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1998
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(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, 1998
[_] 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
Title of Each Class on which registered
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Common Stock ($1.00 par value) 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. [_]
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There were 77,021,797 shares of the registrant's common stock outstanding on
December 31, 1998. The aggregate market value of the voting stock held by non-
affiliates of the registrant on March 1, 1999 based on the closing price on
the New York Stock Exchange composite tape on that date, was $1,023,630,895.
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, 1998
(incorporated by reference under Part III).
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TABLE OF CONTENTS
PAGE
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PART I..................................................................... 1
Items 1 and 2. Business and Properties.................................... 1
THE COMPANY'S BUSINESS.................................................... 1
Development of Business.................................................. 1
Summary Description of Business Segments................................. 3
INTERMEDIATE CHEMICALS AND DERIVATIVES.................................... 5
Overview................................................................. 5
Raw Materials............................................................ 7
Marketing and Sales...................................................... 7
Joint Ventures and Other Agreements...................................... 8
Competition and Industry Conditions...................................... 8
Properties............................................................... 9
Research and Technology; Patents and Trademarks.......................... 10
Employee Relations....................................................... 10
EQUISTAR CHEMICALS, LP.................................................... 11
Management of Equistar................................................... 11
Agreements between Lyondell and Equistar................................. 11
EQUISTAR PETROCHEMICALS................................................... 13
Overview................................................................. 13
Raw Materials............................................................ 15
Marketing and Sales...................................................... 15
Competition and Industry Conditions...................................... 16
EQUISTAR POLYMERS......................................................... 17
Overview................................................................. 17
Raw Materials............................................................ 19
Marketing and Sales...................................................... 19
Competition and Industry Conditions...................................... 19
EQUISTAR PROPERTIES AND EMPLOYEE RELATIONS................................ 20
EQUISTAR RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS.................. 21
LYONDELL-CITGO REFINING LP................................................ 22
Overview................................................................. 22
Management of LCR........................................................ 23
Agreements between Lyondell or CITGO and LCR............................. 23
Agreements between Equistar and LCR...................................... 24
Raw Materials............................................................ 24
Marketing and Sales...................................................... 25
Competition and Industry Conditions...................................... 25
Properties............................................................... 26
Employee Relations....................................................... 26
LYONDELL METHANOL COMPANY, L.P............................................ 26
Overview................................................................. 26
Management of Lyondell Methanol.......................................... 26
Agreements between Equistar and Lyondell Methanol........................ 27
Raw Materials............................................................ 27
Marketing and Sales...................................................... 27
Competition and Industry Conditions...................................... 27
Properties............................................................... 27
Employee Relations....................................................... 27
PROPERTIES AND EMPLOYEE RELATIONS......................................... 27
i
Page
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INTEGRATION OF RECENTLY ACQUIRED AND COMBINED OPERATIONS................. 28
SHARED CONTROL OF JOINT VENTURES......................................... 28
OPERATING HAZARDS........................................................ 28
ENVIRONMENTAL MATTERS.................................................... 29
Item 3. Legal Proceedings................................................ 30
Litigation Matters...................................................... 30
Environmental Matters................................................... 30
EXECUTIVE OFFICERS OF THE REGISTRANT..................................... 32
Item 4. Submission of Matters to a Vote of Security Holders.............. 34
PART II................................................................... 35
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................. 35
Item 6. Selected Financial Data.......................................... 36
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 36
Item 7a. Disclosure of Market Risk....................................... 51
Item 8. Financial Statements and Supplementary Data...................... 52
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 122
PART III.................................................................. 122
Item 10. Directors and Executive Officers of the Registrant.............. 122
Item 11. Executive Compensation.......................................... 122
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 122
Item 13. Certain Relationships and Related Transactions.................. 122
PART IV................................................................... 123
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K....................................................................... 123
Consolidated Financial Statements and Financial Statement Schedules...... 126
Reports on Form 8-K...................................................... 126
ii
PART I
Items 1 and 2. Business and Properties
THE COMPANY'S BUSINESS
Lyondell Chemical Company ("Lyondell" or the "Company"), formerly Lyondell
Petrochemical Company, is a global chemical company with leading market
positions in all of its major products and low cost operations. Lyondell is
vertically integrated into its key raw materials through its equity ownership
in Equistar Chemicals, LP, LYONDELL-CITGO Refining LP and Lyondell Methanol
Company, L.P.
The operations acquired when the Company purchased ARCO Chemical Company
("ARCO Chemical") in July 1998 comprise the Company's intermediate chemicals
and derivatives business. Lyondell manufactures and markets a variety of
intermediate and performance chemicals, including propylene oxide ("PO"),
polyether polyols, 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").
The Company owns 41 percent of Equistar Chemicals, LP, a Delaware limited
partnership ("Equistar"), which operates petrochemicals and polymers
businesses. Equistar's petrochemicals business manufactures and markets
olefins, oxygenated chemicals, aromatics and specialty chemicals. Equistar's
olefins are ethylene, propylene and butadiene and its oxygenated chemicals
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
resins, concentrates and compounds, and polymeric powders.
The Company also owns 58.75 percent 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 percent of Lyondell Methanol Company, L.P.,
a Texas limited partnership ("Lyondell Methanol"), which produces methanol.
Development of Business
From its formation in 1985 through January 1989, Lyondell operated first as
a division and later as a wholly owned subsidiary of Atlantic Richfield
Company ("ARCO"). In January 1989, ARCO completed an initial public offering
of approximately 50.1 percent of Lyondell's Common Stock. In September 1997,
ARCO divested substantially all of its remaining holdings of the Company's
Common Stock pursuant to the terms of notes issued by ARCO in August 1994,
which were satisfied at maturity by the delivery of shares of Lyondell Common
Stock held by ARCO.
Lyondell has been a leader in the ongoing restructuring of the chemical
industry, taking a series of steps to reposition its business portfolio over
the past several years.
In July 1993, pursuant to agreements between the Company and CITGO (and its
affiliates), the Company contributed its refining business, including its
Houston, Texas refinery (the "Refinery"), its lube oil blending and packaging
plant in Birmingport, Alabama and refining working capital to LCR. The Company
retained an approximately 90 percent interest in LCR, while CITGO held the
remaining approximately 10 percent interest.
1
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 percent.
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 Lyondell Methanol 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 percent interest in the methanol plant. Lyondell retained
a 75 percent interest and serves as managing partner. Since December 1997,
Equistar has served as the operator of Lyondell Methanol.
In December 1997, following approval by the stockholders of each company,
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
percent interest in Equistar. Equistar also assumed $745 million of Lyondell's
debt. Millennium contributed substantially all of the assets comprising its
olefins, ethyl alcohol, polyethylene, polypropylene and performance polymers
businesses, which had been held in Millennium Petrochemicals Inc. ("Millennium
Petrochemicals"), a wholly owned subsidiary of Millennium. In exchange,
Millennium received a 43 percent 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.
On May 15, 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 percent 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 transaction,
Lyondell owns 41 percent of Equistar, and Millenium and Occidental each own
29.5 percent.
On July 28, 1998, Lyondell completed the acquisition (the "Acquisition") of
all the outstanding shares of ARCO Chemical, the world's largest producer of
PO and a leading worldwide producer of polyether polyols, PG, PGE, TDI, SM,
MTBE and BDO. The Acquisition was financed through a bank credit agreement
providing for aggregate borrowings of up to $7 billion (the "Credit
Facility"). ARCO Chemical was renamed Lyondell Chemical Worldwide, Inc.
subsequent to the Acquisition. The acquired business is referred to from time
to time hereafter as "ARCO Chemical" for actions or events prior to the
Acquisition and as the "Acquired Business" for actions or events from and
after the Acquisition. Actions or events relating to the Acquired Business may
also be covered by the more general terms Lyondell or the Company.
The Company's principal executive offices are located at 1221 McKinney
Street, Houston, Texas 77010 (Telephone: (713) 652-7200).
2
Summary Description of Business Segments
Through the year ended December 31, 1996, the Company reported its results
of operations in two segments, petrochemicals and refining. In 1997, the
Company reported the results of its polymers operations as a separate segment.
Following the Acquisition in July 1998, the Company added intermediate
chemicals and derivatives as a reportable segment. The operations of the
Acquired Business form the Company's intermediate chemicals and derivatives
segment. The Company's petrochemicals and polymers segments are operated
through Equistar. The Company's refining segment is conducted through LCR. The
methanol business conducted through Lyondell Methanol is not a reportable
segment for financial disclosure purposes.
3
The following chart shows the organization of Lyondell, as well as 1998 sales
revenues for Lyondell and each of its joint ventures, of which Lyondell owns
the specified percentage. Sales revenue for Lyondell and its subsidiaries
represent the pro forma sales revenue of the Acquired Business for 1998 (as if
the acquisition had occurred on January 1, 1998).
[Chart Appears Here showing: 1998 consolidated pro forma sales revenue
(excluding revenues of Equistar, LCR and Lyondell Methanol) of $3.6 billion
for Lyondell and Subsidiaries and the primary products of Lyondell's
Intermediate Chemicals and Derivatives Business; Lyondell's equity investments
in each of Equistar (41 percent), LCR (58.75 percent) and Lyondell Methanol
(75 percent); the 1998 sales revenues of each of Equistar, LCR and Lyondell
Methanol, which were $4.4 billion, $2.1 billion and $104 million,
respectively; and the primary products of each of the petrochemicals,
polymers, refining and methanol businesses]
Sales revenues above include sales to affiliates. For additional segment
information for each of the years in the three-year period ended December 31,
1998, see Notes 4, 5, 6 and 22 of Notes to Consolidated Financial Statements.
4
INTERMEDIATE CHEMICALS AND DERIVATIVES
Overview
Through the Acquired Business, 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 such that either a dedicated PO/TBA or a dedicated PO/SM plant must
be built. The intermediate chemicals and derivatives segment also manufactures
numerous derivatives of PO and TBA. Among these are polyols and PG,
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 plant; PO, SM, MTBE, polyols and BDO at its Channelview, Texas plant;
polyols at its South Charleston and Institute, West Virginia plants; and
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; PGE at its Rotterdam plant; and polyols at the Fos-sur-
Mer plant and at a plant in Rieme, Belgium. In the Asia Pacific region, the
Company has a 50 percent interest in the joint venture Nihon Oxirane Co., Ltd.
("Nihon Oxirane"), which operates a PO/SM plant in Chiba, Japan. The Company
produces polyols at majority-owned plants in Kaohsiung, Taiwan and Anyer, West
Java, Indonesia.
The Company estimates, based in part on published data, that worldwide
demand for PO was approximately 8.7 billion pounds in 1998. Approximately 90
percent of that volume was consumed in the manufacture of three families of PO
derivative products: polyols, PG and PGE. The remainder is consumed in the
manufacture of a growing segment of performance-based products, as well as BDO
and its derivatives. The Company consumes approximately 60 percent of its PO
for the production of derivatives.
Polyols and TDI are combined in the production of urethanes for products
such as automotive seating and home furnishings, as well as coatings,
adhesives, sealants and elastomers.
PG is principally used as an intermediate chemical to produce unsaturated
polyester resins. PG has low toxicity and is also used in certain food,
cosmetic, and pharmaceutical applications and in automotive coolants and
aircraft deicers. PGE comprises low toxicity, high performance solvents.
BDO and its derivatives are utilized in the production of engineering
plastics, pharmaceuticals, personal care products, fibers and high performance
coatings.
Lyondell reacts most of its TBA with methanol to make MTBE, a gasoline
blending component that increases octane and reduces emissions. The Company
also has the capability to produce ethyl tertiary butyl ether ("ETBE"), an
alternate gasoline blending component. ETBE is manufactured from TBA and
ethanol and has a lower vapor pressure than MTBE or ethanol.
Worldwide demand for MTBE in 1998 was approximately 428,000 barrels per day,
based on published data. This demand has 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. The EPA
has proposed a reduction in permissible ozone levels in the United States,
which, if adopted, may create additional demand for MTBE. However, pending or
future legislative initiatives or litigation may materially adversely affect
the Company's MTBE sales or subject the Company to product liability.
Studies by federal and state agencies and other organizations have shown
that MTBE is safe for use in gasoline and is effective in reducing automotive
emissions. Nevertheless, the presence of MTBE in some water
5
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 contaminate drinking water supplies,
and thereby result in a possible health risk. The Governor of California has
announced an intention to eliminate MTBE from gasoline sold in California by
December 31, 2002. There have been claims that MTBE travels more rapidly
through soil, and is more soluble in water, than most other gasoline
components, and is more difficult and more costly to remediate. Heightened
public awareness about MTBE has resulted in certain state and federal
legislative initiatives that have sought either to rescind the oxygenate
requirement for reformulated gasoline sold in California and other states or
restrict the use of MTBE. There is ongoing review of this issue and the
ultimate resolution of the appropriateness of using MTBE could result in a
significant reduction in the Company's MTBE sales.
In addition, the Company has a take-or-pay MTBE sales contract with ARCO,
which contributes significant pre-tax margin. If such legislative initiatives
were enacted, ARCO has indicated that it might attempt to invoke a force
majeure provision in the ARCO contract in order to reduce the quantities of
MTBE it purchases under, or to terminate, the contract. The Company would
vigorously dispute such action. The contract has an initial term expiring
December 31, 2002 and provides for formula-based prices that are currently
significantly above spot market prices for MTBE. A significant reduction in
the Company's sales under the ARCO contract could have a negative impact on
the Company's results of operations.
SM is a commodity chemical produced and traded worldwide for commodity and
specialty polymer applications, such as polystyrene and polyester resins, as
well as various uses in the rubber industry. Based on published data,
worldwide demand in 1998 was approximately 40 billion pounds.
In late 1997, ARCO Chemical initiated a restructuring program designed to
simplify the organization, streamline operations and reduce costs. Lyondell is
on target to achieve most of these cost savings by the end of 1999. Lyondell
believes that it will be able to realize additional cost savings primarily
through overhead consolidation, manufacturing and purchasing efficiencies,
reduced transportation costs and raw material integration with Equistar. As
contemplated at the time of the Acquisition, the Company has delayed the
construction of a PO/SM plant in Rotterdam ("PO-11") that ARCO Chemical had
scheduled for startup in late 2000.
The following table outlines the intermediate chemicals and derivatives
segment's primary products, annual capacity and the primary uses for such
products.
Product Rated Capacity(a) Primary Uses
------- ----------------- ------------
Propylene Oxide (PO) 3.85 billion pounds PO is a key component of polyols, PG, PGE and
BDO.
Polyols 1.47 billion pounds Polyols are used to produce flexible foam for
automotive seating and home furnishings,
coatings, adhesives, sealants and elastomers.
Toluene Diisocyanate 250 million pounds(b) TDI is combined with polyols to produce
(TDI) flexible foam for automotive seating and home
furnishings, coatings, adhesives, sealants
and elastomers.
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 300 million pounds PGE are used as lower toxicity solvents for
(PGE) 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.
6
Product Rated Capacity(a) Primary Uses
------- ----------------- ------------
Tertiary Butyl Alcohol 58,500 barrels/day TBA is a key component of MTBE. MTBE is a
(TBA)--fuel oxygenates: gasoline component for reducing emissions in
Methyl Tertiary Butyl reformulated gasolines and enhancing octane
Ether (MTBE) value.
Styrene Monomer (SM) 3.65 billion pounds SM is used to produce plastics, such as
expandable polystyrene for packaging, foam
cups and containers, insulation products and
durables and engineering resins.
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(a) Unless otherwise specified, represents rated capacity as of January 1,
1999. The term "rated capacity," as used in this table, is calculated by
estimating the number of days in a typical year 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 feedstock mix. Because the rated
capacity of a production unit is an estimated amount, actual production
volumes may be more or less than rated capacity. Capacities shown include
100 percent of the capacity of joint venture facilities.
(b) Does not include 264 million pounds of supply reserved under long-term TDI
supply agreements with Rhone-Poulenc, pursuant to which Lyondell is
entitled to all of the TDI output of Rhone-Poulenc's two plants in France.
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 available 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. The segment receives a portion of its methanol requirements under a
cost-based supply arrangement with a third party.
The Company's raw material suppliers include Equistar, which is a leading
producer of propylene, ethylene and benzene. See Note 4 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 1998, 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 percent 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 limited amounts of MTBE and SM 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 market
economics of the co-products.
The segment has a number of multi-year PO processing or 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. The segment is
also a party to a number of multi-year SM sales and processing agreements and
MTBE sales agreements.
7
Lyondell sells most of its SM production into the United States merchant
market and to selected export markets through sales or tolling agreements. The
SM processing agreements also include long-term processing agreements
providing for the delivery of fixed annual quantities of SM. See "--Joint
Ventures and Other Agreements." As of December 31, 1998, the Company had over
1.1 billion pounds of SM capacity, or 30 percent of its worldwide capacity,
covered by long-term processing arrangements.
In addition to the ARCO contract, the Company also sells its MTBE production
under market-based sales agreements and in the spot market.
The segment's sales are made through Company marketing and sales personnel
and through distributors and independent agents located in the Americas,
Europe and the Asia Pacific region. As part of the restructuring and cost-
reduction program announced in 1997, the segment has centralized certain sales
and order fulfillment functions in regional customer service centers located
in Channelview, Texas, Rotterdam, The Netherlands and Singapore. This will
permit the Company to reduce its sales office infrastructure for this segment
around the world, while maintaining service to its worldwide customer base.
For data relating to foreign operations and export sales, see Note 22 of
Notes to Consolidated Financial Statements.
Joint Ventures and Other Agreements
The PO/SM plant at the Channelview, Texas complex that was completed in 1992
(PO/SM II) is owned by the Company together with third-party equity investors.
The Acquired Business sold additional interests to the investors in 1994, 1996
and 1997. In addition, portions of a 1998 PO/SM II expansion ( see "--
Properties" for additional discussion) were funded through third-party
investment. 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, 1998, 1.1 billion pounds per year of the PO/SM
II plant's existing SM capacity was committed under such arrangements.
The Company, through a subsidiary, has a 50 percent equity interest in Nihon
Oxirane, a joint venture with Sumitomo Chemical Co., Ltd. and Showa Denko K.K.
Since 1976, Nihon Oxirane has operated a PO/SM plant in Chiba, Japan.
In January 1995, ARCO Chemical entered into long-term TDI supply agreements
with Rhone-Poulenc entitling the Acquired Business to the entire TDI output of
Rhone-Poulenc's two plants in France, which have a combined annual capacity of
approximately 264 million pounds, and providing the Acquired Business an
option to acquire one of the plants from Rhone-Poulenc at the end of the
supply term. This TDI 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 affected by 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 domestic and
foreign industry capacity. In general, weak economic conditions either in the
United States or in the world tend to reduce demand and put pressure on
margins. It is not possible to predict accurately the changes in feedstock
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 Dow Chemical Company
("Dow") and 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, the Company believes it has 35 percent, Dow has 32
percent and Shell has over 5 percent of the total worldwide capacity for PO.
8
The expansion of the PO/SM II plant in Channelview, Texas in early 1998
added annual PO and SM capacity of 110 million and 248 million pounds,
respectively. As contemplated at the time of the Acquisition, the Company has
delayed the construction of PO-11 in Rotterdam, The Netherlands, which ARCO
Chemical had scheduled for startup in late 2000.
Shell and BASF AG ("BASF") have formed a joint venture to construct a PO/SM
plant in Europe, using Shell technology, with a target completion date in the
1999 time frame. Shell has also announced plans to construct a PO/SM plant in
Singapore, with BASF as a 50 percent partner and with a target completion date
of late 2001. In addition, Repsol Quimica, S.A. has announced plans to build a
PO/SM plant with an early 2000 startup date in Tarragona, Spain, using
technology for the production of PO and SM originally licensed from ARCO
Chemical.
The Company competes with many polyols producers worldwide, including Dow,
Bayer AG ("Bayer") and BASF. Based on published data, Dow is believed to have
26 percent of worldwide polyols capacity while the Company is believed to have
16 percent.
The Company both manufactures and has long-term supply agreements for TDI,
an isocyanate, which is reacted with polyols to produce flexible foams. The
Company competes with many TDI producers worldwide, including Bayer and BASF.
Based on published data, Bayer is believed to have 24 percent of worldwide TDI
capacity while the Company is believed to have 17 percent.
The Company competes with many MTBE producers worldwide, the most
significant of which is Saudi Basic Industries Corp. ("SABIC"). Based on
published data, SABIC is believed to have 11 percent of the total worldwide
capacity for MTBE. The Company believes it has 10 percent through the Acquired
Business. In addition, the Company believes that Equistar's MTBE capacity
comprises an additional 3 percent of worldwide MTBE capacity. 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 them are
Shell, Dow and BASF. Based on published data, Shell is believed to have 9
percent and the Company is believed to have 8 percent of the total worldwide
SM capacity.
Properties
As part of the Acquisition, Lyondell acquired ARCO Chemical's headquarters
office and research facility in Newtown Square, Pennsylvania, which is leased
from ARCO. The Acquired Business' European headquarters are located in leased
facilities in Maidenhead, England, and the Acquired Business' Asia Pacific
headquarters are located in leased facilities in Hong Kong. As part of its
restructuring program, the Acquired Business reduced or relocated staff from
the European and Asia Pacific headquarters with appropriate reductions in the
size of the leased headquarters facilities and established regional service
centers at leased facilities in Rotterdam, The Netherlands and Singapore. The
Company owns the regional service center in Channelview, Texas.
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 operates an on-site butane
storage tank, propylene spheres, pipeline connections and a jetty that
accommodates deep-draft vessels.
9
The principal manufacturing facilities of the segment are set forth below.
All of these facilities are wholly-owned by Lyondell unless otherwise noted.
Location Principal Products
-------- --------------------------
Bayport (Pasadena), Texas.................... PO, PG, PGE, TBA
Channelview, Texas(1)........................ PO, polyols, BDO, SM, MTBE
Lake Charles, Louisiana...................... TDI
Institute and South Charleston, West
Virginia(2)................................. polyols
Rieme, Belgium............................... polyols
Fos-sur-Mer, France.......................... PO, PG, polyols, TBA, MTBE
Botlek, Rotterdam, The Netherlands........... PO, PG, PGE, TBA, MTBE
Anyer, West Java, Indonesia(3)............... polyols
Chiba, Japan(4).............................. PO, SM
Kaohsiung, Taiwan(5)......................... polyols
- --------
(1) Third-party investors hold a minority ownership interest in the PO/SM II
plant at the Channelview facility.
(2) The Company's plants in South Charleston and Institute, West Virginia are
situated on leased land.
(3) The Anyer plant is owned by P.T. Lyondell Indonesia, an Indonesian joint
venture with P.T. Gema Supra Abadi. The Company, through a subsidiary, has
a majority interest in the joint venture.
(4) The PO/SM plant located in Chiba, Japan is owned by Nihon Oxirane, a joint
venture in which the Company holds a 50 percent interest through a
subsidiary.
(5) The Taiwan plant is owned by Lyondell Taiwan Co., Ltd., a Taiwan company
in which the Company, through a subsidiary, has a majority interest.
Research and Technology; Patents and Trademarks
The Acquired Business has been granted 66 patents and has over 34 patents
pending for the Impact(TM) process technology. The Impact(TM) technology,
first introduced in 1995, offers significant cost savings in the production of
conventional polyols products.
The Company possesses a body of patented and unpatented technology and trade
secrets relating to its products, processes and the design and operation of
its plants, all of which are valuable to the segment. 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
technologies have expired.
The principal research and development facility for the segment is located
in Newtown Square, Pennsylvania, with technical centers in South Charleston,
West Virginia, Villers Saint Paul, France, and Singapore.
Employee Relations
On December 31, 1998, the Acquired Business employed approximately 4,200
employees. Approximately 23 percent of the Acquired Business's domestic
employees are represented by labor unions. The Company believes its relations
with its employees are good.
10
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 percent interest and Millennium and Occidental each hold a
29.5 percent 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.
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 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 between 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 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.
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 such 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 percent of an acquisition that is otherwise not within the scope of
the business of Equistar, Lyondell, Millennium or Occidental, as the case may
be, may make such acquisition provided that after such acquisition, the
portion within the scope of the business of Equistar is offered to Equistar
pursuant to the foregoing provisions.
Lyondell has agreed to provide certain administrative services to Equistar,
including certain legal, risk management, treasury services, tax services and
employee benefit plan administration. Equistar has also agreed to provide
certain services to Lyondell, such as health, safety and environmental
services, human resource
11
services, information services and legal services. As a consequence of
services being provided by Equistar to Lyondell and by Lyondell to Equistar, a
monthly net payment is made by Equistar to Lyondell with respect thereto. See
Note 4 of Notes to Consolidated Financial Statements. 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 and Cincinnati. An affiliate of Occidental
provides services to Equistar, including services related to accounting,
payroll, office administration, marketing, transportation, purchasing and
procurement, management, human resources, customer service, technical services
and others, pursuant to a Transition Services Agreement, which will terminate
on June 1, 1999.
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.
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.
12
EQUISTAR PETROCHEMICALS
Overview
Equistar produces a variety of petrochemicals, including olefins, oxygenated
chemicals, aromatics and specialty chemicals, at twelve facilities located in
six states. Olefins include ethylene, propylene and butadiene. Oxygenated
chemicals 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.
The Chocolate Bayou, Corpus Christi and two Channelview, Texas olefins
plants use petroleum liquid feedstocks, including naphtha, condensates and gas
oils (collectively "Petroleum Liquids"), to produce ethylene. The cost of
ethylene production from Petroleum Liquids feedstocks historically has been
less than the cost of producing ethylene from natural gas liquids feedstocks,
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 chemicals, such as dicyclopentadiene ("DCPD"), isoprene, resin oil,
piperylenes, hydrogen and alkylate. Based upon independent third-party
surveys, management believes that its Channelview facility is the lowest
production cost olefins facility in North America. Equistar's Morris,
Illinois, Clinton, Iowa, Lake Charles, Louisiana and LaPorte, Texas plants are
designed to use primarily NGLs which produce primarily ethylene with some co-
products such as propylene. In addition, Equistar currently is modifying the
LaPorte plant to run certain Petroleum Liquids feedstocks. A comprehensive
pipeline system connects the Gulf Coast plants with major olefins customers.
Feedstocks 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 ethanolamine. EG is used in antifreeze and in polyester
fibers, resins and films. The other EO 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 ethyl alcohol 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 ethyl alcohol by the addition of certain chemicals. In addition, it
produces small volumes of diethyl ether, a by-product of its ethyl alcohol
production, at Tuscola. These ethyl alcohol products are ingredients in
various consumer and industrial products as described more fully in the table
below.
13
The following table outlines Equistar's primary petrochemical products,
annual rated capacity and the primary uses for such products.
Product Rated Capacity(a) Primary Uses
------- ----------------- ------------
OLEFINS:
Ethylene 11.5 billion pounds Ethylene is used as a feedstock to
manufacture polyethylene, EO, ethylene
dichloride and ethylbenzene.
Propylene 5.0 billion pounds(b) Propylene is used to produce polypropylene,
acrylonitrile and propylene oxide.
Butadiene 1.2 billion pounds Butadiene is used to manufacture styrene
butadiene rubber and polybutadiene rubber,
which are used in the manufacture of tires,
hoses, gaskets and other rubber products.
Butadiene is also used in the production of
paints, adhesives, nylon clothing, carpets
and engineered plastics.
OXYGENATED PRODUCTS:
Ethylene Oxide (EO) and 1.1 billion pounds EOE; EO is used to produce surfactants, industrial
Equivalents (EOE) 400 million pounds as pure EO cleaners, cosmetics, emulsifiers, paint, heat
transfer fluids and ethylene glycol
(polyester fibers and film, polyethylene
terephthalate ("PET") resin and antifreeze).
Ethylene Glycol(EG) 1 billion pounds EG is used to produce polyester fibers and
film, PET resin, heat transfer fluids, paint
and automobile antifreeze.
Ethylene Oxide 225 million pounds EO derivatives are used to produce paint and
Derivatives coatings, polishes, solvents and chemical
intermediates.
MTBE 284 million gallons MTBE is an octane enhancer and clean fuel
(18,500 barrels/day)(c) additive in reformulated gasoline.
AROMATICS:
Benzene 301 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 in urethane production.
SPECIALTY CHEMICALS:
Dicyclopentadiene (DCPD) 80 million pounds DCPD is a component of inks, adhesives and
polyester resins for molded parts such as tub
and shower stalls and boat hulls.
Isoprene 105 million pounds Isoprene is a component of premium tires,
adhesive sealants and other rubber products.
Resin Oil 120 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(d) Alkylate is a premium blending component used
by refiners to meet Clean Air Act standards
for reformulated gasoline.
Ethyl Alcohol 50 million gallons Ethyl alcohol is used in the production of
solvents as well as household, medicinal and
personal care products.
Diethyl Ether 5 million gallons Diethyl ether is used in laboratory reagents,
gasoline and diesel engine starting fluid,
liniments, analgesics and smokeless gun
powder.
14
- --------
(a) Unless otherwise specified, represents rated capacity at January 1, 1999.
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 include 100 percent of the capacity of Equistar, of which the
Company owns 41 percent.
(b) 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 and has a current
rated capacity of one billion pounds per year of propylene.
(c) Includes up to 44 million gallons/year of capacity which is operated for
the benefit of LCR.
(d) Includes up to 172 million gallons/year of capacity which is operated for
the benefit of LCR.
Raw Materials
Olefins feedstock cost is generally the largest component of total cost for
the petrochemicals business. Olefins plants with the flexibility to consume a
wide range of feedstocks are able to maintain higher profitability during
periods of changing energy and petrochemicals prices than olefins plants that
are restricted in their feedstock processing capability. The primary
feedstocks used in the production of olefins are Petroleum Liquids (also
referred to as "heavy feedstocks") and NGLs (also referred to as "light
feedstocks"). As of January 1, 1999, approximately 44 percent of domestic
ethylene capacity was limited to NGL feedstocks and approximately 56 percent
of domestic capacity processed to some extent both NGLs and Petroleum Liquids.
Petroleum Liquids have had a historical variable margin advantage over NGLs
such as ethane and propane. For example, using Petroleum Liquid feedstocks
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 variable margin advantage is expected to continue due
to the significantly higher capital cost for plants with the capability to
process both heavy feedstocks (Petroleum Liquids) and the co-products which
result from processing Petroleum Liquid feedstocks in contrast to processing
light feedstocks (NGLs).
The Channelview facility is unusually flexible in that it can process 100
percent Petroleum Liquids or up to 80 percent NGL feedstocks. The Corpus
Christi plant can process up to 70 percent Petroleum Liquids or up to 70
percent NGLs. The Chocolate Bayou facility processes 100 percent Petroleum
Liquids. Equistar's four other olefins facilities currently process only NGLs.
Equistar, however, is in the process of upgrading the LaPorte facility to
integrate the operations of the LaPorte and Channelview facilities to permit
the LaPorte facility to process 25 percent to 30 percent Petroleum Liquids and
the Channelview facility to process the co-products resulting from the
processing of Petroleum Liquids at LaPorte.
The majority of Equistar's Petroleum Liquids requirements are obtained under
contracts or on the spot market from a variety of third-party domestic and
foreign sources. Equistar also purchases NGLs from a wide variety of domestic
sources. Equistar obtains a portion of its olefins feedstock requirements from
LCR at market-based 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
assumed contracts will decline to zero at the end of 2000.
Marketing and Sales
Ethylene produced by the LaPorte, Morris and Clinton facilities is generally
consumed as feedstock by the polymers operations at those sites. Ethylene and
propylene produced at the Channelview, Corpus Christi, Chocolate Bayou and
Lake Charles olefins plants are generally distributed by pipeline or via
exchange
15
agreements to Equistar's Gulf Coast polymer and EO facilities as well as to
other third parties. As of December 31, 1998, approximately 75 percent of the
ethylene produced by Equistar was consumed internally or sold to Equistar's
affiliates based on current market 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. Over the past three years, no single unrelated third
party customer accounted for more than 10% of total segment revenues in any
one year.
Sales to third parties generally are made pursuant to written agreements
which typically provide for monthly negotiation of price. The contracts
typically require the customer to purchase a specified minimum quantity.
Contract terms are typically three to six years with automatic one or two year
term extension provisions. Some contracts are subject to early termination if
deliveries have been suspended for several months.
EO and EG 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.
