Equistar Chemicals, LP

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Equistar Chemicals, LP

1221 McKinney Street, Suite 700
Houston, Texas 77010
U.S.A.
Telephone: (713) 652-7200
Fax: (713) 652-4151
Web site: http://www.equistarchem.com

Wholly Owned Subsidiary of Lyondell Chemical Company
Incorporated: 1997
Employees: 3,165
Sales: $9.31 billion (2004)
NAIC: 325188 All Other Inorganic Chemical Manufacturing

A subsidiary of Lyondell Chemical Company, Equistar Chemicals, LP is a Houston-based manufacturer of petrochemicals and polymers. In the chemical segment Equistar is the largest North American producer of butadiene, the second largest North American producer of ethylene and propylene, the largest U.S. producer of diethyl ether and industrial ethyl alcohol, and also a major U.S. producer of ethylene oxide and ethylene glycol. In addition, Equistar manufactures specialty chemicals such as benzene, TDI toluene, DCPD, and piperylenes. Equistar's polymer products include polyolefin resins, polyethylene, wire and cable resins and compounds, and tie-layer resins. In addition, Equistar maintains 1,400 miles of pipelines in Texas and Louisiana to serve both Equistar and Lyondell facilities, transporting a variety of chemicals as well as natural gas, diesel, butane, and propane. Altogether, Equistar maintains 16 manufacturing facilities, located along the Gulf Coast of Texas and Louisiana, the midwestern states of Iowa, Illinois, and Ohio, plus a facility in Newark, New Jersey.

Parent Company's Origins in the Mid-1980s

Lyondell was created in 1985 as a subsidiary of Atlantic Richfield Company (ARCO), which during the 1960s became actively involved in building a petrochemical business. With Halcon International it forged a joint venture in 1966 called Oxirane Chemical Company, which used a Halcon-developed process to produce propylene oxide. By 1980 Oxirane was doing $1 billion in annual worldwide sales, at which point ARCO bought out Halcon and folded the operation into ARCO Chemical. During the early 1980s, however, ARCO Chemical did not perform as well as expected. ARCO Chemical was on the verge of selling off the olefins business when in 1985 the parent company stepped in to combine these assets under a new unit called Lyondell Petrochemical Corporation. The Lyondell name was drawn from the Lyondell Country Club in Channelview, Texas. On that site in 1955 Texas Butadiene and Chemical Corporation built a plant, which was purchased by Richfield Oil Corporation in 1962. It then became part of ARCO following the merger of Richfield and Atlantic Refining Company in 1966. Three years later ARCO merged with Sinclair Oil & Refining Company, which in 1918 built its first refinery on the 720-acre Allen Ranch in Houston. Among the assets Lyondell inherited was the Allen Ranch facility and the petrochemical complex that replaced the Lyondell Country Club.

As early as 1988 Lyondell began discussing the possibility of combining its operations with another chemical company, Quantum Chemical Company, the largest producer of polyethylene in the United States. Quantum's heritage dated to 1906 and the creation of U.S. Industrial Alcohols, which brewed denatured ethanol from Cuban molasses. In 1939 the company moved into synthetic resins, changing its name to U.S. Industrial Chemical, and a dozen years later merged with National Distillers and soon began producing polyethylene in Illinois. This business grew so much that by the early 1980s National Distillers and Chemicals decided to focus on chemicals. It bought a petrochemicals company, divested all of its nonchemical assets, in 1987 assumed the Quantum name, and soon entered into talks with Lyondell about a merger, an effort that failed but laid the groundwork for the creation of Equistar a decade later.

