-
- |
|
|
|
-
- |
|
|
|
541 |
|
|
|
-
- |
|
|
|
541 |
|
|
Selling,
general and
administrative expenses
|
|
|
-
- |
|
|
|
1 |
|
|
|
77 |
|
|
|
-
- |
|
|
|
78 |
|
|
Research
and development expenses
|
|
|
-
- |
|
|
|
-
- |
|
|
|
2 |
|
|
|
-
- |
|
|
|
2 |
|
|
Business
combination costs
|
|
|
-
- |
|
|
|
-
- |
|
|
|
1 |
|
|
|
-
- |
|
|
|
1 |
|
|
Operating
loss
|
|
|
-
- |
|
|
|
(1 |
) |
|
|
(11 |
) |
|
|
-
- |
|
|
|
(12 |
) |
|
Interest
expense, net
|
|
|
(6 |
) |
|
|
(89 |
) |
|
|
(16 |
) |
|
|
-
- |
|
|
|
(111 |
) |
|
Intercompany
interest income
(expense), net
|
|
|
(1 |
) |
|
|
110 |
|
|
|
(109 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
Income
from equity
investment in Equistar
|
|
|
-
- |
|
|
|
-
- |
|
|
|
221 |
|
|
|
-
- |
|
|
|
221 |
|
|
Equity
in income of subsidiaries
|
|
|
33 |
|
|
|
78 |
|
|
|
-
- |
|
|
|
(111 |
) |
|
|
-
- |
|
|
Other
expense, net
|
|
|
-
- |
|
|
|
(11 |
) |
|
|
(11 |
) |
|
|
-
- |
|
|
|
(22 |
) |
|
(Provision
for) benefit
from income taxes
|
|
|
2 |
|
|
|
(3 |
) |
|
|
(30 |
) |
|
|
-
- |
|
|
|
(31 |
) |
|
Income
from continuing operations
|
|
|
28 |
|
|
|
84 |
|
|
|
44 |
|
|
|
(111 |
) |
|
|
45 |
|
|
Loss
from discontinued operations, net
of tax
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(17 |
) |
|
|
-
- |
|
|
|
(17 |
) |
|
Net
income (loss)
|
|
$ |
28 |
|
|
$ |
84 |
|
|
$ |
27 |
|
|
$ |
(111 |
) |
|
$ |
28 |
|
MILLENNIUM
CHEMICALS INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
For
the year ended December 31, 2005
|
Millions of
dollars
|
|
Millennium
Chemicals
Inc.
|
|
|
Millennium
America
Inc.
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Millennium
Chemicals
Inc.
and Subsidiaries
|
|
|
STATEMENT
OF
CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used
in) operating activities – continuing
operations
|
|
$ |
(7 |
) |
|
$ |
15 |
|
|
$ |
203 |
|
|
$ |
- - |
|
|
$ |
211 |
|
|
Net
cash used in operating activities – discontinued
operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
64 |
|
|
|
-
- |
|
|
|
64 |
|
|
Net
cash provided by (used
in) operating activities
|
|
|
(7 |
) |
|
|
15 |
|
|
|
267 |
|
|
|
-
- |
|
|
|
275 |
|
|
Expenditures
for property, plant
and equipment
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(7 |
) |
|
|
-
- |
|
|
|
(7 |
) |
|
Payments
and distributions from discontinued
operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
269 |
|
|
|
-
- |
|
|
|
269 |
|
|
Net
cash provided by investing activities –
continuing operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
262 |
|
|
|
-
- |
|
|
|
262 |
|
|
Net
cash used in investing activities – discontinued
operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(322 |
) |
|
|
-
- |
|
|
|
(322 |
) |
|
Net
cash used in investing activities
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(60 |
) |
|
|
-
- |
|
|
|
(60 |
) |
|
Repayment
of long-term debt
|
|
|
-
- |
|
|
|
(365 |
) |
|
|
(1 |
) |
|
|
-
- |
|
|
|
(366 |
) |
|
Intercompany
|
|
|
1 |
|
|
|
473 |
|
|
|
(474 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
Contribution
from affiliate
|
|
|
6 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
6 |
|
|
Other
|
|
|
-
- |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
-
- |
|
|
|
(1 |
) |
|
Net
cash provided by (used in) financing activities
– continuing operations
|
|
|
7 |
|
|
|
106 |
|
|
|
(474 |
) |
|
|
-
- |
|
|
|
(361 |
) |
|
Net
cash used in financing activities – discontinued
operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
89 |
|
|
|
-
- |
|
|
|
89 |
|
|
Net
cash provided by (used
in) financing activities
|
|
|
7 |
|
|
|
106 |
|
|
|
(385 |
) |
|
|
-
- |
|
|
|
(272 |
) |
|
Effect
of exchange rate change on cash
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(8 |
) |
|
|
-
- |
|
|
|
(8 |
) |
|
Increase
(decrease) in cash and cash equivalents
|
|
|
-
- |
|
|
|
121 |
|
|
|
(186 |
) |
|
|
-
- |
|
|
|
(65 |
) |
|
Cash
and cash equivalents at
beginning of period
|
|
|
-
- |
|
|
|
90 |
|
|
|
254 |
|
|
|
-
- |
|
|
|
344 |
|
|
Cash
and cash equivalents
at end of period
|
|
|
-
- |
|
|
|
211 |
|
|
|
68 |
|
|
|
-
- |
|
|
|
279 |
|
|
Less: Cash
and cash equivalents at end of
period – discontinued operations
|
|
|
-
- |
|
|
|
-
- |
|
|
|
50 |
|
|
|
-
- |
|
|
|
50 |
|
|
Cash
and cash equivalents at end of period
– continuing operations
|
|
$ |
- - |
|
|
$ |
211 |
|
|
$ |
18 |
|
|
$ |
- - |
|
|
$ |
229 |
|
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and
Procedures
Millennium
performed an evaluation, under the supervision and with the participation of its
management, including the President and Chief Executive Officer (principal
executive officer) and the Chief Financial Officer (principal financial
officer), of the effectiveness of Millennium’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, 2007. Based upon that
evaluation, the President and Chief Executive Officer and the Chief Financial
Officer concluded that Millennium’s disclosure controls and procedures are
effective.
There
were no changes in Millennium’s internal control over financial reporting that
occurred during Millennium’s last fiscal quarter (the fourth quarter 2007) that
have materially affected, or are reasonably likely to materially affect,
Millennium’s internal control over financial reporting.
Millennium’s
management’s report on internal control over financial reporting appears on page
54 of this Annual Report on Form 10-K. The effectiveness of
Millennium’s internal control over financial reporting as of
December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
appears herein.
Item 9B. Other
Information
None.
Item 10. Directors, Executive
Officers and Corporate
Governance
Omitted
pursuant to General Instruction I of Form 10-K. See “Item
1. Business—Additional Information Available” for information
regarding Millennium’s code of ethics.
Item 11. Executive
Compensation
Omitted
pursuant to General Instruction I of Form 10-K.
Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
Omitted
pursuant to General Instruction I of Form 10-K.
Item 13. Certain Relationships and Related
Transactions, and
Director Independence
Omitted
pursuant to General Instruction I of Form 10-K.
Item 14. Principal Accountant Fees and
Services
The
following table presents fees for audit services rendered by
PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) for the audit of
Millennium’s annual financial statements for the years ended December 31,
2007 and 2006, and fees billed or expected to be billed for audit-related, tax
and all other services rendered by PricewaterhouseCoopers during those
periods.
|
Thousands of
dollars
|
|
2007
|
|
|
2006
|
|
|
Audit
fees (a)
|
|
$ |
1,247 |
|
|
$ |
4,650 |
|
|
Audit-related
fees (b)
|
|
|
105 |
|
|
|
174 |
|
|
Tax
fees (c)
|
|
|
50 |
|
|
|
300 |
|
|
All
other fees
|
|
|
-
- |
|
|
|
-
- |
|
|
Total
|
|
$ |
1,402 |
|
|
$ |
5,124 |
|
|
(a)
|
Audit
fees consist of the aggregate fees and expenses billed or expected to be
billed for professional services rendered by PricewaterhouseCoopers for
the audit of Millennium’s annual financial statements, the review of
financial statements included in Millennium’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. The 2006 audit fees shown in the table above reflect a
reduction of $250,000 related to fees that were originally estimated, but
were not incurred with respect to 2006. Of the 2006 audit fees
shown in the table, $684,000 represents fees and expenses billed in 2007
related to 2006 audit services. Of the 2007 audit fees shown in
the table, $484,000 represents fees and expenses expected to be billed in
2008 related to 2007 audit
services.
|
|
(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 Millennium’s financial
statements. This category includes fees related to: the
performance of audits of Millennium’s benefit plans; agreed-upon or
expanded audit procedures relating to accounting 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. Of the 2006 audit-related fees shown in the
table, $105,000 represents fees billed in 2007 for 2006 audit-related
services. Of the 2007 audit-related fees shown in the table,
$103,000 represents fees expected to be billed in 2008 for 2007
audit-related services.
|
|
(c)
|
Tax
fees consist of the aggregate fees billed for professional services
rendered by PricewaterhouseCoopers for federal, state and international
tax compliance and advice.
|
Generally,
the Board of Directors of Millennium serves as Millennium’s Audit Committee, and
is directly responsible for overseeing the work of the independent registered
public accounting firm. However, Millennium is a wholly owned
subsidiary of Lyondell. Millennium’s Board of Directors revised its
pre-approval policy. Millennium’s Board of Directors has delegated to
Lyondell’s Board of Directors the responsibility for reviewing and pre-approving
all audit and non-audit services to be provided for Millennium by Millennium’s
independent registered public accounting firm (including affiliates or related
member firms).
A
centralized service request procedure is used for all requests for the
independent registered public accounting firm to provide services to
Millennium. Under this procedure, all requests for the independent
registered public accounting firm to provide services to Millennium initially
are submitted to Lyondell’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 Lyondell’s Board of Directors, Lyondell’s Vice President and Controller will
submit the request and a detailed description of the proposed services to
Lyondell’s Board of Directors. Requests to provide services that
require pre-approval by Lyondell’s Board of Directors also must include a
statement as to whether, in the view of Lyondell’s Vice President and
Controller, the request is consistent with the SEC’s rules on independent
registered public accounting firm independence.
Millennium’s
Board of Directors has designated Lyondell’s Chief Financial Officer to review
compliance with the pre-approval policy. Lyondell’s Chief Financial
Officer will report to Lyondell’s Board of Directors periodically on the results
of the monitoring.
Item 15. Exhibits and Financial Statement
Schedules
(a) The
Following Documents are Filed as Part of This Report :
1. Supplemental
Financial Information.