Equistar licenses MTBE technology under a license entered into with ARCO
Chemical 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
propylene is shipped by ocean-going vessel. Ethylene oxide and its derivatives
are shipped by railcar. 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
Amoco Chemical Company, Chevron Chemical Company, Dow Chemical Company, Exxon
Chemical Company, Huntsman Chemical Company, Mobil Chemical Company, Phillips
Petroleum Company, Shell Chemical Company and Union Carbide Corporation.
The combined rated capacity of Equistar's olefins units at January 1, 1999
was approximately 11.5 billion pounds of ethylene per year or approximately 18
percent of total North American production capacity. Based on published rated
production capacities, Equistar believes it is the largest producer of
ethylene in North America. North American ethylene rated capacity at January
1, 1999 was approximately 62 billion pounds per year. Of the total ethylene
production capacity in the United States, approximately 95 percent is located
along the Gulf Coast, and approximately 80 percent is owned by nine
manufacturers.
16
Petrochemicals profitability is affected by 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, weak economic conditions either in the United States or
in the world and higher feedstock costs tend to reduce demand and/or put
pressure on margins. Capacity additions in excess of annual growth also put
pressure on margins. In addition, in recent years, industry consolidation has
occurred, a trend the Company expects will continue. It is not possible to
predict accurately the changes in feedstock costs, market conditions and other
factors that will affect petrochemical industry margins in the future.
The petrochemicals industry historically has experienced significant
volatility in capacity utilization and profitability. 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 at extremes 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 75 percent 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.
EQUISTAR POLYMERS
Overview
Through twelve facilities located 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 six 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 Midwest and enjoy a freight cost advantage over Gulf
Coast producers in delivering products to customers in the 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'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. Equistar also 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 produces concentrates and compounds at its facilities
in Crockett, Texas and Heath, Ohio. Concentrates and compounds are
polyethylene compounds impregnated with additives and/or pigments and sold to
converters who mix the compounds with larger volumes of polymers, including
polyethylene, to produce various products. Equistar produces wire and cable
resins and compounds at Morris, Illinois, LaPorte, Texas, Tuscola, Illinois,
Crockett, Texas and Fairport Harbor, Ohio. Wire and cable resins and compounds
are used to insulate copper and fiber optic wiring in power,
telecommunication, computer and automobile applications.
17
The following table outlines Equistar's polymers and performance polymers
products, annual rated capacity, and the primary uses for such products:
Product Rated Capacity(a) Primary Uses
------- ----------------- ------------
High density 3.4 billion pounds(b) HDPE is used to manufacture grocery,
polyethylene (HDPE) merchandise and trash bags; food containers
for items from frozen desserts to
margarine; plastic caps and closures;
liners for boxes of cereal and crackers;
plastic drink cups and toys; dairy crates;
bread trays 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 1.7 billion pounds LDPE is used to manufacture food packaging
(LDPE) films; plastic bottles for packaging food
and personal care items; dry cleaning bags;
ice bags; pallet shrink wrap; heavy-duty
bags for mulch and potting soil; boil-in-
bag bags; coatings on flexible packaging
products; and coatings on paper board such
as milk cartons. 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 1.1 billion pounds LLDPE is used to manufacture garbage and
polyethylene (LLDPE) lawn-leaf bags; 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 (c) Wire and cable resins and compounds are
Resins and Compounds used to insulate copper and fiber optic
wiring in power, telecommunication,
computer and automobile applications.
Polymeric Powders (c) Polymeric powders are component products in
structural and bulk molding compounds,
parting agents and filters for appliance,
automotive and plastics processing
industries.
Concentrates and 150 million pounds Concentrates and compounds provide color in
Compounds film, bottles and foam sheets; the "slip"
that keeps film from sticking together;
flame retardancy; resistance to UV
radiation; and the "gas bubbles" to make
foamed plastic products.
Polymers for Adhesives, (c) Polymers are components in hot-metal-
Sealants and Coatings adhesive formulations for case, carton and
beverage package sealing, glue sticks,
automotive sealants, carpet backing and
adhesive labels.
Reactive Polyolefins (c) 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 (c) Liquid polyolefins are a diesel fuel
additive to inhibit freezing.
- -------
(a) Unless otherwise specified, represents rated capacity at January 1, 1999.
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
18
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 include 100 percent of the capacity of
Equistar, of which the Company owns 41 percent.
(b) Equistar increased its HDPE capacity by approximately 125 million pounds
in 1998. The idling of a portion of the Port Arthur facility effective
March 31, 1999 will result in a decrease in the stated capacity by 300
million pounds at the end of the first quarter of 1999. A 480 million
pound HDPE resin expansion project at the Matagorda facility has a
targeted start-up in the third quarter of 1999.
(c) These are enhanced grades of polyethylene and are included in the capacity
figures for HDPE, LDPE and LLDPE above, as appropriate.
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 Equistar's own production at the site.
The polyethylene plants at Chocolate Bayou, LaPorte, Port Arthur 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 a third party.
Marketing and Sales
Equistar's polymers products are primarily sold to an extensive base of
established customers, many under 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.
Polymers are primarily distributed via railcar. Equistar owns or leases,
pursuant to long-term lease arrangements, approximately 10,000 railcars for
use in its polymers business. Equistar sells its polymers products in the
United States 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 product
performance, product quality, product deliverability, customer service and
price. Equistar competes with other large producers of polymers, including
Chevron Chemical Corporation, Dow Chemical Company, Eastman Chemical Company,
Exxon Chemical Company, Formosa Plastics, Huntsman Chemical Company, NOVA
Corporation, Phillips Petroleum Company, Solvay Polymers, Total Fina, Union
Carbide Corporation and Westlake Polymers. 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. Margins for polymers tend to follow the trend of
the margins of their raw materials with a six to nine months' lag. In general,
weak economic conditions either in the United States or elsewhere in the world
tend to reduce demand and put pressure on margins. It is not possible to
predict accurately the changes in feedstock costs, market conditions and other
factors which will affect polymers industry margins in the future.
Based on published rated industry capacities, Equistar is the largest
producer of polyethylene in North America and is a leading domestic producer
of polyolefins powders, compounds, wire and cable resins, and polymers for
adhesives. The combined rated capacity of Equistar's polyethylene units as of
January 1, 1999 was approximately 6.2 billion pounds per year or approximately
18 percent of total industry capacity in North America. There are 19 other
North American producers of polyethylene, including Chevron Chemical Company,
Dow Chemical Company, Exxon Chemical Company, Phillips Petroleum Company,
Solvay Polymers and Union Carbide Corporation. Equistar's polypropylene
capacity, 680 million pounds per year as of January 1, 1999, represents just
under 5 percent of the total North American polypropylene capacity. There are
14 other North American competitors in the polypropylene business, including
Amoco Chemical Company, Exxon Chemical Company, Montell Polyolefins, BV and
Total Fina.
19
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
Crockett, Texas......... Wire and Cable Resins and Compounds and
Concentrates and Compounds
LaPorte, Texas.......... Ethylene, Propylene, LDPE, LLDPE, HDPE and
Liquid Polyolefins
Matagorda, Texas........ HDPE
Pasadena, Texas(e)...... EO, EG and Other EO Derivatives
Pasadena, Texas(e)...... Polypropylene and LDPE
Port Arthur, Texas(f)... LDPE and HDPE
Victoria, Texas(d)...... HDPE
Lake Charles,
Louisiana(g)........... Ethylene, and Propylene
Morris, Illinois........ Ethylene, LDPE, LLDPE and Polypropylene
Tuscola, Illinois....... Ethyl Alcohol, Diethyl Ether, Wire and Cable
Resins and Compounds and Polymeric Powders
Clinton, Iowa........... Ethylene, LDPE and HDPE
Fairport Harbor, Wire and Cable Resins and Compounds,
Ohio(g)................ Concentrates and Compounds
Heath, Ohio............. Wire and Cable Resins and Compounds,
Concentrates and Compounds
Anaheim, California..... Denatured Alcohol
Newark, New Jersey...... Denatured Alcohol
- --------
(a) The Beaumont facility is owned by PD Glycol, a partnership owned 50
percent by Equistar and 50 percent by DuPont.
(b) The Channelview facility has two ethylene processing units. Lyondell
Methanol owns a methanol plant located within the Channelview facility on
property Lyondell Methanol leases from Equistar. A third party owns and
operates a facility on land leased from Equistar that is used to purify
hydrogen from Lyondell Methanol'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) Occidental and Lyondell each contributed facilities located in Pasadena.
These facilities are primarily on contiguous property, and Equistar plans
to operate them as one site to the extent practicable. These facilities
are operated in conjunction with the LaPorte facility.
(f) A portion of the HDPE capacity of the Port Arthur facility will be idled
on March 31, 1999 (resulting in a decrease of 300 million pounds of
capacity), and could be restarted when market conditions warrant.
(g) The facilities and land are leased.
20
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 NGL feedstocks, 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 owns an extensive olefins pipeline system which extends from Corpus
Christi to Mont Belvieu to Port Arthur and around the Lake Charles area.
Equistar owns other pipelines in connection with its Morris, Clinton, 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 berthing eight barges and related terminal
equipment for loading and unloading feedstocks and products. Equistar owns or
leases pursuant to long-term lease arrangements approximately 10,000 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, 1998, Equistar employed approximately 5,000 full-time
employees. Equistar also uses the services of independent contractors in the
routine conduct of its business. Approximately 365 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 Plano, Texas.
The Channelview facility employs proprietary technology owned by Lyondell to
convert ethylene and other light petrochemical streams into propylene.
Equistar is conducting a research project to investigate alternative
feedstocks for use at the Channelview, Chocolate Bayou and/or Corpus Christi
facilities. These alternative feedstocks could significantly lower costs and
provide an additional competitive advantage at these facilities.
Recent polymers 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. Equistar is
conducting a broad search to evaluate outside technology and is concentrating
in-house research in an effort to identify and develop single-site catalysts
for use in the production of polyolefins resins. Equistar holds several United
States patents and the rights to certain patents pending in connection with
research and development efforts in this area. Equistar is not dependent upon
obtaining or retaining any particular patent, and it believes the failure to
receive or retain any individual patent would not have a material adverse
effect on its operations.
Equistar uses numerous technologies in its operations, many of which are
licensed from third parties. Significant licenses held by Equistar include the
BP Chemicals fluid bed polyethylene process for the production of both LLDPE
and HDPE, the Unipol process for the production of LLDPE, and certain other
licenses for the production of 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 recognized brand names 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 rights to use these trademarks are 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.
21
LYONDELL-CITGO REFINING LP
Overview
Lyondell participates in petroleum refining through an equity interest in
LCR. Lyondell holds a 58.75 percent interest and CITGO holds a 41.25 percent
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 crudes. 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 is approximately 95 percent
high value, clean products (most refineries produce 70 percent or less of high
value, clean products such as gasoline and diesel). 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, motor oils, 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.
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 percent. CITGO has a one-time option expiring in
the year 2000 to increase its participation interest in LCR up to 50 percent
by making an additional equity contribution.
22
The following table outlines LCR's primary products, annual rated capacity
and the primary uses for such products:
Product Rated Capacity(a) Primary Uses
------- ----------------- ------------
Gasoline(b)............. 120,000 barrels per day Automotive fuel
Diesel (#2
Distillate)(b)......... 75,000 barrels per day Fuel for diesel cars and trucks
Jet Fuel(b)............. 22,000 barrels per day Aviation fuel
Benzene(c).............. 50 million gallons per year Nylon for clothing and consumer items;
polystyrene for insulation, packaging and
drink cups
Toluene(d).............. 37 million gallons per year Gasoline component and chemical feedstock for
producing benzene
Paraxylene(d)........... 400 million pounds per year Polyester fibers for clothing and fabrics,
PET soft drink bottles and films for audio
and video tapes
Orthoxylene(d).......... 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(e)............ 4,000 barrels per day Automotive and industrial engine and lube
oils, railroad engine additives and white
oils for food-grade applications
- --------
(a) Unless otherwise specified, represents rated capacity at January 1, 1999.
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 include 100 percent of the capacity of LCR, of which the Company
owns 58.75 percent.
(b) Produced by LCR and sold to CITGO.
(c) Produced by LCR and sold to Equistar.
(d) Produced by LCR and marketed for LCR by Equistar.
(e) Effective January 1999, all lubricant products produced by LCR are sold to
CITGO.
Management of LCR
LCR is a limited partnership organized under the laws of the state of
Delaware, following its conversion from a Texas limited liability company
effective December 31, 1998. 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 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, without
limitation, 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
the executive officers of LCR as appointed by the Partnership Governance
Committee.
Agreements between Lyondell or CITGO and LCR
LCR is a party to a number of agreements with Lyondell and CITGO. Lyondell
currently performs administrative services for LCR pursuant to an
Administrative Services Agreement, which is renegotiated annually.
Under the terms of certain long-term agreements, CITGO will purchase all of
the lubricant products manufactured by LCR. In conjunction therewith, CITGO
will operate LCR's Birmingport, Alabama lubricants plant.
23
In addition, 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.
Agreements between Equistar and LCR
Prior to the formation of Equistar, Lyondell was a party with LCR to
multiple agreements designed to preserve much of the synergy between the
Refinery and the Channelview facility. Such agreements were assumed by
Equistar from Lyondell effective December 1, 1997. Economic evaluations at the
Channelview facility and the Refinery are based on sending products to the
highest-value disposition, 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 feedstocks 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 services agreement, Equistar currently serves
as LCR's sole agent to market aromatics products produced by LCR.
In addition, under a long-term agreement, Equistar and LCR perform certain
manufacturing services for one another.
Raw Materials
In connection with its formation, 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 feedstock for the Refinery is purchased
under the Crude Supply Agreement. Both PDVSA Oil and CITGO are direct or
indirect wholly owned subsidiaries of Petroleos de Venezuela, S.A. ("PDVSA"),
the national oil company of the Republic of Venezuela.
The Crude Supply Agreement pricing structure is designed to reduce the
volatility of cash flow due to market fluctuations in the prices of crude oil
or refined products. Under the Crude Supply Agreement, PDVSA Oil is required
to sell, and LCR is required to purchase, up to 230,000 barrels per day of
heavy crude oil, which constitutes approximately 88 percent of the Refinery's
refining capacity of 260,000 barrels per day of crude oil. PDVSA Oil has a
right of first refusal in certain circumstances to supply incremental amounts
of crude oil above LCR's 230,000 barrel per day contractual obligation. As a
result of the OPEC-mandated supply limitations discussed below, PDVSA's
deliveries have been less than 230,000 barrels per day since August 1998 and
are currently at 195,000 barrels per day. OPEC recently announced an agreement
to further reduce OPEC oil production, which could result in some additional
reductions in the volume of PDVSA's deliveries.
The Crude Supply Agreement provides that Lyondell controls all of the
Partnership'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. The Crude Supply Agreement expires on December 31, 2017.
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. Deemed
margins and deemed costs are adjusted periodically. These adjustments are
based on inflation rates and energy costs. Adjustments to margins track, but
are less than, inflation rates. Because deemed operating costs and the slate
of refined products deemed to be produced from a given barrel of crude oil or
other feedstocks do not necessarily reflect the actual costs and yields in any
period and also because the market value of the refined products used in the
pricing formula does not necessarily reflect the actual price received for the
refined products, the actual refining margin earned by LCR under the Crude
Supply Agreement varies depending on, among other things, the efficiency with
which LCR conducts its operations from time to time. 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
24
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 diminished, 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.
There are risks associated with enforcing the provisions of contracts with
companies such as PDVSA Oil that are non-United States affiliates of a
sovereign nation. Specifically, 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 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 as the
Crude Supply Agreement. In late April 1998, LCR received notification from
PDVSA Oil of reduced delivery of crude oil related to announced OPEC
production cuts. LCR began receiving the reduced allocation of crude oil from
PDVSA Oil in August 1998. As noted above, OPEC has recently announced an
agreement for additional production cuts, which could result in some further
reductions in LCR's allocations.
All of the crude oil supplied by PDVSA under the Crude Supply Agreement is
produced in Venezuela, which has experienced economic difficulties and
attendant social and political unrest in recent years. If the Crude Supply
Agreement is modified or terminated or this source of crude is otherwise
interrupted due to production difficulties, political or economic events in
Venezuela or other factors, LCR could experience significantly greater
volatility in its earnings and cash flows. The parties each have the right to
transfer their interests in LCR to unaffiliated third parties in certain
circumstances, subject to reciprocal rights of first refusal. In the event
that CITGO were to transfer its interest in LCR to an unaffiliated third
party, PDVSA Oil would have an option to terminate the Crude Supply Agreement.
Depending on then current market conditions, any breach or termination of the
Crude Supply Agreement could adversely affect LCR, since LCR would have to
purchase all of its crude oil feedstocks in the merchant market, which could
subject LCR to significant price fluctuations. There can be no assurance that
alternative crude oils with similar margins would be available for purchase by
LCR. However, the Company believes that this transaction holds substantial
economic and other incentives for all parties to perform their obligations.
Lyondell believes PDVSA's strategic interest in expanding its crude oil
refining operations in the United States in order to increase the markets for
its extra heavy crude oil and continued financial commitments of CITGO should
provide a long-term economic incentive for all PDVSA affiliates to perform
their obligations under the various agreements.
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 percent 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-
25
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 Products Agreement has the
effect of stabilizing earnings and cash flows and substantially 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 coking (i.e., non-
asphalt producing) refinery capable of processing 100 percent 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, 1999, there
were 163 crude oil refineries in operation in the United States, and total
domestic refinery capacity was approximately 16 million barrels per day.
During 1998, LCR processed an average of 260,000 barrels per day of crude oil
or over 1 percent of domestic capacity.
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 and packaging 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, 1998, LCR employed approximately 1,200 full-time employees.
LCR also uses the services of independent contractors in the routine conduct
of its business. Approximately 800 hourly workers are covered by a collective
bargaining agreement between LCR and the Oil, Chemical and Atomic Workers
Union that was recently renegotiated and expires in January 2002.
LYONDELL METHANOL COMPANY, L.P.
Overview
Lyondell produces methanol through its 75 percent interest in Lyondell
Methanol, of which Lyondell serves as the managing partner. The remaining 25
percent interest in Lyondell Methanol is held by MCNIC. Effective December 1,
1997, Equistar began serving as the operator of Lyondell Methanol pursuant to
an operating agreement with Lyondell Methanol. Lyondell Methanol owns a
methanol plant located within the Channelview facility. The methanol plant is
a heat-integrated plant, which includes extraction capabilities for co-
products such as hydrogen and fuel oil.
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 as well as
polyester fibers and plastics. Other end uses include solvents and antifreeze
applications. Lyondell Methanol is advantageously located near the Gulf Coast
customer base.
Management of Lyondell Methanol
Lyondell Methanol is a limited partnership organized under the laws of the
State of Texas. Lyondell owns its interest in Lyondell Methanol through two
wholly owned subsidiaries, one of which serves as a general partner and the
managing partner of Lyondell Methanol and one of which serves as a limited
partner. Similarly,
26
MCNIC owns its interest in Lyondell Methanol through two wholly owned
subsidiaries, one a general partner and one a limited partner.
Agreements between Equistar and Lyondell Methanol
Certain agreements entered into by Lyondell and Lyondell Methanol were
assigned to Equistar effective December 1, 1997. Equistar acts as operator of
Lyondell Methanol pursuant to an operating agreement with Lyondell Methanol.
In addition, Equistar sells natural gas to Lyondell Methanol and markets
Lyondell Methanol's product pursuant to agreements with Lyondell Methanol.
Lyondell Methanol also leases from Equistar the real property on which its
methanol plant is located.
Raw Materials
Lyondell Methanol's plant processes natural gas feedstocks. Equistar is
connected to a diverse natural gas supply network, and it purchases natural
gas for use as fuel at its Channelview facility and sells natural gas to
Lyondell Methanol as a feedstock for the methanol plant.
Marketing and Sales
Substantially all of the methanol output from Lyondell Methanol is sold to
Equistar, which then sells it to third parties. The agreement between Lyondell
Methanol and Equistar concerning such sales generally provides that Lyondell
Methanol bears the market risk associated with such sales. Equistar's
agreements with third parties for the sale of 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 product
deliverability, product quality and price. Lyondell Methanol competes with
other large producers of methanol, including Methanex, Borden Chemicals and
Plastics and Terra Industries.
The rated capacity of Lyondell Methanol's processing unit at January 1, 1999
was 248 million gallons. Based on published rated production capacities, the
Company believes that Lyondell Methanol is the third 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
Lyondell Methanol's only property is the methanol plant it owns, which is
located within Equistar's Channelview complex on property leased from
Equistar.
Employee Relations
Lyondell Methanol has no employees. Equistar serves as its operator and
marketing agent.
PROPERTIES AND EMPLOYEE RELATIONS
Generally the Company's operations are conducted through the Acquired
Business, Equistar, LCR and Lyondell Methanol. As of December 31, 1998,
Lyondell, excluding the Acquired Business, Equistar, LCR and Lyondell
Methanol, employed approximately 50 full-time employees. Lyondell's only
facility, excluding the properties owned or leased by the Acquired Business
and the joint ventures, is its leased corporate offices located in Houston,
Texas.
27
INTEGRATION OF RECENTLY ACQUIRED AND COMBINED OPERATIONS
The Company completed the acquisition of the Acquired Business in July 1998.
The Company combined its petrochemicals and polymers business with that of
Millennium to form Equistar in December 1997. Equistar was expanded by the
addition of certain businesses previously held by Occidental in May 1998. The
process of integrating the operations of the Acquired Business with the
Company has only recently begun, and the process of integrating the operations
of Equistar is not complete.
As is the case with any integration of major businesses that previously
operated independently, the integration processes for the Acquired Business
and for Equistar will require the dedication of significant management and
operational resources. The difficulties of combining operations may be
exacerbated by the necessity of coordinating geographically separate
organizations, integrating personnel with disparate business backgrounds,
combining different transaction processing and financial reporting systems and
processes and combining corporate cultures. The process of integrating
operations could cause an interruption of, or loss of momentum in, the
activities of the combined enterprise's business. In addition, the Company may
suffer a loss of key employees, customers or suppliers, loss of revenues,
increases in costs or other difficulties, some of which may not have been
foreseen. There can be no assurance that the Company will be able to realize
the operating efficiencies, cost savings and other benefits that are sought
from such transactions. Difficulties encountered in the integration processes
could have a material adverse effect on the business and operations of the
Company.
SHARED CONTROL OF JOINT VENTURES
All of the operations of the Company, other than those of the Acquired
Business, are conducted through the Company's 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.
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 feedstocks, 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.
28
ENVIRONMENTAL MATTERS
The production facilities of Lyondell, Equistar, LCR and Lyondell Methanol
are generally required to have permits and licenses regulating air emissions,
discharges to water and generation, storage, treatment and disposal of
hazardous wastes. Companies such as Lyondell, its subsidiaries 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 its subsidiaries 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 Lyondell Methanol is to be
in compliance with all applicable environmental laws. Lyondell and Equistar
also are each committed to Responsible Care(R), a 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 federal, state, local and foreign
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, its subsidiaries 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, its subsidiaries or its joint ventures will
be affected differentially from the rest of the petrochemicals and refining
industry.
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 feedstocks and finished products and the
costs of the storage and disposal of water. Also, "Superfund" statutes may
impose joint and several liability for the costs of remedial investigations
and actions on the entities that generated waste, arranged for disposal of the
wastes, transported to or selected the disposal sites and the past and present
owners and operators of such sites. All such responsible parties (or any one
of them, including 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, 1998 and 1997, the Company, its subsidiaries and its joint
ventures spent, in the aggregate, approximately $22 million and $13 million,
respectively, for environmentally related capital expenditures at existing
facilities. The 1998 amount includes the full twelve-months' spending of the
acquired ARCO Chemical business. In 1999, the Company currently estimates that
environmentally related capital expenditures at existing subsidiary and joint
venture facilities will be approximately $27 million. The Company does not
anticipate that environmentally related capital expenditures at subsidiary and
joint venture facilities in 2000 will be materially different than in 1999.
The timing and amount of these expenditures are subject to regulatory and
other uncertainties described above as well as obtaining the necessary permits
and approvals. For periods beyond 2000, additional environmentally related
capital expenditures will be required, although the Company cannot accurately
predict the levels of such expenditures at this time.
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
29
at the Refinery. 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 reserved 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 reserves, 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.
Item 3. Legal Proceedings
Litigation Matters
The Company, its subsidiaries 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. See Note 18 of Notes to
Consolidated Financial Statements.
Although Lyondell, its subsidiaries and its joint ventures are involved in
numerous and varied legal proceedings, a significant portion of its
outstanding litigation arose in three 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; and (3) claims for personal
injury and/or property damage and air, noise and water pollution allegedly
arising out of operations.
Environmental Matters
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 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. In connection with the transfer of such
liabilities, 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.
The party with the most significant potential liability exposure is
responsible for case
30
management and associated costs while allowing the non-case-managing party to
protect its interests. Under the Revised Cross-Indemnity Agreement, the
Company will assume responsibility for its proportionate share of future costs
for waste site matters not covered by ARCO insurance. Subject to the
uncertainty inherent in all litigation, management believes the resolution of
the matters pursuant to the Revised Cross-Indemnity Agreement will not have a
material adverse effect upon the Consolidated Financial Statements of the
Company.
Pursuant to the terms of the Revised Cross-Indemnity Agreement, the Company
is currently contributing funds to the cleanup of one waste site (Brio,
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.
As of December 31, 1998, the Company has accrued $9 million related to
future CERCLA, RCRA and TNRCC assessment and remediation costs associated with
the above-mentioned sites. The costs 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
reserve has been established, new technology or future developments such as
involvement in other CERCLA, RCRA, TNRCC or other comparable state law
investigations, could require the Company to reassess its potential exposure
to environmental matters.
In connection with its acquisition of ARCO Chemical, the Company is
successor 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 oxygenates and
polystyrenics businesses of ARCO Chemical (the "Former ARCO Businesses"),
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 Former ARCO
Businesses. ARCO also indemnified ARCO Chemical for certain federal, foreign,
state and local taxes that might be assessed upon audit of the operations of
the Former ARCO Businesses for periods prior to July 1, 1987.
The Acquired Business' environmental liability totaled $39 million at
December 31, 1998 based on the Company's latest assessment of potential future
remediation costs. A portion of the liability is related to the Beaver Valley
plant site, located in Monaca, Pennsylvania. ARCO Chemical sold the Beaver
Valley plant assets to NOVA Chemicals Inc. ("NOVA") on September 30, 1996, but
retained responsibility for remediation of the land. Final approval of the
remediation methods has been granted by the Pennsylvania Department of
Environmental Protection ("PADEP") based upon risk assessment studies
submitted by the Company. The Company succeeded to an agreement with Beazer
East, Inc. ("Beazer") whereby Beazer has agreed to pay for approximately 50
percent of the Beaver Valley plant site remediation costs. The Company has
also succeeded to an agreement with Beazer and the U.S. government whereby the
government will pay 28.5 percent of the costs incurred by the Company and
Beazer for remediation of substantial portions of the Beaver Valley site. The
remainder of the liability is related to four other plant facilities,
including the Channelview facility, and one federal Superfund site for amounts
ranging from $2 million to $18 million per site. ARCO Chemical was involved in
administrative proceedings or lawsuits relating to a minimal number of other
Superfund sites. However, the Company estimates, based on currently available
information, that potential loss contingencies associated with these sites,
individually and in the aggregate, are not significant. Substantially all
amounts accrued are expected to be paid out over the next five to ten years.
The Company has relied upon remedial investigation/feasibility studies
("RI/FS") at each site of the Acquired Business as a basis for estimating
remediation costs at the site. RI/FS or preliminary assessments have been
completed at most of the sites. However, selection of the remediation method
and the cleanup standard to be applied are, in most cases, subject to approval
by the appropriate government authority. Accordingly, the Company may have
possible loss contingencies in excess of the amounts reserved to the extent
the scope of remediation required, the final remediation method selected and
the cleanup standard applied vary from the assumptions used in estimating the
liability. The Company estimates that the upper range of these possible loss
contingencies should not exceed the amount accrued by more than $65 million.
31
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of Registrant as of February 1,
1999.*
Name, Age and Present Business Experience During Past
Position with Lyondell Five Years and Period Served as Officer(s)
---------------------- ------------------------------------------
Dan F. Smith, 52.............. Mr. Smith was named Chief Executive Officer and
Director, President and President in December 1996. Mr. Smith has been a
Chief Executive Officer Director since 1988. Mr. Smith served as
President and Chief Operating Officer of the
Company from 1994 to December 1996. Prior to
1994, Mr. Smith held various positions including
Executive Vice President, 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.
Van Billet, 44................ Mr. Billet was appointed Vice President and
Vice President and Controller Controller in July 1998. Mr. Billet previously
served as Vice President and Controller of ARCO
Chemical since March 1997. He served as
Corporate Controller of ARCO Chemical from July
1993 to January 1995, and Manager of Planning
and Analysis for Performance Chemicals and
Business Development from January 1995 to March
1997.
T. Kevin DeNicola, 44......... Mr. DeNicola has been Vice President Corporate
Vice President, Corporate Development since April 1998, overseeing
Development strategic planning and investor relations. 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 owners committees of both
Equistar and LCR.
Edward J. Dineen, 44.......... Mr. Dineen was appointed Senior Vice President,
Senior Vice President, Urethanes and Performance Chemicals in July
Urethanes and 1998. Prior to this position, he served as Vice
Performance Chemicals 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.
Morris Gelb, 52............... Mr. Gelb was appointed to his current position
Executive Vice President and in December 1998. Previous to this appointment,
Chief Operating Officer he served as Senior Vice President,
Manufacturing, Process 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.
32
Name, Age and Present Business Experience During Past
Position with Lyondell Five Years and Period Served as Officer(s)
---------------------- ------------------------------------------
John Hollinshead, 49.......... Mr. Hollinshead was appointed to his current
Vice President, Human position in July 1998. Previous to this
Resources appointment, he was Director, Human Resources,
Manufacturing and Engineering for Equistar from
1997. Mr. Hollinshead served as Manager, Human
Resources with Lyondell from 1985 to 1997.
Allen C. Holmes, 51........... Before appointment to his current position in
Vice President, Corporate July 1998, Mr. Holmes served as Vice President,
Services Tax and Business Systems, with the
responsibility for tax planning and compliance,
business systems and administrative services for
Lyondell. Prior to joining Lyondell, Mr. Holmes
served as Vice President and General Tax Officer
of ARCO from 1991 until May 1998.
Alan D. Kornfeld, 56.......... Mr. Kornfeld was appointed to his current
Vice President, Strategic position in July 1998. From 1992 until 1994, he
Ventures served as Vice President, Styrenics of ARCO
and Latin America Chemical, from 1995 to 1996 he was Vice
President, Plastics for ARCO Chemical, and from
1996 to 1997 he was Vice President, Isocyanates.
Most recently he served as Vice President, Basic
Chemicals for ARCO Chemical.
Daniel A. Mariano, 55......... Mr. Mariano was appointed to his current
Vice President, Supply Chain position in July 1998. From 1991 to 1995 he
served as Director, Worldwide Business
Management of ARCO Chemical, and from 1996 to
1997 he was Director of Worldwide Raw Materials
for ARCO Chemical. Most recently, Mr. Mariano
was Vice President, Supply Chain for ARCO
Chemical.
Robert J. Millstone, 55....... Before appointment to his current position in
Vice President and General July 1998, Mr. Millstone served as Vice
Counsel President and General Counsel of ARCO Chemical
since 1995. He was Associate General Counsel of
ARCO Chemical from January 1989 to December
1994, and Secretary of ARCO Chemical from 1990
to 1998.
Jeffrey R. Pendergraft, 50.... Mr. Pendergraft was named Executive Vice
Executive Vice President and President and Chief Administrative Officer in
Chief Administrative Officer July 1998. Prior to this appointment, he served
as Senior Vice President of the Company since
May 1993 and as Vice President, General Counsel
and Secretary of the Company beginning in 1988.
Joseph M. Putz, 57............ Mr. Putz was appointed to his current position
Senior Vice President, in July 1998. Mr. Putz served as Vice President,
Special Assignments Control and Administration of Lyondell (at that
time a division of ARCO) beginning in 1987 until
December 1997, when he was named Senior Vice
President, Finance and Administration of
Equistar.
