<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER: 1-12091
-------------------
MILLENNIUM CHEMICALS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------
<TABLE>
<S> <C>
DELAWARE 22-3436215
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
230 HALF MILE ROAD 07701-7015
P.O. BOX 7015 (ZIP CODE)
RED BANK, NJ
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 732-933-5000
-------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
<S> <C>
Common Stock, par value New York Stock Exchange
$0.01 per share
</TABLE>
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 is 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 Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of voting stock held by non-affiliates as of
March 17, 2000 (based upon the closing price of $17.4375 per common share as
quoted on the New York Stock Exchange), is approximately $1,100 million. For
purposes of this computation, the shares of voting stock held by directors,
officers and employee benefit plans of the registrant and its wholly owned
subsidiaries were deemed to be stock held by affiliates. The number of shares of
common stock outstanding at March 17, 2000, was 67,831,891 shares, excluding
10,059,695 shares held by the registrant, its subsidiaries and certain Company
trusts, which are not entitled to be voted.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1999, are incorporated by reference into Parts I and II of
this Annual Report on Form 10-K as indicated herein. Portions of the
Registrant's definitive Proxy Statement relating to the 2000 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission, are
incorporated by reference in Part III of this Annual Report on Form 10-K as
indicated herein.
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<C> <S> <C>
PART I
1. Business.................................................... 3
2. Properties.................................................. 25
3. Legal Proceedings........................................... 25
4. Submission of Matters to a Vote of Security Holders......... 26
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters....................................... 27
6. Selected Financial Data..................................... 27
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 27
8. Financial Statements and Supplementary Data................. 27
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 27
PART III
10. Directors and Executive Officers of the Registrant.......... 27
11. Executive Compensation...................................... 28
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 28
13. Certain Relationships and Related Transactions.............. 28
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form
8-K....................................................... 28
</TABLE>
DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in the
1999 Annual Report to Shareholders (the 'Annual Report to Shareholders') of
Millennium Chemicals Inc. (the 'Company') and in this Annual Report on Form
10-K, including, without limitation, the statements under 'Business -- Strategy'
included in this Annual Report on Form 10-K and 'Management's Discussion and
Analysis of Financial Condition and Results of Operations' included in the
Annual Report to Shareholders and incorporated by reference in this Annual
Report on Form 10-K, are, or may be deemed to be, forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934 (the
'Exchange Act'). Important factors that could cause actual results to differ
materially from those discussed in such forward-looking statements ('Cautionary
Statements') include: the balance between industry production capacity and
operating rates, on the one hand, and demand for the products of the Company and
Equistar Chemicals, LP ('Equistar'), including titanium dioxide, ethylene and
polyethylene, on the other hand; the economic trends in the United States and
other countries which serve as the Company's and Equistar's marketplaces;
customer inventory levels; competitive pricing pressures; the cost and
availability of the Company's and Equistar's feedstocks and other raw materials,
including natural gas and ethylene; operating interruptions (including leaks,
explosions, fires, mechanical failures, unscheduled downtime, transportation
interruptions, spills, releases and other environmental risks); competitive
technology positions; failure to achieve the Company's or Equistar's
productivity improvement and cost-reduction targets or to complete construction
projects on schedule; and, other unforeseen circumstances.
Some of these Cautionary Statements are discussed in more detail under
'Business' in this Annual Report on Form 10-K and in 'Management's Discussion
and Analysis of Financial Condition and Results of Operations' in the Annual
Report to Shareholders. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on behalf of the
Company are expressly qualified in their entirety by such Cautionary Statements.
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ITEM 1. BUSINESS
Millennium Chemicals Inc. (the 'Company') is a major international chemical
company, with leading market positions in a broad range of commodity,
industrial, performance and specialty chemicals.
The Company has three principal wholly owned operating subsidiaries:
Millennium Inorganic Chemicals Inc. (collectively, with its non-United States
affiliates, 'Millennium Inorganic Chemicals'), Millennium Petrochemicals Inc.
('Millennium Petrochemicals'), and Millennium Specialty Chemicals Inc.
('Millennium Specialty Chemicals'). The Company also owns a 29.5% interest in
Equistar Chemicals, LP ('Equistar'), a joint venture owned by the Company,
Lyondell Chemical Company ('Lyondell') and Occidental Petroleum Corporation
('Occidental'). The Company accounts for its interest in Equistar as an equity
investment.
The Company has leading market positions in the United States ('U.S.') and
the world:
Millennium Inorganic Chemicals is the second-largest producer of titanium
dioxide ('TiO2') in the world, with manufacturing facilities in the U.S.,
the United Kingdom ('U.K.'), France, Brazil and Australia. Millennium
Inorganic Chemicals is also the largest merchant seller of titanium
tetrachloride ('TiCl4') in North America and Europe;
Millennium Petrochemicals is the second-largest producer of acetic acid and
vinyl acetate monomer ('VAM') in North America;
Millennium Specialty Chemicals is the world's largest producer of
terpene-based fragrance chemicals, the world's second-largest manufacturer
of cadmium-based pigments and a major producer of silica gel; and
Through its 29.5% interest in Equistar, the Company is a partner in the
largest producer of ethylene and the second-largest producer of
polyethylene in North America, and a leading producer of performance
polymers, oxygenated chemicals, aromatics and specialty chemicals.
The Company owns an 85% interest in La Porte Methanol Company, L.P. ('La
Porte Methanol Company'), a Delaware limited partnership that owns a methanol
plant located in La Porte, Texas, and certain related facilities that were
contributed to the partnership by Millennium Petrochemicals. These operations
were wholly owned by Millennium Petrochemicals until they were contributed to
the partnership on January 18, 1999.
The Company was incorporated in Delaware on April 18, 1996. The Company's
U.K. office is located at Laporte Road, Stallingborough, Grimsby, North East
Lincolnshire, DN40 2PR, England. Its U.K. telephone number is 0345-662663. The
Company's principal executive offices in the U.S. are located at 230 Half Mile
Road, P.O. Box 7015, Red Bank, NJ 07701-7015. Its U.S. telephone number is (732)
933-5000 and its U.S. fax number is 732-933-5240.
DEVELOPMENT OF BUSINESS
The Company has been an independent, publicly owned company since its
demerger (i.e., spin-off) on October 1, 1996 (the 'Demerger'), from Hanson PLC
('Hanson'). In connection with the Demerger, Hanson transferred its chemical
operations to the Company and the Company issued to Hanson's shareholders all of
the Company's then-outstanding common stock, par value $0.01 per share (the
'Common Stock'). For additional information concerning the Demerger, see Note 1
to the Company's Consolidated Financial Statements included in the Company's
Annual Report to Shareholders.
On December 1, 1997, the Company contributed to Equistar substantially all
of the net assets comprising its former polyethylene, alcohol and related
products business segment, which had been owned by Millennium Petrochemicals. In
exchange, the Company received a 43% interest in Equistar, Equistar repaid $750
million of debt due to the Company from its contributed businesses, the Company
retained $250 million of certain accounts receivable and Equistar assumed
certain liabilities from the Company. A subsidiary of the Company guaranteed
$750 million of Equistar's newly issued bank debt. The Company used the $750
million received from Equistar, together with collected proceeds of the retained
accounts receivable, to repay debt under its revolving credit facility. Lyondell
contributed to Equistar substantially all of the assets comprising its
petrochemical and polymer business segments, as
3
<PAGE>
well as a $345 million note. In exchange, Lyondell received a 57% interest in
Equistar, and Equistar assumed $745 million of Lyondell's debt and certain
liabilities from Lyondell. On May 15, 1998, the Company and Lyondell expanded
Equistar with the addition of the ethylene, propylene, ethylene oxide, ethylene
glycol and other ethylene oxide derivatives businesses of Occidental's chemical
subsidiary. Occidental contributed substantially all of the net assets of these
businesses (including approximately $205 million of related debt) to Equistar.
In exchange, Equistar borrowed an additional $500 million, $420 million of which
was distributed to Occidental and $75 million of which was distributed to the
Company. Equistar is now owned 41% by Lyondell, 29.5% by Occidental and 29.5% by
the Company. Equistar is governed by a Partnership Governance Committee
consisting of representatives of each partner. Approval of Equistar's strategic
plans and other major decisions requires the consent of the representatives of
the three partners. All decisions of Equistar's Governance Committee that do not
require the consent of the representatives of the three partners may be made by
Lyondell's representatives alone.
On December 31, 1997, the Company completed the purchase of the shares of
Rhone-Poulenc Chimie S.A.'s Thann et Mulhouse TiO2 and related intermediate and
specialty chemical operations in France for $185 million, including assumed
debt. The operations in France provide capacity to produce approximately 125,000
metric tons per year of TiO2.
On July 1, 1998, the Company completed the acquisition of 99% of the voting
shares and 72% of the outstanding shares of Titanio do Brazil S.A. ('Tibras'),
Brazil's only integrated TiO2 producer, for $129 million, including assumed
debt. The two operations comprising Tibras included a plant which has the
capacity to produce approximately 60,000 metric tons per year of TiO2 and a
mineral sands mine with over two million metric tons of recoverable reserves.
On January 18, 1999, the Company completed certain transactions with Linde
AG ('Linde') relating to the Company's synthesis gas ('syngas') unit in La
Porte, Texas, and a 15% interest in its methanol business, whereby the Company
received $123 million in cash. Linde operates the syngas unit under a long-term
lease with a purchase option. The Company has the right to require Linde to
purchase the syngas unit under certain circumstances. In addition, Linde
operates and holds a 15% interest in the methanol facility. Linde has the
obligation to purchase an additional 5% interest in the methanol partnership
upon the occurrence of certain events.
On May 26, 1999, the Company sold its 26.4% combined subordinated and
general partnership interests in Suburban Propane Partners, L.P. and Suburban
Propane, L.P. (collectively, 'Suburban Propane') to Suburban Propane and its
management for $75 million in cash. Suburban Propane is the third-largest retail
marketer of propane in the U.S.
In this Annual Report on Form 10-K: (i) references to the Company are to the
Company and its consolidated subsidiaries, except as the context otherwise
requires; (ii) references to the activities of, and financial information with
respect to, the Company prior to October 1, 1996, are to the historical
activities and combined historical financial information of the businesses that
were transferred to the Company by Hanson in connection with the Demerger; (iii)
references to 'tpa' are to metric tons per annum (a metric ton is equal to 1,000
kilograms or 2,204.6 pounds); and, (iv) references to the Company's and
Equistar's annual rated, processing or production capacity are based upon
engineering assessments made by the Company and Equistar, respectively. Actual
production may vary depending on a number of factors including feedstocks,
product mix, unscheduled maintenance and demand.
4
<PAGE>
STRATEGY
The Company's Vision is: 'BE THE MOST VALUE-CREATIVE CHEMICAL COMPANY IN THE
WORLD.' Its strategy is to maximize long-term Economic Value Added ('EVA'r'*')
and cash flow, through improved efficiency at existing operations, disciplined
capital expenditures, selective dispositions and selective acquisitions of
intermediate and specialty chemical businesses. In addition to building upon its
leading market positions in its existing lines of business, the Company seeks to
increase efficiency and reduce costs at its existing businesses, focus its
production on more profitable value-added products, expand its operations
worldwide and increase the proportion of its business that is less cyclical in
nature. The Company emphasizes stock ownership by management and links a
significant portion of management's compensation to the achievement of
performance targets, including targets based on EVA'r', as well as the Company's
performance relative to its industry peers as measured by total shareholder
return. The Company is committed to providing a safe workplace and employing the
highest ethical standards in its dealings with customers, suppliers and the
communities in which it operates.
The following are key elements of the Company's strategy:
FOCUS GROWTH ON LESS CYCLICAL, VALUE-CREATIVE BUSINESSES. The Company seeks
to capitalize upon the leading market positions of its intermediate and
specialty chemical businesses by expanding in domestic and international markets
through capital expenditures and, as opportunities permit, selective
acquisitions. In furthering the Company's business strategy to deemphasize
commodity chemicals, the Company has announced its intention to seek to monetize
its investment in Equistar. On January 28, 2000, the Company made an offer (the
'Offer') to Equistar's other partners to sell to them the Company's 29.5%
partnership interest in Equistar. Both partners have notified the Company that
the Offer has been declined. Under Equistar's Partnership Agreement, the Company
has a 180-day period in which to sell its partnership interest to a third party
on terms at least as favorable to the Company as the terms and conditions of the
Offer. In addition, the Company has retained an investment banker to assist in
the sale of the Company's interest in Equistar. In 1999, the Company transferred
its La Porte, Texas, syngas facility and 15% of its methanol business to Linde
for $123 million in cash, resulting in a value-creative partnership with
long-term EVA'r' benefits. The Company also sold its interest in Suburban
Propane in 1999 for $75 million. In 1999, the Company completed the purchase of
$200 million of its Common Stock using primarily the proceeds of these
transactions, buying back over 10% of its outstanding shares. Millennium
Inorganic Chemicals significantly expanded its global TiO2 business by acquiring
the French TiO2 operations of Rhone-Poulenc Chimie S.A. on December 31, 1997,
and 99% of the voting shares and 72% of the outstanding shares of Tibras,
Brazil's only integrated TiO2 producer, on July 1, 1998.