The
Supplemental Financial Information relating to Equistar, which is contained in
the Annual Report on Form 10-K, consists of the following:
|
|
|
Page
of
|
|
|
|
|
The
Report
|
|
|
Financial
Statements of Equistar:
|
|
|
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
|
|
F-1
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
|
|
|
Consolidated
Statements of Income –
|
|
|
|
|
|
Years
Ended December 31, 2006, 2005 and 2004
|
|
|
F-4
|
|
|
Consolidated
Balance Sheets – December 31, 2006, 2005 and 2004
|
|
|
F-5
|
|
|
Consolidated
Statements of Cash Flows -
|
|
|
|
|
|
Years
Ended December 31, 2006, 2005 and 2004
|
|
|
F-6
|
|
|
Consolidated
Statements of Partners’ Capital -
|
|
|
|
|
|
Years
Ended December 31, 2006, 2005 and 2004
|
|
|
F-7
|
|
|
Notes
to the Consolidated Financial Statements
|
|
F-8
to F-28
|
|
2. Schedules
– None
3. Exhibits
|
Exhibit
Number
|
Description of
Document
|
|
2.1
|
Agreement
and Plan of Merger, dated March 28, 2004, by and among Lyondell Chemical
Company, the Registrant and Millennium Subsidiary LLC
(9)
|
|
2.2
|
Sale
and Purchase Agreement, dated as of February 23, 2007, by and between
Millennium Worldwide Holdings I Inc., Millennium US Op Co, LLC, and The
National Titanium Dioxide Co. Ltd. (Cristal) and, for the limited purposes
set forth therein, Lyondell Chemical Company (14)
|
|
3.1
|
Restated
Certificate of Incorporation of the Registrant (10)
|
|
3.2
|
Amended
and Restated By-laws of the Registrant (11)
|
|
4.1
|
Indenture,
dated as of November 27, 1996, among Millennium America Inc. (formerly
named Hanson America Inc.), the Registrant and The Bank of New York, as
Trustee, in respect to the 7.625% Senior Debentures due November 15, 2026
(2)
|
|
4.1(a)
|
First
Supplemental Indenture dated as of November 21, 1997 among Millennium
America Inc., the Registrant and The Bank of New York, as Trustee
(5)
|
|
4.2
|
Senior
Secured Credit Agreement dated as of December 20, 2007
(16)
|
|
4.3
|
Interim
Loan Credit Agreement dated as of December 20, 2007
(16)
|
|
4.4
|
Indenture
dated as of August 10, 2005 among Nell AF S.A.R., the guarantors named
therein, The Bank of New York, as Trustee, Registrar, Paying Agent,
Transfer Agent and Listing Agent, ABN AMRO Bank N.V., as Security Agent,
and AIB/BNY Fund Management (Ireland) Limited, as Irish Paying Agent
(16)
|
|
4.4(a)
|
Supplemental
Indenture dated as of February 2, 2006 to the Indenture dated as of August
10, 2005 (16)
|
|
4.4(b)
|
Second
Supplemental Indenture dated as of May 22, 2007 to the Indenture dated as
of August 10, 2005 (16)
|
|
4.4(c)
|
Third
Supplemental Indenture dated as of July 26, 2007 to the Indenture dated as
of August 10, 2005 (16)
|
|
4.4(d)
|
Fourth
Supplemental Indenture dated as of December 20, 2007 to the Indenture
dated as of August 10, 2005
(16)
|
|
4.5
|
Senior
Secured Inventory-Based Credit Agreement dated as of December 20, 2007
(16)
|
|
4.6
|
Security
Agreement dated as of December 20, 2007 (16)
|
|
4.7
|
Subsidiary
Guaranty dated as of December 20, 2007 (16)
|
|
4.8
|
Intercreditor
Agreement dated as of December 20, 2007 (16)
|
|
4.9
|
Intercreditor
Agreement dated as of December 20, 2007 (16)
|
|
|
|
|
10.1
|
Indemnification
Agreement, dated as of September 30, 1996, between Hanson and the
Registrant (1)
|
|
10.2
|
Tax
Sharing and Indemnification Agreement, dated as of September 30, 1996,
between Hanson, Millennium Overseas Holdings Ltd., Millennium America
Holdings Inc. (formerly HM Anglo American Ltd.), Hanson North America Inc.
and the Registrant (1)
|
|
10.3
|
Deed
of Tax Covenant, dated as of September 30, 1996, between Hanson,
Millennium Overseas Holdings Ltd., Millennium Inorganic Chemicals Limited
(formerly SCM Chemicals Limited), SCMC Holdings B.V. (formerly Hanson SCMC
B.V.), Millennium Inorganic Chemicals Ltd. (formerly SCM Chemicals Ltd.),
and the Registrant (the “Deed of Tax Covenant”) (1)
|
|
10.3(a)
|
Amendment
to the Deed of Tax Covenant dated January 28, 1997 (3)
|
|
10.4
|
Asset
Contribution Agreement (the “Millennium Asset Contribution Agreement”)
among Millennium Petrochemicals, Millennium Petrochemicals LP LLC and
Equistar Chemicals, LP (4)
|
|
10.4(a)
|
First
Amendment to the Millennium Asset Contribution Agreement dated as of May
15, 1998 (6)
|
|
10.4(b)
|
Second
Amendment to the Millennium Asset Contribution Agreement among the
Registrant, Millennium Petrochemicals LP LLC, and Equistar Chemicals, LP
(7)
|
|
10.5
|
Amended
and Restated Parent Agreement among Lyondell Chemical Company, the
Registrant and Equistar Chemicals, LP, dated as of November 6, 2002
(8)
|
|
10.7
|
Amended
and Restated Partnership Agreement of Equistar (15)
|
|
10.8
|
Indemnity
|
|
10.9
|
Indenture
dated as of January 29, 1996, as supplemented by a First Supplemental
Indenture dated as of February 15, 1996, between Lyondell Chemical Company
and Texas Commerce Bank, as Trustee (12)
|
|
10.9(a)
|
Second
Supplemental Indenture dated as of December 1, 1997 among Lyondell
Chemical Company, Equistar Chemicals, LP and Texas Commerce Bank National
Association (13)
|
|
10.9(b)
|
Third
Supplemental Indenture dated as of November 3, 2000 among Lyondell
Chemical Company, Equistar Chemicals, LP and The Chase Manhattan Bank
(13)
|
|
10.9(c)
|
Fourth
Supplemental Indenture dated as of November 17, 2000 among Lyondell
Chemical Company, Equistar Chemicals, LP and The Chase Manhattan Bank
(13)
|
|
|
|
|
12
|
Statement
Setting Forth Detail for Computation of Ratio of Earnings to Fixed
Charges
|
|
31.1
|
Rule
13a – 14(a)/15d – 14(a) Certification of Principal Executive
Officer
|
|
31.2
|
Rule
13a – 14(a)/15d – 14(a) Certification of Principal Financial
Officer
|
|
32.1
|
Section
1350 Certification of Principal Executive Officer
|
|
32.2
|
Section
1350 Certification of Principal Financial
Officer
|
|
(1)
|
Filed
as an exhibit to the Registrant’s Registration Statement on Form 10 (No.
1-12091) and incorporated herein by reference.
|
|
(2)
|
Filed
as an exhibit to the Registrant’s Registration Statement on Form S-1 (No.
333-15975) and incorporated herein by reference.
|
|
(3)
|
Filed
as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by
reference.
|
|
(4)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated as of
December 10, 1997 and incorporated herein by reference.
|
|
(5)
|
Filed
as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by
reference.
|
|
(6)
|
Filed
as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by
reference.
|
|
(7)
|
Filed
as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001 and incorporated herein by
reference.
|
|
(8)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated as of
November 26, 2002 and incorporated herein by
reference.
|
|
(9)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated as of
March 28, 2004 and incorporated herein by reference.
|
|
(10)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated as of
November 30, 2004 and incorporated herein by reference.
|
|
(11)
|
Filed
as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2004 and incorporated herein by
reference.
|
|
(12)
|
Filed
as an exhibit to the Equistar Chemical LP’s Registration Statement on Form
S-4 (No. 333-76473) and incorporated herein by
reference.
|
|
(13)
|
Filed
as an exhibit to the Equistar Chemical LP’s Annual Report on Form 10-K for
the year ended December 31, 2000 and incorporated herein by
reference.
|
|
(14)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated as of
February 21, 2007 and incorporated herein by reference.
|
|
(15)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated as of
December 19, 2007 and incorporated herein by reference.
|
|
(16)
|
Filed
as an exhibit to Lyondell Chemical Company’s Annual Report on Form 10-K
for the year ended December 31, 2007 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
Consolidated Financial
Statements filed as part of this Annual Report on Form 10-K are listed in the
Index to Financial Statements on page 56.
(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.
The
management of Equistar is responsible for establishing and maintaining adequate
internal control over financial reporting. Equistar’s internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting in accordance with generally
accepted accounting principles.
Equistar
management assessed the effectiveness of Equistar’s internal control over
financial reporting as of December 31, 2007. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal
Control—Integrated Framework. Based on its assessment,
Equistar’s management has concluded that Equistar’s internal control over
financial reporting was effective as of December 31, 2007 based on those
criteria.
The
effectiveness of Equistar’s internal control over financial reporting as of
December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears
herein.
To
the Partnership Governance Committee and Partners
of
Equistar Chemicals, LP
In
our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income, of partners' capital and cash flows present
fairly, in all material respects, the financial position of Equistar Chemicals,
LP and its subsidiaries at December 31, 2007,
and the results of their operations and their cash flows for the period from
December 21, 2007 to December 31, 2007 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2007, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Management's Report on Internal Control over Financial
Reporting. Our responsibility is to express opinions on these
financial statements and on the Company's internal control over financial
reporting based on our integrated audit. We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audit of the financial statements included 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. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for
our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Houston,
Texas
March 27,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Partnership Governance Committee and Partners
of
Equistar Chemicals, LP
In
our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of partners’ capital and cash flows present
fairly, in all material respects, the financial position of Equistar Chemicals,
LP and its subsidiaries at December 31, 2006,
and the results of their operations and their cash flows for the period
January 1, 2007 to December 20, 2007, and the years ended December 31,
2006 and 2005 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company’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 the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, 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, the Company
changed the manner in which it accounts for defined benefit pension and other
postretirement plans in 2006.
/s/PricewaterhouseCoopers
LLP
Houston,
Texas
March
27, 2008
EQUISTAR
CHEMICALS, LP
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
For
the
period
from
December 21
through
December 31,
|
|
|
For
the
period
from
January 1
through
December 20,
|
|
|
For
the year ended December 31,
|
|
|
Millions
of dollars
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Sales
and other operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$ |
342 |
|
|
$ |
9,451 |
|
|
$ |
9,636 |
|
|
$ |
8,732 |
|
|
Related
parties
|
|
|
115 |
|
|
|
3,586 |
|
|
|
3,129 |
|
|
|
2,954 |
|
|
|
|
|
457 |
|
|
|
13,037 |
|
|
|
12,765 |
|
|
|
11,686 |
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
495 |
|
|
|
12,656 |
|
|
|
11,562 |
|
|
|
10,487 |
|
|
Asset
impairment
|
|
|
-
- |
|
|
|
-
- |
|
|
|
135 |
|
|
|
-
- |
|
|
Selling,
general and administrative expenses
|
|
|
6 |
|
|
|
263 |
|
|
|
210 |
|
|
|
198 |
|
|
Research
and development expenses
|
|
|
-
- |
|
|
|
37 |
|
|
|
34 |
|
|
|
33 |
|
|
Purchased
in-process research and
development
|
|
|
22 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
|
|
523 |
|
|
|
12,956 |
|
|
|
11,941 |
|
|
|
10,718 |
|
|
Operating
income (loss)
|
|
|
(66 |
) |
|
|
81 |
|
|
|
824 |
|
|
|
968 |
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(1 |
) |
|
|
(180 |
) |
|
|
(217 |
) |
|
|
(227 |
) |
|
Related
party
|
|
|
-
- |
|
|
|
(16 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
Interest
income
|
|
|
2 |
|
|
|
6 |
|
|
|
7 |
|
|
|
9 |
|
|
Other
expense, net
|
|
|
-
- |
|
|
|
(107 |
) |
|
|
-
- |
|
|
|
(2 |
) |
|
Income
(loss) before interest on
push-down
debt
|
|
|
(65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense on push-down debt
|
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(122 |
) |
|
$ |
(216 |
) |
|
$ |
614 |
|
|
$ |
748 |
|
See
Notes to the Consolidated Financial Statements.
EQUISTAR
CHEMICALS, LP
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Millions
of dollars
|
|
December
31,
2007
|
|
|
December
31,
2006
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
60 |
|
|
$ |
133 |
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
|
|
Trade,
net
|
|
|
95 |
|
|
|
890 |
|
|
Related
parties
|
|
|
43 |
|
|
|
277 |
|
|
Inventories
|
|
|
1,754 |
|
|
|
809 |
|
|
Prepaid
expenses and other current assets
|
|
|
60 |
|
|
|
49 |
|
|
Total
current assets
|
|
|
2,012 |
|
|
|
2,158 |
|
|
Property,
plant and equipment, net
|
|
|
5,116 |
|
|
|
2,846 |
|
|
Notes
receivable from related party
|
|
|
785 |
|
|
|
-
- |
|
|
Investments
|
|
|
65 |
|
|
|
59 |
|
|
Intangible
assets, net:
|
|
|
|
|
|
|
|
|
|
Debt
issuance costs on push-down debt
|
|
|
334 |
|
|
|
-
- |
|
|
Intangible
assets of Equistar
|
|
|
998 |
|
|
|
285 |
|
|
Goodwill
|
|
|
750 |
|
|
|
-
- |
|
|
Other
assets, net
|
|
|
12 |
|
|
|
11 |
|
|
Total
assets
|
|
$ |
10,072 |
|
|
$ |
5,359 |
|
|
LIABILITIES
AND PARTNERS’ CAPITAL
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt:
|
|
|
|
|
|
|
|
|
|
Push-down
debt
|
|
$ |
146 |
|
|
$ |
- - |
|
|
Debt
of Equistar
|
|
|
27 |
|
|
|
-
- |
|
|
Related
party borrowings – push-down
|
|
|
717 |
|
|
|
-
- |
|
|
Accounts
payable:
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
975 |
|
|
|
731 |
|
|
Related
parties
|
|
|
191 |
|
|
|
174 |
|
|
Accrued
liabilities
|
|
|
295 |
|
|
|
312 |
|
|
Notes
payable to related party
|
|
|
80 |
|
|
|
-
- |
|
|
Total
current liabilities
|
|
|
2,431 |
|
|
|
1,217 |
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
Push-down
debt
|
|
|
16,829 |
|
|
|
-
- |
|
|
Debt
of Equistar
|
|
|
129 |
|
|
|
2,160 |
|
|
Other
liabilities and deferred revenues
|
|
|
295 |
|
|
|
378 |
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Partners’
capital:
|
|
|
|
|
|
|
|
|
|
Partners’
accounts
|
|
|
7,746 |
|
|
|
1,642 |
|
|
Push-down
debt
|
|
|
(17,358 |
) |
|
|
-
- |
|
|
Accumulated
other comprehensive loss
|
|
|
-
- |
|
|
|
(38 |
) |
|
Total
partners’ capital (deficit)
|
|
|
(9,612 |
) |
|
|
1,604 |
|
|
Total
liabilities and partners’ capital
|
|
$ |
10,072 |
|
|
$ |
5,359 |
|
See
Notes to the Consolidated Financial Statements.