Edward W. Rich, 48............ Mr. Rich was named Vice President, Finance and
Vice President, Finance and Treasurer in January 1998. Previously, Mr. Rich
Treasurer served as Treasurer of Dow Corning Corporation
from February 1993 to January 1998. Prior to
February 1993, Mr. Rich held various financial
and legal positions with The Dow Chemical
Company.
33
Name, Age and Present Business Experience During Past
Position with Lyondell Five Years and Period Served as Officer(s)
---------------------- ------------------------------------------
Lyndon Stanton, 55............ Prior to appointment to his current position
Vice President and President with the Company in July 1998, Mr. Stanton
of served in various managerial positions with ARCO
Lyondell European Operations Chemical Europe since 1979. He was President,
European Operations from 1994 until 1997, and
Vice President, Business Management from 1991
until 1994.
Debra L. Starnes, 46.......... Ms. Starnes has served in various engineering
Senior Vice President, and managerial positions with the Company since
Intermediate Chemicals 1975. Before her most recent appointment in July
1998, she served as Senior Vice President,
Polymers for Equistar since December 1997. Ms.
Starnes served as Lyondell's Vice President,
Petrochemical Business Management and Marketing
from 1992 to 1994, Senior Vice President of the
Company from 1994 to 1995, and Senior Vice
President, Polymers from 1995 until 1997.
Robert E. Tolbert, 56......... Mr. Tolbert was appointed to his current
Vice President, Information position in July 1998. He served as General
Services Auditor for ARCO from 1991 until 1995, when he
was named Vice President, Information Services
for ARCO Chemical.
Edward V. Zenzola, 55......... Mr. Zenzola joined ARCO Chemical in 1969 and
Vice President and President held various financial positions in its United
of States operations. He assumed responsibility for
Lyondell Asia Pacific ARCO Chemical's Japan operation upon appointment
as President, ARCO Chemical Japan in 1993.
Before appointment to his current position in
July 1998, Mr. Zenzola served as President, ARCO
Chemical Asia Pacific since 1996.
- --------
* 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
34
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock is listed on the New York Stock Exchange.
The reported high and low sale prices of the Common Stock on the New York
Stock Exchange (New York Stock Exchange Composite Tape) for each quarter from
January 1, 1997 through December 31, 1998, inclusive, were as set forth below.
Period High Low
------ ---- ---
1997:
First Quarter......................................... 25 1/2 21 5/8
Second Quarter........................................ 23 5/8 18 3/8
Third Quarter......................................... 27 3/8 21 7/8
Fourth Quarter........................................ 27 1/4 23 15/16
1998:
First Quarter......................................... 36 1/8 23 1/4
Second Quarter........................................ 38 1/8 26 1/2
Third Quarter......................................... 30 15/16 19 1/2
Fourth Quarter........................................ 22 7/16 15
On March 1, 1999, the closing price of the Common Stock was $13 3/8, and
there were approximately 1,860 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 the Company's results of operations, financial condition, cash
position and requirements, investment opportunities, future prospects and
other factors deemed relevant by the Board of Directors. Subject to these
considerations and to the legal considerations discussed in the following
paragraph, the Company currently intends to distribute to its Stockholders
cash dividends on its Common Stock at a quarterly rate of $.225 per share.
During 1998, the Company paid $70 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 the Company's results of operations and capable of being sustained.
Lyondell's credit facilities also could limit the Company's ability to pay
dividends under certain circumstances. See Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The operation of certain of the Company's employee benefit plans may result
in the issuance of Common Stock upon the exercise of options granted to
employees of the Company, including its officers. Although the terms of these
plans provide that additional shares may be issued to satisfy the Company's
obligations under the options, the Company generally intends to cause Common
Stock to be repurchased in the market or to be issued out of treasury in order
to satisfy these obligations.
35
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements, including the related notes, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
For the year ended December 31
------------------------------------
Millions of dollars, except per share data 1998(a) 1997(b) 1996 1995 1994
- ------------------------------------------ ------- ------- ------ ------ ------
Results of Operations Data:
Sales and other operating revenues...... $1,447 $2,878 $5,052 $4,936 $3,857
Income from equity investments.......... 256 132 -- -- --
Net income.............................. 52 286 126 389 223
Basic and diluted earnings per share.... .67 3.58 1.58 4.86 2.78
Dividends per share..................... .90 .90 .90 .90 .90
Balance Sheet Data:
Total assets............................ 9,225 1,559 3,276 2,606 1,663
Long-term debt, less current
maturities............................. 5,391 345 1,194 807 707
- --------
(a) The financial information for 1998 includes five months of operating
results for ARCO Chemical Company (acquired as of July 28, 1998 and
accounted for using the purchase method of accounting). It also includes
twelve months of Equistar Chemicals, LP, LYONDELL-CITGO Refining LP and
Lyondell Methanol Company, L.P., each accounted for as an equity
investment.
(b) The financial information for 1997 includes twelve months of operating
results for Lyondell and Lyondell Methanol Company, L.P. It also includes
twelve months of LYONDELL-CITGO Refining LP and one month of Equistar
Chemicals, LP, each accounted for as an equity investment.
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.
GENERAL
Lyondell took major strategic actions during 1997 and 1998 to strengthen the
Company's position in the chemicals industry. In December 1997, Equistar was
formed by combining the olefins and polymers businesses of Lyondell and
Millennium. In May 1998, Equistar was expanded with the addition of the
olefins and oxygenated chemicals businesses of Occidental Chemical. During the
third quarter 1998, Lyondell acquired ARCO Chemical, the world's largest
producer of PO and a leading worldwide producer and marketer of polyether
polyols, PG, PGE, TDI, SM and MTBE.
The operations of the Acquired Business form the Company's intermediate
chemicals and derivatives business segment. Lyondell's petrochemicals,
polymers and refining segments are conducted through its interests in Equistar
and LCR. The methanol business conducted through Lyondell Methanol is not a
reportable segment for financial disclosure purposes. Lyondell accounts for
its investments in Equistar, LCR and Lyondell Methanol using the equity method
of accounting.
In addition to the discussion of Lyondell's actual results, a discussion of
the unaudited pro forma combined historical results of Lyondell and ARCO
Chemical (see Note 3 of Notes to Consolidated Financial Statements) is
presented in order to facilitate the understanding of operating results. Also,
actual 1998 Equistar operating results are compared to the combined operating
results of the businesses contributed to Equistar by Lyondell and Millennium
for the first eleven months of 1997, together with Equistar's December 1997
operating results.
36
RESULTS OF OPERATIONS
Lyondell Chemical Company
Overview
Net income for 1998 was $52 million compared with $286 million in 1997 and
$126 million in 1996. Earnings for 1998 included unusual charges of $48
million after tax, related to the acquisition of ARCO Chemical, the
renegotiated labor agreement at LCR and the formation of Equistar, compared to
unusual charges of approximately $25 million after tax in 1997 related to the
formation of Equistar. Excluding the unusual charges, the decline in net
income of $211 million for 1998 versus 1997 was primarily due to lower prices
and margins in the petrochemicals and polymers segments of Equistar. Increases
in operating income from the Acquired Business and the refining segment of LCR
were more than offset by higher interest expense as a result of entering into
the Credit Facility. The earnings increase in 1997 versus 1996 was primarily
due to higher sales margins and volumes for petrochemicals and methanol and a
higher 1997 LCR profit contribution as increased volumes of higher-margin
heavy crude oil were processed as a result of the completion of the Upgrade
Project. Earnings for 1996 also included an approximate $20 million after-tax
gain from the sale of an undivided interest in the methanol facility.
For the fourth quarter 1998, Lyondell reported a loss of $27 million
compared to a third quarter 1998 loss of $15 million. The fourth quarter 1998
loss included unusual after-tax charges of $6 million primarily related to a
new agreement with the labor union at LCR and formation costs at Equistar. The
new labor agreement at LCR is expected to result in future cost savings. The
third quarter 1998 loss included unusual after-tax charges of $38 million
related to the Acquisition and the formation of Equistar. The fourth quarter
loss of $21 million, before unusual charges, compared to third quarter income
of $23 million before unusual charges, primarily reflected lower operating
income and higher interest expense versus the third quarter.
Before unusual charges, operating income was $119 million in the fourth
quarter 1998 compared to $148 million in the third quarter 1998. The
intermediate chemicals and derivatives segment showed improvement due to
inclusion of a full three months of operations in the fourth quarter versus
only two months in the third quarter. On a comparable three-month basis, the
intermediate chemicals and derivatives segment showed a decline as lower MTBE
margins and seasonally lower MTBE volumes more than offset the benefits from
higher sales volumes of core products, defined as PO and derivatives and TDI.
Results for the petrochemicals and polymers businesses of Equistar reflected
lower prices and margins as well as the effects of the acceleration of a
scheduled plant turnaround. The timing of this turnaround was accelerated in
light of the current down cycle in those segments. LCR operating results were
negatively affected by a fire at a unit and a full quarter of cutbacks of
Venezuelan crude oil supplies. Higher interest expense reflects a full three
months of charges in the fourth quarter under the Credit Facility.
Revenues, Operating Costs and Expenses--The operating results for 1998
include the Company's income from equity investments in Equistar, LCR and
Lyondell Methanol and five months of operating results of the Acquired
Business. The Acquisition was accounted for as a purchase and the operating
results reflect the depreciation and amortization of the estimated fair value
of the assets, including the amortization of $1.4 billion of goodwill over its
estimated forty-year life.
The Company's operating results for 1997 include: eleven months of operating
results of the Company's petrochemicals and polymers segments, which were
contributed to Equistar on December 1, 1997; one month of income from its
equity investment in Equistar; the Company's income from its equity investment
in LCR; and the operating results of Lyondell Methanol.
For 1996, each of the segments was fully consolidated as part of Lyondell.
Unusual Charges--Unusual charges of $82 million in 1998 increased versus $40
million in 1997 primarily due to the write-off of $57 million of costs
assigned to in-process research and development in connection with the
acquisition of ARCO Chemical. The Company's pro rata share of costs of a new
labor agreement at LCR was more than offset by a decrease in the Company's pro
rata share of Equistar formation costs.
37
INTEREST EXPENSE--Interest expense was $287 million in 1998, $75 million in
1997 and $81 million in 1996. Interest expense in 1998 increased versus 1997
primarily due to interest on the $6.5 billion of debt drawn under the Credit
Facility on July 28, 1998. The decrease in 1997 versus 1996 is primarily due
to the assumption by Equistar of Lyondell indebtedness as of December 1, 1997.
INCOME TAX--The effective tax rate for 1998 was 41.5 percent compared to
37.3 percent in 1997 and 35.7 percent in 1996. The effective tax rate
increased in 1998 versus 1997 due to the Company's current inability to claim
foreign tax credits and limitations on the use of net operating losses for
state tax purposes. The effective income tax rate increased in 1997 versus
1996 due to the non-deductibility of certain executive compensation.
PRO FORMA RESULTS OF THE COMPANY AND ARCO CHEMICAL
The following is a discussion of the operating results for 1998 and 1997
included in the unaudited pro forma combined historical results of the Company
and ARCO Chemical (see Note 3 of Notes to Consolidated Financial Statements).
The unaudited pro forma combined historical results give effect to the
Acquisition, the Credit Facility drawdown in connection with the Acquisition,
the formation of Equistar and the deconsolidation of Lyondell Methanol as of
the beginning of 1998 and 1997, respectively. The following table sets forth
sales volumes for this segment on a pro forma basis:
FOR THE
YEAR ENDED
FOURTH THIRD DECEMBER 31
QUARTER QUARTER -----------
IN MILLIONS 1998 1998 1998 1997
----------- ------- ------- ----- -----
VOLUMES (A):
Core products (pounds)........................ 1,077 971 4,159 4,135
Co-products:
SM (pounds)................................. 819 698 2,912 2,577
TBA and derivatives (gallons)............... 245 256 995 1,054
- --------
(a)Volumes are actual for the fourth quarter 1998 and pro forma for the third
quarter 1998 and for the years ended December 31, 1998 and 1997. Core products
include PO, PO derivatives and TDI.
REVENUES--Pro forma revenues of $3.6 billion for 1998 decreased 11 percent
compared to pro forma revenues of $4.0 billion for 1997. The decrease was
primarily due to lower average sales prices in 1998, reflecting a combination
of downward pressure from lower feedstock costs, ongoing competition in PO
derivatives and TDI markets, the negative effects of a stronger U.S. dollar on
foreign sales, and the effects of weaker Asian markets. Core product volumes
were essentially flat versus 1997 as stronger demand for certain PO
derivatives in the U. S. and Europe was offset by lower volumes in Asian
markets. Increased SM volumes in 1998 primarily reflect higher contractual
offtake under long-term SM processing arrangements. TBA and derivatives
volumes decreased in 1998 by six percent, mainly due to lower MTBE demand.
INCOME FROM EQUITY INVESTMENTS--Pro forma income for 1998 was $256 million
compared to pro forma income of $526 million for 1997. The decrease of $270
million was primarily due to lower margins for petrochemicals and polymers as
a result of declining prices, partially offset by higher earnings from LCR as
greater volumes of extra heavy crude oil were processed in 1998.
OPERATING INCOME--Pro forma operating income of $631 million in 1998
decreased $32 million compared to $663 million in 1997. The 1998 period
included unusual charges of $62 million, primarily related to the write-off of
in-process research and development projects of the Acquired Business and
Equistar formation costs. The 1997 period included unusual charges of $215
million, primarily related to restructuring and other costs of ARCO Chemical
and Equistar formation costs. Excluding these items, operating income
decreased $185 million. The lower income from equity investments was only
partly offset by higher operating income of ARCO Chemical. The improved income
of ARCO Chemical and the Acquired Business in 1998 was primarily due to higher
core product margins and lower fixed costs. Core product margins improved as
feedstock costs decreased more than sales prices. The fixed cost decrease
reflected the benefits of the cost reduction program and lower maintenance
expense due to fewer scheduled plant turnarounds.
38
Net income--Pro forma net income for 1998 was $42 million compared with $27
million for 1997. Excluding the effects of the unusual charges, pro forma net
income decreased by $84 million in 1998 as lower equity income more than offset
improved operating results and lower foreign exchange losses of the Acquired
Business.
Intermediate Chemicals and Derivatives Segment
Comparing the fourth quarter 1998 to the full pro forma third quarter 1998 of
the Acquired Business, the benefit from an increase in sales volumes for core
products was more than offset by lower MTBE margins and volumes. Core product
volumes were 11 percent higher due to increased demand for urethane products,
including polyols and TDI, in the automotive and housing markets. All three
regions, the U.S., Europe and Asia, showed volume improvement, particularly the
Asia region, which showed nearly a 50 percent increase. MTBE margins declined
15 cents per gallon for the fourth quarter 1998 versus the third quarter
primarily due to lower worldwide gasoline prices, which pushed down MTBE
prices, as well as higher raw material costs in Europe.
Equistar Chemicals, LP
Selected Pricing Information--The following graphs present selected industry
pricing information for the periods shown below.
Chart 1 - Month-end average delivered-contract, monthly low price agreement
prices for Ethylene as reported by CMAI Monomers Market Report from January
1996 through December 1998. Chart indicates 1996 prices increased steadily,
with an annual average of the month-end prices of 23.33 cents per pound. 1997
prices were relatively flat, although slightly decreasing, with an annual
average of the month-end prices of 27.42 cents per pound. 1998 prices declined
steadily with an annual average of the month-end prices of 21.17 cents per
pound. Selected month-end average prices are as follows: January 1996--19.75
cents per pound, December 1996--26.25 cents per pound, December 1997--26.25
cents per pound, December 1998--19.00 cents per pound.
Chart 2 - Month-end average spot price WTS low prices for Crude Oil as reported
by Platts Oilgram Price Report from January 1996 through December 1998. Chart
indicates volatile, but increasing prices in 1996 with the chart's peak
occurring at $24.32 per barrel in December 1996. Annual average month-end
prices were $21.35 per barrel in 1996. Prices decreased in 1997 with an annual
average of the month-end prices of $19.35 per barrel. Prices declined steadily
in 1998 with a low point of $10.02 per barrel in December 1998 and an annual
average of the month-end prices of $12.94 per barrel. Selected month-end
average prices are as follows: January 1996--$18.39 per barrel, December 1996--
$24.32 per barrel, December 1997--$17.13 per barrel, December 1998--$10.02 per
barrel.
Actual 1998 versus Combined 1997 Results; Actual 1997 versus Actual 1996
Results
Due to the formation of Equistar, Lyondell's change to the equity method of
accounting for its investment in Equistar in December 1997, and the resulting
difficulty in comparing historically reported financial data, the following
review of the petrochemicals and polymers segments is provided on a dual basis.
The actual 1998 twelve months operating results reported by Equistar, including
the Occidental Contributed Business from May 15, 1998, are compared to the
combined 1997 historical results of the businesses contributed to Equistar by
Lyondell and Millennium for the eleven months ended November 30, 1997 and for
the one month ended December 31, 1997 of Equistar. The actual 1997 operating
results reported by the petrochemicals and polymers segments of Lyondell for
eleven months and by Equistar for one month are then compared to the actual
1996 operating results of the petrochemicals and polymers segments of Lyondell.
The combined results for 1997 are not intended to and do not represent pro
forma results of Equistar. In addition, they may not be indicative of results
that will be obtained in the future.
39
The following tables for the petrochemicals and polymers segments set forth:
sales volumes for major products; revenues, including intersegment sales; and
operating income of these segments as reported by Equistar for 1998 and,
previously, by Lyondell for 1997 and 1996; as well as Lyondell's income from
its equity investment in Equistar, before unusual charges, for the twelve
months ended December 31, 1998, and the one month ended December 31, 1997:
Petrochemicals Segment
For the year
ended December For the year ended
31 December 31
--------------- ------------------
Combined
In millions 1998 1997 1997 1996
----------- ------ -------- --------- ---------
Volumes:
Selected petrochemicals products:
Olefins (pounds)
Equistar........................... 16,716 9,429 737 --
Lyondell........................... -- -- 8,084 7,973
Aromatics (gallons)
Equistar........................... 271 193 17 --
Lyondell........................... -- -- 176 188
Revenues:
Equistar........................... $3,463 $3,866 $ 284 $ --
Lyondell........................... -- -- 2,532 2,293
Operating income:
Equistar operating income.......... $ 319 $ 684 $ 47 $ --
====== ====== ========= =========
Lyondell equity income (a)......... $ 159 $ 28 $ --
Lyondell operating income.......... -- 444 240
------ --------- ---------
Segment total.................... $ 159 $ 472 $ 240
====== ========= =========
- --------
(a) Lyondell contributed its petrochemicals business to Equistar and began to
account for this investment using the equity method of accounting on
December 1, 1997.
Revenues--Revenues for 1998 declined versus combined 1997 revenues,
primarily due to lower industry sales prices for ethylene, propylene and co-
products, partially offset by increased sales volumes as a result of the
addition of the Occidental Contributed Business in May 1998. The decrease in
sales prices is primarily attributable to increased industry capacity and
downward pressure on sales prices as a result of lower feedstock costs. The
sales price decreases began in the fourth quarter of 1997 and continued their
downward trend through most of 1998. Revenues, as reported by Lyondell,
increased in 1997 versus 1996 due primarily to increases in industry sales
prices for ethylene and co-products. Sales prices in 1997 showed significant
increases over 1996 as strong demand from the polyolefins markets resulted in
a tighter balance of supply and demand for olefins. The 1997 increase in sales
prices also reflected cost increases for olefins feedstocks over the course of
1996. In addition, olefins sales volumes increased due to strong demand in the
downstream markets as well as from planned and unscheduled industry
turnarounds.
Operating Income--Operating income decreased in 1998 versus combined 1997
primarily due to lower product margins as sales prices declined more than
feedstock costs and, to a lesser extent, slightly higher fixed costs. The
lower margins were partially offset by the addition of the Occidental
Contributed Business in May 1998. Operating income, as reported by Lyondell,
increased significantly in 1997 versus 1996 due to higher sales margins and
volumes. Sales margins improved due to higher sales prices, resulting from
stronger demand in the downstream polyolefins markets, and lower petrochemical
feedstock costs. Stronger demand also resulted in increased sales volumes.
40
Polymers Segment
For the year
ended December For the year ended
31 December 31
--------------- -------------------
Combined
In millions 1998 1997 1997 1996
----------- ------ -------- --------- ---------
Volumes:
Polymers products (pounds)
Equistar........................... 6,488 6,132 167 --
Lyondell........................... -- -- 1,985 2,136
Revenues:
Equistar........................... $2,058 $2,513 $ 186 $ --
Lyondell........................... -- -- 770 783
Operating income:
Equistar operating income.......... $ 177 $ 233 $ 22 $ --
====== ====== ========= =========
Lyondell equity income (a)......... $ 89 $ 13 $ --
Lyondell operating income.......... -- 82 97
------ --------- ---------
Segment total.................... $ 89 $ 95 $ 97
====== ========= =========
- --------
(a) Lyondell contributed its polymers business to Equistar and began to
account for this investment using the equity method of accounting on
December 1, 1997.
Revenues--Revenues decreased in 1998 versus combined 1997 as a result of
decreases in industry sales prices. These sales price decreases were a result
of excess industry supply and lower feedstock costs. The excess industry
supply started during the fourth quarter of 1997 and continued in a downward
trend through 1998. Revenues, as reported by Lyondell, increased in 1997
versus 1996 as higher industry sales prices for polyethylene were only
partially offset by lower industry sales prices for polypropylene.
Operating Income--Operating income for 1998 decreased versus combined 1997
primarily due to decreases in polymers sales prices, which more than offset
decreases in polymers feedstock costs. Operating income, as reported by
Lyondell, in 1997 was comparable to 1996.
Unallocated Items
Equistar's unusual charges, which are not allocated to either the
petrochemicals or polymers segments, were $35 million and $42 million in 1998
and 1997, respectively. Both years included costs associated with the
formation of Equistar and the consolidation of certain operations. These costs
were paid by Equistar and allocated to the Partners in accordance with their
ownership percentages.
Fourth Quarter 1998 versus Third Quarter 1998
Equistar reported a pretax loss of $51 million for the fourth quarter 1998
compared to pretax income of $29 million in the third quarter 1998. The
decrease was attributable to earnings declines in both the petrochemicals and
polymers segments. In petrochemicals, decreased ethylene and co-product sales
prices were only partially offset by lower feedstock prices. Also contributing
to the petrochemicals earnings decrease in the fourth quarter was the
turnaround of the LaPorte facility. Due to current market conditions, Equistar
elected to both accelerate the timing and extend the length of the turnaround.
The turnaround started in mid-November 1998 and continued through mid-February
1999, rather than as previously scheduled for the third quarter 1999. In
polymers, earnings also decreased primarily as a result of sales price
declines, which exceeded the price decrease of the ethylene feedstock. In
addition, the scheduled turnaround and expansion of the Victoria facility had
a negative impact on fourth quarter polymers earnings. This project was
completed during the fourth quarter 1998 and increased the plant's annual HDPE
capacity by approximately 125 million pounds. Earnings were also negatively
impacted by the reduction of inventories. As a result of these actions,
earnings were unfavorably affected by over $20 million. However Equistar
reduced total working capital during the fourth quarter by approximately $207
million. In addition, Equistar realized a reduction of working capital of
approximately $130 million from the sale of receivables in December 1998 under
a three-year revolving securitization agreement.
41
LYONDELL-CITGO Refining LP
Refining Segment
Lyondell's refining segment consists of the results of operations of LCR.
Effective January 1, 1997, Lyondell began to account for its investment in LCR
using the equity method of accounting. Lyondell's share of LCR's earnings
before unusual charges for 1998 was $116 million compared to $102 million for
1997. LCR's results of operations were consolidated in 1996. The Company would
have recorded $2 million in equity income had the Company followed the equity
method of accounting for its investment in LCR during 1996. The narrative
discussion that follows compares LCR's 1998 operating results to the
information for 1997 and 1996.
The following table sets forth sales volumes for LCR's refined products:
For the year
ended December
31
--------------
Thousand barrels per day 1998 1997 1996
------------------------ ---- ---- ----
Refined products:
Gasoline................................................. 121 111 101
Diesel and heating oil................................... 79 68 47
Jet fuel................................................. 17 17 24
Aromatics................................................ 10 11 9
Other refined products................................... 103 93 82
--- --- ---
Total refined products volumes......................... 330 300 263
=== === ===
The following table sets forth processing rates at the Refinery for the
periods indicated. Refinery runs for 1996 are primarily heavy crude oil,
whereas the 1997 and 1998 refinery runs reflect higher volumes of extra heavy
crude oil processed.
For the year
ended December
31
--------------
Thousand barrels per day 1998 1997 1996
------------------------ ---- ---- ----
Crude processing rates:
Crude Supply Agreement--coked............................ 223 203 122
Other heavy crude oil--coked............................. 19 7 --
Other crude oil.......................................... 18 14 96
--- --- ---
Total crude oil........................................ 260 224 218
=== === ===
Revenues--Revenues for LCR, including intersegment sales, were $2.1 billion
in 1998, $2.7 billion in 1997 and $2.8 billion in 1996. The decrease in 1998
versus 1997 primarily resulted from lower refined products prices, which
declined as a result of lower industry crude prices. These decreases were
partially offset by higher sales volumes as production levels increased,
reflecting a full year's benefit from the Upgrade Project. The slight decrease
in 1997 compared to 1996 primarily resulted from lower crude oil resales,
lower refined products prices, and lower aromatics prices, particularly
paraxylene. These decreases were partially offset by higher sales volumes as
production levels increased after completion of the Upgrade Project in the
first quarter 1997.
Operating Income--LCR's operating income was $213 million in 1998, $181
million in 1997 and $4 million in 1996. The increase in 1998 versus 1997
reflected the benefits of the Upgrade Project, which resulted in higher
average margins as higher volumes of extra heavy crude oil were processed in
the coking mode. The Upgrade Project was completed in the first quarter 1997
and, initially, higher costs were incurred due to normal operational start-up
activities, during which the Refinery did not operate at peak rates. Cost
savings resulting from improved operational efficiency in 1998 were partly
offset by higher depreciation expense attributable to the Upgrade Project.
LCR's operating income improved in 1997 compared to 1996 due to improved
margins
42
caused primarily by higher volumes of extra heavy crude oil processed in the
coking mode under the Crude Supply Agreement. These improved margins were
offset partially by higher production costs, primarily depreciation expense,
and lower paraxylene margins.
Interest Expense--LCR's net interest expense was $43 million in 1998, $35
million in 1997 and none in 1996. Interest expense on debt related to
construction of the Upgrade Project was capitalized through its completion,
including the first quarter of 1997 and the full year 1996.
Fourth Quarter 1998 versus Third Quarter 1998
LCR had pretax income of $32 million in the fourth quarter 1998 compared to
$54 million in the third quarter 1998. The decline in earnings was due to an
unusual charge related to a new agreement with the labor union, a fire in a
hydrotreater unit, and the full quarter impact of lower Venezuelan crude oil
allocations. Beginning in August, LCR began receiving reduced allocations of
crude oil from PDVSA due to announced cutbacks in crude oil production in
Venezuela. While LCR was able to obtain alternate supplies of crude oil, the
margin for these crude oils was lower than for the extra heavy Venezuelan
crude oil purchased under the Crude Supply Agreement. Total crude oil
processing rates averaged 273,000 barrels per day in the fourth quarter 1998
compared to 267,000 barrels per day in the third quarter 1998. The new labor
agreement is expected to result in efficiency gains and cost savings over the
next few years.
Lyondell Methanol Company, L.P.
Lyondell's share of Lyondell Methanol's earnings for 1998 was $6 million.
The Company would have recorded approximately $43 million in income from its
equity investment in Lyondell Methanol had the Company followed the equity
method of accounting for its investment in Lyondell Methanol during 1997. The
decrease in equity income in 1998 versus 1997 was due to significant declines
in the sales prices of methanol beginning in the first quarter 1998. Increased
supply due to new capacity, as well as weaker demand from the Far East, caused
worldwide methanol price declines.
FINANCIAL CONDITION
Operating Activities--Lyondell's cash provided by operating activities
totaled $263 million in 1998 compared to $269 million in 1997. Cash provided
by operating activities in 1998 included $160 million of proceeds from the
sale of domestic receivables in December 1998 under a three year revolving
securitization agreement. Cash provided by operations in 1998 was negatively
affected by the payment of liabilities associated with the Acquisition and the
payment of accounts payable retained by Lyondell in the formation of Equistar
in December 1997.
Investing Activities--As of July 28, 1998, Lyondell completed the
Acquisition for a total cost of approximately $5.9 billion, excluding assumed
debt. The Company made capital expenditures of $64 million in 1998, primarily
related to the Acquired Business. During August 1998, Lyondell announced the
delay of construction of a propylene oxide plant ("PO-11") previously
announced by ARCO Chemical. The previous plan called for the plant to start-up
in late 2000. The Company currently anticipates that the additional capacity
will be available in late 2002 or early 2003. Equistar's 1998 capital
expenditures totaled $200 million, of which $88 million was Lyondell's pro
rata share. LCR made 1998 capital expenditures of $61 million, of which
Lyondell funded $35 million through loans to LCR. The Company's 1999 capital
budget is $273 million, including its $123 million pro rata share of the joint
ventures' capital budgets.
Pursuant to its plans to divest certain assets, Lyondell announced, on
February 25, 1999, the signing of a letter of intent for the sale of its
aliphatic diisocyanates (ADI) business. On March 1, 1999, Equistar announced
the signing of a letter of intent to sell its compounds and concentrates
business. Neither sale is expected to have a material effect on Lyondell's
consolidated financial statements.
43
Distributions in excess of earnings for 1998 were $403 million by Equistar,
$20 million by LCR, and $12 million by Lyondell Methanol. The $403 million
distribution from Equistar includes $197 million resulting from the Company's
repayment of the $345 million note payable to Equistar.
Financing Activities--During the third quarter 1998, the Company obtained a
$7.0 billion Credit Facility of which $6.5 billion was drawn down in
connection with the financing of the Acquisition. As part of the acquisition,
Lyondell assumed approximately $870 million of ARCO Chemical debt. Borrowing
under the Credit Facility of $6.5 billion was used for the purchase of all
outstanding shares of ARCO Chemical stock; repayment of debt, including the
$345 million note payable to Equistar, short-term borrowing of Lyondell and
ARCO Chemical, and other long-term borrowing of ARCO Chemical; and payment of
certain debt issuance costs.
Cash used in other financing activities in 1998 consisted primarily of $59
million used to repurchase Common Stock. From time to time the Company
purchases its shares in the market to issue under the Company's employee
compensation and benefits plans, including stock option and restricted stock
plans. In addition, the Company completed the stock buyback program authorized
in September 1997 by the Board of Directors in the second quarter of 1998. A
total of 2,567,051 shares were purchased under the stock buyback program for
$75 million.
The Company paid regular quarterly dividends of $.225 per share of common
stock in 1998.
In February 1999, Equistar completed an offering of senior unsecured notes
in the principal amount of $900 million. The proceeds were primarily used to
refinance existing indebtedness of Equistar.
In late 1998, LCR postponed a planned debt refinancing. The postponement was
due to bond market conditions and political change in Venezuela associated
with the recent presidential elections. The proceeds of such refinancing would
have been used to repay third party construction loans and subordinated loans
made to LCR by Lyondell and CITGO with any remaining cash distributed to the
partners. LCR intends to pursue the refinancing as soon as practical.
Liquidity--As of December 31, 1998, the Company had outstanding consolidated
debt of $7.0 billion and equity of $0.6 billion. Substantially all of the debt
was incurred in July 1998 under the Credit Facility for the purpose of
acquiring ARCO Chemical or was assumed as part of the Acquisition.
The Credit Facility requires the Company to retire $1.25 billion of the debt
by June 30, 1999 and to issue $1.25 billion of equity securities, as defined,
by July 23, 1999. At the time the Credit Facility was arranged in July 1998,
the Company intended to promptly issue $1.25 billion or more of equity
securities to satisfy both these requirements. An additional $2 billion of
debt under the Credit Facility matures on June 30, 2000. The Company
anticipated that a combination of forecasted operating cash flows and proceeds
to the Company from the then-planned LCR refinancing together with a planned
offering of debt securities would be used to repay or refinance the debt due
in June 2000.