IMPROVE THE COMPANY'S COST STRUCTURE IN COMMODITY, INDUSTRIAL AND
PERFORMANCE CHEMICALS. The Company seeks to increase the competitiveness of its
commodity, industrial and performance chemical businesses by improving the
efficiency of existing operations through the implementation of internally
developed and externally benchmarked best practices and ongoing investments in
technology, new processes and equipment. In 1999, the Company completed the
global implementation of its SAP-based enterprise resource planning system,
creating a totally integrated information platform that enhances customer
service and expands the Company's ability to increase efficiencies and cut
costs. This system would also eventually help link the Company and certain of
its customers and suppliers in an efficient, real-time network. Focused global
teams were established in 1999 at Millennium Inorganic Chemicals to apply best
practices around the world and build stronger business alliances. New
technologies put into place at Millennium Inorganic Chemicals' Stallingborough,
U.K., facility have begun to pay off with additional capacity to meet demand.
INCREASE PRODUCTION AND MARKETING OF VALUE-ADDED PRODUCTS. The Company seeks
to expand its position as a supplier of less cyclical, value-added intermediate
and specialty chemicals, which historically command higher margins than
commodity chemicals. Millennium Inorganic Chemicals completed its new $18
million research center near Baltimore, Maryland, to enhance its ability to
research, develop and test new products and processes, and provide customers
with additional value-added products and services. Millennium Inorganic
Chemicals developed four new products in 1999
- ---------
* EVA'r' is a registered trademark of Stern Stewart & Co.
5
<PAGE>
(including Tiona'r' 568, a new multi-purpose, high-performance pigment) that
will be commercialized in 2000. Millennium Petrochemicals' new, patented
low-water technology to reduce the cost and increase the capacity of its
acetic acid plant was fully implemented in 1999. At Millennium Specialty
Chemicals, the capacity for linalool and anethole production was expanded
through debottlenecking. The Company's equity investment in CheMatch.com,
the chemical industry's leading bulk chemical exchange and auction site,
exemplified the Company's commitment to the rapidly growing area of U.S.
business-to-business e-commerce.
EMPHASIZE EMPLOYEE STOCK OWNERSHIP AND PERFORMANCE-BASED COMPENSATION. In
order to align the interests of the Company's management and shareholders, the
Company has established guidelines for significant investment by management in
Common Stock. Since October 1, 1996, the Company's top 27 executive officers and
senior managers have purchased shares of Common Stock with a market value at
March 17, 2000, of over $12 million. These include shares purchased under the
Company's Salary and Bonus Deferral Plan, some of which are subject to
forfeiture, but do not include Common Stock earned under the Company's Long Term
Stock Incentive Plan. In addition, management's long-term incentive compensation
(including the vesting of 75% of the awards of restricted stock) is dependent
upon the achievement of performance goals based on value creation targets and
the Company's performance relative to industry peers, as measured by total
shareholder return. Information relating to these guidelines and plans is
presented under the heading 'Executive Compensation' in the Company's Proxy
Statement for its 2000 Annual Meeting of Shareholders. To encourage ownership of
Common Stock by employees generally, the Company has established a 401(k) plan
and a Supplemental Savings and Investment Plan that partially match employee
contributions with Common Stock, a Long Term Incentive Plan that awards
participants with Common Stock based on performance measured by EVA'r', Employee
Stock Purchase Plans and a Salary and Bonus Deferral Plan. In addition, the
Company has established a Save As You Earn (SAYE) program and a Bonus Deferral
Plan for its U.K. employees, a 'Plan D'Epargne' for its French employees and a
Salary Deferral Plan for its Australian employees.
PROVIDE A SAFE WORKPLACE AND EMPLOY THE HIGHEST ETHICAL STANDARDS. The
Company is committed to providing a safe workplace and employing the highest
ethical standards in its dealings with customers, suppliers and the communities
in which it operates. 'PEOPLE CREATE THE VALUE' is the basis of the Company's
People Policy. The People Policy promotes innovation and value-creativity within
the context of the Company's Core Values, which include: 'EMPLOY THE HIGHEST
ETHICAL STANDARDS; TREAT EACH OTHER WITH RESPECT, TRUST AND OPENNESS; AND,
PROTECT THE ENVIRONMENT AND THE HEALTH AND SAFETY OF OUR EMPLOYEES AND THE
PUBLIC.' The Company's safety performance showed an improvement of approximately
60% in 1999 in its lost workday incident rate, and Millennium Petrochemicals'
operations had no lost workdays or recordable safety incidents in 1999. To
demonstrate the Company's unequivocal commitment to the Responsible Care'r'*
program in each country in which the Company has operations, the Company adopted
its own Responsible Care'r' program in 1999, named 'One Global Standard of
Excellence,' to achieve excellence in Responsible Care'r' in a globally uniform
way. By focusing on the People Policy, the Core Values, the guiding principles
of Responsible Care'r' and EVA'r', the Company and its people are committed to
the Company's Vision: 'BE THE MOST VALUE-CREATIVE CHEMICAL COMPANY IN THE
WORLD.'
BUSINESS SEGMENTS
The Company's principal operations are grouped into three business segments:
'titanium dioxide and related products,' which are produced by Millennium
Inorganic Chemicals; 'acetyls,' which are produced by Millennium Petrochemicals;
and, 'specialty chemicals,' which are produced by Millennium Specialty
Chemicals. See Note 12 of the Company's Consolidated Financial Statements
included in the Annual Report to Shareholders and page 40 of such Annual Report
for financial information about the Company's business segments; such
information is incorporated herein by reference.
On December 1, 1997, the Company contributed the businesses comprising its
former polyethylene, alcohol and related products segment to Equistar. Results
of these businesses for the eleven months ended November 30, 1997, prior to such
contribution, are included in the Company's Consolidated Financial Statements.
Since December 1, 1997, the Company's interest in Equistar has been accounted
for as an equity investment. Prior to December 1, 1997, the assets contributed
by the Company to
- ----------
* Responsible Care'r' is a registered servicemark of the Chemical Manufacturers
Association.
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Equistar were designated as the 'polyethylene, alcohol and related products'
segment. See Note 3 to the Company's Consolidated Financial Statements included
in the Annual Report to Shareholders for additional information about Equistar's
business, and the Financial Statements of Equistar included in this Annual
Report on Form 10-K for additional financial information about Equistar.
PRINCIPAL PRODUCTS
The following is a description of the principal products of the Company's
consolidated subsidiaries:
<TABLE>
<CAPTION>
Titanium dioxide and related products:
<S> <C>
Titanium dioxide ('TiO2')................ A white pigment used to provide whiteness, brightness
and opacity in coatings and paints, plastics, paper
and rubber.
Titanium tetrachloride ('TiCl4')......... The intermediate product used in making TiO2. TiCl4
is also used for: the manufacture of titanium metal,
which is used to make a wide variety of products
including eyeglass frames, aerospace parts and golf
clubs; the manufacture of catalysts and specialty
pigments; and, as a surface treatment for glass.
Zirconium-based compounds................ Chemicals used in coloring for ceramics, in pigment
surface treatment and to enhance optics.
Specialty TiO2........................... Micropure and ultra-fine products used in optical,
electronic and ultra-violet absorption applications.
Acetyls:
Vinyl acetate monomer ('VAM')............ A petrochemical product used to produce adhesives,
water-based paints, textile coatings, paper coatings
and a variety of polymer products.
Acetic acid.............................. A feedstock used to produce VAM, terephthalic acid
(used to produce polyester for textiles and plastic
bottles) and industrial solvents.
Methanol................................. A feedstock used to produce acetic acid; methyl
tertiary butyl ether ('MTBE'), a gasoline additive;
and, formaldehyde. The Company is a producer of
methanol through its 85% interest in La Porte
Methanol Company.
Specialty chemicals:
Terpene fragrance chemicals.............. Individual components that are blended to make
fragrances used in detergents, soaps, perfumes,
personal-care items and household goods.
Terpene flavor chemicals................. Individual components that are blended to impart or
enhance flavors used in toothpaste, chewing gum and
other consumer products.
Cadmium-based pigments................... Inorganic colors used in engineered plastics,
artists' colors, ceramics, inks, automotive refinish
coatings, coil and extrusion coatings, aerospace
coatings and specialty industrial finishes.
Silica gel............................... Inorganic product used to reduce gloss and control
flow in coatings. Also used to stabilize and extend
the shelf life of beer, plastic films, powdered food
products and pharmaceuticals.
</TABLE>
For a description of Equistar's principal products, see 'Equity Interest in
Equistar,' below.
7
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MILLENNIUM INORGANIC CHEMICALS
TITANIUM DIOXIDE
Millennium Inorganic Chemicals is the second-largest producer of TiO2 in the
world, based on reported production capacities. TiO2 is a white pigment used for
imparting whiteness, brightness and opacity in a wide range of products,
including paints and coatings, plastics, paper and elastomers.
The following table sets forth Millennium Inorganic Chemicals' annual
production capacity, as of the date of this report, using the chloride process
and the sulfate process discussed below, and the approximate percentage of its
total production capacity represented by each such process.
MILLENNIUM INORGANIC CHEMICALS' RATED TIO2 CAPACITY
(METRIC TONS PER ANNUM)
<TABLE>
<CAPTION>
PROCESS CAPACITY
- ------- --------
<S> <C> <C>
Chloride............................................. 483,000 68%
Sulfate.............................................. 229,000 32%
------- ---
Total............................................ 712,000 100%
</TABLE>
TiO2 is produced in two crystalline forms: rutile and anatase. Rutile TiO2
is a more tightly packed crystal that has a higher refractive index than anatase
TiO2 and, therefore, better opacification and tinting strength in many
applications. Some rutile TiO2 products also provide better resistance to the
harmful effects of weather. Rutile TiO2 is the preferred form for use in
coatings, ink and plastics. Anatase TiO2 has a bluer undertone and is less
abrasive than rutile TiO2. It is often preferred for use in paper, ceramics,
rubber and man-made fibers.
TiO2 producers process titaniferous ores to extract a white pigment using
one of two different technologies. The sulfate process is a wet chemical process
that uses concentrated sulfuric acid to extract TiO2, in either anatase or
rutile form. The sulfate process generates higher volumes of waste materials,
including iron sulfate and spent sulfuric acid. The newer chloride process is a
high temperature process in which chlorine is used to extract TiO2 in rutile
form, with greater purity and higher control over the size distribution of the
pigment particles than the sulfate process permits. In general, the chloride
process is also less intensive than the sulfate process in terms of capital
investment, labor and energy. Because much of the chlorine can be recycled, the
chloride process produces less waste subject to environmental regulation. Once
an intermediate TiO2 pigment has been produced by either the chloride or sulfate
process, it is 'finished' into a product with specific performance
characteristics for particular end-use applications through proprietary
processes involving surface treatment with various chemicals and combinations of
milling and micronizing.
Due to customer preferences, as well as economic and environmental factors,
the industry's worldwide chloride-process capacity has increased significantly
relative to sulfate-process capacity during the last twenty years and currently
represents just over half of total industry capacity. Millennium Inorganic
Chemicals is the world's second-largest producer of TiO2 by the chloride
production process.
Millennium Inorganic Chemicals' TiO2 plants are located in the four major
world markets for TiO2: North America, South America, Western Europe and the
Asia/Pacific region. The North American plants, consisting of two in Baltimore,
Maryland, and two in Ashtabula, Ohio, have aggregate production capacities of
248,000 tpa using the chloride process and 44,000 tpa using the sulfate process.
The plant in Salvador, Bahia, Brazil, has a capacity to produce approximately
60,000 tpa using the sulfate process. Millennium Inorganic Chemicals also owns a
mineral sands mine located at Mataraca, Paraiba, Brazil, which supplies the
Brazilian plant with titanium ores. The mine has over two million metric tons of
recoverable reserves and a capacity to produce over 100,000 tpa of titanium
ores, which are generally consumed in the Salvador TiO2 plant, and 16,000 tpa of
zircon, which are sold to third parties. Millennium Inorganic Chemicals'
Stallingborough, U.K., plant has chloride-process production capacity of 150,000
tpa, increased from 109,000 tpa due to the plant expansion which was
substantially completed in late 1998. The plants in France at Le Havre,
Normandy, and Thann, Alsace, have sulfate-
8
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process capacities of 95,000 tpa and 30,000 tpa, respectively. The Kemerton
plant in Western Australia has chloride-process production capacity of 85,000
tpa.