EQUISTAR
CHEMICALS, LP
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
For
the
period
from
December
21
through
December
31,
|
|
|
For
the
period
from
January
1,
through
December
20,
|
|
|
For
the year ended
December
31,
|
|
|
Millions
of dollars
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(122 |
) |
|
$ |
(216 |
) |
|
$ |
614 |
|
|
$ |
748 |
|
|
Adjustments
to reconcile net income (loss) to
net
cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Push-down
debt interest
|
|
|
57 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Depreciation
and amortization
|
|
|
17 |
|
|
|
315 |
|
|
|
324 |
|
|
|
322 |
|
|
Asset
impairment
|
|
|
-
- |
|
|
|
-
- |
|
|
|
135 |
|
|
|
-
- |
|
|
Deferred
maintenance turnaround
expenditures
|
|
|
-
- |
|
|
|
(66 |
) |
|
|
(12 |
) |
|
|
(51 |
) |
|
Purchased
in-process research
and
development
|
|
|
22 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Debt
prepayment premiums and charges
|
|
|
-
- |
|
|
|
109 |
|
|
|
-
- |
|
|
|
-
- |
|
|
Changes
in assets and liabilities that provided (used) cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
-
- |
|
|
|
288 |
|
|
|
(243 |
) |
|
|
(96 |
) |
|
Inventories
|
|
|
34 |
|
|
|
(4 |
) |
|
|
(156 |
) |
|
|
(69 |
) |
|
Accounts
payable
|
|
|
(23 |
) |
|
|
284 |
|
|
|
168 |
|
|
|
197 |
|
|
Other,
net
|
|
|
(44 |
) |
|
|
(49 |
) |
|
|
(23 |
) |
|
|
(4 |
) |
|
Net
cash provided by
(used
in) operating activities
|
|
|
(59 |
) |
|
|
661 |
|
|
|
807 |
|
|
|
1,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for property, plant and equipment
|
|
|
(12 |
) |
|
|
(228 |
) |
|
|
(168 |
) |
|
|
(153 |
) |
|
Notes
receivable from related parties
|
|
|
-
- |
|
|
|
(44 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
Other
|
|
|
-
- |
|
|
|
8 |
|
|
|
2 |
|
|
|
3 |
|
|
Net
cash used in investing activities
|
|
|
(12 |
) |
|
|
(264 |
) |
|
|
(166 |
) |
|
|
(150 |
) |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
|
(4 |
) |
|
|
(2,071 |
) |
|
|
(150 |
) |
|
|
(1 |
) |
|
Payment
of debt issuance costs
|
|
|
-
- |
|
|
|
(7 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
Contributions
from owners
|
|
|
-
- |
|
|
|
1,703 |
|
|
|
-
- |
|
|
|
-
- |
|
|
Distribution
to owners
|
|
|
-
- |
|
|
|
(100 |
) |
|
|
(575 |
) |
|
|
(725 |
) |
|
Net
proceeds from notes payable to related
party
|
|
|
-
- |
|
|
|
80 |
|
|
|
-
- |
|
|
|
-
- |
|
|
Other
|
|
|
(11 |
) |
|
|
11 |
|
|
|
2 |
|
|
|
5 |
|
|
Net
cash used in financing activities
|
|
|
(15 |
) |
|
|
(384 |
) |
|
|
(723 |
) |
|
|
(721 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(86 |
) |
|
|
13 |
|
|
|
(82 |
) |
|
|
176 |
|
|
Cash
and cash equivalents at beginning of period
|
|
|
146 |
|
|
|
133 |
|
|
|
215 |
|
|
|
39 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
60 |
|
|
$ |
146 |
|
|
$ |
133 |
|
|
$ |
215 |
|
See
Notes to the Consolidated Financial Statements.
EQUISTAR
CHEMICALS, LP
|
Millions
of dollars
|
|
Lyondell
|
|
|
Millennium
|
|
|
Total
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
|
Push
down
of
Parent
Debt
|
|
|
Net
Partners’
Capital
|
|
|
Comprehensive
Income
(Loss)
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1,
2005
|
|
$ |
642 |
|
|
$ |
938 |
|
|
$ |
1,580 |
|
|
$ |
(19 |
) |
|
$ |
- - |
|
|
$ |
1,561 |
|
|
|
|
|
Net
income
|
|
|
527 |
|
|
|
221 |
|
|
|
748 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
748 |
|
|
$ |
748 |
|
|
Other
comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
1 |
|
|
|
-
- |
|
|
|
1 |
|
|
|
1 |
|
|
Derivative
instruments
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(2 |
) |
|
|
-
- |
|
|
|
(2 |
) |
|
|
(2 |
) |
|
Distributions
to partners
|
|
|
(511 |
) |
|
|
(214 |
) |
|
|
(725 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
|
(725 |
) |
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
747 |
|
|
Balance
at December 31,
2005
|
|
$ |
658 |
|
|
$ |
945 |
|
|
$ |
1,603 |
|
|
$ |
(20 |
) |
|
$ |
- - |
|
|
$ |
1,583 |
|
|
|
|
|
|
Net
income
|
|
|
433 |
|
|
|
181 |
|
|
|
614 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
614 |
|
|
$ |
614 |
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
5 |
|
|
|
-
- |
|
|
|
5 |
|
|
|
5 |
|
|
Change
in accounting for
pension
and other
postretirement
benefits
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(23 |
) |
|
|
-
- |
|
|
|
(23 |
) |
|
|
-
- |
|
|
Distributions
to partners
|
|
|
(405 |
) |
|
|
(170 |
) |
|
|
(575 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
|
(575 |
) |
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
619 |
|
|
Balance
at December 31, 2006
|
|
$ |
686 |
|
|
$ |
956 |
|
|
$ |
1,642 |
|
|
$ |
(38 |
) |
|
$ |
- - |
|
|
$ |
1,604 |
|
|
|
|
|
|
Net
loss
|
|
|
(152 |
) |
|
|
(64 |
) |
|
|
(216 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
|
(216 |
) |
|
$ |
(216 |
) |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
and other postretirement benefits
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
2 |
|
|
|
-
- |
|
|
|
2 |
|
|
|
-
- |
|
|
Contributions
from partners
|
|
|
1,703 |
|
|
|
-
- |
|
|
|
1,703 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
1,703 |
|
|
|
-
- |
|
|
Distributions
to partners
|
|
|
(70 |
) |
|
|
(30 |
) |
|
|
(100 |
) |
|
|
-
- |
|
|
|
-
- |
|
|
|
(100 |
) |
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(216 |
) |
|
Balance
at December 20, 2007
|
|
$ |
2,167 |
|
|
$ |
862 |
|
|
$ |
3,029 |
|
|
$ |
(36 |
) |
|
$ |
- - |
|
|
$ |
2,993 |
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
6,144 |
|
|
$ |
1,667 |
|
|
$ |
7,811 |
|
|
$ |
- - |
|
|
$ |
- - |
|
|
$ |
7,811 |
|
|
|
|
|
|
Effects
of push-down debt
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(17,301 |
) |
|
|
(17,301 |
) |
|
$ |
- - |
|
|
Net
loss
|
|
|
(51 |
) |
|
|
(14 |
) |
|
|
(65 |
) |
|
|
-
- |
|
|
|
(57 |
) |
|
|
(122 |
) |
|
|
(122 |
) |
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(122 |
) |
|
Balance
at December 31, 2007
|
|
$ |
6,093 |
|
|
$ |
1,653 |
|
|
$ |
7,746 |
|
|
$ |
- - |
|
|
$ |
(17,358 |
) |
|
$ |
(9,612 |
) |
|
|
|
|
See
Notes to the Consolidated Financial Statements.
EQUISTAR
CHEMICALS, LP
TABLE
OF CONTENTS
|
|
Page
|
|
1.
|
|
F-9
|
|
2.
|
|
F-10
|
|
3.
|
|
F-12
|
|
4.
|
|
F-14
|
|
5.
|
|
F-14
|
|
6.
|
|
F-14
|
|
7.
|
|
F-18
|
|
8.
|
|
F-18
|
|
9.
|
|
F-19
|
|
10.
|
|
F-21
|
|
11.
|
|
F-21
|
|
12.
|
|
F-21
|
|
13.
|
|
F-22
|
|
14.
|
|
F-24
|
|
15.
|
|
F-24
|
|
16.
|
|
F-25
|
|
17.
|
|
F-30
|
|
18.
|
|
F-31
|
|
19.
|
|
F-31
|
|
20.
|
|
F-32
|
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Equistar
Chemicals, LP together with its consolidated subsidiaries (collectively,
“Equistar” or “the Partnership”), manufactures and markets ethylene and its
co-products, primarily propylene, butadiene and aromatics. Equistar
also manufactures and markets fuel products and ethylene derivatives, primarily
ethylene oxide, ethylene glycol and polyethylene. The consolidated
financial statements include the accounts of Equistar and its
subsidiaries.
Equistar
became an indirect wholly owned subsidiary of Lyondell Chemical Company
(together with its consolidated subsidiaries, “Lyondell”) as a result of
Lyondell’s acquisition of Millennium in 2004. Prior to
December 20, 2007, Equistar was owned 70.5% by Lyondell and 29.5% by
Millennium Chemicals Inc. (together with its consolidated subsidiaries,
“Millennium”). On December 20, 2007, LyondellBasell Industries AF
S.C.A. (formerly known as Basell AF S.C.A.) indirectly acquired all of the
shares of Lyondell common stock. As a result, Lyondell and Equistar
both became indirect wholly owned subsidiaries of LyondellBasell Industries AF
S.C.A. (together with its consolidated subsidiaries, “LyondellBasell Industries”
and without Lyondell, the “Basell Group”). As part of the
acquisition, Lyondell made a contribution to Equistar of $1,703 million,
which was used to repay certain Equistar debt (see Note 13), resulting in an
increase of Lyondell’s direct ownership interest to 79% and a corresponding
decrease in Millennium’s ownership interest to 21%.
As
a result of the acquisition of Lyondell by LyondellBasell Industries on December
20, 2007, Equistar’s assets and liabilities were revalued to reflect the values
assigned in LyondellBasell Industries’ accounting for the purchase of Lyondell,
resulting in a new basis of accounting. In addition, Equistar has
recognized in its financial statements $17,692 million of debt for which it
is not the primary obligor, but which it has guaranteed, and which was used in
the acquisition by LyondellBasell Industries in the acquisition of Lyondell
(“push-down debt”), and $340 million of related debt issuance
costs.
In Staff Accounting Bulletin (“SAB”), Topic 5J,
Push Down
Basis of Accounting Required in Certain Limited Circumstances, the
Securities and Exchange Commission requires, among other things, that, in
situations where debt is used to acquire substantially all of an acquiree’s
common stock and the acquiree guarantees the debt or pledges its assets as
collateral for the debt, the debt and related interest expense and debt issuance
costs be reflected in, or “pushed down” to, the acquiree’s financial
statements. Equistar guarantees $17,692 million of debt, but
under which Equistar is not the primary obligor.
