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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, 2000
[_] Transition Report Pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934
Commission File No. 1-10145
LYONDELL CHEMICAL COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 95-4160558
(State or other jurisdiction of (I.R.S. Employee Identification No.)
Incorporation or organization)
1221 McKinney Street,
Suite 700, Houston, Texas 77010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 652-7200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of Each Class which registered
------------------- ------------------------
Common Stock ($1.00 par value) New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark 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. [_]
There were 117,563,065 shares of the registrant's common stock outstanding on
March 1, 2001. The aggregate market value of the voting stock held by non-
affiliates of the registrant on March 1, 2001 based on the closing price on the
New York Stock Exchange composite tape on that date, was $1,832,356,978.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 2000
(incorporated by reference under Part III).
TABLE OF CONTENTS
PART I...................................................................... 1
Items 1 and 2. Business and Properties.................................... 1
Development of Business.................................................... 1
Strategy................................................................... 2
Summary Description of Business Segments................................... 4
THE COMPANY'S BUSINESS...................................................... 5
INTERMEDIATE CHEMICALS AND DERIVATIVES...................................... 6
Overview................................................................... 6
Raw Materials.............................................................. 8
Marketing and Sales........................................................ 9
Joint Ventures and Other Agreements........................................ 9
Competition and Industry Conditions........................................ 10
Properties................................................................. 11
Research and Technology; Patents and Trademarks............................ 12
Employee Relations......................................................... 12
EQUISTAR CHEMICALS, LP...................................................... 12
Management of Equistar..................................................... 12
Agreements between Lyondell and Equistar................................... 13
EQUISTAR PETROCHEMICALS..................................................... 14
Overview................................................................... 14
Raw Materials and Ethylene Purchases....................................... 16
Marketing and Sales........................................................ 16
Competition and Industry Conditions........................................ 17
EQUISTAR POLYMERS........................................................... 18
Overview................................................................... 18
Raw Materials.............................................................. 20
Marketing and Sales........................................................ 20
Competition and Industry Conditions........................................ 20
EQUISTAR PROPERTIES AND EMPLOYEE RELATIONS.................................. 21
EQUISTAR RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS.................... 22
LYONDELL-CITGO REFINING LP.................................................. 23
Overview................................................................... 23
Management of LCR.......................................................... 24
Agreements between Lyondell or CITGO and LCR............................... 24
Agreements between Equistar and LCR........................................ 25
Raw Materials.............................................................. 25
Marketing and Sales........................................................ 26
Competition and Industry Conditions........................................ 26
Properties................................................................. 27
Employee Relations......................................................... 27
LYONDELL METHANOL COMPANY, L.P.............................................. 27
Overview................................................................... 27
Management of Lyondell Methanol............................................ 27
Agreements between Equistar and Lyondell Methanol.......................... 28
Raw Materials.............................................................. 28
Marketing and Sales........................................................ 28
Competition and Industry Conditions........................................ 28
Properties................................................................. 28
Employee Relations......................................................... 28
INDUSTRY CYCLICALITY AND OVERCAPACITY....................................... 28
FOREIGN OPERATIONS AND COUNTRY RISKS........................................ 29
JOINT VENTURE RISKS......................................................... 29
OPERATING HAZARDS........................................................... 30
ENVIRONMENTAL MATTERS....................................................... 30
Item 3. Legal Proceedings................................................. 32
Litigation Matters......................................................... 32
Environmental Proceedings.................................................. 33
EXECUTIVE OFFICERS OF THE REGISTRANT........................................ 34
Item 4. Submission of Matters to a Vote of Security Holders............... 35
PART II..................................................................... 36
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 36
Item 6. Selected Financial Data........................................... 37
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 37
Item 7a. Disclosure of Market and Regulatory Risk.......................... 52
Item 8. Financial Statements and Supplementary Data....................... 54
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 128
PART III.................................................................... 128
Item 10. Directors and Executive Officers of the Registrant................ 128
Item 11. Executive Compensation............................................ 128
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................... 128
Item 13. Certain Relationships and Related Transactions.................... 128
PART IV..................................................................... 128
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 128
PART I
Items 1 and 2. Business and Properties
Lyondell Chemical Company ("Lyondell" or the "Company") is a global chemical
company with low cost operations and leading producer positions in all of its
major products. Lyondell manufactures and markets a variety of intermediate and
performance chemicals, including propylene oxide ("PO"), propylene glycol
("PG"), propylene glycol ethers ("PGE"), butanediol ("BDO"), toluene
diisocyanate ("TDI"), styrene monomer ("SM"), and tertiary butyl alcohol ("TBA")
and its derivative, methyl tertiary butyl ether ("MTBE"), which are collectively
known as the Company's intermediate chemicals and derivatives business.
The Company owns 41% of Equistar Chemicals, LP, a Delaware limited partnership
("Equistar"), which operates petrochemicals and polymers businesses. Equistar's
petrochemicals business manufactures and markets olefins, oxygenated products,
aromatics and specialty products. Equistar's olefins are ethylene, propylene and
butadiene and its oxygenated products include ethylene oxide ("EO"), ethylene
glycol ("EG"), ethanol and MTBE. Equistar's aromatics are benzene and toluene.
Equistar's polymers business manufactures and markets polyolefins, including
high density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear
low density polyethylene ("LLDPE"), polypropylene and performance polymers.
Equistar's performance polymers include enhanced grades of polyethylene such as
wire and cable insulating resins, and polymeric powders.
The Company also owns 58.75% of LYONDELL-CITGO Refining LP, a Delaware limited
partnership ("LCR"), which produces refined petroleum products, including
gasoline, low sulfur diesel, jet fuel, aromatics and lubricants ("lube oils").
LCR sells its principal refined products primarily to CITGO Petroleum
Corporation ("CITGO").
In addition, the Company owns 75% of Lyondell Methanol Company, L.P., a Texas
limited partnership ("LMC"), which produces methanol.
Development of Business
Lyondell has been a leader in the ongoing restructuring of the chemical
industry, taking a series of steps to reposition and strengthen its business
portfolio over the past several years.
In July 1993, the Company contributed to LCR the Company's refining business,
including its Houston, Texas refinery (the "Refinery"), its lube oil blending
and packaging plant in Birmingport, Alabama and working capital. The Company
retained an approximately 86% interest in LCR, while CITGO held the remaining
approximately 14% interest. Following completion of a major upgrade project at
the Refinery in the first quarter of 1997, the Company's interest in LCR was
reduced to 58.75%. On December 31, 1998, LCR converted from a Texas limited
liability company to a Delaware limited partnership.
In May 1995, the Company acquired Occidental Chemical Corporation's
("Occidental Chemical") ALATHON(R) HDPE business. Assets involved in this
acquisition included resin production facilities in Matagorda and Victoria,
Texas, related research and development activities and the rights to the
ALATHON(R) trademark.
In December 1996, the Company formed LMC with MCN Investment Corporation
("MCNIC"), a division of MCN Corporation, to own the Company's 248 million
gallons per year methanol plant. Under the terms of the agreement, MCNIC
purchased a 25% interest in the methanol plant. Lyondell retained a 75%
interest and serves as managing partner. Since December 1997, Equistar has
served as the operator of LMC.
In December 1997, Lyondell and Millennium Chemicals Inc. ("Millennium")
combined most of their petrochemicals and polymers businesses to form Equistar.
Lyondell contributed substantially all of the assets comprising its
petrochemicals and polymers business segments, as well as a $345 million note,
in exchange for a 57% interest in Equistar. Equistar also assumed $745 million
of Lyondell's debt. Millennium contributed substantially all of the assets
composing its olefins, ethanol, polyethylene, polypropylene and performance
polymers businesses, which had been held in Millennium Petrochemicals Inc.
("Millennium Petrochemicals"), a wholly
1
owned subsidiary of Millennium. In exchange, Millennium received a 43% interest
in Equistar, Equistar repaid $750 million of debt due to Millennium from its
contributed businesses and Millennium retained $250 million of its accounts
receivable.
In May 1998, Lyondell and Millennium expanded Equistar with the addition of
the ethylene, propylene, EO, EG and other EO derivatives businesses (the
"Occidental Contributed Business") of Occidental Chemical Corporation, a
subsidiary of Occidental Petroleum Corporation ("Occidental"). This addition
included two olefins plants, a plant that produces EO and EO derivatives,
including EG, and Occidental's 50% interest in a joint venture with E.I. DuPont
de Nemours and Company ("DuPont"), which operates an EO/EG plant. Occidental
also contributed more than 950 miles of owned and leased pipelines located on
the Gulf Coast of the United States and the lease of a Lake Charles, Louisiana
olefins plant. Equistar assumed approximately $205 million of Occidental's
debt. Equistar and Occidental also entered into a long-term agreement for
Equistar to supply the ethylene requirements for Occidental's chlorovinyls
business. In June 1998, Equistar borrowed approximately $500 million of
additional debt and distributed cash of approximately $420 million to Occidental
and $75 million to Millennium. Following the May 1998 transaction, Lyondell
owns 41% of Equistar, and Millennium and Occidental each own 29.5%.
In July 1998, Lyondell completed the acquisition (the "ARCO Chemical
Acquisition") of all the outstanding shares of ARCO Chemical Company ("ARCO
Chemical"), the world's largest producer of PO and a leading worldwide producer
of polyether polyols, PG, PGE, TDI, SM, and MTBE. The ARCO Chemical Acquisition
was financed through a bank credit agreement providing for aggregate borrowings
of up to $7 billion (the "Credit Facility"). The acquired business is referred
to as "ARCO Chemical" for actions or events prior to the ARCO Chemical
Acquisition.
On March 31, 2000, Lyondell completed the sale of the polyols business and
ownership interests in its U.S. PO manufacturing operations to Bayer AG and
Bayer Corporation (collectively, "Bayer") for approximately $2.45 billion.
Lyondell used net proceeds of the asset sale to retire a significant portion of
its outstanding debt under the Credit Facility. As part of the transaction,
Lyondell entered into a U.S. PO manufacturing joint venture with Bayer (the "PO
Joint Venture") and a separate joint venture with Bayer for certain related
PO/SM technology (the "PO Technology Joint Venture"). Bayer's ownership
interest in the PO Joint Venture represents ownership of an in kind portion of
the PO production of the PO Joint Venture. Bayer's share of PO production from
the PO Joint Venture will increase from approximately 1.0 billion pounds for the
last nine months of 2000 to approximately 1.6 billion pounds annually in 2004
and thereafter. Lyondell takes in kind the remaining PO production and all of
the co-product (SM and TBA) production from the PO Joint Venture. In addition,
on December 19, 2000, Lyondell and Bayer formed a separate 50/50 joint venture
for the construction of PO-11, a previously announced world-scale PO/SM plant
for which site preparation has begun in Rotterdam, The Netherlands. Lyondell
and Bayer do not share marketing or product sales under either the PO Joint
Venture or PO-11.
Lyondell was incorporated under the laws of Delaware in 1985. Its principal
executive offices are located at 1221 McKinney Street, Suite 700, Houston, Texas
77010 (Telephone: (713) 652-7200).
Strategy
Lyondell believes that its three-prong strategy of Accumulate,
Optimize/Rationalize, Grow will continue to create value for its investors.
This strategy is driven by Lyondell's basic belief that to be a successful
competitor in the chemical industry, the Company must have:
. low total production costs;
. sustainable competitive advantage (driven by technology or market position);
. global reach; and
. scale.
2
Accumulate
Key elements of Lyondell's accumulate strategy to date include:
. the formation of Equistar with Millennium in 1997, and the subsequent
addition of Occidental as an Equistar partner in 1998; and
. the acquisition of ARCO Chemical in 1998.
These actions increased Lyondell's global asset base four-fold, from
approximately $3 billion at the beginning of 1997 to more than $14 billion of
assets currently under management. The value of these actions is reflected in
the nearly three-fold increase in EBITDA (earnings before net interest, taxes,
depreciation and amortization) from approximately $400 million in 1996 to more
than $1 billion in 2000 (including Lyondell's proportionate share of EBITDA from
its joint ventures). In addition, Lyondell acquired considerable intellectual
capital and brought together talented employees through these actions.
Optimize/Rationalize
Lyondell optimizes the financial performance of the businesses that Lyondell
owns and/or operates to extract maximum value and develop a platform for
further, profitable growth. Lyondell has rationalized businesses that either do
not fit the long-term strategic plan or that cannot meet Lyondell's performance
criteria. The optimization/rationalization of Lyondell's assets has included:
. significantly reducing fixed costs by forming Equistar, establishing shared
services arrangements and streamlining staffing;
. improving operational efficiency by shifting production to lower cost, more
efficient sites and simplifying production scheduling, while maintaining or
exceeding Lyondell's current safety and environmental performance;
. continually lowering costs and being more responsive to customer needs,
including through Lyondell's e-business initiatives; and
. divesting non-strategic assets when opportunities arise to receive
appropriate value in exchange.
Lyondell's actions enabled it to reduce long-term debt by more than $2.4
billion in 2000, which improves financial flexibility, including reducing annual
interest expense by more than $200 million.
Grow
Lyondell's growth strategy focuses on those businesses where Lyondell has
long-term sustainable competitive advantages.
Lyondell's core businesses, PO and derivatives, and olefins and polymers,
serve numerous markets that are expected to grow steadily. Lyondell currently
has competitive advantages in each of these businesses due to its size, cost
structure, technology and operating know-how. The major projects that Lyondell
currently is undertaking to maintain and enhance these competitive advantages
include:
. constructing a world-scale PO plant in The Netherlands with an expected
start up in the second quarter of 2003, through a joint venture with Bayer
that links Lyondell with a strong partner in the urethanes market (the major
use for PO);
. constructing a BDO plant in The Netherlands for start up in the second
quarter of 2002 to enable Lyondell to serve the growing needs of BDO
customers in Europe and elsewhere internationally;
. participating with Reliant Energy in the construction of a cogeneration
facility at Equistar's Channelview, Texas complex for startup in 2002, which
will enable Equistar to lower energy costs;
. debottlenecking LDPE capacity and other target polymer expansion projects;
and
. continuing focused research and development programs to strengthen
Lyondell's technology portfolio in its core businesses.
3
Lyondell continues to pursue growth opportunities that are cash flow and
earnings accretive to Lyondell with returns in excess of the cost of capital.
Summary Description of Business Segments
Prior to the ARCO Chemical Acquisition in July 1998, the Company reported its
results of operations in three segments: petrochemicals; polymers; and refining.
Following the acquisition, the Company added intermediate chemicals and
derivatives as a reportable segment, with the operations of the acquired
business forming that segment. The Company's petrochemicals and polymers
segments are conducted through Equistar, and the Company's refining segment is
conducted through LCR. The methanol business conducted through LMC is not a
reportable segment for financial disclosure purposes.
4
THE COMPANY'S BUSINESS
The following chart shows the organization of Lyondell, as well as 2000 sales
revenues for Lyondell, Equistar, LCR and LMC.
[Chart appears here showing: 2000 consolidated sales revenue (excluding revenues
of Equistar, LCR and Lyondell Methanol) of $4.0 billion for Lyondell Chemical
Company and Subsidiaries and the primary products of Lyondell's Intermediate
Chemicals and Derivatives Business Segment; Lyondell's equity investments in
each of Equistar (41%), LCR (58.75%) and Lyondell Methanol (75%); the 2000 sales
revenues of each of Equistar, LCR and Lyondell Methanol, which were $7.5
billion, $4.1 billion and $165 million, respectively; and the primary products
of each of the petrochemicals, polymers, refining and methanol businesses]
5
Sales revenues shown above include sales to affiliates. Sales revenues shown
do not include Bayer's share of production from the PO Joint Venture. For
additional segment information for each of the years in the three-year period
ended December 31, 2000, see Notes 5, 6 and 22 of Notes to Consolidated
Financial Statements.
INTERMEDIATE CHEMICALS AND DERIVATIVES
Overview
Lyondell is a leading global manufacturer and marketer of intermediate
chemicals and performance chemical products used in a broad range of consumer
goods. The segment's core product is PO, which is produced through two distinct
technologies based on indirect oxidation processes that yield co-products. One
process yields TBA as the co-product; the other yields SM as the co-product.
The two technologies are mutually exclusive, necessitating that a manufacturing
facility be dedicated either to PO/TBA or to PO/SM. The intermediate chemicals
and derivatives segment also manufactures numerous derivatives of PO and TBA.
Among these are PG, PGE and BDO, derivatives of PO, and MTBE, a principal
derivative of TBA. This segment also manufactures and markets TDI.
In North America, the Company produces PO, TBA, PG and PGE at its Bayport,
Texas plants and PO, SM, MTBE and BDO at its Channelview, Texas plants. The
Bayport PO/TBA plants and the Channelview PO/SM I plant are held by the PO Joint
Venture. The Channelview PO/SM II plant is held through a joint venture with
other third parties. The Company also produces isocyanates at its Lake Charles,
Louisiana plant. In Europe, the Company produces PO, TBA, PG and MTBE at plants
in Rotterdam, The Netherlands, and Fos-sur-Mer, France and PGE at its Rotterdam
plant. In the Asia Pacific region, the Company has a 50% interest in the joint
venture Nihon Oxirane Co., Ltd. ("Nihon Oxirane"), which operates a PO/SM
plant in Chiba, Japan. In Europe, the Company also currently obtains TDI
through tolling and market-based supply agreements with Rhodia. In the third
quarter of 2000, construction began on a new BDO facility in Rotterdam, with a
planned 275 million pound annual capacity and expected startup in the second
quarter of 2002. Additionally, site preparation of PO-11, a world-scale PO/SM
plant located in Rotterdam, The Netherlands, began in the fourth quarter of
2000. PO-11, which has a planned total capacity of 625 million pounds of PO and
1.4 billion pounds of SM, is operated by Lyondell and owned 50% by Lyondell and
50% by Bayer. PO-11 currently is expected to start up in the second quarter of
2003. Lyondell and Bayer do not share marketing or product sales under either
the PO Joint Venture or PO-11.
The Company estimates, based in part on published data, that worldwide demand
for PO was approximately 9.8 billion pounds in 2000. Approximately 90% of that
volume was consumed in the manufacture of three families of PO derivative
products: polyols, PG and PGE. The remainder was consumed in the manufacture of
a growing segment of performance products, including BDO and its derivatives.
The Company sells less than one billion pounds of its annual capacity of PO in
the merchant market and consumes the rest in the production of derivatives. PG
is principally used to produce unsaturated polyester resins. PG is also used in
certain food, cosmetic and pharmaceutical applications and in automotive
coolants and aircraft deicers. PGE are used as high performance solvents. BDO
and its derivatives are utilized in the production of fibers, engineering
plastics, pharmaceuticals, personal care products and high performance coatings.
TDI is used in the production of urethanes for products such as automotive
seating and home furnishings.
SM is produced and traded worldwide for commodity and specialty polymer
applications, such as polystyrene and unsaturated polyester resins, as well as
various uses in the rubber industry. Based on published data, worldwide demand
for SM in 2000 was approximately 46 billion pounds.
Lyondell converts most of its TBA to isobutylene, which is reacted with
methanol to produce MTBE, an oxygenated gasoline blending component that
increases octane and reduces automotive emissions. Worldwide demand for MTBE in
2000 was approximately 519,000 barrels per day, based on published data. This
demand had increased over the past several years as a result of the Clean Air
Act Amendments of 1990 (the ``Clean Air Act Amendments''), state and local
regulations and the need for incremental octane in gasoline in the United States
and other countries. In the United States, the Clean Air Act Amendments set
minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not
meeting specified air quality standards. However, while studies by federal and
state agencies and other organizations have shown that MTBE is safe for use in
gasoline, is not carcinogenic and is
6
effective in reducing automotive emissions,the presence of MTBE in some water
supplies in California and other states due to gasoline leaking from underground
storage tanks and in surface water from recreational water craft has led to
public concern that MTBE may, in certain limited circumstances, affect the taste
and odor of drinking water supplies, and thereby lead to possible environmental
issues.
Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict or
ban the use of MTBE. At the state level, certain states, including California,
have initiated actions, supported by recent legislation, to reduce, limit or
eliminate the use of MTBE. Such actions, to be effective, would require (i) a
waiver of the state's oxygenate mandate, (ii) Congressional action in the form
of an amendment to the Clean Air Act or (iii) replacement of MTBE with another
oxygenate such as ethanol, a more costly, untested, and less widely available
additive. At the federal level, a blue ribbon panel appointed by the U.S.
Environmental Protection Agency (the "EPA") issued its report on July 27, 1999.
That report recommended, among other things, reducing the use of MTBE in
gasoline. During 2000, the EPA announced its intent to seek legislative changes
from Congress to give the EPA authority to ban MTBE over a three-year period.
Such action would only be granted through amendments to the Clean Air Act.
Additionally, the EPA is seeking a ban of MTBE utilizing rulemaking authority
contained in the Toxic Substance Control Act. It would take at least three
years for such a rule to issue. Recently, however, senior policy analysts at
the U.S. Department of Energy presented a study stating that banning MTBE would
create significant economic risk. The presentation did not identify any
benefits from banning MTBE. The EPA initiatives mentioned above or other
governmental actions could result in a significant reduction in Lyondell's MTBE
sales. The Company has developed technologies to convert TBA into alternate
gasoline blending components should it be necessary to reduce MTBE production in
the future.
In Europe, MTBE is expected to benefit from new legislation in the 15-nation
European Union. The so-called "Auto/Oil Legislation" aimed at reducing air
pollution from vehicle emissions was enacted in 1998, and refineries have
increased consumption of MTBE to meet the new blending requirements. In
addition, the European Union recently completed a risk-benefit analysis
regarding MTBE, and determined that MTBE use in gasoline does not have a
significant negative impact on either the environment or the health of the
community at large. Although the European Union continues to monitor
governmental findings and actions in the United States, no restrictive action
with respect to MTBE is currently planned.
7
The following table outlines the intermediate chemicals and derivatives
segment's primary products, annual processing capacities as of January 1, 2001,
and the primary uses for such products. Unless otherwise specified, annual
processing capacities were calculated by estimating the number of days in a
typical year that a production unit of a plant is expected to operate, after
allowing 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 capacities set forth
below. Capacities shown include 100% of the capacity of joint venture
facilities.
Product Annual Capacity Primary Uses
- ------------------------------------------ ------------------------ -------------------------------------------------------
Propylene Oxide (PO) 3.87 billion pounds (a) PO is a key component of polyols, PG, PGE and BDO.
Propylene Glycol (PG) 960 million pounds PG is used to produce unsaturated polyester resins for
bathroom fixtures and boat hulls; lower toxicity
antifreeze, coolants and aircraft deicers; and
cosmetics and cleaners.
Propylene Glycol Ethers (PGE) 300 million pounds PGE are used as lower toxicity solvents for paints,
coatings and cleaners.
Butanediol (BDO) 120 million pounds BDO is used in the manufacture of engineering resins,
films, personal care products, pharmaceuticals,
coatings, solvents and adhesives.
Toluene Diisocyanate (TDI) 564 million pounds(b) TDI is combined with polyols to produce flexible foam
for automotive seating and home furnishings.
Styrene Monomer (SM) 3.65 billion pounds(c) SM is used to produce plastics, such as expandable
polystyrene for packaging, foam cups and containers,
insulation products and durables and engineering
resins.
Methyl Tertiary Butyl 897 million gallons MTBE is a gasoline component for reducing emissions in
Ether (MTBE) (58,500 barrels/day) reformulated gasolines and enhancing octane value.
_________________
(a) Includes approximately 1.0 billion pounds in the last nine months of 2000
and approximately 1.5 billion pounds in 2001, which represents Bayer's share
under the PO Joint Venture, and 100% of the 360 million pounds of capacity
of Nihon Oxirane, of which the Company owns 50%. See "Joint Ventures and
Other Agreements."
(b) Includes approximately 264 million pounds of average annual TDI capacity
processed by Rhodia at its plants in Lille and Pont de Claix, France.
Pursuant to a tolling agreement and a resale agreement, Lyondell currently
is required to purchase an average minimum of 212 million pounds of TDI per
year from Rhodia. As discussed in "Joint Ventures and Other Agreements"
below, in the second quarter of 2000, Lyondell entered into a series of
arrangements with Rhodia to expand the capacity at the Pont de Claix plant.
(c) Includes 1.1 billion pounds committed to third party investors under long-
term processing agreements and 100% of the 830 million pounds of capacity of
Nihon Oxirane, of which the Company owns 50%. See "Joint Ventures and Other
Agreements."
Raw Materials
The principal hydrocarbon raw materials purchased by the intermediate
chemicals and derivatives segment are propylene, butanes, ethylene, benzene and
methanol. The market prices of these raw materials historically have been
related to the price of crude oil and its principal refinery derivatives and
natural gas liquids. These materials are received in bulk quantities via
pipeline or marine vessels. The segment's raw materials requirements are
purchased from numerous suppliers in the United States and Europe, with which
the Company has established contractual relationships, as well as in the spot
market.
8
The Company's raw material suppliers include Equistar, which is a leading
producer of propylene, ethylene and benzene and is expected to be the major
supplier of these raw materials to Lyondell's U.S. business in 2001. See Note 5
of Notes to Consolidated Financial Statements.
The intermediate chemicals and derivatives segment is a large volume consumer
of isobutane for chemical production. The Company has invested in facilities,
or entered into processing agreements with unrelated third parties, to convert
the widely available commodity, normal butane, to isobutane. The Company is
also a large consumer of oxygen for its PO/TBA plants at Bayport, Texas;
Rotterdam, The Netherlands; and Fos-sur-Mer, France.
In order to assure adequate and reliable sources of supply at competitive
prices and rates, the Company is a party to long-term agreements and other
arrangements with suppliers of raw materials, products, industrial gas and other
utilities.
Marketing and Sales
In 2000, most of the segment's revenues were derived from sales to, or
processing agreements with, unrelated third parties. Over the past three years,
no single unrelated third party customer, nor any related party customer,
accounted for more than 10% of total revenues in any one year.
The intermediate chemicals and derivatives segment delivers products through
sales agreements, processing agreements and spot sales as well as product swaps.
It purchases SM, MTBE and limited amounts of BDO for resale to the extent that
customer demand for these co-products exceeds its production. Production levels
for co-products are based upon the demand for PO and the relative market
economics of the co-products.
The segment has a number of multi-year PO processing (or tolling) and sales
agreements. This reflects an effort to mitigate the adverse impact of
competitive factors and economic business cycles on demand for the segment's PO.
In addition, Bayer's ownership interest in the PO Joint Venture represents
ownership of an in kind portion of the PO production of the PO Joint Venture.
See "Joint Ventures and Other Agreements."
Lyondell sells most of its SM production into the United States merchant
market and to selected export markets through sales or tolling agreements. The
segment is a party to a number of multi-year SM sales and processing agreements.
See "Joint Ventures and Other Agreements."
The Company has a take-or-pay MTBE sales contract with Atlantic Richfield
Company ("ARCO"), now wholly owned by BP Amoco p.l.c. ("BP"). The contract has
an initial term expiring December 31, 2002 and provides for formula-based
prices. In addition, the Company also sells its MTBE production under market-
based sales agreements, including multi-year agreements, and in the spot market.
The majority of the segment's PO derivatives are sold through market-based
sales contracts under annual or multi-year arrangements.
The segment's sales are made by Company marketing and sales personnel and
through distributors and independent agents located in the Americas, Europe and
the Asia Pacific region. Through centralization of certain sales and order
fulfillment functions in regional customer service centers located in Houston,
Texas and Rotterdam, The Netherlands, the Company has reduced its sales office
infrastructure for this segment around the world, while providing superior
service to its worldwide customer base. Lyondell also has long-term contracts
for distribution and logistics to ensure reliable supply to its customers.
For data relating to foreign operations, see Note 22 of Notes to Consolidated
Financial Statements.
Joint Ventures and Other Agreements
On March 31, 2000, Lyondell contributed its Channelview, Texas PO/SM I plant
and its Bayport, Texas PO/TBA plants to the PO Joint Venture. Bayer's ownership
interest in the PO Joint Venture represents ownership
9
of an in kind portion of the PO production of the PO Joint Venture. Bayer's
share of PO production from the PO Joint Venture will increase from
approximately 1.0 billion pounds for the last nine months of 2000 to
approximately 1.6 billion pounds annually in 2004 and thereafter. Lyondell takes
in kind the remaining PO production and all co-product (SM and TBA) production
from the PO Joint Venture. As part of the transaction, Lyondell and Bayer also
formed the separate PO Technology Joint Venture through which Bayer was granted
a non-exclusive and non-transferable right to use certain PO/SM technology in
the PO Joint Venture. Under the terms of the operating and logistics agreements,
Lyondell operates the PO Joint Venture plants and arranges and coordinates the
logistics of PO delivery. Lyondell and Bayer also have formed a separate joint
venture for the construction of PO-11 in Rotterdam, The Netherlands with an
expected startup date in the second quarter of 2003. Lyondell and Bayer each
have a 50% share in the PO-11 joint venture, pursuant to which they each take in
kind 50% of the PO and SM production of PO-11. Lyondell and Bayer do not share
marketing or product sales under either the PO Joint Venture or PO-11.
Lyondell's PO/SM II plant at the Channelview, Texas complex is owned by the
Company together with third-party equity investors. The Company retains a
majority interest in the PO/SM II plant and is the operator of the plant. A
portion of the SM output of the PO/SM II plant is committed to the third-party
investors under long-term processing agreements. As of December 31, 2000, the
Company had over 1.1 billion pounds of SM capacity, or 30% of its worldwide
capacity, committed to third party investors under long-term processing
arrangements.
The Company has a 50% equity interest in Nihon Oxirane, a joint venture with
Sumitomo Chemical Co., Ltd. ("Sumitomo") and Showa Denko K.K. Since 1976,
Nihon Oxirane has operated a PO/SM plant in Chiba, Japan. Lyondell and Sumitomo
conduct joint research and development programs under various agreements
originally entered into in connection with the Nihon Oxirane joint venture.
In January 1995, ARCO Chemical entered into a tolling agreement and a resale
agreement with Rhodia covering the entire TDI output of Rhodia's two plants in
France, which have a combined average annual capacity of approximately 264
million pounds. Lyondell is currently required to purchase an average minimum
of 212 million pounds of TDI per year under the agreements. The aggregate
purchase price is a combination based on plant cost and market price. In the
second quarter 2000, Lyondell entered into a series of arrangements with Rhodia
to expand the capacity at the Pont de Claix plant, which provides TDI to
Lyondell under the tolling agreement. The expansion will add approximately 105
million pounds of average annual capacity at the Pont de Claix plant, resulting
in a total average annual capacity of approximately 269 million pounds, which is
scheduled to be available in the fourth quarter of 2001. After the completion
of the expansion, all of the TDI that Lyondell receives from Rhodia will come
from the Pont de Claix plant, which is designed to have a more efficient cost
structure. Lyondell's average minimum TDI purchase commitment under the revised
tolling agreement will be 197 million pounds of TDI per year and will be
extended through 2016. The resale agreement, which covered output at the Lille
plant, will expire December 31, 2001. The TDI Lyondell purchases from Rhodia is
marketed principally in Europe, the Middle East, Africa and Asia.
Competition and Industry Conditions
Competition within the intermediate chemicals and derivatives segment of the
chemical industry is significant and is based on a variety of factors, including
quality, product price, reliability of supply, technical support, customer
service and potential substitute materials. Profitability in this segment is
affected by the worldwide level of demand along with vigorous price competition
which may intensify due to, among other things, new industry capacity. Demand
is a function of economic growth in the United States and elsewhere in the
world, which fluctuates. It is not possible to predict accurately the changes
in raw material costs, market conditions and other factors that will affect
industry margins in the future. Capacity share figures for the segment 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 agreements.
The Company's major worldwide PO competitors are The Dow Chemical Company
("Dow") and Shell Chemical Company ("Shell"). Dow's operations are based on
chlorohydrin technology. Shell utilizes a proprietary PO/SM technology. Based
on published data relating to the PO market, including the PO Joint Venture's
total capacity, the Company believes it owns and/or operates approximately 31%
of the total worldwide capacity for PO.
10
As part of the Bayer transaction, Lyondell and Bayer have formed a separate
joint venture for the construction of PO-11 in Rotterdam, The Netherlands with
an expected startup in the second quarter of 2003. The Company is also
cooperating with Sumitomo on the commercialization of new PO technology, which
is scheduled to be available in 2003. Shell and BASF AG ("BASF"), through
their joint venture, ELLBA, commenced operation in October 1999 of a PO/SM plant
in The Netherlands, using Shell technology. Shell and BASF, as 50-50 partners,
have also broken ground for the construction of a PO/SM plant in Singapore,
which is scheduled for start up in the last half of 2002. In addition, Repsol
Quimica, S.A. started up a PO/SM plant in Spain in 2000, using technology
originally licensed from ARCO Chemical. The Company believes that a significant
amount of this additional capacity already has been absorbed by the market. The
Company also expects increasing integration to occur as current merchant-market
buyers establish their own sources of PO supply.
The Company both manufactures and has long-term tolling agreements for TDI.
The Company competes with many TDI producers worldwide, including BASF, Bayer
and Dow. Based on published data regarding TDI capacity, the Company believes
it is the second largest producer of TDI worldwide and has approximately 16% of
total worldwide capacity.
The Company competes with many MTBE producers worldwide, the most significant
of which is Saudi Basic Industries Corp. ("SABIC"). Based on published data
regarding MTBE capacity, the Company believes that, combined with Equistar, it
is one of the largest producers of MTBE worldwide. MTBE also faces competition
from substitute products such as ethanol as well as other octane components.
The Company competes with several SM producers worldwide, among which are
BASF, Chevron Phillips, Mitsubishi, Samsung and Shell. Based on published data
regarding SM capacity, the Company believes that it is one of the largest
producers of SM worldwide.
Properties
The Company leases its corporate offices located in Houston, Texas. As part
of the ARCO Chemical Acquisition, Lyondell acquired ARCO Chemical's research
facility in Newtown Square, Pennsylvania, which is leased from a third party.
The Company's European headquarters are located in leased facilities in
Maidenhead, England, and its Asia Pacific headquarters are located in leased
facilities in Hong Kong. The non-U.S. regional customer service center is
located in leased facilities in Rotterdam, The Netherlands.
Depending on location and market needs, the Company's production facilities
can receive primary raw materials by pipeline, railcar, truck, barge or ship and
can deliver finished products in drums or by pipeline, railcar, truck, barge,
isotank or ship. The Company charters ships, owns and charters barges and
leases isotanks and railcars for the dedicated movement of products between
plants, products to customers or terminals, or raw materials to plants, as
necessary. The Company leases liquid and bulk storage and warehouse facilities
at terminals in the Americas, Europe and the Asia Pacific region. In the
Rotterdam outer harbor area, the Company owns and operates an on-site butane
storage tank, propylene spheres, pipeline connections and a jetty that
accommodates deep-draft vessels.
The principal manufacturing facilities of the segment are set forth below.
These facilities are wholly-owned by Lyondell unless otherwise noted.
Location Principal Products
- --------------------------------------------------------------- -----------------------------------
Bayport (Pasadena), Texas (a)............................. PO, PG, PGE, TBA, isobutylene
Channelview, Texas(a)(b).................................. PO, BDO, SM, MTBE
Lake Charles, Louisiana................................... TDI
Fos-sur-Mer, France....................................... PO, PG, TBA, MTBE
Botlek, Rotterdam, The Netherlands........................ PO, PG, PGE, TBA, MTBE, isobutylene
Chiba, Japan(c)........................................... PO, SM
________
(a) The Bayport PO/TBA plants and the Channelview PO/SM I plant are held by
the PO Joint Venture.
(b) Third-party investors hold a minority ownership interest in the PO/SM II
plant at the Channelview facility.
11
(c) The PO/SM plant located in Chiba, Japan is owned by Nihon Oxirane, a joint
venture in which the Company holds a 50% interest through a subsidiary.
Research and Technology; Patents and Trademarks
The Company possesses a body of patented and unpatented technologies and trade
secrets relating to its products, processes and the design and operation of its
plants, all of which are valuable to the intermediate chemicals and derivatives
segment. Lyondell has several patents and patent applications pending for
inventions resulting from its research relating to new PO processes for
producing propylene oxide without co-products. Lyondell believes that
utilization of this technology would reduce the cost of manufacturing PO and
eliminate the production of less valuable co-products.
The Company does not believe that the loss of any individual patent or trade
secret would have a material adverse effect on its intermediate chemicals and
derivatives business. The basic patents relating to the Company's PO/SM and
PO/TBA co-product technologies have expired. However, the technology is not
readily licensable, and Lyondell's experience and know-how in this area provide
it with a significant competitive advantage over others trying to replicate the
technology.
The principal research and development facility for the segment is located in
Newtown Square, Pennsylvania, with a technical center in Villers Saint Paul,
France. The Company's research and development expenditures for 2000, 1999 and
1998 were $35 million, $58 million, and $65 million, respectively. The decrease
in the Company's research and development expenditures in 2000 is a result of
the sale of the polyols business to Bayer on March 31, 2000. The 1998
expenditures are on a pro forma basis for the ARCO Chemical Acquisition.
Lyondell and Sumitomo conduct joint research and development programs under
various agreements originally entered into in connection with the Nihon Oxirane
joint venture.
Employee Relations
On December 31, 2000, Lyondell had approximately 3,200 full-time employees,
with approximately 23% of the U.S. employees represented by labor unions.
Lyondell's employees include approximately 460 persons who became Lyondell
employees effective January 1, 2000 in connection with a November 1999 agreement
with Equistar to expand the scope of shared administrative services provided by
Lyondell to Equistar. These persons had been employed by Equistar in the areas
of information technology, human resources, materials management and raw
material supply, customer supply chain, accounting, facility services and legal.
Lyondell also uses the services of independent contractors in the routine
conduct of its business. The Company believes its relations with its employees
are good.
EQUISTAR CHEMICALS, LP
Management of Equistar
Equistar is a limited partnership organized under the laws of the State of
Delaware. Lyondell owns its interest in Equistar through two wholly owned
subsidiaries, one of which serves as a general partner of Equistar and one of
which serves as a limited partner. Similarly, Millennium owns its interest in
Equistar through two wholly owned subsidiaries, one a general partner and one a
limited partner. Occidental owns its interest in Equistar through three wholly
owned subsidiaries, one a general partner and two limited partners. Lyondell
holds a 41% interest, and Millennium and Occidental each hold a 29.5% interest
in Equistar. The Amended and Restated Partnership Agreement of Equistar (the
"Equistar Partnership Agreement") governs, among other things, ownership, cash
distributions, capital contributions and management of Equistar. In September
2000, Millennium publicly announced that it had terminated the January 2000
announced active marketing of its 29.5% interest in Equistar. However, there
can be no assurance that Millennium will not sell its interest in Equistar at
some point. The Company does not expect any such sale to affect Equistar's
operations or results.
The Equistar Partnership Agreement provides that Equistar is governed by a
Partnership Governance Committee, consisting of nine representatives, three
appointed by each general partner. Matters requiring
12
unanimous agreement by the representatives of Lyondell, Millennium and
Occidental include changes in the scope of Equistar's business, the five-year
strategic plan (and annual updates thereof), the sale or purchase of assets or
capital expenditures of more than $30 million not contemplated by the strategic
plan, investments by Equistar's partners over certain amounts, merging or
combining with another business and certain other matters. All decisions of the
Partnership Governance Committee that do not require unanimity among Lyondell,
Millennium and Occidental may be made by Lyondell's representatives alone. The
day-to-day operations of Equistar are managed by the executive officers of
Equistar. Dan F. Smith, the Chief Executive Officer of Lyondell, also serves as
Chief Executive Officer of Equistar.
Agreements between Lyondell and Equistar
Lyondell and Equistar entered into an agreement on December 1, 1997, providing
for the transfer of assets to Equistar. Among other things, such agreement sets
forth representations and warranties by Lyondell with respect to the transferred
assets and requires indemnification by Lyondell with respect thereto. Such
agreement also provides for the assumption by Equistar of, among other things,
third party claims that are related to certain pre-closing contingent
liabilities that are asserted prior to December 1, 2004, to the extent the
aggregate thereof does not exceed $7 million, third party claims related to
pre-closing contingent liabilities that are asserted for the first time after
December 1, 2004, certain obligations for indebtedness, liabilities for products
sold after December 1, 1997, regardless of when manufactured, and certain long
term liabilities. Millennium Petrochemicals and affiliates of Occidental (the
"Occidental Subsidiaries") entered into similar agreements with Equistar with
respect to the transfer of their respective assets and Equistar's assumption of
liabilities.
Also in connection with the formation of Equistar, Lyondell contributed a
promissory note for $345 million payable to Equistar, which Lyondell repaid with
proceeds of the Credit Facility in July 1998.
If Lyondell, Millennium or Occidental or any of their affiliates desire to
initiate or pursue an opportunity to undertake, engage in, acquire or invest in
a business or activity or operation within the scope of the business of
Equistar, such opportunity must first be offered to Equistar. Equistar has
certain options to participate in the opportunity, but if it determines not to
participate, the party offering the opportunity is free to pursue it on its own.
If the opportunity within Equistar's scope of business constitutes less than 25%
of an acquisition that is otherwise not within the scope of its business,
Lyondell, Millennium or Occidental, as the case may be, may make such
acquisition, provided that the portion within the scope of Equistar's business
is offered to Equistar pursuant to the foregoing provisions.
During 1998 and 1999, Lyondell provided certain administrative services to
Equistar, including certain legal, risk management and treasury services, tax
services and employee benefit plan administration, and Equistar provided
services to Lyondell in the areas of health, safety and environmental, human
resources, information technology and legal. As a consequence of these services,
Equistar made a monthly payment to Lyondell as described in Note 5 of Notes to
Consolidated Financial Statements. In November 1999, Lyondell and Equistar
announced an agreement to utilize shared services over a broader range,
including information technology, human resources, materials management and raw
material supply, customer supply chain, health, safety and environmental,
engineering and research and development, facility services, legal, accounting,
treasury, internal audit, and tax (the "Shared Services Agreement"). Beginning
January 1, 2000, employee-related and indirect costs were allocated between the
two companies in the manner prescribed in the Shared Services Agreement while
direct third party costs, incurred exclusively for either Lyondell or Equistar,
were charged directly to that entity. Equistar and Millennium Petrochemicals are
also parties to a number of agreements for the provision of services, utilities
and materials from one party to the other at common locations, principally
LaPorte, Texas and Cincinnati, Ohio. Lyondell, Millennium Petrochemicals and the
Occidental Subsidiaries each entered into a Master Intellectual Property
Agreement with Equistar. The Master Intellectual Property Agreements provide for
(i) the transfer of certain intellectual property of Lyondell, Millennium
Petrochemicals and the Occidental Subsidiaries related to the businesses each
contributed to Equistar, (ii) certain rights and licenses to Equistar with
respect to intellectual property retained by Lyondell, Millennium Petrochemicals
or the Occidental Subsidiaries that was not solely related to the business of
Equistar but is useful in such business and (iii) certain rights and licenses
from Equistar to Lyondell, Millennium Petrochemicals and the Occidental
Subsidiaries, respectively, with respect to intellectual property transferred to
Equistar that Lyondell, Millennium Petrochemicals and the Occidental
Subsidiaries may use with respect to their other businesses.
13
Lyondell, Millennium, Occidental and certain of its affiliates and Equistar
are parties to an Amended and Restated Parent Agreement dated as of May 15,
1998, which provides that, among other things, each of Lyondell, Millennium and
an Occidental affiliate guarantees the performance by their respective
subsidiaries under various agreements entered into in connection with the
formation of Equistar, including the Equistar Partnership Agreement and the
asset transfer agreements providing for the transfer of assets by Lyondell,
Millennium Petrochemicals and the Occidental Subsidiaries, respectively, to
Equistar.
EQUISTAR PETROCHEMICALS
Overview
Petrochemicals are fundamental to many segments of the economy, including the
production of consumer products, housing components, automotive products and
other durable and nondurable goods. Equistar produces a variety of
petrochemicals, including olefins, oxygenated products, aromatics and specialty
products, at twelve facilities located in six states. Olefins include ethylene,
propylene and butadiene. Oxygenated products include EO, EG, ethanol and MTBE.
Aromatics produced are benzene and toluene. Equistar's petrochemical products
are used to manufacture polymers and intermediate chemicals, which are used in a
variety of consumer and industrial products. 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. With the strong growth of end-use products derived from ethylene
during the past several decades, especially as plastics have developed into low-
cost, high-performance substitutes for a wide range of materials such as metals,
paper and glass, U.S. ethylene consumption has grown by an average annual rate
of approximately 4%.
The Chocolate Bayou, Corpus Christi and two Channelview, Texas olefins plants
use petroleum liquids, including naphtha, condensates and gas oils (collectively
"Petroleum Liquids"), to produce ethylene. Assuming the co-products are
recovered and sold, the cost of ethylene production from Petroleum Liquids
historically has been less than the cost of producing ethylene from natural gas
liquids, including ethane, propane and butane (collectively, "NGLs"). The use
of Petroleum Liquids results in the production of a significant amount of co-
products such as propylene, butadiene, benzene and toluene, and specialty
products, such as dicyclopentadiene ("DCPD"), isoprene, resin oil, piperylenes
and hydrogen. Based upon independent third-party surveys, management believes
that its Channelview facility is the lowest production cost olefins facility in
the United States. Equistar's Morris, Illinois; Clinton, Iowa; Lake Charles,
Louisiana; and LaPorte, Texas plants are designed to primarily use NGLs, which
primarily produce ethylene with some co-products such as propylene. A
comprehensive pipeline system connects the Gulf Coast plants with major olefins
customers. Raw materials are sourced both internationally and domestically and
are shipped via vessel and pipeline.
Equistar produces EO and its primary derivative, EG, at facilities located at
Pasadena, Texas and through a 50/50 joint venture with DuPont in Beaumont,
Texas. The Pasadena facility also produces other derivatives of EO, principally
ethers and ethanolamines. EG is used in antifreeze and in polyester fibers,
resins and films. Ethylene oxide and its derivatives are used in many consumer
and industrial end uses, such as detergents and surfactants, brake fluids and
polyurethane foams for seating and bedding.