Millennium Inorganic Chemicals' plants operated at an average of 88% of
installed capacity during 1999, 93% during 1998 and 97% during 1997. The decline
in the operating rate in 1999 was due to planned and unplanned production
shutdowns at certain facilities. Planned cutbacks in production were made early
during 1999 in response to seasonal slowness in demand and price competition in
Europe. In addition, the Stallingborough, U.K., plant was shut down during the
fall of 1998 to complete a significant expansion of capacity and a new
technology introduction at the facility. Operational difficulties were
experienced during 1999 in connection with the expansion and the technology
introduction. Although the difficulties at Stallingborough are largely resolved,
work continues to increase output levels to nameplate capacity.
Titanium-bearing ores used in the TiO2 extraction process (ilmenite, natural
rutile and leucoxene) occur as mineral sands and hard rock in many parts of the
world. Mining companies increasingly treat these natural ores to extract iron
and other minerals and produce slags or synthetic rutiles with higher TiO2
concentrations, resulting in lower rates of waste by-products during the TiO2
production process. Ores are shipped by bulk carriers from terminals in the
country of origin to TiO2 production plants, usually located near port
facilities. Millennium Inorganic Chemicals obtains ores from a number of
suppliers in South Africa, Australia, Canada and Norway, generally pursuant to
one- to three-year supply contracts. Rio Tinto Iron & Titanium Inc. (through its
affiliates Richards Bay Iron & Titanium (Proprietary) Limited and QIT-Fer et
Titane Inc.) and Iluka Resources Limited are the world's largest producers of
titanium ores and upgraded titaniferous raw materials and accounted for
approximately 81% of the titanium ores and upgraded titaniferous raw materials
purchased by Millennium Inorganic Chemicals in 1999.
Other major raw materials used in the production of TiO2 are chlorine,
caustic soda, petroleum and metallurgical coke, aluminum, sodium silicate,
sulfuric acid, oxygen, nitrogen, natural gas and electricity. The number of
sources for and availability of these materials is specific to the particular
geographic region in which the facility is located. For Millennium Inorganic
Chemicals' Australian plant, chlorine and caustic soda are obtained exclusively
from one supplier under a long-term supply agreement. Millennium Inorganic
Chemicals has experienced tightness in various raw material markets, but not to
an extent requiring curtailed production. There are certain risks related to the
acquisition of raw materials from less-developed or developing countries. At the
present time, the market for chloride process feedstock is beginning to loosen
due to additional new synthetic titanium ore capacity. A number of Millennium
Inorganic Chemicals' raw materials are provided by only a few vendors and,
accordingly, if one significant supplier or a number of significant suppliers
were unable to meet their obligations under present supply arrangements,
Millennium Inorganic Chemicals could suffer reduced supplies and/or be forced to
incur increased prices for its raw materials. Such an event could have a
material adverse effect on the consolidated financial condition, results of
operations or cash flows of the Company.
Of the total 600,000 metric tons of TiO2 sold by Millennium Inorganic
Chemicals in 1999, approximately 60% was sold to customers in the paint and
coatings industry, approximately 20% to customers in the plastics industry,
approximately 15% to customers in the paper industry and approximately 5% to
other customers. Millennium Inorganic Chemicals' ten largest customers accounted
for more than 25% of its TiO2 sales in 1999. Millennium Inorganic Chemicals
experiences some seasonality in its sales because its customers' sales of paints
and coatings are greatest in the spring and summer months.
TiO2 is sold either directly by Millennium Inorganic Chemicals to its
customers or, to a lesser extent, through agents or distributors. TiO2 is
distributed by rail, truck and ocean carrier in either dry or slurry form.
The global markets in which the Company's TiO2 business operates are all
highly competitive. Millennium Inorganic Chemicals competes primarily on the
basis of price, product quality and service. Certain of Millennium Inorganic
Chemicals' competitors are partially vertically integrated, producing
titanium-bearing ores as well as TiO2. Millennium Inorganic Chemicals is
vertically integrated at its Brazilian facility, which owns a titanium ore mine
that supplies the facility. Millennium Inorganic
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Chemicals' major competitors are E.I. du Pont de Nemours and Company ('Dupont');
Huntsman Tioxide ('Huntsman'), a unit of Huntsman Corporation; Kronos, Inc.
('Kronos'), a unit of NL Industries Inc.; Kemira Pigments Oy ('Kemira'), a unit
of Kemira Oy; and, Kerr-McGee Chemical Corporation (both directly and through
various joint ventures) ('Kerr-McGee Chemicals'), a unit of Kerr-McGee
Corporation. DuPont, Millennium Inorganic Chemicals, Huntsman, Kronos, Kemira
and Kerr-McGee Chemicals, collectively, account for approximately three-quarters
of the world's production capacity.
TiO2 competes with other whitening agents which are generally less effective
but less expensive. Paper manufacturers have, in recent years, developed
alternative technologies which reduce the amount of TiO2 used in paper. For
example, kaolin and precipitated calcium carbonate are used extensively as
fillers by paper manufacturers in medium- and lower-priced products.
New plant capacity additions in the TiO2 industry are slow to develop
because of the substantial capital expenditure and the significant lead time
(three to five years typically for a new plant) needed for planning, obtaining
environmental approvals and permits, construction of manufacturing facilities
and arranging for raw material supplies. Debottlenecking and other capacity
expansions at existing plants require substantially less time and capital and
can increase overall industry capacity.
PERFORMANCE CHEMICALS
Millennium Inorganic Chemicals produces a number of specialty products that
are marketed through its newly formed Performance Chemicals business unit. These
products include the following:
Titanium Tetrachloride. Millennium Inorganic Chemicals manufactures a
metallurgical grade of TiCl4 at its Ashtabula, Ohio, plant, primarily for sale
to U.S. titanium metal producers. TiCl4 is produced at Ashtabula as an
intermediate product in the chloride process used for manufacturing TiO2.
Millennium Inorganic Chemicals also manufactures TiCl4 at its Thann, Alsace,
France, facility, primarily for sales to third parties in Europe for use in
catalysts and pharmaceuticals and for use by Millennium Inorganic Chemicals and
others in the sulfate-process manufacturing of TiO2 in Europe. Millennium
Inorganic Chemicals is the largest merchant seller of TiCl4 in North America and
Europe.
The majority of the Company's U.S. TiCl4 sales consist of metallurgical
grade product sold to titanium sponge producers who convert the product into
titanium metal. Other customers use TiCl4 to produce catalysts for chemical
processes and pearlescent pigments for metallic coatings and cosmetics. Sales
are almost exclusively to customers in the U.S. and Europe. TiCl4 is distributed
by rail and truck as anhydrous TiCl4 and as titanium oxychloride (an aqueous
solution of TiCl4).
Specialty Titanium Dioxide Products: The Company's plant in France at Thann,
Alsace, produces zirconium-based compounds and specialty TiO2 products. These
products are marketed globally for various applications, including environmental
applications to eliminate nitrogen oxides from power plant emissions and for
sulfur removal in diesel engine exhaust. Micropure TiO2 is used in the treatment
of glass, primarily to enhance the optical properties of spectacles. Electronic
applications make use of these materials' ultra-purity to miniaturize components
in automotive, telephone and television applications.
Zirconium-based Compounds: Zirconium-based compounds are used as a coloring
agent for ceramics, in pigment surface treatments and to enhance optics.
Millennium Inorganic Chemicals recently completed the acquisition of Hanwha
Advanced Ceramics of South Korea, a company located near Perth, Western
Australia, that produces a broad range of zirconia products that will complement
the current manufacturing operations in Thann, France.
MILLENNIUM PETROCHEMICALS
The following table sets forth information concerning the annual production
capacity, as of the date of this report, of Millennium Petrochemicals' principal
products:
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MILLENNIUM PETROCHEMICALS' RATED CAPACITY
(MILLIONS OF POUNDS PER ANNUM)
<TABLE>
<CAPTION>
PRODUCT CAPACITY
------- --------
<S> <C>
Acetic Acid........................................ 1,000
Vinyl Acetate Monomer.............................. 800
</TABLE>
In addition, Millennium Petrochemicals owns an 85% interest in La Porte
Methanol Company, which owns a methanol plant with an annual production capacity
of 207 million gallons per annum. For a description of the plant and La Porte
Methanol Company, see 'La Porte Methanol Company,' below.
ACETIC ACID
Millennium Petrochemicals is the second-largest producer of acetic acid in
North America, and the third-largest producer worldwide, based on reported
production capacities. Its acetic acid plant is located at La Porte, Texas, and
has an annual production capacity as of December 31, 1999, of one billion
pounds. Millennium Petrochemicals uses approximately 57% of its acetic acid
production internally to produce VAM at La Porte.
The principal starting feedstocks for the production of acetic acid are
carbon monoxide and methanol. Millennium Petrochemicals purchases all of its
carbon monoxide from Linde pursuant to a long-term contract based primarily on
cost of production. Linde produces this carbon monoxide at the syngas plant
leased by Linde from Millennium Petrochemicals pursuant to a long-term lease
that commenced on January 18, 1999. La Porte Methanol Company, 85% owned by the
Company, supplies all of Millennium Petrochemical's requirements for methanol.
(See 'La Porte Methanol Company,' below.)
Millennium Petrochemicals utilizes proprietary technology, including its
patented low-water technology, to produce acetic acid.
Acetic acid not consumed internally by Millennium Petrochemicals is sold
predominantly under contract. These contracts range in term from one to six
years. Export sales constituted approximately 20% of total acetic acid sales in
1999. Acetic acid is shipped by ocean-going vessel, barge, tank car and tank
truck.
Millennium Petrochemicals' principal competitors in the acetic acid business
are Celanese AG, ('Celanese'); BP Amoco P.L.C. ('BP Amoco'); Kyodo Sakusan and
Acetex Chemie S.A., a subsidiary of Acetex Corporation ('Acetex').
VINYL ACETATE MONOMER
Millennium Petrochemicals is the second-largest producer of VAM in North
America, and the third-largest producer worldwide, based on reported production
capacities. Its VAM plant is located at La Porte, Texas, and has an annual
production capacity of 800 million pounds as of December 31, 1999.
The principal feedstocks for the production of VAM are acetic acid and
ethylene. Millennium Petrochemicals supplies its entire requirements for acetic
acid from its internal production and buys all of its ethylene requirements from
Equistar under a long-term supply contract based on market prices.
The process used by Millennium Petrochemicals to produce VAM is proprietary
to the Company.
Millennium Petrochemicals sells VAM under contracts that range in term from
one to ten years, as well as on a spot basis. Millennium Petrochemicals also
sells VAM to Equistar pursuant to a long-term contract at a formula-based price.
The majority of sales are completed under contract. Millennium Petrochemicals
ships this product by barge, ocean-going vessel, pipeline, tank car and tank
truck. Export sales represented approximately 35% of total VAM sales in 1999.
Millennium Petrochemicals has bulk storage arrangements for VAM in the
Netherlands, the U.K., Italy, Turkey, South Africa, Indonesia, Malaysia and
Korea, to better serve its customers' requirements in those regions.
Millennium Petrochemicals' principal competitors in the VAM business are
Celanese, BP Amoco, Union Carbide Corporation, Gantrade Corporation, Acetex and
Dairen Chemical Corporation.
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MILLENNIUM SPECIALTY CHEMICALS
TERPENE FRAGRANCE AND FLAVOR CHEMICALS
Millennium Specialty Chemicals is one of the world's leading producers of
chemicals derived from crude sulfate turpentine ('CST'), and is the largest
purchaser and distiller of CST in the world. Millennium Specialty Chemicals'
primary turpentine-based products are intermediate fragrance chemicals, such as
linalool and geraniol, which are used in fragrance compounds and also provide
the starting point for the production of a number of other fragrance
ingredients. In addition, Millennium Specialty Chemicals supplies chemicals for
use as flavors and in a number of other industrial applications.
Millennium Specialty Chemicals operates manufacturing facilities for its
fragrance chemicals in Jacksonville, Florida, and Brunswick, Georgia. The
Jacksonville site has facilities for the fractionation of turpentine into alpha-
and beta-pinene, sophisticated equipment to further upgrade fragrance chemical
products, as well as manufacturing facilities for synthetic pine oil, anethole,
methyl chavicol and a number of other fragrance and flavor chemicals. The
Brunswick site produces linalool and geraniol from the alpha-pinene component of
CST, utilizing a proprietary and, the Company believes, unique technology. The
Company believes that this technology provides Millennium Specialty Chemicals
with a significant advantage in raw material availability and quality. The
Company's technology also has significant environmental advantages. Linalool and
geraniol produced at the Brunswick site are generally further processed at the
Jacksonville site to produce fragrance chemicals, including citral, citronellol
and pseudoionone. In addition, Millennium Specialty Chemicals operates the
world's largest dihydromyrcenol facility at Brunswick, with a rated annual
capacity of over five million pounds. In 1999, Millennium Specialty Chemicals
expanded its linalool and geraniol production capacities.