However, the Company postponed its plans for a fall 1998 securities offering
as a result of adverse changes in capital market conditions that began in
August 1998. In addition, the cyclical downturn in commodity chemicals
adversely affected both the Company's operating results and the market
valuation of its common stock. In late 1998, LCR's refinancing plans were
postponed for the reasons discussed above. The postponement of the $1.25
billion equity offering and related debt paydown, combined with the decline in
recent and projected operating results, could make it more difficult for the
Company to remain in compliance with certain financial ratio requirements
contained in the Credit Facility as those ratios become more restrictive under
the existing terms.
As a result of all the foregoing, the Company has proposed an amendment to
the Credit Facility that would, among other things, substantially reduce the
requirements for sale of equity and ease the financial ratio
44
requirements. The amendment requires approval by lenders holding a majority of
the commitments. The Company intends to complete the amendment of the Credit
Facility and to effect debt and equity offerings in the second quarter of
1999, using the proceeds to meet the June 1999 debt maturity. At the same
time, the Company is actively exploring other available alternative means of
retiring or refinancing debt, including other financing sources, enhancement
of operating cash flows through cost reductions, management of working capital
levels and sales of assets. The Company continues to believe that
repositioning its balance sheet to achieve an investment grade rating over
time is an important objective.
The ability of the Company to meet its debt obligations, finance its capital
expenditure needs, maintain its dividend rate and comply with the covenants
and financial requirements in the Credit Facility will generally depend on the
future performance of the Company, the outcome of the Credit Facility
amendment process, and the availability and terms of additional financing or
alternative means to repay and refinance bank debt. These factors, in turn,
are affected by relevant prevailing economic, competitive and market
conditions and other factors beyond the Company's control. The breach of any
of the covenants or financial requirements in the Credit Facility could result
in a default thereunder, which would permit the lenders to declare the loans
immediately payable and to terminate future lending commitments.
Based on discussions to date with its agent banks and prospective
underwriters and on current market conditions, the Company is optimistic that
it will be able to amend the terms of the Credit Facility and to complete debt
and equity offerings on satisfactory terms. Accordingly, the Company believes
conditions will be such that cash balances, cash generated from operating
activities, and funds from anticipated financing activities and lines of
credit will be adequate to meet anticipated future cash requirements for
scheduled debt repayments, necessary capital expenditures and dividends.
In addition, as of December 31, 1998, Equistar, LCR and Lyondell Methanol
had, in the aggregate, outstanding debt of approximately $2.9 billion and
equity of approximately $4.6 billion. The ability of the joint ventures to
distribute cash to the Company is reduced by their respective debt service
obligations. Furthermore, a default under certain joint venture debt
agreements would constitute a cross-default under the Company's Credit
Facility. The Company also remains liable on approximately $713 million of
debt for which primary responsibility was assumed by Equistar in connection
with its formation.
CURRENT BUSINESS OUTLOOK
Beginning August 1, 1998, Lyondell's operating results include the Acquired
Business, which is reported as the intermediate chemicals and derivatives
segment. Management expects continued stable growth for the core products in
this segment in 1999, although prices and margins may be adversely affected in
the latter part of the year by the start up of new industry PO capacity in
Europe. The Company has delayed the PO-11 project by two years with a view to
mitigating potential oversupply of PO as well as SM. However, co-products SM
and MTBE are expected to continue to be affected by weak market conditions.
Furthermore, environmental concerns in California and other states,
principally over groundwater contamination due to leaking underground storage
tanks, could lead to legislation that might negatively affect the demand for
MTBE over the long term.
The petrochemicals and polymers segments continue to be affected by
overcapacity, resulting in weak pricing. However, spot prices for ethylene
have improved and industry inventory levels of ethylene have declined well
below benchmark levels that usually indicate a balanced market. Demand for
polymers continues to grow overall. However, this growth has been overshadowed
by new capacity that has put downward pressure on polymers prices. Polymers
prices have approached historical trough levels. The impact of low prices for
petrochemicals and polymers products is mitigated to the extent that the low
prices increase demand for these products versus substitute materials.
Additionally, the low sales prices are partly offset by lower feedstock costs
as a result of low current crude oil and energy costs.
Equistar has taken aggressive actions to buffer the cyclical downturn,
including accelerations of the LaPorte plant turnaround from the third quarter
1999 to mid-November 1998, the announced idling of a substantial
45
portion of HDPE capacity at the Port Arthur plant scheduled for March 31,
1999, reductions in working capital, and cost reductions through the
achievement of synergies. Equistar continues to focus on cost reduction and
synergies. Many of the cost-reduction programs have required time and capital
to achieve with the benefits just now beginning to be realized. For example,
in November, Equistar began implementation of the SAP information system on a
company-wide basis. Completion of implementation in 1999 will eliminate the
extra expense and inefficiency of running and coordinating multiple systems.
Additionally, the LaPorte plant turnaround included changes that enable the
plant to run heavier, cheaper feedstocks, thereby reducing ethylene production
costs.
LCR's financial results will continue to be impacted by the reduction in
PDVSA crude oil allocations which took effect in August 1998. In addition, in
March 1999 OPEC announced an agreement to further limit OPEC oil production,
which could result in some additional decreases in the allocation of crude oil
supplied to LCR by PDVSA. Decreased allocations of PDVSA crude oil tend to
reduce LCR's pretax income and accordingly Lyondell's pro rata share of LCR's
income. LCR is moving forward with a multi-year program to reduce operating
costs; the new labor agreement is part of that program.
The methanol market continues to be weak due to considerable excess
capacity. Methanol margins are expected to continue at current low levels, as
prices remain flat. Improvement is not anticipated in the near term. Lyondell
Methanol took advantage of the current low-margin environment, implementing a
turnaround in February 1999 that will include process enhancements designed to
reduce methanol production costs.
YEAR 2000
Lyondell, Equistar and LCR use many business information (information
technology or "IT") systems as well as non-IT systems such as manufacturing
support and other systems that could be affected by the "Year 2000 problem."
The Year 2000 problem arises from computer programs and computer and other
equipment with embedded chips or processors that use two digits rather than
four to designate the year. Date-sensitive computer operations may recognize a
date using "00" as the year 1900 rather than the year 2000, resulting in
system failures or miscalculations, which may cause operational disruptions.
Lyondell and Equistar have replaced many of their business information
computer systems (including systems operated by Equistar for Lyondell
Methanol). LCR is also in the process of replacing many of its business
information systems. The new systems, based on enterprise software from SAP
America, Inc. ("SAP"), will replace older business systems and allow employees
at different locations to share financial and operating information more
effectively. The first major use of the software commenced in May 1997 for the
majority of the operations contributed to Equistar by Lyondell. Equistar's
second major SAP implementation phase was successfully completed in November
1998, while additional SAP work will be completed in the first half of 1999.
LCR will complete implementation of its SAP project at the beginning of 1999.
The new systems and software are Year 2000 compliant, thus addressing the
majority of the Company's Year 2000 business system requirements. Lyondell has
elected to continue with the repair and remediation for the majority of
systems of the Acquired Business.
The Company has a Year 2000 Executive Sponsor Team with representatives of
Lyondell, Equistar and LCR. The Year 2000 Executive Sponsor Team is providing
oversight to individual Year 2000 Steering Committees within each
organization. Each Steering Committee is in the process of completing an
assessment of the state of readiness of the IT and non-IT systems of the
Company and its joint ventures. These assessments cover manufacturing systems,
including laboratory information systems and field instrumentation, and
significant third party vendor and supplier systems, including employee
compensation and benefit plan maintenance systems. The steering committees are
also in the process of assessing the readiness of significant customers and
suppliers.
46
The Year 2000 assessment process for each organization consists of an
inventory of Year 2000 sensitive equipment, an assessment of the impact of
possible failures, determination of the required remediation actions, and
testing and implementation of solutions. The inventory, assessment and
remediation phases should be completed in the first quarter of 1999, with the
remainder of the testing and final implementation taking place in 1999. The
progress of these phases as of December 31, 1998 is summarized as follows:
Lyondell Enterprise Year 2000 Readiness
As of December 31, 1998
Graph showing the percentage of completion of the inventory, assessment,
remediation, testing and implementation phases of the Year 2000 assessment
process for each of Lyondell, Equistar and LCR. The percentage of completion is
indicated in the table below:
Lyondell Enterprise Year 2000 Readiness
As of December 31, 1998
Inventory Assessment Remediation Testing Implementation
--------- ---------- ----------- ------- --------------
Lyondell 99% 85% 65% 35% 20%
Equistar 99% 98% 89% 39% 28%
LCR 96% 96% 62% 25% 25%
As of December 31, 1998, Year 2000 spending by the Company, Equistar and LCR
for the replacement of both IT and non-IT systems is summarized as follows:
Millions of dollars Lyondell Equistar LCR
------------------- -------- -------- ---
Spending through December 31, 1998.................. $ 5 $ 1 $ 1
Estimated additional spending....................... 7 12 3
--- --- ---
Total estimated spending.......................... $12 $13 $ 4
=== === ===
Lyondell share of estimated spending................ $12 $ 5 $ 2
=== === ===
The total estimated spending of $29 million for all three organizations
represents a midpoint of an estimated range between $23 million and $35
million, of which the Company's share would be $15 million to $24 million. The
estimated amount does not include costs incurred in connection with the
implementation of SAP-related software. These spending estimates will be
refined as phases of the assessment are completed. Spending is funded by cash
generated from operations. Preliminary estimates indicate that approximately
10 to 15 percent of the estimated spending could qualify for capitalization.
Management believes that all significant systems controlled by the Company
will be Year 2000 ready in the last half of 1999. The Company's operations are
dependent on a continuous supply of key services from raw material suppliers
and utility and transportation providers. While the Steering Committees are
assessing the readiness of third party customers and suppliers, there can be
no assurance that third parties with a significant business relationship will
successfully test, reprogram, and replace all of their IT and non-IT systems
on a timely basis. The Company is developing contingency plans with the
assistance of an outside consultant. The final plans, when implemented, are
intended to avoid material interruption of core business operations through
the year 2000 and beyond, while ensuring safe operations and responsible
financial performance. The contingency planning will involve an analysis of
critical business processes and an identification of the most likely threats
to these
47
processes. Solutions and alternatives will be developed for these internal or
external threats. The enterprise expects to complete its analysis and plan
development by mid-year 1999 with implementation to be completed in the last
half of the year.
There is inherent uncertainty in the Year 2000 problem due to the
possibility of unanticipated failures by third party customers and suppliers.
Accordingly, the Company is unable, at this time, to assess the extent and
resulting materiality of the impact of possible Year 2000 failures on its
operations, liquidity or financial position. In a worst case scenario,
controlled plant shutdowns using the Company's standard shutdown procedures
might be necessitated by failures of utility providers or suppliers or by
internal conditions affecting plant operability. Such events could have a
material adverse effect on the Company's operations, liquidity or financial
position. The Year 2000 assessment process is expected to provide information
that will significantly reduce the level of uncertainty regarding the Year
2000 impact. Management believes that the completion of the assessment as
scheduled will help minimize the possibility of any significant disruptions of
Company operations.
EUROPEAN MONETARY UNION
On January 1, 1999, the euro became the official currency for the eleven
member countries of the European Union (Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain) that
are participating in monetary union. On that date, the national currencies of
the participating countries ceased to exist as independent currencies and
continued only as denominations of the euro. The euro conversion rates for
each of the former national currencies were irrevocably fixed on January 1,
1999. 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.
The Company has substantially completed a review of its principal European
markets and does not expect European monetary union to have a material effect
on the conduct of its business. Specifically, there are no major competitive
implications for product pricing, and most significant contracts are expected
to remain in force with no renegotiation expected. Similarly, there is no
impact on the Company's foreign currency swap and forward contracts, which
hedge risks between the U.S. dollar and these currencies. (See Note 17 of
Notes to Consolidated Financial Statements.) The European-based revenues of
the Acquired Business are approximately $1.0 billion on an annual basis.
While the Company has converted its systems to invoice customers in euros
beginning January 1, 1999, the conversion of other business and financial
systems is still in the planning and implementation stages. Due to Year 2000
priorities, it is anticipated that the conversion of most business systems to
the euro will not begin until the fourth quarter of 1999 with a target
completion date of January 1, 2001. The deadline for conversion of systems is
January 1, 2002. Based upon the assessments completed to date, the Company
does not expect the onset of European monetary union to have a material impact
on the Company's consolidated financial statements.
ENVIRONMENTAL MATTERS
Various environmental laws and regulations impose substantial requirements
upon the operations of the Company. The Company's policy is to be in
compliance with such laws and regulations, which include, among others,
CERCLA, as amended, RCRA and the Clean Air Act Amendments. In connection with
the transfer of assets and liabilities from Atlantic Richfield Company
("ARCO") to the Company at the time the Company was formed, effective July 1,
1988, the Company and ARCO entered into an agreement (the "Cross-Indemnity
Agreement") whereby the Company agreed to defend and indemnify ARCO against
certain uninsured claims and liabilities that ARCO might 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. ARCO,
along with many other companies, has been named a potentially responsible
party (PRP) under CERCLA in connection with the past disposal of waste at
third party waste sites. Pursuant to the Cross-Indemnity Agreement, the
Company is
48
currently contributing funds for one site pursuant to its obligation to
reimburse ARCO for a portion of its uninsured remediation costs. Under the
Revised Cross-Indemnity Agreement, both ARCO and the Company waive any claim
for reimbursement under the existing Cross-Indemnity Agreement for any prior
defense and settlement costs associated with waste site matters, and the
Company will assume responsibility for its proportionate share of future costs
for waste site matters not covered by ARCO insurance. The obligation described
above will continue under the Revised Cross-Indemnity Agreement.
Lyondell, Millennium and Occidental have similar indemnifications with
Equistar related to the petrochemicals and polymers businesses contributed by
the companies. Equistar has agreed to indemnify and defend Lyondell,
Millennium and Occidental, individually, up to $7 million each, against
certain uninsured claims and liabilities asserted within the first seven years
after the respective asset contributions that Equistar may incur relating to
the operation of the contributed businesses prior to their contribution to
Equistar, subject to certain terms of the Asset Contribution Agreements.
The Company accrues for contingencies, including those based upon unasserted
claims that are probable and reasonably estimable. In connection with
environmental matters, the Company establishes accruals based upon known facts
and circumstances. Based on current environmental laws and regulations, the
Company believes it has adequately accrued for the matters described herein.
Lyondell's accrued environmental liability at December 31, 1998 was $48
million, including $39 million related to the Acquired Business' environmental
liability.
The environmental liability of the Acquired Business reflected the Company's
latest assessment of potential future remediation costs associated with
currently known sites. The liability is related to four current plant sites,
one former plant site and one federal Superfund site for amounts ranging from
$2 million to $18 million per site. The Acquired Business is involved in
administrative proceedings or lawsuits relating to a minimal number of other
Superfund sites. However, the Company estimates, based on currently available
information, that potential loss contingencies associated with these sites,
individually and in the aggregate, are not significant. Substantially all
amounts accrued are expected to be paid out over the next five to ten years.
The Company has relied upon RI/FS at each of the Acquired Business' sites as
a basis for estimating remediation costs at the site. RI/FS or preliminary
assessments have been completed at most of the sites. However, selection of
the remediation method and the cleanup standard to be applied are, in most
cases, subject to approval by the appropriate government authority.
Accordingly, the Company may have possible loss contingencies in excess of the
amounts reserved to the extent the scope of remediation required, the final
remediation method selected and the cleanup standard applied vary from the
assumptions used in estimating the liability. The Company estimates that the
upper range of these possible loss contingencies should not exceed the $39
million amount accrued by more than $65 million.
The extent of loss related to environmental matters ultimately depends upon
a number of factors, including technological developments, changes in
environmental laws, the number and ability to pay of other parties involved at
a particular site and the Company's potential involvement in additional
environmental assessments and cleanups. Based upon currently known facts,
management believes that any remediation costs the Company may incur in excess
of the amounts accrued or disclosed above would not have a material adverse
impact on the Company's consolidated financial statements. However, the
resolution of one or more of these matters in any reporting period could have
a material impact on the Company's results of operations for that period.
The Company spent $8 million, $1 million and $2 million in 1998, 1997 and
1996, respectively, relating to environmental remediation matters. The Company
estimates that expenditures will total approximately $11 million in 1999. The
Company, its subsidiaries and its joint ventures also make capital
expenditures to comply with environmental regulations. Such capital
expenditures totaled, in the aggregate, approximately $22 million, $13 million
and $28 million for 1998, 1997 and 1996, respectively. The Company estimates
that such capital expenditures will total approximately $27 million in 1999
and will not be materially different in 2000. The 1998 amounts reported above
include the full twelve-months' spending of the acquired ARCO Chemical
business.
49
INDUSTRY CYCLICALITY AND OVERCAPACITY
The Company's historical operating results reflect the cyclical and volatile
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
historically 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 Company's products, the
Company is not necessarily able to protect its market position by product
differentiation or to pass on cost increases to its 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
absolute magnitude. Moreover, a number of participants in various segments of
the chemical industry have 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 the Company's volumes
and margins. As a result, the Company's earnings may be subject to significant
fluctuations.
External factors beyond the Company'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 the Company's
products, product prices, volumes and margins, and can magnify the impact of
economic cycles on the Company's business. A number of the Company's products
are highly dependent on durable goods markets, such as housing and automotive,
that are particularly cyclical. With respect to the Company's refining
business, however, management believes that the combination of the Crude
Supply Agreement and the Products Agreement tends to stabilize earnings and to
substantially reduce the market driven aspects of 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 the Company.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement is effective for the
Company's calendar year 2000; however, early adoption is permitted. SFAS No.
133 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 Company is currently evaluating SFAS No. 133 and
whether it will adopt this pronouncement prior to the effective date.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report, including those set
forth in 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 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
50
expectations will prove to have been correct. The Company'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, raw material costs or supply arrangements, the Company'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 Risk
COMMODITY PRICE RISK
A substantial portion of the Company's products and feedstocks, as well as
those of Equistar, LCR and Lyondell Methanol, are commodities whose prices
fluctuate as market supply/demand fundamentals change. Accordingly, product
margins and the level of the Company's profitability tend to fluctuate with
changes in the business cycle. The Company tries to protect against such
instability through various business strategies. These include increasing the
olefins plants' feedstock flexibility, entering into multi-year processing and
sales agreements, moving downstream into derivatives products whose pricing is
more stable, and the use of the "deemed margin" contract at LCR. The Company
has not used derivative instruments for commodity hedging purposes.
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. The Company uses foreign currency swap
and forward contracts to minimize the exposure related to net monetary
exposures on the balance sheet and anticipatory cash flows. Although the
Company uses these types of contracts to reduce foreign exchange exposures
with respect to revenues, capital commitments and other expenses denominated
in foreign currencies, there can be no assurance that such hedging techniques
will protect the Company's reported results against exchange rate fluctuations
or that the Company will not incur material losses on such contracts. At
December 31, 1998, the Company had foreign currency contracts outstanding in
the notional amount of $205 million, principally swap contracts hedging the
Dutch guilder. Using sensitivity analysis, the hypothetical increase in
foreign exchange loss due to these derivative instruments from an assumed 10
percent unfavorable change in year-end exchange rates was not material. The
quantitative information about market risk is necessarily limited because it
does not take into account the effects of the underlying operating
transactions.
INTEREST RATE RISK
The Company is exposed to interest rate risk with respect to certain
financial instruments and derivative instruments. These include variable-rate
Term Loans outstanding of $6.5 billion and Treasury Lock transactions in the
notional amount of $1 billion at December 31, 1998. The Treasury Locks are
based on U.S. Treasury rates and are being used to hedge anticipated Company
debt offerings. Assuming a hypothetical 10 percent increase in interest rates,
the increase in annual interest expense on the variable-rate Term Loans would
be $35 million. The hypothetical increase in interest rates would result in a
potential change in the fair value of Treasury Locks from a $53 million
obligation at December 31, 1998 to a $20 million obligation, which would be
amortized over the term of the anticipated debt offering. Sensitivity analysis
was used for the purpose of this analysis.
51
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
----
LYONDELL CHEMICAL COMPANY
Report of Independent Accountants.......................................... 53
Consolidated Financial Statements:
Consolidated Statements of Income........................................ 54
Consolidated Balance Sheets.............................................. 55
Consolidated Statements of Cash Flows.................................... 56
Consolidated Statements of Stockholders' Equity.......................... 57
Notes to Consolidated Financial Statements............................... 58
EQUISTAR CHEMICALS, LP
Report of Independent Accountants.......................................... 84
Financial Statements:
Statements of Income..................................................... 85
Balance Sheets........................................................... 86
Statements of Cash Flows................................................. 87
Statements of Partners' Capital.......................................... 88
Notes to Financial Statements............................................ 89
LYONDELL-CITGO REFINING LP
Independent Auditors' Report............................................... 106
Report of Independent Accountants.......................................... 107
Financial Statements:
Statements of Income..................................................... 108
Balance Sheets........................................................... 109
Statements of Cash Flows................................................. 110
Statements of Partners' Capital.......................................... 111
Notes to Financial Statements............................................ 112
52
LYONDELL CHEMICAL COMPANY
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Lyondell Chemical Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Lyondell
Chemical Company (formerly Lyondell Petrochemical Company) and its
subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards 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.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
February 26, 1999
53
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the year ended
December 31
----------------------
Millions of dollars, except per share data 1998 1997 1996
- ------------------------------------------ ------ ------ ------
Sales and other operating revenues:
Unrelated parties...................................... $1,447 $2,346 $4,734
Related parties........................................ -- 532 318
------ ------ ------
1,447 2,878 5,052
------ ------ ------
Income from equity investments (before unusual charges):
Equistar Chemicals, LP................................. 134 30 --
LYONDELL-CITGO Refining LP............................. 116 102 --
Lyondell Methanol Company, L.P......................... 6 -- --
------ ------ ------
256 132 --
------ ------ ------
Gain on sale of assets................................... -- -- 30
------ ------ ------
Operating costs and expenses:
Cost of sales:
Unrelated parties.................................... 1,089 1,827 4,320
Related parties...................................... -- 423 250
Selling, general and administrative expenses........... 126 186 234
Research and development expense....................... 26 -- --
Amortization of goodwill and other intangible assets... 41 -- --
Unusual charges........................................ 82 40 --
------ ------ ------
1,364 2,476 4,804
------ ------ ------
Operating income....................................... 339 534 278
Interest expense......................................... (287) (75) (81)
Interest income.......................................... 25 14 3
Other income (expense), net.............................. 12 (17) (4)
------ ------ ------
Income before income taxes............................... 89 456 196
Provision for income taxes............................... 37 170 70
------ ------ ------
Net income............................................... $ 52 $ 286 $ 126
====== ====== ======
Basic and diluted earnings per share..................... $ .67 $ 3.58 $ 1.58
====== ====== ======
See Notes to Consolidated Financial Statements.
54
LYONDELL CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
December 31
--------------
Millions of dollars 1998 1997
- ------------------- ------ ------
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 233 $ 86
Accounts receivable:
Trade, net................................................. 473 1
Related parties............................................ 6 4
Inventories.................................................. 550 --
Prepaid expenses and other current assets.................... 64 12
------ ------
Total current assets..................................... 1,326 103
------ ------
Property, plant and equipment, net............................. 4,511 46
Investment in affiliates:
Equistar Chemicals, LP....................................... 660 1,063
LYONDELL-CITGO Refining LP................................... 84 104
Lyondell Methanol Company, L.P............................... 50 --
Receivable from LYONDELL-CITGO Refining LP..................... 231 196
Other investments and long-term receivables.................... 53 --
Goodwill, net.................................................. 1,430 --
Deferred charges and other assets.............................. 880 47
------ ------
Total assets................................................... $9,225 $1,559
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade...................................................... $ 252 $ 87
Related parties............................................ 1 97
Notes payable................................................ -- 100
Current maturities of long-term debt......................... 1,603 --
Other accrued liabilities.................................... 481 24
------ ------
Total current liabilities................................ 2,337 308
------ ------
Long-term debt, less current maturities........................ 5,391 345
Other liabilities and deferred credits......................... 294 73
Deferred income taxes.......................................... 413 209
Commitments and contingencies
Minority interest.............................................. 216 5
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,
80,000,000 issued........................................... 80 80
Additional paid-in capital................................... 158 158
Retained earnings............................................ 387 407
Accumulated other comprehensive income....................... 32 --
Treasury stock, at cost, 2,978,203 and 1,015,512 shares,
respectively................................................ (83) (26)
------ ------
Total stockholders' equity............................... 574 619
------ ------
Total liabilities and stockholders' equity..................... $9,225 $1,559
====== ======
See Notes to Consolidated Financial Statements.
55
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended
December 31
---------------------
Millions of dollars 1998 1997 1996
- ------------------- ------- ----- -----
Cash flows from operating activities:
Net income............................................. $ 52 $ 286 $ 126
Adjustments to reconcile net income to net cash
provided by operating activities, net of the effects
of purchase accounting and deconsolidation of
affiliates:
Depreciation and amortization......................... 138 84 110
Unusual charges....................................... 57 -- --
Deferred income taxes................................. 76 43 50
Minority interest..................................... 6 17 4
Gain on sale of assets................................ -- -- (30)
Decrease (increase) in accounts receivable............ 93 (64) (94)
Increase in inventories............................... (15) (37) (29)
(Decrease) increase in accounts payable............... (160) (44) 160
Net change in other working capital accounts.......... 36 (2) 6
Other................................................. (20) (14) (71)
------- ----- -----
Net cash provided by operating activities........... 263 269 232
------- ----- -----
Cash flows from investing activities:
Acquisition of ARCO Chemical Company, net of cash
acquired.............................................. (5,869) -- --
Expenditures for property, plant and equipment......... (64) (49) (609)
Proceeds from sales of assets.......................... -- -- 55
Contributions and advances to affiliates............... (35) (86) --
Distributions from affiliates in excess of earnings.... 435 72 --
Deconsolidation of affiliates.......................... (11) (12) --
------- ----- -----
Net cash used in investing activities............... (5,544) (75) (554)
------- ----- -----
Cash flows from financing activities:
Proceeds from issuance of long-term debt............... 6,500 -- 502
Payment of debt issuance costs......................... (130) -- (3)
Net (decrease) increase in short-term debt............. (100) 50 (43)
Repayments of long-term debt........................... (715) (112) (150)
Minority owners (distributions) contributions.......... -- (16) 146
Repurchase of common stock............................. (59) (26) --
Dividends paid......................................... (70) (72) (72)
------- ----- -----
Net cash provided by (used in) financing
activities......................................... 5,426 (176) 380
------- ----- -----
Effect of exchange rate changes on cash................. 2 -- --
------- ----- -----
Increase in cash and cash equivalents................... 147 18 58
Cash and cash equivalents at beginning of period........ 86 68 10
------- ----- -----
Cash and cash equivalents at end of period.............. $ 233 $ 86 $ 68
======= ===== =====
See Notes to Consolidated Financial Statements.
56
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other
Millions of dollars, --------------- Paid-In Retained Comprehensive Comprehensive
except per share data Issued Treasury Capital Earnings Income Income
- --------------------- ------ -------- ---------- -------- ------------- -------------
Balance, January 1, 1996
(80,000,000 shares
issued)................ $80 $ -- $158 $142 $-- $ --
Net income............ -- -- -- 126 -- 126
Cash dividends ($.90
per share)........... -- -- -- (72) -- --
Other................. -- -- -- (3) -- --
--- ---- ---- ---- --- ----
$126
====
Balance, December 31,
1996
(80,000,000 shares
issued)................ 80 -- 158 193 -- $ --
Net income............ -- -- -- 286 -- 286
Cash dividends ($.90
per share)........... -- -- -- (72) -- --
Purchase of 1,015,512
treasury shares...... -- (26) -- -- -- --
--- ---- ---- ---- --- ----
$286
====
Balance, December 31,
1997
(80,000,000 shares
issued; 1,015,512
treasury shares)....... 80 (26) 158 407 -- $ --
Net income............ -- -- -- 52 -- 52
Cash dividends ($.90
per share)........... -- -- -- (70) -- --
Purchase of 2,051,539
treasury shares...... -- (59) -- -- -- --
Reissuance of 88,848
treasury shares under
restricted stock
plan................. -- 2 -- -- -- --
Foreign currency
translation, net of
tax of $25........... -- -- -- -- 32 32
Other................. -- -- -- (2) -- --
--- ---- ---- ---- --- ----
$ 84
====
Balance, December 31,
1998
(80,000,000 shares
issued; 2,978,203
treasury shares)....... $80 $(83) $158 $387 $32
=== ==== ==== ==== ===
See Notes to Consolidated Financial Statements.
57
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Company and Operations
Lyondell Chemical Company ("Company" or "Lyondell"), formerly Lyondell
Petrochemical Company, operates in the (i) intermediate chemicals and
derivatives, (ii) petrochemicals, (iii) polymers, (iv) refining and (v)
methanol businesses through its wholly owned subsidiary, ARCO Chemical Company
("ARCO Chemical" or "Acquired Business"), acquired by the Company as of July
28, 1998 (see Note 3), and through the Company's joint venture ownership
interests in Equistar Chemicals, LP ("Equistar"), LYONDELL-CITGO Refining LP
("LCR"), formerly LYONDELL-CITGO Refining Company Ltd., and Lyondell Methanol
Company, L.P. ("Lyondell Methanol").
The Acquired Business, now named Lyondell Chemical Worldwide, Inc., is the
world's largest producer of propylene oxide ("PO") and a leading worldwide
producer and marketer of polyether polyols, propylene glycol, propylene glycol
ethers, toluene diisocyanate ("TDI"), styrene monomer ("SM") and methyl
tertiary butyl ether ("MTBE"). The Acquired Business is reported as the
intermediate chemicals and derivatives segment.
The Company's operations in the petrochemicals and polymers segments are
conducted through its joint venture ownership interest in Equistar (see Note
4). The Company accounts for its investment in Equistar using the equity
method of accounting. Prior to the formation of Equistar on December 1, 1997,
the Company's assets and operations of the petrochemicals and polymers
businesses were fully consolidated in the consolidated financial statements of
the Company.
Equistar's petrochemicals division consists of: olefins, including ethylene,
propylene, butadiene, butylenes and specialty products; aromatics, including
benzene and toluene; oxygenated chemicals, including ethylene oxide and
derivatives, MTBE, ethyl alcohol and diethyl ether; and specialty chemicals,
including refinery blending stocks.
Equistar's polymers division consists of: polyolefins, including high
density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear-low
density polyethylene ("LLDPE") and polypropylene; and performance polymers
products, including color concentrates and compounds, wire and cable resins
and compounds, adhesive resins, and fine powders.
The Company's operations in the refining segment are conducted through its
joint venture ownership interest in LCR (see Note 5). This segment consists
of: refined petroleum products, including conventional and reformulated
gasoline, low sulfur diesel and jet fuel; aromatics produced at LCR's full-
conversion Houston, Texas refinery ("Refinery"), including benzene, toluene,
paraxylene and orthoxylene; lubricants, including industrial lubricants, motor
oils, white oils, process oils and base oils; carbon black oil; sulfur;
residual oil; petroleum coke fuel; olefins feedstocks; and crude oil resales.
LCR sells its principal refined products to the Company's joint venture
partner in LCR, CITGO Petroleum Corporation ("CITGO").
The Company has additional operations conducted through its joint venture
ownership interest in Lyondell Methanol (see Note 6). These operations consist
of methanol and other petrochemical products produced by its methanol
facility. Effective January 1, 1998, Lyondell began to account for its
investment in Lyondell Methanol using the equity method of accounting. Prior
to 1998, Lyondell Methanol's assets and operations were fully consolidated in
the consolidated financial statements.
From its formation in 1985 through June 1988, the Company operated as a
division of Atlantic Richfield Company ("ARCO"). In July 1988, ARCO
transferred the division's assets and liabilities along with additional
pipeline assets, to its wholly owned subsidiary, Lyondell Petrochemical
Company, a Delaware corporation. In January 1989, ARCO completed an initial
public offering of approximately 50.1 percent of the Company's common stock.
In August 1994, ARCO issued three-year debt securities ("Exchangeable Notes")
which were
58
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The Company purchased the remaining 383,312 shares of common stock held
by ARCO after the conversion. As of December 31, 1998 and 1997, ARCO owned no
shares of Lyondell common stock.