Although
this presentation may not reflect the likely future demands on Equistar
resources for servicing the debt of LyondellBasell Industries, it provides an
indication of that financial position after considering the maximum possible
demand on Equistar resources relating to the debt of LyondellBasell
Industries. To facilitate an understanding of the impact on these
consolidated financial statements, the effects of push-down debt are
segregated.
The
consolidated statements of income for the 11-day period subsequent to the
acquisition reflect depreciation and amortization expense based on the new value
of the related assets and interest expense on push-down debt; therefore, the
financial information for the periods prior to and subsequent to the acquisition
is not generally comparable. To indicate the application of a
different basis of accounting for the period subsequent to the acquisition, the
2007 financial statements and certain notes to the consolidated financial
statements present separately the period prior to the acquisition
(“Predecessor”) and the 11-day period after the acquisition
(“Successor”). If not so indicated, information in the notes to the
consolidated financial statements is presented on a full year
basis.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue
Recognition—Revenue from product sales is recognized at the time of
transfer of title and risk of loss to the customer, which usually occurs at the
time of shipment. Revenue is recognized at the time of delivery if
Equistar retains the risk of loss during shipment. For products that
are shipped on a consignment basis, revenue is recognized when the customer uses
the product. Costs incurred in shipping products sold are included in
cost of sales. Billings to customers for shipping costs are included
in sales revenue.
Cash and Cash
Equivalents—Cash equivalents consist of highly liquid debt instruments
such as certificates of deposit, commercial paper and money market
accounts. Cash equivalents include instruments 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. Equistar 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.
Allowance for
Doubtful Accounts—Equistar establishes provisions for doubtful accounts
receivable based on management’s estimates of amounts that it believes are
unlikely to be collected. Collectability of receivables is reviewed
and the allowance for doubtful accounts is adjusted at least quarterly, based on
aging of specific accounts and other available information about the associated
customers.
Inventories—Inventories
are stated at the lower of cost or market. Cost is determined using
the last-in, first-out (“LIFO”) method for substantially all inventories, 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 LIFO valuation policy.
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, 5 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 asset and the related accumulated depreciation from the accounts and
reflects any resulting gain or loss 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.
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.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2. Summary
of Significant Accounting Policies – (Continued)
Goodwill—Goodwill
represents the excess of the purchase price allocated by LyondellBasell
Industries to Equistar over the fair value assigned to the net tangible and
intangible assets of Equistar. Goodwill is reviewed for impairment at
least annually.
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.
Costs
of maintenance and repairs exceeding $5 million incurred as part of 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, predominantly 4 to 7 years. These costs are necessary to
maintain, extend and improve the operating capacity and efficiency rates of the
production units.
Other
intangible assets are carried at cost or amortized cost and primarily consist of
emission credits, various contracts, and technology, patents and license
costs. These assets are amortized using the straight-line method over
their estimated useful lives or over the term of the related agreement, if
shorter.
Environmental
Remediation Costs—Anticipated expenditures related to investigation and
remediation of contaminated sites, which include current and former plant sites
and other remediation sites, are accrued when it is probable that a liability
has been incurred and the amount of the liability can be reasonably
estimated. Only ongoing operating and monitoring costs, the timing of
which can be determined with reasonable certainty, are discounted to present
value. Future legal costs associated with such matters, which
generally are not estimable, are not included in these
liabilities.
Legal
Costs—Equistar expenses legal costs, including those incurred in
connection with loss contingencies, as
incurred.
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 periods. Actual results could differ from those
estimates.
Reclassifications—Certain
previously reported amounts have been reclassified to conform to classifications
adopted in 2006.
Accounting and
Reporting Changes—In December 2007, the Financial Accounting Standards
Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.
160, Noncontrolling
Interests in Consolidated Financial Statements – an amendment to ARB No.
51, which establishes new accounting and disclosure requirements for
noncontrolling, or minority, interests, including their classification as a
separate component of equity and the adjustment of net income to include amounts
attributable to minority interests. SFAS No. 160 also
establishes new accounting standards requiring recognition of a gain or loss
upon deconsolidation of a subsidiary. SFAS No. 160 will be effective
for Equistar beginning in 2009, with earlier application
prohibited.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2. Summary
of Significant Accounting Policies – (Continued)
Also
in December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations, which requires an acquiring entity to recognize
all assets acquired and liabilities assumed in a transaction at the
acquisition-date at fair value with limited exceptions. SFAS No. 141
(revised 2007) will change the accounting treatment for certain specific items,
including: expensing of most acquisition and restructuring costs; recording
acquired contingent liabilities, in-process research and development and
noncontrolling, or minority, interests at fair value; and recognizing changes in
income tax valuations and uncertainties after the acquisition date as income tax
expense. SFAS No. 141 (revised 2007) also includes new
disclosure requirements. For Equistar, SFAS No. 141 (revised
2007) will apply to business combinations with acquisition dates beginning in
2009. Earlier adoption is prohibited.
Although
certain past transactions, including the acquisition of Lyondell by
LyondellBasell Industries, would have been accounted for differently under SFAS
No. 160 and SFAS No. 141 (revised 2007), application of these statements in 2009
will not affect historical amounts.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No. 115, which permits election of fair value to
measure many financial instruments and certain other items. SFAS No.
159 is effective for Equistar beginning in 2008. Equistar does not
expect the application of SFAS No. 159 to have a material effect on its
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. The new standard defines fair value, establishes
a framework for its measurement and expands disclosures about such
measurements. In February 2008, the FASB issued FASB Staff Position
FAS 157-2, delaying the effective date of SFAS No. 157 for nonfinancial
assets and nonfinancial liabilities. The effective date for Equistar
would be at the beginning of 2009. Equistar is currently evaluating
the effect of SFAS No. 157 on its consolidated financial
statements.
Effective
December 31, 2006, Equistar adopted the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans-An
Amendment of FASB Statements No. 87, 88, 106, and 132R, which primarily
requires an employer to recognize in its statement of financial position an
asset for a plan’s overfunded status or a liability for a plan’s underfunded
status through comprehensive income in the year in which changes
occur. Equistar’s application of SFAS No. 158 as of December 31,
2006 resulted in increases of $6 million and $8 million in its current
and long-term benefit liabilities, respectively, a decrease of $9 million
in other assets and an increase of $23 million in accumulated other
comprehensive loss in its consolidated balance sheet as of December 31, 2006
(see Note 16).
On
December 20, 2007, LyondellBasell Industries indirectly acquired the outstanding
common shares of Lyondell and, as a result, Lyondell and Equistar became
indirect wholly owned subsidiaries of LyondellBasell Industries.
From
December 20, 2007, Equistar’s consolidated financial statements reflect a
revaluation of Equistar’s assets and liabilities, to reflect the values assigned
in LyondellBasell Industries’ accounting for the purchase of
Lyondell. In addition, Equistar recognized in its financial
statements $17,692 million of push-down debt for which it is not the
primary obligor and $340 million of related debt issuance
costs.
The
following table reflects the preliminary adjustments to Equistar’s assets and
liabilities as of December 31, 2007, resulting from the $7,811 million
purchase price allocated by LyondellBasell Industries to Equistar.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
3. Acquisition
of Lyondell by LyondellBasell Industries – (Continued)
|
Millions
of dollars
|
|
|
|
|
Allocated
purchase price
|
|
$ |
7,811 |
|
|
Book
value of Equistar net assets acquired
|
|
|
2,993 |
|
|
Excess
purchase price to allocate
|
|
|
4,818 |
|
|
|
|
|
|
|
|
Allocation
of excess purchase price to assets and liabilities:
|
|
|
|
|
|
Inventories
|
|
|
975 |
|
|
Plant,
property and equipment
|
|
|
2,288 |
|
|
Investments
and joint ventures
|
|
|
13 |
|
|
Other
identifiable intangibles
|
|
|
703 |
|
|
Purchased
in-process research and development
|
|
|
22 |
|
|
Other,
net
|
|
|
67 |
|
|
Goodwill
|
|
$ |
750 |
|
The
purchase price allocation used in the preparation of these financial statements
is preliminary due to the continuing analyses relating to the determination of
the fair values of the assets acquired and liabilities assumed. Any
changes to the fair value of net assets acquired, based on information as of the
acquisition date, would result in an adjustment to the fair value of the assets
acquired and liabilities assumed and a corresponding adjustment to
goodwill. Management does not expect the finalization of these
matters to have a material effect on the allocation.
Approximately
$22 million, or less than 1% of the allocated purchase price was assigned
to Equistar’s in-process research and development (“IPR&D”). The
estimated fair value of IPR&D was developed using probable discounted cash
flows on a project-by-project basis. The activities represented by
these projects will be continued by Equistar, and the values assigned represent
intangibles with no alternative future use. Accordingly, Equistar’s
results of operations in the Successor period included a charge of
$22 million for the value of the acquired IPR&D.
Equistar
has completed a preliminary assignment of the goodwill to reportable
segments. Goodwill of $500 million was assigned to the chemicals
segment and $250 million was assigned to the polymers
segment. Management does not expect the finalization of the purchase
price allocation to have a material effect on the assignment of goodwill to
reportable segments.
The
following unaudited pro forma historical results of Equistar assume the
acquisition was consummated as of the beginning of each period
presented:
|
Millions
of dollars
|
|
For
the
period
from
January 1
through
December 20,
2007
|
|
|
For
the year
ended
December 31,
2006
|
|
|
Sales
and other operating revenues
|
|
$ |
13,037 |
|
|
$ |
12,765 |
|
|
Operating
income (loss)
|
|
|
(67 |
) |
|
|
583 |
|
|
Net
loss
|
|
|
(1,880 |
) |
|
|
(1,262 |
) |
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
3. Acquisition
of Lyondell by LyondellBasell Industries – (Continued)
The
above pro forma results include a $22 million after-tax charge for
purchased in-process research and development and approximately
$1.6 billion of interest related to push-down debt in each
period. The unaudited pro forma data do not include the charges of
$109 million related to debt refinancing in the 2007 Predecessor
period.
The
unaudited pro forma data presented above are not necessarily indicative of the
results of operations of Equistar that would have occurred had the transaction
actually been consummated as of the beginning of the respective periods, nor are
they necessarily indicative of future results.
Equistar’s
2006 earnings reflect a charge of $135 million for impairment of the net book
value of its idled Lake Charles, Louisiana ethylene facility. In the
third quarter of 2006, Equistar undertook a study of the feasibility, cost and
time required to restart the Lake Charles ethylene facility. As a
result, management determined that restarting the facility would not be
justified. The remaining net book value of the related assets of $10
million represents an estimate, based on probabilities, of alternative-use
value. Equistar does not expect to incur any significant future costs
with respect to the facility.
During
2005, two major hurricanes impacted the chemical and related industries in the
coastal and off-shore regions of the Gulf of Mexico. Net income in
2005 reflected charges totaling $28 million representing Equistar’s
exposure to industry losses expected to be underwritten by industry insurance
consortia, primarily resulting from hurricane damages.
As
a result of Hurricane Rita, Equistar also incurred various costs that are
subject to insurance reimbursements. Such costs include those
incurred in conjunction with suspending operations at substantially all of its
Gulf Coast plants, minor damage to facilities, and costs to restore
operations. Net income in 2005 included $19 million of such
costs incurred by Equistar, of which all but a $5 million deductible under
the relevant insurance policies are subject to reimbursement through
insurance. Equistar recognized benefits from insurance reimbursements
related to its plants of $1 million in 2006. There were no such
reimbursements in 2007 and 2005.
As
a result of the July 16, 2007 agreement and plan of merger between Basell
and Lyondell, Equistar began reporting transactions, including sales of product,
with the Basell Group as related party transactions beginning with the third
quarter 2007 (see Note 3). Equistar also conducts transactions with
Lyondell and Occidental Petroleum Corporation (together with is subsidiaries and
affiliates, collectively “Occidental”), which was considered a related party
during the 2007 Predecessor period as a result of Occidental’s representation on
the Lyondell Board of Directors prior to December 20,
2007. Lyondell owns 100% of Houston Refining LP (formerly known as
LYONDELL-CITGO Refining LP) and Millennium. All of the above
companies are considered related parties of Equistar. In the
discussion of related party transactions below, Lyondell refers to Lyondell
Chemical Company and its wholly owned subsidiaries other than Houston Refining,
Millennium and Equistar and their respective subsidiaries.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Related
Party Transactions – (Continued)
Product
Transactions with the Basell Group—Equistar sells high density
polyethylene (“HDPE”) and low density polyethylene (“LDPE”) to the Basell Group
at market-related prices under an agreement that requires Equistar to sell up to
50,000 pounds of HDPE and LDPE per month. The initial term of the
contract expired March 31, 2006 and continues year to year thereafter
unless terminated by either party. Equistar also sells propylene to
the Basell Group at market-related prices under a multi-year
agreement.