CST, which is Millennium Specialty Chemicals' key raw material for producing
fragrance chemicals, is a by-product of the kraft process of papermaking.
Millennium Specialty Chemicals purchases CST from approximately 50 pulp mills in
North America. Additionally, Millennium Specialty Chemicals purchases quantities
of gum turpentine or its derivatives from Asia, Europe and South America, as
business conditions dictate.
Millennium Specialty Chemicals has experienced tightness in CST supply from
time to time, together with corresponding price increases. Generally, Millennium
Specialty Chemicals seeks to enter into long-term supply contracts with pulp
mills in order to ensure a stable supply of CST. The sale of CST generates
relatively insignificant revenues and profits for the pulp mills that serve as
Millennium Specialty Chemicals' principal suppliers. Accordingly, Millennium
Specialty Chemicals attempts to work closely and cooperatively with its
suppliers and provides them with incentives to produce more CST. For example,
Millennium Specialty Chemicals employs two full-time employees whose sole
responsibility is to work with pulp mills to recover CST more efficiently and
economically.
Fragrance chemicals are used primarily in the production of perfumes. The
major consumers of perfumes worldwide are soap and detergent manufacturers.
Millennium Specialty Chemicals sells directly worldwide to major soap, detergent
and fabric conditioner manufacturers and fragrance compounders and, to a lesser
extent, producers of cosmetics and toiletries. Approximately 80% of Millennium
Specialty Chemicals' 1999 terpene fragrance chemical sales were to the fragrance
chemicals market, with additional sales to the pine oil cleaner and disinfectant
markets. Approximately 63% of Millennium Specialty Chemicals' 1999 terpene
fragrance chemical sales were made outside the U.S., to approximately 50
different countries. Sales are made primarily through Millennium Specialty
Chemicals' direct sales force, while agents and distributors are used in
outlying areas where volume does not justify full-time sales coverage.
The markets in which Millennium Specialty Chemicals' terpene fragrance
business competes are highly competitive. Millennium Specialty Chemicals
competes primarily on the basis of quality, service and the ability to conform
its products to the technical and qualitative requirements of its customers.
Millennium Specialty Chemicals works closely with many of its customers in
developing products to satisfy their specific requirements. Millennium Specialty
Chemicals' supply agreements with customers are typically short-term in duration
(up to one year). Therefore, its business is substantially dependent on
long-term customer relationships based upon quality, innovation and customer
service. Customers
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<PAGE>
from time to time change the formulations of an end product in which one of
Millennium Specialty Chemicals' fragrance chemicals is used, which may affect
demand for such fragrance chemicals. Millennium Specialty Chemicals' ten largest
terpene chemical customers accounted for approximately 40% of its total sales in
1999. Millennium Specialty Chemicals' major competitors are BASF AG,
Hoffman-LaRoche Inc., Kuraray Co. LTD and Bush Boake Allen Inc.
SILICA GEL
Millennium Specialty Chemicals produces several grades of fine-particle
silica gel at the St. Helena plant in Baltimore, Maryland, and markets them
internationally. Fine-particle silica gel is a chemically and biologically inert
form of silica with a particle size ranging from three to ten microns.
The Company's SiLCRON'r' brand of fine-particle silica is used in coatings
as a flatting or matting (gloss reduction) agent and to provide mar-resistance.
SiLCRON'r' is also used in food and pharmaceutical applications. SiL-PROOF'r'
grades of fine-particle silica gel are chill-proofing agents used to stabilize
chilled beer and prevent clouding. Fine-particle silica is distributed in dry
form in palletized bags by truck and ocean carrier.
CADMIUM-BASED PIGMENTS
Millennium Specialty Chemicals manufactures a line of cadmium-selenium based
colored pigments at the St. Helena, Maryland, plant and markets them
internationally. In addition to their brilliance, cadmium colors are light and
heat stable. These properties promote their use in such applications as artists'
colors, plastics and glass colors. Due to concern for the toxicity of heavy
metals, including cadmium, Millennium Specialty Chemicals has introduced
low-leaching cadmium-based pigments that meet all U.S. government requirements
for landfill disposal of non-hazardous waste. Colored pigments are distributed
in dry form in drums by truck and ocean carrier.
RESEARCH AND DEVELOPMENT
The Company's expenditures for research and development totaled $26 million,
$21 million and $28 million in 1999, 1998 and 1997, respectively. Research and
development expenditures at Millennium Inorganic Chemicals increased by
approximately $5 million from 1998 to 1999 due to its strategic initiative to
increase its focus on new product development and process technology. Research
and development expenditures increased from 1997 to 1998 at Millennium Inorganic
Chemicals by approximately $7 million due to the French and Brazilian
acquisitions and additional research and development projects, but decreased by
approximately $14 million at Millennium Petrochemicals as a result of the
transfer of the polyethylene, alcohol and related products segment to Equistar
on December 1, 1997.
Millennium Inorganic Chemicals has research facilities in Baltimore,
Maryland; Stallingborough, U.K.; and, Bunbury, Western Australia. Millennium
Inorganic Chemicals opened its new research center near Baltimore, Maryland
in September 1999. Millennium Specialty Chemicals has research facilities
in Jacksonville, Florida, and Baltimore, Maryland. Millennium Petrochemicals
leases laboratory space from Equistar in Cincinnati, Ohio. The Company's
research efforts are principally focused on improvements in process
technology, product development, technical service to customers, applications
research and product quality enhancements.
INTERNATIONAL EXPOSURE
The Company generates revenue from export sales (i.e., U.S.
dollar-denominated sales outside the U.S. by domestic operations), as well as
revenue from the Company's operations conducted outside the U.S. Export sales,
which are made to approximately 90 countries, amounted to approximately 9%, 10%
and 9% of total revenues in 1999, 1998 and 1997, respectively. Revenue from
non-U.S. operations amounted to approximately 42%, 38% and 12% of total revenues
in 1999, 1998 and 1997, respectively, principally reflecting the operations of
Millennium Inorganic Chemicals in the U.K. and Western Australia and the
addition of the French operations on December 31, 1997, and the Brazilian
operations
13
<PAGE>
on July 1, 1998. Identifiable assets of the non-U.S. operations represented 29%
and 24% of total identifiable assets at December 31, 1999 and 1998,
respectively, principally reflecting the assets of these operations. In
addition, the Company obtains a portion of its principal raw materials from
sources outside the U.S. Millennium Inorganic Chemicals obtains ores used in the
production of TiO2 under long-term contracts from a number of suppliers in South
Africa, Australia, Canada and Norway. Millennium Specialty Chemicals obtains a
portion of its requirements of CST and gum turpentine and its derivatives from
suppliers in Indonesia and other Asian countries, Europe and South America.
The Company's export sales and its non-U.S. manufacturing and sourcing are
subject to the usual risks of doing business abroad, such as fluctuations in
currency exchange rates, transportation delays and interruptions, political and
economic instability and disruptions, restrictions on the transfer of funds, the
imposition of duties and tariffs, import and export controls and changes in
governmental policies. The Company's exposure to the risks associated with doing
business abroad will increase as the Company expands its worldwide operations.
From time to time, the Company utilizes financial derivative instruments to
hedge the impact of currency fluctuations on its purchases and sales.
The functional currency of each of the Company's non-U.S. operations
(principally, the operations of Millennium Inorganic Chemicals in the U.K.,
France, Brazil and Australia) is the local currency. The impact of currency
translation in combining the results of operations and financial position of
such operations has not, historically, been material to the consolidated
financial position of the Company. The 1999 devaluation of Brazil's currency,
the real, had a $6 million impact on the Company's consolidated operations, as a
majority of its Brazilian sales are referenced to U.S. dollar prices. In
addition, as a result of translating the functional currency financial
statements of all its foreign subsidiaries into U.S. dollars, consolidated
shareholders' equity decreased approximately $46 million during 1999. Future
events, which may significantly increase or decrease the risk of future movement
in the real or other currencies in which the Company conducts business, cannot
be predicted.
In addition, the Company generates revenue from export sales and revenue
from operations conducted outside the United States that may be denominated in
currencies other than the relevant functional currency. The Company hedges
certain revenues and costs to minimize the impact of changes in the exchange
rates of those currencies compared to the functional currencies. The Company
does not use derivative financial instruments for trading or speculative
purposes. Foreign currency losses aggregated $13 million in 1999 (including the
impact of Brazil's currency above) and $4 million in each of 1998 and 1997.
EQUITY INTEREST IN EQUISTAR
Through its 29.5% interest in Equistar, the Company is a partner in the
largest producer of ethylene and the second-largest producer of polyethylene in
North America, and a leading producer of performance polymers, oxygenated
chemicals, aromatics and specialty chemicals. Equistar commenced operations on
December 1, 1997, when the Company contributed substantially all of the assets
comprising its former polyethylene, alcohol and related products segment to
Equistar and Lyondell contributed substantially all the assets comprising its
petrochemical and polymer business segments to Equistar. On May 15, 1998, the
Company and Lyondell expanded Equistar with the addition of the ethylene,
propylene, ethylene oxide, ethylene glycol and other ethylene oxide derivatives
businesses of Occidental's chemicals subsidiary. On January 28, 2000, the
Company made an offer (the 'Offer') to Lyondell and Occidental to sell to them
the Company's 29.5% interest in Equistar pursuant to the 'right of first offer'
provisions of the Equistar partnership agreement. Both partners have notified
the Company that the Offer has been declined. Under Equistar's partnership
agreement, the Company has a 180-day period in which to sell its partnership
interest to a third party on terms at least as favorable to the Company as the
terms and conditions of the Offer.
Equistar's petrochemicals business unit manufactures and markets olefins,
oxygenated chemicals and aromatics. Equistar's olefins products are primarily
ethylene, propylene and butadiene. Olefins and their co-products are basic
building blocks used to create a wide variety of products. Ethylene is used to
produce polyethylene, ethylene oxide, ethylene dichloride and ethylbenzene.
Propylene is used to produce polypropylene and propylene oxide. Equistar's
oxygenated chemicals include ethylene oxide,
14
<PAGE>
ethylene glycol, ethanol and methyl tertiary butyl ether ('MTBE'). Oxygenated
chemicals have uses ranging from paint to cleaners to polyester fibers.
Equistar's aromatics are benzene and toluene.
Equistar's polymers business unit manufactures and markets polyolefins,
including high-density polyethylene, low-density polyethylene, linear
low-density polyethylene, polypropylene and performance polymers. Polyethylene
is used to produce packaging film, trash bags and lightweight high-strength
plastic bottles for milk, juices, shampoos and detergents. Polypropylene is used
in a variety of products including plastic caps and other closures, rigid
packaging and carpet facing and backing. Equistar's performance polymers include
enhanced grades of polyethylene such as wire and cable resins and polymeric
powders.
MANAGEMENT OF EQUISTAR; AGREEMENTS BETWEEN EQUISTAR, LYONDELL, OCCIDENTAL AND
THE COMPANY
Equistar is a Delaware limited partnership. Millennium Petrochemicals owns
its 29.5% 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. 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, Occidental and Millennium Petrochemicals include
changes in the scope of Equistar's business, approval of 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 an approved Strategic
Plan, additional investments by Equistar's partners not contemplated by an
approved Strategic Plan if the partners are required to contribute more than a
total of $100 million in a specific year or $300 million in a five-year period
(except in specific circumstances set forth under the Equistar Partnership
Agreement), borrowing money under certain circumstances, issuing or repurchasing
equity securities of Equistar, hiring and firing executive officers of Equistar
(other than Equistar's Chief Executive Officer), approving material compensation
and benefit plans for employees, commencing and settling material lawsuits,
selecting or changing accountants or accounting methods and merging or combining
with another business. All decisions of the Partnership Governance Committee
that do not require consent of the representatives of Lyondell, Occidental and
Millennium Petrochemicals (including approval of Equistar's annual budget, which
must be consistent with the most recently approved Strategic Plan, and selection
of Equistar's Chief Executive Officer, who must be reasonably acceptable to
Millennium Petrochemicals and Occidental) may be made by Lyondell's
representatives alone. The day-to-day operations of Equistar are managed by the
executive officers of Equistar. Dan F. Smith, the Chief Executive Officer of
Lyondell, also serves as the Chief Executive Officer of Equistar.