2. Summary of Significant Accounting Policies
Basis of Presentation--The 1998 Consolidated Financial Statements include
the accounts of the Company and its subsidiaries, including the results of
operations of the Acquired Business for the five months ended December 31,
1998. The Company's joint venture ownership interests in Equistar for 1998 and
December 1997, in LCR for 1998 and 1997, and in Lyondell Methanol for 1998,
are reported as equity investments and are not consolidated into the Company's
financial statements. Lyondell Methanol is fully consolidated into the
Company's financial statements for 1997 and 1996, and LCR is fully
consolidated only for 1996. Additionally, the Company has an investment in a
50 percent owned affiliate that is accounted for using the equity method of
accounting. All significant transactions between the entities of the Company
have been eliminated from the Consolidated Financial Statements.
Revenue Recognition--Revenue from product sales is generally recognized upon
delivery of products to the customer.
Equity Method of Accounting--Investments in joint ventures ("JVs") where the
Company 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 the Company's ownership percentage may exceed 50
percent. Under this method, the operations of the JVs are not consolidated
line by line with those of the Company. Instead, the Company's portion of the
JVs' net income is included in the Consolidated Statements of Income as
"Income from equity investments" and the Company's portion of the JVs' net
assets appears in the Consolidated Balance Sheets as "Investment in
affiliates." Cash advances to, and distributions in excess of earnings from
the JVs, are reflected as individual line items in the Consolidated Statements
of Cash Flows.
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
Company's policy is to invest cash in conservative, highly rated instruments
and limit the amount of credit exposure to any one institution. The Company
performs periodic evaluations of the relative credit standing of these
financial institutions, which are considered in the Company's investment
strategy.
The Company has no requirements for compensating balances in a specific
amount at a specific point in time. The Company does maintain compensating
balances for some of its banking services and products. Such balances are
maintained on an average basis and are solely at the Company's discretion. As
a result, none of the Company's cash is restricted.
Accounts Receivable--The Company sells its products primarily to other
industrial concerns in the petrochemicals and refining industries. The Company
performs ongoing credit evaluations of its customers' financial condition,
and, in certain circumstances, requires letters of credit from them. The
Company's allowance for doubtful accounts receivable, which is reflected in
the Consolidated Balance Sheets as a reduction of accounts receivable, totaled
$11 million at December 31, 1998. The Company had no significant allowance for
doubtful accounts recorded at December 31, 1997.
59
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, the Company 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. The Company'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 the Company'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.
Goodwill--Goodwill represents the excess of purchase price paid over the
value assigned to the net tangible assets of a business acquired. This
intangible asset is amortized over 40 years, the estimated useful life, using
the straight-line method. See Long-Lived Asset Impairment below.
Deferred Charges--Deferred charges are carried at cost and consist primarily
of the value assigned to patents and licensed technology, capacity reservation
fees and other long-term processing rights and costs. These assets are
amortized using the straight-line method over their estimated useful lives or
the term of the related agreement, if shorter.
Environmental Remediation Costs--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.
Pension and Other Postretirement Benefit Plans--During 1998, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 132,
Employers' Disclosures about Pensions and Other Retirement Benefits. The
provisions of SFAS No. 132 revise employer disclosures about pension and other
postretirement benefit plans. It does not change the measurement or
recognition of these plans. SFAS No. 132 standardizes the disclosure
requirements for these plans, to the extent practicable.
Minority Interest--Minority interest in 1998 primarily represents the
interest of third-party investors in a partnership that owns one of the
Company's two domestic PO/SM plants. The Company 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--Crude oil and finished product 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
which are not likely to be realized in full.
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
60
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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" 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, the Company 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.
Segment and Related Information--In 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 supercedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the management
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect the results of operations or the
financial position of the Company (see Note 22).
Reclassifications--Certain previously reported amounts have been restated to
conform to classifications adopted in 1998.
3. Purchase of ARCO Chemical Company
As of July 28, 1998, the Company completed its acquisition of ARCO Chemical
("Acquisition"). The transaction was financed through a $7.0 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 the Company'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. The Company is awaiting additional
information related to the fair value of certain assets acquired and
liabilities assumed. Management does not expect the finalization of these
matters to have a material effect on the purchase price allocation. In
connection with the acquisition, the Company accrued liabilities for costs
associated with the delay of construction of the PO-11 plant, vesting of
certain key manager benefits pursuant to a change of control provision,
severance costs for the involuntary termination of certain headquarters
employees, and relocation costs for moving personnel to the Company's Houston
headquarters. The liability totaled $255 million at the date of acquisition.
Through December 31, 1998, the Company had paid and charged approximately $132
million against the liability.
Approximately $57 million, or less than one percent 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. The activities represented by these projects will be continued by
the Company and the values assigned represent intangibles with no alternative
future use. Accordingly, the Company wrote off the in-process research and
development,
61
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 and is being amortized, using the
straight-line method, over 40 years, the estimated useful life.
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
======
The unaudited pro forma combined historical results of the Company and ARCO
Chemical, giving effect to the Acquisition, the Credit Facility drawdown, the
formation of Equistar, and the deconsolidation of Lyondell Methanol as of the
beginning of 1998 and 1997, respectively, are as follows:
For the year
ended
December 31
-------------
Millions of dollars, except per share data 1998 1997
----------------------------------------------------------- ------ ------
Sales and other operating revenues......................... $3,553 $3,995
Income from equity investments............................. 256 526
Unusual charges............................................ 62 215
Operating income........................................... 631 663
Net income................................................. 42 27
Basic and diluted earnings per share....................... .54 .34
The unaudited pro forma data presented above are not necessarily indicative
of the results of operations of the Company that would have occurred had such
transactions actually been consummated as of the beginning of 1998 and 1997,
respectively, nor are they necessarily indicative of future results.
4. Equity Interest in Equistar Chemicals, LP
Equistar was formed on December 1, 1997 as a joint venture between the
Company 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 ethyl alcohol
businesses, which had been held in Millennium Petrochemicals Inc., a wholly-
owned subsidiary of Millennium. On May 15, 1998, the ethylene, propylene and
ethylene oxide and derivatives businesses of Occidental Chemical Corporation,
a subsidiary of Occidental Petroleum Corporation ("Occidental"), were
contributed to Equistar ("Occidental Contributed Business"). Equistar is
operated as a Delaware limited partnership owned by subsidiaries of the
Company, Millennium and Occidental ("Partners").
62
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Lyondell currently has a 41.0 percent joint venture ownership interest,
while Millennium and Occidental each have 29.5 percent. Prior to the addition
of Occidental as a partner on May 15, 1998, the Company had a 57.0 percent
joint venture ownership interest, while Millennium had 43.0 percent. Because
the Partners jointly control certain management decisions, Lyondell accounts
for its investment in Equistar using the equity method of accounting.
Summarized financial information for Equistar is as follows:
December 31
-------------------------
Millions of dollars 1998 1997
------------------- ------------ ------------
BALANCE SHEETS
Total current assets.......................... $1,130 $1,192
Property, plant and equipment, net............ 4,075 2,118
Goodwill, net................................. 1,151 1,139
Deferred charges and other assets............. 312 151
------ ------
Total assets.................................. $6,668 $4,600
====== ======
Current maturities of long-term debt.......... $ 150 $ 36
Other current liabilities..................... 488 300
Long-term debt, less current maturities....... 1,865 1,512
Capital lease obligations..................... 205 --
Other liabilities and deferred credits........ 75 34
Partners' capital............................. 3,885 3,063
Note receivable from Lyondell................. -- (345)
------ ------
Total liabilities and partners' capital....... $6,668 $4,600
====== ======
For the year For the one
ended month ended
December 31, December 31,
1998 1997
------------ ------------
STATEMENTS OF INCOME
Sales and other operating revenues............ $4,363 $ 365
Cost of sales................................. 3,773 287
Selling, general and administrative expenses.. 273 21
Unusual charges............................... 35 42
------ ------
Operating income.............................. 282 15
Interest expense, net......................... 139 8
------ ------
Net income.................................... $ 143 $ 7
====== ======
SELECTED CASH FLOW INFORMATION
Depreciation and amortization................. $ 268 $ 19
Expenditures for property, plant and
equipment.................................... 200 12
The Company's $134 million and $30 million share of Equistar's income before
unusual charges for the one year and for the one month ended December 31, 1998
and 1997, respectively, are presented as "Income from equity investments" in
Equistar in the Consolidated Statements of Income. The Company's $15 million
and $24 million share of Equistar's unusual charges for the year ended
December 31, 1998 and the one month
63
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ended December 31, 1997, respectively, are included in the "Unusual charges"
line in the Consolidated Statements of Income (see Note 7).
At the formation of Equistar and adjusted for the addition of the Occidental
Contributed Business on May 15, 1998, the difference between the Company's
investment in Equistar and its underlying equity in Equistar's net assets was
approximately $900 million. This difference is being accreted into income of
the Company over 25 years using the straight-line method. This accretion is
included in "Income from equity investments" in Equistar in the Consolidated
Statements of Income.
Included in "Sales and other operating revenues" above are $97 million in
sales to Lyondell for the five months ended December 31, 1998. Sales to LCR
included above were $236 million for the year ended December 31, 1998 and $27
million for the month of December 1997. In addition, Equistar purchased $2
million from Lyondell for the five months ended December 31, 1998, which is
included in Equistar's "Cost of sales" above. Purchases from LCR during the
year ended December 31, 1998 and for the month of December 1997, included in
Equistar's "Cost of sales" totaled $131 million and $10 million, respectively.
The Company has various service and cost sharing arrangements with Equistar.
Billings to Equistar were approximately $3 million for the year ended December
31, 1998. Billings from Equistar were approximately $1 million for the year
ended December 31, 1998.
5. Equity Interest in LYONDELL-CITGO Refining LP
In July 1993, LCR was formed to own and operate the Company's refining
business. LCR is structured as a Delaware limited partnership (formerly a
Texas limited liability company) owned by subsidiaries of the Company and
CITGO. LCR completed a major upgrade project at the Refinery ("Upgrade
Project") 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
percent and 14 percent for the Company and CITGO, respectively, and are
currently 58.75 percent and 41.25 percent for the Company and CITGO,
respectively. Net income before depreciation expense for the period is
allocated to LCR's owners based upon participation interests. Depreciation
expense is allocated to the owners based upon contributed assets.
Pursuant to contractual arrangements and concurrent with the completion of
the Upgrade Project, the authority and responsibility for certain management
decisions previously decided by majority vote, and therefore controlled by the
Company, changed to unanimous vote, resulting in joint control of LCR by
Lyondell and CITGO. Consequently, effective January 1, 1997, the Company began
to account for its investment in LCR using the equity method of accounting.
64
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized financial information for LCR is as follows. The results below
include a restatement for a pricing adjustment between LCR and Lyondell
recorded in 1996 and retroactive to 1993.
December 31
-------------
Millions of dollars 1998 1997
------------------- ------ ------
BALANCE SHEETS
Total current assets....................................... $ 197 $ 243
Property, plant and equipment, net......................... 1,370 1,391
Deferred charges and other assets.......................... 70 47
------ ------
Total assets............................................... $1,637 $1,681
====== ======
Total current liabilities.................................. $ 203 $ 293
Long-term debt............................................. 717 663
Other liabilities and deferred credits..................... 68 52
Partners' capital.......................................... 649 673
------ ------
Total liabilities and partners' capital.................... $1,637 $1,681
====== ======
For the year ended
December 31
--------------------
1998 1997 1996
------ ------ ------
STATEMENTS OF INCOME
Sales and other operating revenues.................. $2,055 $2,695 $2,816
Cost of sales....................................... 1,754 2,442 2,750
Selling, general and administrative expenses........ 78 72 62
Unusual charges..................................... 10 -- --
------ ------ ------
Operating income.................................... 213 181 4
Interest expense, net............................... 43 35 --
State income taxes.................................. 1 1 --
------ ------ ------
Net income.......................................... $ 169 $ 145 $ 4
====== ====== ======
SELECTED CASH FLOW INFORMATION
Depreciation and amortization....................... $ 100 $ 91 $ 35
Expenditures for property, plant and equipment...... 61 85 529
Included in sales and other operating revenues above are $181 million and
$175 million in sales to Lyondell for the eleven months ended November 30,
1997 and the year ended December 31, 1996, respectively. Sales to Equistar
included above were $131 million for the year ended December 31, 1998 and $10
million for the month of December 1997. In addition, LCR purchased $325
million and $234 million, primarily product purchases, from Lyondell for the
eleven months ended November 30, 1997 and the year ended December 31, 1996,
respectively, which are included in LCR's cost of sales. Purchases from
Equistar during the year ended December 31, 1998 and for the month of December
1997, included in LCR's cost of sales, totaled $236 million and $27 million,
respectively.
The Company has various service and cost sharing arrangements with LCR.
Billings to LCR were approximately $4 million, $7 million, and $11 million for
the years ended December 31, 1998, 1997 and 1996, respectively. Billings from
LCR were approximately $4 million, $5 million, and $3 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
65
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, during 1998 and 1997, the Company received interest payments of
approximately $9 million and $13 million respectively, for interest on loans
related to funding a portion of the Upgrade Project and certain other capital
expenditures at the Refinery.
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. Under the Crude Supply Agreement, LCR is required to
purchase, and PDVSA Oil is required to sell, up to 230,000 barrels per day of
extra heavy Venezuelan crude oil. PDVSA Oil has the right, but not the
obligation, to supply incremental amounts above 230,000 barrels per day. 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. Deemed margins and deemed
costs are adjusted periodically. These adjustments are based upon inflation
rates and energy costs, however, deemed margin adjustments can be less than
the rate of inflation. Because deemed operating costs and the slate of refined
products deemed to be produced for a given barrel of crude oil or other
feedstock do not necessarily reflect the actual costs and yields in any period
and also because the market value of the refined products used in the pricing
formula does not necessarily reflect the actual price received for the refined
products, the actual refining margin earned by LCR under the Crude Supply
Agreement will vary depending upon, among other things, the efficiency with
which LCR conducts its operations during such period.
Despite the limitations discussed above, the Crude Supply Agreement reduces
the volatility of earnings and cash flow of the refining operations of LCR
irrespective of market fluctuations of either crude oil or refined products.
Specifically, if the market value of refined products deemed to be produced
from the Venezuelan crude oil increases, the deemed cost of crude oil to LCR
will also increase. Alternatively, if the market value of refined products
deemed to be produced from the Venezuelan crude oil decreases, the deemed cost
of crude oil to LCR will also decrease. This results in relatively stable
deemed margins, regardless of refined products market volatility. If the
actual yields, costs or volumes, differ substantially from those contemplated
by the Crude Supply Agreement, the benefits of this agreement to LCR could be
substantially different than anticipated.
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 has a one-time option to increase its participation
interest in LCR up to 50 percent by making an additional equity contribution
after January 1, 2000, but not later than September 30, 2000.
6. Equity Interest in Lyondell Methanol Company, L.P.
Lyondell Methanol was formed in December 1996 by the Company and MCN
Investment Corporation ("MCNIC") to own and operate the methanol facility at
the Company's Channelview, Texas facility. At formation, the Company sold an
undivided 25 percent interest in the facility to MCNIC, creating Lyondell
Methanol, a Texas limited partnership owned by subsidiaries of the Company and
MCNIC. The Company owns the remaining 75 percent interest and serves as
managing partner. Since December 1, 1997, Equistar has served as operator of
the methanol facility. Lyondell Methanol sells all of its products to
Equistar.
66
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In accordance with the guidance in Emerging Issues Task Force Issue No. 96-
16 issued in May 1997, the Company began to account for its investment in
Lyondell Methanol using the equity method of accounting, effective January 1,
1998.
During 1998 and 1997, Lyondell Methanol revenues were $104 million and $165
million and net income was $8 million and $58 million, respectively.
7. Unusual Charges
During 1998, the Company wrote off $57 million of costs assigned to
purchased in-process research and development in connection with the Acquired
Business. The Company's pro rata share of Equistar's unusual charges for 1998
and 1997 was $15 million and $24 million, respectively, and consisted
primarily of costs associated with the consolidation of certain operations.
These costs were paid by Equistar and allocated to the Partners in accordance
with their ownership percentages. Lyondell's pro rata share of LCR's unusual
charges related to a new agreement with LCR's labor union. Additionally,
related to the formation of Equistar, Lyondell incurred unusual charges in
1998 and 1997 related to the early termination of incentive compensation plans
and executive severance.
The unusual charges consisted of the following items for the years ended
December 31:
Millions of dollars 1998 1997
------------------- ---- ----
Purchased in-process research and development................... $57 $--
Lyondell's pro rata share of Equistar unusual charges........... 15 24
Lyondell's pro rata share of LCR unusual charges................ 6 --
Lyondell incentive compensation and executive severance......... 4 16
--- ---
Total unusual charges......................................... $82 $40
=== ===
8. Income Taxes
The significant components of the provision for income taxes were as follows
for the years ended December 31:
Millions of dollars 1998 1997 1996
------------------- ---- ---- ----
Current
Federal............................................... $(44) $114 $ 19
Foreign............................................... 6 -- --
State................................................. (1) 13 1
---- ---- ----
Total current....................................... (39) 127 20
---- ---- ----
Deferred
Federal............................................... 69 43 48
Foreign............................................... (1) -- --
State................................................. 8 -- 2
---- ---- ----
Total deferred...................................... 76 43 50
---- ---- ----
Total provision for income taxes.................... $ 37 $170 $ 70
==== ==== ====
67
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 the Company's deferred tax liabilities and assets were as follows as of
December 31:
Millions of dollars 1998 1997
------------------- ---- ----
Deferred tax liabilities:
Tax over book depreciation and amortization................ $452 $ --
Investments in partnerships................................ 251 230
Other...................................................... 30 --
---- ----
Total deferred tax liabilities........................... 733 230
---- ----
Deferred tax assets:
Provisions for benefit plans and estimated expenses........ 236 25
Federal benefit attributable to foreign taxes.............. 100 --
Federal tax credit carryforwards........................... 57 --
Other...................................................... 30 2
---- ----
Total deferred tax assets................................ 423 27
Deferred tax asset valuation allowance..................... (27) --
---- ----
Net deferred tax assets.................................. 396 27
---- ----
Net deferred tax liabilities................................. 337 203
Less current portion of deferred tax liability (asset)....... -- (6)
---- ----
Long-term deferred income taxes............................ $337 $209
==== ====
At December 31, 1998, net deferred tax assets of $76 million were classified
as "Deferred charges and other assets" on the Consolidated Balance Sheets.
Under Internal Revenue Code Sections 338 (g) and (h) (10), Lyondell and ARCO
agreed to elect to step up the U.S. tax basis of the Acquired Company's net
assets. This will result in significantly increased depreciation and
amortization deductions for U.S. tax purposes.
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to the Company's effective tax rate follows:
Description 1998 1997 1996
----------- ---- ---- ----
U.S. statutory income tax rate........................ 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Foreign and U.S. tax effects of foreign
operations....................................... 6.9 -- --
State income taxes, net of federal................ 4.9 1.8 1.2
Settlement of tax issues.......................... (5.1) -- --
Officer compensation.............................. -- .9 --
Other, net........................................ (.2) (.4) (.5)
---- ---- ----
Effective income tax rate............................. 41.5% 37.3% 35.7%
==== ==== ====
68
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Related Party Transactions
Atlantic Richfield Company--Sales to ARCO, excluding sales to ARCO Chemical
Company, were $31 million in 1996. Cost of sales and selling expenses include
charges from ARCO, excluding costs to ARCO Chemical Company, of $23 million in
1996. The Company purchased 383,312 shares of its common stock held by ARCO
after the conversion of the Exchangeable Notes on September 15, 1997 at a
price of $25.66 per share. After that transaction, ARCO ceased to be a related
party.
Sales by Lyondell to ARCO Chemical, an ARCO affiliate and therefore a
related party until September 1997, consisting of propylene, MTBE, benzene,
ethylene, methanol and other products and services, were $206 million and $287
million during 1997 and 1996, respectively.
In July 1996, a fire occurred at the ARCO PipeLine Company meter station
located within the Channelview Facility. The fire forced the shutdown of the
entire Channelview Facility for several days and more than two weeks for some
units. The Company recovered lost profits from ARCO PipeLine Company for this
shutdown. The recovery was included in 1996 reported results.
10. Accounts Receivable
In December 1998, the Company entered into a three-year receivables purchase
agreement with an independent issuer of receivables-backed commercial paper.
Under the terms of the agreement, the Company agreed to sell on an ongoing
basis and without recourse, designated accounts receivable. To maintain the
balance of the accounts receivable sold, the Company is obligated to sell new
receivables as existing receivables are collected. The agreement permits the
sale of up to $175 million of accounts receivable through December 2001.
At December 31, 1998, the Company's gross accounts receivable that had been
sold to the purchasers aggregated $160 million. This amount has 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 1998,
approximately 94 percent 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 at December 31, 1998 were comprised of the following:
Millions of dollars
-------------------
Finished goods....................................................... $459
Work-in-process...................................................... 18
Raw materials........................................................ 34
Materials and supplies............................................... 39
----
Total inventories.................................................. $550
====
As of December 31, 1997, all of Lyondell's inventories had been contributed
to Equistar.
69
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 1998 1997
------------------- ------ ----
Land......................................................... $ 19 $ --
Manufacturing facilities and equipment....................... 4,470 138
Construction in progress..................................... 98 --
------ ----
Total property, plant and equipment........................ 4,587 138
Less accumulated depreciation................................ 76 92
------ ----
Property, plant and equipment, net......................... $4,511 $ 46
====== ====
Depreciation expense for 1998, 1997 and 1996 was $75 million, $71 million
and $89 million, respectively. Approximately $32 million of interest cost
during 1996 was capitalized as property, plant and equipment. No interest was
capitalized during 1998 and 1997. At December 31, 1997, the Company's
manufacturing facilities and equipment consisted of the assets owned by
Lyondell Methanol.
13. Deferred Charges and Other Assets
Deferred charges and other assets, net of accumulated amortization, were as
follows at December 31:
Millions of dollars 1998 1997
------------------- ---- ----
Patents and licensed technology................................ $236 $ --
Company owned life insurance................................... 184 43
Contractual rights............................................. 138 --
Debt issue costs, net.......................................... 109 --
Other.......................................................... 213 4
---- ----
Total deferred charges and other assets...................... $880 $ 47
==== ====
The increase in deferred charges and other assets in 1998 is primarily due
to the purchase of the Acquired Business.
14. Other Accrued Liabilities
Other accrued liabilities were as follows at December 31:
Millions of dollars 1998 1997
------------------- ---- ----
Accrued payroll and benefits................................... $148 $ 6
Accrued contractual obligations................................ 139 --
Accrued interest............................................... 55 2
Accrued taxes other than income................................ 49 11
Other.......................................................... 90 5
---- ----
Total other accrued liabilities.............................. $481 $ 24
==== ====
70
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Pension and Other Postretirement Benefits
The Company 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 Postretirement
Benefits Benefits
---------- ----------------
Millions of dollars 1998 1997 1998 1997
- ------------------- ---- ---- ------- -------
Change in benefit obligation:
Benefit obligation, January 1.................. $136 $118 $ 5 $ 25
Service cost................................... 7 6 1 3
Interest cost.................................. 18 10 2 2
Plan amendments................................ -- -- -- (18)
Actuarial loss................................. 42 21 5 5
Effect of settlement........................... 10 (9) -- --
Acquisition of ARCO Chemical................... 303 -- 61 --
Transfer to Equistar........................... -- -- -- (12)
Benefits paid.................................. (29) (10) (1) --
---- ---- ------- -------
Benefit obligation, December 31................ 487 136 73 5
---- ---- ------- -------
Change in plan assets:
Fair value of plan assets, January 1........... 103 90 -- --
Actual return of plan assets................... 11 14 -- --
Company contributions.......................... 12 9 1 --
Acquisition of ARCO Chemical................... 351 -- -- --
Benefits paid.................................. (29) (10) (1) --
---- ---- ------- -------
Fair value of plan assets, December 31......... 448 103 -- --
---- ---- ------- -------
Funded status.................................. (39) (33) (73) (5)
Unrecognized actuarial loss.................... 70 21 8 4
Unrecognized prior service cost................ 6 3 (18) (20)
Unrecognized transition obligation (asset)..... 5 (2) -- --
---- ---- ------- -------
Net amount recognized.......................... $ 42 $(11) $ (83) $ (21)
==== ==== ======= =======
Amounts recognized in the Consolidated Balance
Sheets consist of:
Prepaid benefit cost........................... $ 54 $ -- $ -- $ --
Accrued benefit liability...................... (12) (11) (83) (21)
---- ---- ------- -------
Net amount recognized.......................... $ 42 $(11) $ (83) $ (21)
==== ==== ======= =======
The above table for pension benefits includes foreign pension plans of ARCO
Chemical. These plans constituted approximately 20 percent of the benefit
obligation and 23 percent of the plan assets at December 31, 1998. 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 accumulated benefit obligation for pension plans
with accumulated benefit obligations in excess of plan assets were $19 million
and $11 million, respectively, as of December 31, 1998 and $11 million and $7
million, respectively, as of December 31, 1997. These plans are not funded and
consisted primarily of supplementary benefit plans for executives and
expatriates.
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
71
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Postretirement
Millions of dollars Benefits Benefits
- ------------------------------------------------ ---------------- ---------------
1998 1997 1996 1998 1997 1996
Components of net periodic benefit cost: ---- ---- ---- ---- ---- ----
Service cost................................... $ 7 $ 6 $ 10 $ 1 $ 3 $ 4
Interest cost.................................. 19 10 12 2 2 4
Expected return of plan assets................. (24) (8) (10) -- -- --
Prior service cost amortization................ -- -- -- (1) -- --
Actuarial loss amortization.................... 1 1 1 -- -- --
Transition obligation amortization............. -- -- 1 -- -- --
---- --- ---- --- --- ---
Net periodic benefit cost before settlement.... 3 9 14 2 5 8
Effect of settlement........................... 2 -- -- -- -- --
---- --- ---- --- --- ---
Net periodic benefit cost after settlement..... $ 5 $ 9 $ 14 $ 2 $ 5 $ 8
==== === ==== === === ===
The above net periodic benefit costs included eleven months of 1997 and the
full-year 1996 costs of the business contributed to Equistar on December 1,
1997, as well as the 1996 net periodic benefit costs of LCR.
Other
Pension Postretirement
Benefits Benefits
---------------- ----------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Weighted-average assumptions as of
December 31:
Discount rate............................ 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected return on plan assets........... 9.50% 9.50% 9.50% -- -- --
Rate of compensation increase............ 4.75% 4.75% 5.00% 4.75% 4.75% 5.00%
For measurement purposes, the assumed annual rate of increase in the per
capita cost of covered health care benefits as of December 31, 1998 was 7.0
percent for 1999-2001 and 5.0 percent thereafter. A one-percentage-point
increase in assumed health care cost trend rates would increase the
postretirement benefit obligation by $10 million, while a one-percentage-point
decrease would reduce the obligation by $8 million. The effect of a one-
percentage-point change would be less than $1 million on the total of the
service and interest cost components.
16. Long-Term Debt and Financing Arrangements
In connection with its purchase of the Acquired Business, the Company
executed a bank credit agreement providing for aggregate borrowings of up to
$7.0 billion ("Credit Facility"). As part of the acquisition, the Company
assumed approximately $870 million of ARCO Chemical debt. Borrowings under the
Credit Facility of $6.5 billion were used for: (i) the purchase of
approximately 97.4 million shares of ARCO Chemical common stock; (ii)
repayment of debt, including the $345 million term note payable to Equistar,
short-term borrowings of Lyondell and ARCO Chemical and other long-term
borrowings of ARCO Chemical; and (iii) payment of certain debt issuance costs.
The Credit Facility comprises: (i) a five-year revolving credit facility of
up to $500 million to be used for general corporate purposes ("Revolving
Credit Facility"); and (ii) four separate term loans ("Term Loans") in the
amounts of: (a) $2.0 billion ("Term Loan A") to be amortized over five years;
(b) $1.25 billion ("Term Loan B") to be amortized over seven years; (c) $1.25
billion with principal maturing on June 30, 1999 ("Term Loan C"); and (d) $2.0
billion with principal maturing on June 30, 2000 ("Term Loan D"). All of the
Term Loans were funded on July 28, 1998. No amounts have been funded to date
under the Revolving Credit Facility.
72
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Credit Facility is collateralized by cash flow streams from the Company's
three joint ventures and the Company's common stock ownership in its
subsidiaries.
The Term Loans bear interest at the following rates: (i) Term Loan A--LIBOR
plus 2.0 percent; (ii) Term Loan B--LIBOR plus 2.5 percent; (iii) Term Loan
C--LIBOR plus 2.0 percent; and (iv) Term Loan D--LIBOR plus 2.0 percent.
Mandatory prepayments from certain sources of funds are required with
respect to the Term Loans until such time as: (i) Term Loans C and D are
repaid in full, including accrued interest and fees thereon; and (ii) Lyondell
has achieved investment grade ratings of at least BBB- and Baa3 from Standard
& Poor's Ratings Services and Moody's Investors Service, Inc., respectively.
The sources of funds for mandatory prepayments include: (i) cash proceeds
received from or as a result of: (a) certain equity or debt issuances; (b) the
recapitalization of LCR; and (c) asset sales, as defined; and (ii) 50 percent
of annual excess cash flow, as defined, less the aggregate principal amount
prepaid under the Term Loans.
Under the covenant provisions of the Credit Facility, the Company has agreed
to, among other things: (i) maintain certain specified financial ratios and
consolidated net worth (as defined in the Credit Facility); (ii) refrain from
making certain distributions with respect to Lyondell's common 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, debt level and cash distribution policies. The Credit Facility
requires the Company, among other things, to issue $1.25 billion of equity, as
defined, by July 23, 1999. The breach of any of the covenants or financial
requirements in the Credit Facility could result in a default thereunder,
which would permit the lenders to declare the loans immediately payable and to
terminate future lending commitments. The Company intends to seek an amendment
to the Credit Facility that would, among other things, substantially reduce
the requirements for the sale of equity and ease the financial ratio
requirements. The amendment requires approval by lenders holding a majority of
the commitments. Subject to the foregoing, the Company intends to complete an
amendment of the Credit Facility and to effect debt and equity offerings in
the second quarter of 1999, using the proceeds to meet the June 1999 debt
maturity. In addition, the Company is actively exploring alternative means of
retiring or refinancing debt, including other financing sources, enhancement
of operating cash flows through cost reductions, management of working capital
levels and sales of assets. Accordingly, the Company believes that it will be
able to satisfy its obligations through the actions discussed above.
Long-term debt at December 31, 1998 and 1997 consisted of the following:
Millions of dollars 1998 1997
------------------- ------ ------
Term Loan A................................................ $1,852 $ --
Term Loan B................................................ 1,248 --
Term Loan C................................................ 1,250 --
Term Loan D................................................ 2,000 --
Debentures due 2000, 9.9%.................................. 200 --
Debentures due 2005, 9.375%................................ 100 --
Debentures due 2010, 10.25%................................ 100 --
Debentures due 2020, 9.8%.................................. 224 --
Other...................................................... 20 --
Term note to Equistar...................................... -- 345
------ ------
Total long-term debt..................................... 6,994 345
Less current maturities.................................... 1,603 --
------ ------
Long-term debt, net...................................... $5,391 $ 345
====== ======
Lyondell transferred $744 million of long-term debt to Equistar on December
1, 1997 of which $713 million was outstanding at December 31, 1998. Lyondell
remains an obligor on the debt. Under certain limited circumstances the debt
holders have the right to require repurchase of up to $313 million of the
debt.
73
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Aggregate maturities of all long-term debt during the next five years are
$1.6 billion in 1999, $2.6 billion in 2000, $445 million in 2001, $445 million
in 2002, $446 million in 2003, and $1.4 billion thereafter.
17. Financial Instruments
The Company does not buy or sell, or hold or issue financial instruments for
speculative trading purposes.
Foreign currency swap and forward contracts are used to minimize foreign
exchange exposures. Foreign exchange exposures result from cash flows between
U.S. and international operations and transactions denominated in currencies
other than the local currency of an operating entity. Swap contracts and
forward contracts are used to hedge foreign exchange exposures The notional
amounts of foreign currency contracts outstanding, principally involving the
Netherlands guilder, were $205 million at December 31, 1998 with various
maturity dates in 1999.
Gains and losses, realized and unrealized, on foreign currency forward and
swap contracts as well as realized and unrealized gains and losses on the
underlying exposures are recognized currently in "Other income (expense), net"
in the Consolidated Statements of Income.