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 methyl tertiary butyl ether (“MTBE”)
technology to Equistar, and purchases MTBE produced by Equistar at
market-related prices.
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 and it continues thereafter for one-year periods unless either
party serves notice of termination twelve months in
advance.
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, and 100% of its glacial acetic acid requirements at
market-related prices from Millennium for the production of glycol ether acetate
at its Bayport, Texas plant. The initial terms of these agreements
expired December 31, 2005 and continue year to year thereafter unless terminated
by either party.
Product
Transactions with Occidental—Equistar and Occidental, previously one of
the partners of Equistar, entered into an ethylene sales agreement on
May 15, 1998, which was amended effective April 1, 2004, pursuant to which
Occidental agreed to purchase a substantial amount of its ethylene raw material
requirements from Equistar. Either party has the option to “phase
down” volumes over time. However, a “phase down” cannot begin until
January 1, 2014 and the annual minimum requirements cannot decline to zero prior
to December 31, 2018, unless certain specified force majeure events
occur. In addition to the sales of ethylene, from time to time
Equistar has made sales of ethers and glycols to Occidental, and Equistar has
purchased various other products from Occidental, all at market-related
prices.
Product
Transactions with Houston Refining LP—Equistar has product sales and raw material purchase
agreements with Houston Refining, a wholly owned subsidiary of Lyondell as of
August 16, 2006. Certain ethylene co-products are sold by Equistar to
Houston Refining for processing into gasoline and certain refined products are
sold by Houston Refining to Equistar as raw materials. Equistar also
has processing and storage arrangements with Houston Refining and provides
certain marketing services for Houston Refining. All of the
agreements between Houston Refining and Equistar are on terms generally
representative of prevailing market prices. Subsequent to August 16,
2006, transactions between Equistar and Houston Refining are reported as related
party transactions of Lyondell.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Related
Party Transactions – (Continued)
Shared Services
Agreement with Lyondell—Under a shared services agreement, Lyondell
provides office space and various services to Equistar, including information
technology, sales and marketing, supply chain, and other administrative and
support services. 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 on behalf of Lyondell. In such cases, Equistar charges
Lyondell for its share of such costs.
Shared Services
and Shared-Site Agreements with Millennium—Equistar and Millennium
provide operating services, utilities and raw materials to each other at common
locations. Millennium and Equistar have various operating,
manufacturing and technical service agreements under which, Millennium bills
Equistar for certain operational services, including utilities, plant-related
transportation and other services, and Equistar bills Millennium for utilities
and fuel streams.
Lease
Agreements with Occidental—Equistar subleases certain railcars from
Occidental and leases its Lake Charles ethylene facility and the land related
thereto from Occidental. See Note 4 for additional information
related to the Lake Charles ethylene facility.
Notes
Receivable from Subsidiaries of Lyondell—On December 20, 2007 in
conjunction with the execution of Lyondell’s new $1,150 million Accounts
Receivable Securitization Facility (see Note 7), Equistar and a wholly owned,
bankruptcy-remote subsidiary of Lyondell entered into a receivables sales
agreement for the sale of substantially all of Equistar’s domestic accounts
receivable to Lyondell, a portion of which are then sold under the Lyondell
third party facility. Under the agreement, Equistar received a
subordinated note, the principal amount of which may vary based on the level of
Equistar’s accounts receivable sold to the Lyondell subsidiary, proceeds
received from such sales and any amount of interest capitalized. The
note, which matures one year and one day after the outstanding balance of
Equistar’s accounts receivable sold, has been reduced to zero, bears interest at
the alternate base rate, as defined. At the option of the Lyondell
subsidiary, the payment of interest, which is due one month in arrears, may be
deferred and added to the principal amount outstanding under the
note. The balance of the note outstanding at December 31, 2007
was $741 million.
Also
on December 20, 2007, Equistar and a subsidiary of Lyondell entered into a loan
agreement under which Equistar shall, at the request of the Lyondell subsidiary,
make advances up to and not exceeding $2,000 million
dollars. The loan, which bears interest at LIBOR plus 4%, matures in
2012. Accrued interest due and payable may, at the option of the
Lyondell subsidiary, be added to the outstanding principal amount of the
note. The balance of the note outstanding at December 31, 2007
was $44 million. It is anticipated that Equistar and Lyondell
will replace the loan agreement with a current account agreement for an
indefinite period, under which Equistar may deposit excess cash balances with
the Lyondell subsidiary and have access to uncommitted revolving lines of credit
in excess of deposits.
Notes Payable
to Millennium Chemicals
Inc.—In 2007, Equistar and Millennium entered into loan agreements
permitting Equistar to borrow up to $600 million from
Millennium. In connection with the acquisition of Lyondell by
LyondellBasell Industries (see Note 3), the maturity of the notes was extended
to February 16, 2008 from December 21, 2007, or earlier upon
demand. The notes bear interest, which is payable quarterly, at the
London Interbank Offered Rate ("LIBOR”) plus 1.75%. The balance of
the notes outstanding at December 31, 2007 was $80 million and was paid in
January 2008.
Related Party
Borrowings-Push-Down—As a result of the
acquisition of Lyondell by LyondellBasell Industries, on December 20, 2007
Equistar recorded related party borrowings under an unsecured current account
agreement of $717 million for which it is not a primary
obligor.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Related
Party Transactions – (Continued)
Related
party transactions are summarized as follows:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Millions
of dollars
|
|
For
the
period
from
December
21
through
December
31,
|
|
|
For
the
period
from
January
1
through
December
20,
|
|
|
For
the year ended December 31,
|
|
| |
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equistar
billed related parties for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of products and processing services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lyondell
|
|
$ |
54 |
|
|
$ |
1,741 |
|
|
$ |
1,467 |
|
|
$ |
1,202 |
|
|
Houston
Refining
|
|
|
30 |
|
|
|
968 |
|
|
|
842 |
|
|
|
944 |
|
|
Occidental
|
|
|
25 |
|
|
|
753 |
|
|
|
780 |
|
|
|
755 |
|
|
Millennium
|
|
|
4 |
|
|
|
93 |
|
|
|
40 |
|
|
|
53 |
|
|
Basell
Group
|
|
|
2 |
|
|
|
31 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shared
services and shared site agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millennium
|
|
|
1 |
|
|
|
25 |
|
|
|
16 |
|
|
|
27 |
|
|
Lyondell
|
|
|
-
- |
|
|
|
16 |
|
|
|
24 |
|
|
|
20 |
|
|
Houston
Refining
|
|
|
-
- |
|
|
|
-
- |
|
|
|
5 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
– Lyondell
|
|
|
2 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
parties billed Equistar for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Houston
Refining
|
|
$ |
39 |
|
|
$ |
970 |
|
|
$ |
928 |
|
|
$ |
394 |
|
|
Lyondell
|
|
|
15 |
|
|
|
411 |
|
|
|
352 |
|
|
|
307 |
|
|
Millennium
|
|
|
-
- |
|
|
|
10 |
|
|
|
9 |
|
|
|
8 |
|
|
Occidental
|
|
|
1 |
|
|
|
28 |
|
|
|
33 |
|
|
|
20 |
|
|
Basell
Group
|
|
|
-
- |
|
|
|
3 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shared
services, transition and lease agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lyondell
|
|
|
11 |
|
|
|
271 |
|
|
|
209 |
|
|
|
183 |
|
|
Millennium
|
|
|
-
- |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
Occidental
|
|
|
-
- |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
Houston
Refining
|
|
|
-
- |
|
|
|
-
- |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
- Millennium
|
|
|
-
- |
|
|
|
16 |
|
|
|
-
- |
|
|
|
-
- |
|
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Equistar
sells its products primarily to other chemical manufacturers in the
petrochemical industry. Equistar performs ongoing credit evaluations
of its customers’ financial condition and, in certain circumstances, requires
letters of credit from them.
Equistar’s
allowance for doubtful accounts receivable, which is reflected in the
Consolidated Balance Sheets as a reduction of accounts receivable, totaled $5
million at December 31, 2006. There was no allowance for doubtful
accounts receivable for the year ended December 31, 2007. The
Consolidated Statements of Income included provisions for doubtful accounts of
less than $1 million in each of 2007 and 2006. There were no
provisions for doubtful accounts receivable in 2005.
On
December 20, 2007, as part of the acquisition of Lyondell by LyondellBasell
Industries, Lyondell entered into a $1,150 million Accounts Receivable
Securitization Facility. Concurrently, Equistar entered into a
receivable sales agreement with Lyondell and terminated its $600 million
accounts receivable sales facility.
Pursuant
to the new receivables sales agreement, Equistar sells, on an ongoing basis and
without recourse, substantially all of its domestic accounts receivable to a
wholly owned bankruptcy-remote subsidiary of Lyondell. The payment
received for these sales may, at the option of Lyondell, be a combination of
cash and notes payable. A portion of the Equistar accounts
receivables sold under the facility with Lyondell may then be sold under
Lyondell’s $1,150 million Accounts Receivable Securitization
Facility.
Accounts
receivable in the Consolidated Balance Sheets are reduced by the outstanding
amount of accounts receivable sold to Lyondell. Increases and
decreases in the amounts sold are reflected in operating cash flows in the
Consolidated Statements of Cash Flows, representing collections of sales
revenue. Fees related to the sales are included in “Selling, general
and administrative expenses” in the Consolidated Statements of
Income.
At
December 31, 2007, the outstanding amount of receivables sold by Equistar to
Lyondell was $1,407 million for which Equistar received cash proceeds of $666
million and a note receivable from Lyondell for $741 million (see Note
6). At December 31, 2006, there were no outstanding receivables
sold under the previous facility.
Prior
to January 2006, discounts were offered to certain customers for early payment
for product. As a result, some receivable amounts were collected in
December 2005 that otherwise would have been expected to be collected in January
2006. This included collections of $84 million in December 2005
related to receivables from Occidental.
Inventories
consisted of the following components at December 31:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
Finished
goods
|
|
$ |
902 |
|
|
$ |
452 |
|
|
Work-in-process
|
|
|
40 |
|
|
|
14 |
|
|
Raw
materials
|
|
|
650 |
|
|
|
225 |
|
|
Materials
and supplies
|
|
|
162 |
|
|
|
118 |
|
|
Total
inventories
|
|
$ |
1,754 |
|
|
$ |
809 |
|
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
8. Inventories
– (Continued)
The
increase in inventory is primarily due to the revaluation of inventory at
December 31, 2007 to the values assigned in accounting for the acquisition
of Lyondell by LyondellBasell Industries.
At
December 31, 2007, approximately 95% of Equistar’s inventories, excluding
materials and supplies and in-transit inventory were valued using the LIFO
method.
The
excess of the current replacement cost over book value of those inventories that
are carried at cost using the LIFO method was approximately $15 million and
$381 million at December 31, 2007 and 2006,
respectively.
The
components of property, plant and equipment, at cost, and the related
accumulated depreciation were as follows at December 31:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$ |
46 |
|
|
$ |
85 |
|
|
Manufacturing
facilities and equipment
|
|
|
4,890 |
|
|
|
6,093 |
|
|
Construction
in progress
|
|
|
193 |
|
|
|
141 |
|
|
Total
property, plant and equipment
|
|
|
5,129 |
|
|
|
6,319 |
|
|
Less
accumulated depreciation
|
|
|
(13 |
) |
|
|
(3,473 |
) |
|
Property,
plant and equipment, net
|
|
$ |
5,116 |
|
|
$ |
2,846 |
|
The
increases in property, plant and equipment, goodwill and other assets in 2007
are due to the revaluation of the related assets to reflect the values assigned
in the accounting for the acquisition of Lyondell by LyondellBasell
Industries. The increase in depreciation and amortization expense in
2007 reflects the related effect of the revaluation of property, plant and
equipment and other assets.
Maintenance
and repair expenses were $10 million and $300 million, respectively,
for the Successor and Predecessor periods in 2007, $287 million in 2006 and
$261 million in 2005. No interest was capitalized to property,
plant and equipment during the three-year period ended December 31,
2007.