Formation of the Company from
a Joint Venture in 1997

In the meantime, Lyondell and Quantum went their separate ways. After a strong 1988, Lyondell was spun off by ARCO, which took advantage of the subsidiary's peak performance to sell half of the business to the public for $1.4 billion. ARCO also took $500 million out of the company as a special distribution, resulting in Lyondell gaining independence, but with a debt burden of $760 million. Lyondell shares began trading on the New York Stock Exchange and quickly tanked. But free of ARCO's control, Lyondell was able to establish its own course and unleash a hidden entrepreneurial spirit. In 1990 the company completed its first acquisition, the low-density polyethylene and polypropylene plants from Rexene Products Company, valuable additions because they consumed Lyondell's ethylene and propylene and helped the company move into the polyolefins market. Among other deals, Lyondell acquired Occidental Chemical Corporation's high-density polyethylene business in 1995. During this same period, Quantum began to struggle and changed ownership in 1993, acquired by British conglomerate Hanson PLC. In 1996 Hanson elected to focus on its building materials and crane manufacturing operations and spin off its tobacco, manufacturing, energy, and chemical businesses. Quantum was packaged with SCM Chemical, a titanium dioxide maker, and Glidco, which produced terpene-based aroma chemicals, to form a new company, Millennium Chemicals. Because its three component businesses shared little in common, an offer to combine the old Quantum assets with those of Lyondell's was gladly accepted.

In 1997 Lyondell and Millennium petrochemical and polymer assets were used to form Equistar Chemicals, LP. Lyondell held a 57 percent stake in the joint venture and Millennium held the balance. Under terms of the agreement, Equistar assumed $745 million of Lyondell's debt and made a $1 billion cash payment to Lyondell, which necessitated the borrowing of another $750 million. Lyondell's chairman and CEO took over as Equistar's CEO, and he served as co-chairman of the partnership's six-member governance committee along with Millennium CEO William M. Landuyt. Handling day-to-day operations was President and COO Eugene Allspach, a Millennium executive. The melding of Lyondell and Millennium assets was a good fit, and even before the parties received approval from the Federal Trade Commission and Equistar was officially operational on December 1, 1997, the two companies were hard at work integrating the operations in order to realize an anticipated $150 million in cost savings. About a third of that amount would be the result of a 10 percent staff reduction. Equistar also seized on a chance to save about $70 million by dedicating plants to specific grades of resin. Essentially, the company hit the ground running, a $5 billion powerhouse that was the largest North American producer of polyethylene and ethylene, with management determined to take advantage of synergies to become the low-cost producers of these commodities.

From the outset, Equistar was in the market for a third joint venture partner. In March it announced that it had found one in Occidental Chemical Corporation, which agreed to add its ethylene, propylene, ethylene oxide, and derivatives business to Equistar. Assets included a pair of olefins plants in Texas and Louisiana; a 50 percent ownership stake in PD Glycol, which operated ethylene oxide/ethylene glycol (EO/EG) plants in Beaumont, Texas; Occidental's ethylene oxide, ethylene glycol, and ethylene oxide derivatives operations; and more than 950 miles of olefins pipelines and two Texas storage wells that would benefit Equistar's other operations. As a result of the merger, Equistar controlled $7 billion in assets and in pro forma sales in 1997 generated $6 billion. It was now North America's largest olefins producer and the second largest in the world. It was also one of the top three producers of ethylene, propylene, butadiene, and polyethylene in North America and the world. Lyondell, which operated the company for the partnership, owned 41 percent of Equistar, while Millennium and Occidental each controlled a 29.5 percent stake. As part of the deal, Equistar assumed $200 million in further debt and borrowed another $500 million in order to make a cash disbursement of $75 million to Millennium and $425 million to Occidental Petroleum, Occidental Chemical's parent company, which was in the process of redeploying $4.7 billion in assets. For Equistar, the addition of the Occidental assets allowed it to seek even greater synergies in its efforts to become the most efficient and cost-effective producer in its arena of chemical commodities.