During 1998, to mitigate interest rate exposure on its anticipated future
public debt issuance, the Company entered into treasury-rate lock transactions
("Treasury Locks") in the notional amount of $1 billion. The Treasury Locks,
which are based on U.S. Treasury rates have an average interest rate of 5.52
percent with a determination date of August 5, 1999. The Company's accounting
policy is to defer any gains and losses on the Treasury Locks, and recognize
them as an adjustment to interest expense over the term of the debt issued.
The fair value of the Treasury Locks at December 31, 1998 was an obligation of
approximately $53 million, resulting from a decline in the relevant U.S.
Treasury rates. Had the Company issued the anticipated fixed-rate debt as of
December 31, 1998, it would have benefited from a lower interest rate on the
debt issued, resulting in lower interest expense over the life of the debt,
that would have been an offset to the potential settlement of the Treasury
Locks.
The carrying value and the estimated fair value of the Company's financial
instruments as of December 31, 1998 are shown as assets (liabilities) in the
table below.
1998
---------------
Carrying Fair
Millions of dollars Value Value
------------------- -------- ------
Nonderivatives:
Investments and long-term receivables.................. $1,078 $1,078
Long-term debt (including current maturities).......... 6,994 7,027
Derivatives:
Treasury locks......................................... -- (53)
Foreign currency swaps................................. (10) (11)
Foreign currency forwards.............................. (1) (1)
All derivative instruments are off-balance-sheet instruments, however net
receivable or payable positions related to derivative instruments are carried
on the balance sheet.
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. Based upon the borrowing rates currently available to the Company
for debt with terms and average maturities similar to the Company's debt
portfolio, the fair value of the Company's long-term debt, including amounts
due within one year, was $7.0 billion at December 31, 1998. The fair value of
derivative financial instruments represents the amount to be exchanged if the
existing contracts were settled at December 31, 1998 and are based on market
quotes.
74
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is exposed to credit risk related to its financial instruments
in the event of nonperformance by the counterparties. The Company does not
generally require collateral or other security to support these financial
instruments. The counterparties to these transactions are major institutions
deemed creditworthy by the Company. The Company does not anticipate
nonperformance by the counterparties.
For the year ended December 31, 1998, the results of foreign exchange
transactions, including foreign currency derivative instruments, were not
significant.
18. Commitments and Contingencies
The Company has commitments, including those related to capital
expenditures, all made in the normal course of business. During August 1998,
as contemplated at the time of the Acquisition, Lyondell announced the delay
of construction of a PO plant, known as PO-11, that ARCO Chemical had
previously scheduled for startup in late 2001. As part of the delay, the
Company is negotiating the cancellation of the related lump-sum contract for
the engineering, procurement and construction of the PO-11 plant. The Company
recorded estimated liabilities for penalties and cancellation charges related
to the cancellation of the lump-sum contract and related commitments at the
time of the acquisition of ARCO Chemical (see Note 3).
The Acquired Business is party to a long-term supply arrangement for toluene
diisocyanate ("TDI"). Under the arrangement, the Company is entitled to all of
the TDI output of the supplier's two plants in France, which have a combined
rated capacity of approximately 264 million pounds per year. The Company is
required to purchase a minimum of 216 million pounds of TDI per year for up to
15 years, beginning January 1, 1995. The aggregate purchase price is a
combination of plant cost and market price. The Company is further obligated
to pay additional capacity reservation fees based upon plant output factors.
Prior to the formation of Equistar on December 1, 1997, the Company was
party to various unconditional purchase obligation contracts as a purchaser of
product and services. The Company's total purchases under those agreements,
including LCR for 1996, were $27 million and $47 million in 1997 and 1996,
respectively.
Crude Supply Agreement--Depending upon market conditions, breach or
termination of LCR's Crude Supply Agreement could adversely affect LCR, and
therefore, the Company. Although the parties have negotiated alternate
arrangements in the event of a force majeure, which may arise from, among
other things, 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 as the Crude Supply Agreement. There can
be no assurance that alternative crude oils with similar margins would be
available for purchase by LCR. Furthermore, the breach or termination of the
Crude Supply Agreement would require LCR to return to the practice of
purchasing all or a portion of its crude oil feedstocks in the merchant market
and would again subject LCR to significant volatility and price fluctuations.
In late April 1998, LCR received notification from PDVSA Oil of reduced
delivery of crude oil related to announced OPEC production cuts. LCR began
receiving the reduced allocation of crude oil from PDVSA Oil in August 1998.
Cross Indemnity Agreement--In connection with the transfer of assets and
liabilities from ARCO to the Company 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. In connection with
the transfer of such liabilities, the Company and ARCO entered into an
agreement, updated in 1997 ("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 which 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 upon years of ownership during the
relevant time period. The party with the more significant potential liability
75
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exposure is responsible for case management and associated costs while
allowing the non-case managing party to protect its interests. Under the
Revised Cross-Indemnity Agreement, the Company will assume responsibility for
its proportionate share of future costs for waste site matters not covered by
ARCO insurance. Subject to the uncertainty inherent in all litigation,
management believes the resolution of the matters pursuant to the Revised
Cross-Indemnity Agreement will not have a material adverse effect upon the
Consolidated Financial Statements of the Company.
In connection with the Acquisition, the Company 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 ("Former
ARCO Businesses"), 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 Former ARCO Businesses. ARCO also indemnified ARCO Chemical for certain
federal, foreign, state, and local taxes that might be assessed upon audit of
the operations of the Former ARCO Businesses for periods prior to July 1,
1987.
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 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. During the thirteen months ended December 31, 1998, approximately
$1 million had been expensed by Equistar under the $7 million indemnification
basket with respect to the business contributed by Lyondell.
Environmental--The Company's policy is to be in compliance with all
applicable environmental laws. The Company 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 Company 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.
Pursuant to the terms of the Revised Cross-Indemnity Agreement, the Company
is currently contributing funds to the clean up of one waste site (Brio,
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. The Company is also subject to
certain assessment and remedial actions at the Refinery under the Resource
Conservation and Recovery Act ("RCRA"). In addition, the Company has
negotiated an order with the Texas Natural Resource Conservation Commission
("TNRCC") for assessment and remediation of groundwater and soil contamination
at the Refinery.
As of December 31, 1998, the Company has accrued $9 million related to
future CERCLA, RCRA and TNRCC assessment and remediation costs associated with
the above mentioned sites. The costs 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
reserve has been established, new technology or future developments such as
involvement in other CERCLA, RCRA, TNRCC or other comparable state law
investigations, could require the Company to reassess its potential exposure
related to environmental matters.
76
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As part of the Acquisition (see Note 3), the Company assumed ARCO Chemical's
environmental liability, which totaled $39 million at December 31, 1998 and
reflects the Company's latest assessment of potential future remediation costs
associated with known ARCO Chemical sites. The liability is related to four
current plant sites, one former plant site and one federal Superfund site for
amounts ranging from $2 million to $18 million per site. Further, the Acquired
Business is involved in administrative proceedings or lawsuits relating to a
minimal number of other Superfund sites. The Company estimates however, based
upon currently available information, that potential loss contingencies
associated with these sites, individually and in the aggregate, are not
significant. Substantially all amounts accrued are expected to be paid out
over the next five to ten years.
The Company has relied upon remedial investigation/feasibility studies
("RI/FS") at each site of the Acquired Business as a basis for estimating
remediation costs at the site. RI/FS or preliminary assessments have been
completed at most of the sites. However, selection of the remediation method
and the cleanup standard to be applied are, in most cases, subject to approval
by the appropriate government authority. Accordingly, the Company may have
possible loss contingencies in excess of the amounts accrued to the extent the
scope of remediation required, the final remediation method selected and/or
the cleanup standard applied, vary from the assumptions used in estimating the
liability. The Company estimates that the upper range of these possible loss
contingencies should not exceed the amount accrued by more than $65 million.
During July 1994, the Company reported results of an independent
investigation conducted by the Audit Committee of the Board of Directors
regarding the compliance status of two process waste-water streams under the
applicable Benzene National Emissions Standard for Hazardous Air Pollutants
("NESHAPS") regulations and certain issues raised by an employee. The Company
has been informed that this matter is considered closed by the EPA and no
further enforcement action is anticipated.
The extent of loss related to environmental matters ultimately depends upon
a number of factors, including technological developments, changes in
environmental laws, the number and ability to pay of other parties involved at
a particular site and the Company's potential involvement in additional
environmental assessments and cleanups. Based upon currently known facts,
management believes that any remediation costs the Company may incur in excess
of the amounts accrued or disclosed above would not have a material adverse
impact on the Company's Consolidated Financial Statements.
MTBE--Certain federal and state legislative initiatives have sought to
either rescind the oxygenate requirement for reformulated gasoline sold in
California and other states or restrict the use of MTBE. There is ongoing
review of this issue and the ultimate resolution of the appropriateness of
using MTBE could result in a significant reduction in the Company's MTBE
sales. In addition, the Company has a take-or-pay contract with ARCO, which
contributes significant pretax margin. If such legislative initiatives were
enacted, ARCO has indicated that it might attempt to invoke a force majeure
provision in the contract in order to reduce the quantities of MTBE it
purchases under, or to terminate, the contract. The Company would vigorously
dispute such action.
General--The Company 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 Consolidated Financial Statements of the Company.
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 of the Company. 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 the Company'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.
77
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. Lease Commitments
The Company leases various facilities and equipment under noncancelable
lease arrangements for varying periods. As of December 31, 1998, future
minimum lease payments for years ending December 31, relating to all
noncancelable operating leases with lease terms in excess of one year were as
follows:
Millions of dollars
-------------------
1999................................................................ $ 52
2000................................................................ 42
2001................................................................ 38
2002................................................................ 33
2003................................................................ 26
Thereafter.......................................................... 310
----
Total minimum lease payments...................................... $501
====
Operating lease net rental expenses for 1998, 1997 and 1996, including
Lyondell Methanol for 1997 and LCR for 1996, were $39 million, $43 million and
$66 million, respectively.
20. Stockholders' Equity
Dividends--During 1998, 1997 and 1996, the Company paid regular quarterly
dividends of $.225 per share on common stock outstanding.
Basic and Diluted Earnings per Share--Basic earnings per share for all
periods presented are computed based upon the weighted average number of
shares outstanding for the periods. Diluted earnings per share include the
effect of outstanding stock options issued under the Executive Long-Term
Incentive Plan and the Incentive Stock Option Plan. The following earnings per
share ("EPS") data is presented for the years ended December 31:
1998 1997 1996
----------- ------------ ------------
Thousands of shares Shares EPS Shares EPS Shares EPS
- ------------------- ------ ---- ------ ----- ------ -----
Basic.................................... 77,669 $.67 79,796 $3.58 80,000 $1.58
Dilutive effect of options............... 30 -- 17 -- 45 --
------ ---- ------ ----- ------ -----
Diluted.................................. 77,699 $.67 79,813 $3.58 80,045 $1.58
====== ==== ====== ===== ====== =====
Treasury Stock--From time to time the Company purchases its shares in the
open market to be used for issuances under the Company's employee compensation
and benefits plans, including stock option and restricted stock plans. During
1998, the Company purchased 500,000 shares for approximately $10 million to be
used for such plans. The Company reissued, under the Restricted Stock Plan,
88,848 shares previously purchased. Earlier in 1998, the Company completed the
stock repurchase program authorized by the Company's Board of Directors in
September 1997. A total of 2,567,051 shares were purchased for $75 million
under this stock repurchase program.
Restricted Stock Plan--During 1998 the Company granted and issued 88,848
shares of restricted stock to employees of the Acquired Business. The shares
vest on various dates through December 15, 2000, 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 the Company'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
78
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
announcement by another entity that it has acquired beneficial ownership of 15
percent 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 percent 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 the Company as described in the
Rights Agreement dated as of December 8, 1995.
Preferred Stock--The Company has authorized 80,000,000 shares of preferred
stock, $.01 par value, of which none were issued or outstanding at December
31, 1998.
Stock Options--The Company'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. The LTI Plan provided, among other compensation awards,
for the granting to officers and other key management employees of non-
qualified stock options for the purchase of up to 1,295,000 shares of the
Company's common stock. The number of options exercisable each year is equal
to 25 percent of the number granted after each year of continuous service
starting one year from the date of grant. The LTI Plan provided that the
option price per share was not less than 100 percent of the fair market value
of the stock on the effective date of the grant. As of December 31, 1998,
options covering 621,835 shares were outstanding under the LTI Plan with a
weighted average remaining life of 4 years, all of which were exercisable at
prices ranging from $18.25 to $30.00 per share. The following summarizes stock
option activity for the LTI Plan:
Number Average
of Option Price
Shares Per Share
-------- ------------
Balance, January 1, 1996................................. 948,256 $23.26
Exercised.............................................. (204,454) 22.64
--------
Balance, December 31, 1996............................... 743,802 23.43
Exercised.............................................. (11,642) 19.15
--------
Balance, December 31, 1997............................... 732,160 23.50
Exercised.............................................. (110,325) 22.84
--------
Balance, December 31, 1998............................... 621,835 23.62
========
79
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company'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. All employees of the Company who were not on the executive
payroll were eligible to participate in the ISO Plan, subject to certain
restrictions. Various restrictions apply as to when and to the number of stock
options that may be exercised during any year. As of December 31, 1998,
options covering 145,191 shares were outstanding at $30.00 per share. These
options were held by 641 eligible employees and expired in January 1999. At
December 31, 1998, no stock options were exercisable. The following summarizes
stock option activity for the ISO Plan:
Number Average
of Option Price
Shares Per Share
------- ------------
Balance, January 1, 1996.................................. 189,553 $29.64
Canceled/forfeited...................................... (10,303) 28.51
Exercised............................................... (3,446) 19.44
-------
Balance, December 31, 1996................................ 175,804 29.91
Canceled/forfeited...................................... (18,250) 29.68
Exercised............................................... (803) 19.44
-------
Balance, December 31, 1997................................ 156,751 29.99
Canceled/forfeited...................................... (11,408) 30.00
Exercised............................................... (152) 19.44
-------
Balance, December 31, 1998................................ 145,191 30.00
=======
Employee stock options are accounted for under the intrinsic value based
method prescribed by the 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.
There were no grants in any of the years ended December 31, 1998, 1997 and
1996.
21. Supplemental Cash Flow Information
Supplemental cash flow information is summarized as follows for the years
ended December 31:
Millions of dollars 1998 1997 1996
------------------- ---- ---- ----
Cash paid during the year for:
Interest:
Paid.................................................... $230 $ 66 $103
Less amount capitalized................................. -- -- 32
---- ---- ----
Net.................................................... $230 $ 66 $ 71
==== ==== ====
Income taxes............................................. $ 63 $125 $ 42
==== ==== ====
The petrochemicals and polymers businesses contributed by the Company to
Equistar on December 1, 1997 included non-cash net assets with a net book
value of $762 million, including $381 million of accounts receivable, $233
million of inventory, $826 million of net property, plant and equipment and
$745 million of long-term debt, including the current maturities. In addition,
the Company contributed a $345 million term note payable to Equistar, which
was repaid in July 1998.
80
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
22. Segment and Related Information
Using the guidelines set forth in SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, the Company has identified four
reportable segments in which it operates. The reportable segments are: (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 the 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 ("PO"), polyether polyols,
propylene glycol, propylene glycol ethers, toluene diisocyanate ("TDI"),
styrene monomer ("SM") and methyl tertiary butyl ether ("MTBE").
Petrochemicals--This segment consists of operations in: olefins, including
ethylene, propylene, butadiene, butylenes and specialty products; aromatics,
including benzene and toluene; methanol; oxygenated chemicals, including
ethylene oxide and derivatives, MTBE, ethyl alcohol and diethyl ether; and
specialty chemicals, including refinery blending stocks. The petrochemicals
business of Equistar for 1998 and December 1997 is included in this segment.
Polymers--This segment consists of operations in: polyolefins, including
high density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear
low density polyethylene ("LLDPE") and polypropylene; and performance polymers
products, including color concentrates and compounds, wire and cable resins
and compounds, adhesive resins, and fine powders. The polymers business of
Equistar for 1998 and December 1997 is included in this segment.
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 produced at the Refinery, including
benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial
lubricants, motor oils, white oils, process oils and base oils; carbon black
oil; sulfur; residual oil; petroleum coke fuel; olefins feedstocks; and crude
oil resales.
No customer accounted for 10 percent or more of consolidated sales during
1998, 1997 or 1996, other than CITGO during 1996, which purchased
substantially all of the refined products produced at the LCR Refinery under
the Products Agreement (see Note 5). Under the terms of that agreement, CITGO
continues to purchase a substantial portion of the output of the Refining
segment.
81
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The table includes certain
reclassifications for an intersegment pricing adjustment recorded in 1996.
Intersegment sales from the petrochemicals segment to the polymers segment in
1997 and 1996 include ethylene and propylene produced at Equistar's
Channelview facility. Intersegment sales between the petrochemicals and
refining segments in 1997 and 1996 include olefins feedstocks and benzene
produced at the Refinery, and gasoline blending stocks and hydrogen produced
at Equistar's Channelview facility. Intersegment sales were made at prices
based upon current market values.
INTERMEDIATE
CHEMICALS
AND
MILLIONS OF DOLLARS DERIVATIVES PETROCHEMICALS POLYMERS REFINING OTHER TOTAL
- ------------------- ------------ -------------- -------- -------- ----- ------
1998
Sales and other
operating revenues..... $1,447 $1,447
Income from equity
investments before
unusual charges........ -- $ 159 $ 89 $ 116 $(108) 256
Unusual charges......... 57 -- -- 6 19 82
Operating income........ 108 159 89 110 (127) 339
Total assets............ 8,200 297 201 315 212 9,225
Capital expenditures.... 64 -- -- -- -- 64
Depreciation and
amortization expense... 138 -- -- -- -- 138
1997
Sales and other
operating revenues:
Customers............. $2,108 $770 $2,878
Intersegment.......... 424 -- $(424) --
Income from equity
investments before
unusual charges........ 28 13 $ 102 (11) 132
Unusual charges......... -- -- -- 40 40
Operating income........ 472 95 102 (135) 534
Total assets............ 447 349 300 463 1,559
Capital expenditures.... 27 13 -- 9 49
Depreciation and
amortization expense... 50 29 -- 5 84
1996
Sales and other
operating revenues:
Customers............. $1,628 $783 $2,641 $5,052
Intersegment.......... 665 -- 171 $(836) --
Operating income........ 240 97 1 (60) 278
Total assets............ 870 624 1,706 76 3,276
Capital expenditures.... 57 20 529 3 609
Depreciation and
amortization expense... 44 29 34 3 110
82
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the details of "Other" operating income as
presented above for the years ended December 31:
Millions of dollars 1998 1997 1996
------------------- ----- ----- -----
Expenses, principally Equistar selling, general and
administrative, not allocated to petrochemicals and
polymers segments..................................... $(114) $ (95) $ (60)
Income from equity investment in Lyondell Methanol
Company, L.P.......................................... 6 -- --
Unallocated unusual charges............................ (19) (40) --
----- ----- -----
Total................................................ $(127) $(135) $ (60)
===== ===== =====
The following "Sales and other operating revenues" by country data are based
upon the location of the use of the product. Long-lived assets by country data
are based upon the location of the assets. The data are for the five months
ended and as of December 31, 1998, respectively:
Sales and
Other
Operating Long-Lived
Millions of dollars Revenues Assets
------------------- --------- ----------
United States........................................ $ 724 $3,046
Foreign.............................................. 723 1,465
------ ------
Total.............................................. $1,447 $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 intermediate chemicals and
derivatives segment. Prior to the purchase of the Acquired Business as of July
28, 1998, the Company did not have operations outside the United States and
export sales were not significant.
23. Unaudited Quarterly Results
For the quarter ended
-----------------------------
March June September December
Millions of dollars, except per share data 31 30 30 31
- ------------------------------------------ ----- ---- --------- --------
1998
Sales and other operating revenues............... $ -- $ -- $566 $881
Income from equity investments................... 120 53 61 22
Operating income................................. 107 45 87 100
Income (loss) before income taxes................ 104 47 (24) (38)
Net income (loss)................................ 65 29 (15) (27)
Basic and diluted earnings (loss) per share...... .82 .38 (.20) (.35)
1997
Sales and other operating revenues............... $755 $789 $799 $535
Income from equity investments................... 6 21 29 76
Operating income................................. 85 167 182 100
Income before income taxes....................... 63 146 162 85
Net income....................................... 40 93 102 51
Basic and diluted earnings per share............. .50 1.17 1.27 .64
- --------
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.
83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Governance Committee
of Equistar Chemicals, LP
In our opinion, the accompanying balance sheets and the related 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") at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the year ended December 31, 1998 and for the
period from December 1, 1997 (inception) to December 31, 1997, in conformity
with generally accepted accounting principles. 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 generally accepted
auditing standards 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.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
February 26, 1999
84
EQUISTAR CHEMICALS, LP
STATEMENTS OF INCOME
For the
period from
December 1,
1997
For the year (inception)
ended to
December 31, December 31,
Millions of dollars 1998 1997
- ------------------- ------------ ------------
Sales and other operating revenues:
Unrelated parties................................... $3,818 $338
Related parties..................................... 545 27
------ ----
4,363 365
------ ----
Operating costs and expenses:
Cost of sales:
Unrelated parties................................. 3,313 261
Related parties................................... 460 26
Selling, general and administrative expenses........ 273 21
Unusual charges..................................... 35 42
------ ----
4,081 350
------ ----
Operating income.................................... 282 15
Interest expense...................................... (156) (10)
Interest income....................................... 17 2
------ ----
Net income............................................ $ 143 $ 7
====== ====
See Notes to Financial Statements.
85
EQUISTAR CHEMICALS, LP
BALANCE SHEETS
December 31
----------------
Millions of dollars 1998 1997
- ------------------- ------- -------
ASSETS
Current assets:
Cash and cash equivalents................................... $ 66 $ 41
Accounts receivable:
Trade, net................................................ 376 428
Related parties........................................... 111 36
Receivables from partners................................... 3 150
Inventories................................................. 549 513
Prepaid expenses and other current assets................... 25 24
------- -------
Total current assets.................................... 1,130 1,192
------- -------
Property, plant and equipment................................. 5,847 3,690
Less accumulated depreciation and amortization................ (1,772) (1,572)
------- -------
4,075 2,118
Investment in PD Glycol....................................... 55 --
Goodwill, net................................................. 1,151 1,139
Deferred charges and other assets............................. 257 151
------- -------
Total assets.................................................. $ 6,668 $ 4,600
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade..................................................... $ 264 $ 154
Related parties........................................... 15 18
Payables to partners........................................ 9 63
Current maturities of long-term debt........................ 150 36
Other accrued liabilities................................... 200 65
------- -------
Total current liabilities............................... 638 336
------- -------
Obligations under capital leases.............................. 205 --
Long-term debt................................................ 1,865 1,512
Other liabilities and deferred credits........................ 75 34
Commitments and contingencies
Partners' capital:
Partners' capital........................................... 3,885 3,063
Note receivable from Lyondell LP............................ -- (345)
------- -------
Total partners' capital................................. 3,885 2,718
------- -------
Total liabilities and partners' capital....................... $ 6,668 $ 4,600
======= =======
See Notes to Financial Statements.
86
EQUISTAR CHEMICALS, LP
STATEMENTS OF CASH FLOWS
For the
period from
December 1,
1997
For the year (inception)
ended to
December 31, December 31,
Millions of dollars 1998 1997
- ------------------- ------------ ------------
Cash flows from operating activities:
Net income.......................................... $ 143 $ 7
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 268 19
Loss on disposition of property, plant and
equipment........................................ 8 --
Equity in losses of investment in PD Glycol....... 3 --
Changes in assets and liabilities, net of the
effects of assets contributed:
Decrease (increase) in accounts receivable....... 105 (100)
Decrease (increase) in receivables from
partners........................................ 147 (101)
Decrease (increase) in inventories............... 133 (5)
Increase in accounts payable..................... 40 188
(Decrease) increase in payables to partners...... (63) 54
Increase in other accrued liabilities............ 122 48
Net change in other working capital accounts..... 2 (15)
Other............................................ (62) 7
------- -----
Net cash provided by operating activities........ 846 102
------- -----
Cash flows from investing activities:
Additions to property, plant and equipment......... (200) (12)
Proceeds from disposition of property, plant and
equipment......................................... 3 --
Contributions and advances to affiliates........... (15) --
------- -----
Net cash used in investing activities............ (212) (12)
------- -----
Cash flows from financing activities:
Borrowings of long-term debt....................... 757 50
Repayments of long-term debt....................... (290) --
Proceeds from payment of note receivable by
Lyondell.......................................... 345 --
Cash contributions from partners................... -- 1
Distributions to partners.......................... (1,421) (100)
------- -----
Net cash used in financing activities............ (609) (49)
------- -----
Increase in cash and cash equivalents................ 25 41
Cash and cash equivalents at beginning of period..... 41 --
------- -----
Cash and cash equivalents at end of period........... $ 66 $ 41
======= =====
See Notes to Financial Statements.
87
EQUISTAR CHEMICALS, LP
STATEMENTS OF PARTNERS' CAPITAL
Millions of dollars Lyondell Millennium Occidental Total
- ------------------- -------- ---------- ---------- ------
Balance, December 1, 1997 (inception)... $ -- $ -- $ -- $ --
Capital contributions at inception:
Net assets.......................... 763 2,048 -- 2,811
Note receivable from Lyondell LP.... 345 -- -- 345
Net income............................ 4 3 -- 7
Distributions to partners............. (57) (43) -- (100)
----- ------ ------ ------
Balance, December 31, 1997.............. 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, December 31, 1998.............. $ 613 $1,621 $1,651 $3,885
===== ====== ====== ======
See Notes to Financial Statements.
88
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS
1. Formation of the Company 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, the Partnership was owned 57 percent by
Lyondell and 43 percent by Millennium. Lyondell owns its interest in the
Partnership through two wholly-owned subsidiaries, Lyondell Petrochemical G.P.
Inc. ("Lyondell GP") and Lyondell Petrochemical L.P. Inc. ("Lyondell LP").
Millennium also owns its interest in the Partnership through two wholly-owned
subsidiaries, Millennium Petrochemicals GP LLC ("Millennium GP") and
Millennium Petrochemicals LP LLC ("Millennium LP").
On May 15, 1998, the Partnership was expanded with the contribution of
certain assets from Occidental Petroleum Corporation ("Occidental") (see Note
3). These assets include the ethylene, propylene and ethylene oxide ("EO") and
EO derivatives businesses and certain pipeline assets held by Oxy
Petrochemicals Inc. ("Oxy Petrochemicals"), a 50 percent interest in a joint
venture between PDG Chemical Inc. ("PDG Chemical") and E.I. DuPont de Nemours
and Company ("PD Glycol"), and a lease to the Partnership of the Lake Charles,
Louisiana olefins plant and related pipelines held by Occidental Chemical
Corporation ("Occidental Chemical") (collectively, "Occidental Contributed
Business"). Occidental Chemical, Oxy Petrochemicals and PDG Chemical are
wholly-owned, indirect subsidiaries of Occidental. The Occidental Contributed
Business included olefins plants at Corpus Christi and Chocolate Bayou, Texas,
EO/ethylene glycol and EO derivatives businesses located at Bayport, Texas,
Occidental's 50 percent ownership of PD Glycol, which operates a polyglycol
plant at Beaumont, Texas, 1,430 miles of owned and leased ethylene/propylene
pipelines, and the lease to the Partnership 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 the Partnership for an aggregate partnership
interest of 29.5 percent. In addition, the Partnership assumed approximately
$205 million of Occidental indebtedness and the Partnership issued a
promissory note to an Occidental subsidiary in the amount of $419.7 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, the
Partnership 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, the Partnership and Occidental also entered into a long-term
agreement for the Partnership to supply the ethylene requirements for
Occidental Chemical's U.S. manufacturing plants.
After completion of this transaction, the Partnership is owned 41 percent by
Lyondell, 29.5 percent by Millennium and 29.5 percent by Occidental, through
its wholly-owned subsidiaries Occidental Petrochem Partner GP Inc.
("Occidental GP"), Occidental Petrochem Partner 1, Inc. ("Occidental LP1") and
Occidental Petrochem Partner 2, Inc. ("Occidental LP2").
The Partnership owns and operates the petrochemicals and polymers businesses
contributed by Lyondell, Millennium and Occidental ("Contributed Businesses")
which consist of 20 manufacturing facilities on the U.S. Gulf Coast and in the
U.S. Midwest. The petrochemicals segment manufactures and markets olefins,
oxygenated chemicals, aromatics and specialty chemicals. Olefins include
ethylene, propylene and butadiene, and oxygenated chemicals 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-
89
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 resins, concentrates and compounds, and polymeric powders.
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 on their percentage ownership of the
Partnership. Distributions are made to the partners based on their percentage
ownership of the Partnership. Additional cash contributions required by the
Partnership will also be based on the partners' percentage ownership of the
Partnership.
2. Summary of Significant Accounting Policies
Revenue Recognition--Revenue from product sales is generally 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. The
Partnership's policy is to invest cash in conservative, highly rated
instruments and limit the amount of credit exposure to any one institution.
The Partnership performs periodic evaluations of the relative credit standing
of these financial institutions which are considered in the Partnership's
investment strategy.
The Partnership 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 the Partnership's discretion.
As a result, none of the Partnership's cash is restricted.
Accounts Receivable--The Partnership sells its products primarily to
companies in the petrochemicals and polymers 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, which is reflected in the
accompanying Balance Sheet as a reduction of accounts receivable, totaled $3
million at December 31, 1998. The Partnership had no allowance for doubtful
accounts recorded at December 31, 1997.
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.
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, the Partnership removes the cost of the assets and
the related accumulated depreciation from the accounts and reflects any
resulting gains or losses in the Statement of Income. The Partnership's policy
is to capitalize interest cost incurred on debt during the construction of
major projects exceeding one year.
90
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Turnaround Maintenance and Repair Expenses--Cost of major repairs and
maintenance incurred in connection with turnarounds of units at the
Partnership's manufacturing facilities are deferred and amortized on a
straight-line basis until the next planned turnaround, generally five to seven
years.
Deferred Software Costs--Costs to purchase and develop software for internal
use are deferred and amortized on a straight-line basis over 10 years. The
Partnership amortized $6 million and less than $1 million of deferred software
costs for the year ended December 31, 1998 and during the period from December
1, 1997 (inception) to December 31, 1997, respectively.
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 forty years. Management
periodically evaluates goodwill for impairment based on the anticipated future
cash flows attributable to the related operations. Such expected cash flows,
on an undiscounted basis, are compared to the carrying value of the tangible
and intangible assets, and if impairment is indicated, the carrying value of
goodwill, and if necessary other related assets, is adjusted. Management
believes that no impairment exists at December 31, 1998. The Partnership
amortized $31 million and $3 million of goodwill for the year ended December
31, 1998 and during the period from December 1, 1997 (inception) to December
31, 1997, respectively. Accumulated amortization of goodwill was $166 million
and $135 million at December 31, 1998 and 1997, respectively.
Investment in PD Glycol--Equistar holds a 50 percent 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.
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.
Pension and Other Postretirement Benefit Plans--During 1998, the Partnership
adopted Statement of Financial Accounting Standards ("SFAS") No. 132,
Employers' Disclosures about Pensions and Other Retirement Benefits. The
provisions of SFAS No. 132 revise employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of these plans. SFAS No. 132 standardizes the disclosure
requirements for these plans, to the extent practicable.
Exchanges--Finished product 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 and
receipt of cash are accounted for as purchases and sales.
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.
91
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Segment and Related Information--In 1998, the Partnership adopted SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 supercedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Partnership's reportable segments. SFAS No. 131 also
requires disclosures about products and services, geographic areas and major
customers. The adoption of SFAS No. 131 did not affect the results of
operations or the financial position of the Partnership (see Note 18).
Reclassifications--Certain 1997 amounts have been restated to conform to
classifications adopted in 1998.