Equistar produces synthetic ethanol at its Tuscola, Illinois plant by a direct
hydration process that combines water and ethylene. Equistar also owns and
operates facilities in Newark, New Jersey and Anaheim, California for denaturing
ethanol by the addition of certain chemicals. In addition, it produces small
volumes of diethyl ether, a by-product of its ethanol production, at Tuscola.
These ethanol products are ingredients in various consumer and industrial
products as described more fully in the table below.
The following table outlines Equistar's primary petrochemical products, annual
processing capacity as of January 1, 2001, and the primary uses for such
products. Unless otherwise specified, annual processing capacity was calculated
by estimating the 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 represent 100% of the capacity of Equistar, of which the
Company owns 41%.
14
Product Annual Capacity Primary Uses
- --------------------------- ---------------------------------- -----------------------------------------------------------------
OLEFINS:
- --------
Ethylene 11.6 billion pounds Ethylene is used as a raw material to manufacture polyethylene,
EO, ethanol, ethylene dichloride and ethylbenzene.
Propylene 5.0 billion pounds (a) 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 and engineered plastics.
OXYGENATED PRODUCTS:
- --------------------
Ethylene Oxide (EO) 1.1 billion pounds ethylene oxide EO is used to produce surfactants, industrial cleaners,
equivalents; 400 million pounds cosmetics, emulsifiers, paint, heat transfer fluids and ethylene
as pure ethylene oxide glycol.
Ethylene Glycol (EG) 1 billion pounds EG is used to produce polyester fibers and film, polyethylene
terephthalate ("PET") resin, heat transfer fluids and automobile
antifreeze.
Ethylene Oxide 225 million pounds EO derivatives are used to produce paint and coatings, polishes,
Derivatives 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.
MTBE 284 million gallons MTBE is a gasoline component for reducing emissions in
(18,500 barrels/day)(b) reformulated gasolines and enhancing octane value.
AROMATICS:
- ----------
Benzene 310 million gallons Benzene is used to produce styrene, phenol and cyclohexane.
These products are used in the production of nylon, plastics,
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
feedstock for benzene production, and a core ingredient in TDI,
a compound used in urethane production.
SPECIALTY PRODUCTS:
- -------------------
Dicyclopentadiene 130 million pounds DCPD is a component of inks, adhesives and polyester resins for
(DCPD) molded parts such as tub and shower stalls and boat hulls.
Isoprene 145 million pounds Isoprene is a component of premium tires, adhesive sealants and
other rubber products.
Resin Oil 150 million pounds Resin oil is used in the production of hot-melt-adhesives, inks,
sealants, paints and varnishes.
Piperylenes 100 million pounds Piperylenes are used in the production of adhesives, inks and
sealants.
Hydrogen 44 billion cubic feet Hydrogen is used by refineries to remove sulfur from process gas
in heavy crude oil.
Alkylate 337 million gallons(c) Alkylate is a premium gasoline blending component used by
refiners to meet Clean Air Act standards for reformulated
gasoline.
Diethyl Ether 5 million gallons Diethyl ether is used in laboratory reagents, gasoline and
diesel engine starting fluid, liniments, analgesics and
smokeless gunpowder.
__________
(a) Does not include refinery-grade material or production from the product
flexibility unit at Equistar's Channelview facility, which can convert
ethylene and other light petrochemicals into propylene. This facility has a
current annual processing capacity of one billion pounds per year of
propylene.
(b) Includes up to 44 million gallons/year of capacity operated for the benefit
of LCR.
(c) Includes up to 172 million gallons/year of capacity operated for the
benefit of LCR.
15
Raw Materials and Ethylene Purchases
The raw materials cost for olefins production is generally the largest
component of total cost for the petrochemicals business. Olefins plants with
the flexibility to consume a wide range of raw materials generally are able to
maintain higher profitability during periods of changing energy and
petrochemicals prices than olefins plants that are restricted in their raw
material processing capability, assuming the co-products are recovered and sold.
The primary raw materials used in the production of olefins are Petroleum
Liquids (also referred to as "heavy raw materials") and NGLs (also referred to
as "light raw materials"). Petroleum Liquids have had a historical cost
advantage over NGLs such as ethane and propane, assuming the co-products are
recovered and sold. For example, using Petroleum Liquids typically generates
between one and four cents additional margin per pound of ethylene produced
compared to using ethane. Equistar has the capability to realize this margin
advantage at the Channelview, Corpus Christi and Chocolate Bayou facilities.
This cost advantage is expected to continue due to the significantly higher
capital cost for new plants with the capability to process both heavy raw
materials (Petroleum Liquids) and their resulting co-products in contrast to
processing light raw materials (NGLs).
The Channelview facility is uniquely flexible in that it can process 100%
Petroleum Liquids or up to 80% NGLs. The Corpus Christi plant can process up to
70% Petroleum Liquids or up to 70% NGLs, subject to the availability of NGLs.
The Chocolate Bayou facility processes 100% Petroleum Liquids. Equistar's four
other olefins facilities currently process only NGLs. Equistar's LaPorte
facility can process heavier NGLs, such as butane and natural gasoline.
The majority of Equistar's Petroleum Liquids requirements are purchased via
contractual arrangement from a variety of third-party domestic and foreign
sources. Equistar also purchases Petroleum Liquids on the spot market from
third-party domestic and foreign sources. Equistar purchases NGLs from a wide
variety of domestic and international sources. Equistar obtains a portion of
its olefins raw material requirements from LCR at market-related prices.
In addition to producing its own ethylene, Equistar assumed certain agreements
of an affiliate of Millennium for the purchase of ethylene from Gulf Coast
producers at market prices. Ethylene purchase obligations under the Millennium
contracts terminated at the end of 2000.
Marketing and Sales
Ethylene produced by the LaPorte, Morris and Clinton facilities is generally
consumed as raw material by the polymers operations at those sites, except for
the ethylene produced at LaPorte and sold to Millennium. Ethylene and propylene
produced at the Channelview, Corpus Christi, Chocolate Bayou and Lake Charles
olefins plants are generally distributed by pipeline or via exchange agreements
to Equistar's Gulf Coast polymer and ethylene oxide and glycol facilities as
well as to Equistar's affiliates and third parties. As of January 1, 2001,
approximately 80% of the ethylene produced by Equistar was consumed internally
or sold to Equistar's affiliates at market-related prices.
With respect to sales to third parties, Equistar sells a majority of its
olefins products to customers with whom Lyondell and Occidental have had long-
standing relationships. Sales to third parties generally are made under written
agreements that typically provide for monthly negotiation of price; customer
purchase of a specified minimum quantity; and three- to six-year terms with
automatic one- or two-year term extension provisions. Some contracts may be
terminated early if deliveries have been suspended for several months. No
single unrelated third party customer accounted for more than 10% of total
segment revenues in 2000.
Ethylene oxide and ethylene glycol are sold under long-term contracts of three
to five years' duration to third-party customers, with pricing negotiated on a
quarterly basis to reflect market conditions. Glycol ethers are sold primarily
into the solvent and distributor markets under one-year contracts at market
prices, as are ethanolamines and brake fluids. Ethanol and ethers are sold to
third-party customers under one-year contracts at market prices.
16
Equistar licenses MTBE technology under a license from an affiliate of
Lyondell and sells a significant portion of MTBE produced at one of its two
Channelview units to Lyondell at market-related prices. The production from the
second unit is consumed by LCR for gasoline blending. MTBE produced at
Chocolate Bayou is sold to third parties at market-related prices.
Equistar sells most of its aromatics production under contracts that have
initial terms ranging from two to three years and that typically contain
automatic one-year term extension provisions. These contracts generally provide
for monthly or quarterly price adjustments based upon current market prices.
Aromatics produced by LCR, with the exception of benzene, are marketed by
Equistar for LCR under contracts with similar terms to Equistar's own. Benzene
produced by LCR is sold directly to Equistar at market-related prices.
Most of the ethylene and propylene production of the Channelview, Chocolate
Bayou, Corpus Christi and Lake Charles facilities is shipped via a 1,430-mile
pipeline system which has connections to numerous Gulf Coast ethylene and
propylene consumers. This pipeline system, some of which is owned and some of
which is leased by Equistar, 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 olefins 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. Some propylene is
shipped by ocean-going vessel. Ethylene oxide is shipped by railcar, and its
derivatives are shipped by railcar, truck, isotank or ocean-going vessel.
Butadiene, aromatics and other petrochemicals are distributed by pipeline,
railcar, truck, barge or ocean-going vessel.
Competition and Industry Conditions
The basis for competition in Equistar's petrochemicals products is price,
product quality, product deliverability and customer service. Equistar competes
with other large domestic producers of petrochemicals, including BP, Chevron
Phillips Chemical Company LP ("Chevron Phillips"), Dow, Exxon Mobil Corporation
("Exxon Mobil"), Huntsman Chemical Company and Shell. Industry consolidation,
including the combinations of British Petroleum and Amoco, Exxon and Mobil, and
Dow and Union Carbide Corporation and the formation of Chevron Phillips, has
concentrated the industry in fewer, although larger and stronger, competitors.
The combined rated capacity of Equistar's olefins units at January 1, 2001 was
approximately 11.6 billion pounds of ethylene per year or approximately 16% of
total North American production capacity. Based on published rated production
capacities, Equistar believes it is currently the second largest producer of
ethylene in North America. North American ethylene rated capacity at January 1,
2001 was approximately 72 billion pounds per year. Of the total ethylene
production capacity in the United States, approximately 95% is located along the
Gulf Coast.
Petrochemicals profitability is affected by raw materials costs and the level
of demand for petrochemicals and derivatives, along with vigorous 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. Capacity
additions in excess of annual growth also put pressure on margins. It is not
possible to predict accurately the changes in raw material costs, market
conditions and other factors that will affect petrochemical industry margins in
the future.
The petrochemicals industry historically has experienced significant
volatility in profitability due to capacity utilization. Producers of
olefins primarily for merchant supply to unaffiliated customers typically
experience greater variations in their sales volumes and profitability when
industry supply and demand relationships are not balanced in comparison to more
integrated competitors, i.e., those with a higher proportion of captive demand
for olefins derivatives production. Equistar currently consumes or sells to its
partners' downstream derivatives facilities approximately 80% of its ethylene
production, which has the effect of reducing volatility.
Equistar's other major commodity chemical products also experience cyclical
market conditions similar to, although not necessarily coincident with, those of
ethylene.
17
EQUISTAR POLYMERS
Overview
Through facilities located at nine plant sites in four states, Equistar's
polymers segment manufactures a wide variety of polyolefins, including
polyethylene, polypropylene and various performance polymers.
Equistar currently manufactures polyethylene using a variety of technologies
at five facilities in Texas and at its Morris, Illinois and Clinton, Iowa
facilities. The Morris and Clinton facilities are the only polyethylene
facilities located in the U.S. Midwest and enjoy a freight cost advantage over
Gulf Coast producers in delivering products to customers in the U.S. Midwest and
on the East Coast of the United States. Polyethylene is used in a wide variety
of consumer products, packaging materials and industrial applications.
Equistar produces performance polymer products, which include enhanced grades
of polyethylene and polypropylene, at several of its polymers facilities. The
Company 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 also
produces wire and cable insulating resins and compounds at Morris, Illinois; and
LaPorte, Texas; and wire and cable insulating compounds at Tuscola, Illinois;
and Fairport Harbor, Ohio. Wire and cable insulating resins and compounds are
used to insulate copper and fiber optic wiring in power, telecommunication,
computer and automobile applications. Equistar's Morris, Illinois and Pasadena,
Texas facilities manufacture polypropylene using propylene produced as a co-
product of Equistar's ethylene production as well as propylene purchased from
third parties. Polypropylene is sold for various applications in the
automotive, housewares and appliance industries.
18
The following table outlines Equistar's polymers and performance polymers
products, annual processing capacity at January 1, 2001, and the primary uses
for such products. The table excludes the capacity of Equistar's Port Arthur,
Texas facility, which was permanently shut down February 28, 2001. Unless
otherwise specified, annual processing capacity was calculated by estimating the
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 represent 100% of the capacity of
Equistar, of which the Company owns 41%.
Product Annual Capacity Primary Uses
- -------------------------------------- ------------------- ------------------------------------------------------------------
High density polyethylene (HDPE) 3.1 billion pounds HDPE is used to manufacture grocery, merchandise and trash
(a) 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 and pails for items from paint to fresh fruits and
vegetables; safety equipment such as hard hats; house wrap for
insulation; bottles for household/industrial chemicals and
motor oil; milk/water/juice bottles; and large (rotomolded)
tanks for storing liquids like agricultural and lawn care
chemicals.
Low density polyethylene (LDPE) 1.5 billion pounds LDPE is used to manufacture food packaging films; plastic
(a) 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. Specialized forms of LDPE are Ethyl Methyl
Acrylate (``EMA''), which provides adhesion in a variety of
applications, and Ethylene Vinyl Acetate (``EVA''), which is
used in foamed sheets, bag-in-box bags, vacuum cleaner hoses,
medical tubing, clear sheet protectors and flexible binders.
Linear low density polyethylene 1.1 billion pounds LLDPE is used to manufacture garbage and lawn-leaf bags;
(LLDPE) housewares; lids for coffee cans and margarine tubs; and large
(rotomolded) toys like outdoor gym sets.
Polypropylene 680 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.
Wire and Cable Insulating (b) Wire and cable insulating resins and compounds are used to
Resins and Compounds insulate copper and fiber optic wiring in power,
telecommunication, computer and automobile applications.
Polymeric Powders (b) Polymeric powders are component products in structural and bulk
molding compounds, parting agents and filters for appliance,
automotive and plastics processing industries.
Polymers for Adhesives, Sealants (b) Polymers are components in hot-melt-adhesive formulations for
and Coatings case, carton and beverage package sealing, glue sticks,
automotive sealants, carpet backing and adhesive labels.
Reactive Polyolefins (b) Reactive polyolefins are functionalized polymers used to bond
non-polar and polar substrates in barrier food packaging, wire
and cable insulation and jacketing, automotive gas tanks and
metal coating applications.
Liquid Polyolefins (b) Liquid polyolefins are a diesel fuel additive to inhibit
freezing.
_______________
(a) Excludes capacity of Port Arthur, Texas facility, which was permanently
shut down February 28, 2001.
(b) These are enhanced grades of polyethylene and are included in the capacity
figures for HDPE, LDPE and LLDPE above, as appropriate.
19
Raw Materials
With the exception of the Chocolate Bayou polyethylene plant, Equistar's
polyethylene and polypropylene production facilities can receive their ethylene
and propylene directly from Equistar's petrochemical facilities via Equistar's
olefins pipeline system or from on-site production. The polyethylene plants at
Chocolate Bayou, LaPorte and Pasadena, Texas are pipeline-connected to third
parties and can receive ethylene via exchanges or purchases. The polypropylene
facility at Morris, Illinois also receives propylene from third parties.
Marketing and Sales
Equistar's polymers products are primarily sold to an extensive base of
established customers. Approximately 50% of these customers have term contracts,
typically having a duration of one to three years. The remainder is generally
sold without contractual term commitments. In either case, in most of the
continuous supply relationships, prices are subject to change upon mutual
agreement between Equistar and the customer. No single unrelated third party
customer accounted for more than 10% of total segment revenues in 2000.
Polymers are primarily distributed via railcar. Equistar owns or leases,
pursuant to long-term lease arrangements, approximately 8,600 railcars for use
in its polymers business. Equistar sells its polymers products in the United
States and Canada primarily through its own sales organization. It generally
engages sales agents to market its products in the rest of the world.
Competition and Industry Conditions
The basis for competition in Equistar's polymers products is price, product
performance, product quality, product deliverability and customer service.
Equistar competes with other large producers of polymers, including Atofina, BP,
Chevron Phillips, Dow, Eastman Chemical Company, Exxon Mobil, Formosa Plastics,
Huntsman Chemical Company, Solvay Polymers and Westlake Polymers. Industry
consolidation, including the combinations of British Petroleum and Amoco, Exxon
and Mobil, and Dow and Union Carbide Corporation, the formation of Chevron
Phillips, and the pending polymers business combinations between BP and Solvay,
has concentrated the industry in fewer, although larger and stronger,
competitors. Polymers profitability is affected by the worldwide level of demand
for polymers, along with vigorous price competition which may intensify due to,
among other things, new domestic and foreign industry 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 predict accurately the
changes in raw material costs, market conditions and other factors which will
affect polymers industry margins in the future.
Based on published rated industry capacities, Equistar is the third largest
producer of polyethylene in North America and is a leading domestic producer of
polyolefins powders, compounds, wire and cable insulating resins, and polymers
for adhesives. The combined rated capacity of Equistar's polyethylene units as
of January 1, 2001 was approximately 5.7 billion pounds per year or
approximately 14% of total industry capacity in North America. There are
approximately 15 other North American producers of polyethylene, including
Chevron Phillips, Dow, Exxon Mobil, Nova Chemicals and Solvay Polymers.
Equistar's polypropylene capacity, 680 million pounds per year as of January 1,
2001, represents approximately 4.5% of the total North American polypropylene
capacity. There are approximately 15 other North American competitors in the
polypropylene business, including Atofina, Basell, BP, Chevron Phillips, Dow and
Exxon Mobil.
20
EQUISTAR PROPERTIES AND EMPLOYEE RELATIONS
Equistar's principal manufacturing facilities and principal products are set
forth below. All of these facilities are wholly owned by Equistar unless
otherwise noted.
Location Principal Products
- ---------------------------------------- ----------------------------------------------------------------
Beaumont, Texas(a)...................... EG
Channelview, Texas(b)................... Ethylene, Propylene, Butadiene, Benzene, Toluene, DCPD,
Isoprene, Resin Oil, Piperylenes, Alkylate and MTBE
Corpus Christi, Texas................... Ethylene, Propylene, Butadiene and Benzene
Chocolate Bayou, Texas(c)............... HDPE
Chocolate Bayou, Texas(c)(d)............ Ethylene, Propylene, Butadiene, Benzene, Toluene, DCPD,
Isoprene, Resin Oil and MTBE
LaPorte, Texas (e)...................... Ethylene, Propylene, LDPE, LLDPE, HDPE, Liquid Polyolefins,
Wire and Cable Insulating Resins and Compounds
Matagorda, Texas........................ HDPE
Pasadena, Texas(f)...................... EO, EG and Other EO Derivatives
Pasadena, Texas(f)...................... Polypropylene and LDPE
Victoria, Texas(d)...................... HDPE
Lake Charles, Louisiana(g).............. Ethylene, and Propylene
Morris, Illinois........................ Ethylene, Propylene, LDPE, LLDPE and Polypropylene
Tuscola, Illinois....................... Ethanol, Diethyl Ether, Wire and Cable Insulating Compounds
and Polymeric Powders
Clinton, Iowa........................... Ethylene, Propylene, LDPE and HDPE
Fairport Harbor, Ohio(g)................ Wire and Cable Insulating Compounds
Anaheim, California..................... Denatured Alcohol
Newark, New Jersey...................... Denatured Alcohol
_____________
(a) The Beaumont facility is owned by PD Glycol, a partnership owned 50% by
Equistar and 50% by DuPont.
(b) The Channelview facility has two ethylene processing units. LMC owns a
methanol plant located within the Channelview facility on property LMC
leases from Equistar. A third party owns and operates a facility on land
leased from Equistar that is used to purify hydrogen from LMC's methanol
plant. Equistar also operates a styrene maleic anhydride unit and a
polybutadiene unit which are owned by a third party and are located on
property leased from Equistar within the Channelview facility.
(c) Millennium and Occidental each contributed a facility located in Chocolate
Bayou. These facilities are not on contiguous property.
(d) The land is leased, and the facility is owned.
(e) All of the HDPE capacity and a portion of the LDPE capacity at the LaPorte
facility has been idled since the first quarter of 2000.
(f) Occidental and Lyondell each contributed facilities located in Pasadena.
These facilities are primarily on contiguous property, and Equistar
operates them as one site to the extent practicable. These facilities are
operated in conjunction with the LaPorte facility.
(g) The facilities and land are leased.
Equistar also owns a storage facility, a brine pond and a tract of vacant land
in Mont Belvieu, Texas, located approximately 15 miles east of the Channelview
facility. Storage capacity for up to approximately 13 million barrels of NGLs,
ethylene, propylene and other hydrocarbons is provided in salt domes at the Mont
Belvieu facility. There are an additional 3 million barrels of ethylene and
propylene storage operated by Equistar on leased property in Markham, Texas.
Equistar uses an extensive olefins 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 Tuscola, Chocolate Bayou, Matagorda, Victoria, Corpus
Christi and LaPorte facilities. Equistar owns and leases several pipelines
connecting the Channelview facility, the Refinery and the Mont Belvieu storage
facility; these pipelines are used to transport feedstocks, butylenes, hydrogen,
butane, MTBE and unfinished gasolines. Equistar also owns a barge docking
facility near the Channelview facility capable of
21
berthing eight barges and related terminal equipment for loading and unloading
raw materials and products. Equistar owns or leases pursuant to long-term lease
arrangements approximately 12,200 railcars for use in its business.
Equistar sub-leases its executive offices and corporate headquarters from
Lyondell in downtown Houston. In addition, Equistar owns facilities which house
the Morris and Cincinnati research operations. Equistar also leases sales
facilities and leases storage facilities, primarily in the Gulf Coast area, from
various third parties for the handling of products.
As of December 31, 2000, Equistar employed approximately 3,700 full-time
employees. Equistar also uses the services of independent contractors in the
routine conduct of its business. Approximately 270 hourly workers are covered by
collective bargaining agreements. Equistar believes that its relations with its
employees are good.
EQUISTAR RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS
Equistar maintains a significant research and development facility in
Cincinnati, Ohio. Equistar has additional research facilities in Morris,
Illinois; Matagorda, Texas; and Chocolate Bayou, Texas. Equistar's research and
development expenditures for 2000, 1999 and 1998 were $38 million, $42 million,
and $40 million, respectively.
The Channelview facility employs proprietary technology owned by Lyondell to
convert ethylene and other light petrochemical streams into propylene.
Consistent with its strategy, Equistar is conducting a research project to
investigate alternative olefin feedstocks for use at the Channelview, Chocolate
Bayou and/or Corpus Christi facilities. These alternative olefin feedstocks
could significantly lower costs and provide an additional competitive advantage
at these facilities.
Recent polymer industry announcements relate to the development of single-site
catalysts. Successful development and commercialization of these catalysts are
expected to result in enhanced polymer properties and higher margin products.
Equistar is conducting research and developing several non-metallocene single-
site catalysts (STAR(TM) catalysts) for use in the production of polyolefin
resins. Equistar has several patents and patent applications pending in
connection with research and development efforts in this area. Equistar does
not believe that the loss of any individual patent or trade secret would have a
material adverse effect on its petrochemicals or polymers businesses.
In August 2000, Equistar and ABB Lummus Global formed a joint venture, Novolen
Technology Holdings C.V., to acquire the Novolen(R) technology business from
Targor GmbH, a subsidiary of BASF AG. The joint venture, owned 80% by ABB and
20% by Equistar, licenses the Novolen(R) technology and supports new catalyst
and process development through joint research and development programs.
Equistar uses numerous technologies in its operations, many of which are
licensed from third parties. Equistar and Maruzen Petrochemical Co., Ltd.
jointly own a bi-modal process for the production of HDPE. Equistar uses this
bi-modal process at its Matagorda, Texas facility. Significant licenses held by
Equistar include the Unipol process for the production of LLDPE, and certain
other licenses for the production of EO, EG, polyethylene and polypropylene.
Equistar is not dependent on the retention of any particular license, and it
believes that the loss of any individual license would not have a material
adverse effect on its operations.
Equistar acquired rights to numerous trademarks from Lyondell and Millennium
Petrochemicals in connection with its formation, including ALATHON(R),
KromaLon(R), Petrothene(R), Ultrathene(R), Vynathene(R) and Microthene(R).
Equistar's right to use these trademarks is perpetual as long as Equistar
actively uses the trademarks. Equistar is not dependent upon any particular
trademark, and it believes the loss of any individual trademark would not have a
material adverse effect on its operations.
22
LYONDELL-CITGO REFINING LP
Overview
Lyondell participates in petroleum refining through an equity interest in LCR.
Lyondell holds a 58.75% interest and CITGO holds a 41.25% interest in LCR. LCR
owns and operates the Refinery, which is located on the Houston Ship Channel in
Houston, Texas. The Refinery is a full conversion refinery designed to run
extra heavy (17 degree API), high sulfur crude oil which is less expensive than
other grades of crude. Processing extra heavy, high sulfur crude oil in
significant quantities requires a refinery with extensive coking, catalytic
cracking, hydrotreating and desulfurization capabilities, i.e., a "complex
refinery." The Refinery's complexity enables it to operate in full conversion
mode producing a slate of products that consists primarily of high value, clean
products (many refineries produce less high value, clean products such as
gasoline and diesel and produce significant quantities of heavy fuel oil due to
a lack of equipment to convert these fuels into premium products). In addition,
the Refinery's complexity allows it to produce most of these clean products as
premium grades such as reformulated gasoline, jet fuel, low sulfur diesel and
aromatics chemicals. The Refinery's products include conventional and
reformulated gasoline, low sulfur diesel, jet fuel, aromatics, lubricants
(industrial lubricants, white oils and process oils), carbon black oil, sulfur,
residual fuel and petroleum coke. The aromatics chemicals produced by the
Refinery are benzene, toluene, orthoxylene and paraxylene. These products are
sold to intermediate chemicals and polyester intermediate manufacturers and are
ultimately used in clothing, soft drink bottles and drink cups, audio and video
tapes, and resins.
LCR was formed in 1993 to upgrade the Refinery's ability to process
substantial additional volumes of lower cost, extra heavy, higher margin crude
oil. An upgrade project completed in 1997 (the "Upgrade Project") increased
the extra heavy crude oil processing capability of the Refinery from 130,000
barrels per day of 22 degree API gravity crude oil to approximately 260,000
barrels per day of 17 degree API gravity crude oil. The 17 degree API gravity
crude oil is more viscous and dense than traditional crude oil and contains
higher concentrations of sulfur and heavy metals, making it more difficult to
refine into gasoline and other high value fuel products but less costly to
purchase. The Upgrade Project also included expansion of the Refinery's
reformulated gasoline and low sulfur diesel production capability.
The Upgrade Project, which cost approximately $1.1 billion, was funded through
a combination of approximately $485 million in capital contributions to LCR by
CITGO (including cash contributions for financing costs and reinvestment of
operating cash distributions), a $450 million construction loan credit facility
(the "Construction Facility") provided by a group of banks, and $166 million
and $16 million in subordinated loans to LCR from Lyondell and CITGO,
respectively. On May 5, 2000, Lyondell and CITGO arranged interim financing for
LCR to repay the $450 million outstanding under the LCR Construction Facility.
On September 15, 2000, Lyondell and CITGO completed the syndication of one-year
credit facilities, including a $450 million term loan to replace the interim
financing and a $70 million revolving credit facility to be used for working
capital and other general business purposes. Lyondell and CITGO have agreed to
pursue a refinancing of the indebtedness, although the final terms have not been
determined. Based on previous experience of refinancing LCR's debt and the
current conditions of the financial markets, the management of LCR, Lyondell and
CITGO anticipate that this debt can be refinanced prior to its maturity.
In exchange for CITGO's Upgrade Project capital contributions, together with
an additional $130 million in equity contributions CITGO had previously made to
LCR, CITGO's participation interest in LCR increased effective April 1, 1997,
and is currently 41.25%. CITGO had a one-time option, which expired unexercised
on September 30, 2000, to increase its participation interest in LCR up to 50%
by making an additional equity contribution.
23
The following table outlines LCR's primary products, annual rated capacity as
of January 1, 2001, and the primary uses for such products. The term "rated
capacity," as used in this table, is calculated by estimating the 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
feedstock mix. Because the rated capacity of a production unit is an estimated
amount, the actual production volumes may be more or less than the rated
capacity. Capacities shown represent 100% of the capacity of LCR, of which the
Company owns 58.75%.
Product Rated Capacity Primary Uses
- ------------------------------- --------------------------- ------------------------------------------------------------------
Gasoline (a)................... 120,000 barrels per day Automotive fuel
Diesel (#2 Distillate)(a)...... 75,000 barrels per day Fuel for diesel cars and trucks
Jet Fuel (a)................... 25,000 barrels per day Aviation fuel
Benzene (b).................... 50 million gallons per year Nylon for clothing and consumer items; polystyrene for
insulation, packaging and drink cups
Toluene (c).................... 46 million gallons per year Gasoline component and chemical feedstock for producing
benzene
Paraxylene (c)................. 400 million pounds per year Polyester fibers for clothing and fabrics, PET soft drink
bottles and films for audio and video tapes
Orthoxylene (c)................ 270 million pounds per year Plasticizer in products such as rainwear, shower curtains,
toys and auto upholstery and an intermediate in paints and
fiberglass
Lube Oils (a).................. 4,000 barrels per day Automotive and industrial engine and lube oils, railroad
engine additives and white oils for food-grade applications
__________
(a) Produced by LCR and sold to CITGO.
(b) Produced by LCR and sold to Equistar.
(c) Produced by LCR and marketed for LCR by Equistar.
Management of LCR
LCR is a limited partnership organized under the laws of the state of
Delaware. Lyondell owns its interest in LCR through two wholly owned
subsidiaries, one of which serves as a general partner and one of which serves
as a limited partner. Similarly, CITGO, which is an indirect wholly owned
subsidiary of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company
of the Republic of Venezuela, owns its interest in LCR through two wholly owned
subsidiaries, a general partner and a limited partner.
LCR is governed by a Limited Partnership Agreement (the "LCR Partnership
Agreement"), which provides for, among other things, the ownership and cash
distribution rights of the partners. The LCR Partnership Agreement also
provides that LCR is managed by a Partnership Governance Committee, which is
composed of six representatives, three appointed by each general partner.
Actions requiring unanimous consent of the representatives include amendment of
the LCR Partnership Agreement, borrowing money, delegations of authority to
committees, certain purchase commitments and capital expenditures. The day-to-
day operations of the Refinery are managed by two general managers, one of which
is a loaned employee of Lyondell and the other of which is a loaned employee of
CITGO.
Agreements between Lyondell or CITGO and LCR
LCR is a party to a number of agreements with Lyondell and CITGO. Under the
terms of a long-term product sales agreement ("Products Agreement"), CITGO
purchases from LCR substantially all of the refined products produced at the
Refinery. Lyondell currently performs administrative services for LCR pursuant
to an Administrative Services Agreement, which is renegotiated annually. Under
the terms of lubricant sales agreements, CITGO purchases all of the lubricant
products manufactured by LCR. In conjunction therewith, CITGO operates LCR's
Birmingport, Alabama lubricants plant.
24
Agreements between Equistar and LCR
Prior to the formation of Equistar, Lyondell was a party with LCR to multiple
agreements designed to preserve many of the synergies between the Refinery and
the Channelview petrochemicals facility. These agreements were assumed by
Equistar from Lyondell effective December 1, 1997. Economic evaluations at the
Channelview facility and the Refinery are made to maximize product utilization,
which may be local use, use at the other site, or third party sales. Certain
Refinery products (propane, butane, low-octane naphthas, heating oils, and gas
oils) can be used as raw materials for olefins production, and certain
Channelview facility olefins by-products can be processed by the Refinery into
gasoline. Butylenes from the Refinery are tolled through the Channelview
facility for the production of alkylate and MTBE for gasoline blending.
Hydrogen from the Channelview facility is used at the Refinery for sulfur
removal and product stabilization. In accordance with a marketing service
agreement scheduled to expire no later than June 2001, Equistar currently serves
as LCR's sole agent to market aromatics products, with the exception of benzene,
produced by LCR. Benzene produced by LCR is sold directly to Equistar at market-
related prices. See Notes 5 and 6 of Notes to Consolidated Financial
Statements.
Raw Materials
In 1993, LCR entered into a long-term crude supply agreement ("Crude Supply
Agreement") with Lagoven, S.A., now known as PDVSA Petroleo y Gas S.A. ("PDVSA
Oil"), an affiliate of CITGO. A substantial amount of the crude oil used by
LCR as a raw material for the Refinery is purchased under the Crude Supply
Agreement. Both PDVSA Oil and CITGO are direct or indirect wholly owned
subsidiaries of PDVSA.
Under the Crude Supply Agreement, PDVSA Oil is required to sell, and LCR is
required to purchase, 230,000 barrels per day of extra heavy crude oil, which
constitutes approximately 88% of the Refinery's refining capacity of 260,000
barrels per day of crude oil. In late April 1998, LCR received notification
from PDVSA Oil that it would reduce deliveries of crude oil on the grounds of
announced OPEC production cuts. LCR began receiving reduced deliveries of crude
oil from PDVSA Oil in August 1998, amounting to 195,000 barrels per day in that
month. LCR was advised by PDVSA Oil in May 1999 of a further reduction in the
deliveries of crude oil supplied under the Crude Supply Agreement to 184,000
barrels per day, effective May 1999. On several occasions since then, PDVSA Oil
has further reduced crude oil deliveries, although it has made payments in
partial compensation for such reductions. Subsequently, PDVSA Oil unilaterally
increased deliveries of crude oil to LCR to 195,000 barrels per day effective
April 2000, to 200,000 barrels per day effective July 1, 2000 and to 230,000
barrels per day effective October 1, 2000.
By letter dated February 9, 2001, PDVSA Oil informed LCR that the Venezuelan
government, through the Ministry of Energy and Mines, has instructed that
production of certain grades of crude oil be reduced effective February 1, 2001.
The letter states that PDVSA Oil declares itself in a force majeure situation,
but does not announce any reduction in crude oil deliveries to LCR. Although
some reduction in crude oil delivery may be forthcoming, it is unclear as to the
level of reduction, if any, which may be anticipated. LCR has consistently
contested the validity of PDVSA Oil's and PDVSA's reductions in deliveries under
the Crude Supply Agreement and, on March 12, 2001, Lyondell, on behalf of LCR,
sent a letter to PDVSA Oil and PDVSA disputing the existence and validity of the
purported force majeure situation declared by the February 9 letter.
The Crude Supply Agreement incorporates formula prices to be paid by LCR for
the crude oil supplied based on the market value of a slate of refined products
deemed to be produced from each particular crude oil or feedstock, less: (i)
certain deemed refining costs, adjustable for inflation and energy costs; (ii)
certain actual costs; and (iii) a deemed margin, which varies according to the
grade of crude oil or other feedstock delivered. Although the Company believes
that the Crude Supply Agreement reduces the volatility of LCR's earnings and
cash flows, the Crude Supply Agreement also limits LCR's ability to enjoy higher
margins during periods when the market price of crude oil is low relative to
then current market prices for refined products. In addition, if the actual
yields, costs or volumes of the LCR refinery differ substantially from those
contemplated by the Crude Supply Agreement, the benefits of this agreement to
LCR could be substantially different, and could result in lower earnings and
cash flow for LCR. Furthermore, there may be periods during which LCR's costs
for crude oil under the Crude Supply Agreement may be higher than might
otherwise be available to LCR from other sources. A disparate increase in the
25
price of crude oil relative to the prices for its products, such as was
experienced in 1999, has the tendency to make continued performance of its
obligations under the Crude Supply Agreement less attractive to PDVSA Oil.
The Crude Supply Agreement, which expires on December 31, 2017, provides that
Lyondell controls all of LCR's decisions and enforcement rights in connection
with the Crude Supply Agreement so long as PDVSA has a direct or indirect
ownership interest in LCR.
There are risks associated with enforcing the provisions of contracts with
companies such as PDVSA Oil that are affiliates of a foreign sovereign nation.
All of the crude oil supplied by PDVSA Oil under the Crude Supply Agreement is
produced in the Republic of Venezuela, which has experienced economic
difficulties and attendant social and political changes in recent years. It is
impossible to predict how governmental policies may change under the current or
any subsequent Venezuelan government. In addition, there are risks associated
with enforcing judgments of United States courts against entities whose assets
are located largely outside of the United States and whose management does not
reside in the United States. Although the parties have negotiated alternative
arrangements in the event of certain force majeure conditions, including
Venezuelan governmental or other actions restricting or otherwise limiting PDVSA
Oil's ability to perform its obligations, any such alternative arrangements may
not be as beneficial to LCR as the Crude Supply Agreement.
PDVSA has announced that it intends to renegotiate the crude supply agreements
that it has with all third parties, including LCR. In light of PDVSA's
announced intent, there can be no assurance that PDVSA Oil will continue to
perform its obligations under the Crude Supply Agreement. However, they have
confirmed that they expect to honor their commitments if a mutually acceptable
restructuring of the Crude Supply Agreement is not achieved. In recent years,
the Company and PDVSA have had discussions covering both a restructuring of the
Crude Supply Agreement and a broader restructuring of the LCR partnership. The
Company is unable to predict whether changes in either arrangement will occur.
If the Crude Supply Agreement is modified or terminated or this source of
crude is otherwise interrupted, LCR could experience significantly lower
earnings and cash flows. Depending on then current market conditions, any
modification, breach or termination of the Crude Supply Agreement could
adversely affect LCR, since LCR would have to purchase all or a portion of its
crude oil feedstocks in the merchant market, which could subject LCR to
significant volatility and price fluctuations. There can be no assurance that
alternative crude oils with similar margins would be available for purchase by
LCR.
Marketing and Sales
The Refinery produces gasoline, low sulfur diesel, jet fuel, aromatics,
lubricants and certain industrial products. On a weekly basis, LCR evaluates
and determines the optimal product output mix for the Refinery, based on spot
market prices and conditions. Under the Products Agreement, CITGO is obligated
to purchase and LCR is required to sell 100% of the gasoline, jet fuel, heating
oil, diesel fuel, coke and sulfur produced by the Refinery. CITGO purchases
these products at prices based on industry benchmark indexes. For example, the
price for gasoline is based on prices published by Platts Oilgram, an industry
trade publication. The Products Agreement provides that Lyondell controls all
of LCR's material decisions and enforcement rights in connection with the
Products Agreement so long as CITGO has a direct or indirect ownership interest
in LCR. The Products Agreement expires on December 31, 2017.
Competition and Industry Conditions
All of LCR's gasoline, low sulfur diesel, jet fuel, and lube oils are sold to
CITGO.
The refining business tends to be volatile as well as cyclical. Crude oil
prices, which are impacted by worldwide political events and the economics of
exploration and production in addition to refined products demand, are the
largest source of this volatility. Demand for refined products is influenced by
seasonal and short-term factors such as weather and driving patterns, as well as
by longer term issues such as energy conservation and alternative fuels.
Industry refined products supply is also dependent on industry operating
capabilities and on long-term refining capacity trends. However, management
believes that the combination of the Crude Supply Agreement and the
26
Products Agreement has the effect of stabilizing earnings and cash flows and
reducing the market-driven aspects of such volatility.
With a capacity of approximately 260,000 barrels per day, the Company believes
that the Refinery is North America's largest full conversion (i.e., not
producing asphalt or high sulfur heavy fuel) refinery capable of processing 100%
17 API crude oil.
Among LCR's refining competitors are major integrated petroleum companies and
domestic refiners that are owned by or affiliated with major integrated oil
companies. Based on published industry data, as of January 1, 2001, there were
152 crude oil refineries in operation in the United States, and total domestic
refinery capacity was approximately 16.5 million barrels per day. During 2000,
LCR processed an average of 245,000 barrels per day of crude oil or
approximately 1.6% of all U.S. crude runs.
Properties
LCR owns the real property, plant and equipment which comprise the Refinery,
located on approximately 700 acres in Houston, Texas. Units include a fluid
catalytic cracking unit, cokers, reformers, crude distillation units, sulfur
recovery plants and hydrodesulfurization units, as well as a lube oil
manufacturing plant and an aromatics recovery unit. LCR also owns the real
property, plant and equipment which comprise a lube oil blending and packaging
plant in Birmingport, Alabama. LCR owns a pipeline used to transport gasoline,
kerosene and heating oil from the Refinery to the GATX Terminal located in
Pasadena, Texas to interconnect with common carrier pipelines.
Employee Relations
At December 31, 2000, LCR employed approximately 1,000 full-time employees.
LCR also uses the services of independent contractors in the routine conduct of
its business. Approximately 600 hourly workers are covered by a collective
bargaining agreement between LCR and the Paper, Allied-Industrial, Chemical and
Energy Workers International Union (formerly the Oil, Chemical and Atomic
Workers Union), which expires in January 2002. LCR believes that relations with
its employees are good.
LYONDELL METHANOL COMPANY, L.P.
Overview
Lyondell produces methanol through its 75% interest in LMC, of which Lyondell
serves as the managing partner. The remaining 25% interest in LMC is held by
MCNIC. LMC owns a methanol plant located within the Channelview facility.
Effective December 1, 1997, Equistar began serving as the operator of the LMC
plant pursuant to an operating agreement with LMC. The LMC plant is a heat-
integrated plant, which includes extraction capabilities for co-product
hydrogen.
Methanol is used to produce MTBE and a variety of chemical intermediates,
including formaldehyde, acetic acid and methyl methacrylate. These
intermediates are used to produce bonding adhesives for plywood, personal care
products, polyester fibers and plastics. Other end uses include solvents,
windshield wash and antifreeze applications. LMC is advantageously located near
its Gulf Coast customer base.
Management of Lyondell Methanol
LMC is a limited partnership organized under the laws of the State of Texas.
Lyondell owns its interest in LMC through two wholly owned subsidiaries, one of
which serves as a general partner and the managing partner of LMC and one of
which serves as a limited partner. Similarly, MCNIC owns its interest in LMC
through two wholly owned subsidiaries, one a general partner and one a limited
partner.
27
Agreements between Equistar and Lyondell Methanol
Certain agreements entered into by Lyondell and LMC were assigned to Equistar
effective December 1, 1997. Equistar acts as operator of the LMC plant pursuant
to an operating agreement with LMC. In addition, Equistar markets LMC's product
pursuant to agreements with LMC. LMC also leases from Equistar the real
property on which its methanol plant is located.
Raw Materials
LMC's plant processes natural gas as its primary raw material. The
Channelview facility is connected to a diverse natural gas supply network. The
natural gas for LMC's plant is purchased under Equistar master agreements with
various third party suppliers, which master agreements are administered by
Lyondell personnel under the Shared Services Agreement.
Marketing and Sales
LMC sells all of its methanol output to Equistar, which then sells a large
portion of it to third parties and Lyondell. The agreement between LMC and
Equistar concerning sales provides that LMC bears the market risk associated
with Equistar's re-sales to third parties. Equistar's sales agreements with
third parties for the methanol have initial terms ranging from two to three
years and typically contain automatic one year term extension provisions. These
contracts generally provide for monthly price adjustments based upon current
market prices. Methanol is distributed by pipeline, railcar, truck, barge or
ocean-going vessel.
Competition and Industry Conditions
The basis for competition in the methanol business is raw material acquisition
price, product deliverability, product quality and price. LMC competes with
other large producers of methanol, including Enron, Methanex, Millennium,
Southern Chemical and Terra Industries.
The rated capacity of LMC's processing unit at January 1, 2001 was 248 million
gallons. Based on published rated production capacities, the Company believes
that LMC is the second largest methanol producer in the United States.
Methanol profitability is affected by the level of demand for products in
which methanol is used, including MTBE and plywood (the production of which
involves the use of formaldehyde), demand for which in turn is driven by the
gasoline and housing markets, respectively. Methanol profitability is also
affected by the price of its feedstock, natural gas.
Properties
LMC's only property is the methanol plant it owns, which is located within
Equistar's Channelview complex on property leased from Equistar.
Employee Relations
LMC has no employees. Equistar serves as its operator and marketer.
INDUSTRY CYCLICALITY AND OVERCAPACITY
Lyondell's historical operating results reflect the cyclical nature of both
the chemical and refining industries. Both industries are mature and capital
intensive, and industry margins are sensitive to supply and demand balances,
which have historically been cyclical. The chemical industry has experienced
alternating periods of tight supply, causing prices and profit margins to
increase, followed by periods of substantial capacity additions, resulting in
oversupply and declining prices and profit margins. Due to the commodity nature
of most of the products of
28
Lyondell and its joint ventures, Lyondell is not necessarily able to protect
market position by product differentiation or to pass on cost increases to
customers. Accordingly, increases in raw material and other costs do not
necessarily correlate with changes in product prices, either in the direction of
the price change or in magnitude. Specifically, timing differences in pricing
between raw material prices, which change daily, and contract product prices,
which in many cases are negotiated only monthly, sometimes with an additional
lag in effective dates, can have a positive or negative effect on profitability.
Moreover, a number of participants in various segments of the chemical industry
have expanded or announced plans for expansion of plant capacity. There can be
no assurance that future growth in product demand will be sufficient to utilize
this additional, or even current, capacity. Excess industry capacity, to the
extent it occurs, may depress Lyondell's or its joint ventures' volumes and
margins. As a result, Lyondell's earnings may be subject to significant
fluctuations.
External factors beyond Lyondell's control, such as general economic
conditions, competitor action, international events and circumstances and
governmental regulation in the United States and abroad, can cause volatility in
feedstock prices, as well as fluctuations in demand for products, product
prices, volumes and margins, and can magnify the impact of economic cycles on
Lyondell's business. A number of products of Lyondell and its joint ventures
are highly dependent on durable goods markets, such as housing and automotive,
that are particularly cyclical. With respect to Lyondell's refining business,
management believes that the combination of the Crude Supply Agreement and the
Products Agreement tends to stabilize earnings and to reduce market driven
volatility.
FOREIGN OPERATIONS AND COUNTRY RISKS
International operations and exports to foreign markets are subject to a
number of risks, including currency exchange rate fluctuations, trade barriers,
exchange controls, national and regional labor strikes, political risks and
risks of increases in duties and taxes, as well as changes in laws and policies
governing operations of foreign-based companies. In addition, earnings of
foreign subsidiaries and intercompany payments may be subject to foreign income
tax rules that may reduce cash flow available to meet required debt service and
other obligations of Lyondell.