As
a result of the acquisition of Lyondell by LyondellBasell Industries on
December 20, 2007, Equistar recognized $750 million of goodwill
reflecting the excess of the purchase price allocated by LyondellBasell
Industries to Equistar over the fair value assigned to the net tangible and
intangible assets of Equistar (see Notes 3 and 20). In addition,
Equistar has recognized in its financial statements $340 million of debt
issuance costs related to $17,692 million of push-down debt for which
Equistar is not the primary obligor, but which it has guaranteed, and which was
used by LyondellBasell Industries in the acquisition of Lyondell.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
9. Property,
Plant and Equipment, Goodwill and Other Assets – (Continued)
The
components of other assets, at cost, and the related accumulated amortization
were as follows at December 31:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Millions
of dollars
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Identifiable
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emission
credits
|
|
$ |
486 |
|
|
$ |
- - |
|
|
$ |
486 |
|
|
$ |
35 |
|
|
$ |
- - |
|
|
$ |
35 |
|
|
Various
contracts
|
|
|
211 |
|
|
|
(1 |
) |
|
|
210 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Turnaround
costs
|
|
|
190 |
|
|
|
(2 |
) |
|
|
188 |
|
|
|
324 |
|
|
|
(157 |
) |
|
|
167 |
|
|
Technology,
patents and licenses
|
|
|
30 |
|
|
|
-
- |
|
|
|
30 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Software
costs
|
|
|
32 |
|
|
|
-
- |
|
|
|
32 |
|
|
|
100 |
|
|
|
(68 |
) |
|
|
32 |
|
|
Debt
issuance costs
|
|
|
4 |
|
|
|
-
- |
|
|
|
4 |
|
|
|
46 |
|
|
|
(28 |
) |
|
|
18 |
|
|
Debt
issuance costs on
Push-down
debt
|
|
|
340 |
|
|
|
(6 |
) |
|
|
334 |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
Catalyst
costs
|
|
|
11 |
|
|
|
-
- |
|
|
|
11 |
|
|
|
44 |
|
|
|
(31 |
) |
|
|
13 |
|
|
Other
|
|
|
37 |
|
|
|
-
- |
|
|
|
37 |
|
|
|
44 |
|
|
|
(24 |
) |
|
|
20 |
|
|
Total
intangible assets
|
|
$ |
1,341 |
|
|
$ |
(9 |
) |
|
|
1,332 |
|
|
$ |
593 |
|
|
$ |
(308 |
) |
|
|
285 |
|
|
Pension
asset
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
Total
other assets, net
|
|
|
|
|
|
|
|
|
|
$ |
1,344 |
|
|
|
|
|
|
|
|
|
|
$ |
296 |
|
Amortization
of these identifiable intangible assets for the next five years is expected to
be $304 million in 2008, $116 million in 2009, $102 million in
2010, $86 million in 2011 and $79 million in 2012.
Depreciation
and amortization expense is summarized as
follows:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Millions
of dollars
|
|
For
the
period
from
December
21
through
December
31,
|
|
|
For
the
period
from
January
1
through
December
20,
|
|
|
For
the year ended
December
31,
|
|
| |
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Property,
plant and equipment
|
|
$ |
14 |
|
|
$ |
249 |
|
|
$ |
254 |
|
|
$ |
254 |
|
|
Turnaround
costs
|
|
|
2 |
|
|
|
43 |
|
|
|
40 |
|
|
|
38 |
|
|
Software
costs
|
|
|
-
- |
|
|
|
11 |
|
|
|
17 |
|
|
|
18 |
|
|
Other
|
|
|
1 |
|
|
|
12 |
|
|
|
13 |
|
|
|
12 |
|
|
Total
depreciation and amortization
|
|
$ |
17 |
|
|
$ |
315 |
|
|
$ |
324 |
|
|
$ |
322 |
|
In
addition to the depreciation and amortization expense shown above, amortization
of debt issuance costs included in interest expense in the Consolidated
Statements of Income was less than $1 million and $4 million,
respectively, for the Successor and Predecessor periods in 2007, and
$5 million in each of 2006 and 2005.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
9. Property,
Plant and Equipment, Goodwill and Other Assets – (Continued)
Equistar
believes that there are asset retirement obligations associated with some of its
facilities, but that the present value of those obligations normally is not
material in the context of an indefinite expected life of the
facilities. Equistar continually reviews the optimal future
alternatives for its facilities. Any decision to retire one or more
facilities would result in an increase in the present value of such
obligations. At December 31, 2007 and 2006, the liabilities that had
been recognized for all asset retirement obligations were $16 million and
$12 million, respectively.
Accounts
payable at December 31, 2007 and 2006 included liabilities in the amount of
$7 million for checks issued in excess of associated bank balances but not
yet presented for collection.
Accrued
liabilities consisted of the following components at December 31:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
Payroll
and benefits
|
|
$ |
131 |
|
|
$ |
92 |
|
|
Pension
and other postretirement benefits
|
|
|
7 |
|
|
|
7 |
|
|
Taxes
other than income taxes
|
|
|
70 |
|
|
|
68 |
|
|
Interest
|
|
|
5 |
|
|
|
60 |
|
|
Product
sales rebates
|
|
|
36 |
|
|
|
28 |
|
|
Deferred
revenues
|
|
|
26 |
|
|
|
36 |
|
|
Other
|
|
|
20 |
|
|
|
21 |
|
|
Total
accrued liabilities
|
|
$ |
295 |
|
|
$ |
312 |
|
The
carrying amount of accrued liabilities were not changed in accounting for the
acquisition of Lyondell by LyondellBasell Industries.
Deferred
revenues at December 31, 2007 and 2006 of $142 million and
$175 million, respectively, represent advances from customers as partial
prepayments for products to be delivered under long-term product supply
contracts. Equistar is recognizing this deferred revenue as the
associated product is delivered. Trade sales and other operating
revenues included $38 million for the combined 2007 Successor and
Predecessor periods and $13 million and $22 million in 2006 and 2005,
respectively, of such previously deferred revenues.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As
a result of the December 20, 2007 acquisition of Lyondell by LyondellBasell
Industries, Equistar recorded the following push-down debt for which it is not a
primary obligor.
|
Millions
of dollars
|
|
|
|
|
Term
loan A due 2013
|
|
$ |
1,500 |
|
|
Term
loan B due 2014 ($75 million of discount)
|
|
|
7,475 |
|
|
Interim
Loan
|
|
|
8,000 |
|
|
Total
long-term debt
|
|
|
16,975 |
|
|
Less
current maturities
|
|
|
(146 |
) |
|
Total
long-term debt, net
|
|
$ |
16,829 |
|
Aggregate
maturities of the debt are $146 million in 2008, $147 million in 2009,
$225 million in 2010, $301 million in 2011, $413 million in 2012
and $15,743 million thereafter.
If
not repaid prior to the 12 months tenure, the Interim Loan converts to a senior
secured loan in December 2008 and is due in December
2015. The push-down debt represents acquisition-related debt for
which Equistar is not the borrower, but the debt is guaranteed by Equistar and
secured by its assets. The primary obligor under Term loans A and B
is Lyondell and under the Interim Loan is LyondellBasell
Industries. Equistar does not expect that it will be required to fund
a substantial portion of the push-down debt.
Long-term
debt under which Equistar is the primary obligor consisted of the following at
December 31:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
Senior
Notes due 2008, 10.125%
|
|
$ |
8 |
|
|
$ |
700 |
|
|
Senior
Notes due 2011, 10.625%
|
|
|
4 |
|
|
|
707 |
|
|
Debentures
due 2026, 7.55% ($21 million of discount)
|
|
|
129 |
|
|
|
150 |
|
|
Notes
due 2009, 8.75%
|
|
|
15 |
|
|
|
600 |
|
|
Other
|
|
|
-
- |
|
|
|
3 |
|
|
Total
long-term debt
|
|
|
156 |
|
|
|
2,160 |
|
|
Less
current maturities
|
|
|
(27 |
) |
|
|
-
- |
|
|
Total
long-term debt, net
|
|
$ |
129 |
|
|
$ |
2,160 |
|
Aggregate
maturities of long-term debt under which Equistar is the primary obligor are
$27 million in 2008 and $129 million in 2026.
On
December 20, 2007, in connection with the acquisition of Lyondell by
LyondellBasell Industries, Equistar, together with Lyondell and a U.S.-based
subsidiary of the Basell Group, entered into a five-year $1,000 million
senior secured inventory-based credit facility. Loans under this
facility, which matures in December 2012, bear interest, at the option of the
borrower, of the applicable margin plus the alternate base rate, as defined, or
the current LIBO rate, as defined.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
13. Long-Term
Debt – (Continued)
The
senior secured inventory-based credit facility contains covenants that subject
to certain exceptions, restrict, among other things, debt incurrence, lien
incurrence, investments, certain payments on indebtedness, sales of assets and
mergers, amendment of terms of certain indebtedness and material obligations,
and affiliate transactions and covenants that establish maximum levels of
capital expenditures, all of which are substantially similar to the
LyondellBasell Industries Senior Secured Credit Facility. The
inventory-based credit facility also provides that if for any period of four
consecutive quarters the Fixed Charge Coverage Ratio, as defined, of
LyondellBasell Industries, on a consolidated basis, for any period of four
consecutive quarters is less than 1.1:1, then during the next quarter, total
excess availability may not be less than $200 million for five consecutive
business days or more unless on each such day, total excess availability is at
least $150 million and total collateral availability is at least
$275 million.
Also,
on December 20, 2007, Equistar repaid $300 million principal amount
outstanding under its then-existing $400 million inventory-based revolving
credit facility and terminated the facility.
Pursuant
to tender offers, in December 2007, Equistar repaid $1,373 million principal
amount of debt, comprising $585 million of its 8.75% Notes due 2009,
$396 million of its 10.625% Senior Notes due 2011 and $392 million of
its 10.125% Senior Notes due 2008, paying premiums totaling
$71 million. In conjunction with the tender offers, on
December 5, 2007, Equistar obtained consents from holders of the tendered
notes to effect certain proposed amendments to the indentures governing the
notes, including the elimination of substantially all the restrictive
covenants.
Also
during 2007, Equistar repaid $300 million principal amount of its 10.125% Senior
Notes due 2008 and $300 million principal amount of its 10.625% Senior
Notes due 2011, paying premiums totaling $32 million.
In
February 2008, Equistar called and repaid the remaining principal amounts of
$15 million of its 8.75% Notes due 2009, $4 million of its 10.625%
Senior Notes due 2011 and $8 million of its 10.125% Senior Notes due 2008,
paying premiums totaling $2 million.
Equistar’s
remaining 7.55% Debentures, due 2026, cannot be redeemed prior to
maturity. During 2006, Equistar repaid the $150 million of 6.5%
Notes outstanding, which matured in February 2006.
The
indenture for Equistar’s 7.55% Debentures due 2026 contains covenants that,
subject to exceptions, restrict, among other things, lien incurrence, sale and
leaseback transactions and mergers. Equistar’s 7.55% Debentures are
secured equally and ratably with the LyondellBasell Industries Senior Secured
Credit Facility and Interim Loan generally by liens on any Equistar plant for
the production of petrochemicals and ownership interests in such
plants.
Lyondell
is a guarantor of Equistar’s 7.55% Debentures due 2026.
Equistar
is a guarantor of certain debt borrowed by Lyondell under the LyondellBasell
Industries Senior Secured Credit Facility, including $1,500 million and
$7,550 million, respectively, under the term loans A and B facilities;
and certain LyondellBasell Industries debt, including an $8,000
million Interim loan, 8.375% High Yield Notes due 2015, comprising borrowings of
$615 million and €500 million ($736 million), and amounts borrowed by
the Basell Group under the Senior Secured Credit Facility, consisting of
$500 million borrowed under term loan A and €1,287 million
($1,894 million) under term loan B. Equistar is also is a
guarantor for amounts borrowed under the senior secured inventory-based credit
facility by other Lyondell subsidiaries and a U.S.-based subsidiary of the
Basell Group. At December 31, 2007, borrowings of
$100 million were outstanding under the inventory-based credit facility all
on the part of Lyondell.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Equistar
leases various facilities and equipment under noncancelable operating lease
arrangements for varying periods. Operating leases include leases of
railcars used in the distribution of products in Equistar’s
business. As of December 31, 2007, future minimum lease payments for
the next five years and thereafter, relating to all noncancelable operating
leases with lease terms in excess of one year were as follows:
|
Millions
of dollars
|
|
|
|
|
2008
|
|
$ |
89 |
|
|
2009
|
|
|
79 |
|
|
2010
|
|
|
70 |
|
|
2011
|
|
|
56 |
|
|
2012
|
|
|
51 |
|
|
Thereafter
|
|
|
322 |
|
|
Total
minimum lease payments
|
|
$ |
667 |
|
Net
rental expense for 2007, 2006 and 2005 was $121 million, $106 million
and $103 million, respectively.