3. Addition of Occidental Contributed Business
On May 15, 1998, the Partnership 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 Statement of Income
prospectively from May 15, 1998. The consideration paid for the Occidental
Contributed Business was approximately $2.1 billion and was allocated to the
assets contributed and liabilities assumed based on the estimated fair values
of such assets and liabilities at the date of the contribution. The fair value
of the assets contributed and liabilities assumed by the Partnership on May
15, 1998 was 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 the Partnership as if
the Occidental Contributed Business had been contributed on January 1, 1998 is
as follows:
For the year
ended
December 31,
Millions of dollars 1998
------------------- ------------
Sales and other operating revenues........................... $4,869
Unusual charges.............................................. 35
Operating income............................................. 320
Net income................................................... 154
The unaudited pro forma data presented above is not necessarily indicative
of the results of operations of the Partnership that would have occurred had
such transaction actually been consummated as of January 1, 1998, nor are they
necessarily indicative of future results.
92
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Supplemental Cash Flow Information
Millions of dollars 1998 1997
------------------- ---- ----
Cash paid for interest.......................................... $154 $--
==== ===
Noncash investing and financing activities:
Noncash adjustments to contributed capital.................... $ 3 $--
Inventory transfer from PD Glycol............................. 15 --
==== ===
Historical cost of assets contributed and liabilities assumed by the
Partnership in December 1997 (inception):
Total current assets............................................ $ 948
Property, plant and equipment, net.............................. 2,121
Goodwill, net................................................... 1,142
Deferred charges and other assets............................... 158
------
Total assets.................................................. $4,369
======
Current maturities of long-term debt............................ $ 36
Other current liabilities....................................... 17
Long-term debt.................................................. 1,462
Other liabilities and deferred credits.......................... 43
Partners' capital............................................... 3,156
Note receivable from Lyondell LP................................ (345)
------
Total liabilities and partners' capital....................... $4,369
======
5. 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 and accrued liabilities approximated their carrying value due
to their short maturity. Based on the borrowing rates currently available to
the Partnership for debt with terms and average maturities similar to the
Partnership's debt portfolio, the fair value of the Partnership's long-term
debt, including amounts due within one year, was approximately $2.3 billion
and $1.5 billion at December 31, 1998 and 1997, respectively.
The Partnership had issued letters of credit totaling $2.6 million and $4
million at December 31, 1998 and 1997, respectively.
6. Related Party Transactions
Loans to Millennium and Occidental--In connection with Occidental's entry
into Equistar in May 1998, Equistar executed promissory notes to Millennium
and Occidental in the principal amounts of $75.0 million and $419.7 million,
respectively. Each of the notes provides for the annual accrual of interest
(based on a year of 360 days and actual days elapsed) at a rate equal to LIBOR
plus 0.6 percent. 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 the Partnership in the form of a $345
million promissory note ("Lyondell Note"). The Lyondell Note bears interest at
LIBOR plus a market spread. The note was repaid in full by Lyondell in July
1998. Interest income accrued on the Lyondell Note totaled $12.8 million and
$1.75 million during 1998 and during the period from December 1, 1997
(inception) to December 31, 1997, respectively.
93
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Shared Services Agreement with Lyondell--Lyondell provides certain
corporate, general and administrative services to the Partnership, including
legal, tax, treasury, risk management and other services pursuant to a shared
services agreement. During the year ended December 31, 1998, Lyondell charged
the Partnership $3 million for these services. During the period December 1,
1997 (inception) to December 31, 1997, charges from Lyondell were less than $1
million. As part of the shared services agreement, the Partnership provides
certain general and administrative services to Lyondell, such as health,
safety and environmental services, human resource services, information
services and legal services. During the year ended December 31, 1998 and
during the period December 1, 1997 (inception) to December 31, 1997, the
Partnership charged Lyondell less than $1 million for these services.
Shared Services and Shared-Site Agreements with Millennium--The Partnership
and Millennium have entered into a variety of operating, manufacturing and
technical service agreements related to the business of Equistar and the vinyl
acetate monomers, acetic acid, synthesis gas and methanol businesses retained
by Millennium Petrochemicals. These agreements include the provision by the
Partnership to Millennium Petrochemicals of materials management, certain
utilities, administrative office space, health, safety and environmental
services and computer services. During the year ended December 31, 1998, the
Partnership charged Millennium Petrochemicals $5 million for these services.
During the period from December 1, 1997 (inception) to December 31, 1997,
charges to Millennium Petrochemicals were less than $1 million. These
agreements also include the provision by Millennium Petrochemicals to the
Partnership of certain operational services, including waste water treatment
and barge dock access. During the year ended December 31, 1998 and during the
period December 1, 1997 (inception) to December 31, 1997, Millennium
Petrochemicals charged the Partnership less than $1 million for these
services.
Operating Agreement with Occidental Chemical Corporation--On May 15, 1998,
Occidental Chemical and the Partnership 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. Under the terms of the Operating Agreement, the Partnership agreed
to reimburse Occidental Chemical for its cost in connection with the services
provided to the Partnership, and the Partnership agreed to pay Occidental
Chemical an administrative fee. The Operating Agreement terminated in
accordance with its terms on June 1, 1998. During the term of the Operating
Agreement, the Partnership paid Occidental Chemical an administrative fee of
$1 million.
Transition Services Agreement with Occidental Chemical--On June 1, 1998,
Occidental Chemical and the Partnership entered into a Transition Services
Agreement ("TSA"). Under the terms of the TSA, Occidental Chemical agreed to
provide the Partnership certain services in connection with the Occidental
Contributed Business, including services related to accounting, payroll,
office administration, marketing, transportation, purchasing and procurement,
management, human resources, customer service, technical services and others.
Between June 1, 1998 and December 31, 1998, the Partnership expensed $6
million in connection with services provided pursuant to the TSA. The TSA
expires by its terms on June 1, 1999.
Occidental Chemical Ethylene Sales Agreement--The Partnership 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 has agreed to purchase an annual minimum amount of ethylene from the
Partnership equal to 100 percent of the ethylene feedstock requirements of
Occidental Chemical's United States plants (estimated to be 2 billion pounds
per year at the time of the signing of the agreement) less any quantities up
to 250 million pounds tolled in accordance with the provisions of such
agreement. The Partnership's maximum supply obligation in any calendar year
under the Ethylene Sales Agreement is 2.55 billion pounds. Upon three years
notice from either party to the other, the Partnership's maximum supply
obligation in any
94
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 an ethylene
sales price that is generally reflective of market prices and will be
determined pursuant to a formula using the Partnership's sales price to third
parties and several published market price indices. During the period from May
15, 1998 to December 31, 1998, the Partnership charged Occidental Chemical
$171 million under the Ethylene Sales Agreement.
Product Sales to Millennium--The Partnership 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 percent of its ethylene requirements for its LaPorte, Texas
facility (estimated to be 300 million pounds per year), up to a maximum of 330
million pounds per year. Millennium has the option to increase the amount
purchased to up to 400 million pounds per year beginning January 1, 2001. The
initial term of the contract expires December 1, 2000 and thereafter, the
contract automatically renews annually. Either party may terminate on one
year's notice, except that if Millennium elects to increase its purchases
under the contract, a party must provide two year's notice of termination. The
pricing terms of this agreement are similar to the Ethylene Sales Agreement
with Occidental Chemical. The Partnership charged Millennium $41 million and
$4 million for ethylene for 1998 and December 1997, respectively.
Product Sales to Lyondell--Lyondell acquired its intermediate chemicals and
derivatives business through the acquisition of ARCO Chemical Company
effective August 1, 1998. Sales to Lyondell, primarily for ethylene,
propylene, MTBE, benzene and alkylate, totaled $97 million for the period from
August 1, 1998 to December 31, 1998, and were based on price terms generally
reflective of market.
Transactions with LCR--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
the Partnership. Accordingly, certain refinery products are sold to the
Partnership as feedstocks, and certain olefins by-products are sold to LCR for
processing into gasoline. Sales to LCR were $236 million and $27 million and
purchases from LCR were $131 million and $10 million for the year ended
December 31, 1998 and for the period from December 1, 1997 (inception) to
December 31, 1997, respectively. The Partnership also assumed certain tolling
arrangements as well as terminalling and storage obligations between Lyondell
and LCR and performs certain marketing services for LCR. Aggregate charges
under these various service agreements of $15 million were made to LCR by the
Partnership with respect to 1998. No charges were made during December 1997.
All of the agreements between LCR and the Partnership are on terms generally
representative of prevailing market prices. The Partnership also has a shared
services agreement with LCR to provide LCR with information services,
including mainframe processing and maintenance. Net charges to LCR by the
Partnership for the shared services agreement were less than $1 million during
1998. No charges were made during December 1997.
Transactions with Lyondell Methanol--The Partnership provides operating and
other services for Lyondell Methanol Company, L.P. ("Lyondell Methanol") under
the terms of existing agreements that were assumed by Equistar from Lyondell,
including the lease to Lyondell Methanol by the Partnership of the real
property on which its methanol plant is located. Pursuant to the terms of
those agreements, Lyondell Methanol pays the Partnership a management fee and
will reimburse certain expenses of the Partnership at cost. Management fees
charged by the Partnership to Lyondell Methanol totaled $6 million for the
year ending December 31, 1998 and less than $1 million during the period from
December 1, 1997 (inception) to December 31, 1997. The Partnership sells
natural gas to Lyondell Methanol at prices generally representative of its
cost. Purchases by Lyondell
95
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Methanol of natural gas feedstock from the Partnership totaled $44 million and
$4 million for the year ended December 31, 1998 and during the period from
December 1, 1997 (inception) to December 31, 1997, respectively. Lyondell
Methanol sells all of its products to Equistar. For the year ending December
31, 1998 and during the period from December 1, 1997 (inception) to December
31, 1997, purchases from Lyondell Methanol were $103 million and $15 million,
respectively.
Related Party Leases--As part of their shared services agreement with the
Partnership, Millennium subleases from the Partnership certain administrative
office space at a monthly rent of $42,000.
7. Accounts Receivable
In December 1998, the Partnership entered into a purchase agreement with an
independent issuer of receivables-backed commercial paper. Under the terms of
the agreement, the Partnership agreed to sell on an ongoing basis and without
recourse, designated accounts receivable. To maintain the balance of the
accounts receivable sold, the Partnership is obligated to sell new receivables
as existing receivables are collected. The agreement expires in December 1999.
At December 31, 1998, the Partnership's gross accounts receivable that had
been sold to the purchasers aggregated $130 million. This amount has been
reported as operating cash flows in the Statements of Cash Flows. Costs
related to the sale are included in "Selling, general and administrative
expenses" in the Statements of Income.
8. Inventories
Inventories at December 31, 1998 and 1997 consisted of the following:
Millions of dollars 1998 1997
------------------- ---- ----
Raw materials................................................... $149 $160
Work-in-process................................................. 11 5
Finished goods.................................................. 301 282
Materials and supplies.......................................... 88 66
---- ----
Total inventories............................................. $549 $513
==== ====
For the year ending December 31, 1998, cost of sales increased by less than
$1 million associated with the reduction of LIFO inventories. For the period
from December 1, 1997 (inception) to December 31, 1997, cost of sales
increased by approximately $1 million associated with the reduction in LIFO
inventories. The excess of the current cost of inventories over book value was
approximately $103 million at December 31, 1997.
9. Property, Plant and Equipment, Net
The components of property, plant and equipment, at cost, and the related
accumulated depreciation at December 31, 1998 and 1997 were as follows:
Millions of dollars 1998 1997
------------------- ------ ------
Manufacturing facilities and equipment..................... $5,344 $3,489
Manufacturing equipment acquired under capital leases...... 236 --
Construction projects in progress.......................... 189 127
Land....................................................... 78 74
------ ------
Total property, plant and equipment...................... 5,847 3,690
Less accumulated depreciation.............................. 1,772 1,572
------ ------
Property, plant and equipment, net....................... $4,075 $2,118
====== ======
96
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Depreciation expense for the year ending December 31, 1998 and for the
period from December 1, 1997 (inception) to December 31, 1997 was $200 million
and $15 million, respectively. At December 31, 1998, $10 million of the
accumulated depreciation reported in the accompanying Balance Sheet related to
the manufacturing equipment acquired under capital leases that was contributed
by Occidental in 1998.
In July 1998, the depreciable lives of certain assets were increased from a
range of 5 to 25 years to a range of 5 to 30 years. This change was accounted
for as a change in accounting estimate and resulted in a $33 million decrease
in depreciation expense for 1998.
10. Deferred Charges and Other Assets
Deferred charges and other assets at December 31, 1998 and 1997 were as
follows:
Millions of dollars 1998 1997
------------------- ---- ----
Deferred turnaround costs, net................................. $ 84 $ 66
Deferred software costs, net................................... 70 44
Deferred pension asset......................................... 30 23
Other.......................................................... 73 18
---- ----
Total deferred charges and other assets...................... $257 $151
==== ====
11. Other Accrued Liabilities
Other accrued liabilities at December 31, 1998 and 1997 were as follows:
Millions of dollars 1998 1997
------------------- ---- ----
Accrued property taxes.......................................... $ 76 $ 4
Accrued freight................................................. 22 8
Accrued payroll costs........................................... 44 19
Accrued interest................................................ 18 --
Accrued severance and other costs related to formation of
the Partnership................................................ 3 27
Other........................................................... 37 7
---- ----
Total other accrued liabilities............................... $200 $ 65
==== ====
97
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. Long-Term Debt and Financing Arrangements
Long-term debt at December 31, 1998 and 1997 was comprised of the following:
Millions of dollars 1998 1997
------------------- ------ ------
Bank credit facilities:
5-year term credit facility.............................. $1,150 $ 800
$500 million credit agreement............................ 152 --
Other debt obligations:
Medium-term notes (2000-2005)............................ 163 194
10.00% Notes due in 1999................................. 150 150
9.125% Notes due in 2002................................. 100 100
6.50% Notes due in 2006.................................. 150 150
7.55% Debentures due in 2026............................. 150 150
Other.................................................... -- 4
------ ------
Total long-term debt................................... 2,015 1,548
Less current maturities.................................... 150 36
------ ------
Long-term debt, net.................................... 1,865 1,512
Capital lease obligations (5.89% due in 2000).............. 205 --
------ ------
Total long-term debt and lease obligations............. $2,070 $1,512
====== ======
Aggregate maturities of long-term debt during the five years subsequent to
December 31, 1998 are as follows: 1999-$302 million; 2000-$247 million; 2001-
$90 million; 2002-$1.251 billion; 2003-$29 million. All of the above debt is
guaranteed by the partners.
The medium-term notes mature at various dates from 2000 to 2005 and have a
weighted average interest rate of 9.87 percent and 9.83 percent at December
31, 1998 and 1997, respectively.
The Partnership has a five-year, $1.25 billion credit facility ("Facility")
with a group of banks expiring November 2002. Borrowings under the Facility
bear interest at either the Federal Funds rate plus 1/2 of 1 percent, LIBOR
plus 1/2 of 1 percent, 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 on the type of borrowing made under the Facility.
Borrowings under the Facility had a weighted average interest rate of 5.8
percent and 5.7 percent at December 31, 1998 and 1997, respectively.
On June 12, 1998, the Partnership entered into a $500 million credit
agreement consisting of a $250 million revolving credit facility and a $250
million one-year term facility. Borrowings under the $500 million credit
agreement bear interest at either the Federal Funds rate plus 1/2 of 1
percent, LIBOR plus 0.625 percent, 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. At December 31, 1998, the weighted average
interest rate for borrowings under the $500 million credit agreement was 6.1
percent.
The Facility and the $500 million credit agreement ("Bank Credit
Facilities") are available for working capital and general purposes as needed
and contain covenants relating to liens, sale and leaseback transactions, debt
incurrence, leverage and interest coverage ratios, sales of assets and mergers
and consolidations.
In February 1999, the Partnership issued $900 million of debt securities.
The debt securities include $300 million of 8.50 percent notes, which will
mature on February 15, 2004, and $600 million of 8.75 percent notes, which
will mature on February 15, 2009. The Partnership intends to use the net
proceeds from this offering (i) to
98
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
repay the $205 million outstanding under a capitalized lease obligation
relating to the Partnership's Corpus Christi facility, (ii) to repay the
outstanding balance under the $500 million credit agreement, after which the
$500 million credit agreement will be terminated, (iii) to repay the
outstanding $150 million, 10.00 percent Notes due in June 1999, upon maturity
and (iv) to the extent of the remaining net proceeds, reduce outstanding
borrowings under the Facility and for Partnership working capital. Outstanding
borrowings under the Partnership's $500 million credit agreement that are
payable in 1999 are included as long-term obligations of the Partnership in
the accompanying Balance Sheet at December 31, 1998 based on the expectation
that these borrowings will be refinanced as described above.
13. Unusual Charges
In December 1997, the Partnership recorded $42 million of unusual charges
related to the formation of the Partnership. These charges included severance
and other costs related to a workforce reduction (approximately 430 employees)
that resulted from the consolidation of the businesses contributed to the
Partnership ($30 million), various closing costs ($6 million), and various
other charges ($6 million). Approximately $15 million of these charges were
paid in 1997 and $27 million were included in other accrued liabilities at
December 31, 1997. During the year ended December 31, 1998, approximately $24
million of these charges were paid and $3 million were included in other
accrued liabilities at December 31, 1998.
During 1998, the Partnership recorded and paid $35 million of unusual
charges related to its initial formation and the addition of Occidental to the
Partnership. These charges included transition personnel costs ($14 million),
costs associated with the consolidation of certain operations and facilities
($11 million), operating and transition services provided by Occidental
Chemical ($7 million), various closing costs ($2 million), and other
miscellaneous charges ($1 million).
14. Leases
At December 31, 1998, future minimum lease payments for capital and
operating leases with noncancelable lease terms in excess of one year were as
follows:
Millions of dollars Capital Operating
------------------- ------- ---------
1999.................................................... $ 13 $101
2000.................................................... 208 74
2001.................................................... -- 58
2002.................................................... -- 44
2003.................................................... -- 38
Thereafter.............................................. -- 336
---- ----
Total minimum lease payments.......................... 221 $651
====
Imputed interest........................................ (16)
----
Present value of minimum lease payments............... $205
====
Operating lease net rental expense was $110 million for the year ending
December 31, 1998 and $11 million for the period from December 1, 1997
(inception) to December 31, 1997.
99
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Partnership is party to various unconditional purchase obligation
contracts as a purchaser for product and services. At December 31, 1998,
future minimum payments under these contracts with noncancelable contract
terms in excess of one year were as follows:
Millions of dollars
-------------------
1999................................................................ $ 29
2000................................................................ 28
2001................................................................ 24
2002................................................................ 23
2003................................................................ 23
Thereafter.......................................................... 142
----
Total minimum contract payments................................... $269
====
The Partnership's total purchases under these agreements were $33 million
for the year ending December 31, 1998 and $3 million during the period from
December 1, 1997 (inception) to December 31, 1997.
15. Retirement Plans
All full-time regular employees of the Partnership are covered by defined
benefit pension plans sponsored by the Partnership. The plans became effective
on January 1, 1998, except for union represented employees formerly employed
by Millennium, whose plans were contributed to the Partnership on December 1,
1997, and union represented employees formerly employed by Occidental, whose
plans were contributed to the Partnership on May 15, 1998. In connection with
the formation of the Partnership, there were no pension assets or obligations
contributed to the Partnership, except for the union represented plans
described above. Retirement benefits are based on years of service and the
employee's highest three consecutive years of compensation during the last ten
years of service. The funding policy for these plans is to make periodic
contributions as required by applicable law. The Partnership accrues pension
costs based on an actuarial valuation and funds the plans through
contributions to pension trust funds. The Partnership also has unfunded
supplemental nonqualified retirement plans which provide pension benefits for
certain employees in excess of the tax qualified plans' limits.
100
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the retirement plans at December 31, 1998 and
1997:
Millions of dollars 1998 1997
- ------------------- ---- ----
Change in benefit obligation:
Benefit obligation, January 1.................................... $ 21 $ --
Benefit obligation contributed at inception of Partnership....... -- 21
Benefit obligation contributed by Occidental..................... 46 --
Service cost..................................................... 16 --
Interest cost.................................................... 5 --
Actuarial loss................................................... 5 --
Benefits paid.................................................... (5) --
---- ----
Benefit obligation, December 31.................................. $ 88 $ 21
==== ====
Change in plan assets:
Fair value of plan assets, January 1............................. $ 40 $ --
Fair value of plan assets contributed at inception of
Partnership..................................................... -- 40
Fair value of plan assets contributed by Occidental.............. 51 --
Actual return of plan assets..................................... 1 --
Partnership contributions........................................ 1 --
Benefits paid.................................................... (5) --
---- ----
Fair value of plan assets, December 31........................... $ 88 $ 40
==== ====
Funded status...................................................... $ -- $ 19
Unrecognized actuarial loss........................................ 13 4
---- ----
Net amount recognized.............................................. $ 13 $ 23
==== ====
Amounts recognized in the Balance Sheets consist of:
Prepaid benefit cost............................................. $ 30 $ 23
Accrued benefit liability........................................ (17) --
---- ----
Net amount recognized............................................ $ 13 $ 23
==== ====
Weighted-average assumptions as of December 31:
Discount rate.................................................... 6.75% 7.25%
Expected return on plan assets................................... 9.50% 9.00%
Rate of compensation increase.................................... 4.75% 4.75%
As of December 31, 1998, Equistar had defined benefit pension plans where
the accumulated benefit obligation exceeded the fair value of plan assets. The
accumulated benefit obligation exceeded the fair value of plan assets by $19
million for these plans as of December 31, 1998. As of December 31, 1998 and
1997, Equistar had defined benefit pension plans where the fair value of plan
assets exceeded the accumulated benefit obligation. The fair value of plan
assets exceeded the accumulated benefit obligation by $19 million for these
plans as of December 31, 1998 and 1997.
The Partnership's net periodic pension cost for 1998 included the following
components:
Millions of dollars
-------------------
Components of net periodic benefit cost:
Service cost....................................................... $16
Interest cost...................................................... 5
Expected return on plan assets..................................... (6)
---
Net periodic benefit cost.......................................... $15
===
101
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
As the non-union plans became effective on January 1, 1998, the Partnership
did not recognize any net periodic pension cost during the period from
December 1, 1997 (inception) to December 31, 1997.
Effective January 1, 1998, the Partnership also maintains voluntary defined
contribution savings plans for eligible employees. Under provisions of the
plans, the Partnership contributes an amount equal to 160 percent of employee
contributions up to a maximum matching contribution of eight percent of the
employee's base salary. Contributions to the plans by the Partnership were $7
million and less than $1 million for the year ended December 31, 1998 and
during the period from December 1, 1997 (inception) to December 31, 1997,
respectively.
16. Postretirement Benefits Other Than Pensions
The Partnership sponsors unfunded postretirement benefit plans other than
pensions ("OPEB") for both salaried and non-salaried employees, which provide
medical and life insurance benefits. The postretirement health care plans are
contributory while the life insurance plans are non-contributory. Currently,
the Partnership pays approximately 80 percent of the cost of the health care
plans, but reserves the right to modify the cost-sharing provisions at any
time. In connection with the formation of the Partnership on December 1, 1997,
Lyondell and Millennium contributed $31 million of accrued postretirement
benefit liabilities for employees that transferred to the Partnership. Upon
joining the Partnership in May 1998, Occidental contributed $14 million of
accrued postretirement benefit liabilities for employees that transferred to
the Partnership.
The following table provides a reconciliation of benefit obligations and
funded status of the OPEB plans at December 31, 1998 and 1997:
Millions of dollars 1998 1997
- ------------------- ---- ----
Change in benefit obligation:
Benefit obligation, January 1.................................... $ 50 $ --
Benefit obligation contributed at inception of Partnership....... -- 50
Benefit obligation contributed by Occidental..................... 14 --
Service cost..................................................... 3 --
Interest cost.................................................... 4 --
Actuarial gain................................................... (2) --
---- ----
Benefit obligation, December 31.................................. $ 69 $ 50
==== ====
Funded status...................................................... $(69) $(50)
Unrecognized actuarial loss........................................ 16 19
---- ----
Net amount recognized.............................................. $(53) $(31)
==== ====
Amounts recognized in the Balance Sheets consist of:
Prepaid benefit cost............................................. $ -- $ --
Accrued benefit liability........................................ (53) (31)
---- ----
Net amount recognized............................................ $(53) $(31)
==== ====
Weighted-average assumptions as of December 31:
Discount rate.................................................... 6.75% 7.25%
Rate of compensation increase.................................... 4.75% 4.75%
Because the OPEB plans are unfunded, there was no change in the plan assets
during the year ended December 31, 1998 and for the period from December 1,
1997 (inception) to December 31, 1997.
102
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Partnership's postretirement benefit costs for 1998 included the
following components:
Millions of dollars
-------------------
Components of net periodic benefit cost:
Service cost........................................................ $ 3
Interest cost....................................................... 4
---
Net periodic benefit cost........................................... $ 7
===
The accrued postretirement benefit liabilities at December 31, 1997 were
calculated and contributed as of December 31, 1997; therefore, there was no
net periodic postretirement benefit costs for the period from December 1, 1997
(inception) to December 31, 1997.
For measurement purposes, the assumed annual rate of increase in the per
capita cost of covered health care benefits as of December 31, 1998 was 7.0
percent for 1999-2001 and 5.0 percent thereafter. The health care cost trend
rate assumption does not have a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit liability as of December 31, 1998 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. Decreasing the assumed health care cost trend rates by one percentage
point in each year would decrease the accumulated postretirement benefit
liability as of December 31, 1998 by $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.
17. Commitments and Contingencies
The Partnership 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.
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 the Partnership.
Equistar has agreed to indemnify and defend Lyondell and Millennium,
individually, against certain uninsured claims and liabilities which Equistar
may incur relating to the operation of the Contributed Business prior to
December 1, 1997 up to $7 million each within the first seven years of the
Partnership, subject to certain terms of the Asset Contribution Agreements.
Equistar has also agreed to indemnify Occidental up to $7 million on a similar
basis relating to the operation of the Occidental Contributed Business prior
to May 15, 1998. During the year ended December 31, 1998, the Partnership
incurred $5 million in expenses for these uninsured claims and liabilities. No
expenses were incurred for these uninsured claims and liabilities during the
period December 1, 1997 (inception) to December 31, 1997.
The Partnership's policy is to be in compliance with all applicable
environmental laws. The Partnership 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.
103
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 the Partnership. 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 the Partnership'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.
18. Segment Information
Using the guidelines set forth in SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, the Partnership has identified two
segments in which it operates. The reportable segments are petrochemicals and
polymers. The petrochemicals segment includes olefins, oxygenated chemicals,
aromatics and specialty chemicals. Olefins include ethylene, propylene and
butadiene, and the oxygenated chemicals include ethylene oxide, ethylene
glycol, ethanol and MTBE. The petrochemicals segment also includes the
production and sale of aromatics including 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 resins, concentrates and compounds, and
polymeric powders.
No customer accounted for 10 percent or more of sales.
The accounting policies of the segments are the same as those described in
Summary of Significant Accounting Policies (see Note 2).
104
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Summarized financial information concerning the Partnership'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, 1998:
Sales and other
operating revenues:
Customers............. $2,351 $2,012 $ -- $ -- $4,363
Intersegment.......... 1,112 46 -- (1,158) --
------ ------ ------ ------- ------
$3,463 $2,058 $ -- $(1,158) $4,363
====== ====== ====== ======= ======
Unusual charges......... $ -- $ -- $ 35 $ -- $ 35
====== ====== ====== ======= ======
Operating income........ $ 319 $ 177 $ (214) $ -- $ 282
====== ====== ====== ======= ======
Depreciation and
amortization expense... $ 152 $ 65 $ 51 $ -- $ 268
====== ====== ====== ======= ======
Capital expenditures.... $ 71 $ 116 $ 13 $ -- $ 200
====== ====== ====== ======= ======
Total assets............ $2,997 $2,035 $1,636 $ -- $6,668
====== ====== ====== ======= ======
For the period from
December 1, 1997
(inception) to December
31, 1997:
Sales and other
operating revenues:
Customers............. $ 179 $ 186 $ -- $ -- $ 365
Intersegment.......... 105 -- -- (105) --
------ ------ ------ ------- ------
$ 284 $ 186 $ -- $ (105) $ 365
====== ====== ====== ======= ======
Unusual charges......... $ -- $ -- $ 42 $ -- $ 42
====== ====== ====== ======= ======
Operating income........ $ 47 $ 22 $ (54) $ -- $ 15
====== ====== ====== ======= ======
Depreciation and
amortization expense... $ 7 $ 7 $ 5 $ -- $ 19
====== ====== ====== ======= ======
Capital expenditures.... $ 7 $ 4 $ 1 $ -- $ 12
====== ====== ====== ======= ======
Total assets............ $1,668 $1,504 $1,428 $ -- $4,600
====== ====== ====== ======= ======
19. Subsequent Event
In January 1999, the Partnership announced that it was going to shut down
and "mothball" its gas phase HDPE reactor at Port Arthur, Texas, on March 31,
1999, as part of its long-term strategy to maximize value. The shutdown will
reduce the Partnership's HDPE capacity by 300 million pounds per year and
reduce employment at the unit from 200 to approximately 125. Customers for
products from the mothballed unit will be supplied with comparable products
produced at the Partnership's Matagorda, Victoria, and LaPorte, Texas,
facilities.
105
LYONDELL-CITGO REFINING LP
INDEPENDENT AUDITORS' REPORT
To the Partnership Governance Committee
of LYONDELL-CITGO Refining LP
We have audited the accompanying balance sheet of LYONDELL-CITGO Refining LP
(a Limited Partnership) as of December 31, 1998 and the related statements of
income, partners' capital, and cash flows for the year then ended. 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 generally accepted auditing
standards. 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 financial position of LYONDELL-CITGO Refining LP as of December
31, 1998 and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 11, 1999
106
LYONDELL-CITGO REFINING LP
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Governance Committee
of LYONDELL-CITGO Refining LP
We have audited the accompanying balance sheet of LYONDELL-CITGO Refining LP
(formerly LYONDELL-CITGO Refining Company Ltd.) as of December 31, 1997 and
the related statements of income, partners' capital, and cash flows for each
of the two years in the period ended December 31, 1997. These financial
statements are the responsibility of the Partnerships' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LYONDELL-CITGO Refining LP
as of December 31, 1997 and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Houston, Texas
February 6, 1998
107
LYONDELL-CITGO REFINING LP
STATEMENTS OF INCOME
For the year ended
December 31
----------------------
Millions of dollars 1998 1997 1996
- ------------------- ------ ------ ------
Sales and other operating revenues...................... $2,055 $2,697 $2,823
Operating costs and expenses:
Cost of sales:
Crude oil and feedstock............................. 1,264 1,960 2,367
Operating and other expenses........................ 490 482 386
Selling, general and administrative expenses.......... 78 72 59
Unusual charges....................................... 10 -- --
------ ------ ------
1,842 2,514 2,812
------ ------ ------
Operating income...................................... 213 183 11
Interest expense........................................ (44) (37) (2)
Interest income......................................... 1 2 2
------ ------ ------
Income before state income taxes........................ 170 148 11
Provision for state income taxes........................ 1 1 --
------ ------ ------
Net income.............................................. $ 169 $ 147 $ 11
====== ====== ======
See Notes to Financial Statements.
108
LYONDELL-CITGO REFINING LP
BALANCE SHEETS
December 31
--------------
Millions of dollars 1998 1997
- ------------------- ------ ------
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 24 $ 65
Accounts receivable:
Trade, net.................................................. 39 37
Related parties and affiliates.............................. 26 42
Inventories................................................... 106 98
Prepaid expenses and other current assets..................... 2 1
------ ------
Total current assets...................................... 197 243
------ ------
Property, plant and equipment................................... 2,234 2,228
Construction projects in progress............................... 80 52
Accumulated depreciation and amortization....................... (944) (889)
------ ------
1,370 1,391
Deferred charges and other assets............................... 70 47
------ ------
Total assets.................................................... $1,637 $1,681
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade....................................................... $ 71 $ 72
Related parties and affiliates.............................. 42 125
Distribution payable to Lyondell Partners..................... 19 36
Distribution payable to CITGO Partners........................ 13 25
Loan payable to bank.......................................... 20 --
Taxes, payroll and other liabilities.......................... 38 35
------ ------
Total current liabilities................................. 203 293
------ ------
Commitments and contingencies
Loan payable to bank............................................ 450 450
Loans payable to Lyondell Partners.............................. 231 196
Loans payable to CITGO Partners................................. 36 17
Pension, postretirement benefit and other liabilities........... 68 52
------ ------
Total long-term liabilities............................... 785 715
------ ------
Partners' capital............................................... 649 673
------ ------
Total liabilities and partners' capital......................... $1,637 $1,681
====== ======
See Notes to Financial Statements.