As earlier discussed, LCR is party to a long-term crude supply agreement with
a wholly owned subsidiary of PDVSA. There are risks associated with enforcing
the provisions of contracts with companies that are affiliates of a foreign
sovereign nation, such as PDVSA. Additionally, all of the crude oil supplied
under the Crude Supply Agreement is produced in the Republic of Venezuela, which
has experienced economic difficulties and attendant social and political changes
in recent years. See "LYONDELL-CITGO REFINING LP--Raw Materials."
JOINT VENTURE RISKS
A substantial portion of the Company's operations are conducted through joint
ventures. The Company shares control of these joint ventures with unaffiliated
third parties.
The Company's forecasts and plans with respect to these joint ventures assume
that its joint venture partners will observe their obligations with respect to
the joint ventures. In the event that any of the Company's joint venture
partners do not observe their commitments, it is possible that the affected
joint venture would not be able to operate in accordance with its business plans
or that the Company would be required to increase its level of commitment in
order to give effect to such plans.
As with any such joint venture arrangements, differences in views among the
joint venture participants may result in delayed decisions or in failures to
agree on major matters, potentially adversely affecting the business and
operations of the joint ventures and in turn the business and operations of the
Company.
The other owners of the joint ventures may transfer control of their joint
venture interests, subject to the requirement in many instances to first offer
the other owners an opportunity to purchase the interest. In September 2000,
Millennium publicly announced that it had terminated the January 2000 announced
active marketing of its interest in Equistar. However, there can be no
assurance that Millennium will not sell its interest in Equistar at some point.
Lyondell cannot predict how the sale of Millennium's interest in Equistar to a
third party or the sale by any other joint venture owner of its interest would
ultimately affect the governance, operations or business of the venture.
However, the partnership agreement and key agreements between Equistar and its
partners would remain in
29
place, and may not be modified without the consent of all of the partners.
Equistar's credit facility provides that an event of default occurs if Lyondell,
Millennium and Occidental cease to collectively hold at least a majority
interest. LCR's credit facility provides that an event of default occurs if
Lyondell and CITGO cease to individually or collectively hold at least a 35%
interest. In addition, LCR's credit facility provides that an event of default
occurs if (i) Lyondell transfers its interest as a member of LCR to a person
other than an affiliate or (ii) neither CITGO nor any of its affiliates is a
member of LCR.
OPERATING HAZARDS
The occurrence of material operating problems, including, but not limited to,
the events described below, may have a material adverse effect on the
productivity and profitability of a particular manufacturing facility, or on the
Company as a whole, during and after the period of such operational
difficulties. The Company's revenues are dependent on the continued operation
of its various production facilities (including the ability to complete
construction projects on schedule). The Company's operations are subject to the
usual hazards associated with chemical manufacturing and refining and the
related storage and transportation of raw materials, products and wastes,
including pipeline leaks and ruptures, explosions, fires, inclement weather and
natural disasters, mechanical failure, unscheduled downtime, labor difficulties,
transportation interruptions, remediation complications, chemical spills,
discharges or releases of toxic or hazardous substances or gases, storage tank
leaks and other environmental risks. 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 and the
imposition of civil or criminal penalties. Furthermore, the Company is also
subject to present and future claims with respect to workplace exposure,
workers' compensation and other matters. The Company maintains property,
business interruption and casualty insurance which it believes is in accordance
with customary industry practices, but it is not fully insured against all
potential hazards incident to its business.
ENVIRONMENTAL MATTERS
The production facilities of Lyondell, Equistar, LCR and LMC are generally
required to have permits and licenses regulating air emissions, discharges to
water and storage, treatment and disposal of hazardous wastes. Companies such as
Lyondell and its joint ventures that are permitted to treat, store or dispose of
hazardous waste and maintain underground storage tanks pursuant to the Resource
Conservation and Recovery Act ("RCRA") also are required to meet certain
financial responsibility requirements. The Company believes that it and its
joint ventures have all permits and licenses generally necessary to conduct its
business or, where necessary, are applying for additional, amended or modified
permits and that it meets applicable financial responsibility requirements.
The policy of each of Lyondell, Equistar, LCR and LMC is to be in compliance
with all applicable environmental laws. Lyondell and Equistar also are each
committed to Responsible Care(R), an international chemical industry initiative
to enhance the industry's responsible management of chemicals. The Company's
subsidiaries and joint ventures (together with the industries in which they
operate) are subject to extensive national, state and local environmental laws
and regulations concerning 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, the Company cannot accurately predict future developments, such as
increasingly strict requirements of environmental laws, and inspection and
enforcement policies and compliance costs therefrom, 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 particular operations and products of the Company,
and its joint ventures, 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 capital expenditures
and risks described above, the Company does not expect that it or its joint
ventures will be affected differentially from the rest of the chemicals and
refining industry where the Company's or its joint ventures' 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 water. 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
30
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 the Company) may be required to bear all
of such costs regardless of fault, legality of the original disposal or
ownership of the disposed site.
In some cases, compliance with environmental, health and safety laws and
regulations can only be achieved by capital expenditures. In the years ended
December 31, 2000 and 1999, the Company, its subsidiaries and its joint ventures
spent, in the aggregate, approximately $20 million and $21 million,
respectively, for environmentally related capital expenditures at existing
facilities. In 2001, the Company currently estimates that environmentally
related capital expenditures at existing subsidiary and joint venture facilities
will be approximately $37 million. The Company anticipates that the level of
such expenditures will increase in 2002 as a result of, among other things,
implementation of a plan to reach the Houston/Galveston region ozone standard,
as discussed below. The timing and amount of these expenditures are subject to
regulatory and other uncertainties described in this report as well as obtaining
the necessary permits and approvals. The Refinery contains on-site solid-waste
landfills, which were used in the past to dispose of waste generated at this
facility. It is anticipated that corrective measures will be necessary to
comply with federal and state requirements with respect to this facility. The
Company is also subject to certain assessment and remedial actions at the
Refinery under RCRA. In addition, the Company negotiated an order with the
Texas Natural Resource Conservation Commission ("TNRCC") for assessment and
remediation of groundwater and soil contamination at the Refinery. The Company
also has liabilities under RCRA and various state and foreign government
regulations related to five current plant sites and three former plant sites.
The Company is also responsible for a portion of the remediation of certain off-
site waste disposal facilities. The Company'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 responsible
parties under applicable statutes. The Company, its subsidiaries and its joint
ventures, to the extent appropriate, have accrued amounts (without regard to
potential insurance recoveries or other third party reimbursements) believed to
be sufficient to cover current estimates of the cost for remedial measures at
manufacturing facilities and off-site waste disposal facilities based upon their
interpretation of current environmental standards. In the opinion of
management, there is no material range of loss in excess of the amount recorded.
Based on the establishment of such accruals, and the status of discussions with
regulatory agencies described in this paragraph, the Company does not anticipate
any material adverse effect upon its financial statements or competitive
position as a result of compliance with the laws and regulations described in
this or the preceding paragraphs. See also "Item 3. Legal Proceedings" and
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the EPA. As a result, the TNRCC has submitted a
plan to the EPA to reach and demonstrate compliance with the ozone standard by
the year 2007. Lyondell has been actively involved with a number of
organizations to help solve the ozone problem in the most cost-effective manner
and, in January 2001, Lyondell and an organization composed of industry
participants filed a lawsuit against the TNRCC to encourage adoption of their
alternative plan to achieve the same air quality improvement with less negative
economic impact on the region.
Ozone is a product of the reaction between volatile organic compounds ("VOCs")
and nitrogen oxides ("NOx") in the presence of sunlight, and is a principal
component of smog. Because much has already been done to limit VOC emissions,
the proposed plans for meeting the ozone standard focus on significant
reductions in NOx emissions. It is expected that drastic cuts in industrial
sources of NOx will be required under any plan to meet the ozone standard.
These emission reduction controls must be installed during the next several
years, well in advance of the 2007 deadline. This could result in increased
capital investment, which could be between $400 million and $500 million before
the 2007 deadline, as well as higher annual operating costs for Equistar,
Lyondell, and LCR. See Item 3. Legal Proceedings--Environmental Proceedings.
In the United States, the Clean Air Act Amendments of 1990 set minimum levels
for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified
air quality standards. However, while studies by federal and state agencies and
other organizations have shown that MTBE is safe for use in gasoline, is not
carcinogenic and is
31
effective in reducing automotive emissions, the presence of MTBE in some water
supplies in California and other states due to gasoline leaking from underground
storage tanks and in surface water from recreational water craft has led to
public concern that MTBE may, in certain limited circumstances, affect the taste
and odor of drinking water supplies, and thereby lead to possible environmental
issues.
Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict or
ban the use of MTBE. Such actions, to be effective, would require (i) a waiver
of the state's oxygenate mandate, (ii) Congressional action in the form of an
amendment to the Clean Air Act or (iii) replacement of MTBE with another
oxygenate such as ethanol, a more costly, untested, and less widely available
additive. At the federal level, a blue ribbon panel appointed by the EPA issued
its report on July 27, 1999. That report recommended, among other things,
reducing the use of MTBE in gasoline. During 2000, the EPA announced its intent
to seek legislative changes from Congress to give the EPA authority to ban MTBE
over a three-year period. Such action would only be granted through amendments
to the Clean Air Act. Additionally, the EPA is seeking a ban of MTBE utilizing
rulemaking authority contained in the Toxic Substance Control Act. It would
take at least three years for such a rule to issue. Recently, however, senior
policy analysts at the U.S. Department of Energy presented a study stating that
banning MTBE would create significant economic risk. The presentation did not
identify any benefits from banning MTBE. The EPA initiatives mentioned above or
other governmental actions could result in a significant reduction in Lyondell's
MTBE sales. The Company has developed technologies to convert TBA into alternate
gasoline blending components should it be necessary to reduce MTBE production in
the future. See "Intermediate Chemicals and Derivatives--Overview."
The Clean Air Act specified certain emissions standards for vehicles beginning
in the 1994 model year and required the EPA to study whether further emissions
reductions from vehicles were necessary starting no earlier than the 2004 model
year. In 1998, the EPA concluded that more stringent vehicle emission standards
were needed and that additional controls on gasoline and diesel were necessary
to meet these emission standards. New standards for gasoline were finalized in
1999 and will require refiners to produce a low sulfur gasoline by 2004, with
some allowances for a conditional phase-in period that could extend final
compliance until 2006. A new "on-road" diesel standard was adopted in late 2000
and will require refiners to produce ultra low sulfur diesel by 2007. These
rules could result in increased capital investment and higher operating costs
for LCR. Equistar's olefins fuel business may also be impacted if these rules
increase the cost for processing fuel components.
Item 3. Legal Proceedings
Litigation Matters
The Company 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, the Company does not believe that any
ultimate uninsured liability resulting from the legal proceedings in which it
currently is involved (directly or indirectly) will individually, or in the
aggregate, have a material adverse effect on the business or financial condition
of the Company. However, the adverse resolution in any reporting period of one
or more of these suits could have a material impact on Lyondell's results of
operations for that period without giving effect to contribution or
indemnification obligations of co-defendants or others, or to the effect of any
insurance coverage that may be available to offset the effects of any such
award.
Although Lyondell and its joint ventures are involved in numerous and varied
legal proceedings, a significant portion of its outstanding litigation arose in
four contexts: (1) claims for personal injury or death allegedly arising out of
exposure to the products produced by 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 and/or property damage and air, noise and
water pollution allegedly arising out of operations; and (4) employment related
claims.
32
Environmental Proceedings
On January 19, 2001, Equistar and LCR, individually, and Lyondell,
individually and as part of the BCCA Appeal Group (a group of industry
participants), filed a lawsuit against the TNRCC in State District Court in
Travis County, Texas. The lawsuit seeks to encourage the adoption of the
plaintiffs' alternative plan to achieve the same air quality improvement as the
TNRCC plan, with less negative economic impact on the region.
In addition, from time to time the Company receives notices from federal,
state or local governmental entities of alleged violations of environmental laws
and regulations pertaining to, among other things, the disposal, emission and
storage of chemical and petroleum substances, including hazardous wastes.
Although the Company has not been the subject of significant penalties to date,
such alleged violations may become the subject of enforcement actions or other
legal proceedings and may (individually or in the aggregate) involve monetary
sanctions of $100,000 or more (exclusive of interest and costs).
In connection with the transfer of assets and liabilities from ARCO to the
Company prior to its initial public offering in 1988, the Company agreed to
assume certain liabilities arising out of the operation of the Company's
integrated petrochemicals and refining business prior to July 1, 1988. The
Company and ARCO entered into an agreement, updated in 1997 (the "Revised
Cross-Indemnity Agreement"), whereby the Company agreed to defend and indemnify
ARCO against certain uninsured claims and liabilities which ARCO may incur
relating to the operation of the business of the Company prior to July 1, 1988,
including certain liabilities that may arise out of pending and future lawsuits.
For current and future cases related to Company products and Company operations,
ARCO and the Company bear a proportionate share of judgment and settlement costs
according to a formula that allocates responsibility based on years of ownership
during the relevant time period. Under the Revised Cross-Indemnity Agreement,
the Company assumed responsibility for its proportionate share of future costs
for waste site matters not covered by ARCO insurance. In connection with the
ARCO Chemical Acquisition, the Company is successor to a cross-indemnity
agreement between ARCO and ARCO Chemical relating to claims or liabilities that
ARCO may incur relating to its former ownership and operation of the oxygenates
and polystyrenics businesses of ARCO Chemical for periods after July 1, 1987.
On April 18, 2000, ARCO was acquired by BP Amoco p.l.c. Subject to the
uncertainty inherent in all litigation, management believes the resolution of
the matters pursuant to these indemnity agreements will not have a material
adverse effect upon the Consolidated Financial Statements of the Company.
Lyondell's environmental liability totaled $31 million at December 31, 2000
based on the Company's latest assessment of potential future remediation costs.
This amount comprises liability for remediation responsibility retained by ARCO
Chemical in connection with the sale of a plant in 1996 and liability related to
several owned plant facilities, including the Channelview facility, and federal
Superfund sites for amounts ranging from less than $1 million to $13 million per
site. Lyondell is involved in administrative proceedings or lawsuits relating
to a minimal number of other Superfund sites. The Company estimates, based on
currently available information, that potential loss contingencies associated
with these sites, individually and in the aggregate, are not significant.
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 other CERCLA, RCRA, TNRCC or other comparable state or foreign
law investigations, could require the Company to reassess its potential exposure
related to environmental matters. Substantially all amounts accrued are
expected to be paid out over the next two to seven years. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Lyondell, Millennium and Occidental have each agreed to provide certain
indemnifications to Equistar with respect to the petrochemicals and polymers
businesses contributed by the partners. In addition, Equistar agreed to assume
third party claims that are related to certain pre-closing contingent
liabilities that are asserted prior to December 1, 2004 for Lyondell and
Millennium, and May 15, 2005 for Occidental, to the extent the aggregate thereof
does not exceed $7 million to each partner, subject to certain terms of the
respective asset contribution agreements. As of December 31, 2000, Equistar had
expensed approximately $5 million under the $7 million indemnification basket
with respect to the business contributed by Lyondell. Equistar also agreed to
assume third party claims that are related to certain pre-closing contingent
liabilities that are asserted for the first time after December 1, 2004 for
Lyondell and Millennium, and May 15, 2005 for Occidental.
33
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the Company as of March 1, 2001.
The By-Laws of the Company provide that each officer shall hold office until the
officer's successor is elected or appointed and qualified or until the officer's
death, resignation or removal by the Board of Directors.
Name, Age and Present Business Experience During Past
Position with Lyondell Five Years and Period Served as Officer(s)
---------------------- ------------------------------------------
Dan F. Smith, 54................................ Mr. Smith was named Chief Executive Officer in December 1996 and President
Director, President and of the Company in August 1994. Mr. Smith has been a Director since 1988.
Chief Executive Officer Since December 1, 1997, Mr. Smith has also served as the Chief Executive
Officer of Equistar. Mr. Smith served as Chief Operating Officer of the
Company from May 1993 to December 1996. Prior thereto, Mr. Smith held
various positions including Executive Vice President and Chief Financial
Officer of the Company, Vice President, Corporate Planning of ARCO and
Senior Vice President in the areas of management, manufacturing, control and
administration for the Company and the Lyondell Division of ARCO. Mr. Smith
is a Director of Cooper Industries and ChemFirst, Inc.
Eugene R. Allspach, 54......................... Mr. Allspach was appointed Executive Vice President of Lyondell on December
Executive Vice President 2, 1999, and has served as President and Chief Operating Officer of Equistar
since December 1997. Mr. Allspach served as Group Vice President,
Manufacturing and Technology for Millennium Petrochemicals from 1993 to
1997. Before 1993, Mr. Allspach held various senior executive positions
with Millennium, including Group Vice President, Manufacturing and
Manufacturing Services and Vice President, Specialty Polymers and Business
Development. Mr. Allspach is an employee of Equistar.
Robert T. Blakely, 59........................... Mr. Blakely was appointed to his present position effective November 1,
Executive Vice President and 1999. Prior thereto, he served as Executive Vice President and Chief
Chief Financial Officer Financial Officer of Tenneco, Inc. from 1981 to 1999. Mr. Blakely is a
Director of Solutia Inc. and Vlasic Foods International, Inc.
Morris Gelb, 54................................. Mr. Gelb was appointed to his current position in December 1998. Prior to
Executive Vice President and this appointment, he served as Senior Vice President, Manufacturing, Process
Chief Operating Officer Development and Engineering of Lyondell from July 1998. He was named Vice
President for Research and Engineering of ARCO Chemical in 1986 and Senior
Vice President of ARCO Chemical in July 1997.
John R. Beard, 48............................... Mr. Beard was appointed to his present position in October 2000. He
President, Lyondell Europe previously served as Senior Vice President of Manufacturing for Equistar
since May 1998. In this position, he was also responsible for Lyondell's
U.S. manufacturing sites beginning in late 1999. From 1997 to May 1998, Mr.
Beard held the position of Vice President, Manufacturing for Equistar.
Prior to this, Mr. Beard held positions as Vice President, Petrochemicals
Manufacturing and Vice President, Quality Supply and Planning for Lyondell.
Mr. Beard originally joined the Company in 1974.
Edward J. Dineen, 46............................ Mr. Dineen was appointed to his current position in May 2000. Prior
Senior Vice President, Intermediates and thereto, he served as Senior Vice President, Urethanes and Performance
Performance Chemicals Chemicals since July 1998. Prior to this position, he served as Vice
President, Performance Products and Development for ARCO Chemical beginning
in June 1997. He served as Vice President, Planning and Control for ARCO
Chemical European Operations from 1993 until his appointment as Vice
President, Worldwide CoProducts and Raw Materials in 1995.
34
Name, Age and Present Business Experience During Past
Position with Lyondell Five Years and Period Served as Officer(s)
---------------------- ------------------------------------------
T. Kevin DeNicola, 46........................... Mr. DeNicola has been Vice President, Corporate Development since April
Vice President, Corporate Development 1998, overseeing strategic planning. From 1996 until April 1998, Mr.
DeNicola was Director of Investor Relations of Lyondell. Mr. DeNicola
served as Ethylene Products Manager of Lyondell from 1993 until 1996. Mr.
DeNicola also serves as a member of the partnership governance committee of
Equistar. He served as a member of the partnership governance committee of
LCR from 1998 to 2000.
Kerry A. Galvin, 40............................. Ms. Galvin was appointed Vice President, General Counsel and Secretary of
Vice President, General Counsel the Company in July 2000. Ms. Galvin originally joined the Company in 1990
and Secretary and most recently served as the Associate General Counsel with
responsibility for international legal affairs.
John A. Hollinshead, 51......................... Mr. Hollinshead was appointed to his current position in July 1998. Mr.
Vice President, Human Resources Hollinshead has also served as Vice President, Human Resources of Equistar
since July 1998. Prior to his appointment as Vice President, Human
Resources, he was Director, Human Resources, Manufacturing and Engineering
for Equistar since 1997. Mr. Hollinshead served as Manager, Human Resources
with Lyondell from 1985 to 1997.
Item 4. Submission of Matters to a Vote of Security Holders
None.
35
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock, $1.00 par value ("Common Stock"), is listed on the
New York Stock Exchange. The reported high and low close sale prices of the
Common Stock on the New York Stock Exchange (New York Stock Exchange Composite
Tape) for each quarter from January 1, 1999 through December 31, 2000,
inclusive, were as set forth below.
Period High Low
----------------------------------------- ------- -------
1999:
First Quarter....................... 18.25 12.6875
Second Quarter...................... 22.375 11.875
Third Quarter....................... 21.5625 12.125
Fourth Quarter...................... 17 11.25
2000:
First Quarter....................... 14.875 8.4375
Second Quarter...................... 19.50 13.5
Third Quarter....................... 17.75 11.0
Fourth Quarter...................... 16.75 11.3125
On March 1, 2001, the closing sale price of the Common Stock was $15.65, and
there were approximately 1,876 holders of record of the Common Stock.
During the last two years, Lyondell has declared $.225 per share quarterly
cash dividends (which were paid in the subsequent quarter). The declaration and
payment of dividends is at the discretion of the Board of Directors. The future
declaration and payout of dividends and the amount thereof will be dependent
upon Lyondell's results of operations, financial condition, cash position and
requirements, investment opportunities, future prospects, contractual
restrictions and other factors deemed relevant by the Board of Directors.
Subject to these considerations and to the legal considerations discussed in the
following paragraph, Lyondell currently intends to distribute to its
stockholders cash dividends on its Common Stock at a quarterly rate of $.225 per
share. During 2000, Lyondell paid $106 million in dividends.
Certain debt instruments which were assumed by Equistar, but as to which
Lyondell remains an obligor provide that the holders of such debt may, under
certain limited circumstances, require the obligor to repurchase the debt ("Put
Rights"). Among other things, the Put Rights may be triggered by the making by
either of Lyondell or Equistar of certain unearned distributions to stockholders
or partners, respectively, other than regular dividends, which are followed by a
specified decline in public ratings on such debt. Regular dividends are those
quarterly cash dividends determined in good faith by the Board of Directors
(whose determination is conclusive) to be appropriate in light of Lyondell's
results of operations and capable of being sustained. Lyondell's credit
facilities and indentures also could limit Lyondell's ability to pay dividends
under certain circumstances, including if Lyondell's consolidated net worth
falls below certain specified minimum levels. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
36
Item 6. Selected Financial Data
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."
For the year ended December 31,
-----------------------------------------------------
Millions of dollars, except per share data 2000 1999 1998(a) 1997(b) 1996(c)
- ------------------------------------------ ------ ------ --------- --------- ---------
Results of Operations Data:
Sales and other operating revenues $4,036 $3,693 $1,447 $2,878 $5,052
Income from equity investments 199 76 235 108 - -
Net income (loss) (d) 437 (115) 52 286 126
Basic earnings (loss) per share (d) 3.72 (1.10) .67 3.58 1.58
Diluted earnings (loss) per share (d) 3.71 (1.10) .67 3.58 1.58
Dividends per share .90 .90 .90 .90 .90
Balance Sheet Data:
Total assets 7,047 9,498 9,156 1,559 3,276
Long-term debt, less current maturities 3,844 6,046 5,391 345 1,194
- ----------
(a) The financial information for 1998 included five months of operating results
for ARCO Chemical, acquired as of July 28, 1998 and accounted for using the
purchase method of accounting. It also included twelve months of Equistar,
LCR and LMC; each accounted for as an equity investment.
(b) The financial information for 1997 included twelve months of consolidated
operating results of Lyondell and LMC, and Lyondell's equity income from LCR
for twelve months and from Equistar for one month.
(c) The financial information for 1996 included the consolidated operating
results of Lyondell, LCR and LMC.
(d) Net income for 2000 and the net loss for 1999 included extraordinary losses
on early extinguishment of debt, net of income taxes, of $33 million and $35
million, or $.28 and $.33 per basic and diluted share, respectively.
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 and the notes thereto.
Overview
General--On March 31, 2000, Lyondell completed the sale of the polyols
business and ownership interests in its U.S. PO manufacturing operations to
Bayer for approximately $2.45 billion. As part of the transaction, Lyondell and
Bayer entered into the PO Joint Venture, a U.S. PO manufacturing joint venture,
and the separate PO Technology Joint Venture, a joint venture with respect to
certain related PO/SM technology. Lyondell recorded a $400 million after-tax
gain on the sale. During 2000, total debt of $2.4 billion was retired,
primarily using net proceeds of the sale. In addition, on December 19, 2000,
Lyondell and Bayer formed a separate 50/50 joint venture for the construction of
the previously announced world-scale PO/SM plant, known as PO-11, located in
Rotterdam, The Netherlands.
Lyondell's operating income includes the intermediate chemicals and
derivatives ("IC&D") business segment, consisting of the business acquired from
ARCO Chemical, prospectively from August 1, 1998. Lyondell's activity in the
petrochemicals, polymers and refining business segments is conducted through its
interests in Equistar and LCR. The methanol business conducted through LMC is
not a reportable segment for financial disclosure purposes. Lyondell accounts
for its investments in Equistar, LCR and LMC using the equity method of
accounting.
37
Net Income--Net income of $437 million in 2000 compares to a net loss of $115
million in 1999 and net income of $52 million in 1998. Each year was affected
by unusual items at Lyondell, Equistar and LCR as follows:
For the year ended December 31,
-------------------------------
In millions 2000 1999 1998
- ----------- ------ ------ ------
Net income (loss) $ 437 $(115) $ 52
Add (deduct):
Gains on asset sales (400) (10) --
Extraordinary losses 33 35 --
Other unusual items -- 42 42
------ ------ ------
Adjusted net income (loss) $ 70 $ (48) $ 94
====== ====== ======
Net income for 2000 included a $400 million after-tax gain on the sale of
assets to Bayer and a $33 million extraordinary loss on early debt retirement.
The net loss for 1999 included Lyondell's $10 million after-tax share of an
Equistar gain on asset sale, a $35 million extraordinary loss on early
retirement of debt, an after-tax, LIFO-related charge of $10 million and
Lyondell's $32 million after-tax share of Equistar restructuring and LCR
renegotiated labor agreement charges. Earnings for 1998 included unusual
charges of $42 million after tax, related to the ARCO Chemical Acquisition, the
renegotiated labor agreement at LCR and the formation of Equistar.
The $118 million increase in adjusted net income to $70 million in 2000 from
the adjusted net loss of $48 million in 1999 was primarily due to lower net
interest expense and higher equity earnings from Equistar and LCR. These
benefits were partly offset by lower operating income for the IC&D business
segment. The decrease in net interest expense reflected the retirement of $2.4
billion of debt during 2000, primarily using net proceeds of the sale to Bayer.
Equistar operating results improved due to higher petrochemicals margins in
2000. The increase in LCR operating results reflected higher deliveries and a
more favorable mix of crude oil under the Crude Supply Agreement. The decrease
in operating income for the IC&D business was primarily due to the sale of the
polyols business and lower margins for PO and derivatives, partly offset by
higher margins and volumes for MTBE and SM.
The $142 million decrease from adjusted net income of $94 million in 1998 to
the adjusted net loss of $48 million in 1999 was primarily due to higher
interest expense and lower equity income from LCR and, to a lesser extent, from
Equistar. The increase in interest expense reflected a full year of interest on
debt related to the acquisition of ARCO Chemical on July 28, 1998. This was
only partly offset by the inclusion of a full year of operating income of the
acquired business, which was included prospectively from August 1, 1998. LCR
equity income decreased due to reduced deliveries and a less favorable mix of
crude oil under the Crude Supply Agreement, lower margins on crude oil purchased
on the spot market and production unit outages in 1999. Equistar equity income
decreased primarily due to lower polymers margins, which reflected higher raw
material costs in 1999.
RESULTS OF OPERATIONS
Lyondell Chemical Company
Revenues, Operating Costs and Expenses--Lyondell's operating results are
reviewed in the discussion of the IC&D segment below.
Gain on Sale of Assets--In 2000, Lyondell sold the polyols business and
ownership interests in its U.S. PO manufacturing operations to Bayer for
approximately $2.45 billion. As part of the transaction, Lyondell and Bayer
entered into the PO Joint Venture and the separate PO Technology Joint Venture.
Including post-closing adjustments, the sale of assets to Bayer generated a
pretax gain of $590 million, or $400 million after tax.
Unusual Charges--Unusual charges, before tax, of $61 million in 1998 primarily
consisted of the write-off of $57 million of costs assigned to in-process
research and development in connection with the ARCO Chemical Acquisition.
38
Income from Equity Investment in Equistar--Lyondell's income from its equity
investment in Equistar was $101 million in 2000, $52 million in 1999 and $119
million in 1998. Operationally, the increase of $49 million from 1999 to 2000
was due to higher petrochemicals margins, which were partly offset by lower
polymers margins. In the petrochemicals segment, sales prices for ethylene
increased more than costs for raw materials, leading to higher margins,
primarily in the first nine months of 2000. In the polymers segment, 2000
margins were lower as sales price increases lagged behind raw material cost
increases. In the fourth quarter 2000, margins in both segments were negatively
affected by rapid increases in natural gas costs, which caused raw material and
utility costs to increase, and a decline in sales prices due to decreased
demand. Lyondell's 1999 equity income from Equistar was also negatively
affected by its share of restructuring and other unusual charges of $39 million,
which was partly offset by its share of gains on asset sales of $17 million.
The decrease of $67 million from 1998 to 1999 reflected Lyondell's pretax
share of Equistar's restructuring and other unusual charges, which were $39
million in 1999 compared to $6 million in 1998, as well as lower polymers
margins, higher general and administrative expenses, and higher interest
expense. These were only partly offset by higher petrochemicals sales volumes
and Lyondell's share of gains on asset sales of $17 million.
Income from Equity Investment in LCR--Lyondell's income from its equity
investment in LCR was $86 million in 2000, $23 million in 1999 and $110 million
in 1998. The increase of $63 million from 1999 to 2000 was primarily due to
increased deliveries and an improved mix of crude oil under the Crude Supply
Agreement in the latter half of 2000 and higher margins on spot crude oil. The
higher spot margins primarily reflected a stronger gasoline market in 2000.
Although 2000 included a major planned turnaround, the effect was more than
offset by the impact of unplanned production unit outages during 1999.
The decrease of $87 million from 1998 to 1999 was primarily due to reduced
deliveries and a less favorable mix of crude oil under the Crude Supply
Agreement, lower 1999 spot margins, and the effects of the production unit
outages in the second quarter 1999.
Interest Expense--Interest expense was $514 million in 2000, $616 million in
1999 and $287 million in 1998. The decrease in interest expense in 2000 was
principally due to the retirement of $2.4 billion of debt, primarily using net
proceeds from the sale to Bayer. The increase in interest expense in 1999 was
primarily due to a full year of interest on debt related to the ARCO Chemical
Acquisition on July 28, 1998.
Interest Income--Interest income was $52 million in 2000, $27 million in 1999
and $25 million in 1998. The increase in 2000 reflected higher cash balances
for part of the year as a result of proceeds from the asset sale to Bayer.
Income Tax--The effective tax rate, including extraordinary items, was a
provision of 32% in 2000, compared to a benefit of 27.0% in 1999 and a provision
of 41.5% in 1998. The 2000 tax rate of 32% reflects, in part, the federal tax
benefit from a restructuring of Lyondell's European operations after the Bayer
transaction, primarily in The Netherlands, and the attendant recognition of
certain foreign exchange translation losses. Lyondell's 1999 income tax benefit
was a result of the federal income tax benefit from a domestic loss incurred in
1999, which was partially offset by tax provisions in foreign jurisdictions.
The higher effective tax rate in 1998 compared to a statutory rate of 35% was
due to Lyondell's inability to claim foreign tax credits and limitations on the
use of net operating losses for state tax purposes.
Extraordinary Items--The extraordinary items for 2000 consisted of the write-
off of unamortized debt issuance costs and amendment fees of $40 million and the
payment of call premiums of $10 million. The total of $50 million, or $33
million after tax, related to the early retirement of $2.2 billion of debt,
primarily using net proceeds from the Bayer asset sale. The 1999 extraordinary
item consisted of the write-off of unamortized debt issuance costs and amendment
fees totaling $54 million, or $35 million after tax, related to early retirement
and partial refinancing of $4.1 billion of debt. During May 1999, Lyondell
issued $2.4 billion of fixed-rate debt, $1 billion of variable-rate debt and
40.25 million shares of common stock, using the net proceeds to reduce variable-
rate debt by a net $3.1 billion.
39
Pro Forma
On March 31, 2000, Lyondell completed the sale of the polyols business and
ownership interests in its U.S. PO manufacturing operations to Bayer for
approximately $2.45 billion in cash. The following condensed income statements
present the unaudited pro forma consolidated operating results for 2000 and 1999
as if the transaction had occurred as of the beginning of 2000 and 1999,
respectively. The pro forma income statements assume that net proceeds of $2.05
billion were used to retire debt in accordance with the provisions of Lyondell's
Credit Facility and indentures as of the beginning of each period. The
operating results for 2000 exclude the after-tax gain on the asset sale of $400
million, or $3.40 per share.
For the year ended
December 31,
-------------------------
In millions, except per share data 2000 1999
- ---------------------------------- ------ ------
Sales and other operating revenues $3,816 $2,864
Operating income 324 308
Interest expense 451 426
Income from equity investments 199 76
Net income (loss) from continuing operations 95 (11)
Basic and diluted income (loss) per share from continuing operations .81 (.11)
The unaudited pro forma data presented above are not necessarily indicative of
the results of operations of Lyondell that would have occurred had such
transactions actually been consummated as of the indicated dates, nor are they
necessarily indicative of future results.
Fourth Quarter 2000 versus Third Quarter 2000
For the fourth quarter 2000, Lyondell reported a net loss before extraordinary
item of $45 million. For the third quarter 2000, Lyondell's net income was $62
million, excluding a post-closing adjustment of the gain on the Bayer asset sale
and the effect of revising the income tax rate for the first six months of 2000
from 39% to 32%. The decrease from the third to the fourth quarter was
primarily due to lower operating income in the IC&D segment and lower equity
income from Equistar.
The decrease in IC&D operating income was primarily due to a sharp decline in
MTBE margins due to lower sales prices and higher costs for butane, a key raw
material. In addition, the IC&D segment was impacted by the effect of high
natural gas prices on utility costs and a major turnaround at a plant in
Channelview, Texas. These factors more than offset a 10% sales volume increase,
primarily due to higher seasonal aircraft deicer sales. Equity income from
Equistar decreased to a loss in the fourth quarter 2000 due to significant
increases in natural gas costs and, to a lesser extent, the slowing economy.
These conditions resulted in higher NGL raw material costs, higher natural gas-
based utility costs and lower product sales prices.
Intermediate Chemicals and Derivatives (IC&D) Segment
Overview--Lyondell's operating results for 1998 include five months of
operating results of the IC&D business segment. This segment consists of the
business acquired from ARCO Chemical, which is included in Lyondell's operating
results prospectively from August 1, 1998. Beginning in early 1999, the cost of
raw materials began escalating, following the general trend in the commodity
petrochemical industry. Benchmark prices of propylene, one of the major raw
materials for this segment, more than doubled from the end of 1998 to the end of
2000. At the same time, approximately 1 billion pounds of new PO capacity, or
over 10% of existing world capacity, was added in late 1999 and early 2000 in
Europe. This new capacity limited the ability to raise sales prices as the cost
of propylene increased, putting pressure on margins during 1999 and 2000. In
addition, Lyondell sold the polyols business and ownership interests in its U.S.
PO manufacturing operations to Bayer on March 31, 2000.
40
The following is a discussion of historical operating results for the years
ended December 31, 2000 and 1999 and of the pro forma operating results for the
year ended December 31, 1998 included in the unaudited pro forma combined
historical results of Lyondell and ARCO Chemical (see Note 3 of Notes to
Consolidated Financial Statements). The unaudited pro forma combined historical
results give effect to the acquisition of ARCO Chemical as if it had occurred at
the beginning of 1998.
The following table sets forth volumes, including processing volumes, included
in sales and other operating revenues for this segment. Co-product tertiary
butyl alcohol ("TBA") is principally used to produce the derivative MTBE.
Volumes for the polyols business, sold on March 31, 2000, are included through
the date of sale. Bayer's ownership interest in the PO Joint Venture represents
ownership of an in kind portion of the PO production of the PO Joint Venture.
Bayer's share of the PO production from the PO Joint Venture will increase from
approximately 1.0 billion pounds for the last nine months of 2000 to
approximately 1.6 billion pounds annually in 2004 and thereafter. Lyondell
takes in kind the remaining PO production and all co-product (SM and TBA)
production from the PO Joint Venture. Bayer's PO volumes are not included in
sales and are excluded from the table.
For the year ended December 31,
-------------------------------
Volumes, in millions 2000 1999 1998(a)
- -------------------- ----- ----- --------
PO, PO derivatives, TDI (pounds) 3,393 4,464 4,159
Co-products:
SM (pounds) 3,475 3,129 2,912
TBA and derivatives (gallons) 1,211 1,071 995
Millions of dollars
- -------------------
Sales and other operating revenues $4,036 $3,693 $3,553
Unusual charges -- -- 41
Operating income 339 404 396
- ----------
(a) Volumes and financial data are pro forma for the year ended December 31,
1998.
Revenues--Revenues in 2000 increased $343 million, or 9%, compared to 1999,
despite the March 31, 2000 sale of the polyols business. The sale of the
polyols business resulted in a decrease of $609 million in sales revenues and a
decrease of 1.1 billion pounds in sales volumes, comparing 2000 to 1999.
Excluding the effect of polyols, sales revenues increased 33%, primarily due to
higher prices and volumes for MTBE and SM. The higher MTBE prices and 13%
increase in MTBE sales volumes reflected higher gasoline prices, increased
global demand, and tighter supplies. New regulations in Europe contributed to
higher global demand, while new U.S. reformulated gasoline standards affected
supplies. The higher SM prices and an 11% increase in volumes reflected
stronger demand in the first half of 2000. For 2000, sales price increases for
PO and derivatives, excluding polyols, were tempered by new industry PO capacity
and the foreign exchange effects of a stronger U.S. dollar. PO and derivatives
volumes, excluding polyols, were essentially flat compared to 1999 due to the
effect of new industry capacity in Europe, which was primarily offset by higher
U.S. volumes.
Actual 1999 revenues increased 4% compared to pro forma 1998 revenues as a
result of higher volumes, which were partly offset by lower average sales
prices. PO, PO derivatives and TDI volumes increased 7% compared to 1998 driven
by U.S. economic growth, particularly in the automotive, housing and
construction sectors, and continued improvements in Asian economies. Asia
accounted for about 10% of Lyondell's total 1999 PO sales volumes. SM volumes
increased 7% primarily due to higher exports to Europe and Asia as well as
higher contractual amounts under long-term SM processing arrangements. TBA and
derivatives volumes increased 8% due to higher global demand for MTBE. Average
sales prices decreased in 1999 for PO, PO derivatives and TDI, despite higher
average raw material costs. The decrease reflects heightened competition in the
PO industry as a result of significant new European PO capacity, which came on
stream in late 1999 and early 2000. European sales prices were also negatively
affected by the foreign exchange effect of a stronger U.S. dollar.
41
Unusual Charges--The 1998 period included pro forma net unusual charges of
$41 million, consisting of $57 million related to the write-off of in-process
research and development projects in connection with the ARCO Chemical
Acquisition, $4 million of Lyondell severance costs, and a $20 million reversal
by ARCO Chemical of its 1997 restructuring accrual.
Operating Income--Operating income of $339 million in 2000 decreased from $404
million in 1999. The decrease was primarily due to the sale of the polyols
business and lower margins for PO and derivatives, partly offset by higher
margins and volumes for MTBE and SM. PO and derivatives product margins,
excluding polyols, decreased as raw material costs, primarily propylene, rose in
2000, while the new industry PO capacity constrained price increases. Average
benchmark propylene costs increased about 70% compared to 1999. The improvement
in MTBE margins reflected significantly higher prices primarily due to a
stronger gasoline market. Decreases in selling, general and administrative
expenses, as well as in research and development expense in 2000 primarily
reflected the effects of the sale of the polyols business and benefits from cost
reduction efforts.
Excluding unusual charges, actual 1999 operating income of $404 million
decreased $33 million or 8% compared to pro forma operating income of $437
million in 1998. Operating income in 1999 reflected lower product margins due
to lower sales prices and higher raw material costs. The decrease in product
margins was partly offset by a $43 million decrease in selling, general and
administrative expenses, reflecting benefits of cost reduction efforts and a $13
million reduction of estimated liabilities related to the ARCO Chemical
Acquisition.
Fourth Quarter 2000 versus Third Quarter 2000
Operating income in the fourth quarter 2000 decreased to $13 million from $97
million in the third quarter 2000. The decrease was due to a sharp drop in MTBE
margins along with the effects of higher utility costs and a major planned
turnaround at a PO/SM plant in Channelview, Texas. Spot market raw material
margins for MTBE on the U.S. Gulf Coast fell from about 37 cents per gallon in
the third quarter to about 9 cents per gallon in the fourth quarter. MTBE
prices decreased about 22 cents per gallon, primarily due to seasonal factors,
while the cost of butane, the key raw material in MTBE, increased 6 cents per
gallon. These factors more than offset an increase in PO and derivatives sales
volumes.
Sales volumes for PO, PO derivatives and TDI increased 10% in the fourth
quarter compared to the third quarter. This was primarily due to very strong
aircraft deicer sales during the month of December 2000 along with continued
volume growth in the solvents and butanediol product lines. Overall sales
prices in the PO business were flat compared to the third quarter, while
propylene prices decreased about 1.5 cents per pound. The average price for
contract chemical grade propylene in the fourth quarter was 22.5 cents per pound
compared to 24 cents per pound in the third quarter.
Equistar Chemicals, LP
Overview
General--The three-year period from 1998 to 2000 was marked by considerable
volatility in the industry. The fourth quarter 1998 marked a trough in the
commodity petrochemical cycle due to a combination of new capacity, high
inventory levels and the Asian financial crisis. In 1999, ethylene and
derivatives prices rebounded from year end 1998 lows as domestic ethylene demand
grew by more than 6.5%, while the industry experienced both planned and
unplanned outages. As a result, benchmark ethylene prices increased every
quarter from the end of 1998, peaking in mid-2000. Raw material costs also
began increasing during 1999 due to higher oil and gas prices. These increases
continued through 1999 into 2000 and remained at high levels during 2000. From
the end of 1998 to the end of 2000, the weighted-average cost of raw materials
for the industry rose 150%. Surging natural gas costs late in 2000 increased
both the costs of NGL-based raw materials (primarily ethane) as well as the cost
of utilities. As a result, some U.S.-based producers, including Equistar, idled
plants that use NGL-based raw materials. Also during 2000, significant new
industry ethylene capacity was added. During the latter half of 2000, demand
began to
42
weaken due to slower U.S. economic growth. As a result of these factors,
benchmark ethylene prices declined in the fourth quarter 2000.
Net Income--Equistar's 2000 net income of $153 million increased $71 million
from net income, excluding unusual items, of $82 million in 1999. The increase
reflected the benefits of higher petrochemicals segment margins and lower
selling, general and administrative expenses partly offset by lower polymers
segment margins and lower sales volumes in both segments. The unusual items in
1999 included restructuring and other unusual charges of $96 million and gains
on asset sales of $46 million. Petrochemicals margins improved in 2000 as
average sales prices increased more than raw material costs. However, polymers
sales price increases in 2000 lagged behind raw material cost increases, leading
to reduced margins. Lower 2000 volumes in both segments primarily reflected a
slow down in demand in the latter half of 2000.
Equistar's net income, excluding unusual items, of $82 million in 1999
decreased $75 million from net income, excluding unusual items, of $157 million
in 1998. The decrease was attributable to lower polymers margins, higher
general and administrative expenses, and higher interest expense in 1999
compared with 1998. These were only partly offset by higher petrochemicals
sales volumes. Unusual items in 1998 included $14 million of restructuring
charges.
Fourth Quarter 2000 compared to Third Quarter 2000
Equistar's net loss of $118 million in the fourth quarter 2000 decreased from
net income of $63 million in the third quarter 2000. Compared to the third
quarter, Equistar was affected by higher raw material and utility costs from an
unprecedented increase in natural gas prices and lower selling prices for
petrochemicals and polymers.
In the petrochemicals segment, operating income decreased from $204 million in
the third quarter to $51 million in the fourth quarter. Ethylene cash margins
in the fourth quarter were about half of third quarter levels due to a sharp
rise in manufacturing costs and a decline in ethylene and propylene prices.
Manufacturing costs were affected by higher NGL-based raw material costs and
higher utility costs. Costs of NGL-based raw materials, primarily ethane, and
utility costs were affected by the rapid increase in natural gas costs late in
the fourth quarter 2000. Reported ethylene cash margins for the U.S. industry
decreased from 11.5 cents per pound in the third quarter to 5.6 cents per pound
in the fourth quarter. As a result of the dramatic deterioration in
profitability and reduced demand, there was a sharp reduction in industry
operating rates, estimated by industry analysts at 15% to 20% of North American
capacity.
In the polymers segment, the operating loss increased from $46 million in the
third quarter to $85 million in the fourth quarter, reflecting a decline in
margins and a 6% drop in sales volumes from the third quarter. Polymers prices
eroded more than the above-noted decline in the price of ethylene, one of the
principal raw materials for polymers. Average fourth quarter benchmark prices
for polyethylene products were down approximately 5% to 10% from third quarter
levels.
43
Segment Data
The following tables reflect selected sales volume data, including
intersegment sales volumes, and summarized financial information for Equistar's
business segments. The addition of the Occidental Contributed Business is
reflected prospectively from May 15, 1998.