Millennium Petrochemicals 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 Millennium
Petrochemicals with respect to the transferred assets and requires
indemnification by Millennium Petrochemicals with respect to such assets. Such
agreement also provides for the assumption of certain liabilities by Equistar,
subject to specified limitations. Lyondell and affiliates of Occidental entered
into a similar agreements with Equistar with respect to the transfer of their
respective assets and Equistar's assumption of liabilities.
Equistar is party to a number of agreements with Millennium Petrochemicals
for the provision of services, utilities and materials from one party to the
other at common locations, principally La Porte, Texas, and Cincinnati, Ohio. In
general, the goods and services under these agreements, other than the purchase
of ethylene by Millennium Petrochemicals from Equistar and the purchase of VAM
by Equistar from Millennium Petrochemicals, are provided at cost. Millennium
Petrochemicals purchases its ethylene requirements at market-based prices from
Equistar pursuant to a long-term contract. Equistar purchases its VAM
requirements from Millennium Petrochemicals at a formula-based price pursuant to
a long-term contract. Lyondell and affiliates of Occidental also entered into
agreements with Equistar for the provision of services. The Company, Lyondell
and an affiliate of Occidental have
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agreed to guarantee the obligations of their respective subsidiaries under each
of the agreements discussed above, including the Equistar Partnership Agreement
and the asset-transfer agreements.
EQUISTAR'S PETROCHEMICAL BUSINESS UNIT
Overview: Equistar produces petrochemicals at twelve facilities located in
six states. The Chocolate Bayou, Corpus Christi and two Channelview, Texas,
olefin plants use petroleum liquids, including naphtha, condensates and gas oils
(collectively, 'Petroleum Liquids'), as raw materials to produce ethylene.
Assuming the co-products are recovered and sold, the cost of ethylene production
from Petroleum Liquids historically has been less than the cost of producing
ethylene from natural gas liquid 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 of specialty products such as dicyclopentadiene,
isoprene, resin oil, piperylenes, hydrogen and alkylate.
Equistar's Morris, Illinois; Clinton, Iowa; Lake Charles, Louisiana; and, La
Porte, Texas, plants are designed to use NGLs, which primarily produce ethylene
with some co-products, such as propylene. A comprehensive pipeline system
connects the Gulf Coast plants with major olefin customers. Raw materials are
sourced both internationally and domestically and are shipped via vessel and
pipeline.
Equistar produces ethylene oxide and its primary derivative, ethylene
glycol, at facilities located at Pasadena, Texas, and through a joint venture
located in Beaumont, Texas, that is 50% owned by Equistar and 50% owned by
DuPont. The Pasadena facility also produces other derivatives of ethylene oxide,
principally glycol ethers and ethanolamine. Ethylene glycol is used in
antifreeze and in polyester fibers, resins and films. Ethylene oxide and its
derivatives are used in many consumer and industrial end uses, such as
detergents and surfactants, brake fluids and polyurethane foams for seating and
bedding.
Equistar produces synthetic 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. 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.
The following table outlines Equistar's primary petrochemical products,
annual processing capacity and the primary uses for such products.
<TABLE>
<CAPTION>
ANNUAL
PRODUCT CAPACITY(A) PRIMARY USES
------- ----------- ------------
<S> <C> <C>
Olefins:
Ethylene................ 11.5 billion pounds Ethylene is used as a raw material to
manufacture polyethylene, ethylene oxide,
ethylene dichloride, VAM and ethyl benzene.
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.
Oxygenated Products:
Ethylene oxide.......... 1.1 billion pounds ethylene Ethylene oxide is used to produce
oxide; 400 million pounds as surfactants, industrial cleaners, cosmetics,
pure ethylene oxide emulsifiers, paint, heat transfer fluids and
ethylene glycol.
Ethylene glycol......... 1 billion pounds Ethylene glycol is used to produce polyester
fibers and film, PET resin, heat transfer
fluids, paint and automobile antifreeze.
</TABLE>
(table continued on next page)
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(table continued from previous page)
<TABLE>
<CAPTION>
ANNUAL
PRODUCT CAPACITY(A) PRIMARY USES
------- ----------- ------------
<S> <C> <C>
Ethylene oxide
derivatives........... 225 million pounds Ethylene oxide derivatives are used to
produce paint and coatings, polishes,
solvents and chemical intermediates.
MTBE.................... 284 million gallons (c) MTBE is an octane enhancer and clean fuel
additive in reformulated gasoline.
Aromatics:
Benzene................. 300 million gallons Benzene is used to produce styrene, phenol
and cyclohexane.
Toluene................. 66 million gallons Toluene is used as an octane enhancer in
gasoline, as a chemical raw material for
benzene production and as a core ingredient
in toluene diisocyanate, a compound in
urethane production.
Specialty Products:
Dicyclopentadiene
('DCPD').............. 130 million pounds DCPD is a component of inks, adhesives and
polyester resins.
Isoprene................ 145 million pounds Isoprene is a component of premium tires,
adhesive sealants and other rubber products.
Resin oil............... 150 million pounds Resin oil is used in the production of
hot-melt-adhesives, inks, sealants, paints
and varnishes.
Piperylenes............. 100 million pounds Piperylenes are used in the production of
adhesives, inks and sealants.
Hydrogen................ 44 billion cubic feet Hydrogen is used by refineries to remove
sulfur from process gas in heavy crude oil.
Alkylate................ 337 million gallons(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.
</TABLE>
- ---------
(a) Unless otherwise specified, represents annual processing capacity at
January 1, 2000, as determined by Equistar's management.
(b) Does not include refinery-grade material or production from the product
flexibility unit at Equistar's Channelview, Texas, 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 per year of capacity which is operated
for the benefit of LYONDELL-CITGO Refining LP, a joint venture owned by
Lyondell and CITGO Petroleum Corporation ('LCR').
(d) Includes up to 172 million gallons per year of capacity which is operated
for the benefit of LCR.
Raw Materials and Ethylene Purchases: The raw materials cost for olefin
production is generally the largest component of total cost for the
petrochemicals business. Olefin plants with the flexibility to consume a wide
range of raw materials are better able to maintain higher profitability during
periods of
17
<PAGE>
changing energy and petrochemical prices than olefin plants that are restricted
in their raw material processing capability, assuming the co-products are
recovered and sold. Equistar's Channelview, Texas, facility is uniquely flexible
in that it can process 100% Petroleum Liquids or up to 80% NGLs. The Corpus
Christi plant can process up to 70% Petroleum Liquids or up to 70% NGLs, subject
to availability of NGLs. The Chocolate Bayou facility processes 100% Petroleum
Liquids. Equistar's four other olefin facilities currently process only NGLs.
Equistar's La Porte, Texas, facility can process heavier NGLs such as butane and
natural gasoline.
The majority of Equistar's petroleum liquids requirements are purchased via
contractual arrangements from a variety of third-party domestic and foreign
sources. Equistar also purchases a minimal amount of petroleum liquids from
third-party domestic and foreign sources selling product via the spot market at
the market rate at time of purchase. Equistar purchases NGLs from a wide variety
of domestic sources. It obtains a portion of its olefin raw material
requirements from LCR at market-related prices.
In addition to producing its own ethylene, Equistar assumed certain
agreements of the Company on December 1, 1997, for the purchase of ethylene from
Gulf Coast producers at market prices. Ethylene purchase obligations under the
assumed contracts will decline at the end of 2000, although Equistar currently
intends to continue purchasing ethylene from third-party sources as needed to
meet its requirements.
Marketing and Sales: Ethylene produced by the La Porte, Morris and Clinton
facilities is generally consumed as raw material by the polymer operations at
those sites, except for the ethylene produced at La Porte and sold to Millennium
Petrochemicals for its VAM production. Ethylene and propylene produced at the
Channelview, Corpus Christi, Chocolate Bayou and Lake Charles olefin plants are
generally distributed by pipeline or via exchange agreements to Equistar's Gulf
Coast polymer and ethylene oxide facilities as well as to other third parties.
As of January 1, 2000, approximately 80% 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
olefin products to customers with whom its partners have had long-standing
relationships. In any one of the past three years, no single unrelated
third-party customer has accounted for more than ten percent of the
petrochemical business unit's revenue. 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.
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, part of which is owned and part 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 olefin 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 is shipped by railcar and its
derivatives are shipped by railcar, truck, isotank or ocean going vessel.
Butadiene, aromatics and other petrochemicals are distributed by pipeline,
railcar, truck, barge and ocean-going vessel.
EQUISTAR'S POLYMER BUSINESS UNIT
Overview: Through facilities located at ten plant sites in four states,
Equistar's polymer business unit 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 U.S.
18
<PAGE>
Equistar's Morris, Illinois, and Pasadena, Texas, facilities manufacture
polypropylene using propylene produced as a co-product of Equistar's ethylene
production and propylene purchased from third parties. Equistar produces
performance polymer products, which include enhanced grades of polyethylene and
polypropylene, at several of its polymer facilities. Equistar produces wire and
cable resins and compounds at Morris, Illinois; La Porte and Crockett, Texas;
Tuscola, Illinois; 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.
The following table outlines Equistar's polymer and performance polymer
products, its annual processing capacity and the primary uses for such products:
<TABLE>
<CAPTION>
ANNUAL PRIMARY
PRODUCT CAPACITY(A) USES
------- ----------- ----
<S> <C> <C>
High density
polyethylene
('HDPE')................... 3.6 billion pounds(b)(c) HDPE is used to manufacture grocery,
merchandise and trash bags; food containers for
items from frozen desserts to margarine; plastic
caps and closures; liners for boxes of cereal and
crackers; plastic drink cups and toys; dairy crates;
bread trays and pails for items from paint to
fresh fruits and vegetables; safety equipment
such as hard hats; house wrap for insulation;
bottles for household/industrial chemicals and
motor oil; milk/water/juice bottles; and, large
(rotomolded) tanks for storing liquids like
agricultural and lawn care chemicals.
Low density polyethylene
('LDPE').................. 1.7 billion pounds(c) LDPE is used to manufacture food packaging films;
plastic bottles for packaging food and personal care
items; dry cleaning bags; ice bags; pallet shrink
wrap; heavy-duty bags for mulch and potting soil;
boil-in-bag bags; coatings on flexible packaging
products, and, coatings on paper board such as milk
cartons. Specialized forms of LDPE are Ethyl Methyl
Acrylate, which provides adhesion in a variety of
applications; and, Ethylene Vinyl Acetate, which is
used in foamed sheets, bag-in-box bags, vacuum
cleaner hoses, medical tubing, clear sheet
protectors and flexible binders.
Linear low-density
polyethylene ('LLDPE').... 1.1 billion pounds LLDPE is used to manufacture garbage and 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.
</TABLE>
(table continued on next page)
19
<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
ANNUAL PRIMARY
PRODUCT CAPACITY(A) USES
------- ----------- ----
<S> <C> <C>
Wire and cable resins and
compounds................. (d) Wire and cable resins and compounds are used
to insulate copper and fiber optic wiring in
power, telecommunication, computer and
automobile applications.
Polymeric powders........... (d) Polymeric powders are component products in
structural and bulk molding compounds,
parting agents and filters for appliance,
automotive and plastics processing
industries.
Polymers for adhesives,
sealants and coatings..... (d) Polymers are components in hot-metal
adhesive formulations for case, carton and
beverage package sealing; glue sticks;
automotive sealants; carpet backing; and,
adhesive labels.
Reactive polyolefins........ (d) 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.......... (d) Liquid polyolefins are a diesel fuel
additive to inhibit freezing.
</TABLE>
- ---------
(a) Unless otherwise specified, represents Equistar's annual processing
capacity at January 1, 2000, as determined by Equistar's management.
(b) Includes a 480-million-pound HDPE resin expansion project at the Matagorda,
Texas, facility which commenced operation in October 1999. Also includes
the impact of idling a single gas-phase reactor at the Port Arthur, Texas,
facility effective March 31, 1999, which resulted in a decrease in capacity
of 300 million pounds in 1999. Additionally, includes the impact of
shutting down two slurry reactors at the La Porte, Texas, facility
effective April 30, 1999, resulting in a decrease of 100 million pounds in
1999.
(c) In the first quarter of 2000, Equistar idled two slurry reactors with a
total capacity of 300 million pounds per year of HDPE. Additionally, two
autoclave reactors with annual capacity of 60 million pounds of LDPE were
idled. All of this capacity is at the La Porte, Texas, facility.
(d) 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 olefin pipeline system or Equistar's own on-site production. The
polyethylene plants at Chocolate Bayou, La Porte, 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 polymer 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 may be changed upon mutual agreement between Equistar and
its customer.
Polymers are primarily distributed by railcar. Equistar owns or leases,
pursuant to long-term lease arrangements, approximately 9,500 railcars for use
in its polymer business. Equistar sells its polymer
20
<PAGE>
products in the U.S. primarily through its own sales organization. It generally
engages sales agents to market its polymer products in the rest of the world.