Equistar
is exposed to commodity price volatility related to anticipated purchases of
natural gas and other raw materials and sales of its
products. Equistar selectively uses commodity swap, option, and
futures contracts with various terms to manage the volatility related to these
risks. Such contracts are generally limited to durations of one year
or less.
Designation
of the derivatives as fair value or cash flow hedges is performed on a specific
exposure basis. Cash-flow hedge accounting is normally elected for
these derivative transactions; however, in some cases, when the duration of a
derivative is short, hedge accounting is not elected. When hedge
accounting is not elected, the changes in fair value of these instruments are
recorded in earnings. When hedge accounting is elected, gains and
losses on these instruments are deferred in accumulated other comprehensive
income (“AOCI”) until the underlying transaction is recognized in
earnings.
Earnings
included net gains from derivative transactions of $4 million in 2007 and
$1 million in each of 2006 and 2005.
In
2007, Equistar entered into futures contracts designated as cash flow hedges to
offset the effect of changes in the price of silver used as catalyst in the
production process. At December 31, 2007, futures contracts for
1 million troy ounces of silver in the notional amount of $15 million,
maturing in September 2008, were outstanding. Gains, related to these
cash flow hedges, of less than $1 million were deferred in AOCI as of
December 31, 2007.
Equistar
also entered into futures contracts in 2007 and 2006 designated as cash flow
hedges to offset the changes in the price of natural gas. At December
31, 2007, futures contracts for 620,000 mmbtu of natural gas in the
notional amounts of $5 million were outstanding. Net losses of
less than $1 million related to these contracts, which mature in January
and February 2008, were deferred in AOCI as of December 31,
2007. There were no outstanding contracts at December 31,
2006.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
15. Financial
Instruments and Derivatives – (Continued)
The
fair value of all nonderivative financial instruments included in current assets
and current liabilities, including cash and cash equivalents, accounts
receivable and accounts payable, 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 $149 million and $2,255 million at
December 31, 2007 and 2006, respectively.
All
full-time regular employees are covered by defined benefit pension plans
sponsored by Equistar. Retirement benefits are generally based upon
years of service and the employee’s highest compensation for any consecutive
36-month period during the last 120 months of service or other compensation
measures as defined under the respective plan provisions. Equistar
funds the plans through contributions to pension trust funds, generally subject
to minimum funding requirements as provided by applicable
law. 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 non
contributory. The life insurance benefits are provided to employees
who retired before July 1, 2002.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16. Pension
and Other Postretirement Benefits – (Continued)
The
following table provides a reconciliation of projected benefit obligations, plan
assets and the funded status of these plans:
|
|
|
Pension
Benefits
|
|
|
Other
Postretirement
Benefits
|
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation, January 1
|
|
$ |
275 |
|
|
$ |
256 |
|
|
$ |
106 |
|
|
$ |
110 |
|
|
Service
cost
|
|
|
22 |
|
|
|
23 |
|
|
|
2 |
|
|
|
3 |
|
|
Interest
cost
|
|
|
15 |
|
|
|
14 |
|
|
|
6 |
|
|
|
5 |
|
|
Actuarial
gain
|
|
|
(13 |
) |
|
|
(8 |
) |
|
|
(6 |
) |
|
|
(7 |
) |
|
Benefits
paid
|
|
|
(14 |
) |
|
|
(10 |
) |
|
|
(5 |
) |
|
|
(5 |
) |
|
Benefit
obligation, December 31
|
|
|
285 |
|
|
|
275 |
|
|
|
103 |
|
|
|
106 |
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets, January 1
|
|
|
229 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
Actual
return on plan assets
|
|
|
18 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
Partnership
contributions
|
|
|
41 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
Benefits
paid
|
|
|
(14 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
Fair
value of plan assets, December 31
|
|
|
274 |
|
|
|
229 |
|
|
|
|
|
|
|
|
|
|
Funded
status, December 31
|
|
|
(11 |
) |
|
|
(46 |
) |
|
|
(103 |
) |
|
|
(106 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
not recognized in benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial
and investment gain (loss)
|
|
|
-
- |
|
|
|
46 |
|
|
|
-
- |
|
|
|
(5 |
) |
|
Prior
service benefit
|
|
|
-
- |
|
|
|
(1 |
) |
|
|
-
- |
|
|
|
(2 |
) |
|
Net
amount recognized in benefit costs
|
|
$ |
(11 |
) |
|
$ |
(1 |
) |
|
$ |
(103 |
) |
|
$ |
(113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in the
Consolidated
Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
benefit cost
|
|
$ |
8 |
|
|
$ |
5 |
|
|
$ |
- - |
|
|
$ |
- - |
|
|
Accrued
benefit liability, current
|
|
|
-
- |
|
|
|
-
- |
|
|
|
(6 |
) |
|
|
(6 |
) |
|
Accrued
benefit liability, long-term
|
|
|
(19 |
) |
|
|
(51 |
) |
|
|
(97 |
) |
|
|
(100 |
) |
|
Funded
status, December 31,
|
|
$ |
(11 |
) |
|
$ |
(46 |
) |
|
$ |
(103 |
) |
|
$ |
(106 |
) |
|
Accumulated
other comprehensive
(income)
loss
|
|
|
-
- |
|
|
|
45 |
|
|
|
-
- |
|
|
|
(7 |
) |
|
Net
amount recognized in benefit costs
|
|
$ |
(11 |
) |
|
$ |
(1 |
) |
|
$ |
(103 |
) |
|
$ |
(113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation
for
defined benefit plans, December 31
|
|
$ |
234 |
|
|
$ |
224 |
|
|
|
|
|
|
|
|
|
|
Decrease
in minimum liability, prior to
application
of SFAS No. 158, included in
other
comprehensive income
|
|
|
-
- |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16. Pension
and Other Postretirement Benefits – (Continued)
Pension
plans with projected benefit obligations in excess of the fair value of assets
are summarized as follows at December 31:
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
Projected
benefit obligation
|
|
$ |
214 |
|
|
$ |
257 |
|
|
Fair
value of assets
|
|
|
195 |
|
|
|
205 |
|
Pension
plans with accumulated benefit obligations in excess of the fair value of assets
are summarized as follows at December 31:
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
Accumulated
benefit obligation
|
|
$ |
6 |
|
|
$ |
61 |
|
|
Fair
value of assets
|
|
|
-
- |
|
|
|
48 |
|
The
following table provides the components of net periodic pension
costs:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Millions
of dollars
|
|
For
the
period
from
December
21
through
December
31,
|
|
|
For
the
period
from
January
1
through
December
20,
|
|
|
For
the year ended
December
31,
|
|
| |
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net
periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
1 |
|
|
$ |
22 |
|
|
$ |
23 |
|
|
$ |
21 |
|
|
Interest
cost
|
|
|
1 |
|
|
|
14 |
|
|
|
14 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
return on plan assets
|
|
|
(1 |
) |
|
|
(17 |
) |
|
|
(20 |
) |
|
|
(10 |
) |
|
Less-return
in excess of (less than) expected return
|
|
|
-
- |
|
|
|
-
- |
|
|
|
6 |
|
|
|
(2 |
) |
|
Expected
return on plan assets
|
|
|
(1 |
) |
|
|
(17 |
) |
|
|
(14 |
) |
|
|
(12 |
) |
|
Actuarial
and
investment loss amortization
|
|
|
-
- |
|
|
|
3 |
|
|
|
5 |
|
|
|
6 |
|
|
Net
periodic pension cost
|
|
$ |
1 |
|
|
$ |
22 |
|
|
$ |
28 |
|
|
$ |
28 |
|
As
a result of purchase accounting, there are no defined benefit pension plans
actuarial losses or prior service costs components included in AOCI at
December 31, 2007.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16. Pension
and Other Postretirement Benefits – (Continued)
The
following table provides the components of other postretirement benefit
costs:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Millions
of dollars
|
|
For
the
period
from
December
21
through
December
31,
|
|
|
For
the
period
from
January
1
through
December
20,
|
|
|
For
the year ended
December
31,
|
|
| |
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net
periodic other postretirement benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
- - |
|
|
$ |
2 |
|
|
$ |
3 |
|
|
$ |
3 |
|
|
Interest
cost
|
|
|
-
- |
|
|
|
6 |
|
|
|
5 |
|
|
|
6 |
|
|
Prior
service cost amortization
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
2 |
|
|
Net
periodic other postretirement benefit cost
|
|
$ |
- - |
|
|
$ |
8 |
|
|
$ |
8 |
|
|
$ |
11 |
|
Net
other postretirement benefit cost was less than $1 million in the 2007
Successor period and comprised service cost, interest cost and prior service
cost amortization, each of which were less than $1 million.
As
a result of purchase accounting, there are no defined benefit postretirement
plan actuarial losses or prior service benefits included in AOCI at
December 31, 2007.
The
assumptions used in determining the net benefit liabilities were as follows at
December 31:
|
|
|
Pension
Benefits
|
|
|
Other
Postretirement Benefits
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average
assumptions as of
December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.25 |
% |
|
|
5.75 |
% |
|
|
6.25 |
% |
|
|
5.75 |
% |
|
Rate
of compensation increase
|
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
|
|
The
assumptions used in determining net benefit costs were as follows for the year
ended December 31:
|
|
|
Pension
Benefits
|
|
|
Other
Postretirement Benefits
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted-average
assumptions
for
the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.75 |
% |
|
|
5.50 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
5.50 |
% |
|
|
5.75 |
% |
|
Expected
return on plan assets
|
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
of compensation increase
|
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16. Pension
and Other Postretirement Benefits – (Continued)
The
assumed annual rate of increase in the per capita cost of covered health care
benefits as of December 31, 2007 was 9% for 2008, decreasing 1% per year to 5%
in 2012 and thereafter. At December 31, 2007, similar cost escalation
assumptions were used. 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 to 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 other
postretirement benefit liability as of December 31, 2007 by less than
$1 million and would not have a material effect on the aggregate service
and interest cost components of the net periodic other postretirement benefit
cost for the year then ended.
Management’s
goal is to manage pension investments over the long term to achieve optimal
returns with an acceptable level of risk and volatility. Equistar’s
targeted asset allocations of 55% U.S. equity securities, 15% non-U.S. equity
securities, 25% fixed income securities and 5% investments in real estate are
based on recommendations by Equistar’s independent pension investment
advisor. Equistar’s expected long-term rate of return on plan assets
of 8% is based on the average level of earnings that its independent pension
investment advisor has advised could be expected to be earned over time on such
allocation. 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
except for real estate, are marketable securities that provide sufficient
liquidity to meet expected benefit obligation payments.
Equistar’s
pension plan weighted-average asset allocations by asset category were as
follows at December 31:
|
Asset
Category
|
|
2007
Policy
|
|
|
2007
|
|
|
2006
|
|
|
U.S.
equity securities
|
|
|
55 |
% |
|
|
56 |
% |
|
|
56 |
% |
|
Non-U.S.
equity securities
|
|
|
15 |
% |
|
|
16 |
% |
|
|
17 |
% |
|
Fixed
income securities
|
|
|
25 |
% |
|
|
24 |
% |
|
|
27 |
% |
|
Real
estate investments
|
|
|
5 |
% |
|
|
4 |
% |
|
|
-
- |
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
There
are no required contributions due to the pension plans in 2008.