For the year ended December 31,
-------------------------------------------------------------
In millions 2000 1999 1998
- ----------- ---------------- ---------------- ----------------
Selected petrochemicals products:
Olefins (pounds) 18,490 18,574 16,716
Aromatics (gallons) 397 367 271
Polymers products (pounds) 6,281 6,388 6,488
Millions of dollars
- -------------------
Sales and other operating revenues:
Petrochemicals segment $ 7,031 $ 4,759 $ 3,474
Polymers segment 2,351 2,159 2,208
Intersegment eliminations (1,887) (1,324) (1,158)
---------------- ---------------- ----------------
Total $ 7,495 $ 5,594 $ 4,524
================ ================ ================
Cost of sales:
Petrochemicals segment $ 6,330 $ 4,298 $ 3,143
Polymers segment 2,465 2,028 1,943
Intersegment eliminations (1,887) (1,324) (1,158)
---------------- ---------------- ----------------
Total $ 6,908 $ 5,002 $ 3,928
================ ================ ================
Other operating expenses:
Petrochemicals segment $ 7 $ 14 $ 12
Polymers segment 71 80 88
Unallocated 175 240 200
Restructuring and other unusual charges -- 96 14
---------------- ---------------- ----------------
Total $ 253 $ 430 $ 314
================ ================ ================
Operating income:
Petrochemicals segment $ 694 $ 447 $ 319
Polymers segment (185) 51 177
Unallocated (175) (336) (214)
---------------- ---------------- ----------------
Total $ 334 $ 162 $ 282
================ ================ ================
Petrochemicals Segment
Revenues--Revenues of $7.0 billion in 2000 increased 48% from $4.8 billion in
1999. The increase was primarily due to higher average sales prices, as sales
volumes were relatively flat compared to 1999. Sales prices rose rapidly in
1999, and remained at higher levels throughout 2000, resulting in higher average
prices in 2000. For example, average benchmark ethylene prices were 37% higher
in 2000 than in 1999. Volumes were flat due to a slow down in demand in the
latter half of 2000, reflecting slower growth in the U.S. economy. As a result
of the slower demand and the adverse effects of the rapid fourth quarter
increase in natural gas costs, Equistar idled some capacity in 2000 that uses
NGL-based raw materials.
Revenues of $4.8 billion in 1999 increased 37% from $3.5 billion in 1998. The
increase was due to both higher average sales prices and higher sales volumes
during 1999. As a result of rapidly rising prices throughout 1999, which
reflected stronger demand as well as increases in the underlying cost of raw
materials, average sales prices for 1999 were about 20% higher than average
sales prices for 1998. Sales volumes increased about 13% during 1999,
reflecting a full year of the Occidental Contributed Business and stronger
demand.
44
Operating Income--Operating income of $694 million in 2000 increased 55%
compared to $447 million in 1999. Gross margin as a percent of sales was flat
at 10%, as sales price increases, on average, kept pace with raw material cost
increases. Generally, Equistar was able to increase sales prices more than the
increase in raw material costs per unit.
Operating income of $447 million in 1999 increased 40% compared to $319
million in 1998, while gross margin as a percent of sales was flat at 10%.
Gross margin percentages were flat as sales prices increases, on average, kept
pace with increases in raw material costs. The benefit from increased sales
volumes was only partly offset by the effects of the production unit outage in
1999. The 1999 increase in sales volumes was primarily due to inclusion of a
full year of operations of the Occidental Contributed Business, which was added
in mid-May 1998.
Polymers Segment
Revenues--Revenues of $2.4 billion in 2000 increased 9% compared to revenues
of $2.2 billion in 1999 due to higher sales prices partly offset by lower sales
volumes. Average sales prices were 9% higher, primarily in response to higher
raw material costs for ethylene and propylene. Sales volumes declined 2% due to
a combination of a planned maintenance turnaround at the Morris, Illinois plant
in the second quarter 2000 and a slow down in demand in the latter half of 2000,
reflecting slower growth in the U.S. economy.
Revenues of $2.2 billion in 1999 decreased slightly from 1998 revenues
primarily due to lower sales volumes. Sales volumes decreased due to the shut
down of less efficient HDPE and other polymer product capacity, plant
maintenance and the sale of the concentrates and compounds business in 1999.
Industry sales prices, which began decreasing during the fourth quarter 1997,
continued in a downward trend throughout 1998, but then increased during 1999 as
raw material costs increased. As a result, average sales prices were comparable
from 1998 to 1999.
Operating Income--The operating loss of $185 million in 2000 decreased from
operating income of $51 million in 1999. The decrease was primarily due to
substantially lower margins for 2000 compared to 1999 as raw material cost
increases outpaced sales price increases. Gross margin as a percent of sales
was negative in 2000 compared to 6% in 1999.
Operating income of $51 million in 1999 decreased 71% compared to $177 million
in 1998. The decrease was primarily due to substantially lower margins for 1999
compared to 1998 as raw material cost increases outpaced sales price increases.
Gross margin as a percent of sales decreased to 6% in 1999 from 9% in 1998.
Unallocated Items
The following discusses expenses that were not allocated to the petrochemicals
and polymers segments.
Other Operating Expenses--This caption includes general and administrative
expenses and amortization of goodwill and other intangibles. Unallocated
expenses were $175 million in 2000, $240 million in 1999, and $200 million in
1998. The increase from 1998 to 1999 was primarily due to higher compensation
and employee benefit expenses and costs associated with Year 2000 preventive
measures. The decrease from 1999 to 2000 reflects the reduction in compensation
and employee benefit expenses and Year 2000 costs, as well as savings realized
from the consolidation of certain administrative functions under the Shared
Services Agreement with Lyondell.
Restructuring and Other Unusual Charges--Restructuring and other unusual
charges were $96 million in 1999 and $14 million in 1998. During 1999, Equistar
recorded a charge of $96 million associated with a decision to shut down
certain polymer reactors and severance costs related to these shutdowns and
consolidation of certain administrative functions between Lyondell and Equistar.
The decision to shut down the polymer reactors was based on their high
production costs, market conditions in the polyethylene industry and the
flexibility to utilize more efficient reactors to meet customer requirements.
Approximately $72 million of the total charge was an adjustment of the asset
carrying values of the reactors. The remaining $24 million represented
severance and other employee-related costs for approximately 500 employee
positions that were eliminated. The eliminated positions, primarily
administrative functions, resulted from opportunities to consolidate such
services among Lyondell and Equistar and,
45
to a lesser extent, positions associated with the shut down polymer reactors.
Equistar made severance payments of $19 million in 2000. As of December 31,
2000, substantially all of the employee terminations had been completed and the
remaining liability was eliminated. Equistar incurred and recorded $14 million
of restructuring charges related to the addition of the Occidental Contributed
Business in 1998.
Interest Expense, Net and Other Income--Net interest expense was $181 million
in 2000, $176 million in 1999 and $139 million in 1998. Interest expense
increased from 1998 to 1999 due to higher levels of debt as a result of the
addition of the Occidental Contributed Business in mid-May 1998. Interest
expense also increased from 1998 to 1999 and from 1999 to 2000 due to the
February 1999 refinancing of $900 million of bank debt with senior unsecured
notes, which carry a higher fixed rate of interest. Other income of $46 million
in 1999 primarily consisted of net gains on asset sales, including the sale of
the concentrates and compounds business in April 1999.
LYONDELL-CITGO Refining LP
Refining Segment
Overview--PDVSA Oil reduced deliveries to LCR under the Crude Supply Agreement
from the 230,000 barrels per day contract rate to 195,000 barrels per day,
beginning in August 1998. In May 1999, the deliveries were further reduced to
184,000 barrels per day. Deliveries were increased to 195,000 barrels per day
in April 2000, to 200,000 barrels per day in July 2000 and restored to the
230,000 barrels per day contract level in October 2000. A stronger gasoline
market in 2000 helped improve the margins that LCR realized on its spot
purchases of crude oil. LCR experienced major unplanned outages of a coker unit
and a fluid catalytic cracker unit during the second quarter 1999, and had a
major planned turnaround in the second quarter 2000.
The following table sets forth, in thousands of barrels per day, sales volumes
for LCR's refined products and processing rates at the Refinery for the periods
indicated:
For the year ended December 31,
---------------------------------------------------
2000 1999 1998
------------- ------------- -------------
Refined products sales volumes:
Gasoline 118 118 121
Diesel and heating oil 72 68 79
Jet fuel 19 18 17
Aromatics 11 10 10
Other refined products 105 104 103
------------- ------------- -------------
Total refined products volumes 325 318 330
============= ============= =============
Crude processing rates:
Crude Supply Agreement - coked 196 182 223
Other heavy crude oil - coked 19 14 19
Other crude oil 30 43 18
------------- ------------- -------------
Total crude processing rates 245 239 260
============= ============= =============
Revenues--Revenues for LCR, including intersegment sales, were $4.1 billion in
2000, $2.6 billion in 1999 and $2.1 billion in 1998. The 58% increase in 2000
compared to 1999 is primarily due to higher sales prices. Sales volumes
increased 2%. Prices of refined products increased in 2000, pushed by higher
average benchmark crude oil prices that were 65% higher than for 1999. Crude
oil prices increased sharply in 1999, and remained at higher levels throughout
2000, resulting in a higher average price in 2000 than in 1999. Sales volumes
and Crude Supply Agreement processing rates were higher in 2000 compared to 1999
as PDVSA Oil increased deliveries of Crude Supply Agreement crude oil during
2000 after having reduced deliveries in 1998 and again in 1999.
46
The revenue increase in 1999 compared to 1998 was due to higher prices partly
offset by lower volumes. Prices of refined products increased in 1999 as crude
oil prices escalated rapidly. The lower sales volumes and processing rates in
1999 primarily reflect the lower deliveries of crude oil under the Crude Supply
Agreement and, to a lesser extent, the effect of the second quarter 1999
unplanned production unit outages.
Net Income--LCR's net income was $128 million in 2000, $24 million in 1999 and
$169 million in 1998. The improvement in 2000 compared to 1999 was due to
increased deliveries and an improved mix of Crude Supply Agreement crude oil,
higher spot margins, reflecting a stronger gasoline market in 2000, and higher
margins for reformulated gasoline due to industry supply shortages. These
improvements were partly offset by higher fuels and utility costs and interest
expense. While the second quarter 2000 was negatively impacted by a major
planned turnaround, this was more than offset by the effect of unplanned
production unit outages in the second quarter 1999.
The decrease in 1999 from 1998 primarily reflected reduced processing of extra
heavy crude oil as a result of lower deliveries and a less favorable mix of
crude oil received from PDVSA Oil under the Crude Supply Agreement, partially
offset by increased processing of spot crude. Margins on the crude oil
purchased in the spot market were also lower compared to 1998. The 1999
operating results were also negatively affected by costs and lower operating
rates related to the unplanned outages during the second quarter 1999. The 1999
and 1998 periods included pretax charges of $6 million and $10 million,
respectively, associated with LCR's renegotiated labor agreement.
Interest Expense--LCR's net interest expense was $61 million in 2000, $44
million in 1999 and $43 million in 1998. Interest expense increased in 2000 due
to fees and higher interest rates associated with the refinancing of LCR's debt
in May and September 2000.
Fourth Quarter 2000 versus Third Quarter 2000
LCR had net income of $62 million in the fourth quarter 2000 compared to $66
million in the third quarter 2000. LCR benefited from continued excellent
operating reliability and delivery of contract levels of crude oil under the
Crude Supply Agreement in the fourth quarter. Compared to the third quarter,
the benefit of higher margins on spot crude was more than offset by higher
utility costs. The third quarter also benefited from the processing of
inventoried crude oil volumes, which did not recur in the fourth quarter.
Processing of Crude Supply Agreement crude oil averaged 219,000 barrels per day
during the fourth quarter. The Crude Supply Agreement processing rate was lower
than the Crude Supply Agreement delivery rate due to the timing of crude oil
receipts, which resulted in the processing of a higher ratio of spot market
crude oil during the quarter. Total crude processing rates in the fourth
quarter averaged 270,000 barrels per day.
FINANCIAL CONDITION
Operating Activities--Cash provided by operations was $61 million in 2000
compared to $300 million in 1999. The 2000 period reflects the effects of the
asset sale to Bayer and higher working capital. Efforts to reduce working
capital have been hampered by the escalation in sales prices and raw material
costs. Although working capital metrics such as days of working capital,
receivables collection efficiency and inventory turnover have all improved,
these benefits have been offset by the effects of higher sales prices and raw
material costs, requiring additional investment in working capital that reduces
funds available for debt reduction. Cash provided by operating activities in
1999 included customer advances and tax refunds totaling approximately $190
million.
Investing Activities--On March 31, 2000, Lyondell completed the sale of the
polyols business and ownership interests in its U.S. PO manufacturing operations
to Bayer for approximately $2.45 billion. As part of the transaction, Lyondell
and Bayer entered into the PO Joint Venture and the separate PO Technology Joint
Venture. In addition, on December 19, 2000, Lyondell and Bayer formed a
separate joint venture for the construction of PO-11, the previously announced
world-scale PO/SM plant located in The Netherlands. Lyondell sold a 50%
interest in the PO-11 project, based on project expenditures to date, to Bayer
for approximately $52 million. Lyondell and Bayer each contributed their 50%
interest in PO-11 into the joint venture and each will bear 50% of the costs
going
47
forward to complete the project. The plant is expected to start up in the second
quarter of 2003. Lyondell and Bayer do not share marketing or product sales
under either the PO Joint Venture or PO-11.
During the third quarter 2000, construction began on a new 275 million pound
per year BDO facility in Europe known as BDO-2. The construction is being
financed by a third party lessor, who will retain ownership of the facility and,
upon completion in the second quarter of 2002, lease it to a subsidiary of
Lyondell by means of an operating lease. In the transaction documents for
BDO-2, Lyondell agreed to comply with certain financial and other covenants that
are substantially the same as those contained in the Credit Facility. A breach
of those covenants could result in, among other things, Lyondell having to pay
the project costs incurred to date. As of December 31, 2000, Lyondell was in
compliance with all of those covenants. However, given the poor current business
environment, Lyondell is seeking amendments to the transaction documents
consistent with the amendments being sought to its Credit Facility. Lyondell
anticipates that the amendments will become effective prior to March 31, 2001.
See "-Liquidity and Capital Resources" below for a discussion of the proposed
amendments to the Credit Facility.
Lyondell made capital expenditures of $104 million in 2000, including initial
spending on the PO-11 facility and expansion of a TDI plant in France.
Lyondell's pro rata share of Equistar's and LCR's 2000 capital expenditures was
$54 million and $35 million, respectively. Lyondell's 2001 capital budget is
$216 million, and its pro rata share of Equistar's and LCR's 2001 projected
capital spending is $54 million and $64 million, respectively. The higher 2001
capital amounts reflect increased spending for PO-11 by Lyondell, cost reduction
and business opportunity projects at Equistar, and higher spending for
regulatory compliance, maintenance and cost reduction projects at LCR.
Distributions from affiliates in excess of earnings for 2000 were $85 million,
principally from LCR. Contributions and advances to affiliates of $40 million
in 2000 included contributions and loans of $25 million and $10 million,
respectively, to LCR for capital projects.
Financing Activities--Lyondell used the net proceeds of the sale to Bayer to
significantly reduce its variable-rate debt. During 2000, Lyondell used the net
proceeds to repay the $1.1 billion outstanding balance of Term Loan A, the $149
million outstanding balance of Term Loan F and $810 million of the outstanding
balance of Term Loan B. Additionally, Lyondell repaid the $200 million
outstanding balance of the 9.9% debentures, which matured in November 2000, and
reduced the outstanding balance of Term Loan B by an additional $150 million.
Lyondell also made $13 million of other scheduled debt repayments and paid $10
million in debt amendment fees and $10 million of Term Loan B call premiums.
Lyondell paid regular quarterly dividends of $.225 per share of common stock
in 2000 for a total of $106 million.
Liquidity and Capital Resources--At December 31, 2000, Lyondell had cash on
hand of $260 million. Lyondell also had $500 million available under its
revolving credit facility that extends until July 2003. Current maturities of
long-term debt are $10 million. Aggregate maturities of long-term debt are $10
million in 2001; $11 million in 2002; $44 million in 2003; $85 million in 2004;
$87 million in 2005; and $3.6 billion thereafter.
Lyondell's Credit Facility and the indentures under which Lyondell's senior
secured notes and senior subordinated notes were issued contain covenants that,
subject to exceptions, restrict sale and leaseback transactions, lien
incurrence, debt incurrence, dividends and investments, sales of assets and
mergers and consolidations. In addition, the Credit Facility requires Lyondell
to maintain specified financial ratios and consolidated net worth, in all cases
as provided in the Credit Facility. The breach of these covenants could permit
the lenders under Lyondell's Credit Facility and indentures to declare the loans
immediately payable and could permit the lenders under Lyondell's Credit
Facility to terminate future lending commitments. For more detailed
information, see Note 16 of Notes to the Consolidated Financial Statements and
the full text of the Credit Facility and the indentures, which have been filed
as exhibits to this Form 10-K.
Lyondell secured an amendment to certain financial covenants in the Credit
Facility in February 2000 designed to increase its financial and operating
flexibility in the near term. Lyondell was in compliance with all covenants
under the Credit Facility and the indentures as of December 31, 2000. However,
given the poor current business
48
environment, Lyondell is seeking an amendment to the Credit Facility that would
further increase its financial and operating flexibility, primarily by making
certain financial ratio requirements less restrictive. Lyondell anticipates that
the amendment will become effective prior to March 31, 2001.
In addition to amending certain financial convenants in the Credit Facility,
the February 2000 amendment to the Credit Facility eliminated a cross-default
provision in the Credit Facility that could have been triggered by a default by
LCR under its debt instruments. On May 5, 2000, Lyondell and CITGO, as partners
of LCR, arranged interim financing for LCR to repay the $450 million outstanding
under the LCR Construction Facility. On September 15, 2000, Lyondell and CITGO
completed the syndication of one-year credit facilities for LCR, including a
$450 million term loan to replace the interim financing and a $70 million
revolving credit facility to be used for working capital and other general
business purposes. Lyondell and CITGO, as partners of LCR, have agreed to
pursue a refinancing of the indebtedness, although the final terms have not been
determined. Based on previous experience of refinancing LCR's debt and the
current conditions of the financial markets, the management of LCR, Lyondell and
CITGO anticipate that this debt can be refinanced prior to its maturity.
Equistar had outstanding debt of $2.2 billion at December 31, 2000. Lyondell
remains liable on $521 million of Equistar debt for which Equistar assumed
primary responsibility in connection with its formation. At December 31, 2000,
Equistar and LCR had combined outstanding debt of $2.7 billion to unrelated
parties and combined equity of approximately $4.0 billion. The ability of the
joint ventures to distribute cash to Lyondell is reduced by their respective
debt service obligations.
Equistar's credit facility contains covenants that, subject to exceptions,
restrict sale and leaseback transactions, lien incurrence, debt incurrence,
sales of assets and mergers and consolidations, and require Equistar to maintain
certain specified financial ratios, in all cases as provided in the credit
facility. The breach of these covenants could permit the lenders to declare the
loans immediately payable and to terminate future lending commitments.
Furthermore, a default under Equistar's debt instruments involving more than $50
million of indebtedness would constitute a cross-default under Lyondell's credit
facility. For more detailed information, please see the full text of the
Equistar and Lyondell credit facilities, which have been filed as exhibits to
this Form 10-K.
Equistar was in compliance with all covenants under its debt instruments as of
December 31, 2000. However, given the poor current business environment,
Equistar is seeking an amendment to its credit facility that would increase its
financial and operating flexibility, primarily by making certain financial ratio
requirements less restrictive. Equistar anticipates that the amendment will
become effective prior to March 31, 2001.
Lyondell believes that conditions will be such that cash balances, cash
generated from operating activities and funds from lines of credit will be
adequate to meet anticipated future cash requirements for scheduled debt
repayments, necessary capital expenditures and dividends.
CURRENT BUSINESS OUTLOOK
Given high energy and raw material costs and a weakening domestic economy,
Lyondell expects first quarter 2001 consolidated operating results to be roughly
comparable to the fourth quarter 2000. In the IC&D segment, MTBE margins have
improved from fourth quarter 2000 levels. PO and derivatives margins could
benefit if propylene costs continue declining, however volumes will be adversely
affected by weaker demand due to the economy. Despite the shutdown of Equistar's
Port Arthur facility, which will result in a first quarter 2001 charge for
severance and shutdown activity, Equistar expects first quarter 2001 operating
results to improve over the fourth quarter 2000. Raw material costs are trending
downwards, and Equistar is implementing price increases in both the
petrochemicals and polymers segments. Success in implementing the price
increases will depend on industry demand levels and the strength of the economy.
LCR profits and production will be down in the first quarter due to unplanned
downtime and high natural gas costs. Although PDVSA Oil informed LCR that the
Venezuelan government has instructed that production of certain grades of crude
oil be reduced effective February 1, 2001, LCR has not been advised of any
reductions in deliveries to LCR and would continue to dispute any such
reduction. LCR cannot predict the level of reductions, if any, that may be
forthcoming.
49
Industry forecasts project that 2001 operating results will be negatively
affected by high raw material costs, a slowing economy and industry-wide
ethylene capacity additions. These forecasts predict that higher raw material
costs and uncertain economic growth will continue to pressure profit margins
in the first half of 2001. In addition, industry ethylene capacity currently
under construction is scheduled to start up late in the second quarter 2001 and
is forecast to put pressure on ethylene pricing and margins in the latter half
of 2001. Lyondell management feels that the market has already factored in the
impact of the new industry capacity, and that the key to any improvement will be
economic growth to generate additional demand and lower energy and raw material
costs. See "Items 1 and 2. Business and Properties -- Industry Cyclicality and
Overcapacity".
EUROPEAN MONETARY UNION
On January 1, 1999, the euro became the official currency for the member
countries of the European Union participating in monetary union. Euro banknotes
and coins will be introduced on January 1, 2002 and the former national currency
banknotes and coins will be withdrawn by July 1, 2002 at the latest.
Lyondell converted its systems to invoice customers in euros beginning
January 1, 1999. Due to Year 2000 priorities and the planned conversion of
Lyondell's European business and financial systems to enterprise software from
SAP America, Inc. in July 2001, it is anticipated that the full conversion of
systems to the euro will not be completed until July 2001. Based upon the
assessments completed to date, European monetary union has not had, and is not
expected to have, a material impact on Lyondell's consolidated financial
statements. Lyondell's European-based revenues are approximately $1.0 billion on
an annual basis.
ENVIRONMENTAL MATTERS
Various environmental laws and regulations impose substantial requirements
upon the operations of Lyondell. Lyondell'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") as amended,
RCRA and the Clean Air Act Amendments. Lyondell 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. Lyondell, its
subsidiaries and its joint ventures also make capital expenditures to comply
with environmental regulations. Such capital expenditures totaled, in the
aggregate, approximately $20 million, $21 million and $22 million for 2000, 1999
and 1998, respectively. All such expenditures were funded by cash generated
from operations.
Lyondell is also subject to certain assessment and remedial actions at its own
plant sites under RCRA and at CERCLA sites. The liability under RCRA and
various state and foreign government regulations primarily relates to the LCR
Refinery, five current Lyondell plant sites and three former plant sites. Under
CERCLA, the liability primarily relates to three federal sites. Lyondell is
also involved in administrative proceedings or lawsuits relating to a minimal
number of other CERCLA sites. Lyondell estimates, based upon currently
available information, that potential loss contingencies associated with the
latter CERCLA sites, individually and in the aggregate, are not significant. In
addition, Lyondell has negotiated an order with the TNRCC for assessment and
remediation of groundwater and soil contamination at the LCR Refinery.
As of December 31, 2000, Lyondell's environmental liability for future
assessment and remediation costs at the above-mentioned sites totaled
$31 million. The liabilities per site range from less than $1 million to
$13 million and are expected to be incurred over the next two to seven years.
Lyondell spent $7 million to $8 million annually for each of the last three
years for environmental remediation matters. Lyondell estimates that
expenditures will also be approximately $8 million in 2001. In the opinion of
management, there is currently no material range of loss in excess of the amount
recorded for these sites. 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 other CERCLA, RCRA, TNRCC or other
comparable state or foreign law investigations, could require Lyondell to
reassess its potential exposure related to environmental matters.
The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the EPA. The Texas Natural Resource Conservation
Commission has submitted a plan to the EPA to reach and
50
demonstrate compliance with the ozone standard by the year 2007. Compliance with
the provisions of the plan will result in increased capital investment and
higher operating costs for Equistar, Lyondell, and LCR during the next several
years. As a result of these rules, Lyondell estimates that capital expenditures
will increase to approximately $37 million in 2001 and will increase further in
2002. The timing and amount of these expenditures are subject to regulatory and
other uncertainties, including litigation, as well as obtaining the necessary
permits and approvals. For periods beyond 2001, additional environmentally
related capital expenditures will be required, which could total between
$400 million and $500 million for Lyondell, Equistar and LCR before the 2007
deadline. Lyondell's share of such expenditures would total between $225 million
and $275 million.
In the United States, the Clean Air Act Amendments of 1990 set minimum levels
for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified
air quality standards. However, while studies by federal and state agencies and
other organizations have shown that MTBE is safe for use in gasoline, is not
carcinogenic and is effective in reducing automotive emissions, the presence of
MTBE in some water supplies in California and other states due to gasoline
leaking from underground storage tanks and in surface water from recreational
water craft has led to public concern that MTBE may, in certain limited
circumstances, affect the taste and odor of drinking water supplies, and thereby
lead to possible environmental issues.
Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict or
ban the use of MTBE. At the federal level, a blue ribbon panel appointed by the
EPA issued its report on July 27, 1999. That report recommended, among other
things, reducing the use of MTBE in gasoline. During 2000, the EPA announced
its intent to seek legislative changes from Congress to give the EPA authority
to ban MTBE over a three-year period. Such action would only be granted through
amendments to the Clean Air Act. Additionally, the EPA is seeking a ban of MTBE
utilizing rulemaking authority contained in the Toxic Substance Control Act. It
would take at least three years for such a rule to issue. Recently, however,
senior policy analysts at the U.S. Department of Energy presented a study
stating that banning MTBE would create significant economic risk. The
presentation did not identify any benefits from banning MTBE. The EPA
initiatives mentioned above or other governmental actions could result in a
significant reduction in Lyondell's MTBE sales. The Company has developed
technologies to convert TBA into alternate gasoline blending components should
it be necessary to reduce MTBE production in the future. See "Items 1 and 2.
Business and Properties -- Intermediate Chemicals and Derivatives--Overview."
Additionally, the Clean Air Act specified certain emissions standards for
vehicles beginning in the 1994 model year and required the EPA to study whether
further emissions reduction standards for vehicles were necessary. New
standards for gasoline were finalized in 1999 and will require refiners to
produce a low sulfur gasoline by 2004, with some allowances for a conditional
phase-in period that could extend final compliance until 2006. A new "on-road"
diesel standard was adopted in late 2000 and will require refiners to produce
low-sulfur diesel fuel by 2007. These rules could result in increased capital
investment and higher operating costs for LCR. Equistar's olefins fuel business
may also be impacted if these rules increase the cost for processing fuel
components.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. Subsequently, the FASB delayed
the effective date by one year. In June 2000, the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities,
amending certain provisions of SFAS No. 133. SFAS No. 133, as amended by SFAS
No. 138, requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending upon
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The gains and losses on the derivative
instrument that are reported in other comprehensive income will be reclassified
as earnings in the periods in which earnings are impacted by the hedged item.
The ineffective portion of all hedges will be recognized in current-period
earnings. The statement is effective for the calendar year 2001. SFAS No. 133
implementation did not have a significant effect on the financial statements of
Lyondell, Equistar or LCR.
51
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB No. 101"), Revenue Recognition in
Financial Statements. SAB No. 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in the
financial statements. The statement was effective for Lyondell's fourth quarter
of 2000. Lyondell, Equistar and LCR were in compliance with the provisions of
SAB No. 101. Therefore, implementation of SAB No. 101 did not have an impact on
their financial statements.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report, including those set forth
in "Items 1 and 2. Business and Properties", this "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations", as
well as those set forth in "Item 7a. Disclosure of Market and Regulatory Risk,"
are "forward-looking statements" within the meaning of the federal securities
laws. Although Lyondell believes the expectations reflected in such forward-
looking statements are reasonable, they do involve certain assumptions, risks
and uncertainties, and Lyondell can give no assurance that such expectations
will prove to have been correct. Lyondell's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including the cyclical nature of the chemical and
refining industries, uncertainties associated with the United States and
worldwide economies, current and potential governmental regulatory actions in
the United States and in other countries, substantial chemical and refinery
capacity additions resulting in oversupply and declining prices and margins, the
availability and cost of raw materials, Lyondell's ability to implement cost
reductions, and operating interruptions (including leaks, explosions, fires,
mechanical failure, unscheduled downtime, labor difficulties, transportation
interruptions, spills and releases and other environmental risks). Many of such
factors are beyond Lyondell's or its joint ventures' ability to control or
predict. 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.
Item 7a. Disclosure of Market and Regulatory Risk
COMMODITY PRICE RISK
A substantial portion of Lyondell's products and raw materials, as well as
those of Equistar, LCR and LMC, are commodities whose prices fluctuate as market
supply/demand fundamentals change. Accordingly, product margins and the level
of Lyondell's profitability tend to fluctuate with changes in the business
cycle. Lyondell tries to protect against such instability through various
business strategies. These include increasing the olefins plants' raw material
flexibility, entering into multi-year processing and sales agreements, moving
downstream into olefins derivatives products whose pricing is more stable, and
the use of the "deemed margin" contract at LCR. Lyondell has not used
derivative instruments for commodity price hedging purposes.
Equistar has entered into over-the-counter "derivatives" for crude oil to help
manage its exposure to commodity price risk with respect to crude oil-related
raw material purchases. As of December 31, 2000, the outstanding over-the-
counter "derivatives" covered 5.1 million barrels, mature from January 2001
through July 2001, and cover from approximately 26% in January 2001 to
approximately 4% in July 2001 of Equistar's crude oil-related raw material
requirements for those periods. Assuming a hypothetical 30% decrease in crude
oil prices from those in effect at year end, the loss in earnings for the
combined derivatives contracts would be $39 million. Lyondell's pretax share
would be approximately $16 million. Sensitivity analysis was used for this
purpose. The quantitative information about market risk is necessarily limited
because it does not take into account the effects of the underlying operating
transactions. Equistar does not engage in any derivatives trading activities.
52
FOREIGN EXCHANGE RISK
Foreign exchange exposures result from cash flows between U.S. and foreign
operations and transactions denominated in currencies other than the local
currency of a foreign operating entity. Lyondell is using foreign currency
forward contracts to minimize the exposure related to euro-denominated capital
commitments related to the construction of the PO-11 plant in The Netherlands.
Although Lyondell uses these types of contracts to reduce foreign exchange
exposures with respect to capital commitments denominated in euros, there can be
no assurance that such hedging techniques will protect Lyondell's capital
commitments from adverse exchange rate fluctuations or that Lyondell will not
incur material losses on such contracts. Furthermore, these contracts are not
designed to protect Lyondell's reported results against exchange rate
fluctuations. At December 31, 2000, Lyondell had foreign currency forward
contracts outstanding in the notional amount of 134 million euros (approximately
$125 million). Assuming a hypothetical 10% unfavorable change in the euro
exchange rate from that in effect at year end, the foreign exchange loss on
these contracts would be $13 million. Sensitivity analysis was used for this
purpose. The quantitative information about market risk is necessarily limited
because it does not take into account the effects of the underlying operating
transactions. Lyondell does not engage in any derivatives trading activities.
INTEREST RATE RISK
Lyondell is exposed to interest rate risk with respect to variable-rate debt.
During 2000, Lyondell reduced variable-rate debt from $3.2 billion at December
31, 1999 to $1.0 billion at December 31, 2000, thereby reducing its exposure to
interest rate risk. Assuming a hypothetical 10% increase in interest rates from
those in effect at year end, the increase in annual interest expense on the
variable-rate debt would be approximately $7 million.
At December 31, 2000, Equistar and LCR had variable rate debt of $820 million
and $505 million, respectively, excluding the note payable by LCR to Lyondell.
Assuming a hypothetical 10% increase in interest rates from those in effect at
year end, Lyondell's share of the increase in annual interest expense on the
variable-rate debt would be approximately $4 million. Sensitivity analysis was
used for both of the above analyses.
REGULATORY RISK
Certain federal and state governmental initiatives in the U.S. have sought
either to rescind the oxygenate requirement for reformulated gasoline or to
restrict or ban the use of MTBE. Lyondell does not expect the recent proposals
to have a significant impact on MTBE margins and volumes in the near term. In
Europe, MTBE demand is benefiting from new legislation in the European Union,
which may offset any potential decline in the U.S. Should it become necessary
to reduce MTBE production over the longer term, Lyondell would need to make
capital expenditures to convert its MTBE plants to production of alternate
gasoline blending components. The profit margins on such alternate gasoline
blending components could differ from those historically realized on MTBE. See
"Items 1. and 2. Business and Properties -- Intermediate Chemicals and
Derivatives -- Overview".
New air pollution standards promulgated by federal and state regulatory
agencies in the U.S., including those specifically targeting the eight-county
Houston/Galveston region, will affect a substantial portion of the operating
facilities of Lyondell, Equistar and LCR. Compliance with these standards will
result in increased capital investment and higher operating costs for Lyondell,
Equistar and LCR during the next several years. See "Items 1. and 2. Business
and Properties -- Intermediate Chemicals and Derivatives -- Environmental
Matters".
53
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
----
LYONDELL CHEMICAL COMPANY
Report of Independent Accountants........................................ 55
Consolidated Financial Statements:
Consolidated Statements of Income..................................... 56
Consolidated Balance Sheets........................................... 57
Consolidated Statements of Cash Flows................................. 58
Consolidated Statements of Stockholders' Equity....................... 59
Notes to Consolidated Financial Statements............................ 60
EQUISTAR CHEMICALS, LP
Report of Independent Accountants........................................ 91
Consolidated Financial Statements:
Consolidated Statements of Income..................................... 92
Consolidated Balance Sheets........................................... 93
Consolidated Statements of Cash Flows................................. 94
Consolidated Statements of Partners' Capital.......................... 95
Notes to Consolidated Financial Statements............................ 96
LYONDELL-CITGO REFINING LP
Report of Independent Accountants........................................ 112
Independent Auditors' Report............................................. 113
Financial Statements:
Statements of Income.................................................. 114
Balance Sheets........................................................ 115
Statements of Cash Flows.............................................. 116
Statements of Partners' Capital....................................... 117
Notes to Financial Statements......................................... 118
54
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Lyondell Chemical Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Lyondell Chemical
Company and its subsidiaries at December 31, 2000 and 1999, and the results of
their operations and their cash flows for the years then ended, 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
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 12, 2001
55
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31,
-------------------------------
Millions of dollars, except per share data 2000 1999 1998
- ------------------------------------------ ------ ------ ------
Sales and other operating revenues $4,036 $3,693 $1,447
Operating costs and expenses:
Cost of sales 3,371 2,891 1,089
Selling, general and administrative expenses 190 240 126
Research and development expense 35 58 26
Amortization of goodwill and other intangibles 101 100 41
Unusual charges -- -- 61
------ ------ ------
3,697 3,289 1,343
------ ------ ------
Operating income 339 404 104
Interest expense (514) (616) (287)
Interest income 52 27 25
Other income, net 27 5 12
Gain on sale of assets 590 -- --
------ ------ ------
Income (loss) before equity investments,
income taxes and extraordinary item 494 (180) (146)
------ ------ ------
Income from equity investments:
Equistar Chemicals, LP 101 52 119
LYONDELL-CITGO Refining LP 86 23 110
Other 12 1 6
------ ------ ------
199 76 235
------ ------ ------
Income (loss) before income
taxes and extraordinary item 693 (104) 89
Provision for (benefit from) income taxes 223 (24) 37
------ ------ ------
Income (loss) before extraordinary item 470 (80) 52
Extraordinary loss on extinguishment
of debt, net of income taxes (33) (35) --
------ ------ ------
Net income (loss) $ 437 $ (115) $ 52
====== ====== ======
Basic earnings per share:
Income (loss) before extraordinary item $ 4.00 $ (.77) $ .67
Extraordinary loss (.28) (.33) --
------ ------ ------
Net income (loss) $ 3.72 $(1.10) $ .67
====== ====== ======
Diluted earnings per share:
Income (loss) before extraordinary item $ 3.99 $ (.77) $ .67
Extraordinary loss (.28) (.33) --
------ ----- ------
Net income (loss) $ 3.71 $(1.10) $ .67
====== ====== ======
See Notes to Consolidated Financial Statements.
56
LYONDELL CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
----------------
Millions, except shares and par value data 2000 1999
- ------------------------------------------ ------ ------
ASSETS
Current assets:
Cash and cash equivalents $ 260 $ 307
Accounts receivable:
Trade, net 465 554
Related parties 43 12
Inventories 392 519
Prepaid expenses and other current assets 49 114
Deferred tax assets 136 380
------ ------
Total current assets 1,345 1,886
Property, plant and equipment, net 2,429 4,291
Investments and long-term receivables:
Investment in PO joint ventures 621 --
Investment in Equistar Chemicals, LP 599 607
Receivable from LYONDELL-CITGO Refining LP 229 219
Investment in LYONDELL-CITGO Refining LP 20 52
Other investments and long-term receivables 137 137
Goodwill, net 1,152 1,545
Other assets 515 761
------ ------
Total assets $7,047 $9,498
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade $ 313 $ 339
Related parties 86 11
Current maturities of long-term debt 10 225
Other accrued liabilities 325 446
------ ------
Total current liabilities 734 1,021
Long-term debt, less current maturities 3,844 6,046
Other liabilities 441 331
Deferred income taxes 702 891
Commitments and contingencies -- --
Minority interest 181 202
Stockholders' equity:
Preferred stock, $.01 par value, 80,000,000 shares
authorized, none outstanding -- --
Common stock, $1.00 par value, 250,000,000 shares
authorized, 120,250,000 issued 120 120
Additional paid-in capital 854 854
Retained earnings 504 172
Accumulated other comprehensive loss (258) (64)
Treasury stock, at cost, 2,689,667 and 2,678,976 shares, (75) (75)
respectively ------ ------
Total stockholders' equity 1,145 1,007
------ ------
Total liabilities and stockholders' equity $7,047 $9,498
====== ======
See Notes to Consolidated Financial Statements.
57
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
---------------------------------------
Millions of dollars 2000 1999 1998
- ------------------- ------- ------- -------
Cash flows from operating activities:
Net income (loss) $ 437 $ (115) $ 52
Adjustments to reconcile net income (loss) to net
cash provided by operating activities, net of the
effects of purchase accounting and deconsolidation
of affiliates:
Gain on sale of assets (590) -- --
Depreciation and amortization 279 330 138
Unusual charges -- -- 61
Extraordinary items 33 35 --
Deferred income taxes 55 36 76
(Increase) decrease in accounts receivable (160) (124) 93
Decrease (increase) in inventories 3 15 (15)
Increase (decrease) in accounts payable 67 52 (148)
Net change in other working capital accounts 24 (11) 24
Other, net (87) 82 (18)
------- ------- -------
Net cash provided by operating activities 61 300 263
------- ------- -------
Cash flows from investing activities:
Purchase of ARCO Chemical Company, net of
cash acquired -- -- (5,869)
Proceeds from sales of assets, net of cash sold 2,497 -- --
Expenditures for property, plant and equipment (104) (131) (64)
Contributions and advances to affiliates (40) (52) (35)
Distributions from affiliates in excess of earnings 85 134 435
Deconsolidation of affiliate -- -- (11)
Other -- 4 --
------- ------- -------
Net cash provided by (used in) investing activities 2,438 (45) (5,544)
------- ------- -------
Cash flows from financing activities:
Repayments of long-term debt (2,417) (4,122) (715)
Proceeds from issuance of long-term debt -- 3,400 6,500
Payment of debt issuance costs -- (107) (130)
Issuance of common stock -- 736 --
Dividends paid (106) (97) (70)
Net decrease in short-term debt -- -- (100)
Repurchase of common stock -- -- (59)
Other (20) 8 --
------- ------- -------
Net cash (used in) provided by financing activities (2,543) (182) 5,426
------- ------- -------
Effect of exchange rate changes on cash (3) 1 2
------- ------- -------
(Decrease) increase in cash and cash equivalents (47) 74 147
Cash and cash equivalents at beginning of period 307 233 86
------- ------- -------
Cash and cash equivalents at end of period $ 260 $ 307 $ 233
======= ======= =======
See Notes to Consolidated Financial Statements.
58
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other
Millions, except shares and per ------------------------ Paid-In Retained Comprehensive Comprehensive
share data Issued Treasury Capital Earnings Income (Loss) Income (Loss)
- ------------------------------- -------- ------------ ----------- ----------- -------------- -------------
Balance, January 1, 1998
(80,000,000 shares issued) $ 80 $(26) $158 $ 407 $ -- $ --
Net income -- -- -- 52 -- 52
Cash dividends ($.90 per -- -- -- (70) -- --
share)
Purchase of 3,067,051 -- (59) -- -- -- --
treasury shares
Reissuance of 88,848 treasury
shares under restricted
stock plan -- 2 -- -- -- --
Foreign currency translation,
net of tax of $25 -- -- -- -- 32 32
Other -- -- -- (2) -- --
---- ---- ---- ----- --------- ---------
Comprehensive income $ 84
=========
Balance, December 31, 1998
(80,000,000 shares issued;
2,978,203 treasury shares) 80 (83) 158 387 32 $ --
Net loss -- -- -- (115) -- (115)
Cash dividends ($.90 per -- -- -- (97) -- --
share)
Issuance of common stock 40 -- 696 -- -- --
Reissuance of 299,227
treasury shares under
restricted stock plan -- 8 -- -- -- --
Foreign currency translation,
net of tax of $31 -- -- -- -- (96) (96)
Other -- -- -- (3) -- --
---- ---- ---- ----- --------- ---------
Comprehensive loss $(211)
=========
Balance, December 31, 1999
(120,250,000 shares issued;
2,678,976 treasury shares) $120 $(75) $854 $ 172 $ (64) $ --
Net income -- -- -- 437 -- 437
Cash dividends ($.90 per -- -- -- (106) -- --
share)
Reissuance of 71,127 treasury
shares under restricted
stock plan -- 2 -- -- -- --
Forfeiture of 60,436 shares
under restricted stock plan -- (2) -- -- -- --
Foreign currency translation -- -- -- -- (183) (183)
Minimum pension liability,
net of tax of $5 -- -- -- -- (11) (11)
Other -- -- -- 1 -- --
---- ---- ---- ----- --------- ---------
Comprehensive income $ 243
=========
Balance, December 31, 2000
(120,250,000 shares issued;
2,689,667 treasury shares) $120 $(75) $854 $ 504 (258)
==== ==== ==== ===== =========
See Notes to Consolidated Financial Statements.
59
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Company and Operations
Lyondell Chemical Company ("Lyondell") operates in the (i) intermediate
chemicals and derivatives, (ii) petrochemicals, (iii) polymers, (iv) refining
and (v) methanol businesses through the operations of the former ARCO Chemical
Company ("ARCO Chemical") acquired by Lyondell as of July 28, 1998 (see Note 3),
and through Lyondell's joint venture ownership interests in Equistar Chemicals,
LP ("Equistar"), LYONDELL-CITGO Refining LP ("LCR") and Lyondell Methanol
Company, L.P. ("LMC").
Lyondell is a leading worldwide producer and marketer of propylene oxide ("PO"),
polyether polyols, propylene glycol, propylene glycol ethers, toluene
diisocyanate ("TDI"), styrene monomer ("SM") and methyl tertiary butyl ether
("MTBE"). The polyether polyols business was sold effective March 31, 2000 (see
Note 4). These operations are reported as the intermediate chemicals and
derivatives ("IC&D") segment.
Lyondell's operations in the petrochemicals and polymers segments are conducted
through its joint venture ownership interest in Equistar (see Note 5). Lyondell
accounts for its investment in Equistar using the equity method of accounting.
Equistar's petrochemicals segment produces olefins, including ethylene,
propylene and butadiene; aromatics, including benzene and toluene; oxygenated
products, including ethylene oxide and derivatives, ethylene glycol, ethanol and
MTBE, and specialty products, including refinery blending stocks.
Equistar's polymers segment produces polyolefins, including high density
polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear-low density
polyethylene ("LLDPE") and polypropylene; and performance polymers products,
including wire and cable insulating resins and compounds, adhesive resins, and
fine powders. Equistar's color concentrates and compounds business, which was
part of performance polymers products, was sold effective April 30, 1999.
Lyondell's refining segment operations are conducted through its joint venture
ownership interest in LCR (see Note 6). Lyondell accounts for its investment in
LCR using the equity method of accounting. LCR's full-conversion Houston, Texas
refinery ("Refinery") produces refined petroleum products, including
conventional and reformulated gasoline, low sulfur diesel and jet fuel;
aromatics, including benzene, toluene, paraxylene and orthoxylene; lubricants,
including industrial lubricants, white oils and process oils; carbon black oil;
sulfur; residual fuel and petroleum coke. LCR sells its principal refined
products to Lyondell's joint venture partner in LCR, CITGO Petroleum Corporation
("CITGO").
Lyondell has additional operations conducted through its 75% joint venture
ownership interest in LMC, which produces methanol. Lyondell accounts for its
investment in LMC using the equity method of accounting.
From its formation in 1985 through June 1988, Lyondell operated as a division of
Atlantic Richfield Company ("ARCO"), which is now wholly owned by BP. In July
1988, ARCO transferred the division's assets and liabilities along with
additional pipeline assets, to its wholly owned subsidiary, Lyondell
Petrochemical Company (subsequently renamed Lyondell Chemical Company in 1998),
a Delaware corporation. In January 1989, ARCO completed an initial public
offering of approximately 50.1% of Lyondell's common stock. In August 1994,
ARCO issued three-year debt securities ("Exchangeable Notes") which were
exchangeable upon maturity on September 15, 1997 into Lyondell common stock or
an equivalent cash value, at ARCO's option. On September 15, 1997, ARCO
delivered shares of Lyondell common stock to the holders of the Exchangeable
Notes. Lyondell purchased the remaining 383,312 shares of common stock held by
ARCO after the conversion, and ARCO no longer owns any shares of Lyondell common
stock.