In 1999 a struggling Millennium signaled that it was interested in selling its stake in Equistar in order to raise cash and buy back a large portion of its stock. In August Lyondell showed some interest but quickly backed off after the price of its own stock began to dip, due to investor concerns about the amount of debt Lyondell had taken on in the 1998 $5.6 billion acquisition of Arco Chemical. The company made certain that Wall Street now heard its pledge to make debt reduction its top priority. Millennium, according to press accounts, held some exploratory talks with potential buyers of its stake in Equistar, but Lyondell's and Occidental's right of first offer proved problematic. In order to clear the way for a sale, Millennium in early 2000 made the necessary offer to Lyondell and Occidental. Neither of the partners were interested, both expressing satisfaction with their current positions. Millennium was now free to seek a buyer, but it was never able to complete a deal.

Company Perspectives:

With Equistar, customers have one reliable source to meet their needs for petrochemicals, polymers, ethylene oxide and derivatives.

Industry Slump in the Early 2000s

As the economy began to slow down in 2000, Equistar was adversely impacted, but higher natural gas prices caused more of a problem, forcing the company to cut back on natural gas-based ethylene production and the shuttering of some facilities. Poor conditions for the chemical industry continued in 2001, leading to further erosion in Equistar's sales and margins. Lyondell also struggled to perform, posting a net loss of $150 million in 2001. Nevertheless, Lyondell was in a stronger position than many other chemical companies, and in 2002 it was able to use its stock to buy out Occidental's interest in Equistar, giving it a 70.5 percent share of the joint venture. Millennium had the right to purchase Occidental's shares on a pro rata basis, but was content with its 29.5 percent stake and declined to participate in the sale—while reiterating its willingness to participate in the governance of the partnership, to help optimize cash flows and, of course, increase the value of its piece of Equistar. Lyondell's CEO Dan Smith explained to investors on a conference call that the rationale for the deal from Lyondell's perspective was "cash flow driven," adding, "It gives us greater command of a greater cash flow stream to shape up our balance sheet much quicker. That's our number one, two, and three focus." From Occidental's point of view, exchanging an illiquid stake in Equistar for a stake in Lyondell made sense, because Occidental could now raise money if needed by selling some or all of its 30 million-plus shares of newly issued Lyondell Series B common stock.

Poor industry conditions persisted in 2002, leading to Equistar's revenues dropping to $5.4 billion in 2002, after sales of $5.9 billion the year before, and a loss of $1.3 billion. High crude oil and natural gas liquid prices continued to be a problem in 2003, but the cost of ethylene production was offset by rising prices for ethylene and its derivatives. As a result, revenues rebounded in 2003 to more than $6.5 billion, but maintenance and financing expenses and employee severance costs led to another net loss of $339 million. Lyondell, in the meantime, recorded a net loss of $302 million in 2003.

To improve its standing in the chemical industry, Lyondell took a major step in April 2004 by reaching an agreement to acquire Millennium in a stock swap, thereby assuming 100 percent control of Equistar. The deal closed on November 30 of that year after shareholders of both companies gave their approval. According to Smith, Lyondell had "achieved the global depth and breadth necessary for long-term success." Because Lyondell would now report the consolidated results of three wholly owned businesses—Equistar, Millennium, and Lyondell's intermediate chemicals and derivatives business—"the true size of the Lyondell enterprise will be more apparent," Smith told reporters. In 2003 Lyondell possessed a market capitalization of $6.5 billion, making it North America's third largest independent, publicly traded chemical company. After enduring a protracted slump in petrochemicals, Lyondell was poised to reap the benefits of an upswing in the cycle, a turnaround led by Equistar, whose 100 percent contribution to the Lyondell balance sheet was a key to the company's future.

Principal Operating Units

Chemicals; Polymers; Pipeline.

Principal Competitors

The Dow Chemical Company; ExxonMobil Chemical Company; Huntsman International L.L.C.

Key Dates:

1997:: Lyondell Chemical Company and Millennium Chemicals form Equistar as a joint venture.
1998:: Occidental Chemical Corporation becomes the third joint venture partner.
2002:: Lyondell acquires Occidental's Equistar interest.
2004:: Lyondell acquires Millennium, gaining 100 percent ownership of Equistar.