109
LYONDELL-CITGO REFINING LP
STATEMENTS OF CASH FLOWS
For the year
ended December
31
----------------
Millions of dollars 1998 1997 1996
- ------------------- ---- ---- ----
Cash flows from operating activities:
Net income.................................................. $169 $147 $ 11
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation............................................... 75 75 25
Amortization............................................... 25 16 10
(Increase) decrease in accounts receivable--trade.......... (2) 72 (1)
(Increase) decrease in accounts receivable--related
parties................................................... 16 9 (20)
(Increase) decrease in inventories......................... (9) -- 9
(Increase) decrease in prepaid expenses and other current
assets.................................................... (1) (1) 6
Increase (decrease) in accounts payable--trade............. 4 (89) 51
Increase (decrease) in accounts payable--related parties... (83) (27) 43
Increase (decrease) in taxes, payroll and other
liabilities............................................... 3 5 (4)
(Increase) in deferred charges and other assets and change
in pension, postretirement benefit and other liabilities.. (28) 5 (28)
---- ---- ----
Net cash provided by operating activities................. 169 212 102
---- ---- ----
Cash flows from investing activities:
Additions to property, plant and equipment:
Maintenance capital expenditures........................... (19) (12) (10)
Environmental capital expenditures......................... (12) (11) (28)
Capital enhancement expenditures........................... (27) (17) (18)
Refinery upgrade expenditures.............................. (3) (45) (473)
---- ---- ----
Total capital expenditures................................ (61) (85) (529)
Other....................................................... (1) (1) (1)
---- ---- ----
Net cash used in investing activities..................... (62) (86) (530)
---- ---- ----
Cash flows from financing activities:
Proceeds from (repayments of) bank loan..................... 20 (10) 10
Proceeds from bank loan for costs incurred on refinery
upgrade.................................................... -- -- 199
Proceeds from Lyondell GP loans for costs incurred on
refinery upgrade........................................... -- 18 123
Contributions from Lyondell GP for working capital facility
paydown.................................................... -- 65 --
Proceeds from Lyondell GP loans for costs to be incurred on
capital projects........................................... -- 2 29
Contributions from Lyondell GP for costs to be incurred on
capital projects........................................... -- 1 8
Proceeds from Lyondell GP loans for environmental projects.. 8 -- --
Proceeds from Lyondell GP loans for capital enhancement
projects................................................... 16 -- --
Proceeds from Lyondell GP loans for maintenance projects.... 11 -- --
Distributions to Lyondell Partners.......................... (130) (147) (84)
Distributions to CITGO Partners............................. (92) (91) (13)
Reimbursements from Lyondell for capital expenditures....... -- -- 4
Reimbursements from CITGO LP for costs incurred on refinery
upgrade.................................................... -- 2 123
Reimbursements from CITGO LP for loan costs incurred on
refinery upgrade........................................... -- 8 21
Contributions from CITGO LP for working capital facility
paydown.................................................... -- 28 --
Proceeds from CITGO LP loans for costs incurred on refinery
upgrade.................................................... -- 16 --
Contributions from CITGO LP for costs to be incurred on
capital projects........................................... -- 35 13
Proceeds from CITGO LP loans for environmental projects..... 4 -- --
Proceeds from CITGO LP loans for capital enhancement
projects................................................... 9 -- --
Proceeds from CITGO LP loans for maintenance projects....... 6 -- --
---- ---- ----
Net cash provided by (used in) financing activities....... (148) (73) 433
---- ---- ----
Increase (decrease) in cash and cash equivalents............. (41) 53 5
Cash and cash equivalents at beginning of period............. 65 12 7
---- ---- ----
Cash and cash equivalents at end of period................... $ 24 $ 65 $ 12
==== ==== ====
See Notes to Financial Statements.
110
LYONDELL-CITGO REFINING LP
STATEMENTS OF PARTNERS' CAPITAL
Lyondell CITGO
Millions of dollars Partners Partners Total
- ------------------- -------- -------- -----
Balance, January 1, 1996............................... $ 130 $ 459 $ 589
Cash contributions................................... 8 157 165
Other contributions.................................. -- 1 1
Distributions........................................ (91) (12) (103)
Net income........................................... 10 1 11
----- ----- -----
Balance, December 31, 1996............................. 57 606 663
Cash distributions................................... 66 73 139
Distributions........................................ (158) (118) (276)
Net income........................................... 103 44 147
----- ----- -----
Balance, December 31, 1997............................. 68 605 673
Distributions........................................ (113) (80) (193)
Net income........................................... 110 59 169
----- ----- -----
Balance, December 31, 1998............................. $ 65 $ 584 $ 649
===== ===== =====
See Notes to Financial Statements.
111
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS
1. The Partnership
On July 1, 1993, Lyondell Chemical Company (formerly Lyondell Petrochemical
Company) ("Lyondell") and CITGO Petroleum Corporation ("CITGO") announced the
commencement of operations of LYONDELL-CITGO Refining LP ("LCR" or
"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") (formerly LOwner). These two subsidiaries are known as
Lyondell Partners. CITGO holds its interest through CITGO Refining Investment
Company ("CITGO LP") (formerly COwner) and CITGO Gulf Coast Refining, Inc.
("CITGO GP"), both wholly-owned subsidiaries of CITGO. These two subsidiaries
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 ("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, 1998. CITGO Partners have a one-time option,
that will expire in the year 2000, to make an additional capital contribution
sufficient to increase its participation interest in LCR to 50 percent.
At December 31, 1998, the Partnership employed approximately 1,200 full-time
employees. Of these, approximately 800 were covered by collective bargaining
agreements between LCR and the Oil, Chemical and Atomic Workers Union. LCR
also uses the services of independent contractors in the routine conduct of
its business.
2. Summary of Significant Accounting Policies
Revenue Recognition--Revenue from product sales is generally 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. The
Partnership's policy is to invest cash in conservative, highly rated
instruments and limit the amount of credit exposure to any one institution.
The Partnership performs periodic evaluations of the relative credit standing
of these financial institutions which are considered in the Partnership's
investment strategy.
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 in accounts receivable, was approximately
$179,000 at December 31, 1998 and 1997.
112
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. The primary components of property, plant and equipment were
manufacturing facilities and equipment. Depreciation of fixed assets 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 costs incurred on debt during
the construction of major projects are capitalized.
During 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 the year ended December 31, 1998.
Refinery Maintenance--Turnaround costs are repair and maintenance costs
incurred while performing an overhaul of a manufacturing unit. Significant
turnaround costs are deferred and amortized on a straight-line basis over the
estimated period until the next planned turnaround, generally four to six
years. Amortization of deferred turnaround costs for 1998, 1997 and 1996 was
approximately $12 million, $10 million and $5 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--Crude oil and finished product exchange transactions, which are
of a homogeneous nature of 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 and receipt of cash are accounted for as purchases and
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 sheet in accordance with the 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 and
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.
Reclassifications--Certain prior period amounts have been reclassified to
conform to the current year presentation.
113
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Long-Lived Assets Impairment--In accordance with SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, LCR periodically evaluates the carrying value of long-lived
assets to be held and used when events and circumstances warrant such a
review. The carrying value of long-lived assets is considered impaired when
the separately identifiable anticipated undiscounted cash flow from such asset
is less than its carrying value. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the fair value of the long-
lived asset. Fair value is determined primarily using the anticipated cash
flows, discounted at a rate commensurate with the risk involved. Losses on
long-lived assets to be disposed of are determined in a similar manner, except
that fair values are reduced for disposal costs.
Comprehensive Income--Effective January 1, 1998, LCR adopted SFAS No. 130,
Reporting Comprehensive Income. LCR had no items of other comprehensive income
during the three years ended December 31, 1998.
Pensions and Other Postretirement Benefits--During 1998, LCR adopted SFAS
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits. The provisions of SFAS No. 132 revise employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of these plans. SFAS No. 132 standardizes the
disclosure requirements for these plans, to the extent practicable (see Note
9).
Derivatives--In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
The statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize
all derivatives, at fair value, as either assets or liabilities in the
statement of financial position with an offset either to partners' capital and
comprehensive income or income, depending upon the classification of the
derivative. LCR has not determined the impact on its financial statements that
may result from adoption of SFAS No. 133, which is required no later than
January 1, 2000.
3. Related Party Transactions
On July 1, 1993, LCR entered into a long-term crude oil supply agreement
("Crude Supply Agreement") with Lagoven, S.A., now known as PDVSA Petroleo y
Gas, S.A. ("PDVSA Oil"), an affiliate of CITGO. Pursuant to this agreement,
the Partnership will purchase a substantial majority of its crude oil supply
at market-based prices, adjusted for certain indexed items (see Note 11). In
addition, under the terms of a long-term product sales agreement, CITGO
purchases all of the gasoline, low sulfur diesel and jet fuel produced at the
Refinery at market-based prices. Both PDVSA Oil and CITGO are subsidiaries of
Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company of the
Republic of Venezuela.
Also effective July 1, 1993, LCR and Lyondell entered into a number of
feedstock and product sales agreements; a tolling agreement, pursuant to which
alkylate and methyl tertiary butyl ether will be produced at Lyondell's
Channelview, Texas petrochemical complex for the Partnership; and various
administrative services agreements.
On December 1, 1997, Lyondell contributed its Channelview, Texas
petrochemical complex, including its rights and obligations under the related
party agreements with LCR, to a joint venture named Equistar Chemicals, LP
("Equistar"). At December 31, 1998, Lyondell had a 41 percent interest in
Equistar.
114
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 1998 1997 1996
------------------- ------ ------ ------
Costs:
Crude oil purchases................................... $ 555 $ 977 $1,046
Product purchases..................................... 262 435 246
Transportation fees................................... 10 13 27
------ ------ ------
$ 827 $1,425 $1,319
====== ====== ======
Sales of products....................................... $1,555 $1,987 $1,835
====== ====== ======
LCR billed Lyondell and Equistar approximately $4 million, $5 million and $3
million and Lyondell and Equistar billed LCR approximately $4 million, $7
million and $11 million pursuant to various service and cost sharing
arrangements during the years ended December 31, 1998, 1997 and 1996,
respectively. In addition, LCR paid Lyondell and Equistar approximately $34
million, $40 million and $6 million during 1998, 1997 and 1996, respectively,
pursuant to hydrogen supply agreements.
In September 1997, Atlantic Richfield Company ("ARCO") eliminated its
ownership interest in Lyondell by delivering its shares of Lyondell common
stock to the holders of certain ARCO notes and by Lyondell repurchasing the
remaining shares owned by ARCO. For the nine months ended September 30, 1997,
the Partnership paid ARCO PipeLine Company, an affiliate of ARCO,
approximately $4 million pursuant to throughput agreements. During 1996, LCR
paid ARCO PipeLine Company approximately $5 million pursuant to throughput
agreements.
LCR recognized revenue from Lyondell of approximately $11 million in 1996
for a pricing adjustment retroactive to 1993.
During 1998, 1997 and 1996, LCR paid Lyondell GP approximately $9 million,
$13 million and $4 million, respectively, for interest on loans related to
funding a portion of the upgrade project at the Refinery and other capital
expenditures.
During 1998 and 1997, LCR paid CITGO LP approximately $2 million and $1
million, respectively, for interest on loans related to funding a portion of
the upgrade project at the Refinery and other capital expenditures. During
1997 and 1996, LCR billed CITGO LP approximately $7 million and $22 million,
respectively, and CITGO LP paid LCR approximately $8 million and $21 million,
respectively, for financing costs incurred in connection with the bank loan
being used to partially fund the upgrade project at the Refinery.
4. Supplemental Cash Flow Information
At December 31, 1998, 1997 and 1996, property, plant and equipment included
approximately $9 million, $13 million and $9 million, respectively, of non-
cash additions which related to accounts payable accruals.
During 1998, 1997 and 1996, LCR paid approximately $43 million, $42 million
and $27 million, respectively, for interest and approximately $1 million, $1
million and $4 million, respectively, for state income and franchise taxes. Of
the interest paid during 1997 and 1996, approximately $9 million and $25
million, respectively, was capitalized. No interest costs were capitalized
during 1998.
115
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. 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 and notes payable, approximated their carrying value due to
their short maturity. The fair value of long-term loans payable approximated
their carrying value because they are variable interest rate loans.
At December 31, 1998, LCR had issued letters of credit totaling
approximately $9 million.
The Partnership is party to take-or-pay contracts for hydrogen and
electricity. At December 31, 1998, future minimum payments under these
contracts with noncancelable contract terms in excess of one year were as
follows:
Millions of dollars
-------------------
1999................................................................ $ 39
2000................................................................ 39
2001................................................................ 39
2002................................................................ 29
2003................................................................ 29
Thereafter.......................................................... 379
----
Total minimum payments............................................ $554
====
Total LCR purchases under these agreements were approximately $81 million,
$90 million and $35 million during 1998, 1997 and 1996, respectively.
6. Inventories
Inventories were as follows at December 31:
Millions of dollars 1998 1997
------------------- ---- ----
Crude oil....................................................... $ 47 $ 47
Refined products................................................ 45 35
Materials and supplies.......................................... 14 16
---- ----
Total inventories............................................. $106 $ 98
==== ====
The excess of the current cost of inventories over book value was
approximately $40 million and $73 million at December 31, 1998 and 1997,
respectively.
7. 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 most recently renewed in May 1998, and is being
utilized for general business purposes and for letters of credit. At December
31, 1998, $20 million was outstanding under this credit facility with a
weighted average interest rate of 5.3 percent. At December 31, 1997, no
amounts were outstanding under this credit facility. Interest for this credit
facility is 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 is 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 both December 31, 1998 and 1997, $450 million was
outstanding under this
116
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
credit facility with a weighted average interest rate of 6.2 percent and 6.5
percent, respectively. Interest for this facility is based on prime or
eurodollar rates at the Partnership's option. This second facility is due in
May, 2000. Both facilities contain covenants that required LCR to maintain a
minimum net worth which increased each year until 1998 and maintenance of
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.
In October 1995, LCR began borrowing funds from Lyondell GP 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, 1998 and 1997, these subordinated loans totaled
approximately $231 million and $196 million, respectively, and had a weighted
average interest rate of 5.8 percent and 6.2 percent, respectively. Interest
on these loans is based on eurodollar rates and is payable at the end of each
calendar quarter.
In January 1997, LCR began borrowing funds from CITGO LP 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 facilities.
At December 31, 1998 and 1997, these subordinated loans totaled approximately
$36 million and $17 million, respectively, and had a weighted average interest
rate of 5.8 percent and 6.2 percent, respectively. Interest on these loans is
based on eurodollar rates and is payable at the end of each calendar quarter.
During 1998, 1997 and 1996, LCR incurred approximately $44 million, $45
million and $30 million of interest cost, respectively. Of the interest cost
incurred in 1997 and 1996, the Partnership capitalized approximately $9
million and $27 million, respectively. No interest costs were capitalized in
1998.
8. Leases
LCR leases crude oil storage facilities, a fleet of railroad tank cars,
computers, office equipment and other items. At December 31, 1998, future
minimum rental payments for operating leases with noncancelable lease terms in
excess of one year were as follows:
Millions of dollars
-------------------
1999................................................................. $22
2000................................................................. 22
2001................................................................. 6
2002................................................................. 9
2003................................................................. 1
Thereafter........................................................... 7
---
Total minimum lease payments....................................... $67
===
Operating lease net rental expenses for the years ended December 31, 1998,
1997 and 1996 were approximately $26 million, $22 million and $22 million,
respectively.
9. 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 $5 million, $5 million and $4 million
related to its contributions to this plan for the years 1998, 1997 and 1996,
respectively.
117
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, copayment 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, 1998 and 1997 and the funded status of such plans reconciled with amounts
reported in the Partnership's Balance Sheets.
Other
Pension Postretirement
Benefits Benefits
---------- -----------------
Millions of dollars 1998 1997 1998 1997
- ------------------- ---- ---- ------- -------
Change in benefit obligation:
Benefit obligation, January 1.................. $64 $48 $ 42 $ 31
Service cost................................... 5 4 2 2
Interest cost.................................. 5 4 2 3
Actuarial loss (gain).......................... 9 8 (2) 6
Liability transfer............................. -- 1 2 --
Special termination benefits................... 7 -- -- --
Benefits paid.................................. (2) (1) -- --
--- --- ------- -------
Benefit obligation, December 31................ 88 64 46 42
--- --- ------- -------
Change in plan assets:
Fair value of plan assets, January 1........... 37 30 -- --
Actual return on plan assets................... 3 5 -- --
Partnership contributions...................... 5 3 -- --
Benefits paid.................................. (2) (1) -- --
--- --- ------- -------
Fair value of plan assets, December 31......... 43 37 -- --
--- --- ------- -------
Funded status........................................ (45) (27) (46) (42)
Unrecognized actuarial loss.......................... 18 9 6 9
Unrecognized prior service cost...................... 2 2 (2) (3)
Unrecognized transition asset........................ (1) (1) -- --
---- ---- ==== ----
Accrued benefit cost................................. $(26) $(17) $(42) $(36)
==== ==== ==== ====
Accumulated benefit obligation....................... $ 53 $ 31 -- --
==== ====
118
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Other
Pension Postretirement
Benefits Benefits
---------------- ----------------
Millions of dollars 1998 1997 1996 1998 1997 1996
- ------------------- ---- ---- ---- ---- ---- ----
Components of net periodic benefit cost:
Service cost............................. $ 5 $ 4 $ 4 $ 2 $ 2 $ 2
Interest cost............................ 5 5 3 2 3 2
Expected return on plan assets........... (3) (3) (2) -- -- --
---- ---- ---- ---- ---- ----
Net periodic benefit cost before FAS 88
cost.................................... 7 6 5 4 5 4
Effect of curtailment.................... -- -- -- 2 -- --
---- ---- ---- ---- ---- ----
Net periodic benefit cost................ $ 7 $ 6 $ 5 $ 6 $ 5 $ 4
==== ==== ==== ==== ==== ====
Special termination benefit charge....... $ 7 $ -- $ -- $ -- $ -- $ --
==== ==== ==== ==== ==== ====
Weighted-average assumptions as of December
31:
Discount rate............................ 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected return on plan assets........... 9.50% 9.50% 9.50% -- -- --
Rate of compensation increase............ 4.75% 4.75% 5.00% 4.75% 4.75% 5.00%
For measurement purposes, the assumed annual rate of increase in the per
capita cost of covered health care benefits as of December 31, 1998 was 7.0
percent for 1999-2001 and 5.0 percent thereafter.
The benefit obligation, accumulated benefit obligation and the fair value of
plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $73 million, $53 million and $33 million,
respectively, as of December 31, 1998 and $53 million, $31 million and $29
million, respectively, as of December 31, 1997.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
Millions of dollars Point Increase Point Decrease
------------------- -------------- --------------
Effect on total of service and interest
cost components.......................... $ 1 $(1)
Effect on postretirement benefit
obligation............................... 8 (6)
During 1998, the management of LCR implemented a Reduction In Force ("RIF")
program, which will result in certain personnel reductions. LCR expensed
approximately $10 million in 1998 relating to the first phase of the RIF,
which is reflected as "Unusual charges" on the Statement of Income. In this
phase, approximately 80 employees in 1998 made an irrevocable voluntary
election to terminate employment and retire. As a result, they will receive
certain special termination benefits in the form of enhanced retirement
benefits. LCR expects additional amounts for phase two of the RIF to be
expensed in 1999.
10. Income Taxes
LCR is treated as a partnership for federal income tax purposes;
consequently, no provision for federal income taxes is required. LCR was
however, subject to state income taxes, and therefore a provision for state
income taxes has been recorded.
Pretax income was taxed by domestic jurisdictions only. The current
provision for state income tax was $1 million in both 1998 and 1997. There was
no current provision for state income tax in 1996. In addition, there was no
deferred provision for state income tax in 1998, 1997 and 1996.
119
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Commitments and Contingencies
LCR is subject to various lawsuits and proceedings.
With respect to liabilities associated with LCR, Lyondell generally has
retained liability for events that occurred prior to July 1, 1993 and certain
on-going environmental projects at the Refinery. LCR generally is responsible
for liabilities associated with events occurring after June 30, 1993 and on-
going 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 $8 million at
December 31, 1998 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 $7 million. LCR has accrued a current liability
of approximately $1 million related to this liability for which Lyondell does
not have any obligation to reimburse LCR. In the opinion of management, there
is currently no material range of 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.
Depending on then current market conditions, reduced deliveries under the
Crude Supply Agreement could adversely affect LCR. In the event of certain
force majeure conditions, including governmental or other actions restricting
or otherwise limiting PDVSA Oil's ability to perform its obligations, LCR
would seek alternative crude supply arrangements. Any such alternative
arrangements may not be as beneficial as the Crude Supply Agreement. There can
be no assurance that alternative crude oils with similar margins would be
available for purchase by LCR.
In April 1998, LCR received notification from PDVSA Oil of intentions to
exercise a force majeure clause related to the announced OPEC production cuts.
As a result of this force majeure clause being exercised, LCR began receiving
reduced allocations of crude oil in August 1998. This condition required LCR
to make alternative arrangements for its additional crude oil requirements and
such action resulted in lower operating margins.
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.
120
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. Subsequent Event
Effective January 1, 1999, the Partnership entered into a lubricant facility
operating agreement and lubricant sales agreements with CITGO. The lubricant
facility operating agreement is for the lubricant facility in Birmingport,
Alabama that will allow CITGO to operate the facility while the Partnership
retains ownership. The lubricant sales agreements state the provisions for the
Partnership to sell and CITGO to buy paraffinic lubricants base oil, naphthenic
lubricants, white mineral oils and specialty oils.
121
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None except as set forth in the Company's Current Report on Form 8-K filed
pursuant to the Securities Exchange Act of 1934, as amended, on March 12, 1998.
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 Registrant's definitive proxy statement for its Annual Meeting
of Stockholders, to be held on May 6, 1999, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1998, and
which is incorporated herein by reference.
122
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 Financial Statements.
Exhibits
--------
3.1 --Amended and Restated Certificate of Incorporation of the
Registrant(15)
3.2 --Amended and Restated By-Laws of the Registrant(16)
4.1 --Indenture, as supplemented by a First Supplemental Indenture,
between the Registrant and Texas Commerce Bank National Association,
as Trustee(2)
4.1(a) --Second Supplemental Indenture between the Registrant, Equistar and
Texas Commerce Bank National Association(19)
4.2 --Indenture, as supplemented by a First Supplemental Indenture,
between the Registrant and Continental Bank, National Association,
as Trustee(4)
4.2(a) --Second Supplemental Indenture between the Registrant, Equistar and
First Trust National Association(19)
4.3 --Indenture, as supplemented by a First Supplemental Indenture,
between the Registrant and Texas Commerce Bank, as Trustee(12)
4.3(a) --Second Supplemental Indenture between the Registrant, Equistar and
Texas Commerce Bank National Association(19)
4.4 --Specimen certificate(1)
4.5 --LCR $70,000,000 Credit Agreement(8)
4.5(a) --Amendment No. 1 to the LCR $70,000,000 Credit Agreement(13)
4.5(b) --Amendment No. 2 to the LCR $70,000,000 Credit Agreement(14)
4.5(c) --Amendment No. 3 to the LCR $70,000,000 Credit Agreement
4.5(d) --Amendment No. 4 to the LCR $70,000,000 Credit Agreement
4.6 --LCR $450,000,000 Credit Agreement(8)
4.6(a) --Amendment No. 1 to the LCR $450,000,000 Credit Agreement(13)
4.6(b) --Amendment No. 2 to the LCR $450,000,000 Credit Agreement(14)
4.6(c) --Amendment No. 3 to the LCR $450,000,000 Credit Agreement
4.6(d) --Amendment No. 4 to the LCR $450,000,000 Credit Agreement
4.7 --Registrant's $225,000,000 Amended and Restated Credit Agreement(19)
4.8 --Rights Agreement between the Registrant and the Bank of New York,
as Rights Agent(11)
4.9 --Credit Agreement dated as of November 25, 1997 among Equistar as
Borrower, Millennium America Inc., as Guarantor, and the lenders
party thereto
4.9(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
4.10 --Lyondell Petrochemical Company $7,000,000,000 Credit Agreement
dated as of July 23, 1998(22)
4.11 --Indenture dated as of January 15, 1999, as supplemented by a First
Supplemental Indenture between Equistar and The Bank of New York
4.12 --Indenture, dated as of June 15, 1998, between ARCO Chemical Company
a Bank of New York as Trustee
4.13 --Form of 9 3/8% Debenture Due 2005 issuable under the Indenture
referred to in Exhibit 4.12
4.14 --Form of 9.80% Debenture Due 2020 issuable under the Indenture
referred to in Exhibit 4.12
4.15 --Form of 9.90% Debenture Due 2000 issuable under the Indenture
referred to in Exhibit 4.12
4.16 --Form of 10.25% Debenture Due 2010 issuable under the Indenture
referred to in Exhibit 4.12
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.
123
EXECUTIVE COMPENSATION:
10.1 --Amended and Restated Executive Supplementary Savings Plan(15)
10.2 --Amended and Restated Executive Long-Term Incentive Plan(3)
10.3 --Amended and Restated Supplementary Executive Retirement Plan(19)
10.3(a) --Amendment to the Amended and Restated Supplementary Executive
Retirement Plan(19)
10.4 --Executive Medical Plan(15)
10.4(a) --Amendment No. 1 to the Executive Medical Plan(15)
10.4(b) --Amendment No. 2 to the Executive Medical Plan(15)
10.5 --Amended and Restated Executive Deferral Plan(19)
10.6 --Executive Long-Term Disability Plan(4)
10.6(a) --Amendment No. 1 to the Executive Long-Term Disability Plan(15)
10.7 --Executive Life Insurance Plan(4)
10.8 --Amended and Restated Supplemental Executive Benefit Plans Trust
Agreement(19)
10.8(a) --Amendment to the Amended and Restated Supplemental Executive
Benefit Plans Trust Agreement(19)
10.9 --Restricted Stock Plan(7)
10.9(a) --Amendment No. 1 to the Restricted Stock Plan(10)
10.9(b) --Amendment No. 2 to the Restricted Stock Plan(19)
10.10 --Form of Registrant's Indemnity Agreement with Officers and
Directors(1)
10.11 --Amended and Restated Elective Deferral Plan for Non-Employee
Directors(15)
10.11(a) --Amendment No. 1 to the Amended and Restated Elective Deferral Plan
for Non-Employee Directors(15)
10.11(b) --Amendment No. 2 to the Amended and Restated Elective Deferral Plan
for Non-Employee Directors(19)
10.12 --Amended and Restated Retirement Plan for Non-Employee Directors(19)
10.12(a) --Amendment to the Amended and Restated Retirement Plan for Non-
Employee Directors(19)
10.13 --Restricted Stock Plan for Non-Employee Directors(13)
10.13(a) --Amendment to the Restricted Stock Plan for Non-Employee
Directors(19)
10.14 --Non-Employee Directors Benefit Plans Trust Agreement(19)
10.14(a) --Amendment to the Non-Employee Directors Benefit Plans Trust
Agreement(19)
10.15 --1999 Long-Term Incentive Plan
10.16 --Lyondell Chemical Company Executive Severance Pay Plan
10.17 --ARCO Chemical Company Change of Control Plan
10.18 --Executive Severance Agreement between the Registrant and Joseph M.
Putz
10.19 --Description of 1998 Executive Incentive Plan
OTHER MATERIAL CONTRACTS:
10.20 --Conveyance (conformed without exhibits) between the Registrant and
ARCO(1)
10.21 --Asset Purchase Agreement (conformed without exhibits) between the
Registrant and Rexene Products Company(2)
10.22 --Limited Partnership Agreement of LCR
10.23 --Contribution Agreement between the Registrant and LYONDELL-CITGO
Refining Company Ltd.(5)
10.24 --Crude Oil Supply Agreement between LYONDELL-CITGO Refining Company
Ltd. and Lagoven, S.A.(5)
10.25 --Asset Purchase Agreement between the Registrant and Occidental
Chemical Company(9)
10.26 --Amended and Restated Limited Partnership Agreement of Equistar
Chemicals, LP(20)
10.26(a) --First Amendment to Amended and Restated Limited Partnership
Agreement of Equistar
10.27 --Asset Contribution Agreement among the Registrant, Lyondell
Petrochemical LP and Equistar Chemicals, LP(18)
124
10.27(a) --First Amendment to Asset Contribution Agreement among the
Registrant, Lyondell Petrochemical LP and Equistar Chemicals, LP
10.28 --Asset Contribution Agreement among Millennium Petrochemicals Inc.,
Millennium LP and Equistar Chemicals, LP(18)
10.28(a) --First Amendment to Asset Contribution Agreement among Millennium
Petrochemicals Inc., Millennium LP and Equistar Chemicals, LP
10.29 --Amended and Restated Parent Agreement dated May 15, 1998 among
Occidental Chemical, Oxy CH Corporation, Occidental, the Registrant,
Millennium and the Partnership(20)
10.29(a) --First Amendment to the Amended and Restated Parent Agreement
10.29(b) --Assignment and Assumption Agreement with Respect to the Amended and
Restated Parent Agreement
10.30 --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 the
Partnership(20)
10.31 --Agreement and Plan of Merger, dated June 18, 1998 among the
Registrant, Lyondell Acquisition Corporation and ARCO Chemical
Company(21)
10.32 --Tax Agreement, dated June 18, 1998 among the Atlantic Richfield
Company, ARCO Chemical Company and the Registrant(21)
10.33 --Tender and Voting Agreement dated June 18, 1998 among the
Registrant, Lyondell Acquisition Corporation and Atlantic Richfield
Company(21)
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
27 --Financial Data Schedule
- --------
(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, 1993 and incorporated herein by reference.
(7) 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.
(8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995 and incorporated herein by reference.
(9) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as
of May 1, 1995 and incorporated herein by reference.
(10) 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.
(11) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated
December 8, 1995 and incorporated herein by reference.
(12) Filed as an exhibit to Registrant's Registration Statement on Form S-3
dated as of January 31, 1996 and incorporated herein by reference.
125
(13) 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.
(14) 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.
(15) 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.
(16) 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.
(17) Filed as an exhibit to Registrant's Interim Report on From 8-K dated as
of July 25, 1997 and incorporated herein by reference.
(18) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as
of October 17, 1997 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, 1997 and incorporated herein by reference.
(20) 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.
(21) Filed as an exhibit to the Registrant's Interim Report on Form 8-K dated
as of June 18, 1998 and incorporated herein by reference.
(22) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 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 52.
(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.
(c) Reports on Form 8-K:
The following Current Reports on Form 8-K or amendments thereto were
filed during the quarter ended December 31, 1998.
Item
Date of Report No. Financial Statements
-------------- ---- --------------------
10/2/98 7 Financial Statements of ARCO Chemical Company
126
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
/s/ Dan F. Smith*
By:__________________________________
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 March 25, 1999
- ----------------------------------- Board
(William T. Butler)
/s/ Dan F. Smith* President, Chief March 25, 1999
- ----------------------------------- Executive Officer
(Dan F. Smith, Principal Executive and Director
Officer)
/s/ Carol A. Anderson* Director March 25, 1999
- -----------------------------------
(Carol A. Anderson)
/s/ Travis Engen* Director March 25, 1999
- -----------------------------------
(Travis Engen)
/s/ Stephen F. Hinchliffe, Jr.* Director March 25, 1999
- -----------------------------------
(Stephen F. Hinchliffe, Jr.)
/s/ Dudley C. Mecum II* Director March 25, 1999
- -----------------------------------
(Dudley C. Mecum II)
/s/ Frank Savage* Director March 25, 1999
- -----------------------------------
(Frank Savage)
/s/ Paul R. Staley* Director March 25, 1999
- -----------------------------------
(Paul R. Staley)
/s/ Van Billet Vice President and March 25, 1999
- ----------------------------------- Controller
(Van Billet, Principal Accounting
Officer)
/s/ Edward W. Rich Vice President and March 25, 1999
- ----------------------------------- Treasurer
(Edward W. Rich, Principal
Financial Officer)
*By:/s/ Jeffrey R. Pendergraft March 25, 1999
- -----------------------------------
(Jeffrey R. Pendergraft, as
Attorney-in-fact)
127