60
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies
Basis of Presentation--The consolidated financial statements include the
accounts of Lyondell and its subsidiaries, including the results of the
operations of the business acquired from ARCO Chemical prospectively from August
1, 1998. All significant intercompany transactions have been eliminated in
consolidation. Lyondell's joint venture ownership interests are accounted for
using the equity method of accounting.
Equity Method of Accounting--Investments in joint ventures where Lyondell exerts
a certain minimum level of management control, but lacks full decision making
ability over all major issues, are accounted for using the equity method of
accounting. Under those circumstances, this accounting treatment is used even
though Lyondell's ownership percentage may exceed 50%.
Revenue Recognition--Revenue from product sales is recognized upon delivery of
products to the customer.
Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. Lyondell's
policy is to invest cash in conservative, highly rated instruments and limit the
amount of credit exposure to any one institution. Lyondell performs periodic
evaluations of the relative credit standing of these financial institutions,
which are considered in Lyondell's investment strategy.
Lyondell has no requirements for compensating balances in a specific amount at a
specific point in time. Lyondell does maintain compensating balances for some
of its banking services and products. Such balances are maintained on an
average basis and are solely at Lyondell's discretion. As a result, none of
Lyondell's cash is restricted.
Accounts Receivable--Lyondell sells its products primarily to other industrial
concerns in the petrochemicals and refining industries. Lyondell performs
ongoing credit evaluations of its customers' financial condition, and, in
certain circumstances, requires letters of credit from them. Lyondell's
allowance for doubtful accounts receivable, which is reflected in the
Consolidated Balance Sheets as a reduction of accounts receivable, totaled $12
million and $9 million at December 31, 2000 and 1999, respectively.
Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. Depreciation of manufacturing facilities and equipment is computed using
the straight-line method over the estimated useful lives of the related assets
ranging from 5 to 30 years. Upon retirement or sale, Lyondell 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.
Lyondell's policy is to capitalize interest cost incurred on debt during the
construction of major projects exceeding one year.
Turnaround Maintenance and Repair Expenses--Cost of repairs and maintenance
incurred in connection with turnarounds of major units at Lyondell's
manufacturing facilities exceeding $5 million are deferred and amortized using
the straight-line method until the next planned turnaround, generally four to
six years. These costs are maintenance, repair and replacement costs that are
necessary to maintain, extend and improve the operating capacity and efficiency
rates of the production units. Lyondell amortized $10 million and $7 million of
deferred turnaround maintenance and repair costs for the years ended December
31, 2000 and 1999, respectively. None were amortized in 1998.
Deferred Software Costs--Costs to purchase and develop software for internal use
are deferred and amortized on a straight-line basis over a range of 3 to 7
years. Lyondell amortized $3 million of deferred software costs for the year
ended December 31, 2000. None were deferred prior to 2000.
Goodwill--Goodwill represents the excess of purchase price paid over the value
assigned to the net tangible and identifiable intangible assets of a business
acquired. Goodwill is amortized over 40 years, the estimated useful life, using
the straight-line method.
61
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Charges--Deferred charges are carried at cost and consist primarily of
company-owned life insurance, capacity reservation fees and other long-term
processing rights and costs, deferred debt issuance costs and patents and
licensed technology. These assets are amortized using the straight-line method
over their estimated useful lives or the term of the related agreement, if
shorter.
Environmental Remediation Costs--Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Estimates have not
been discounted to present value. Environmental remediation costs are expensed
or capitalized in accordance with generally accepted accounting principles.
Minority Interest--Minority interest in 2000 and 1999 primarily represents the
interest of third-party investors in a partnership that owns Lyondell's PO/SM II
plant at the Channelview, Texas complex. Lyondell retains a majority interest
in the partnership. The minority interest share of the partnership's income and
loss is reported in "Other income (expense), net" in the Consolidated Statements
of Income.
Exchanges--Inventory exchange transactions, which involve homogeneous
commodities in the same line of business and do not involve the payment or
receipt of cash, are not accounted for as purchases and sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance with
the normal LIFO valuation policy.
Income Taxes--Deferred income taxes result from temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes
and are calculated based upon cumulative book and tax differences in the
Consolidated Balance Sheets in accordance with SFAS No. 109, Accounting for
Income Taxes. 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.
Foreign Currency Translation--Where the local currency is the functional
currency, the financial statements of international operations are translated
into U.S. dollars using the exchange rate at each balance sheet date for assets
and liabilities and the average exchange rate for each period for revenues,
expenses, gains and losses. Translation adjustments are recorded as a separate
component of "Accumulated other comprehensive income (loss)" in the
stockholders' equity section of the Consolidated Balance Sheets. Where the U.S.
dollar is the functional currency, remeasurement adjustments are recorded as
foreign exchange gains and losses in the Consolidated Statements of Income.
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 period. Actual results could differ from those estimates.
Long-Lived Asset Impairment--In accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
Lyondell reviews its long-lived assets, including goodwill, for impairment on an
exception basis whenever events or changes in circumstances indicate a potential
loss in utility. Impairment losses are recognized in the Consolidated
Statements of Income.
Derivatives--Adoption of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, did not have a significant impact on the Consolidated
Financial Statements of Lyondell. The statement is effective for Lyondell's
calendar year 2001.
Reclassifications--Certain previously reported amounts have been reclassified to
conform to classifications adopted in 2000.
62
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Purchase of ARCO Chemical Company
As of July 28, 1998, Lyondell completed its acquisition of ARCO Chemical. The
transaction was financed through a $7 billion Credit Facility (see Note 16).
This acquisition was accounted for using the purchase method of accounting and,
accordingly, the results of operations of the acquired business are included in
Lyondell's Consolidated Statements of Income prospectively from August 1, 1998.
The acquisition cost of approximately $5.9 billion has been allocated to the
assets acquired and liabilities assumed based upon the estimated fair value of
such assets and liabilities at the date of acquisition. In connection with the
acquisition, Lyondell accrued liabilities for costs associated with the delay of
construction of the PO-11 plant, vesting of certain key manager benefits
pursuant to change of control provisions, severance costs for the involuntary
termination of certain headquarters employees, and relocation costs for moving
personnel to Lyondell's Houston headquarters. The liability totaled $255
million at the date of acquisition. Lyondell subsequently revised the portion
of the estimated liabilities for penalties and cancellation charges related to
the PO-11 lump-sum construction contract and related commitments. Based on the
final negotiated terms, Lyondell reduced the accrued liability by $13 million in
1999 and by $8 million in 2000. In addition, during 2000 Lyondell finalized the
portion of the accrued liability related to employee costs and reduced the
liability by $10 million. The benefit in 2000 from the accrual reversal was
substantially offset by other acquisition-related costs. Through December 31,
2000, Lyondell had paid and charged approximately $213 million in total against
the accrued liability. The remaining $11 million of the accrued liability
relates to PO-11 commitments and final settlement is subject to negotiations
with the affected third parties.
Approximately $57 million, or less than 1% of the purchase price, was allocated
to purchased in-process research and development. This included three projects
valued at $29 million, $18 million and $10 million, respectively, representing
two new product applications and one new process technology. Lyondell is
continuing activities represented by these projects and the values assigned
represent intangibles with no alternative future use. Accordingly, Lyondell
wrote off the in-process research and development, recording a nonrecurring
charge of $57 million in the third quarter 1998 (see Note 7). The excess of
purchase price paid over the estimated fair value of net assets acquired was
allocated to goodwill. The amount allocated to goodwill was approximately $1.4
billion.
The fair value of the assets acquired and liabilities assumed, net of cash
acquired, was as follows:
Millions of dollars
- -------------------
Current assets, net of cash acquired $1,133
Property, plant and equipment 4,454
Purchased in-process research and development 57
Goodwill 1,445
Deferred charges and other assets 1,124
Current liabilities (599)
Long-term debt (952)
Other liabilities and deferred credits (793)
------
Purchase price, net of cash acquired $5,869
======
During 1999, Lyondell obtained the additional information needed to complete its
review of the deferred tax effects of purchase accounting. This additional
information resulted in an increase in goodwill of $188 million, primarily due
to an increase in the long-term deferred income tax liability and a reduction of
long-term deferred tax assets.
63
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The unaudited pro forma combined historical results of Lyondell and ARCO
Chemical, giving effect to the acquisition and the Credit Facility drawdown as
of the beginning of 1998 are as follows:
For the year ended
December 31, 1998
------------------
Millions of dollars, except per share data
- ------------------------------------------
Sales and other operating revenues $3,553
Unusual charges 41
Operating income 396
Income from equity investments 235
Net income 42
Basic and diluted earnings per share $ .54
The unaudited pro forma data presented above are not necessarily indicative of
the results of operations of Lyondell that would have occurred had such
transactions actually been consummated as of the beginning of 1998, nor are they
necessarily indicative of future results.
4. Gain on Sale of Assets
On March 31, 2000, Lyondell completed the sale of the polyols business and
ownership interests in its U.S. PO manufacturing operations to Bayer AG and
Bayer Corporation (collectively "Bayer") for approximately $2.45 billion.
Lyondell recorded a pretax gain on the sale of $544 million. In the third
quarter 2000, the final settlement of working capital with Bayer and resolution
of certain estimated liabilities resulted in the recording of an additional
pretax gain on the sale of $46 million. Lyondell used net proceeds of the asset
sale to retire a significant portion of its outstanding debt (see Note 16). The
polyols business had sales of approximately $830 million for the year ended
December 31, 1999. The accompanying consolidated statements of income included
the operating results of the polyols business through March 31, 2000. As part
of the transaction, Lyondell entered into a U.S. PO manufacturing joint venture
with Bayer and a separate joint venture with Bayer for certain related PO/SM
technology. Lyondell contributed approximately $1.2 billion of assets to the
joint ventures, and sold $522 million of ownership interests to Bayer.
Lyondell's residual interests are reported as "Investment in PO joint ventures"
in the accompanying Consolidated Balance Sheets (see Note 13). In addition, on
December 19, 2000, Lyondell and Bayer formed a separate 50/50 joint venture for
the construction of PO-11, a previously announced world-scale PO/SM plant
located in Rotterdam, The Netherlands.
The major components of the net assets divested, were as follows:
Millions of dollars:
- --------------------
Working capital, net of cash sold $ 241
Property, plant and equipment 492
Investment in PO joint ventures 522
Goodwill 348
Other intangibles 134
Other liabilities, net (15)
------
Total net assets divested $1,722
======
As part of the asset sale, Lyondell accrued liabilities of $53 million for
employee severance, relocation and other employee benefits, covering
approximately 850 employees. The affected employees were generally terminated
on or about April 1, 2000, with a limited number providing transition services
through mid-2001. Payments of $25 million for severance, relocation and other
employee benefits were made through December 31, 2000. During the third quarter
2000, Lyondell reduced the accrued liability by $25 million due to a reduction
in the number of affected employees and significantly lower than expected
payments of severance and other benefits. The $25 million reduction in accrued
liability was included as part of the gain on sale recognized in the third
quarter. Lyondell expects to settle the remainder of the liability within the
next year.
64
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Equity Interest in Equistar Chemicals, LP
Equistar was formed on December 1, 1997 as a joint venture between Lyondell and
Millennium Chemicals Inc. ("Millennium"), to own and operate the businesses
contributed by the partners. Lyondell contributed substantially all of the
assets comprising its petrochemicals and polymers business segments, while
Millennium contributed substantially all of the assets comprising its
polyethylene and related products, performance polymers and ethanol businesses.
On May 15, 1998, the ethylene, propylene and ethylene oxide and derivatives
businesses of Occidental Petroleum Corporation ("Occidental") were contributed
to Equistar ("Occidental Contributed Business"). Equistar is operated as a
Delaware limited partnership owned by subsidiaries of Lyondell, Millennium and
Occidental.
Lyondell currently has a 41% joint venture ownership interest, while Millennium
and Occidental each have 29.5%. Prior to the addition of Occidental as a
partner on May 15, 1998, Lyondell had a 57% joint venture ownership interest,
while Millennium had 43%.
Summarized financial information for Equistar is as follows:
December 31,
-------------------
Millions of dollars 2000 1999
- ------------------- ------ ------
BALANCE SHEETS
Total current assets $1,332 $1,360
Property, plant and equipment, net 3,819 3,926
Goodwill, net 1,086 1,119
Deferred charges and other assets 345 331
------ ------
Total assets $6,582 $6,736
====== ======
Current maturities of long-term debt $ 90 $ 92
Other current liabilities 653 692
Long-term debt, less current maturities 2,158 2,169
Other liabilities and deferred credits 141 121
Partners' capital 3,540 3,662
------ ------
Total liabilities and partners' capital $6,582 $6,736
====== ======
For the year ended December 31,
-------------------------------
2000 1999 1998
------ ------ ------
STATEMENTS OF INCOME
Sales and other operating revenues $7,495 $5,594 $4,524
Cost of sales 6,908 5,002 3,928
Other operating costs and expenses 253 334 300
Restructuring and other unusual charges -- 96 14
------ ------ ------
Operating income 334 162 282
Interest expense, net 181 176 139
Other income, net -- (46) --
------ ------ ------
Net income $ 153 $ 32 $ 143
====== ====== ======
SELECTED CASH FLOW INFORMATION
Depreciation and amortization $ 310 $ 300 $ 268
Expenditures for property, plant and equipment 131 157 200
Lyondell's "Income from equity investments" in Equistar as presented in the
Consolidated Statements of Income consists of Lyondell's share of Equistar's net
income and the accretion of the difference between Lyondell's investment and its
underlying equity in Equistar's net assets. At the formation of Equistar and
adjusted for the addition of the Occidental Contributed Business on May 15,
1998, the difference between Lyondell's investment in
65
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equistar and its underlying equity in Equistar's net assets was approximately
$900 million. This difference is being accreted into Lyondell's income over 25
years using the straight-line method.
Lyondell has purchased benzene, ethylene, propylene and other products at
market-related prices from Equistar since Lyondell's acquisition of ARCO
Chemical Company in July 1998. Pursuant to agreements dated effective as of
August 1999 and expiring in 2014, Lyondell is required to purchase 100% of its
benzene, ethylene and propylene requirements for its Channelview and Bayport,
Texas facilities, with the exception of a supply agreement for one of the
products with an unrelated third party entered into prior to 1999 and expiring
in 2015. In addition, a wholly owned subsidiary of Lyondell licenses MTBE
technology to Equistar. Lyondell also purchases a significant portion of the
MTBE produced by Equistar at one of its two Channelview units at market-related
prices. Included in "Sales and other operating revenues" above are $572
million, $242 million and $89 million in sales to Lyondell for the years ended
December 31, 2000 and 1999 and the five months ended December 31, 1998,
respectively. In addition, Equistar purchased $2 million, $6 million and $2
million from Lyondell for the years ended December 31, 2000 and 1999 and for the
five months ended December 31, 1998, respectively, which are included in
Equistar's "Cost of sales" above.
Sales to LCR included above were $440 million, $263 million and $238 million for
the years ended December 31, 2000, 1999 and 1998, respectively. Purchases from
LCR during the years ended December 31, 2000, 1999 and 1998 included in
Equistar's "Cost of sales" totaled $264 million, $190 million and $131 million,
respectively.
During 1998 and 1999, Lyondell had various service and cost-sharing arrangements
with Equistar. In November 1999, Lyondell and Equistar announced an agreement
to utilize shared services more broadly, consolidating such services among
Lyondell and Equistar (the "Shared Services Agreement"). Beginning January 1,
2000, employee-related and indirect costs were allocated between the two
companies in the manner prescribed in the Shared Services Agreement, while
direct third party costs, incurred exclusively for either Lyondell or Equistar,
were charged directly to that entity. Billings by Lyondell to Equistar were
approximately $133 million, $9 million and $3 million for the years ended
December 31, 2000, 1999 and 1998, respectively. The increased billings by
Lyondell during 2000 resulted from the increase in services provided by Lyondell
under the Shared Services Agreement. Billings from Equistar to Lyondell were
approximately $8 million and $1 million for the years ended December 31, 1999
and 1998, respectively. There were no billings from Equistar to Lyondell for
the year ended December 31, 2000.
6. Equity Interest in LYONDELL-CITGO Refining LP
In July 1993, LCR was formed to own and operate Lyondell's refining business.
LCR is structured as a Delaware limited partnership owned by subsidiaries of
Lyondell and CITGO. LCR completed a major upgrade project at the Refinery
during the first quarter of 1997, which enabled the facility to process
substantial additional volumes of extra heavy crude oil. As a result of the
completion of the upgrade project, effective April 1, 1997, the participation
interests changed to reflect CITGO's equity contribution to the upgrade project.
The participation interests changed from approximately 86% and 14% for Lyondell
and CITGO, respectively, and are currently 58.75% and 41.25% for Lyondell and
CITGO, respectively. Net income before depreciation expense for the period is
allocated to LCR's partners based upon participation interests. Depreciation
expense is allocated to the partners based upon contributed assets.
66
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized financial information for LCR is as follows:
December 31,
-------------------
Millions of dollars 2000 1999
- ------------------- ------ ------
BALANCE SHEETS
Total current assets $ 310 $ 219
Property, plant and equipment, net 1,319 1,350
Deferred charges and other assets 67 60
------ ------
Total assets $1,696 $1,629
====== ======
Current maturities of long-term debt $ -- $ 450
Notes payable 450 --
Other current liabilities 417 307
Long-term debt, less current maturities 264 247
Other liabilities and deferred credits 57 69
Partners' capital 508 556
------ ------
Total liabilities and partners' capital $1,696 $1,629
====== ======
For the year ended December 31,
-------------------------------
2000 1999 1998
------ ------ ------
STATEMENTS OF INCOME
Sales and other operating revenues $4,075 $2,571 $2,055
Cost of sales 3,826 2,432 1,754
Selling, general and administrative expenses 60 66 78
Unusual charges -- 6 10
------ ------ ------
Operating income 189 67 213
Interest expense, net 61 44 43
State income taxes (benefit) -- (1) 1
------ ------ ------
Net income $ 128 $ 24 $ 169
====== ====== ======
SELECTED CASH FLOW INFORMATION
Depreciation and amortization $ 112 $ 103 $ 100
Expenditures for property, plant and equipment 60 56 61
Included in "Sales and other operating revenues" above are sales to Equistar of
$264 million, $190 million, and $131 million for the years ended December 31,
2000, 1999 and 1998, respectively. Purchases from Equistar during the years
ended December 31, 2000, 1999 and 1998, included in LCR's cost of sales, totaled
$440 million, $263 million, and $238 million, respectively.
Lyondell has various service and cost sharing arrangements with LCR. Billings
by Lyondell to LCR were approximately $4 million per year for the years ended
December 31, 2000, 1999 and 1998. Billings from LCR to Lyondell were
approximately $2 million, $3 million and $4 million for the years ended December
31, 2000, 1999 and 1998, respectively.
In addition, during 1999 and 1998, LCR made interest payments to Lyondell of
approximately $9 million each year for interest on loans and advances related to
the funding of a portion of the upgrade project and certain other capital
expenditures at the Refinery. No interest was paid to Lyondell in 2000 in
accordance with the terms of LCR's credit facility.
LCR has a long-term crude supply agreement ("Crude Supply Agreement") with
Lagoven, S.A., now known as PDVSA Petroleo y Gas, S.A. ("PDVSA Oil"), an
affiliate of CITGO (see Note 18, Commitments and Contingencies--Crude Supply
Agreement). The Crude Supply Agreement incorporates formula prices to be paid
by LCR for the crude oil supplied based on the market value of a slate of
refined products deemed to be produced from each particular crude oil or
feedstock, less: (i) certain deemed refining costs, adjustable for inflation and
energy costs; (ii) certain actual costs; and (iii) a deemed margin, which varies
according to the grade of crude oil or other feedstock
67
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
delivered. Although Lyondell believes that the Crude Supply Agreement reduces
the volatility of LCR's earnings and cash flows, the Crude Supply Agreement also
limits LCR's ability to enjoy higher margins during periods when the market
price of crude oil is low relative to then current market prices for refined
products. In addition, if the actual yields, costs or volumes of the LCR
refinery differ substantially from those contemplated by the Crude Supply
Agreement, the benefits of this agreement to LCR could be substantially
different, and could result in lower earnings and cash flow for LCR.
Furthermore, there may be periods during which LCR's costs for crude oil under
the Crude Supply Agreement may be higher than might otherwise be available to
LCR from other sources. A disparity in the price of crude oil under the Crude
Supply Agreement relative to the market prices for its products, such as was
experienced in 1999, has the tendency to make continued performance of its
obligations under the Crude Supply Agreement less attractive to PDVSA Oil.
In addition, under the terms of a long-term product sales agreement ("Products
Agreement"), CITGO purchases substantially all of the refined products produced
at the Refinery. Both PDVSA Oil and CITGO are direct or indirect, wholly owned
subsidiaries of Petroleos de Venezuela, S.A., the national oil company of the
Republic of Venezuela.
Under the terms of the limited partnership agreement of LYONDELL-CITGO Refining
LP, CITGO had a one-time option to increase its participation interest in LCR up
to 50% by making an additional capital contribution. This option expired
September 30, 2000.
7. Unusual Charges
During 1998, Lyondell wrote off $57 million of costs assigned to purchased in-
process research and development in connection with the ARCO Chemical
acquisition. Additionally, Lyondell incurred unusual charges of $4 million for
the early termination of incentive compensation plans and executive severance
related to the formation of Equistar.
8. Income Taxes
The significant components of the provision for (benefit from) income taxes were
as follows for the years ended December 31:
Millions of dollars 2000 1999 1998
- ------------------- ------ ------ ------
Current
Federal $ 154 $ (71) $ (44)
Foreign 8 6 6
State 6 5 (1)
----- ----- -----
Total current 168 (60) (39)
----- ----- -----
Deferred
Federal 71 38 69
Foreign (31) 10 (1)
State 15 (12) 8
----- ----- -----
Total deferred 55 36 76
----- ----- -----
Total provision for (benefit from) income taxes $ 223 $ (24) $ 37
===== ===== =====
68
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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. Significant components
of Lyondell's deferred tax liabilities and assets were as follows as of December
31:
Millions of dollars 2000 1999
- ------------------- ------ ------
Deferred tax liabilities:
Tax over book depreciation and amortization $ 717 $1,039
Investments in partnerships 358 283
Other 36 55
------ ------
Total deferred tax liabilities 1,111 1,377
------ ------
Deferred tax assets:
Net operating loss carryforwards 161 419
Provisions for benefit plans and estimated expenses 70 122
Federal benefit attributable to foreign taxes 96 65
Federal tax credit carryforwards 135 26
Other 103 263
------ ------
Total deferred tax assets 565 895
Deferred tax asset valuation allowance (20) (29)
------ ------
Net deferred tax assets 545 866
------ ------
Net deferred tax liabilities 566 511
Less current portion of:
Deferred tax asset (136) (380)
Deferred tax liability -- --
------ ------
Long-term deferred income taxes $ 702 $ 891
====== ======
Under Internal Revenue Code Sections 338 (g) and (h) (10), Lyondell and ARCO
elected to treat ARCO Chemical as an asset acquisition, which resulted in a step
up of the U.S. tax basis of the ARCO Chemical net assets purchased. This has
resulted in significantly increased depreciation and amortization deductions for
U.S. tax purposes. The March 2000 sale of assets to Bayer reversed a
significant portion of the accelerated depreciation, while utilizing net
operating loss carryforwards.
The domestic and foreign components of income (loss) before income taxes and
extraordinary item and a reconciliation of income tax computed at the U.S.
federal statutory tax rate to Lyondell's effective tax rate on income (loss)
before extraordinary item are as follows:
Millions of dollars 2000 1999 1998
- ------------------- ------ ------- ------
Income (loss) before income taxes:
Domestic $ 759 $ (137) $ 103
Foreign (66) 33 (14)
------ ------- ------
Total $ 693 $ (104) $ 89
====== ======= ======
Percentages
- -----------
U.S. statutory income tax rate 35.0% (35.0)% 35.0%
Increase (reduction) in taxes resulting from:
Reorganization of foreign operations (5.4) -- --
Foreign and U.S. tax effects of foreign operations (2.6) 7.4 6.9
Goodwill and other permanent differences 2.1 4.4 - -
State income taxes, net of federal 1.5 (2.4) 4.9
Settlement of tax issues -- -- (5.1)
Other, net 1.6 2.3 (.2)
------ ------- -----
Effective income tax rate 32.2% (23.3)% 41.5%
====== ======= =====
69
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, Lyondell had alternative minimum tax ("AMT") credit
carryforwards of $135 million. This credit is available to offset future
federal income taxes and has no expiration date. In addition, Lyondell had
state tax loss carryforwards of $374 million, federal tax loss carryforwards of
$234 million and foreign tax loss carryforwards of $208 million. The state tax
loss carryforwards expire on various dates beginning in 2003, the federal tax
loss carryforwards begin expiring in 2014, and a significant portion of the
foreign tax loss carryforwards have no expiration date.
9. Extraordinary Items
During 2000, Lyondell retired debt in the principal amount of $2.2 billion prior
to maturity (see Note 16). Lyondell wrote off $40 million of unamortized debt
issuance costs and amendment fees and paid call premiums of $10 million. The
total charges of $50 million, less a tax benefit of $17 million, were reported
as an extraordinary loss on extinguishment of debt. During 1999, Lyondell
retired and partially refinanced debt in the principal amount of $4.1 billion
prior to maturity. Unamortized debt issuance costs and amendment fees of $54
million, less a tax benefit of $19 million, were written off and reported as an
extraordinary loss on extinguishment of debt. Previously, these debt issuance
costs and amendment fees had been deferred and were being amortized to interest
expense.
10. Accounts Receivable
In December 1998, Lyondell entered into a three-year receivables purchase
agreement with an independent issuer of receivables-backed commercial paper.
Under the terms of the agreement, Lyondell agreed to sell on an ongoing basis
and without recourse, designated accounts receivable through December 2001. To
maintain the balance of the accounts receivable sold, Lyondell is obligated to
sell new receivables as existing receivables are collected. The agreement
currently permits the sale of up to $100 million of accounts receivable. The
amount of receivables permitted to be sold and actually sold is determined by a
formula, which takes into account, among other factors, Lyondell's credit
rating. As of December 31, 2000 and 1999, Lyondell's gross accounts receivable
that had been sold to the purchasers aggregated $53 million and $76 million,
respectively. Increases and decreases in the amount sold have been reported as
operating cash flows in the Consolidated Statements of Cash Flows. Costs
related to the sale are included in "Other income (expense), net" in the
Consolidated Statements of Income.
11. Inventories
Inventories are stated at the lower of cost or market. In 2000 and 1999,
approximately 97% and 93%, respectively, of inventories, excluding materials and
supplies, were determined by the last-in, first-out ("LIFO") method. Materials
and supplies and other non-LIFO inventories are valued using either the first-
in, first-out ("FIFO") or the average cost methods. Inventories were as follows
at December 31:
Millions of dollars 2000 1999
- ------------------- ------ ------
Finished goods $ 301 $ 405
Work-in-process 7 31
Raw materials 51 44
Materials and supplies 33 39
------ ------
Total inventories $ 392 $ 519
====== ======
70
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Property, Plant and Equipment, Net
The components of property, plant and equipment, at cost, and the related
accumulated depreciation were as follows at December 31:
Millions of dollars 2000 1999
- ------------------- ------ ------
Land $ 10 $ 35
Manufacturing facilities and equipment 2,580 4,406
Construction projects in progress 95 114
------ ------
Total property, plant and equipment 2,685 4,555
Less accumulated depreciation 256 264
------ ------
Property, plant and equipment, net $2,429 $4,291
====== ======
No interest was capitalized during 2000, 1999 and 1998. Depreciation expense
for 2000, 1999 and 1998 was $160 million, $199 million and $75 million,
respectively.
13. Investment in PO Joint Ventures
As part of the sale of the polyols business and ownership interests in its U.S.
PO manufacturing operations to Bayer, Lyondell entered into a U.S. PO
manufacturing joint venture with Bayer (the "PO Joint Venture") and a separate
joint venture with Bayer for certain related PO/SM technology (the "PO
Technology Joint Venture") (see Note 4). Bayer's ownership interest represents
ownership of an in kind portion of the PO production of the PO Joint Venture.
Bayer's share of PO production from the PO Joint Venture will increase from
approximately 1.0 billion pounds for the last nine months of 2000 to
approximately 1.6 billion pounds annually in 2004 and thereafter. Lyondell
takes in kind the remaining PO production and all co-product (SM and TBA)
production from the PO Joint Venture. Under the terms of the operating and
logistics agreements, Lyondell operates the PO Joint Venture plants and arranges
and coordinates the logistics of PO delivery. The partners share in the cost of
production based on their product offtake. Lyondell reports the cost of its
product offtake as inventory and cost of sales in its Consolidated Financial
Statements. Related cash flows are reported in the operating cash flow section
of the Consolidated Statement of Cash Flows. Lyondell's investment in the PO
Joint Venture and the PO Technology Joint Venture is reduced through recognition
of its share of the depreciation and amortization of the assets of the joint
ventures, which is included in cost of sales. Other changes in the investment
balance are principally due to additional capital investments by Lyondell in the
PO Joint Venture and the PO Technology Joint Venture. Additionally, in December
2000, Lyondell and Bayer formed a separate joint venture for the construction of
a world-scale PO/SM plant, known as PO-11, located in The Netherlands. Lyondell
sold a 50% interest in the construction project, based on project expenditures
to date, to Bayer for approximately $52 million. Lyondell and Bayer each
contributed their 50% interest in PO-11 into the joint venture and each will
bear 50% of the costs going forward to complete the project. The plant is
expected to start up in the second quarter of 2003. Lyondell and Bayer do not
share marketing or product sales under either the PO Joint Venture or PO-11.
14. Other Accrued Liabilities
Other accrued liabilities were as follows at December 31:
Millions of dollars 2000 1999
- ------------------- ------ ------
Accrued taxes other than income $ 71 $ 77
Accrued payroll and benefits 69 115
Accrued interest 67 101
Accrued income taxes 20 57
Accrued contractual obligations 58 70
Other 40 26
----- -----
Total other accrued liabilities $ 325 $ 446
===== =====
71
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Pension and Other Postretirement Benefits
Lyondell provides defined pension and postretirement benefit plans to employees.
The following table provides a reconciliation of benefit obligations, plan
assets and the funded status of the plans:
Other
Pension Benefits Postretirement Benefits
---------------- -----------------------
Millions of dollars 2000 1999 2000 1999
- ------------------- ------ ------ ----- ------
Change in benefit obligation:
Benefit obligation, January 1 $ 399 $ 487 $ 72 $ 73
Service cost 14 18 2 2
Interest cost 31 32 5 5
Plan participants' contributions 1 -- -- --
Actuarial (gain) loss 64 (80) (11) (4)
Net effect of settlements, curtailments and
special termination benefits (10) -- 1 --
Sale of polyols business (9) -- -- --
Benefits paid (53) (47) (3) (4)
Transfer from Equistar -- -- 3 --
Foreign exchange effects (6) (11) -- --
------ ----- ----- -----
Benefit obligation, December 31 431 399 69 72
------ ----- ----- -----
Change in plan assets:
Fair value of plan assets, January 1 456 448 -- --
Actual return of plan assets 5 56 -- --
Company contributions 14 11 3 4
Benefits paid (53) (47) (3) (4)
Foreign exchange effects (10) (12) -- --
------ ----- ----- -----
Fair value of plan assets, December 31 412 456 -- --
------ ----- ----- -----
Funded status (19) 57 (69) (72)
Unrecognized actuarial (gain) loss 73 (27) 9 19
Unrecognized prior service cost 5 6 (26) (33)
Unrecognized transition obligation 3 4 -- --
------ ----- ----- -----
Net amount recognized $ 62 $ 40 $ (86) $ (86)
====== ===== ===== =====
Amounts recognized in the
Consolidated Balance Sheets consist of:
Prepaid benefit cost $ 71 $ 53 $ -- $ --
Accrued benefit liability (9) (13) (86) (86)
Additional minimum liability (19) -- -- --
Intangible asset 3 -- -- --
Accumulated other comprehensive income 16 -- -- --
------ ----- ----- -----
Net amount recognized $ 62 $ 40 $ (86) $ (86)
====== ===== ===== =====
The above table for pension benefits includes foreign pension plans of Lyondell.
These plans constituted approximately 20% of the benefit obligation and 25% of
the plan assets at December 31, 2000 and 25% of the benefit obligation and 21%
of the plan assets at December 31, 1999. The assumptions used in determining
the net periodic pension cost and pension obligation for foreign pension plans
were based on the economic environment of each applicable country.
The benefit obligation and fair value of assets for pension plans with benefit
obligations in excess of plan assets were $152 million and $86 million,
respectively, as of December 31, 2000 and $154 million and $122 million,
respectively, as of December 31, 1999. The accumulated benefit obligation and
fair value of assets for pension plans with accumulated benefit obligations in
excess of plan assets were $112 million and $86 million, respectively, as of
December 31, 2000 and $16 million and $4 million, respectively, as of December
31, 1999.
72
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the formation of Equistar, pension obligations and assets
were not contributed by Lyondell to Equistar. The employees transferred to
Equistar became fully vested in the Lyondell pension plan effective December 1,
1997 and no longer accrue pension service with Lyondell. However, an accrued
postretirement benefit obligation of $12 million associated with Lyondell
employees transferred to Equistar was contributed to Equistar by Lyondell.
Net periodic pension and other postretirement benefit costs included the
following components:
Other
Pension Benefits Postretirement Benefits
----------------------- -----------------------
Millions of dollars 2000 1999 1998 2000 1999 1998
- ------------------- ----- ----- ----- ----- ----- -----
Components of net periodic benefit cost:
Service cost $ 14 $ 18 $ 7 $ 2 $ 2 $ 1
Interest cost 31 32 19 5 5 2
Expected return of plan assets (40) (40) (24) -- -- --
Prior service cost amortization 1 1 -- (3) (3) (1)
Actuarial loss amortization 2 2 1 -- 2 --
Net effect of curtailments, settlements,
and special termination benefits (13) -- 2 (4) -- --
----- ----- ----- ----- ----- -----
Net periodic benefit cost $ (5) $ 13 $ 5 $ -- $ 6 $ 2
===== ===== ===== ===== ===== =====
The 2000 net effect of settlements, curtailments, and special termination
benefits primarily relates to employees terminated as part of the asset sale to
Bayer. The above net periodic benefit costs included five months of expense in
1998 of the business acquired from ARCO Chemical. Foreign pension plans
comprised $2 million, $2 million and $1 million of net periodic pension cost for
2000, 1999 and 1998, respectively.
The assumptions used as of December 31, 2000, 1999 and 1998 in determining the
domestic net pension cost and net pension liability were as follows:
Other
Pension Benefits Postretirement Benefits
-------------------- ------------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Weighted-average assumptions as of
December 31:
Discount rate 7.50% 8.00% 6.75% 7.50% 8.00% 6.75%
Expected return on plan assets 9.50% 9.50% 9.50% - - - - - -
Rate of compensation increase 4.50% 4.75% 4.75% 4.50% 4.75% 4.75%
For measurement purposes, the assumed annual rate of increase in the per capita
cost of covered health care benefits as of December 31, 2000 was 7.0% for 2001
and 5.0% thereafter. A one-percentage-point increase or decrease in assumed
health care cost trend rates would not have a material effect on the
postretirement benefit obligation or the total of the service and interest cost
components.
Lyondell also maintains voluntary defined contribution savings plans for
eligible employees. Contributions to the plans by Lyondell were $11 million,
$10 million and $4 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
16. Long-Term Debt and Financing Arrangements
In connection with the ARCO Chemical Acquisition, Lyondell executed a bank
credit agreement providing for aggregate borrowing of up to $7 billion. As part
of the acquisition, Lyondell assumed approximately $870 million of ARCO Chemical
debt. Borrowing under the $7 billion Credit Facility of $6.5 billion was used
for: (i) the purchase of approximately 97.4 million shares of ARCO Chemical
common stock; (ii) repayment of debt, including
73
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the $345 million term note payable to Equistar, short-term borrowing of Lyondell
and ARCO Chemical and other long-term borrowing of ARCO Chemical; and (iii)
payment of certain debt issuance costs.
The $7 billion Credit Facility was originally comprised of a five-year, $500
million revolving credit facility and four separate term loans as follows:
(a) Term Loan A - $2.0 billion to be amortized over five years;
(b) Term Loan B - $1.25 billion to be amortized over seven years;
(c) Term Loan C - $1.25 billion with principal maturing on June 30, 1999; and
(d) Term Loan D - $2.0 billion with principal maturing on June 30, 2000.
All of the term loans were funded on July 28, 1998. No amounts have been funded
to date under the revolving credit facility. The Credit Facility was initially
collateralized by cash flow streams from Lyondell's three joint ventures and
Lyondell's common stock ownership in its subsidiaries.
During May 1999, Lyondell amended the $7 billion Credit Facility. The amended
Credit Facility retained the $500 million revolving credit facility and also
provided the lenders with additional collateral consisting of its domestic
assets (excluding the assets of its subsidiaries), re-priced the existing loans
to reflect then market interest rates and revised certain financial covenants.
Also in May 1999, Lyondell issued 40.25 million shares of common stock,
receiving net proceeds of $736 million. Lyondell also issued $500 million of
senior subordinated notes and $1.9 billion of senior secured notes. Lyondell
borrowed additional amounts under the amended Credit Facility through the Credit
Facility's new $850 million Term Loan E, maturing June 30, 2006, and the Credit
Facility's new $150 million Term Loan F, maturing December 31, 2003. Lyondell
used the proceeds to retire the $1.25 billion principal amount of Term Loan C,
maturing June 30, 1999, and the $2 billion principal amount of Term Loan D,
maturing June 30, 2000, and to partially repay principal amounts outstanding
under Term Loans A and B under the Credit Facility.
Lyondell used the net proceeds of the March 31, 2000 asset sale to significantly
reduce its variable-rate debt. During the first and second quarter 2000,
Lyondell used the net proceeds to repay the $1.1 billion of Term Loan A, the
$149 million outstanding balance of Term Loan F and $810 million of the
outstanding balance of Term Loan B. During the fourth quarter 2000, Lyondell
repaid the 9.9% debentures, which matured in November 2000 and reduced the
outstanding balance of Term Loan B by an additional $150 million.
Long-term debt consisted of the following at December 31:
Millions of dollars 2000 1999
- ------------------- ------ ------
Term Loan A $ -- $1,095
Term Loan B 193 1,156
Term Loan E 835 844
Term Loan F -- 149
Senior Secured Notes, Series A due 2007, 9.625% 900 900
Senior Secured Notes, Series B due 2007, 9.875% 1,000 1,000
Senior Subordinated Notes due 2009, 10.875% 500 500
Debentures - due 2000, 9.9% -- 200
Debentures - due 2005, 9.375% 100 100
Debentures - due 2010, 10.25% 100 100
Debentures - due 2020, 9.8% 224 224
Other 2 3
------ ------
Total long-term debt 3,854 6,271
Less current maturities 10 225
------ ------
Long-term debt, net 3,844 $6,046
====== ======
The term loans bear interest at the following variable rates: (i) Term Loan A -
LIBOR plus 3.25%; (ii) Term Loan B - LIBOR plus 3.75%; (iii) Term Loan E - LIBOR
plus 3.875%; and (iv) Term Loan F - LIBOR plus 3.5%.
74
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Aggregate maturities of all long-term debt during the next five years are $10
million in 2001, $11 million in 2002, $44 million in 2003, $85 million in 2004,
$87 million in 2005 and $3.6 billion thereafter.
The amended Credit Facility requires Lyondell to issue $470 million of
subordinated notes, or more junior securities, by June 2002. The requirement to
issue $470 million of subordinated notes will be reduced by $2 for each $1 of
equity securities issued by Lyondell, and will be eliminated if Lyondell
achieves either (1) a specified total debt to adjusted EBITDA ratio, as defined,
or (2) a specified credit rating for its senior unsecured debt. As part of the
amendments to the Credit Facility discussed below, Lyondell is seeking
additional flexibility with respect to this requirement.
Under the covenant provisions of the amended Credit Facility, Lyondell has
agreed to, among other things, (i) maintain certain specified financial ratios
and consolidated net worth, in all cases as provided in the Credit Facility,
(ii) refrain from making certain distributions with respect to Lyondell's
capital stock, (iii) refrain from making certain investments, as defined, (iv)
refrain from allowing its subsidiaries to incur certain types and amounts of
debt, and (v) use its best efforts to maintain certain ownership interests in
its joint ventures and to ensure that the joint ventures maintain certain
capital expenditure and debt levels and cash distribution policies. The breach
of these covenants could permit the lenders to declare the loans immediately
payable and to terminate future lending commitments.
The indentures under which the senior secured notes and the senior subordinated
notes were issued contain covenants that, subject to exceptions, restrict the
ability of Lyondell and its subsidiaries to (i) incur additional debt or issue
subsidiary preferred stock, (ii) increase aggregate dividends on Lyondell
capital stock, (iii) redeem or repurchase capital stock or repurchase
subordinated debt, (iv) engage in transactions with affiliates, except on an
arms-length basis, (v) create liens or engage in sale and leaseback
transactions, (vi) make some types of investments and sell assets, and (vii)
consolidate or merge with, or sell substantially all of its assets to, another
person. Some of the covenants will no longer apply if the notes achieve
specified credit ratings. The notes are unconditionally guaranteed by certain
Lyondell subsidiaries (see Note 24). The breach of these covenants could permit
the lenders to declare the loans immediately payable.
Lyondell secured an amendment to certain financial covenants in the Credit
Facility in February 2000 designed to increase its financial and operating
flexibility in the near term. Additionally, the amendment eliminated a cross-
default provision in the Credit Facility that could have been triggered by a
default by LCR under its debt instruments.
Lyondell was in compliance with all covenants under its Credit Facility and the
indentures for the senior secured notes and senior subordinated notes as of
December 31, 2000. However, given the poor current business environment,
Lyondell is seeking an amendment to the Credit Facility that would further
increase its financial and operating flexibility, primarily by making certain
financial ratio requirements less restrictive. Lyondell anticipates that the
amendment will become effective prior to March 31, 2001.
Lyondell transferred $745 million of long-term debt to Equistar on December 1,
1997 of which $521 million was outstanding at December 31, 2000. As between
Equistar and Lyondell, Equistar is primarily liable for the debt. Following
amendments to the indentures for $400 million of the debt in November 2000,
Lyondell remains a guarantor of $400 million of the debt and a co-obligor for
$121 million of the debt. Under certain limited circumstances the debt holders
have the right to require repurchase of up to $121 million of the debt.
17. Financial Instruments
Lyondell does not buy, sell, hold or issue financial instruments for speculative
trading purposes.
Foreign currency forward contracts are being used to minimize foreign exchange
exposures, which result from euro-denominated capital commitments related to the
construction of PO-11. At December 31, 2000, Lyondell had forward contracts
outstanding in the notional amount of 134 million euros (approximately $125
million), maturing
75
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
monthly from January 2001 to December 2001. There were no
significant amounts of financial instruments outstanding at December 31, 1999.
Unrealized gains and losses on the foreign currency forward contracts at
December 31, 2000 were not significant and were deferred. Foreign exchange
transactions, including the effects of foreign currency derivative instruments,
were a net gain of $13 million in 2000, a net loss of $2 million in 1999 and a
net gain of $8 million in 1998. The effects of foreign currency derivative
instruments were not significant during 2000, 1999 and 1998.
During 1998, to mitigate interest rate exposure on its anticipated future public
debt issuance, Lyondell entered into treasury-rate lock transactions in the
notional amount of $1 billion. As a result of the refinancing, Lyondell settled
the treasury locks during the second quarter 1999 in the amount of $4 million.
This amount is being amortized to interest expense over the life of the related
debt.
The carrying value and the estimated fair value of Lyondell's financial
instruments as of December 31, 2000 and 1999 are shown as assets (liabilities)
in the table below:
2000 1999
------------------ -------------------
Carrying Fair Carrying Fair
Millions of dollars Value Value Value Value
- ------------------- -------- ------- -------- -------
Nonderivatives:
Investments and long-term receivables $1,606 $1,606 $1,015 $1,015
Long-term debt (including current
maturities) 3,854 3,777 6,271 6,334
Derivatives:
Foreign currency forwards -- 1 -- --
All derivative instruments are off-balance-sheet instruments.
The fair value of all nonderivative financial instruments included in current
assets and current liabilities, including cash and cash equivalents, accounts
receivable, accounts payable and notes payable, approximated their carrying
value due to their short maturity. Investments and long-term receivables, which
consist primarily of equity investments in affiliated companies, were valued
using current financial and other available information. Long-term debt,
including amounts due within one year, was valued based upon the borrowing rates
currently available to Lyondell for debt with terms and average maturities
similar to Lyondell's debt portfolio. The fair value of derivative financial
instruments represents the amount to be exchanged if the existing contracts were
settled at year end and are based on market quotes.
Lyondell is exposed to credit risk related to its financial instruments in the
event of nonperformance by the counterparties. Lyondell does not generally
require collateral or other security to support these financial instruments.
The counterparties to these transactions are major institutions deemed
creditworthy by Lyondell. Lyondell does not anticipate nonperformance by the
counterparties.
18. Commitments and Contingencies
Capital Commitments--Lyondell has commitments, including those related to
capital expenditures, all made in the normal course of business. At December
31, 2000, major capital commitments included Lyondell's 50% share of those
related to the construction of a world-scale PO facility, known as PO-11, in The
Netherlands and a major expansion of a TDI facility in France. The outstanding
commitments on these two projects totaled $290 million as of December 31, 2000.
Leases--During the third quarter 2000, construction began on a new BDO facility
in Europe known as BDO-2. Construction is being financed by a third party
lessor. Upon completion in the second quarter of 2002, a subsidiary of Lyondell
will lease the facility under an operating lease for a term of five years.