LA PORTE METHANOL COMPANY
The La Porte Methanol Company is a Delaware limited partnership that owns a
methanol plant and certain related facilities in La Porte, Texas. The
partnership is owned 85% by Millennium Petrochemicals and 15% by Linde. Linde is
also required to purchase, under certain circumstances, an additional 5%
interest in the partnership. A wholly-owned subsidiary of Millennium
Petrochemicals is the managing general partner of the partnership. A
wholly-owned subsidiary of Linde is responsible for operating the methanol
plant. The partnership commenced operations on January 18, 1999, when the
methanol plant and certain related facilities owned by Millennium Petrochemicals
were contributed to the partnership and Linde purchased its partnership interest
from Millennium Petrochemicals.
La Porte Methanol Company's methanol plant had an annual production capacity
of 207 million gallons as of December 31, 1999. The plant employs a process
supplied by a major engineering and construction firm to produce methanol.
Methanol is used primarily as a feedstock to produce acetic acid, MTBE and
formaldehyde. Millennium Petrochemicals uses approximately 80 million gallons of
La Porte Methanol Company's annual methanol production for the manufacture of
acetic acid at Millennium Petrochemicals' La Porte, Texas, acetic acid plant.
The methanol produced by La Porte Methanol Company which is not consumed by
Millennium Petrochemicals currently is marketed by Millennium Petrochemicals on
behalf of Millennium Petrochemicals and Linde. Methanol is sold under contract
as well as on a spot basis to large domestic customers. These contracts range in
term from one to ten years. The product is shipped by barge and pipeline.
The principal feedstocks for the production of methanol are carbon monoxide
and hydrogen, collectively termed synthesis gas or syngas. These raw materials
are largely supplied to La Porte Methanol Company from the syngas plant at La
Porte, Texas, owned by Millennium Petrochemicals and leased to Linde pursuant to
a long-term lease that commenced January 18, 1999. La Porte Methanol Company
also purchases relatively small volumes of hydrogen from time to time from other
parties.
La Porte Methanol Company's principal competitors in the methanol business
are Methanex Company, Saudi Basic Industries Corporation, Lyondell Methanol
Company, L.P., Borden, Inc. and Caribbean Petrochemical Marketing Company
Limited. The methanol produced by Lyondell Methanol Company, L.P. is marketed by
Equistar.
EMPLOYEES
At December 31, 1999, excluding employees of Equistar and La Porte Methanol
Company, the Company had approximately 4,440 full and part-time employees.
Approximately 2,790 of the Company's employees were engaged in manufacturing;
920 were engaged in sales, distribution and technology; 665 were engaged in
administrative, executive and support functions at the Company's operating
subsidiaries; and, 65 were engaged at the corporate level. Approximately 24% of
the Company's U.S. employees are represented by various labor unions, a
significant percentage of the Company's European and Brazilian employees are
represented by various worker associations, and fewer than 1% of the Company's
Australian employees are represented by labor unions. Of the Company's nine
collective bargaining agreements or other required labor negotiations, four must
be renegotiated on an annual basis, one was successfully renegotiated in the
first quarter of 2000 and now must be renegotiated again in 2004, three others
must be renegotiated in 2000 and one must be renegotiated in 2001. The annual
renegotiations are all outside the U.S. The Company believes that the relations
of its operating subsidiaries with employees and unions are generally good.
ENVIRONMENTAL MATTERS
The Company's businesses are subject to extensive federal, state, local and
foreign laws, regulations, rules and ordinances concerning, among other things,
emissions to the air, discharges and
21
<PAGE>
releases to land and water, the generation, handling, storage, transportation,
treatment and disposal of wastes and other materials and the remediation of
environmental pollution caused by releases of wastes and other materials
('Environmental Laws'). The operation of any chemical manufacturing plant and
the distribution of chemical products entail risks under Environmental Laws,
many of which provide for substantial fines and criminal sanctions for
violations. There can be no assurance that material costs or liabilities will
not be incurred with respect to such operations and activities. In particular,
the production of TiO2, TiCl4, VAM, methanol and certain other chemicals
involves the handling, manufacture or use of substances or compounds that may be
considered to be toxic or hazardous within the meaning of certain Environmental
Laws, and certain operations have the potential to cause environmental or other
damage. Potentially significant expenditures could be required in connection
with the repair or upgrade of facilities in order to meet existing or new
requirements under Environmental Laws as well as in connection with the
investigation and remediation of threatened or actual pollution.
The Company's costs and operating expenses relating to environmental matters
were approximately $45 million, $29 million and $57 million in 1999, 1998 and
1997, respectively. These amounts cover, among other things, the Company's cost
of complying with environmental regulations and permit conditions, as well as
managing and minimizing its waste. Capital expenditures for environmental
compliance and remediation were approximately $12 million, $8 million and $13
million in 1999, 1998 and 1997, respectively. In addition, capital expenditures
for projects in the normal course of operations and major expansions include
costs associated with the environmental impact of those projects which are
inseparable from the overall project cost. Capital expenditures and costs and
operating expenses relating to environmental matters for years after 1999 will
be subject to evolving regulatory requirements and will depend, to some extent,
on the amount of time required to obtain necessary permits and approvals.
From time to time, various agencies may serve cease and desist orders or
notices of violation on an operating unit or deny its applications for certain
licenses or permits, in each case alleging that the practices of the operating
unit are not consistent with the regulations or ordinances. In some cases, the
relevant operating unit may seek to meet with the agency to determine mutually
acceptable methods of modifying or eliminating the practice in question. The
Company believes that its operating units should be able to achieve compliance
with the applicable regulations and ordinances in a manner which should not have
a material adverse effect on the consolidated financial position, results of
operations or cash flows of the Company. In April 1997, the Illinois Attorney
General's Office filed a complaint seeking monetary sanctions for releases into
the environment at Millennium Petrochemicals' Morris, Illinois, plant (which was
contributed to Equistar on December 1, 1997) in alleged violation of state
regulations, and a civil penalty in excess of $100,000 could result.
Certain Company subsidiaries have been named as defendants, potentially
responsible parties ('PRPs'), or both, in a number of environmental proceedings
associated with waste disposal sites and facilities currently or previously
owned, operated or used by the Company's subsidiaries or their predecessors,
some of which disposal sites or facilities are on the Superfund National
Priorities List of the U.S. Environmental Protection Agency ('EPA') or similar
state lists. These proceedings seek cleanup costs, damages for personal injury
or property damage, or both. Certain of these proceedings involve claims for
substantial amounts, individually ranging in estimates from less than $300,000
to $45 million. The Company believes that the range of potential liability for
environmental and other legal contingencies, collectively, but which primarily
relates to environmental remediation activities and other environmental
proceedings, is between $144 million and $147 million and has accrued $147
million as of December 31, 1999. One potentially significant matter in which a
Company subsidiary is a PRP concerns alleged PCB contamination of a section of
the Kalamazoo River from Kalamazoo, Michigan, to Lake Michigan for which a
remedial investigation/feasibility study is currently being undertaken.
Potential remediation costs related to this matter that are reasonably probable
have been included in the collective range of potential liabilities referred to
above, as well as in the accrual for environmental matters on the Company's
balance sheet. The accrual also reflects the fact that certain Company
subsidiaries have contractual obligations to indemnify the purchasers of certain
discontinued operations against certain environmental and other liabilities. For
example, the Company agreed as part of the Demerger transactions to indemnify
Hanson and certain of its subsidiaries against certain of such contractual
indemnification obligations, and Millennium Petrochemicals agreed as part of the
December
22
<PAGE>
1, 1997, formation of Equistar to indemnify Equistar for certain liabilities
related to the assets contributed by Millennium Petrochemicals to Equistar.
Equistar agreed to indemnify Millennium Petrochemicals for certain of the
liabilities related to the assets contributed by Millennium Petrochemicals to
Equistar, subject to an aggregate limitation of $7 million, as specified in the
Asset Contribution Agreement between Equistar and Millennium Petrochemicals. No
assurance can be given that actual costs will not exceed accrued amounts for the
sites and indemnification obligations for which estimates have been made, and no
assurance can be given that costs will not be incurred with respect to sites and
indemnification obligations that are unknown or as to which no estimate
presently can be made.
The Company cannot predict whether future developments in laws and
regulations concerning environmental protection will affect its earnings or cash
flow in a materially adverse manner or whether its operating units will be
successful in meeting future demands of regulatory agencies in a manner which
will not materially adversely affect the consolidated financial position,
results of operations or cash flows of the Company.
PATENTS, TRADEMARKS AND LICENSES
The Company's subsidiaries have numerous U.S. and foreign patents,
registered trademarks and trade names, together with applications. Millennium
Petrochemicals has licensed to others certain of its process technology for the
manufacture of VAM. Millennium Petrochemicals is also licensed by others in the
application of certain processes and equipment designs. Millennium Inorganic
Chemicals generally does not license its proprietary processes to third parties
or hold licenses from others. While the patents and licenses of the Company's
subsidiaries provide certain competitive advantages and are considered
important, particularly with regard to processing technologies such as
Millennium Inorganic Chemicals' proprietary chloride-production process,
Millennium Petrochemicals' proprietary low-water acetic acid process and
Millennium Specialty Chemicals' proprietary terpene chemistry process, the
Company does not consider its business, as a whole, to be materially dependent
upon any one particular patent or license.
EXECUTIVE OFFICERS
The following individuals serve as executive officers of the Company:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
William M. Landuyt................... Chairman of the Board, President and Chief
Executive Officer
Robert E. Lee........................ President and Chief Executive Officer of
Millennium Inorganic Chemicals
Peter P. Hanik....................... President and Chief Executive Officer of
Millennium Petrochemicals
George H. Hempstead, III............. Senior Vice President -- Law and
Administration and Secretary
Richard A. Lamond.................... Vice President -- Human Resources
John E. Lushefski.................... Senior Vice President and Chief Financial
Officer
George W. Robbins.................... President and Chief Executive Officer of
Millennium Specialty Chemicals
C. William Carmean................... Vice President -- Legal
Marie S. Dreher...................... Vice President and Corporate Controller
A. Mickelson Foster.................. Vice President -- Corporate and Investor
Relations
James A. Lofredo..................... Vice President -- Corporate Development
Christine F. Wubbolding.............. Vice President and Treasurer
</TABLE>
Mr. Landuyt, 44, has served as Chairman of the Board and Chief Executive
Officer of the Company since the Demerger. He has served as the President of the
Company since June 1997. Mr. Landuyt was Director, President and Chief Executive
Officer of Hanson Industries (which managed the U.S.
23
<PAGE>
operations of Hanson until the Demerger) from June 1995 until the Demerger, a
Director of Hanson from 1992 until September 29, 1996, Finance Director of
Hanson from 1992 to May 1995, and Vice President and Chief Financial Officer of
Hanson Industries from 1988 to 1992. He joined Hanson Industries in 1983. He is
a member and a Co-Chairman of the Partnership Governance Committee of Equistar.
He is also a director of Bethlehem Steel Corporation.
Mr. Lee, 43, has served as President and Chief Executive Officer of
Millennium Inorganic Chemicals since June 1997. From the Demerger to June 1997,
he served as the President and Chief Operating Officer of the Company. He has
been a Director of the Company since the Demerger. Mr. Lee was a Director and
the Senior Vice President and Chief Operating Officer of Hanson Industries from
June 1995 until the Demerger, an Associate Director of Hanson from 1992 until
the Demerger, Vice President and Chief Financial Officer of Hanson Industries
from 1992 to June 1995, Vice President and Treasurer of Hanson Industries from
1990 to 1992, and Treasurer of Hanson Industries from 1987 to 1990. He joined
Hanson Industries in 1982.
Mr. Hanik, 53, has served as President and Chief Executive Officer of
Millennium Petrochemicals since March 1998. Prior to that time, he was Vice
President, Chemicals and Supply Chain, where he was responsible for the
Company's acetyls business. Mr. Hanik joined Millennium Petrochemicals in 1974
and has been associated with the plastic and chemical industries for over 30
years.
Mr. Hempstead, 56, has served as Senior Vice President -- Law and
Administration and Secretary of the Company since the Demerger. He was Senior
Vice President -- Law and Administration of Hanson Industries from June 1995
until the Demerger, an Associate Director of Hanson from 1990 until the
Demerger, and a Director of Hanson Industries from 1986 until the Demerger. Mr.
Hempstead was Senior Vice President and General Counsel of Hanson Industries
from 1993 to June 1995 and Vice President and General Counsel of Hanson
Industries from 1982 to 1993. He initially joined Hanson Industries in 1976.