As
of December 31, 2007, future expected benefit payments by the plans, which
reflect expected future service, as appropriate, were as follows:
|
Millions
of dollars
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
2008
|
|
$ |
18 |
|
|
$ |
7 |
|
|
2009
|
|
|
19 |
|
|
|
7 |
|
|
2010
|
|
|
19 |
|
|
|
8 |
|
|
2011
|
|
|
20 |
|
|
|
8 |
|
|
2012
|
|
|
21 |
|
|
|
8 |
|
|
2013
through 2017
|
|
|
122 |
|
|
|
41 |
|
Equistar
also maintains voluntary defined contribution savings plans for eligible
employees. Contributions to these plans by Equistar were
$14 million for the combined Successor and Predecessor periods in 2007,
$13 million in 2006 and $12 million in 2005.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Commitments—Equistar has various purchase commitments for
materials, supplies and services incident to the ordinary conduct of business,
generally for quantities required for its businesses and at prevailing market
prices. Equistar is also a party to various obligations to
purchase products and services, principally for utilities and industrial
gases. These commitments are designed to assure sources of supply and
are not expected to be in excess of normal requirements. See also
Note 6, describing related party transactions. At
December 31, 2007, future minimum payments under those contracts with
noncancelable contract terms in excess of one year and fixed minimum payments
were as follows:
|
Millions
of dollars
|
|
|
|
|
2008
|
|
$ |
304 |
|
|
2009
|
|
|
291 |
|
|
2010
|
|
|
280 |
|
|
2011
|
|
|
278 |
|
|
2012
|
|
|
277 |
|
|
Thereafter
through 2023
|
|
|
2,272 |
|
|
Total
minimum contract payments
|
|
$ |
3,702 |
|
Equistar’s
total purchases under these agreements were $439 million, $416 million
and $494 million for the years ended December 31, 2007, 2006 and 2005,
respectively.
Environmental
Remediation—Equistar’s accrued liability for future environmental
remediation costs totaled $4 million as of December 31, 2007 and
2006. In the opinion of management, there is no material estimable
range of reasonably possible loss in excess of the liability recorded for
environmental remediation. However, it is possible that new
information about the sites for which the accrual has been established, new
technology or future developments such as involvement in investigations by
regulatory agencies, could require Equistar to reassess its potential exposure
related to environmental matters.
Other—Equistar
is, from time to time, a defendant in lawsuits and other commercial disputes,
some of which are not covered by insurance. Many of these suits make
no specific claim for relief. Although final determination of any
liability and resulting financial impact with respect to any such matters cannot
be ascertained with any degree of certainty, management does not believe that
any ultimate uninsured liability resulting from these matters in which it
currently is involved will, individually or in the aggregate, have a material
adverse effect on the financial position, liquidity or results of operations of
Equistar.
General—In
the opinion of management, the matters discussed in this note are not expected
to have a material adverse effect on the financial position or liquidity of
Equistar. However, the adverse resolution in any reporting period of
one or more of these matters could have a material impact on Equistar’s results
of operations for that period, which may be mitigated by contribution or
indemnification obligations of others, or by any insurance coverage that may be
available.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On
December 20, 2007, as a result of the acquisition of Lyondell by
LyondellBasell Industries, Equistar’s consolidated financial statements reflect
a revaluation of Equistar’s assets and liabilities, to reflect the values
assigned in LyondellBasell Industries’ accounting for the purchase of
Lyondell. In addition, Equistar recognized in its financial
statements $17,692 million of push-down debt for which Equistar is not the
primary obligor, but which it has guaranteed, and which was used by
LyondellBasell Industries in the acquisition of Lyondell (see Notes 1, 6 and
13). The
push-down debt and related interest do not represent direct obligations of
Equistar, and accordingly are not allocated to the individual partner’s accounts
in the Consolidated Statement of Partners’ Capital. Prior to the
acquisition on December 20, 2007, Equistar’s partners capital was
$2,993 million, representing equity of Equistar acquired through sources
other than financing of the Lyondell acquisition.
As
part of the acquisition of Lyondell by LyondellBasell Industries on
December 20, 2007, Lyondell made a contribution to Equistar of
$1,703 million, which was used to repay certain Equistar debt (see Note
13), resulting in an increase of Lyondell’s direct ownership interest from 70.5%
to approximately 79% and a corresponding decrease in Millennium’s ownership
interest from 29.5% to approximately 21%.
Accumulated
Other Comprehensive Loss—At December 20, 2007, the $36 million
balance of Equistar’s accumulated other comprehensive loss represented
unrecognized benefit costs associated with the application of SFAS No.
158. There was no balance in accumulated other comprehensive income
(loss) at December 31, 2007 as a result of LyondellBasell’s accounting for
the purchase of Lyondell.
Supplemental
cash flow information is summarized as follows for the years ended December
31:
|
|
|
Predecessor
|
|
|
Millions
of dollars
|
|
For
the period
from
January 1
through
December
20,
|
|
|
For
the year ended
December
31,
|
|
| |
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash
paid for interest
|
|
$ |
233 |
|
|
$ |
216 |
|
|
$ |
221 |
|
|
Cash
paid for interest – related party
|
|
|
15 |
|
|
|
-
- |
|
|
|
-
- |
|
|
Total
|
|
$ |
248 |
|
|
$ |
216 |
|
|
$ |
221 |
|
Interest
payments in the 11-day Successor period were less than
$1 million.
As
part of the December 20, 2007 acquisition transaction, Equistar sold
$741 million of accounts receivable to a subsidiary of Lyondell in exchange
for a subordinated note receivable from the Lyondell subsidiary (see Note
6).
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As
a result of the acquisition of Lyondell by LyondellBasell Industries, Equistar
established new business segments through which its operations are managed as
part of LyondellBasell Industries. Based on this analysis, Equistar
concluded that management is focused on the two segments listed
below.
|
·
|
Chemicals,
primarily manufacturing and marketing of ethylene; its co-products,
including propylene, butadiene and aromatics, which include benzene and
toluene; ethylene derivatives, including ethylene glycol, ethylene oxide
(“EO”), and other EO derivatives, as well as ethanol; gasoline blending
components such as MTBE and alkylate;
and
|
|
·
|
Polymers,
including manufacturing and marketing of polyethylene, including high
density polyethylene, low density polyethylene and linear low density
polyethylene, and polypropylene.
|
The
accounting policies of the segment are the same as those described in “Summary
of Significant Accounting Policies” (see Note 2) except that segment operating
results reported to management reflect cost of sales determined under the
first-in, first-out (“FIFO”) method of accounting for
inventory. These FIFO-basis operating results are reconciled to
LIFO-basis operating results in the following table.
No
trade customer accounted for 10% or more of Equistar’s consolidated sales during
any year in the three-year period ended December 31, 2007; however, sales to
Lyondell were approximately 13%, 11% and 10% for the years ended
December 31, 2007, 2006 and 2005, respectively.
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
20. Segment
and Related Information – (Continued)
Summarized
financial information concerning reportable segments is shown in the following
table for the periods presented.
|
Millions
of dollars
|
|
Chemicals
|
|
|
Polymers
|
|
|
Other
|
|
|
Consolidated
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and other operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers
|
|
$ |
9,999 |
|
|
$ |
3,495 |
|
|
$ |
- - |
|
|
$ |
13,494 |
|
|
Intersegment
|
|
|
2,432 |
|
|
|
-
- |
|
|
|
(2,432 |
) |
|
|
-
- |
|
|
|
|
|
12,431 |
|
|
|
3,495 |
|
|
|
(2,432 |
) |
|
|
13,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating income (loss)
|
|
|
379 |
|
|
|
156 |
|
|
|
(22 |
) |
|
|
513 |
|
|
Adjustment
to LIFO basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(498 |
) |
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
Capital
expenditures
|
|
|
219 |
|
|
|
19 |
|
|
|
2 |
|
|
|
240 |
|
|
Depreciation
and amortization expense
|
|
|
268 |
|
|
|
62 |
|
|
|
2 |
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and other operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers
|
|
$ |
9,341 |
|
|
$ |
3,424 |
|
|
$ |
- - |
|
|
$ |
12,765 |
|
|
Intersegment
|
|
|
2,227 |
|
|
|
-
- |
|
|
|
(2,227 |
) |
|
|
-
- |
|
|
|
|
|
11,568 |
|
|
|
3,424 |
|
|
|
(2,227 |
) |
|
|
12,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating income
|
|
|
689 |
|
|
|
137 |
|
|
|
-
- |
|
|
|
826 |
|
|
Adjustment
to LIFO basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
824 |
|
|
Capital
expenditures
|
|
|
149 |
|
|
|
19 |
|
|
|
-
- |
|
|
|
168 |
|
|
Depreciation
and amortization expense
|
|
|
258 |
|
|
|
63 |
|
|
|
3 |
|
|
|
324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and other operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers
|
|
$ |
8,576 |
|
|
$ |
3,110 |
|
|
$ |
- - |
|
|
$ |
11,686 |
|
|
Intersegment
|
|
|
2,125 |
|
|
|
-
- |
|
|
|
(2,125 |
) |
|
|
-
- |
|
|
|
|
|
10,701 |
|
|
|
3,110 |
|
|
|
(2,125 |
) |
|
|
11,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating income
|
|
|
1,017 |
|
|
|
104 |
|
|
|
-
- |
|
|
|
1,121 |
|
|
Adjustment
to LIFO basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153 |
) |
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
968 |
|
|
Capital
expenditures
|
|
|
141 |
|
|
|
12 |
|
|
|
-
- |
|
|
|
153 |
|
|
Depreciation
and amortization expense
|
|
|
255 |
|
|
|
62 |
|
|
|
5 |
|
|
|
322 |
|
EQUISTAR
CHEMICALS, LP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
20. Segment
and Related Information – (Continued)
Sales
and other operating revenues in the “Other” column above include elimination of
intersegment transactions. Other segment results in 2007 include a
$22 million charge for the value of the purchase price allocated by
LyondellBasell Industries to Equistar’s IPR&D.
In
2006, the operating income of the chemicals segment included a $135 million
charge for impairment of the net book value of the Lake Charles, Louisiana
ethylene facility (see Note 4).
The
2007 data above comprises:
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Total
|
|
|
Millions
of dollars
|
|
For
the
period
from
December 21
through
December 31,
2007
|
|
|
For
the
period
from
January
1
through
December
20
2007
|
|
|
For
the year ended December 31, 2007
|
|
|
Sales
and other operating revenues
|
|
$ |
457 |
|
|
$ |
13,037 |
|
|
$ |
13,494 |
|
|
Operating
income (loss)
|
|
|
(66 |
) |
|
|
81 |
|
|
|
15 |
|
|
Capital
expenditures
|
|
|
12 |
|
|
|
228 |
|
|
|
240 |
|
|
Depreciation
and amortization expense
|
|
|
17 |
|
|
|
315 |
|
|
|
332 |
|
Long-lived
assets of continuing operations, including goodwill, are summarized and
reconciled to the consolidated totals in the following table with the exception
of turnaround costs. Turnaround costs, as defined in Note 2 are
reconciled to “Total other assets, net” in Note 9.
|
Millions
of dollars
|
|
Chemicals
|
|
|
Polymers
|
|
|
Total
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$ |
4,520 |
|
|
$ |
596 |
|
|
$ |
5,116 |
|
|
Goodwill
|
|
|
500 |
|
|
|
250 |
|
|
|
750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$ |
2,202 |
|
|
$ |
644 |
|
|
$ |
2,846 |
|
|
Goodwill
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$ |
2,413 |
|
|
$ |
650 |
|
|
$ |
3,063 |
|
|
Goodwill
|
|
|
-
- |
|
|
|
-
- |
|
|
|
-- |
|
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.
|
|
|
MILLENNIUM
CHEMICALS INC.
|
|
|
|
|
|
|
Date:
|
March
28, 2008
|
By:
|
/s/ MORRIS
GELB
|
|
|
|
|
Morris
Gelb,
|
|
|
|
|
Principal
and Chief Executive Officer
|
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated on March 28, 2008.
|
Signature
|
|
Title
|
|
|
|
|
|
|
|
|
|
/s/
MORRIS
GELB
|
|
President
and Chief Executive Officer and Director
|
|
(Morris
Gelb,
|
|
|
|
Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
/s/
ALAN
BIGMAN
|
|
Chief
Financial Officer and Director
|
|
(Alan
Bigman,
|
|
|
|
Principal
Financial Officer)
|
|
|
|
|
|
|
|
|
|
|
|
/s/
EBERHARD
FALLER
|
|
Vice
President, Controller and Chief Accounting Officer
|
|
(Eberhard
Faller,
|
|
|
|
Principal
Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
/s/
C. BART DE
JONG
|
|
Director
|
|
(C.
Bart de Jong)
|
|
|
|
|
|
|
|
|
|
|
|
/s/ EDWARD J.
DINEEN
|
|
Director
|
|
(Edward
J. Dineen)
|
|
|
|
|
|
|
|
|
|
|
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.