Lyondell may, at its option, purchase the facility at any time up to the end of
the lease term for an amount equal to the unrecovered construction
76
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
costs of the lessor, as defined. If Lyondell does not exercise the purchase
option, the facility will be sold and Lyondell will pay the lessor a termination
fee to the extent the sales price is less than the residual value of the
facility, as defined. The residual value at the end of the lease term is
estimated at approximately $185 million. In the transaction documents for BDO-2,
Lyondell agreed to comply with certain financial and other covenants that are
substantially the same as those contained in the Credit Facility. A breach of
those covenants could result in, among other things, Lyondell having to pay the
project costs incurred to date. As of December 31, 2000, Lyondell was in
compliance with all of those covenants. However, given the poor current business
environment, Lyondell is seeking amendments to the transaction documents
consistent with the amendments being sought to its Credit Facility. Lyondell
anticipates that the amendments will become effective prior to March 31, 2001.
See Note 16 above for a discussion of the proposed amendments to the Credit
Facility.
TDI Agreements--In January 1995, ARCO Chemical entered into a tolling agreement
and a resale agreement with Rhodia covering the entire TDI output of Rhodia's
two plants in France, which have a combined average annual capacity of
approximately 264 million pounds. Lyondell is currently required to purchase an
average minimum of 212 million pounds of TDI per year under the agreements. The
aggregate purchase price is a combination based on plant cost and market price.
In the second quarter 2000, Lyondell entered into a series of arrangements with
Rhodia to expand the capacity at the Pont de Claix plant, which provides TDI to
Lyondell under the tolling agreement. The expansion will add approximately 105
million pounds of average annual capacity at the Pont de Claix plant, resulting
in a total average annual capacity of approximately 269 million pounds, which is
scheduled to be available in the fourth quarter of 2001. After the completion
of the expansion, all of the TDI that Lyondell receives from Rhodia will come
from the Pont de Claix plant, which is designed to have a more efficient cost
structure. Lyondell's average minimum TDI purchase commitment under the revised
tolling agreement will be 197 million pounds of TDI per year and will be
extended through 2016. The resale agreement, which covered output at the Lille
plant, will expire December 31, 2001.
Crude Supply Agreement--Under the Crude Supply Agreement, PDVSA Oil, an
affiliate of CITGO and of Petroleos de Venezuela, S.A. ("PDVSA"), the national
oil company of the Republic of Venezuela, is required to sell, and LCR is
required to purchase, 230,000 barrels per day of extra heavy crude oil. This
constitutes approximately 88% of the refinery's refining capacity of 260,000
barrels per day of crude oil. In late April 1998, LCR received notification
from PDVSA Oil that it would reduce deliveries of crude oil on the grounds of
announced OPEC production cuts. LCR began receiving reduced deliveries of crude
oil from PDVSA Oil in August 1998, amounting to 195,000 barrels per day in that
month. LCR was advised by PDVSA Oil in May 1999 of a further reduction to
184,000 barrels per day, effective May 1999. On several occasions since then,
PDVSA Oil has further reduced certain crude oil deliveries, although it has made
payments in partial compensation for such reductions. Subsequently, PDVSA Oil
unilaterally increased deliveries of crude oil to LCR to 195,000 barrels per day
effective April 2000, to 200,000 barrels per day effective July 2000 and to
230,000 barrels per day effective October 2000. By letter dated February 9,
2001, PDVSA Oil informed LCR that the Venezuelan government, through the
Ministry of Energy and Mines, has instructed that production of certain grades
of crude oil be reduced effective February 1, 2001. The letter states that
PDVSA Oil declares itself in a force majeure situation, but does not announce
any reduction in crude oil deliveries to LCR. Although some reduction in crude
oil delivery may be forthcoming, it is unclear as to the level of reduction, if
any, which may be anticipated. LCR has consistently contested the validity of
PDVSA Oil's and PDVSA's reductions in deliveries under the Crude Supply
Agreement and, on March 12, 2001, Lyondell, on behalf of LCR, sent a letter to
PDVSA Oil and PDVSA disputing the existence and validity of the purported force
majeure situation declared by the February 9 letter. PDVSA has announced that
it intends to renegotiate the crude supply agreements that it has with all third
parties, including LCR. However, they have confirmed that they expect to honor
their commitments if a mutually acceptable restructuring of the Crude Supply
Agreement is not achieved. The breach or termination of the crude supply
agreement would require LCR to purchase all or a portion of its crude oil
feedstocks in the merchant market, would subject LCR to significant volatility
and price fluctuations and could adversely affect LCR and, therefore, Lyondell.
LCR Debt--On May 5, 2000, Lyondell and CITGO, as partners of LCR, arranged
interim financing for LCR to repay the $450 million outstanding under its
Construction Facility. On September 15, 2000, Lyondell and CITGO completed the
syndication of one-year credit facilities for LCR, which consist of a $450
million term loan to replace the interim financing and a $70 million revolving
credit facility to be used for working capital and general business
77
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purposes. Lyondell and CITGO, as partners of LCR, have agreed to pursue a
refinancing of the indebtedness, although the final terms have not been
determined. Based on previous experience of refinancing LCR's debt and the
current conditions of the financial markets, the management of LCR, Lyondell and
CITGO anticipate that this debt can be refinanced prior to its maturity.
Cross Indemnity Agreement--In connection with the transfer of assets and
liabilities from ARCO (now wholly owned by BP) to Lyondell in 1988, Lyondell
agreed to assume certain liabilities arising out of the operation of Lyondell's
integrated petrochemicals and refining business prior to July 1, 1988. In
connection with the transfer of such liabilities, Lyondell and ARCO entered into
an agreement, updated in 1997 ("Revised Cross-Indemnity Agreement"), whereby
Lyondell agreed to defend and indemnify ARCO against certain uninsured claims
and liabilities which ARCO may incur relating to the operation of Lyondell prior
to July 1, 1988, including certain liabilities which may arise out of pending
and future lawsuits. For current and future cases related to Lyondell's
products and operations, ARCO and Lyondell bear a proportionate share of
judgment and settlement costs according to a formula that allocates
responsibility based upon years of ownership during the relevant time period.
Under the Revised Cross-Indemnity Agreement, Lyondell will assume responsibility
for its proportionate share of future costs for waste site matters not covered
by ARCO insurance.
In connection with the acquisition of ARCO Chemical Company ("ARCO Chemical"),
Lyondell succeeded, indirectly, to a cross indemnity agreement with ARCO whereby
ARCO Chemical indemnified ARCO against certain claims or liabilities that ARCO
may incur relating to ARCO's former ownership and operation of the businesses of
ARCO Chemical, including liabilities under laws relating to the protection of
the environment and the workplace, and liabilities arising out of certain
litigation. As part of the agreement, ARCO indemnified ARCO Chemical with
respect to claims or liabilities and other matters of litigation not related to
the ARCO Chemical business.
Indemnification Arrangements Relating to Equistar--Lyondell, Millennium and
Occidental have each agreed to provide certain indemnifications to Equistar with
respect to the petrochemicals and polymers businesses contributed by the
partners. In addition, Equistar agreed to assume third party claims that are
related to certain pre-closing contingent liabilities that are asserted prior to
December 1, 2004 for Lyondell and Millennium, and May 15, 2005 for Occidental,
to the extent the aggregate thereof does not exceed $7 million to each partner,
subject to certain terms of the respective asset contribution agreements. As of
December 31, 2000, Equistar had expensed approximately $5 million under the $7
million indemnification basket with respect to the business contributed by
Lyondell. Equistar also agreed to assume third party claims that are related to
certain pre-closing contingent liabilities that are asserted for the first time
after December 1, 2004 for Lyondell and Millennium, and for the first time after
May 15, 2005 for Occidental.
Environmental--Lyondell's policy is to be in compliance with all applicable
environmental laws. Lyondell is subject to extensive environmental laws and
regulations concerning emissions to the air, discharges to surface and
subsurface waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. Some of these laws and regulations
are subject to varying and conflicting interpretations. In addition, Lyondell
cannot accurately predict future developments, such as increasingly strict
environmental laws and inspection and enforcement policies, as well as higher
compliance costs arising therefrom, which might affect the handling,
manufacture, use, emission or disposal of products, other materials or hazardous
and non-hazardous waste.
Lyondell is also subject to certain assessment and remedial actions at the LCR
refinery under the Resource Conservation and Recovery Act ("RCRA"). In
addition, Lyondell has negotiated an order with the Texas Natural Resource
Conservation Commission ("TNRCC") for assessment and remediation of groundwater
and soil contamination at the LCR refinery. Lyondell also has liabilities under
RCRA and various state and foreign government regulations related to five
current plant sites and three former plant sites.
Lyondell is currently contributing funds to the clean up of two waste sites
located near Houston, Texas under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") as amended and the Superfund
Amendments and Reauthorization Act of 1986. Lyondell has also been named, along
with several other companies, as a potentially responsible party for a third
CERCLA site near Houston, Texas. In addition, Lyondell is involved in
administrative proceedings or lawsuits relating to a minimal number of other
CERCLA sites. Lyondell
78
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
estimates, based upon currently available information, that potential loss
contingencies associated with the latter CERCLA sites, individually and in the
aggregate, are not significant.
As of December 31, 2000, Lyondell's environmental liability for future
assessment and remediation costs at the above-mentioned sites totaled $31
million. The liabilities per site range from less than $1 million to $13
million and are expected to be incurred over the next two to seven years. In
the opinion of management, there is currently no material range of loss in
excess of the amount recorded for these sites. 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 other CERCLA, RCRA,
TNRCC or other comparable state or foreign law investigations, could require
Lyondell to reassess its potential exposure related to environmental matters.
The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the EPA. As a result, the TNRCC has submitted a
plan to the EPA to reach and demonstrate compliance with the ozone standard by
the year 2007. These emission reduction controls must be installed during the
next several years, well in advance of the 2007 deadline. This could result in
increased capital investment, which could, in the aggregate, be between $400
million and $500 million before the 2007 deadline, and higher operating costs
for Equistar, Lyondell, and LCR. Lyondell has been actively involved with a
number of organizations to help solve the ozone problem in the most cost-
effective manner and, in January 2001, Lyondell and an organization composed of
industry participants filed a lawsuit against the TNRCC to encourage adoption of
their alternative plan to achieve the same air quality improvement with less
negative economic impact on the region.
In the United States, the Clean Air Act Amendments of 1990 set minimum levels
for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified
air quality standards. However, while studies by federal and state agencies and
other organizations have shown that MTBE is safe for use in gasoline, is not
carcinogenic and is effective in reducing automotive emissions, the presence of
MTBE in some water supplies in California and other states due to gasoline
leaking from underground storage tanks and in surface water from recreational
water craft has led to public concern that MTBE may, in certain limited
circumstances, affect the taste and odor of drinking water supplies, and thereby
lead to possible environmental issues.
Certain federal and state governmental initiatives have sought either to rescind
the oxygenate requirement for reformulated gasoline or to restrict or ban the
use of MTBE. Such actions, to be effective, would require (i) a waiver of the
state's oxygenate mandate, (ii) Congressional action in the form of an amendment
to the Clean Air Act or (iii) replacement of MTBE with another oxygenate such as
ethanol, a more costly, untested, and less widely available additive. At the
federal level, a blue ribbon panel appointed by the U.S. Environmental
Protection Agency (the "EPA") issued its report on July 27, 1999. That report
recommended, among other things, reducing the use of MTBE in gasoline. During
2000, the EPA announced its intent to seek legislative changes from Congress to
give the EPA authority to ban MTBE over a three-year period. Such action would
only be granted through amendments to the Clean Air Act. Additionally, the EPA
is seeking a ban of MTBE utilizing rulemaking authority contained in the Toxic
Substance Control Act. It would take at least three years for such a rule to
issue. Recently, however, senior policy analysts at the U.S. Department of
Energy presented a study stating that banning MTBE would create significant
economic risk. The presentation did not identify any benefits from banning
MTBE. The EPA initiatives mentioned above or other governmental actions could
result in a significant reduction in Lyondell's MTBE sales. The Company has
developed technologies to convert TBA into alternate gasoline blending
components should it be necessary to reduce MTBE production in the future.
General--Lyondell is involved in various lawsuits and proceedings. Subject to
the uncertainty inherent in all litigation, management believes the resolution
of these proceedings will not have a material adverse effect upon the Lyondell
Consolidated Financial Statements.
In the opinion of management, any liability arising from the matters discussed
in this note is not expected to have a material adverse effect on the
Consolidated Financial Statements. However, the adverse resolution in any
reporting period of one or more of these matters discussed in this note could
have a material impact on Lyondell's results of operations for that period
without giving effect to contribution or indemnification obligations of co-
defendants or others, or to the effect of any insurance coverage that may be
available to offset the effects of any such award.
79
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. Lease Commitments
Lyondell leases various facilities and equipment under noncancelable lease
arrangements for varying periods. As of December 31, 2000, 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
-------------------
2001 $ 51
2002 43
2003 36
2004 34
2005 34
Thereafter 163
Less sublease rentals (51)
----
Total minimum lease payments $310
====
Operating lease net rental expenses for 2000, 1999 and 1998 were $74 million,
$106 million and $39 million, respectively.
20. Stockholders' Equity
Common Stock--In May 1999, Lyondell issued 40.25 million shares of common stock
at $19 per share. The net proceeds of $736 million were credited to "Common
stock" and "Additional paid in capital" in the Consolidated Balance Sheet.
Common stock outstanding increased from 77.0 million shares at December 31, 1998
to 117.6 million shares at December 31, 1999.
Basic and Diluted Earnings per Share--Basic earnings per share for income (loss)
before extraordinary item for the periods presented are computed based upon the
weighted average number of shares outstanding for the periods. Diluted earnings
per share for income (loss) before extraordinary item include the effect of
outstanding stock options issued under the Executive Long-Term Incentive Plan
and the Incentive Stock Option Plan. These stock options were antidilutive in
1999. The following earnings (loss) per share ("EPS") data is presented for the
years ended December 31:
2000 1999 1998
-------------------- ------------------- -------------------
Thousands of shares Shares EPS Shares EPS Shares EPS
- ------------------- --------- ------- --------- ------- --------- -------
Basic 117,557 $4.00 103,115 $(.77) 77,669 $.67
Dilutive effect of options 221 (.01) -- -- 30 --
Diluted 117,778 $3.99 103,115 $(.77) 77,699 $.67
========= ======= ========= ===== ======== =======
Treasury Stock--From time to time Lyondell purchases its shares in the open
market to issue under its employee compensation and benefits plans, including
stock option and restricted stock plans. During 1998, Lyondell purchased
500,000 shares for approximately $10 million to be used for such plans. In
addition during 1998, Lyondell completed the stock repurchase program authorized
by Lyondell's Board of Directors in September 1997. A total of 2,567,051 shares
were purchased for $75 million under this stock repurchase program. For the
years ended December 31, 2000, 1999 and 1998, respectively, Lyondell reissued,
under the Restricted Stock Plan, 71,127 shares, 299,227 shares and 88,848 shares
previously purchased.
1999 Incentive Plan--The 1999 Long-Term Incentive Plan ("1999 LTIP") provides
for the grant of awards to employees of Lyondell and its subsidiaries. Awards
to employees may be in the form of (i) stock options, (ii) stock appreciation
rights, payable in cash or common stock, (iii) restricted grants of common stock
or units denominated in common stock, (iv) performance grants denominated in
common stock or units denominated in common stock that are subject to the
attainment of one or more goals, (v) grants of rights to receive the value of a
specified number of shares of common stock (phantom stock), and (vi) a cash
payment. Awards of common stock under the 1999 LTIP are generally limited to
the lesser of ten million shares or 10% of the number of shares of common stock
80
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
outstanding at the time of granting of the award. During 2000, Lyondell awarded
stock option grants for 2,228,241 shares and grants for 706,345 performance
shares under this plan. The weighted-average grant-date fair value of the
performance share grants was $12.91 per share. During 1999, Lyondell awarded
stock option grants for 1,756,098 shares and grants for 463,123 performance
shares under this plan. The weighted-average grant-date fair value of the
performance share grants was $17.625 per share.
Restricted Stock Plan--Under the 1995 Restricted Stock Plan, one million shares
of common stock are available for grants and awards to officers and other key
management employees. Lyondell grants fixed awards of common stock that are
forfeitable and subject to restrictions on transfer. Vesting is contingent on
the participant's continuing employment at Lyondell for a period specified in
the award. During 2000 and 1999, Lyondell granted and issued restricted stock
of 71,127 shares and 299,227 shares, respectively, to officers and employees.
During 1998 Lyondell granted and issued 88,848 shares of restricted stock to
former employees of ARCO Chemical. The shares vest on various dates through May
4, 2003, depending upon the terms of the individual grants. Employees are
entitled to receive dividends on the restricted shares.
Rights to Purchase Common Stock--On December 8, 1995, the Board of Directors of
Lyondell declared a dividend of one right ("Right") for each outstanding share
of Lyondell's common stock to stockholders of record on December 20, 1995. The
Rights become exercisable upon the earlier of: (i) ten days following a public
announcement by another entity that it has acquired beneficial ownership of 15%
or more of the outstanding shares of common stock; or (ii) ten business days
following the commencement of a tender offer or exchange offer to acquire
beneficial ownership of 15% or more of the outstanding shares of common stock,
except under certain circumstances. The Rights expire at the close of business
on December 8, 2005 unless earlier redeemed at a price of $.0005 per Right or
exchanged by Lyondell as described in the Rights Agreement dated as of December
8, 1995.
Stock Options--The following table summarizes activity relating to stock options
under the 1999 LTIP. As of December 31, 2000, options covering 3,665,767 shares
with a weighted average remaining life of 8 years were outstanding at prices
ranging from $11.8125 to $20.00 per share of which 520,189 shares were
exercisable.
Average
Number Option Price
of Shares Per Share
------------ ------------
Balance, January 1, 1999 -- $ --
Granted 1,756,098 17.82
Cancelled (132,664) 18.13
----------
Balance, December 31, 1999 1,623,434 17.79
Granted 2,228,241 13.07
Cancelled (185,908) 16.64
----------
Balance, December 31, 2000 3,665,767 14.98
==========
Lyondell's Executive Long-Term Incentive Plan ("LTI Plan") became effective in
November 1988. The last stock options granted under the LTI Plan were granted
in March 1994. No additional stock option grants will be made under this plan.
As of December 31, 2000, options covering 596,264 shares were outstanding under
the LTI Plan with a weighted average remaining life of 2 years, all of which
were exercisable at prices ranging from $20.25 to $26.00 per share.
81
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes stock option activity for the LTI Plan:
Average
Number Option Price
of Shares Per Share
--------- ------------
Balance, January 1, 1998 732,160 $23.50
Exercised (92,952) 22.90
Cancelled (22,727) 23.02
-------- ------
Balance, December 31, 1998 616,481 $23.61
Cancelled (7,884) 23.62
-------- ------
Balance, December 31, 1999 608,597 $23.61
Exercised (6,850) 20.25
Cancelled (5,483) 21.30
-------- ------
Balance, December 31, 2000 596,264 $23.67
========
Lyondell's Incentive Stock Option Plan ("ISO Plan"), a tax qualified plan,
became effective in January 1989. The last stock options granted under the ISO
Plan were granted in March 1993. No additional grants will be made under the
ISO Plan. As of December 31, 1998, options covering 145,191 shares were
outstanding at $30.00 per share. These options expired in January 1999. At
December 31, 1999, no stock options were outstanding. The following summarizes
stock option activity for the ISO Plan:
Average
Number Option Price
of Shares Per Share
--------- ------------
Balance, January 1, 1998 156,751 29.99
Cancelled (11,408) 30.00
Exercised (152) 19.44
--------- ------
Balance, December 31, 1998 145,191 30.00
Cancelled (145,191) 30.00
--------- ------
Balance, December 31, 1999 --
=========
Employee stock options are accounted for under the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. Accordingly, no compensation cost has been recognized in
connection with stock option grants under the plans. The pro forma impact on
net income and earnings per share from calculating compensation expense
consistent with SFAS No. 123, Accounting for Stock-Based Compensation, in 2000
and 1999 was approximately $6 million, or $.05 per share and $.06 per share,
respectively. There were no grants in 1998. The fair value per share of options
granted was estimated as of the date of grant using the Black-Scholes option-
pricing model and the following assumptions.
2000 1999
-----------------------
Fair value per share of options granted $4.04 $4.67
Fair value assumptions:
Dividend yield 5% 5%
Expected volatility 46% 35%
Risk-free interest rate 6.5% 5%
Maturity, in years 10 10
82
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
21. Supplemental Cash Flow Information
Supplemental cash flow information is summarized as follows for the years ended
December 31:
Millions of dollars 2000 1999 1998
- ------------------- ---- ---- ----
Interest paid $521 $570 $230
==== ==== ====
Net income taxes (received) paid $ 57 $(91) $ 63
==== ==== ====
Effective December 31, 1999, Lyondell made a noncash capital contribution to LCR
by converting $47 million of its note receivable from LCR to a capital
investment in LCR.
22. Segment and Related Information
Using the guidelines set forth in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, Lyondell has identified four reportable
segments: (i) intermediate chemicals and derivatives; (ii) petrochemicals; (iii)
polymers; and (iv) refining. The accounting policies of the segments are the
same as those described in "Summary of Significant Accounting Policies" (see
Note 2). The methanol segment is not a reportable segment. The reportable
segments are described further below:
Intermediate Chemicals and Derivatives--This segment consists of the production
and marketing of propylene oxide, propylene glycol, propylene glycol ethers,
toluene diisocyanate, styrene monomer and MTBE. The polyether polyols business
is included through March 31, 2000, the date of sale to Bayer.
Petrochemicals--This segment consists of the petrochemicals business of
Equistar, which includes production and marketing of olefins, including
ethylene, propylene and butadiene, aromatics, including benzene and toluene;
oxygenated products, including ethylene oxide and derivatives, ethylene glycol,
ethanol and MTBE, and specialty products, including refinery blending stocks.
Polymers--This segment consists of the polymers business of Equistar, which
includes production and marketing of polyolefins, including HDPE, LDPE, LLDPE;
and performance polymers products, including wire and cable insulating resins
and compounds, adhesive resins, and fine powders. Equistar's color concentrates
and compounds business, which was part of performance polymers products, was
sold effective April 30, 1999.
Refining--This segment, which is comprised of LCR operations, consists of:
refined petroleum products, including conventional and reformulated gasoline,
low sulfur diesel and jet fuel; aromatics, including benzene, toluene,
paraxylene and orthoxylene; lubricants, including industrial lubricants, white
oils and process oils; carbon black oil; sulfur; residual fuel and petroleum
coke.
No customer accounted for 10% or more of consolidated sales during the years
ended December 31, 2000, 1999 or 1998. However, under the terms of the LCR
Products Agreement (see Note 6), CITGO purchases substantially all of the
refined products of the Refining segment.
83
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized financial information for Lyondell's reportable segments is shown in
the following table.
Intermediate
Chemicals and
Millions of dollars Derivatives Petrochemicals Polymers Refining Other Total
- ------------------- ------------- -------------- -------- -------- ----- -----
2000
- ----
Sales and other $4,036 $4,036
operating revenues
Operating income 339 339
Income from equity
investments -- $285 $(76) $ 86 $ (96) 199
Total assets 6,150 336 139 249 173 $7,047
Capital expenditures 104 104
Depreciation and
amortization expense 279 279
1999
- ----
Sales and other
operating revenues $3,693 $3,693
Operating income 404 404
Income from equity
investments -- $183 $ 21 $ 23 $(151) 76
Total assets 8,557 314 140 271 216 9,498
Capital expenditures 131 -- -- -- -- 131
Depreciation and
amortization expense 330 -- -- -- -- 330
1998
- ----
Sales and other
operating revenues $1,447 $1,447
Unusual charges 57 $ 4 61
Operating income 108 (4) 104
Income from equity
investments -- $159 $ 89 $110 (123) 235
Total assets 8,131 297 201 315 212 9,156
Capital expenditures 64 -- -- -- -- 64
Depreciation and
amortization expense 138 -- -- -- -- 138
The following table presents the details of "Income from equity investments" as
presented above in the "Other" column for the years ended December 31:
Millions of dollars 2000 1999 1998
- ------------------- ------ ------ ------
Equistar items not allocated to petrochemicals and
polymers segments:
Principally general and administrative expenses
and interest expense, net $(108) $(171) $(129)
Other income, net -- 19 --
Income from other equity investments 12 1 6
----- ----- -----
Total--Other $ (96) $(151) $(123)
===== ===== =====
84
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the details of "Total assets" as presented above in
the "Other" column for the years ended December 31:
Millions of dollars 2000 1999 1998
- ------------------- ------ ------ ------
Equistar items not allocated to petrochemicals and
polymers segments:
Goodwill $ 99 $ 113 $ 126
Other assets 25 40 36
Other equity investments 49 63 50
----- ----- -----
Total--Other $ 173 $ 216 $ 212
===== ===== =====
The following "Revenues" by country data are based upon the location of the use
of the product. The "Long-lived assets" by country data is based upon the
location of the assets.
Revenues Long-Lived Assets
------------------------ ------------------------
Millions of dollars 2000 1999 1998 2000 1999 1998
- ------------------- ------ ------ ------ ------ ------ ------
United States $2,101 $1,826 $ 724 $1,482 $2,944 $3,046
Foreign 1,935 1,867 723 947 1,347 1,465
------------------------ ------------------------
Total $4,036 $3,693 $1,447 $2,429 $4,291 $4,511
======================== ========================
Foreign long-lived assets primarily consist of the net property, plant and
equipment of two plants, located in Rotterdam, The Netherlands, and Fos-sur-Mer,
France, both of which are part of the IC&D segment. Prior to the purchase of
ARCO Chemical as of July 28, 1998, Lyondell had no operations outside the United
States and no significant export sales.
23. Unaudited Quarterly Results
For the quarter ended
-----------------------------------------------
Millions of dollars, except per share data March 31 June 30 September 30 December 31
- ------------------------------------------ -------- ------- ------------ -----------
2000
- ----
Sales and other operating revenues $1,136 $ 976 $ 975 $ 949
Operating income 87 142 97 13
Income from equity investments 50 66 83 - -
Net income (loss) (a) 306 46 133 (48)
Basic and diluted earnings (loss) per
share before extraordinary item (a) (c) 2.69 .39 1.13 (.38)
1999
- ----
Sales and other operating revenues $ 855 $ 854 $ 976 $1,008
Operating income 129 100 100 75
Income from equity investments 21 8 40 7
Net income (loss) (b) 2 (42) (17) (58)
Basic and diluted earnings (loss) per
share before extraordinary item (b) (c) .02 (.11) (.11) (.50)
- ------------
(a) The first and third quarters of 2000 included after-tax gains on asset sales
of $369 million, or $3.14 per share, and $31 million, or $.26 per share,
respectively. The first, second and fourth quarters of 2000 included an
extraordinary loss on early extinguishment of debt of $11 million, or $.09
per share, $19 million, or $.16 per share, and $3 million, or $.03 per
share, respectively.
(b) The second and third quarters of 1999 included an extraordinary loss on
early extinguishment of debt of $31 million, $.32 per share, and $4 million,
$.03 per share, respectively.
85
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(c) Earnings per common share calculations for each of the quarters are based
upon the weighted average number of shares outstanding for each period
(basic earnings per share). The sum of the quarters may not necessarily be
equal to the full year earnings per share amount.
24. Supplemental Guarantor Information
ARCO Chemical Technology Inc. ("ACTI"), ARCO Chemical Technology L.P. ("ACTLP")
and Lyondell Chemical Nederland, Ltd. ("LCNL") are guarantors (collectively
"Guarantors") of the Credit Facility as well as the $500 million senior
subordinated notes and $1.9 billion senior secured notes issued by Lyondell in
May 1999. LCNL, a Delaware corporation, is a wholly owned subsidiary of
Lyondell that operates a chemical production facility in Rotterdam, The
Netherlands and has been a Guarantor since the Credit Facility was entered into.
In April 2000, pursuant to the terms of Lyondell's Credit Facility, ACTI and
ACTLP became "significant subsidiaries" as defined in the Credit Facility, and,
as such, guarantors of the above-mentioned debt securities. ACTI is a Delaware
corporation, which holds the investment in ACTLP. ACTLP is a Delaware limited
partnership, which holds and licenses technology to other Lyondell affiliates
and to third parties. Separate financial statements of the Guarantors are not
considered to be material to the holders of the senior subordinated notes and
senior secured notes. The following condensed consolidating financial
information present supplemental information for the Guarantors as of and for
the years ended December 31, 2000 and 1999.
86
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
As of and for the year ended December 31, 2000
Non- Consolidated
Millions of dollars Lyondell Guarantor Guarantors Eliminations Lyondell
- ------------------- -------- --------- ---------- ------------ ------------
BALANCE SHEET
Total current assets $1,103 $ 242 $ -- $ -- $1,345
Property, plant and equipment, net 1,863 566 -- -- 2,429
Other investments and
long-term receivables 3,154 413 920 (2,881) 1,606
Goodwill, net 738 414 -- -- 1,152
Other assets 450 61 -- 4 515
------ ------- ---- ------- ------
Total assets $7,308 $ 1,696 $920 $(2,877) $7,047
====== ======= ==== ======= ======
Current maturities of long-term debt $ 10 $ -- $ -- $ -- $ 10
Other current liabilities 501 223 -- -- 724
Long-term debt,
less current maturities 3,844 -- -- -- 3,844
Other liabilities 382 59 -- -- 441
Deferred income taxes 562 140 -- -- 702
Intercompany liabilities (assets) 1,173 (1,245) 68 4 --
Minority interest 181 -- -- -- 181
Stockholders' equity 655 2,519 852 (2,881) 1,145
------ ------- ---- ------- ------
Total liabilities and
stockholders' equity $7,308 $ 1,696 $920 $(2,877) $7,047
====== ======= ==== ======= ======
STATEMENT OF INCOME
Sales and other operating revenues $3,454 $ 936 $ -- $ (354) $4,036
Cost of sales 3,052 673 -- (354) 3,371
Selling, general and
administrative expenses 185 5 -- -- 190
Research and development expense 35 -- -- -- 35
Amortization of goodwill
and other intangibles 79 22 -- -- 101
------ ------- ---- ------- ------
Operating income 103 236 -- -- 339
Interest income (expense), net (479) 1 16 -- (462)
Other income (expense), net 754 (137) -- -- 617
Income from equity investments 176 -- 190 (167) 199
Intercompany income (expense) 4 82 (77) (9) --
Provision for income taxes 162 82 62 (83) 223
------ ------- ---- ------- ------
Income before
extraordinary item 396 100 67 (93) 470
Extraordinary item, net of taxes (33) -- -- -- (33)
------ ------- ---- ------- ------
Net income $ 363 $ 100 $ 67 $ (93) $ 437
====== ======= ==== ======= ======
87
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the year ended December 31, 2000
Non- Consolidated
Millions of dollars Lyondell Guarantor Guarantors Eliminations Lyondell
- ------------------- -------- --------- ---------- ------------ ------------
STATEMENT OF CASH FLOWS
Net income $ 270 $ 99 $ 68 $ -- $ 437
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Depreciation and amortization 222 57 -- -- 279
Extraordinary item 33 -- -- -- 33
(Gain) loss on sale of assets (599) 9 -- -- (590)
Net changes in working
capital and other 244 (217) (125) -- (98)
-------- --------- ---------- ------------ ------------
Net cash provided by
(used in) operating
activities 170 (52) (57) -- 61
-------- --------- ---------- ------------ ------------
Proceeds from sale of
Assets, net of cash sold 2,281 216 -- -- 2,497
Expenditures for property,
plant and equipment (68) (36) -- -- (104)
Contributions and advances
to affiliates 8 -- (48) -- (40)
Distributions from affiliates
in excess of earnings (20) -- 105 -- 85
Other 91 -- -- (91) --
-------- --------- ---------- ------------ ------------
Net cash provided
by investing activities 2,292 180 57 (91) 2,438
-------- --------- ---------- ------------ ------------
Payment of debt issuance costs (20) -- -- -- (20)
Repayment of long-term debt (2,417) -- -- -- (2,417)
Dividends paid (106) (91) -- 91 (106)
-------- --------- ---------- ------------ ------------
Net cash used in
financing activities (2,543) (91) -- 91 (2,543)
-------- --------- ---------- ------------ ------------
Effect of exchange rate
changes on cash 46 (49) -- -- (3)
-------- --------- ---------- ------------ ------------
Increase in cash and
cash equivalents (35) (12) -- -- (47)
Cash and cash equivalents:
Beginning of year 275 32 -- -- 307
-------- --------- ---------- ------------ ------------
End of year $ 240 $ 20 $ -- $ -- $ 260
======== ========= ========== ============ ============
88
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of and for the year ended December 31, 1999
Non- Consolidated
Millions of dollars Lyondell Guarantor Guarantors Eliminations Lyondell
- ------------------- -------- --------- ---------- ------------ ------------
BALANCE SHEET
Total current assets $1,567 $ 311 $ 8 $ -- $1,886
Property, plant and equipment, net 3,650 641 -- -- 4,291
Other investments and
long-term receivables 2,925 50 936 (2,896) 1,015
Goodwill, net 765 780 -- -- 1,545
Other assets 573 188 -- -- 761
------ ------ ---- ------- ------
Total assets $9,480 $1,970 $944 $(2,896) $9,498
====== ====== ==== ======= ======
Current maturities of long-term debt $ 225 $ -- $ -- $ -- $ 225
Other current liabilities 614 182 -- -- 796
Long-term debt,
less current maturities 6,046 -- -- -- 6,046
Other liabilities 330 1 -- -- 331
Deferred income taxes 746 145 -- -- 891
Intercompany liabilities (assets) 310 (605) 295 -- --
Minority interest 202 -- -- -- 202
Stockholders' equity 1,007 2,247 649 (2,896) 1,007
------ ------ ---- ------- ------
Total liabilities and
stockholders' equity $9,480 $1,970 $944 $(2,896) $9,498
====== ====== ==== ======= ======
STATEMENT OF INCOME
Sales and other operating revenues $3,225 $ 796 $ -- $ (328) $3,693
Cost of sales 2,663 556 -- (328) 2,891
Selling, general and
administrative expenses 240 -- -- -- 240
Research and development expense 58 -- -- -- 58
Amortization of goodwill
and other intangibles 65 35 -- -- 100
------ ------ ---- ------- ------
Operating income 199 205 -- -- 404
Interest income (expense), net (606) 3 14 -- (589)
Other income (expense), net 151 (146) -- -- 5
Income from equity investments 354 -- 72 (350) 76
Intercompany income (expense) (15) 281 5 (271) --
Provision for (benefit from)
income taxes 10 67 16 (117) (24)
------ ------ ---- ------- ------
Income (loss) before
extraordinary item 73 276 75 (504) (80)
Extraordinary item, net of taxes (35) -- -- -- (35)
------ ------ ---- ------- ------
Net income (loss) $ 38 $ 276 $ 75 $ (504) $ (115)
====== ====== ==== ======= ======
89
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the year ended December 31, 1999
Non- Consolidated
Millions of dollars Lyondell Guarantor Guarantors Eliminations Lyondell
- ------------------- -------- --------- ---------- ------------ ------------
STATEMENT OF CASH FLOWS
Net (loss) income $ (466) $ 277 $ 74 $ -- $ (115)
Adjustments to reconcile net
(loss) income to net cash provided
by (used in) operating activities:
Depreciation and amortization 269 61 -- -- 330
Extraordinary item 35 -- -- -- 35
Net changes in working
capital and other 351 (127) (174) -- 50
------- ----- ----- ----------- -------
Net cash provided by
(used in) operating
activities 189 211 (100) -- 300
------- ----- ----- ----------- -------
Expenditures for property,
plant and equipment (116) (15) -- -- (131)
Contributions and advances
to affiliates (18) -- (34) -- (52)
Distributions from affiliates
in excess of earnings -- -- 134 -- 134
Other 171 -- -- (167) 4
------- ----- ----- ----------- -------
Net cash provided by
(used in) investing 37 (15) 100 (167) (45)
activities
------- ----- ----- ----------- -------
Repayment of long-term debt (4,122) -- -- -- (4,122)
Proceeds from issuance
of long-term debt 3,400 -- -- -- 3,400
Payment of debt issuance costs (107) -- -- -- (107)
Issuance of common stock 736 -- -- -- 736
Dividends paid (97) (167) -- 167 (97)
Other 8 -- -- -- 8
------- ----- ----- ----------- -------
Net cash used in
financing activities (182) (167) -- 167 (182)
------- ----- ----- ----------- -------
Effect of exchange rate
changes on cash 29 (28) -- -- 1
------- ----- ----- ----------- -------
Increase in cash and
cash equivalents 73 1 -- -- 74
Cash and cash equivalents:
Beginning of year 202 31 -- -- 233
------- ----- ----- ----------- -------
End of year $ 275 $ 32 $ -- $ -- $ 307
======= ===== ===== =========== =======
90
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Governance Committee
of Equistar Chemicals, LP
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of partners' capital and of cash flows
present fairly, in all material respects, the financial position of Equistar
Chemicals, LP (the "Partnership") and its subsidiaries at December 31, 2000 and
1999, and the results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Partnership's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 12, 2001
91
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF INCOME
For the year ended
December 31,
----------------------
Millions of dollars 2000 1999 1998
- ------------------- ------ ------ ------
Sales and other operating revenues:
Unrelated parties $5,770 $4,506 $3,987
Related parties 1,725 1,088 537
------ ------ ------
7,495 5,594 4,524
------ ------ ------
Operating costs and expenses:
Cost of sales:
Unrelated parties 5,417 4,069 3,437
Related parties 1,491 933 491
Selling, general and administrative expenses 182 259 229
Research and development expense 38 42 40
Amortization of goodwill and other intangibles 33 33 31
Restructuring and other unusual charges -- 96 14
------ ------ ------
7,161 5,432 4,242
------ ------ ------
Operating income 334 162 282
Interest expense (185) (182) (156)
Interest income 4 6 17
Other income, net -- 46 --
------ ------ ------
Net income and comprehensive income $ 153 $ 32 $ 143
====== ====== ======
See Notes to Consolidated Financial Statements.
92
EQUISTAR CHEMICALS, LP
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------
Millions of dollars 2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 18 $ 108
Accounts receivable:
Trade, net 568 491
Related parties 190 209
Inventories 506 520
Prepaid expenses and other current assets 50 32
------ ------
Total current assets 1,332 1,360
Property, plant and equipment, net 3,819 3,926
Investment in PD Glycol 53 52
Goodwill, net 1,086 1,119
Other assets 292 279
------ ------
Total assets $6,582 $6,736
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade $ 426 $ 424
Related parties 61 35
Current maturities of long-term debt 90 92
Other accrued liabilities 166 233
------ ------
Total current liabilities 743 784
Long-term debt, less current maturities 2,158 2,169
Other liabilities 141 121
Commitments and contingencies -- --
Partners' capital 3,540 3,662
------ ------
Total liabilities and partners' capital $6,582 $6,736
====== ======
See Notes to Consolidated Financial Statements.
93
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
-------------------------------
Millions of dollars 2000 1999 1998
- ------------------- ------ ------ ------
Cash flows from operating activities:
Net income $ 153 $ 32 $ 143
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 310 300 268
Net loss on disposition of assets 5 35 8
(Increase) decrease in accounts receivable (58) (213) 105
Decrease in receivables from partners -- -- 150
Decrease in inventories 14 17 118
Increase in accounts payable 28 119 98
Decrease in payables to partners -- (6) (66)
(Decrease) increase in other accrued (65) 82 64
liabilities
Net change in other working capital accounts (18) (5) 2
Other (30) (17) (59)
------ ------ -------
Net cash provided by operating activities 339 344 831
------ ------ -------
Cash flows from investing activities:
Expenditures for property, plant and equipment (131) (157) (200)
Proceeds from sales of assets 4 75 3
------ ------ -------
Net cash used in investing activities (127) (82) (197)
------ ------ -------
Cash flows from financing activities:
Net borrowing (payments) under lines of credit 20 (502) 502
Proceeds from issuance of long-term debt -- 898 --
Payment of debt issuance costs -- (6) --
Repayments of long-term debt (42) (150) (35)
Repayments of obligations under capital leases -- (205) --
Distributions to partners (280) (255) (1,421)
Proceeds from Lyondell note repayment -- -- 345
------ ------ -------
Net cash used in financing activities (302) (220) (609)
------ ------ -------
(Decrease) increase in cash and cash equivalents (90) 42 25
Cash and cash equivalents at beginning of period 108 66 41
------ ------ --------
Cash and cash equivalents at end of period $ 18 $ 108 $ 66
====== ====== ========
See Notes to Consolidated Financial Statements.
94
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
Millions of dollars Lyondell Millennium Occidental Total
- ------------------- -------- ---------- ---------- --------
Balance at January 1, 1998 $1,055 $2,008 $ -- $ 3,063
Capital contributions:
Net assets -- -- 2,097 2,097
Other (14) 9 8 3
Net income (loss) 84 64 (5) 143
Distributions to partners (512) (460) (449) (1,421)
------- ------- ------- --------
Balance at December 31, 1998 613 1,621 1,651 3,885
Net income 14 9 9 32
Distributions to partners (105) (75) (75) (255)
------- ------- ------- --------
Balance at December 31, 1999 522 1,555 1,585 3,662
Net income 63 45 45 153
Distributions to partners (114) (83) (83) (280)
Other 5 -- -- 5
------- ------- ------- --------
Balance at December 31, 2000 $ 476 $1,517 $1,547 $ 3,540
======= ======= ======= ========
See Notes to Consolidated Financial Statements.
95
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Formation of the Partnership and Operations
Pursuant to a partnership agreement ("Partnership Agreement"), Lyondell Chemical
Company ("Lyondell") and Millennium Chemicals Inc. ("Millennium") formed
Equistar Chemicals, LP ("Equistar" or "Partnership"), a Delaware limited
partnership, which commenced operations on December 1, 1997. From December 1,
1997 to May 15, 1998, Equistar was owned 57% by Lyondell and 43% by Millennium.
Lyondell owns its interest in Equistar through two wholly owned subsidiaries,
Lyondell Petrochemical G.P. Inc. and Lyondell Petrochemical L.P. Inc. ("Lyondell
LP"). Millennium also owns its interest in Equistar through two wholly owned
subsidiaries, Millennium Petrochemicals GP LLC and Millennium Petrochemicals LP
LLC ("Millennium LP").
On May 15, 1998, Equistar was expanded with the contribution of certain assets
from Occidental Petroleum Corporation ("Occidental") (see Note 3). These assets
included the ethylene, propylene and ethylene oxide ("EO") and EO derivatives
businesses and certain pipeline assets held by Oxy Petrochemicals Inc. ("Oxy
Petrochemicals"), a former subsidiary of Occidental, a 50% interest in a joint
venture ("PD Glycol") between PDG Chemical Inc. and E.I. DuPont de Nemours and
Company, and a lease to Equistar of the Lake Charles, Louisiana olefins plant
and related pipelines held by Occidental Chemical Corporation ("Occidental
Chemical") (collectively, "Occidental Contributed Business"). Occidental
Chemical and PDG Chemical Inc. are both wholly owned, indirect subsidiaries of
Occidental. The Occidental Contributed Business included olefins plants at
Corpus Christi and Chocolate Bayou, Texas, EO/ethylene glycol ("EG") and EG
derivatives businesses located at Bayport, Texas, Occidental's 50% ownership of
PD Glycol which operates EO/EG plants at Beaumont, Texas, 950 miles of owned and
leased ethylene/propylene pipelines, and the lease to Equistar of the Lake
Charles, Louisiana olefins plant and related pipelines.
In exchange for the Occidental Contributed Business, two subsidiaries of
Occidental were admitted as limited partners and a third subsidiary was admitted
as a general partner in Equistar for an aggregate partnership interest of 29.5%.
In addition, Equistar assumed approximately $205 million of Occidental
indebtedness and Equistar issued a promissory note to an Occidental subsidiary
in the amount of $420 million, which was subsequently paid in cash in June 1998.
In connection with the contribution of the Occidental Contributed Business and
the reduction of Millennium's and Lyondell's ownership interests in the
Partnership, Equistar also issued a promissory note to Millennium LP in the
amount of $75 million, which was subsequently paid in June 1998. These payments
are included in "Distributions to partners" in the accompanying Statements of
Partners' Capital and of Cash Flows. The consideration paid for the Occidental
Contributed Business was determined based upon arms-length negotiations between
Lyondell, Millennium and Occidental. In connection with the transaction,
Equistar and Occidental also entered into a long-term agreement for Equistar to
supply the ethylene requirements for Occidental Chemical's U.S. manufacturing
plants.
Upon completion of this transaction, Equistar is now owned 41% by Lyondell,
29.5% by Millennium and 29.5% by Occidental, all through wholly owned
subsidiaries.
Equistar owns and operates the petrochemicals and polymers businesses
contributed by Lyondell, Millennium and Occidental ("Contributed Businesses"),
which consist of 17 manufacturing facilities primarily on the U.S. Gulf Coast
and in the U.S. Midwest. The petrochemicals segment manufactures and markets
olefins, oxygenated products, aromatics and specialty products. Olefins include
ethylene, propylene and butadiene, and oxygenated products include ethylene
oxide, ethylene glycol, ethanol and methyl tertiary butyl ether ("MTBE"). The
petrochemicals segment also includes the production and sale of aromatics,
including benzene and toluene. The polymers segment manufactures and markets
polyolefins, including high-density polyethylene ("HDPE"), low-density
polyethylene ("LDPE"), linear low-density polyethylene ("LLDPE"), polypropylene,
and performance polymers, all of which are used in the production of a wide
variety of consumer and industrial products. The performance polymers include
enhanced grades of polyethylene, including wire and cable insulating resins, and
polymeric powders. The concentrates and compounds business, which was part of
performance polymers products, was sold effective April 30, 1999 (see Note 5).
96
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Partnership Agreement provides that Equistar is governed by a Partnership
Governance Committee consisting of nine representatives, three appointed by each
partner. Most of the significant decisions of the Partnership Governance
Committee require unanimous consent, including approval of the Partnership's
Strategic Plan and annual updates thereof.
Pursuant to the Partnership Agreement, net income is allocated among the
partners on a pro rata basis based upon their percentage ownership of Equistar.
Distributions are made to the partners based upon their percentage ownership of
Equistar. Additional cash contributions required by the Partnership will also
be based upon the partners' percentage ownership of Equistar.