Mr. Lamond, 53, has served as Vice President -- Human Resources of the
Company since November 1997. He served as Vice President -- Human Resources for
Millennium Inorganic Chemicals from March 1997 to November 1997 and as Vice
President -- Human Resources for Grove Worldwide, a subsidiary of Hanson, from
September 1994 to March 1997. He served as the Director -- Organization
Development and Compensation and Benefits of Millennium Inorganic Chemicals for
the balance of the past five years.
Mr. Lushefski, 44, has served as Senior Vice President and Chief Financial
Officer of the Company since the Demerger. He was a Director and the Senior Vice
President and Chief Financial Officer of Hanson Industries from June 1995 until
the Demerger. He was Vice President and Chief Financial Officer of Peabody
Holding Company, a Hanson subsidiary which held Hanson's coal mining operations,
from 1991 to May 1995 and Vice President and Controller of Hanson Industries
from 1990 to 1991. Mr. Lushefski initially joined Hanson Industries in 1985. Mr.
Lushefski is a member of the Equistar Partnership Governance Committee.
Mr. Robbins, 59, has served as President and Chief Executive Officer of
Millennium Specialty Chemicals since 1986. He was an Associate Director of
Hanson from May 1995 until the Demerger and a Director of Hanson Industries from
June 1995 until the Demerger. Mr. Robbins joined SCM Corporation in 1982 as Vice
President and General Manager of the SCM Organic Chemicals Division. He has been
associated with the plastic and chemical industries for over 30 years. He is a
member of the Partnership Governance Committee of Equistar.
Mr. Carmean, 47, has served as Vice President -- Legal of the Company since
December 1997. He was Associate General Counsel of the Company from the Demerger
to December 1997, Associate General Counsel of Hanson Industries from 1993 to
the Demerger, and Corporate Counsel of Quantum Chemical Corporation from 1990
until its acquisition by Hanson in 1993. Prior to 1990, he was Associate General
Counsel of Squibb Corporation.
Ms. Dreher, 41, has served as Corporate Controller of the Company since the
Demerger and was elected a Vice President and Corporated Controller in October
1996. She was Director of Planning and Budgeting of Hanson Industries from
November 1995 until the Demerger. She joined Hanson Industries in January 1994
as Assistant Corporate Controller with principal responsibilities focused on
tax, environmental and
24
<PAGE>
financial compliance matters. She is a certified public accountant. Prior to
joining Hanson Industries, she was a Senior Manager at Ernst & Young LLP.
Mr. Foster, 44, has served as Vice President -- Corporate and Investor
Relations of the Company since December 1999 and was Vice President -- Investor
Relations from the Demerger to December 1999. He was Vice President -- Investor
Relations of Hanson Industries from August 1992 until the Demerger. Mr. Foster
held investor relation positions with Atlantic Richfield and Pacific Enterprises
from 1983 to 1992. He is a past Chairman of the National Investor Relations
Institute.
Mr. Lofredo, 44, has served as the Company's Director of Corporate
Development since the Demerger and was elected a Vice President in October 1996.
He was Director of Corporate Development of Hanson Industries from March 1993
until the Demerger, with his principal responsibilities focused on acquisitions
and divestitures. He joined Hanson Industries in June 1992 as Assistant
Corporate Controller.
Ms. Wubbolding, 47, has served as Vice President and Treasurer of the
Company since the Demerger. She served as Vice President of Hanson Industries
from January 1996 until the Demerger and as Treasurer of Hanson Industries from
June 1994 until the Demerger. She joined Hanson Industries in 1976 and held
various financial positions, primarily in the treasury area, prior to 1994.
ITEM 2. PROPERTIES
Set forth below is a list of the Company's principal manufacturing
facilities (other than those of Equistar and La Porte Methanol Company), all of
which are owned. In addition, the Company owns a mineral sands mine in Mataraca,
Paraiba, Brazil, that supplies Millennium Inorganic Chemicals' TiO2 plant in
Brazil with titanium ore, and Millennium Petrochemicals owns a syngas plant in
La Porte, Texas, which it leases to Linde pursuant to a long-term lease. The
Company's operating subsidiaries also lease warehouses and offices, none of
which are material to the Company's business or operations. The Company believes
that its properties are well maintained and are in good operating condition.
<TABLE>
<CAPTION>
LOCATION PRODUCTS
-------- --------
<S> <C>
Millennium Inorganic Chemicals
Ashtabula, Ohio*......................... TiO2 and TiCl4
Baltimore, Maryland (Hawkins Point)*..... TiO2
Kemerton, Western Australia.............. TiO2
Le Havre, Normandy, France............... TiO2
Salvador, Bahia, Brazil.................. TiO2 TiO2
Stallingborough, U.K..................... TiO2
Thann, Alsace, France.................... TiO2, TiCl4, specialty TiO2 and
zirconium-based compounds
Millennium Petrochemicals
La Porte, Texas.......................... VAM and acetic acid
Millennium Specialty Chemicals
Baltimore, Maryland (St. Helena)......... Cadmium-based pigments and silica gel
Brunswick, Georgia....................... Fragrance and flavor chemicals
Jacksonville, Florida.................... Fragrance and flavor chemicals
</TABLE>
- ---------
* Millennium Inorganic Chemicals has two manufacturing plants at Ashtabula,
Ohio, both of which use the chloride process, and two manufacturing plants
located in Baltimore, Maryland (Hawkins Point), one of which uses the
chloride process for manufacturing TiO2 and the other of which uses the
sulfate process.
ITEM 3. LEGAL PROCEEDINGS
The Company and various Company subsidiaries are defendants in a number of
pending legal proceedings incidental to present and former operations. These
include several proceedings alleging injurious exposure of the plaintiffs to
various chemicals and other materials manufactured by the
25
<PAGE>
Company's current and former subsidiaries. Typically, such proceedings involve
large claims made by many plaintiffs against many defendants in the chemical
industry. The Company does not expect that the outcome of these proceedings,
either individually or in the aggregate, will have a material adverse effect
upon the consolidated financial position, results of operations or cash flows of
the Company.
In addition, together with other alleged past manufacturers of lead pigments
for use in paint and lead-based paint, a former subsidiary of a discontinued
operation has been named as a defendant or third-party defendant in various
legal proceedings alleging that it and other manufacturers are responsible for
personal injury and property damage allegedly associated with the use of lead
pigments in paint and lead-based paint. These proceedings consist of three cases
in the State of New York, one of which has been brought by the New York City
Housing Authority; a case brought by the State of Rhode Island; a case brought
by The City of St. Louis; a purported class action personal injury case filed on
behalf of all purportedly lead-poisoned children in Ohio; one case filed in
Baltimore, Maryland, on behalf of six plaintiffs alleging personal injury; one
purported class action for property damage brought in Baltimore, Maryland, on
behalf of homeowners who allegedly have lead-based paint in their homes; one
personal injury case filed in Milwaukee, Wisconsin; and, a case brought by the
County of Santa Clara, California, individually and as a purported class action.
There can be no assurance that additional litigation will not be filed. The
legal proceedings seek recovery under a variety of theories, including
negligence, failure to warn, breach of warranty, conspiracy, market share
liability, fraud, misrepresentation and nuisance. The plaintiffs in these
actions generally seek to impose on the defendants responsibility for alleged
damages and health concerns associated with the use of lead pigments in paint
and lead-based paints. These cases are in various pre-trial stages. The trial
court in the Brenner case cited below had ruled that a market share theory of
recovery was applicable to this type of lead case, which is the first time any
court made such a determination. The New York Appellate Division unanimously
reversed the trial court's decision, ruling that the market share theory is not
applicable to this type of lead case. The Company is vigorously defending all
litigation related to the use of lead. Although liability, if any, that may
result is not reasonably capable of estimation, the Company currently believes
that, based on information currently available, the disposition of such claims
in the aggregate should not have a material adverse effect on the financial
position, results of operations or cash flows of the Company. The pending legal
proceedings referred to above are as follows: Brenner et al. v. American
Cyanamid Company, et al., commenced in the Supreme Court of the State of New
York on November 9, 1993; The City of New York et al. v. Lead Industries
Association, Inc., et al., commenced in the Supreme Court of the State of
New York on June 8, 1989; Kayla Sabater et al. v. Lead Industries Association,
Inc., et al., commenced in the Supreme Court of New York, Bronx County, on
November 25, 1998; Jackson, et al. v. The Glidden Co., et al., commenced in the
Court of Common Pleas, Cuyahoga County, Ohio, on August 12, 1992; State of
Rhode Island v. Lead Industries Association, Inc., et al., commenced in the
Superior Court of Providence, Rhode Island, on October 12, 1999; City of
St. Louis v. Lead Industries Association, Inc., et al., commenced in the
St. Louis, Missouri, Circuit Court on January 25, 2000; Steven Thomas, et al. v.
Lead Industries Association, Inc., et al., commenced in the Milwaukee County,
Wisconsin, Circuit Court on September 10, 1999; Reginald Smith, et al. v. Lead
Industries Association, Inc., et al. and Earl Cofield et al. v. Lead Industires
Association, Inc., et al., both commenced in the Baltimore City, Maryland,
Circuit Court on September 29, 1999; and, The County of Santa Clara, a political
subdivision of the State of California, individually and on behalf of all those
similarly situated v. Atlantic Richfield et al., commenced in the Santa Clara
County, California, Superior Court on March 23, 2000.
In addition, various laws and administrative regulations have, from time to
time, been enacted or proposed at the federal, state and local levels and may be
proposed in the future that seek to (i) impose various obligations on present
and former manufacturers of lead pigment and lead paint with respect to asserted
health concerns associated with the use of such products, and (ii) effectively
overturn court decisions in which the Company's former subsidiary and other
defendants have been successful. No legislation or regulations have been adopted
to date which are expected to have a material adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
For information concerning the Company's environmental proceedings, see
'Environmental Matters' in Item 1 of this Annual Report on Form 10-K, which is
incorporated by reference herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
26
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The data regarding the Company's Common Stock, Dividends and Shareholders
contained under the caption 'Common Stock and Dividend Data' on page 43 of the
Annual Report to Shareholders are incorporated into this Annual Report on
Form 10-K by reference.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data and quarterly financial data of the Company
contained on pages 41 and 42 of the Annual Report to Shareholders are
incorporated into this Annual Report on Form 10-K by reference. Such selected
financial data were derived from the Consolidated Financial Statements of the
Company, and should be read in conjunction with such financial statements,
including the Notes thereto, and 'Management's Discussion and Analysis of
Financial Condition and Results of Operations,' which are incorporated by
reference into this Annual Report on Form 10-K from the Annual Report to
Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' contained on pages 18 through 25 of the Annual Report
to Shareholders is incorporated into this Annual Report on Form 10-K by
reference. Such information should be read in conjunction with the Company's
Consolidated Financial Statements, including the Notes thereto. In connection
with the forward-looking statements which appear in 'Management's Discussion and
Analysis of Financial Condition and Results of Operations,' the 'Cautionary
Statements' which appear immediately after the Table of Contents in this Annual
Report on Form 10-K should be reviewed carefully.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The discussions under the captions 'Foreign Currency Matters,' 'Financial
Instruments and other Market Related Risks' and 'Euro Conversion' in the
Company's 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and the discussion under the caption 'Off Balance Sheet
Risk' in Note 7 to the Company's Consolidated Financial Statements, each of
which is included in the Annual Report to Shareholders, are incorporated into
this Annual Report on Form 10-K by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, including the Notes
thereto, and the report of PricewaterhouseCoopers LLP thereon, contained on
pages 25 through 40 of the Annual Report to Shareholders are incorporated into
this Annual Report on Form 10-K by reference.
In addition, the Supplemental Financial Information and Financial Statement
Schedule listed in Item 14(a)(1)(ii) and (2) of this Annual Report on
Form 10-K, including the report of PricewaterhouseCoopers LLP thereon, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the caption 'Executive Officers' in Item 1 of
this Annual Report on Form 10-K is incorporated herein by reference.