2. Summary of Significant Accounting Policies
Basis of Presentation--The consolidated financial statements include the the
accounts of Equistar and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition--Revenue from product sales is recognized upon delivery of
products to the customer.
Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. Equistar's
policy is to invest cash in conservative, highly rated instruments and limit the
amount of credit exposure to any one institution. Equistar performs periodic
evaluations of the relative credit standing of these financial institutions
which are considered in Equistar's investment strategy.
Equistar has no requirements for compensating balances in a specific amount at a
specific point in time. The Partnership does maintain compensating balances for
some of its banking services and products. Such balances are maintained on an
average basis and are solely at Equistar's discretion. As a result, none of
Equistar's cash is restricted.
Accounts Receivable--Equistar sells its products primarily to companies in the
petrochemicals and polymers industries. Equistar performs ongoing credit
evaluations of its customers' financial condition and, in certain circumstances,
requires letters of credit from them. The Partnership's allowance for doubtful
accounts, which is reflected in the accompanying Consolidated Balance Sheets as
a reduction of accounts receivable, totaled $9 million and $6 million at
December 31, 2000 and 1999, respectively.
Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. Depreciation of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the related assets,
ranging from 5 to 30 years. Upon retirement or sale, Equistar removes the cost
of the assets and the related accumulated depreciation from the accounts and
reflects any resulting gains or losses in the Consolidated Statements of Income.
Equistar's policy is to capitalize interest cost incurred on debt during the
construction of major projects exceeding one year.
Turnaround Maintenance and Repair Expenses--Cost of major repairs and
maintenance incurred in connection with substantial overhauls or maintenance
turnarounds of production units at Equistar's manufacturing facilities are
deferred and amortized on a straight-line basis until the next planned
turnaround, generally five to seven years. These costs are maintenance, repair
and replacement costs that are necessary to maintain, extend and improve the
operating capacity and efficiency rates of the production units. Equistar
amortized $24 million, $25 million and $20 million of deferred turnaround
maintenance and repair costs for the years ended December 31, 2000, 1999 and
1998, respectively.
Deferred Software Costs--Costs to purchase and develop software for internal use
are deferred and amortized on a straight-line basis over a range of 3 to 10
years. Equistar amortized $13 million, $12 million and $6 million of deferred
software costs for the years ended December 31, 2000, 1999 and 1998,
respectively.
97
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill--Goodwill includes goodwill contributed by Millennium and goodwill
recorded in connection with the contribution of Occidental's assets. Goodwill
is being amortized using the straight-line method over 40 years. Accumulated
amortization of goodwill was $232 million, $199 million and $166 million at
December 31, 2000, 1999 and 1998, respectively.
Investment in PD Glycol--Equistar holds a 50% interest in a joint venture with
E.I. DuPont de Nemours and Company that owns an ethylene glycol facility in
Beaumont, Texas. This investment was contributed by Occidental in 1998. The
investment in PD Glycol is accounted for using the equity method of accounting.
At December 31, 2000 and 1999, Equistar's underlying equity in the net assets of
PD Glycol exceeded the cost of the investment by $7 million and $8 million,
respectively. The excess is being accreted into income on a straight-line basis
over a period of 25 years.
Environmental Remediation Costs--Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can be reasonably estimated. The estimated
liabilities have not been discounted to present value. Environmental
remediation costs are expensed or capitalized in accordance with accounting
principles generally accepted in the United States of America.
Exchanges--Inventory exchange transactions, which involve homogeneous
commodities in the same line of business and do not involve the payment or
receipt of cash, are not accounted for as purchases and sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance with
the normal LIFO valuation policy.
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Comprehensive Income--Equistar had no items of other comprehensive income during
the years ended December 31, 2000, 1999 and 1998.
Long-Lived Asset Impairment--In accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
Equistar reviews its long-lived assets, including goodwill, for impairment on an
exception basis whenever events or changes in circumstances indicate a potential
loss in utility. Impairment losses are recognized in "Restructuring and other
unusual charges" in the Consolidated Statements of Income.
Derivatives--Adoption of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, did not have a significant impact on the Consolidated
Financial Statements of Equistar. The statement is effective for Equistar's
calendar year 2001.
Reclassifications--Certain previously reported amounts have been reclassified to
conform to classifications adopted in 2000.
3. Occidental Contributed Business
On May 15, 1998, Equistar was expanded with the contribution of certain assets
from Occidental. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations for these assets are
included in the accompanying Consolidated Statements of Income prospectively
from May 15, 1998. Occidental contributed assets and liabilities to Equistar
with a net fair value of $2.1 billion in exchange for a 29.5%
98
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
interest in the Partnership. Equistar also issued a promissory note to an
Occidental subsidiary in the amount of $420 million, which was subsequently paid
in cash in June 1998. The fair value was allocated to the assets contributed and
liabilities assumed based upon the estimated fair values of such assets and
liabilities at the date of the contribution. The fair value was determined based
upon a combination of internal valuations performed by Lyondell, Millennium and
Occidental using the income approach. The fair values of the assets contributed
and liabilities assumed by the Partnership on May 15, 1998 were as follows:
Millions of dollars
-------------------
Total current assets $ 281
Property, plant and equipment 1,964
Investment in PD Glycol 58
Goodwill 43
Deferred charges and other assets 49
------
Total assets $2,395
======
Other current liabilities $ 79
Long-term debt 205
Other liabilities and deferred credits 14
Partners' capital 2,097
------
Total liabilities and partners' capital $2,395
======
The unaudited pro forma combined historical results of Equistar as if the
Occidental Contributed Business had been contributed on January 1, 1998 were as
follows:
For the year ended
Millions of dollars December 31, 1998
- ------------------- ------------------
Sales and other operating revenues $4,869
Restructuring and other unusual charges 14
Operating income 320
Net income 154
The unaudited pro forma data presented above are not necessarily indicative of
the results of operations of Equistar that would have occurred had such
transaction actually been consummated as of January 1, 1998, nor are they
necessarily indicative of future results.
4. Related Party Transactions
Product Transactions with Lyondell--Lyondell has purchased benzene, ethylene,
propylene and other products at market-related prices from Equistar since
Lyondell's acquisition of ARCO Chemical Company in July 1998. Currently,
Equistar sells ethylene, propylene and benzene to Lyondell at market-related
prices pursuant to agreements dated effective as of August 1999. Under the
agreements, Lyondell is required to purchase 100% of its benzene, ethylene and
propylene requirements for its Channelview and Bayport, Texas facilities, with
the exception of quantities of one product that Lyondell is obligated to
purchase under a supply agreement with an unrelated third party entered into
prior to 1999 and expiring in 2015. The initial term of each of the agreements
between Equistar and Lyondell expires on December 31, 2014. After the initial
term, each of those agreements automatically renews for successive one-year
periods and either party may terminate any of the agreements on one year's
notice. The pricing terms under the agreements between Equistar and Lyondell
are similar to the pricing terms under the ethylene sales agreement between
Equistar and Occidental Chemical. In addition, a wholly owned subsidiary of
Lyondell licenses MTBE technology to Equistar. Lyondell also purchases a
significant portion of the MTBE produced by Equistar at one of its two
Channelview units at market-related prices. Sales to Lyondell totaled $572
million, $242 million and $89 million for the years ended December 31, 2000 and
1999 and for the period from August 1, 1998 to December 31, 1998, respectively.
Purchases from Lyondell totaled $2 million, $6 million and $2
99
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
million for the years ended December 31, 2000 and 1999 and for the period from
August 1, 1998 to December 31, 1998, respectively.
Product Transactions with Occidental Chemical--Equistar and Occidental Chemical
entered into a Sales Agreement, dated May 15, 1998 ("Ethylene Sales Agreement").
Under the terms of the Ethylene Sales Agreement, Occidental Chemical agreed to
purchase an amount of ethylene from Equistar equal to 100% of the ethylene
feedstock requirements of Occidental Chemical's United States plants less any
quantities up to 250 million pounds tolled in accordance with the provisions of
such agreement. Upon three years notice from either party to the other,
Equistar's maximum supply obligation in any calendar year under the Ethylene
Sales Agreement may be "phased down" as set forth in the agreement, provided
that no phase down may occur prior to January 1, 2009. In accordance with the
phase down provisions of the agreement, the annual minimum requirements set
forth in the agreement must be phased down over at least a five year period so
that the annual required minimum cannot decline to zero prior to December 31,
2013 unless certain specified force majeure events occur. The Ethylene Sales
Agreement provides for sales of ethylene at market-related prices. In addition
to ethylene, Equistar sells methanol, ethers, and glycols to Occidental
Chemical. During the years ended December 31, 2000 and 1999 and the period from
May 15, 1998 to December 31, 1998, Equistar sold Occidental Chemical $558
million, $435 million and $171 million, respectively, of product, primarily
under the Ethylene Sales Agreement.
Equistar also purchases various products from Occidental Chemical. During the
years ended December 31, 2000 and 1999 and the period from May 15, 1998 to
December 31, 1998, purchases from Occidental Chemical totaled $2 million, $2
million and $4 million, respectively.
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. The
initial term of the contract expired December 1, 2000 and thereafter, renews
annually. Either party may terminate on one year's notice. Neither party has
provided notice of termination of the agreement. The pricing terms of this
agreement are similar to the pricing terms of the Ethylene Sales Agreement with
Occidental Chemical. Equistar sold Millennium $90 million, $54 million, and $41
million of ethylene in 2000, 1999 and 1998, respectively.
Equistar purchases vinyl acetate monomer ("VAM") feedstock from Millennium at
formula-based market prices pursuant to an agreement entered into in connection
with the formation of Equistar. Under this agreement, Equistar is required to
purchase 100% of its VAM feedstock requirements for its LaPorte, Texas, Clinton,
Illinois, and Morris, Illinois plants for the production of ethylene vinyl
acetate products at those locations. The initial term of the contract expires
December 31, 2000 and thereafter, renews annually. Either party may terminate
on one year's notice of termination. The initial term will extend until
December 31, 2002 if Millennium elects to increase the amount of ethylene
purchased under the Ethylene Sales Agreement. Millennium did not elect to
increase the amount of ethylene purchased under the Ethylene Sales Agreement.
Therefore, the contract for VAM purchases expired December 31, 2000 and was
subsequently renewed for one year under the automatic renewal provisions.
During the years ending December 31, 2000, 1999 and 1998, purchases from
Millennium, primarily of vinyl acetate monomer, were $16 million, $12 million,
and $14 million, respectively.
Product Transactions with Oxy Vinyls, LP--Occidental Chemical owns 76% of Oxy
Vinyls, LP ("Oxy Vinyls"), a joint venture company formed with an unrelated
third party effective May 1, 1999. Equistar sells ethylene to Oxy Vinyls for
Oxy Vinyls' LaPorte, Texas facility at market-related prices pursuant to an
agreement dated effective as of June 1998, which agreement was assigned to Oxy
Vinyls by one of its owners. The initial term of the agreement expires on
December 31, 2003. After the initial term, the agreement automatically renews
for successive one year periods and either party may terminate the agreement on
24 months' notice. Ethylene sales to Oxy Vinyls totaled $67 million for the
year ended December 31, 2000 and $93 million for the period from May 1, 1999 to
December 31, 1999.
Transactions with LYONDELL--CITGO Refining LP-Lyondell's rights and obligations
under the terms of its product sales and feedstock purchase agreements with
LYONDELL-CITGO Refining LP ("LCR"), a joint venture investment of Lyondell, were
assigned to Equistar. Accordingly, certain olefins by-products are sold to LCR
for processing into gasoline and certain refinery products are sold to Equistar
as feedstocks. Sales of product to LCR
100
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
were $425 million, $250 million and $223 million and purchases from LCR were
$264 million, $190 million and $131 million for the years ended December 31,
2000, 1999 and 1998, respectively. Equistar also assumed certain processing
arrangements as well as storage obligations between Lyondell and LCR and
provides certain marketing and information processing services for LCR.
Aggregate charges under these various service agreements of $15 million, $13
million and $15 million were made to LCR by Equistar for the years ended
December 31, 2000, 1999 and 1998, respectively. All of the agreements between
LCR and Equistar are on terms generally representative of prevailing market
prices.
Transactions with LMC--Lyondell Methanol Company, L.P. ("LMC") sells all of its
products to Equistar. For the years ending December 31, 2000, 1999 and 1998,
purchases from LMC were $165 million, $95 million and $103 million,
respectively. Equistar sells natural gas to LMC at prices generally
representative of its cost. Purchases by LMC of natural gas feedstock from
Equistar totaled $85 million, $46 million and $44 million for the years ended
December 31, 2000, 1999 and 1998, respectively. Equistar provides operating and
other services for LMC under the terms of existing agreements that were assumed
by Equistar from Lyondell, including the lease to LMC by Equistar of the real
property on which its methanol plant is located. Pursuant to the terms of those
agreements, LMC pays Equistar a management fee and reimburses certain expenses
of Equistar at cost. Management fees charged by Equistar to LMC totaled $6
million during each of the years ending December 31, 2000, 1999 and 1998.
Shared Services Agreement with Lyondell--During 1998 and 1999, Lyondell provided
certain administrative services to Equistar, including legal, risk management,
treasury, tax and employee benefit plan administrative services, while Equistar
provided services to Lyondell in the areas of health, safety and environment,
human resources, information technology and legal. In November 1999, Lyondell
and Equistar announced an agreement to utilize shared services more broadly,
consolidating such services among Lyondell and Equistar. These services
included information technology, human resources, materials management, raw
material supply, customer supply chain, health, safety and environmental,
engineering, research and development, facility services, legal, accounting,
treasury, internal audit, and tax (the "Shared Services Agreement"). Beginning
January 1, 2000, employee-related and indirect costs were allocated between the
two companies in the manner prescribed in the Shared Services Agreement, while
direct third party costs, incurred exclusively for either Lyondell or Equistar,
were charged directly to that entity. During the years ended December 31, 2000,
1999 and 1998, Lyondell charged Equistar $133 million, $9 million and $3 million
for these services. The increased charges to Equistar during 2000 resulted from
the increase in services provided by Lyondell under the Shared Services
Agreement. During the years ended December 31, 1999 and 1998, Equistar charged
Lyondell approximately $8 million and approximately $1 million, respectively,
for services. There were no billings from Equistar to Lyondell for the year
ended December 31, 2000.
Shared Services and Shared--Site Agreements with Millennium-Equistar and
Millennium have entered into a variety of operating, manufacturing and technical
service agreements related to the business of Equistar and the businesses
retained by Millennium Petrochemicals. These agreements include the provision
by Equistar to Millennium Petrochemicals of materials management, certain
utilities, administrative office space, and health and safety services. During
the years ended December 31, 2000, 1999 and 1998, Equistar charged Millennium
Petrochemicals $2 million, $3 million and $5 million for these services. These
agreements also include the provision by Millennium Petrochemicals to Equistar
of certain operational services, including barge dock access. During each of
the years ended December 31, 2000, 1999 and 1998, Millennium Petrochemicals
charged Equistar less than $1 million for these services.
Operating Agreement with Occidental Chemical--On May 15, 1998, Occidental
Chemical and Equistar entered into an Operating Agreement ("Operating
Agreement") whereby Occidental Chemical agreed to operate and maintain the
Occidental Contributed Business and to cause third-parties to continue to
provide equipment, products and commodities to those businesses upon
substantially the same terms and conditions as provided prior to the transfer.
The Operating Agreement terminated on June 1, 1998. During the term of the
Operating Agreement, Equistar paid Occidental Chemical an administrative fee of
$1 million.
Transition Services Agreement with Occidental Chemical--On June 1, 1998,
Occidental Chemical and Equistar entered into a Transition Services Agreement.
Under the terms of the Transition Services Agreement, Occidental Chemical agreed
to provide Equistar certain services in connection with the Occidental
Contributed Business,
101
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
including services related to accounting, payroll, office administration,
marketing, transportation, purchasing and procurement, management, human
resources, customer service, technical services and others. Predominantly all
services under the Transition Services Agreement ceased in June 1999 in
accordance with the terms of the agreement. Health, safety, and environmental
services were extended until December 31, 1999 as permitted by the Transition
Services Agreement. During the year ended December 31, 1999 and the period from
June 1, 1998 to December 31, 1998, Equistar expensed $2 million and $6 million,
respectively, in connection with services provided pursuant to the Transition
Service Agreement.
Loans to Millennium and Occidental--In connection with Occidental's admission
into Equistar in May 1998, Equistar executed promissory notes to Millennium and
Occidental in the principal amounts of $75 million and $420 million,
respectively. Each of the notes provided for the annual accrual of interest at
a rate equal to LIBOR plus 0.6%. These notes were paid in full in June 1998.
Interest expense incurred on these notes during 1998 was $3 million.
Note Receivable from Lyondell LP--Upon formation of the Partnership, Lyondell LP
contributed capital to Equistar in the form of a $345 million promissory note
("Lyondell Note"). The Lyondell Note bore interest at LIBOR plus a market
spread. The note was repaid in full by Lyondell in July 1998. Interest income
on the Lyondell Note totaled $13 million during 1998.
5. Sale of Concentrates and Compounds Business
Effective April 30, 1999, Equistar completed the sale of its concentrates and
compounds business. The transaction included two manufacturing facilities,
located in Heath, Ohio and Crockett, Texas, and related inventories. Equistar's
proceeds from the sale were approximately $75 million.
6. Restructuring and Other Unusual Charges
During the fourth quarter 1999, Equistar recorded a charge of $96 million
associated with decisions to shut down certain polymer reactors and to
consolidate certain administrative functions between Lyondell and Equistar. The
decision to shut down the reactors was based on their high production cost,
market conditions in the polyethylene industry and the flexibility to utilize
more efficient reactors to meet customer requirements. Accordingly, Equistar
recorded a charge of $72 million to adjust the asset carrying values. The
remaining $24 million of the total charge represents severance and other
employee-related costs for approximately 500 employee positions that are being
eliminated. The eliminated positions, primarily administrative functions,
resulted from opportunities to share such services between Lyondell and Equistar
and, to a lesser extent, positions associated with the shut down polymer
reactors. Through December 31, 2000, approximately $19 million of severance and
other employee-related costs had been paid and charged against the accrued
liability. As of December 31, 2000, substantially all of the employee
terminations had been completed and the remaining liability was eliminated.
In 1998, Equistar recorded and paid, as incurred, an additional $12 million in
restructuring charges related to the initial merger and integration of Equistar.
These costs included costs associated with the consolidation of operations and
facilities of $11 million and other miscellaneous charges of $1 million.
7. Accounts Receivable
In December 1998, Equistar entered into a purchase agreement with an independent
issuer of receivables-backed commercial paper. Under the terms of the
agreement, Equistar agreed to sell on an ongoing basis and without recourse,
designated accounts receivable. To maintain the balance of the accounts
receivable sold, Equistar is obligated to sell new receivables as existing
receivables are collected. The agreement continues until terminated upon notice
by either party.
102
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, 1999 and 2000, Equistar's gross accounts receivable that
had been sold to the purchasers aggregated $130 million. Increases and
decreases in the amount have been reported as operating cash flows in the
Consolidated Statements of Cash Flows. Costs related to the sale are included
in "Selling, general and administrative expenses" in the Consolidated Statements
of Income.
8. Inventories
Inventories are stated at the lower of cost or market. Cost is determined on
the last-in, first-out ("LIFO") basis except for materials and supplies, which
are valued at average cost. Inventories at December 31, 2000 and 1999 consisted
of the following:
Millions of dollars 2000 1999
- ------------------- ------ ------
Finished goods $ 273 $ 278
Work-in-process 16 10
Raw materials 123 137
Materials and supplies 94 95
------ ------
Total inventories $ 506 $ 520
====== ======
The excess of the current cost of inventories over book value was approximately
$165 million at December 31, 2000.
9. Property, Plant and Equipment, Net
The components of property, plant and equipment, at cost, and the related
accumulated depreciation were as follows at December 31:
Millions of dollars 2000 1999
- ------------------- ------ ------
Land $ 78 $ 78
Manufacturing facilities and equipment 5,769 5,656
Construction in progress 134 134
------ ------
Total property, plant and equipment 5,981 5,868
Less accumulated depreciation 2,162 1,942
------ ------
Property, plant and equipment, net $3,819 $3,926
====== ======
No interest was capitalized during 2000, 1999 and 1998. Depreciation expense
for the years ending December 31, 2000, 1999 and 1998 was $229 million, $221
million and $200 million, respectively.
In July 1998, the depreciable lives of certain assets, primarily manufacturing
facilities and equipment, were increased from a range of 5 to 25 years to a
range of 5 to 30 years. The change was made to more accurately reflect the
estimated periods during which such assets will remain in service, based upon
Equistar's actual experience with those assets. This change was accounted for
as a change in accounting estimate and resulted in a $33 million decrease in
depreciation expense for 1998.
103
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Other Accrued Liabilities
Other accrued liabilities at December 31, 2000 and 1999 were as follows:
Millions of dollars 2000 1999
- ------------------- ------ ------
Accrued property taxes $ 73 $ 68
Accrued payroll costs 38 68
Accrued interest 52 50
Other 3 47
------ ------
Total other accrued liabilities $ 166 $ 233
====== ======
11. Pension and Other Postretirement Benefits
All full-time regular employees of the Partnership are covered by defined
benefit pension plans sponsored by Equistar. The plans became effective
January 1, 1998, except for union represented employees formerly employed by
Millennium, whose plans were contributed to Equistar on December 1, 1997, and
union represented employees formerly employed by Occidental, whose plans were
contributed to Equistar on May 15, 1998. In connection with the formation of
Equistar, there were no pension assets or obligations contributed to Equistar,
except for the union represented plans described above. Retirement benefits are
based upon years of service and the employee's highest three consecutive years
of compensation during the last ten years of service. Equistar accrues pension
costs based upon an actuarial valuation and funds the plans through periodic
contributions to pension trust funds as required by applicable law. Equistar
also has unfunded supplemental nonqualified retirement plans, which provide
pension benefits for certain employees in excess of the tax qualified plans'
limits. In addition, Equistar sponsors unfunded postretirement benefit plans
other than pensions for both salaried and nonsalaried employees, which provide
medical and life insurance benefits. These postretirement health care plans are
contributory while the life insurance plans are noncontributory.
The following table provides a reconciliation of benefit obligations, plan
assets and the funded status of these plans:
Other
Pension Benefits Postretirement Benefits
----------------------------- ----------------------------
Millions of dollars 2000 1999 2000 1999
- ------------------- ------ ------ ------ ------
Change in benefit obligation:
Benefit obligation, January 1 $ 99 $ 88 $ 77 $ 69
Service cost 17 22 2 4
Interest cost 9 7 6 6
Actuarial loss (gain) 8 (8) 11 (2)
Net effect of curtailments, settlements
and special termination benefits (1) -- 1 --
Transfer to Lyondell -- -- (3) --
Benefits paid (12) (10) (2) --
------ ------ ------ ------
Benefit obligation, December 31 120 99 92 77
------ ------ ------ ------
Change in plan assets:
Fair value of plan assets, January 1 101 88 -- --
Actual return of plan assets (3) 7 -- --
Partnership contributions 31 16 2 --
Benefits paid (12) (10) (2) --
------ ------ ------ ------
Fair value of plan assets, December 31 117 101 -- --
------ ------ ------ ------
Funded status (3) 2 (91) (77)
Unrecognized actuarial loss 24 5 20 13
------ ------ ------ ------
Net amount recognized $ 21 $ 7 $ (71) $ (64)
====== ====== ====== ======
104
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other
Pension Benefits Postretirement Benefits
----------------------------- ----------------------------
Millions of dollars 2000 1999 2000 1999
- ------------------- ------ ------ ------ ------
Amounts recognized in the
Consolidated Balance Sheets consist of:
Prepaid benefit cost $ 35 $ 33 $ -- $ --
Accrued benefit liability (14) (26) (71) (64)
------ ------ ------ ------
Net amount recognized $ 21 $ 7 $ (71) $ (64)
====== ====== ====== ======
The benefit obligation, accumulated benefit obligation and fair value of assets
for pension plans with benefit obligations in excess of plan assets were $63
million, $42 million and $40 million, respectively, as of December 31, 2000 and
$40 million, $26 million and $13 million, respectively, as of December 31, 1999.
Net periodic pension and other postretirement benefit costs included the
following components:
Other
Pension Benefits Postretirement Benefits
----------------------------- ----------------------------
Millions of dollars 2000 1999 1998 2000 1999 1998
- ------------------- ----------------------------- ----------------------------
Components of net periodic
benefit cost:
Service cost $ 17 $ 22 $ 16 $ 2 $ 4 $ 3
Interest cost 9 7 5 6 6 4
Amortization of actuarial loss -- 1 -- 1 1 --
Expected return of plan assets (8) (8) (6) -- -- --
Net effect of curtailments,
settlements and special termination
benefits (1) -- -- 1 -- --
----------------------------- ----------------------------
Net periodic benefit cost $ 17 $ 22 $ 15 $ 10 $ 11 $ 7
============================= ============================
Other
Pension Benefits Postretirement Benefits
----------------------------- ----------------------------
2000 1999 1998 2000 1999 1998
----------------------------- ----------------------------
Weighted-average assumptions as of
December 31:
Discount rate 7.50% 8.00% 6.75% 7.50% 8.00% 6.75%
Expected return on plan assets 9.50% 9.50% 9.50% -- -- --
Rate of compensation increase 4.50% 4.75% 4.75% 4.50% 4.75% 4.75%
For measurement purposes, the assumed annual rate of increase in the per capita
cost of covered health care benefits as of December 31, 2000 was 7.0% for 2001
and 5.0% thereafter. The health care cost trend rate assumption does not have a
significant effect on the amounts reported. To illustrate, increasing or
decreasing the assumed health care cost trend rates by one percentage point in
each year would change the accumulated postretirement benefit liability as of
December 31, 2000 by less than $1 million and would not have a material effect
on the aggregate service and interest cost components of the net periodic
postretirement benefit cost for the year then ended.
Equistar also maintains voluntary defined contribution savings plans for
eligible employees. Contributions to the plans by Equistar were $17 million,
$20 million and $15 million for the years ended December 31, 2000, 1999 and
1998, respectively.
12. Long-Term Debt and Financing Arrangements
In February 1999, Equistar and Equistar Funding Corporation ("Equistar Funding")
co-issued $900 million of debt securities. Equistar Funding, a wholly owned
subsidiary of Equistar, is a Delaware corporation formed for the sole purpose of
facilitating the financing activities of Equistar. Equistar is jointly and
severally liable with Equistar Funding on the outstanding notes and new notes.
The debt securities include $300 million of 8.50% Notes, which will mature on
February 15, 2004, and $600 million of 8.75% Notes, which will mature on
February 15, 2009. Equistar used the net proceeds from this offering (i) to
repay the $205 million outstanding under a capitalized lease
105
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
obligation relating to Equistar's Corpus Christi facility, (ii) to repay the
outstanding balance under the $500 million credit agreement, after which the
$500 million credit agreement was terminated, (iii) to repay the outstanding
$150 million, 10.00% Notes due in June 1999, and (iv) to the extent of the
remaining net proceeds, to reduce outstanding borrowing under the five-year
credit facility and for Partnership working capital purposes.
Equistar has a five-year, $1.25 billion credit facility with a group of banks
expiring November 2002. Borrowing under the facility bears interest at either
the Federal Funds rate plus 1/2 of 1%, LIBOR plus 1/2 of 1%, a fixed rate
offered by one of the sponsoring banks or interest rates that are based on a
competitive auction feature wherein the interest rate can be established by
competitive bids submitted by the sponsoring banks, depending upon the type of
borrowing made under the facility. Borrowing under the facility had a weighted
average interest rate of 7.13% and 6.0% at December 31, 2000 and 1999,
respectively. Millennium America Inc., a subsidiary of Millennium, provided
limited guarantees with respect to the payment of principal and interest on a
total of $750 million principal amount of indebtedness under the $1.25 billion
revolving credit facility. However, the lenders may not proceed against
Millennium America Inc. until they have exhausted their remedies against
Equistar. The guarantee will remain in effect indefinitely, but at any time
after December 31, 2004, Millennium America Inc. may elect to terminate the
guarantee if certain conditions are met including financial ratios and
covenants. In addition, Millennium America Inc. may elect to terminate the
guarantee if Millennium Petrochemicals Inc. sells its interests in Millennium GP
and Millennium LP or if those entities sell their interests in Equistar,
provided certain conditions are met including financial ratios and covenants.
The credit facility is available for working capital and general Partnership
purposes as needed and contains covenants that, subject to exceptions, restrict
sale and leaseback transactions, lien incurrence, debt incurrence, sales of
assets and mergers and consolidations, and require Equistar to maintain
specified financial ratios, in all cases as provided in the credit facility. The
breach of these covenants could permit the lenders to declare the loans
immediately payable and to terminate future lending commitments.
Equistar was in compliance with all covenants under its credit facility as of
December 31, 2000. However, given the poor current business environment,
Equistar is seeking an amendment to its credit facility that would increase its
financial and operating flexibility, primarily by making certain financial ratio
requirements less restrictive. Equistar anticipates that the amendment will
become effective prior to March 31, 2001.
The terminated $500 million credit agreement was entered into on June 12, 1998.
Borrowing under the agreement bore interest at either the Federal Funds rate
plus 1/2 of 1%, LIBOR plus 0.625%, a fixed rate offered by one of the
sponsoring banks or interest rates that were based on a competitive auction
feature.
Long-term debt at December 31 consisted of the following:
Millions of dollars 2000 1999
- ------------------- ------ ------
Bank credit facilities:
5-year term credit facility $ 820 $ 800
Other debt obligations:
Medium-term notes (due 2000-2005) 121 163
9.125% Notes due 2002 100 100
8.50% Notes due 2004 300 300
6.50% Notes due 2006 150 150
8.75% Notes due 2009 598 598
7.55% Debentures due 2026 150 150
Other 9 --
------ ------
Total long-term debt 2,248 2,261
Less current maturities 90 92
------ ------
Total long-term debt, net $2,158 $2,169
====== ======
Aggregate maturities of long-term debt during the next five years are as
follows: 2001-$90 million; 2002-$921 million; 2003-$29 million; 2004-$300
million; 2005-$5 million; and thereafter-$903 million.
106
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The 8.75% Notes have a face amount of $600 million and are shown net of
unamortized discount. The medium-term notes mature at various dates from 2001 to
2005 and had a weighted average interest rate of 9.6% and 10.0% at December 31,
2000 and 1999, respectively.
The medium-term Notes, the 9.125% Notes, the 6.5% Notes and the 7.55% Debentures
were assumed by Equistar from Lyondell when Equistar was formed in 1997. As
between Equistar and Lyondell, Equistar is primarily liable for this debt.
Lyondell remains a co-obligor for the medium-term notes and certain events
involving only Lyondell could give rise to events of default under those notes,
permitting the obligations to be accelerated. If such an event permitted more
than $50 million of the medium-term notes to be accelerated, the lenders under
Equistar's $1.25 billion revolving credit facility would have the right to
accelerate all debt outstanding under the facility and to terminate future
lending commitments. $90 million aggregate principal amount of the medium-term
notes will mature on August 1, 2001. Under certain limited circumstances, the
holders of the medium-term notes have the right to require repurchase of the
notes. Following amendments to the identures for the 9.125% Notes and 6.5% Notes
and the 7.55% Debentures in November 2000, Lyondell remains a guarantor of that
debt but not a co-obligor. The consolidated financial statements of Lyondell are
filed as an exhibit to Equistar's Annual Report on Form 10-K for the year ended
December 31, 2000.
13. Financial Instruments
Equistar does not buy, sell, hold or issue financial instruments for speculative
trading purposes.
Beginning October 1999, Equistar entered into over-the-counter "derivatives" and
price collar agreements for crude oil with Occidental Energy Marketing, Inc., a
subsidiary of Occidental, to help manage its exposure to commodity price risk
with respect to crude-oil related raw material purchases. At December 31, 2000,
"derivatives" agreements covering 5.1 million barrels and maturing from January
2001 through July 2001 were outstanding. The carrying value and fair market
value of these derivative instruments at December 31, 2000 represented a
liability of $13 million and was based on quoted market prices. At December 31,
1999, "derivatives" and collar agreements covering 2.4 million and 1.5 million
barrels, respectively, and maturing in January 2000, were outstanding. Both the
carrying value and fair market value of these derivative instruments at
December 31, 1999 represented an asset of $7 million and was based on quoted
market prices. Unrealized gains and losses on "derivatives" and price collars
are deferred until realized at which time they are reflected in the cost of the
purchased raw material. See Item 7a. Disclosure of Market and Regulatory Risk--
Commodity Price Risk.
The fair value of all nonderivative financial instruments included in current
assets and current liabilities, including cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, approximated their
carrying value due to their short maturity. Based on the borrowing rates
currently available to Equistar for debt with terms and average maturities
similar to Equistar's debt portfolio, the fair value of Equistar's long-term
debt, including amounts due within one year, was approximately $2.1 billion and
$2.2 billion at December 31, 2000 and 1999, respectively.
Equistar had issued letters of credit totaling $1 million and $6 million at
December 31, 2000 and 1999, respectively.
14. Commitments and Contingencies
Commitments--Equistar has various purchase commitments for materials, supplies
and services incident to the ordinary conduct of business. In the aggregate,
such commitments are not at prices in excess of current market. See also
Note 4, describing related party commitments.
Equistar is party to various unconditional purchase obligation contracts as a
purchaser for product and services. At December 31, 2000, future minimum
payments under these contracts with noncancelable contract terms in excess of
one year were as follows:
Millions of dollars
-------------------
2001 $ 29
2002 27
2003 23
2004 22
2005 22
Thereafter 118
----
Total minimum contract payments $241
====
Equistar's total purchases under these agreements were $35 million, $39 million
and $35 million for the years ending December 31, 2000, 1999 and 1998,
respectively.
107
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Indemnification Arrangements--Lyondell, Millennium and Occidental have each
agreed to provide certain indemnifications to Equistar with respect to the
petrochemicals and polymers businesses contributed by the partners. In
addition, Equistar agreed to assume third party claims that are related to
certain pre-closing contingent liabilities that are asserted prior to
December 1, 2004 for Lyondell and Millennium, and May 15, 2005 for Occidental,
to the extent the aggregate thereof does not exceed $7 million to each partner,
subject to certain terms of the respective asset contribution agreements. As of
December 31, 2000, Equistar had incurred a total of $16 million for these
uninsured claims and liabilities. Equistar also agreed to assume third party
claims that are related to certain pre-closing contingent liabilities that are
asserted for the first time after December 1, 2004 for Lyondell and Millennium,
and for the first time after May 15, 2005 for Occidental.
Environmental--Equistar's policy is to be in compliance with all applicable
environmental laws. Equistar is subject to extensive environmental laws and
regulations concerning emissions to the air, discharges to surface and
subsurface waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. Some of these laws and regulations
are subject to varying and conflicting interpretations. In addition, Equistar
cannot accurately predict future developments, such as increasingly strict
requirements of environmental laws, inspection and enforcement policies and
compliance costs therefrom which might affect the handling, manufacture, use,
emission or disposal of products, other materials or hazardous and non-hazardous
waste. Equistar had no reserves for environmental matters as of December 31,
2000 and 1999.
The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the EPA. As a result, the Texas Natural Resource
Conservation Commission ("TNRCC") has submitted a plan to the EPA to reach and
demonstrate compliance with the ozone standard by the year 2007. These emission
reduction controls must be installed during the next several years, well in
advance of the 2007 deadline. This could result in increased capital
investment, which could be between $150 million and $300 million before the 2007
deadline, as well as higher annual operating costs for Equistar. Equistar has
been actively involved with a number of organizations to help solve the ozone
problem in the most cost-effective manner and, in January 2001, Equistar and an
organization composed of industry participants filed a lawsuit against the TNRCC
to encourage adoption of their alternative plan to achieve the same air quality
improvement with less negative economic impact on the region.
In the United States, the Clean Air Act Amendments of 1990 set minimum levels
for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified
air quality standards. However, while studies by federal and state agencies and
other organizations have shown that MTBE is safe for use in gasoline, is not
carcinogenic and is effective in reducing automotive emissions, the presence of
MTBE in some water supplies in California and other states due to gasoline
leaking from underground storage tanks and in surface water from recreational
water craft has led to public concern that MTBE may, in certain limited
circumstances, affect the taste and odor of drinking water supplies, and thereby
lead to possible environmental issues.
Certain federal and state governmental initiatives have sought either to rescind
the oxygenate requirement for reformulated gasoline or to restrict or ban the
use of MTBE. Such actions, to be effective, would require (i) a waiver of the
state's oxygenate mandate, (ii) Congressional action in the form of an amendment
to the Clean Air Act or (iii) replacement of MTBE with another oxygenate such as
ethanol, a more costly, untested, and less widely available additive. At the
federal level, a blue ribbon panel appointed by the EPA issued its report on
July 27, 1999. That report recommended, among other things, reducing the use of
MTBE in gasoline. During 2000, the EPA announced its intent to seek legislative
changes from Congress to give the EPA authority to ban MTBE over a three-year
period. Such action would only be granted through amendments to the Clean Air
Act. Additionally, the EPA is seeking a ban of MTBE utilizing rulemaking
authority contained in the Toxic Substance Control Act. It would take at least
three years for such a rule to issue. Recently, however, senior policy analysts
at the U.S. Department of Energy presented a study stating that banning MTBE
would create significant economic risk. The presentation did not identify any
benefits from banning MTBE. The EPA initiatives mentioned above or other
governmental actions could result in a significant reduction in Equistar's MTBE
sales. Equistar has developed technologies to convert its process to produce
alternate gasoline blending components should it be necessary to reduce MTBE
production in the future.
108
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
General--The Partnership is also subject to various lawsuits and proceedings.
Subject to the uncertainty inherent in all litigation, management believes the
resolution of these proceedings will not have a material adverse effect upon the
financial statements or liquidity of Equistar.
In the opinion of management, any liability arising from the matters discussed
in this Note is not expected to have a material adverse effect on the financial
statements or liquidity of Equistar. However, the adverse resolution in any
reporting period of one or more of these matters discussed in this Note could
have a material impact on Equistar's results of operations for that period
without giving effect to contribution or indemnification obligations of co-
defendants or others, or to the effect of any insurance coverage that may be
available to offset the effects of any such award.
15. Lease Commitments
Equistar leases various facilities and equipment under noncancelable lease
arrangements for various periods. At December 31, 2000, future minimum lease
payments relating to noncancelable operating leases with lease terms in excess
of one year were as follows:
Millions of dollars
-------------------
2001 $ 83
2002 66
2003 59
2004 54
2005 48
Thereafter 317
----
Total minimum lease payments $627
====
Operating lease net rental expense was $115 million, $112 million and $110
million for the years ending December 31, 2000, 1999 and 1998, respectively.
Equistar leases railcars for the distribution of products in its polymers
business segment. The railcars are leased under two master leases entered into
in 1999 and a third master lease entered into in 1996 by Millennium and assumed
by Equistar upon its formation on December 1, 1997. The leases have five
renewable one-year terms and mature after the fifth year. Equistar may, at its
option, purchase the railcars during or at the end of the lease term for an
amount generally equal to the lessor's unrecovered costs, as defined. If
Equistar does not exercise the purchase option, the railcars will be sold and
Equistar will pay the lessor to the extent the proceeds from the sale of the
railcars are less than their quaranteed residential value, as defined by the
agreements. The guaranteed residual value under these leases was approximately
$185 million at December 31, 2000.
16. Supplemental Cash Flow Information
Supplemental cash flow information is summarized as follows for the periods
presented:
For the year ended December 31,
---------------------------------
Millions of dollars 2000 1999 1998
- ------------------- -------- -------- --------
Cash paid for interest $ 180 $ 146 $ 154
======== ======== ========
17. Segment Information and Related Information
Using the guidelines set forth in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, Equistar has identified two reportable
segments in which it operates. The reportable segments are petrochemicals and
polymers. The petrochemicals segment includes olefins, oxygenated products,
aromatics and specialty products. Olefins include ethylene, propylene and
butadiene, and the oxygenated products include ethylene oxide, ethylene glycol,
ethanol and MTBE. Aromatics include benzene and toluene. The polymers segment
consists of polyolefins, including high-density polyethylene, low-density
polyethylene, linear low-density polyethylene, polypropylene, and performance
polymers. The performance polymers include enhanced grades of polyethylene,
including wire and cable insulating resins, and polymeric powders. The
concentrates and compounds business, which was part of performance polymers, was
sold effective April 30, 1999 (see Note 5).
109
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
No customer accounted for 10% or more of sales during the years ended December
31, 2000, 1999 or 1998.
The accounting policies of the segments are the same as those described in
"Summary of Significant Accounting Policies" (see Note 2).
Summarized financial information concerning Equistar's reportable segments is
shown in the following table. Intersegment sales between the petrochemicals and
polymers segments were made at prices based on current market values.
Millions of dollars Petrochemicals Polymers Unallocated Eliminations Consolidated
- ------------------- -------------- -------- ----------- ------------ ------------
For the year ended December 31, 2000:
Sales and other operating
operating revenues:
Customers $5,144 $2,351 $ -- $ -- $7,495
Intersegment 1,887 -- -- (1,887) --
------ ------ ------ ------- -------
7,031 2,351 -- (1,887) 7,495
Operating income (loss) 694 (185) (175) -- 334
Total assets 3,693 1,534 1,355 -- 6,582
Capital expenditures 79 46 6 -- 131
Depreciation and amortization expense 199 55 56 -- 310
For the year ended December 31, 1999:
Sales and other operating
operating revenues:
Customers 3,435 2,159 -- -- 5,594
Intersegment 1,324 -- -- (1,324) --
------ ------ ------ ------- -------
4,759 2,159 -- (1,324) 5,594
Restructuring and other unusual charges -- -- 96 -- 96
Operating income 447 51 (336) -- 162
Total assets 3,671 1,551 1,514 -- 6,736
Capital expenditures 61 83 13 -- 157
Depreciation and amortization expense 194 53 53 -- 300
For the year ended December 31, 1998:
Sales and other operating
operating revenues:
Customers 2,362 2,162 -- -- 4,524
Intersegment 1,112 46 -- (1,158) --
------ ------ ------ ------- -------
3,474 2,208 -- (1,158) 4,524
Restructuring and other unusual charges -- -- 14 -- 14
Operating income 319 177 (214) -- 282
Total assets 3,625 1,563 1,477 -- 6,665
Capital expenditures 71 116 13 -- 200
Depreciation and amortization expense 152 65 51 -- 268
110
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the details of "Operating income" as presented
above in the "Unallocated" column for the years ended December 31, 2000, 1999
and 1998.
Millions of dollars 2000 1999 1998
------------------- ------ ------ ------
Expenses not allocated to petrochemicals and polymers:
Principally general and administrative expenses $ (175) $ (240) $ (200)
Restructuring and other unusual charges -- (96) (14)
------ ------ ------
Total-Unallocated $ (175) $ (336) $ (214)
====== ====== ======
The following table presents the details of "Total assets" as presented above in
the "Unallocated" column as of December 31, for the years indicated:
Millions of dollars 2000 1999 1998
------------------- ------ ------ ------
Cash $ 18 $ 108 $ 66
Accounts receivable-trade and related parties 16 18 14
Prepaids and other current assets 17 22 25
Property, plant and equipment, net 56 58 48
Goodwill, net 1,086 1,119 1,151
Other assets 162 189 173
------ ------ ------
$1,355 $1,514 $1,477
====== ====== ======
18. Subsequent Event
Equistar discontinued production at its Port Arthur, Texas, polyethylene
facility on February 28, 2001 and shut down the facility. Closed production
units include a 240 million pounds per year HDPE reactor and an LDPE reactor
with annual capacity of 160 million pounds. These units and a 300 million pounds
per year HDPE reactor mothballed in 1999 have been shut down permanently. The
asset values of these production units were previously adjusted as part of a $96
million restructuring charge recognized in 1999. Equistar expects to incur
approximately $20 million of costs, including severance benefits for
approximately 125 people at the Port Arthur facility as well as shutdown-related
costs.
111
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Governance Committee
of LYONDELL-CITGO Refining LP
In our opinion, the accompanying balance sheets at December 31, 2000 and 1999,
and the related statements of income, partners' capital and cash flows for the
years then ended, present fairly, in all material respects, the financial
position of LYONDELL-CITGO Refining LP (the Partnership) at December 31, 2000
and 1999, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Partnership's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The Partnership's credit facilities mature in September 2001. Management's plans
in regard to this matter are discussed in Note 2.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
February 15, 2001
112
INDEPENDENT AUDITORS' REPORT
To the Partnership Governance Committee
of LYONDELL-CITGO Refining LP:
We have audited the accompanying statements of income, partners' capital, and
cash flows of LYONDELL-CITGO Refining LP (a Limited Partnership) for the year
ended December 31, 1998. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations, changes in partners' capital and cash flows
of LYONDELL-CITGO Refining LP for the year ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Houston, Texas
February 11, 1999
113
LYONDELL-CITGO REFINING LP
STATEMENTS OF INCOME
For the year ended December 31,
-------------------------------
Millions of dollars 2000 1999 1998
- ------------------- ------ ------ ------
Sales and other operating revenues $4,075 $2,571 $2,055
Operating costs and expenses:
Cost of sales:
Crude oil and feedstock 3,246 1,959 1,264
Operating and other expenses 580 473 490
Selling, general and administrative expenses 60 66 78
Unusual charges -- 6 10
----- ----- -----
3,886 2,504 1,842
----- ----- -----
Operating income 189 67 213
Interest expense (63) (45) (44)
Interest income 2 1 1
----- ----- -----
Income before state income taxes 128 23 170
Provision for (benefit from) state income taxes -- (1) 1
----- ----- -----
Net income $ 128 $ 24 $ 169
===== ===== =====
See Notes to Financial Statements.
114
LYONDELL-CITGO REFINING LP
BALANCE SHEETS
December 31,
---------------------
Millions of dollars 2000 1999
- ------------------- ------ ------
ASSETS
Current assets:
Cash and cash equivalents $ 1 $ 16
Accounts receivable:
Trade, net 75 43
Related parties and affiliates 131 101
Inventories 90 47
Prepaid expenses and other current assets 13 12
------- -------
Total current assets 310 219
------- -------
Property, plant and equipment 2,292 2,255
Construction projects in progress 127 112
Accumulated depreciation and amortization (1,100) (1,017)
------- -------
1,319 1,350
Deferred charges and other assets 67 60
------- -------
Total assets $ 1,696 $ 1,629
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade $ 108 $ 75
Related parties and affiliates 187 129
Distribution payable to Lyondell Partners 18 33
Distribution payable to CITGO Partners 13 23
Loan payable to bank 20 --
Current maturities of long-term debt -- 450
Note payable 450 --
Taxes, payroll and other liabilities 71 47
------- -------
Total current liabilities 867 757
------- -------
Loans payable to Lyondell Partners 229 219
Loans payable to CITGO Partners 35 28
Pension, postretirement benefit and other liabilities 57 69
------- -------
Total long-term liabilities 321 316
Commitments and contingencies
Partners' capital 508 556
------- -------
Total liabilities and partners' capital $ 1,696 $ 1,629
======= =======
See Notes to Financial Statements.
115
LYONDELL-CITGO REFINING LP
STATEMENTS OF CASH FLOWS
For the year ended December 31,
--------------------------------
Millions of dollars 2000 1999 1998
- ------------------- ------ ------ ------
Cash flows from operating activities:
Net income $ 128 $ 24 $ 169
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 112 103 100
Increase in accounts receivable - trade, net (32) (4) (2)
(Increase) decrease in accounts receivable - related parties (30) (75) 16
(Increase) decrease in inventories (43) 59 (9)
Decrease (increase) in prepaid expenses and other current assets 10 (10) (1)
Increase in accounts payable - trade 38 4 4
Increase (decrease) in accounts payable - related parties 59 87 (83)
Increase in taxes, payroll and other liabilities 24 9 3
(Increase) in deferred charges and other assets and change
in pension, postretirement benefit and other liabilities (44) (16) (28)
----- ----- -----
Net cash provided by operating activities 222 181 169
----- ----- -----
Cash flows from investing activities:
Expenditures for property, plant and equipment:
Maintenance capital expenditures (7) (13) (19)
Environmental capital expenditures (12) (19) (12)
Capital enhancement expenditures (41) (24) (27)
Refinery upgrade expenditures -- -- (3)
----- ----- -----
Total capital expenditures (60) (56) (61)
Other (1) (1) (1)
----- ----- -----
Net cash used in investing activities (61) (57) (62)
----- ----- -----
Cash flows from financing activities:
Proceeds from (repayment of) bank loan 20 (20) 20
Payment of current maturities of long-term debt (450) -- --
Proceeds from PDVSA loan 439 -- --
Contributions from Lyondell Partners 25 -- --
Contributions from CITGO Partners 18 -- --
Proceeds from Lyondell Partners' loans 4 35 35
Proceeds from CITGO Partners' loans 13 25 19
Distributions to Lyondell Partners (144) (101) (130)
Distributions to CITGO Partners (101) (71) (92)
----- ----- -----
Net cash used in financing activities (176) (132) (148)
----- ----- -----
Decrease in cash and cash equivalents (15) (8) (41)
Cash and cash equivalents at beginning of period 16 24 65
----- ----- -----
Cash and cash equivalents at end of period $ 1 $ 16 $ 24
===== ===== =====
See Notes to Financial Statements.
116
LYONDELL-CITGO REFINING LP
STATEMENTS OF PARTNERS' CAPITAL
Lyondell CITGO
Millions of dollars Partners Partners Total
- ------------------- ---------- ---------- -------
Balance, January 1, 1998 $ 68 $605 $ 673
Distributions (113) (80) (193)
Net income 110 59 169
----- ---- -----
Balance, December 31, 1998 65 584 649
Other contributions 47 32 79
Distributions (115) (81) (196)
Net income 23 1 24
----- ---- -----
Balance, December 31, 1999 20 536 556
Cash contributions 25 18 43
Distributions (128) (91) (219)
Net income 86 42 128
----- ---- -----
Balance, December 31, 2000 $ 3 $505 $ 508
===== ==== =====
See Notes to Financial Statements.
117
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS
1. The Partnership
On July 1, 1993, Lyondell Chemical Company ("Lyondell") and CITGO Petroleum
Corporation ("CITGO") announced the commencement of operations of LYONDELL-CITGO
Refining LP ("LCR" or the "Partnership") (formerly LYONDELL-CITGO Refining
Company Ltd.), a new entity formed and owned by subsidiaries of Lyondell and
CITGO in order to own and operate a refinery ("Refinery") located adjacent to
the Houston Ship Channel in Houston, Texas and a lube oil blending and packaging
plant in Birmingport, Alabama.
Lyondell owns its interest in the Partnership through wholly owned subsidiaries,
Lyondell Refining LP, LLC ("Lyondell LP") and Lyondell Refining Company
("Lyondell GP"). Lyondell LP and Lyondell GP together are known as Lyondell
Partners. CITGO holds its interest through CITGO Refining Investment Company
("CITGO LP") and CITGO Gulf Coast Refining, Inc. ("CITGO GP"), both wholly owned
subsidiaries of CITGO. CITGO LP and CITGO GP together are known as CITGO
Partners. Lyondell Partners and CITGO Partners together are known as the
Partners.
During 1998 LCR converted from a Texas limited liability company to a Delaware
limited partnership. Accordingly, the name was changed from LYONDELL-CITGO
Refining Company Ltd. to LYONDELL-CITGO Refining LP. LCR will continue in
existence until it is dissolved under the terms of the Limited Partnership
Agreement (the "Agreement").
The Partners have agreed to allocate net income and cash provided by operating
activities based on certain contributions and other factors instead of
allocating such amounts based on their capital account balances. Based upon
these contributions and other factors, Lyondell Partners and CITGO Partners had
ownership interests of approximately 59 percent and 41 percent, respectively, as
of December 31, 2000.
At December 31, 2000, the Partnership employed approximately 1,000 full-time
employees. Of these, approximately 600 were covered by a collective bargaining
agreement between LCR and the Paper, Allied-Industrial, Chemical and Energy
Workers International Union ("PACE"). This agreement expires January 31, 2002.
LCR also uses the services of independent contractors in the routine conduct of
its business.
2. Liquidity
LCR has $450 million outstanding under a one-year term credit facility, which
expires in September 2001. LCR has previously been successful in refinancing the
$450 million debt with a syndication of banks (See Note 8). The management of
Lyondell and CITGO are pursuing a refinancing of the debt, although the final
terms have not been determined. Based on previous experience of refinancing its
debt and the current conditions of the financial markets, the management of LCR,
Lyondell and CITGO anticipate that this debt will be refinanced prior to its
maturity.
3. Summary of Significant Accounting Policies
Revenue Recognition - Revenue from product sales is recognized upon delivery of
products to customers.
Cash and Cash Equivalents - Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. The
Partnership's policy is to invest cash in conservative, highly rated instruments
and limit the amount of credit exposure to any one institution.
118
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS - (Continued)
Accounts Receivable - The Partnership sells its products primarily to companies
in the petrochemical and refining industries. The Partnership performs ongoing
credit evaluations of its customers' financial condition and in certain
circumstances requires letters of credit from them. The Partnership's allowance
for doubtful accounts receivable, which is reflected in the Balance Sheets as a
reduction of accounts receivable-trade, totaled approximately $25,000 and
$50,000 at December 31, 2000 and 1999, respectively.
Property, Plant and Equipment - Property, plant and equipment are recorded at
cost. The primary components of property, plant and equipment are manufacturing
facilities and equipment. Depreciation of property, plant and equipment is
computed using the straight-line method over the estimated useful lives of the
related assets which range from five to thirty years. Upon retirement or sale,
the Partnership removes the cost of the assets and the related accumulated
depreciation from the accounts and reflects any resulting gains or losses in
income. Interest incurred on debt during the construction of major projects is
capitalized.
Effective January 1, 1998, the depreciable life of assets related to an upgrade
project completed in February 1997 was increased from twenty to twenty-four
years. These changes were accounted for as a change in accounting estimate. The
gross value of these assets when the depreciable life changed was approximately
$1 billion with accumulated depreciation of approximately $52 million. The
increase in the depreciable life of these assets decreased depreciation expense
by approximately $9 million for each of the years ended December 31, 2000, 1999
and 1998.
Turnaround Maintenance and Repair Expenses - Cost of repairs and maintenance
incurred in connection with turnarounds of major units at the Refinery exceeding
$5 million are deferred and amortized using the straight-line method, until the
next planned turnaround, generally four to six years. These costs consist of
maintenance, repair and replacement costs that are necessary to maintain, extend
and improve the operating capacity and efficiency rates of the production units.
Amortization of deferred turnaround costs for 2000, 1999 and 1998 was
approximately $11 million, $13 million and $12 million, respectively. Other
turnaround costs and ordinary repair and maintenance costs are expensed as
incurred.
Environmental Remediation Costs - Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Estimates have not
been discounted to present value. Environmental remediation costs are expensed
or capitalized in accordance with generally accepted accounting principles.
Exchanges - Inventory exchange transactions, which involve homogeneous
commodities in the same line of business and do not involve the payment or
receipt of cash, are not accounted for as purchases and sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance with
the normal LIFO valuation policy. Exchanges settled through payment or receipt
of cash are accounted for as purchases or sales.
Income Taxes - Deferred taxes result from temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes
and are calculated based upon cumulative book and tax differences in the Balance
Sheets in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes.
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 liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Long-Lived Assets Impairment - In accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets to be Disposed Of, LCR reviews its long-
lived assets for impairment on an exception basis whenever events or changes in
circumstances indicate a potential loss in utility. Impairment losses are
recognized in the Statements of Income.
119
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS - (Continued)
Comprehensive Income - LCR had no items of other comprehensive income during the
three years ended December 31, 2000.
Derivatives - Adoption of SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, did not have a significant impact on the Financial
Statements of LCR. The statement is effective for LCR's calendar year 2001.
There is no transition adjustment needed at December 31, 2000.
Reclassifications - Certain previously reported amounts have been reclassified
to conform to classifications adopted in 2000.
4. Related Party Transactions
LCR is party to agreements with the following related parties:
. PDVSA
. PDV Holding, Inc.
. PDVSA Oil
. PDVSA Services
. CITGO
. CITGO Partners
. Lyondell
. Lyondell Partners
. Equistar Chemicals, LP ("Equistar"), a 41% owned investment of Lyondell
LCR buys a substantial majority of its crude oil supply at deemed product-based
prices, adjusted for certain indexed items (see Note 13), from PDVSA Oil under
the terms of a long-term crude oil supply agreement ("Crude Supply Agreement").
Under the terms of a long-term product sales agreement, CITGO buys all of the
gasoline, low sulfur diesel and jet fuel produced at the Refinery at market-
based prices.
LCR is party to a number of feedstock, product sales and administrative service
agreements with Lyondell and Equistar. In addition, a tolling agreement provides
for the production of alkylate and methyl tertiary butyl ether for the
Partnership at Equistar's Channelview, Texas petrochemical complex.
Effective January 1, 1999, the Partnership entered into a lubricant facility
operating agreement and lubricant sales agreements with CITGO. The lubricant
facility operating agreement allows CITGO to operate the lubricant facility in
Birmingport, Alabama while the Partnership retains ownership. Under the terms of
the lubricant sales agreements, CITGO buys paraffinic lubricants base oil,
naphthenic lubricants, white mineral oils and specialty oils from the
Partnership.
During both 1999 and 1998, LCR paid Lyondell Partners approximately $9 million,
for interest on loans related to funding a portion of the upgrade project at the
Refinery and other capital expenditures. Also, during 1999 and 1998, LCR paid
CITGO Partners approximately $1 million and $2 million, respectively, for
interest on loans related to funding a portion of the upgrade project at the
Refinery and other capital expenditures. In accordance with the terms of LCR's
credit facility (See Note 8) no interest was paid to Lyondell Partners or CITGO
Partners on these loans during 2000.
During 2000 LCR paid PDVSA approximately $15 million for interest on the $450
million interim financing from May 5, 2000 through September 15, 2000. During
2000 LCR paid PDV Holding, Inc. approximately $1 million for interest on the
interim $70 million revolver loan from May 5, 2000 through September 15, 2000
(See Note 8).
120
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS - (Continued)
Related party transactions are summarized as follows:
For the year ended December 31,
Millions of dollars 2000 1999 1998
------------------- ------ ------ ------
LCR billed related parties for the following:
- ---------------------------------------------
Sales of products:
Equistar $ 264 $ 190 $ 131
CITGO 2,879 1,755 1,424
PDVSA Services 14 -- --
Services and cost sharing arrangements:
Lyondell 2 3 4
CITGO -- 2 --
Delivery shortfalls under Crude Supply
Agreement: PDVSA Oil -- 12 --
Related parties billed LCR for the following:
- ---------------------------------------------
Purchase of products:
Equistar 425 250 223
CITGO 52 46 31
PDVSA 1,796 764 547
Transportation charges:
CITGO 1 1 1
PDVSA 1 4 9
Services and cost sharing arrangements:
Equistar 15 13 15
Lyondell 4 4 4
CITGO 2 1 --
5. Supplemental Cash Flow Information
At December 31, 2000, 1999 and 1998, property, plant and equipment included
approximately $3 million, $7 million and $9 million, respectively, of non-cash
additions which related to accounts payable accruals.
During 2000, 1999 and 1998, LCR paid interest of approximately $41 million, $37
million and $43 million, respectively. No interest costs were capitalized in
2000, 1999 or 1998. During 1998, LCR paid approximately $1 million for state
income and franchise taxes.
During the third quarter 2000, LCR recorded certain non-cash financing
transactions. Proceeds from the $450 million one-year credit facility completed
on September 15, 2000, net of approximately $11 million of loan costs, were paid
directly to the holder of the interim financing note. Also, approximately $6
million was paid by Lyondell directly to CITGO for Lyondell's share of previous
capital funding loans made by CITGO to LCR.
In December 1999 the Partners agreed to reclassify part of the outstanding
balance of their respective loans to their respective partners' capital accounts
in relation to their ownership interests of approximately 59 percent for
Lyondell Partners and 41 percent for CITGO Partners. Approximately $47 million
and $32 million of Lyondell Partners' and CITGO Partners' loans, respectively,
were reclassified to the respective partners' capital accounts.
6. Financial Instruments
The fair value of all financial instruments included in current assets and
current liabilities, including cash and cash equivalents, accounts receivable,
accounts payable, loans payable to bank and note payable, approximated their
121
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS - (Continued)
carrying value due to their short maturity. The fair value of long-term loans
payable, to related parties, approximated their carrying value because they bear
interest at variable rates.
At December 31, 2000, LCR had issued letters of credit totaling approximately
$10 million.
The Partnership is party to take-or-pay contracts for hydrogen. At December 31,
2000, future minimum payments under these contracts with noncancelable contract
terms in excess of one year were as follows:
Millions of dollars
-------------------
2001 $ 47
2002 34
2003 31
2004 32
2005 32
Thereafter 368
----
Total minimum payments $544
====
Total LCR purchases under these agreements were approximately $78 million, $87
million and $81 million during 2000, 1999 and 1998, respectively.
7. Inventories
Inventories are stated at the lower of cost or market. Cost is determined on
the last-in, first-out ("LIFO") basis except for materials and supplies, which
are valued at average cost.
Inventories were as follows at December 31:
Millions of dollars 2000 1999
------------------- ------ ------
Crude oil $ 49 $ 14
Refined products 26 20
Materials and supplies 15 13
----- -----
Total inventories $ 90 $ 47
===== =====
During the year ended December 31, 1999, inventories were reduced, which
resulted in a liquidation of LIFO inventory layers carried at costs which
prevailed in prior years. The effect of the liquidation was to decrease cost of
sales and increase net income by approximately $1 million. There were no
significant liquidations of LIFO inventories in 2000 or 1998. The excess of
replacement cost of inventories over the carrying value was approximately $137
million and $115 million at December 31, 2000 and 1999, respectively.
8. Financing Arrangements
In May 1995, LCR entered into two credit facilities totaling $520 million with a
group of banks. The first facility, a $70 million, 364-day revolving working
capital facility, was utilized for general business purposes and for letters of
credit. At December 31, 1999, no amounts were outstanding under this credit
facility. Interest for this credit facility was based on either prime,
eurodollar rates or based on a competitive auction feature wherein the interest
rate can be established by competitive bids submitted by the participating
banks, all at LCR's option. The second facility was a $450 million, five-year
term credit facility that was used to partially fund an upgrade project at the
Refinery which was completed in February 1997. At December 31, 1999, $450
million was outstanding under this credit facility with a weighted average
interest rate of 5.8 percent. Interest for this facility was based on prime or
eurodollar rates at the Partnership's option. Both facilities expired in May of
2000 and accordingly on the December 31, 1999 balance sheet the $450 million was
classified as a current liability.
122
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS - (Continued)
In August 1999 both facilities were amended to change the covenant calculations
of certain financial ratios. In consideration for these changes the Partners
agreed that LCR would defer payment of interest accrued on loans payable to the
Partners from July 1, 1999 through the termination date of the two facilities.
On May 5, 2000 LCR entered into a credit facility with PDVSA for interim
financing to repay the $450 million outstanding under its May 1995 credit
facility that expired in May 2000.
On September 15, 2000 LCR entered into two one-year credit facilities with a
syndication of banks, consisting of a $450 million term loan to replace the $450
million interim financing and a $70 million revolving credit facility to be used
for working capital and general business purposes. At December 31, 2000 $450
million was outstanding under the $450 million term loan with a weighted average
interest rate of 8.2 percent. At December 31, 2000 $20 million was outstanding
under the $70 million revolving credit facility with a weighted average interest
rate of 8.6 percent.
Both facilities contain covenants that require LCR to maintain a minimum net
worth and maintain certain financial ratios defined in the agreements. The
facilities also contain other customary covenants which limit the Partnership's
ability to modify certain significant contracts, incur additional debt or liens,
dispose of assets, make restricted payments as defined in the agreements or
merge or consolidate with other entities. Additionally, the covenants continue
to defer the payment of interest accrued on loans payable to the Partners
through the termination date of the two facilities. LCR was in compliance with
all such covenants at December 31, 2000.
In October 1995 and January 1997 LCR began borrowing funds from Lyondell
Partners and CITGO Partners, respectively, in connection with the upgrade
project at the Refinery and other capital expenditures. These loans are due on
July 1, 2003 and are subordinate to the two bank credit facilities. At December
31, 2000, Lyondell Partners and CITGO Partners loans totaled approximately $229
million and $35 million, respectively, and both loans had weighted average
interest rates of 6.7 percent which is based on eurodollar rates. At December
31, 1999, Lyondell Partners and CITGO Partners loans totaled approximately $219
million and $28 million, respectively, and both loans had weighted average
interest rates of 5.5 percent which is based on eurodollar rates. Interest to
both Partners was payable at the end of each calendar quarter through June 30,
1999, but is now deferred in accordance with the $450 million credit facility.
During 2000, 1999 and 1998, LCR incurred approximately $63 million, $45 million
and $44 million of interest cost, respectively. Included in the interest cost
for 2000 is approximately $3 million of amortization of deferred loan cost fees
incurred to obtain the $450 million one-year term financing in September 2000.
9. Lease Commitments
LCR leases crude oil storage facilities, computers, office equipment and other
items. At December 31, 2000, future minimum lease payments for operating leases
with noncancelable lease terms in excess of one year were as follows:
Millions of dollars
-------------------
2001 $13
2002 16
2003 1
2004 1
2005 1
Thereafter 5
---
Total minimum lease payments $37
===
Operating lease net rental expenses for the years ended December 31, 2000, 1999
and 1998 were approximately $31 million, $27 million and $26 million,
respectively.
123
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS - (Continued)
10. Employee Benefit Plans
Employee Savings - LCR sponsors qualified defined contribution retirement and
savings plans covering substantially all eligible salaried and hourly employees.
Participants make voluntary contributions to the plans and the Partnership makes
contributions, including matching employee contributions, based on plan
provisions. LCR expensed approximately $5 million related to its contributions
to these plans in each of the three years ended December 31, 2000.
Pension Benefits - LCR sponsors one qualified noncontributory defined benefit
pension plan covering eligible hourly employees and one covering eligible
salaried employees. The Partnership also sponsors one nonqualified defined
benefit plan for certain eligible employees. The qualified plans' assets include
primarily stocks and bonds. The nonqualified plan is not funded.
LCR's policy is to fund the qualified pension plans in accordance with
applicable laws and regulations and not to exceed the tax deductible limits. The
nonqualified plans are funded as necessary to pay retiree benefits. The plan
benefits for each of the qualified pension plans are primarily based on an
employee's years of plan service and compensation as defined by each plan.
Postretirement Benefits Other Than Pensions - In addition to pension benefits,
the Partnership also provides certain health care and life insurance benefits
for eligible salaried and hourly employees at retirement. These benefits are
subject to deductibles, co-payment provisions and other limitations and are
primarily funded on a pay as you go basis. The Partnership reserves the right to
change or to terminate the benefits at any time.
The following table sets forth the changes in benefit obligations and plan
assets for the pension and postretirement plans for the years ended December 31,
2000 and 1999 and the funded status of such plans reconciled with amounts
reported in the Partnership's Balance Sheets.
Other Postretirement
Pension Benefits Benefits
---------------------- ---------------------
2000 1999 2000 1999
---------------------- ---------------------
Millions of dollars
-------------------
Change in benefit obligation:
Benefit obligation, January 1 $ 66 $ 88 $ 31 $ 46
Service cost 4 5 1 1
Interest cost 5 6 2 2
Actuarial loss (gain) 8 (14) (1) (18)
Special termination benefits 1 3 - - 1
Benefits paid (14) (22) (1) (1)
---------------------- ---------------------
Benefit obligation, December 31 70 66 32 31
---------------------- ---------------------
Change in plan assets:
Fair value of plan assets, January 1 39 43 -- --
Actual return on plan assets (2) 2 -- --
Partnership contributions 19 16 1 1
Benefits paid (14) (22) (1) (1)
---------------------- ---------------------
Fair value of plan assets, December 31 42 39 -- --
---------------------- ---------------------
Funded status (28) (27) (32) (31)
Unrecognized actuarial loss 13 2 14 - -
Unrecognized prior service cost 2 2 (25) (28)
Unrecognized transition asset -- -- -- 16
---------------------- ---------------------
Accrued benefit cost $ (13) $ (23) $ (43) $ (43)
====================== =====================
Accumulated benefit obligation $ 49 $ 48 N/A N/A
======================
124
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS - (Continued)
Net periodic pension and other postretirement benefit costs include the
following components:
Other
Pension Benefits Postretirement Benefits
2000 1999 1998 2000 1999 1998
----------------------------------------------------------
Millions of dollars
-------------------
Components of net periodic benefit cost:
Service cost $ 4 $ 5 $ 5 $ 1 $ 1 $ 2
Interest cost 6 6 5 2 2 2
Expected return on plan assets (3) (4) (3) -- -- --
Amortization of:
Prior service costs -- -- -- (3) (3) --
Actuarial (gain) loss -- 1 -- 1 1 --
Net periodic benefit cost before FAS 88 cost 7 8 7 1 1 4
Effect of curtailments, settlements and
special termination benefits 2 5 -- -- 1 2
----------------------------------------------------------
Net periodic benefit cost $ 9 $ 13 $ 7 $ 1 $ 2 $ 6
==========================================================
Special termination benefit charge $ 1 $ 3 $ 7 $ -- $ 1 $ --
==========================================================
The assumptions used as of December 31, 2000, 1999 and 1998 in determining net
pension cost and net pension liability were as follows:
Other
Pension Benefits Postretirement Benefits
-------------------------- ---------------------------
2000 1999 1998 2000 1999 1998
-------------------------- ---------------------------
Weighted-average assumptions as of
December 31:
Discount rate 7.50% 8.00% 6.75% 7.50% 8.00% 6.75%
Expected return on plan assets 9.50% 9.50% 9.50% N/A N/A N/A
Rate of compensation increase 4.50% 4.75% 4.75% 4.50% 4.75% 4.75%
For measurement purposes, the assumed annual rate of increase in the per capita
costs of health care benefits as of December 31, 2000 was 7 percent for 2001 and
5 percent thereafter. A one-percentage-point increase or decrease in assumed
health care cost trend rates would have a less than $1 million change on both
the postretirement benefit obligation and the total of the service and interest
cost components.
The benefit obligation and fair value of assets for pension plans with benefit
obligation in excess of plan assets were $70 million and $42 million,
respectively as of December 31, 2000 and $66 million and $39 million,
respectively, as of December 31, 1999. The accumulated benefit obligation and
the fair value of plan assets for pension plans with accumulated benefit
obligations in excess of plan assets were $35 million and $28 million,
respectively, as of December 31, 2000 and $38 million and $27 million,
respectively, as of December 31, 1999.
During 1998, LCR and PACE ratified a new, three-year labor contract. That
contract called for a Reduction In Force ("RIF") program, which resulted in
certain personnel reductions. LCR expensed approximately $6 million and $10
million in 1999 and 1998, respectively, relating to the two phases of the RIF
(RIF I and RIF II) which are reflected as "Unusual charges" on the Statements of
Income. In RIF I, approximately 80 employees in 1998 made an irrevocable
voluntary election to terminate employment and retire. In RIF II, 44 employees
made an irrevocable voluntary election to terminate employment and retire. The
election period for RIF II was open from November 15, 1999 to January 31, 2000.
At December 31, 1999, 37 employees had made the election. In January 2000 seven
other
125
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS - (Continued)
employees made an irrevocable voluntary election to terminate employment and
retire, which resulted in an additional $2 million charge in 2000 that is
reflected in operating expenses.
11. Income Taxes
LCR is treated as a partnership for federal income tax purposes; consequently,
no provision for federal income taxes is required. LCR is however, subject to
state income taxes, and therefore a provision for or benefit from state income
taxes has been recorded. Pretax income was taxed by domestic jurisdictions only.
There was no provision for or benefit from state income taxes reflected for
2000. The benefit from state income tax was approximately $1 million in 1999.
The provision for state income tax was approximately $1 million in 1998. In
addition, there was no deferred provision for state income tax in 2000, 1999 and
1998.
12. Production Units
On May 3, 1999 LCR shut down a fluid catalytic cracking unit as a result of a
malfunction that damaged the main air blower. Repairs were completed and the
unit was placed back in service in late May 1999. On May 7, 1999 LCR shut down
one of two coker units following a fire. Repairs were completed and this unit
was placed back in service in early July 1999. As a result of these two
incidents, crude oil processing rates were reduced. Both of these incidents were
covered by business interruption insurance, subject to deductibles of $10
million per incident. LCR recorded approximately $12 million of business
interruption insurance recoveries related to these incidents in the year ended
December 31, 1999. Additionally, approximately $5 million of business
interruption insurance recoveries were recorded in 2000. Both the $12 million
from 1999 and $5 million from 2000 have been collected at December 31, 2000.
13. Commitments and Contingencies
LCR is subject to various lawsuits and proceedings.
With respect to liabilities associated with the Refinery, Lyondell generally has
retained liability for events that occurred prior to July 1, 1993 and certain
ongoing environmental projects at the Refinery under the Contribution Agreement,
retained liability section. LCR generally is responsible for liabilities
associated with events occurring after June 30, 1993 and ongoing environmental
compliance inherent to the operation of the Refinery.
LCR's policy is to be in compliance with all applicable environmental laws. LCR
is subject to extensive environmental laws and regulations concerning emissions
to the air, discharges to surface and subsurface waters and the generation,
handling, storage, transportation, treatment and disposal of waste materials.
Some of these laws and regulations are subject to varying and conflicting
interpretations. In addition, the Partnership cannot accurately predict future
developments, such as increasingly strict requirements of environmental laws,
inspection and enforcement policies and compliance costs therefrom, which might
affect the handling, manufacture, use, emission or disposal of products, other
materials or hazardous and non-hazardous waste.
LCR estimates that it has a liability of approximately $2 million at December
31, 2000 related to future Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA"), Resource Conservation and Recovery Act
("RCRA"), and the Texas Natural Resource Conservation Commission ("TNRCC")
assessment and remediation costs. Lyondell has a contractual obligation to
reimburse LCR for a portion of this liability, which is currently estimated to
be approximately $1 million. Accordingly, LCR has recorded a current liability
of approximately $1 million for the portion of this liability that will not be
reimbursed by Lyondell. In the opinion of management, there is currently no
material range of probable loss in excess of the amount recorded. However, it
is possible that new information about the sites associated with this liability,
new technology or future developments such as involvement in other CERCLA, RCRA,
TNRCC or other comparable state law investigations, could require LCR to
reassess its potential exposure related to environmental matters.
126
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS - (Continued)
The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the Environmental Protection Agency ("EPA"). As a
result, the TNRCC has submitted a plan to the EPA to reach and demonstrate
compliance with the ozone standard by the year 2007. These emission reduction
controls must be installed during the next several years, well in advance of the
year 2007 deadline. This could result in increased capital investment, which
could, in the aggregate, be between $130 million and $150 million in addition to
higher operating costs for LCR. LCR and Lyondell, have been actively involved
with a number of organizations to help solve the ozone problem in the most cost-
effective manner. In January 2001, LCR, individually, and Lyondell, individually
and as a member of an organization composed of industry participants, filed a
lawsuit against the TNRCC to encourage adoption of their alternative plan to
achieve the same air quality improvement with less economic impact on the
region.
Under the Crude Supply Agreement, which will expire on December 31, 2017, LCR is
required to purchase, and PDVSA Oil is required to sell 230,000 barrels per day
of extra heavy Venezuelan crude oil. This constitutes approximately 88% of the
Refinery's refining capacity of 260,000 barrels per day of crude oil. Depending
on market conditions, a breach or termination of the Crude Supply Agreement
could adversely affect LCR. In the event of certain force majeure conditions,
including governmental, OPEC or other actions restricting or otherwise limiting
PDVSA Oil's ability to perform its obligations, LCR may seek alternative crude
supply arrangements. Any such alternative arrangements may not be as beneficial
as the Crude Supply Agreement. Furthermore, the breach or termination of the
Crude Supply Agreement would require LCR to purchase all or a portion of its
crude oil feedstocks in the merchant market and would subject LCR to significant
volatility and price fluctuations and could adversely affect the Partnership.
In late April 1998, LCR received notification from PDVSA Oil that it would
reduce deliveries of crude oil on the grounds of announced OPEC production cuts.
LCR began receiving reduced deliveries of crude oil from PDVSA Oil in August
1998, amounting to 195,000 barrels per day in that month. LCR was advised by
PDVSA Oil in May 1999 of a further reduction to 184,000 barrels per day,
effective May 1999. On several occasions since then, PDVSA Oil has further
reduced certain crude oil deliveries, although it has made payments in partial
compensation for such reductions. Subsequently, PDVSA Oil unilaterally increased
deliveries of crude oil to LCR to 195,000 barrels per day effective April 2000,
to 200,000 barrels per day effective July 2000 and to 230,000 barrels per day
effective October 2000. LCR has consistently contested the validity of PDVSA
Oil's and PDVSA's reduction in deliveries under the Crude Supply Agreement.
PDVSA has announced that it intends to renegotiate the crude supply agreements
it has with all third parties, including LCR. However, PDVSA has confirmed they
expect to honor their commitments if a mutually acceptable restructuring of the
Crude Supply Agreement is not achieved.
LCR has various purchase commitments for materials, supplies and services
incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market.
In the opinion of management, any liability arising from the matters discussed
in this Note will not have a material adverse effect on the financial position
of LCR. 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 LCR's
results of operations for that period.
14. Subsequent Event
By letter dated February 9, 2001 PDVSA Oil informed LCR that the Venezuelan
government, through the Ministry of Energy and Mines, has instructed that
production of certain grades of crude oil be reduced effective February 1, 2001.
The letter states that PDVSA Oil declares itself in a force majeure situation,
but does not announce any reduction in crude oil deliveries to LCR. Although
some reduction in crude oil delivery may be forthcoming, it is unclear as to the
level of reduction, if any, which may be anticipated. LCR has consistently
contested the validity of PDVSA Oil's and PDVSA's reductions in deliveries under
the Crude Supply Agreement and, on March 12, 2001, Lyondell, on behalf of LCR,
sent a letter to PDVSA Oil and PDVSA disputing the existence and validity of the
purported force majeure situation declared by the February 9 letter.
127
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Information regarding executive officers of the Company is included in Part I.
For the other information called for by Items 10, 11, 12 and 13, reference is
made to the Company's definitive proxy statement for its Annual Meeting of
Stockholders, to be held on May 3, 2000, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 2000, and which is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1 and 2--Consolidated Financial Statements: these documents are listed in
the Index to Consolidated Financial Statements.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant(14)
3.1(a) Certificate of Ownership and Merger dated July 31, 1998(23)
3.2 Amended and Restated By-Laws of the Registrant(15)
4.1 Indenture dated as of March 10, 1992, as supplemented by a
First Supplemental Indenture dated as of March 10, 1992, between the
Registrant and Continental Bank, National Association, Trustee(4)
4.1(a) Second Supplemental Indenture dated as of December 1, 1997 among the
Registrant, Equistar and First Trust National Association(17)
4.1(b) Third Supplemental Indenture dated as of November 3, 2000 among the
Registrant, Equistar and U.S. Bank Trust, National Association
4.1(c) Fourth Supplemental Indenture dated as of November 17, 2000 among the
Registrant, Equistar and U.S. Bank Trust, National Association
4.2 Indenture dated as of January 29, 1996, as supplemented by a First
Supplemental Indenture dated as of February 15, 1996, between the
Registrant and Texas Commerce Bank, as Trustee(10)
4.2(a) Second Supplemental Indenture dated as of December 1, 1997 among the
Registrant, Equistar and Texas Commerce Bank National Association(17)
4.2(b) Third Supplemental Indenture dated as of November 3, 2000 among the
Registrant, Equistar and The Chase Manhattan Bank
4.2(c) Fourth Supplemental Indenture dated as of November 17, 2000 among the
Registrant, Equistar and The Chase Manhattan Bank
4.3 Specimen common stock certificate(1)
4.4 $70,000,000 revolving Credit Agreement dated as of September 13, 2000
among LCR, the Lenders from time to time parties hereto, and
Credit Suisse First Boston, as Issuer and Agent(25)
4.5 $450,000,000 Credit Agreement dated as of September 13, 2000 among
LCR, the lenders from time to time parties hereto, and Credit Suisse
First Boston, as Agent(25)
4.6 Rights Agreement dated as of December 8, 1995 between the Registrant
and the Bank of New
128
York, as Rights Agent(9)
4.7 Credit Agreement dated as of November 25, 1997 among Equistar as
Borrower, Millennium America Inc., as Guarantor, and the lenders
party thereto(19)
4.7(a) Amendment to the Credit Agreement dated as of November 25, 1997 among
Equistar as Borrower, Millennium America Inc., as Guarantor, and the
lenders party thereto(19)
4.8 $7,000,000,000 Credit Agreement dated as of July 23, 1998 as amended
by Amendment No. 1 thereto, as amended and restated as of April 16,
1999(20)
4.8(a) Amendment No. 3 dated as of February 3, 2000 to the $7,000,000,000
Credit Agreement dated as of July 23, 1998(23)
4.9 Indenture dated as of January 15, 1999, as supplemented by a
First Supplemental Indenture between Equistar and The Bank of
New York(19)
4.9(a) Second Supplemental Indenture dated October 4, 1999 among Equistar,
Equistar Funding Corporation and The Bank of New York(23)
4.10 Indenture dated as of June 15, 1988 between ARCO Chemical Company and
Bank of New York, as Trustee(19)
4.10(a) First Supplemental Indenture dated as of January 5, 2000 between the
Registrant and Bank of New York, as Trustee(23)
4.10(b) Form of 9 3/8% Debenture Due 2005 issuable under the Indenture
referred to in Exhibit 4.10(19)
4.10(c) Form of 9.80% Debenture Due 2020 issuable under the Indenture
referred to in Exhibit 4.10(19)
4.10(d) Form of 10.25% Debenture Due 2010 issuable under the Indenture
referred to in Exhibit 4.10(19)
4.11 Indenture among the Registrant, the Subsidiary Guarantors party
thereto and The Bank of New York, as Trustee, dated as of May 17,
1999, for 9 5/8% Senior Secured Notes, Series A, due 2007(21)
4.12 Indenture dated as of May 17, 1999 among the Registrant, the
Subsidiary Guarantors party thereto and The Bank of New York, as
Trustee, for 9 7/8% Senior Secured Notes, Series B, due 2007(21)
4.13 Indenture dated as of May 17, 1999 among the Registrant, the
Subsidiary Guarantors party thereto and The Bank of New York, as
Trustee, for 10 7/8% Senior Subordinated Notes due 2009(21)
The Company is a party to several debt instruments under which the total
amount of securities authorized does not exceed 10% of the total assets of the
Company and its subsidiaries on a consolidated basis. Pursuant to paragraph
4(iii)(A) of Item 601(b) of Registration S-K, the Company agrees to furnish a
copy of such instruments to the Commission upon request.
EXECUTIVE COMPENSATION:
10.1 Amended and Restated Executive Supplementary Savings Plan(14)
10.2 Amended and Restated Executive Long-Term Incentive Plan(3)
10.3 Amended and Restated Supplementary Executive Retirement Plan(17)
10.3(a) Amendment to the Amended and Restated Supplementary Executive
Retirement Plan(17)
10.4 Executive Medical Plan(14)
10.4(a) Amendment No. 1 to the Executive Medical Plan(14)
10.4(b) Amendment No. 2 to the Executive Medical Plan(14)
10.5 Amended and Restated Executive Deferral Plan(17)
10.6 Executive Long-Term Disability Plan(4)
10.6(a) Amendment No. 1 to the Executive Long-Term Disability Plan(14)
10.7 Executive Life Insurance Plan(4)
10.8 Amended and Restated Supplemental Executive Benefit Plans Trust
Agreement(17)
10.8(a) Amendment to the Amended and Restated Supplemental Executive Benefit
Plans Trust Agreement(17)
10.9 Restricted Stock Plan(6)
10.9(a) Amendment No. 1 to the Restricted Stock Plan(8)
10.9(b) Amendment No. 2 to the Restricted Stock Plan(17)
10.10 Form of Registrant's Indemnity Agreement with Officers and
Directors(23)
10.11 Amended and Restated Elective Deferral Plan for Non-Employee
Directors as of October 16, 1998, as amended by Amendment No. 1 there
to dated January 3, 2000, effective as of December
129
2, 1999(23)
10.12 Amended and Restated Retirement Plan for Non-Employee Directors(17)
10.12(a) Amendment to the Amended and Restated Retirement Plan for
Non-Employee Directors(17)
10.13 Restricted Stock Plan for Non-Employee Directors(12)
10.13(a) Amendment to the Restricted Stock Plan for Non-Employee Directors(17)
10.14 Non-Employee Directors Benefit Plans Trust Agreement(17)
10.14(a) Amendment to the Non-Employee Directors Benefit Plans Trust
Agreement(17)
10.15 1999 Long-Term Incentive Plan(19)
10.16 Lyondell Chemical Company Executive Severance Pay Plan, as amended
and restated effective October 5, 2000.
10.17 ARCO Chemical Company Change of Control Plan(19)
10.18 Description of 1998 Executive Incentive Plan(19)
OTHER MATERIAL CONTRACTS:
10.19 Conveyance (conformed without exhibits) between the Registrant and
ARCO(1)
10.20 Asset Purchase Agreement (conformed without exhibits) between the
Registrant and Rexene Products Company(2)
10.21 Limited Partnership Agreement of LCR, dated December 31, 1998(19)
10.22 Contribution Agreement between the Registrant and LYONDELL-CITGO
Refining Company Ltd.(5)
10.23 Crude Oil Supply Agreement between LYONDELL-CITGO Refining Company
Ltd. and Lagoven, S.A.(5)
10.24 Asset Purchase Agreement dated April 13, 1995 between the Registrant
and Occidental Chemical Company(7)
10.25 Amended and Restated Limited Partnership Agreement of Equistar, dated
May 15, 1998(18)
10.25(a) First Amendment to Amended and Restated Limited Partnership Agreement
of Equistar, dated as of June 30, 1998(19)
10.25(b) Second Amendment to Amended and Restated Limited Partnership
Agreement of Equistar, dated as of February 16, 1999(23)
10.26 Asset Contribution Agreement among the Registrant, Lyondell
Petrochemical L.P. Inc. and Equistar (16)
10.26(a) First Amendment to Asset Contribution Agreement, dated as of May 15,
1998, among the Registrant, Lyondell Petrochemical L.P. Inc. and
Equistar(19)
10.27 Asset Contribution Agreement among Millennium Petrochemicals Inc.,
Millennium LP and Equistar(16)
10.27(a) First Amendment to Asset Contribution Agreement, dated as of May 15,
1998, among Millennium Petrochemicals Inc., Millennium LP and
Equistar(19)
10.28 Amended and Restated Parent Agreement dated as of May 15, 1998 among
Occidental Chemical, Oxy CH Corporation, Occidental, the Registrant,
Millennium and Equistar(18)
10.28(a) First Amendment to the Amended and Restated Parent Agreement, dated
as of June 30, 1998(19)
10.28(b) Assignment and Assumption Agreement, executed as of June 19, 1998,
with Respect to the Amended and Restated Parent Agreement(19)
10.29 Agreement and Plan of Merger and Asset Contribution dated May 15,
1998 among Occidental Petrochem Partner 1, Inc., Occidental
Petrochem Partner 2, Inc., Oxy Petrochemicals, PDG Chemical and
Equistar(18)
10.30 Amended and Restated Master Transaction Agreement dated as of
March 31, 2000 among the Registrant, Bayer AG and Bayer
Corporation(24)
10.30(a) First Amendment to Amended and Restated Master Transaction Agreement,
dated as of December 18, 2000
10.31 Amended and Restated Master Asset and Stock Purchase Agreement dated
as of March 31, 2000 among the Registrant, the entities set forth on
Schedule 1 thereto, Bayer AG and Bayer Corporation(24)
10.32 Amended and Restated Limited Partnership Agreement of PO JV, LP dated
as of March 31, 2000(24)
10.33 Limited Partnership Interest Purchase and Sale Agreement dated as of
March 31, 2000 among Lyondell SAT, INC., Lyondell POTechLP, Inc.,
BAYPO I LLC, BAYPO II LLC and BIPPO
130
Corporation(24)
10.34 General Partnership Agreement dated December 18, 2000 between Bayer
Polyurethanes B.V. and Lyondell PO-11 C.V.
10.35 Parent Agreement dated December 18, 2000 between the Registrant and
Bayer AG
12 Statement Setting Forth Detail for Computation of Ratio of Earnings
to Fixed Charges
21 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Deloitte & Touche LLP
24 Powers of Attorney
_________
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(No. 33-25407) and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for
the year ended December 31, 1989 and incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for
the year ended December 31, 1990 and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for
the year ended December 31, 1992 and incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of
July 1, 1993 and incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of
May 1, 1995 and incorporated herein by reference.
(8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995 and incorporated herein by reference.
(9) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated
December 8, 1995 and incorporated herein by reference.
(10) Filed as an exhibit to Registrant's Registration Statement on Form S-3
dated as of January 31, 1996 and incorporated herein by reference.
(11) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 1996 and incorporated herein by reference.
(12) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1996 and incorporated herein by reference.
(13) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1996 and incorporated herein by reference.
(14) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
(15) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1997 and incorporated herein by reference.
(16) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of
October 17, 1997 and incorporated herein by reference.
(17) 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.
(18) Filed as an exhibit to the Registrant's Interim Report on Form 8-K dated
as of May 15, 1998 and incorporated herein by reference.
(19) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference.
(20) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
April 19, 1999 and incorporated herein by reference.
(21) Filed as an exhibit to Registrant's Registration Statement on Form S-4
(No. 333-81831) incorporated herein by reference.
(22) Filed as an exhibit to Registrant's Current Report on Form 8-K dated
November 16, 1999 and incorporated herein by reference.
131
(23) 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.
(24) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
as of April 14, 2000 and incorporated herein by reference.
(25) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 2000 and incorporated herein by reference.
(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 54.
(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.
Copies of exhibits will be furnished upon prepayment of 25 cents per page.
Requests should be addressed to the Secretary.
132
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.
LYONDELL CHEMICAL COMPANY
Date: March 16, 2001 By:/s/ Dan F. Smith
- -------------------- --------------------------
Dan F. Smith
President 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 and on the dates indicated.
Signature Title Date
------------------------- ------------------------ --------------
/s/ William t. Butler* Chairman of the Board March 16, 2001
----------------------------------
(William T. Butler)
/s/ Dan F. Smith President, Chief Executive March 16, 2001
----------------------------------
(Dan F. Smith) Officer and Director
/s/ Carol A. Anderson* Director March 16, 2001
----------------------------------
(Carol A. Anderson)
/s/ Travis Engen* Director March 16, 2001
----------------------------------
(Travis Engen)
/s/ Stephen F. Hinchliffe, Jr.* Director March 16, 2001
----------------------------------
(Stephen F. Hinchliffe, Jr.)
/s/ David J. Lesar* Director March 16, 2001
----------------------------------
(David J. Lesar)
/s/ Dudley C. Mecum II* Director March 16, 2001
----------------------------------
(Dudley C. Mecum II)16
/s/ William R. Spivey* Director March 16, 2001
----------------------------------
(William R. Spivey)
/s/ Paul R. Staley* Director March 16, 2001
----------------------------------
(Paul R. Staley)
/s/ Robert T. Blakely Executive Vice President March 16, 2001
----------------------------------
(Robert T. Blakely) and Chief Financial Officer
/s/ Kelvin R. Collard Vice President and March 16, 2001
----------------------------------
(Kelvin R. Collard, Principal Accounting Officer) Controller
*By:/s/ Kelvin R. Collard March 16, 2001
----------------------------------
(Kelvin R. Collard, as Attorney-in-fact)
133