27
<PAGE>
The information to be included under the captions 'Election of Directors'
and 'Other Matters -- Section 16(a) Beneficial Ownership Reporting Compliance'
in the Company's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A of the Exchange Act in connection with the Annual
Meeting of the Company's Shareholders to be held on May 12, 2000 (the 'Proxy
Statement') is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information to be included under the captions 'Corporate
Governance -- Directors' Remuneration and Attendance at Meetings' and 'Executive
Compensation' in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information to be included under the caption 'Ownership of Common Stock'
in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information about loans between the Company and certain of its executive
officers to be included under the caption 'Executive Agreements and Other
Relationships' in the Proxy Statement is incorporated herein by reference. The
amount of the loans disclosed therein is the largest aggregate amount of
indebtedness outstanding between the Company and each such executive officer
during the period January 1, 1999 and the date of this Annual Report on
Form 10-K, as well as the amount outstanding on the date hereof.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. (i) The Consolidated Financial Statements of the Company, including
the Notes thereto, and the report of PricewaterhouseCoopers LLP
thereon, contained on pages 25 through 40 of the Annual Report to
Shareholders, consist of the following:
<TABLE>
<CAPTION>
PAGE OF
THE COMPANY'S
ANNUAL REPORT
-------------
<S> <C>
-- Report of PricewaterhouseCoopers LLP.................... 25
-- Consolidated Balance Sheets -- December 31, 1999 and
1998.................................................... 26
-- Consolidated Statements of Operations -- Years Ended
December 31, 1999, 1998 and 1997........................ 27
-- Consolidated Statements of Cash Flows -- Years Ended
December 31, 1999, 1998 and 1997........................ 28
-- Consolidated Statements of Changes in Shareholders'
Equity -- Years Ended December 31, 1999, 1998 and 1997.. 29
-- Notes to Consolidated Financial Statements.............. 30-40
</TABLE>
With the exception of the information listed directly above and the
information specifically incorporated by reference into Items 1, 5, 6,
7, 7A and 8 of this Annual Report on Form 10-K, the Annual Report to
Shareholders is not to be deemed filed as a part of this Annual Report
on Form 10-K.
(ii) Supplemental Financial Information.
The Supplemental Financial Information relating to the Company,
Millennium America Inc. ('Millennium America') and Equistar consist of
the following:
28
<PAGE>
<TABLE>
<CAPTION>
PAGE OF
THIS REPORT
-----------
<S> <C>
Report of PricewaterhouseCoopers LLP........................ F-1
Supplemental Financial Information of the Company:
Millennium America Consolidated Balance Sheets --
December 31, 1999 and 1998............................ F-2
Millennium America Consolidated Statements of
Operations -- Years Ended December 31, 1999, 1998 and
1997.................................................. F-3
Financial Statements of Equistar:
Report of PricewaterhouseCoopers LLP.................... F-4
Consolidated Balance Sheets -- December 31, 1999 and
1998.................................................. F-5
Consolidated Statements of Income -- Years ended
December 31, 1999 and 1998 and the Period from
December 1, 1997 to December 31, 1997................. F-6
Consolidated Statements of Partners' Capital -- Years
ended December 31, 1999 and 1998 and the period from
December 1, 1997 to December 31, 1997................. F-7
Consolidated Statements of Cash Flows -- Years ended
December 31, 1999 and 1998 and the period from
December 1, 1997 to December 31, 1997................. F-8
Notes to Financial Statements........................... F-9 to F-24
</TABLE>
2. Financial Statement Schedule.
Financial Statement Schedule II -- Valuation and Qualifying Accounts,
located on page S-1 of this Annual Report on Form 10-K, should be read
in conjunction with the Financial Statements included in Item 8 of
this Annual Report on Form 10-K. Schedules, other than Schedule II,
are omitted because of the absence of the conditions under which they
are required or because the information called for is included in the
Consolidated Financial Statements of the Company or the Notes thereto.
3. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
3.1 -- Amended and Restated Certificate of Incorporation of the Company (Filed as
Exhibit 3.1 to the Company's Registration Statement on Form 10 (File No.
1-12091) (the 'Form 10'))*
3.2 -- By-laws of the Company (Filed as Exhibit 3.2 to the Form 10)*
4.1(a) -- Form of Indenture, dated as of November 27, 1996, among Millennium America
Inc. (formerly Hanson America Inc.) ('Millennium America'), the Company and
The Bank of New York, as Trustee, in respect of the 7% Senior Notes due
November 15, 2006 and the 7.625% Senior Debentures due November 15, 2026
(Filed as Exhibit 4.1 to the Registration Statement of the Company and
Millennium America on Form S-1 (Registration No. 333-15975) (the
'Form S-1'))*
4.1(b) -- First Supplemental Indenture dated as of November 21, 1997 among
Millennium America, the Company and The Bank of New York, as Trustee (Filed
as Exhibit 4.1(b) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 (the '1997 Form 10-K'))*
10.1 -- Form of Post-Demerger Stock Purchase Agreement, dated as of September 30,
1996, between Hanson and MHC Inc. (including related form of
Indemnification Agreement and Tax Sharing and Indemnification Agreement)
(Filed as Exhibit 10.6 to the Form 10)*
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
10.2 -- Demerger Agreement, dated as of September 30, 1996,
between Hanson, Millennium Overseas Holdings Ltd.
(formerly Hanson Overseas Holdings Ltd.) and the Company
(Filed as Exhibit 10.7 to the Form 10)*
10.3 -- Form of Indemnification Agreement, dated as of
September 30, 1996, between Hanson and the Company (Filed
as Exhibit 10.8 to the Form 10)*
10.4(a) -- Form of Tax Sharing and Indemnification Agreement, dated
as of September 30, 1996, between Hanson, Millennium
Overseas Holdings Ltd., Millennium America Holdings Inc.
(formerly HM Anglo American Ltd.), Hanson North America
Inc. and the Company (Filed as Exhibit 10.9(a) to the
Form 10)*
10.4(b) -- Deed of Tax Covenant, dated as of September 30, 1996,
between Hanson, Millennium Overseas Holdings Ltd.,
Millennium Inorganic Chemicals Limited (formerly SCM
Chemicals Limited), SCMC Holdings B.V. (formerly Hanson
SCMC B.V.), Millennium Inorganic Chemicals Ltd. (formerly
SCM Chemicals Ltd.), and the Company (the 'Deed of Tax
Covenant') (Filed as Exhibit 10.9(b) to the Form 10)*
10.4(c) -- Amendment to the Deed of Tax Covenant dated January 28,
1997 (Filed as Exhibit 10.9(c) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996
(the '1996 Form 10-K'))*
10.5(a) -- Credit Agreement ('Credit Agreement'), dated as of
July 26, 1996, among Millennium America, the Company, as
Guarantor, the borrowing subsidiaries party thereto, the
lenders party thereto, The Chase Manhattan Bank, as
Documentation Agent, and Bank of America National Trust
and Savings Association, as Administration Agent (Filed as
Exhibit 10.14 to the Form 10)*
10.5(b) -- Amendment to the Credit Agreement dated as of
December 18, 1996 (Filed as Exhibit 10.14(b) to the 1996
Form 10-K)*
10.5(c) -- Second Amendment to the Credit Agreement dated as of
October 20, 1997 (Filed as Exhibit 10.14(b) to the 1996
Form 10-K)*
10.5(d) -- Third Amendment to the Credit Agreement dated as of
December 31, 1999**
10.6 -- Form of Agreement, dated as of July 24, 1998, between
Millennium America Holdings Inc. and William M. Landuyt;
Robert E. Lee; George H. Hempstead, III; Richard A.
Lamond; and, John E. Lushefski (Filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (the 'September 30, 1998
Form 10-Q'))*'D'
10.7 -- Form of Agreement, dated as of July 24, 1998, between
Millennium Specialty Chemicals Inc. and George W. Robbins.
This form of agreement is identical to the agreements
between the Company's operating subsidiaries and certain
officers of such subsidiaries who are not executive
officers of the Company. (Filed as Exhibit 10.2 to the
September 30, 1998 Form 10-Q)*'D'
10.8 -- Form of Agreement, dated as of July 24, 1998, between
Millennium Petrochemicals Inc. and each of Peter P. Hanik
and Charles F. Daly (Filed as Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (the '1998 Form 10-K'))*'D'
10.9 -- Form of Change-in-Control Agreement, dated as of
July 24, 1998, between Millennium America Holdings Inc.
and each of C. William Carmean, Marie S. Dreher, A.
Mickelson Foster, James A. Lofredo and Christine F.
Wubbolding (Filed as Exhibit 10.22 to the Form 10-Q)*'D'
10.10 -- Form of Change-in-Control Agreement between each of the
Company's operating subsidiaries and certain officers of
such subsidiaries who are not executive officers of the
Company (Filed as Exhibit 10.19 to the 1998
Form 10-K)*'D'
10.11(a) -- Millennium Chemicals Inc. Annual Performance Incentive
Plan (Filed as Exhibit 10.23 to the Form 10)*'D'
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
10.11(b) -- Amendment Number 1 dated January 20, 1997, to the
Millennium Chemicals Inc. Annual Performance Plan. (Filed
as Exhibit 10.23(b) to the 1996 Form 10-K)*'D'
10.11(c) -- Amendment Number 2 dated January 23, 1998, to the
Millennium Chemicals Inc. Annual Performance Incentive
Plan (Filed as Exhibit 10.23(c) to the 1997
Form 10-K)*'D'
10.11(d) -- Amendment Number 3 dated January 22, 1999, to the
Millennium Chemicals Inc. Annual Performance Incentive
Plan (Filed as Exhibit 10.20(d) to the 1998
Form 10-K)*'D'
10.12(a) -- Millennium Chemicals Inc. 1996 Long Term Incentive Plan
(Filed as Exhibit 10.24 to the Form 10)*'D'
10.12(b) -- Termination Amendment dated as of October 23, 1997, to
the Millennium Chemicals Inc. 1996 Long Term Incentive
Plan (Filed as Exhibit 10.24(b) to the 1997
Form 10-K)*'D'
10.12(c) -- Amendment dated January 23, 1998 to the Millennium
Chemicals Inc. 1996 Long Term Incentive Plan (Filed as
Exhibit 10.24(c) to the 1997 Form 10-K)*'D'
10.12(d) -- Amendment dated January 22, 1999 to the Millennium
Chemicals Inc. 1996 Long Term Incentive Plan (Filed as
Exhibit 10.21(d) to the 1998 Form 10-K)*'D'
10.13 -- Millennium Chemicals Inc. Executive Long-Term Incentive
Plan, as amended by the Termination Amendment thereto,
dated as of October 23, 1997, and as further amended by
amendments thereto dated January 23, 1998 and January 22,
1999 (Filed as Exhibit 10.22 to the 1998 Form 10-K)*'D'
10.14(a) -- Millennium Chemicals Inc. Long Term Stock Incentive Plan
(Filed as Exhibit 10.25 to the Form 10)*'D'
10.14(b) -- Amendment Number 1 to the Millennium Chemicals Inc. Long
Term Stock Incentive Plan (Filed as Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997)*'D'
10.14(c) -- Amendment dated July 24, 1997 to the Millennium Chemicals
Inc. Long Term Stock Incentive Plan (Filed as Exhibit
10.25(c) to the 1997 Form 10-K)*'D'
10.14(d) -- Amendments dated January 23, 1998 and December 10, 1998
to the Millennium Chemicals Inc. Long Term Stock Incentive
Plan (Filed as Exhibit 10.23(d) to the 1998
Form 10-K)*'D'
10.15 -- Millennium Chemicals Inc. Supplemental Executive
Retirement Plan (Filed as Exhibit 10.26 to the
Form 10)*'D'
10.16 -- Millennium Petrochemicals Supplemental Executive
Retirement Plan (Filed as Exhibit 10.27 to the
Form 10)*'D'
10.17 -- Millennium Inorganic Chemicals Supplemental Executive
Retirement Plan (Filed as Exhibit 10.28 to the
Form 10)*'D'
10.18 -- Millennium Specialty Chemicals Supplemental Executive
Retirement Plan (Filed as Exhibit 10.29 to the
Form 10)*'D'
10.19(a) -- Millennium Chemicals Inc. Salary and Bonus Deferral Plan
(Filed as Exhibit 10.30 to the 1996 Form 10-K)*'D'
10.19(b) -- Amendment Number 1 dated January 23, 1998, to the
Millennium Chemicals Inc. Salary and Bonus Deferral Plan
(Filed as Exhibit 10.30(b) to the 1997 Form 10-K)*'D'
10.19(c) -- Amendment Number 2 dated January 22, 1999, to the
Millennium Chemicals Inc. Salary and Bonus Deferral Plan
(Filed as Exhibit 10.28(c) to the 1998 Form 10-K)*'D'
10.20 -- Millennium Chemicals Inc. Supplemental Savings and
Investment Plan (Filed as Exhibit 10.29 to the 1998
Form 10-K)*'D'
10.21(a) -- Master Transaction Agreement between the Company and
Lyondell (Filed as an Exhibit to the Company's Current
Report on Form 8-K dated July 25, 1997)*
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
10.21(b) -- First Amendment to Master Transaction Agreement between
Lyondell and the Company (Filed as an Exhibit to the
Company's Current Report on Form 8-K dated October 17,
1997)*
10.22(a) -- Amended and Restated Partnership Agreement of Equistar,
dated May 15, 1998 (Filed as Exhibit 10.36 to the 1998
Form 10-K)*
10.22(b) -- First Amendment to the Limited Partnership Agreement,
dated as of June 30, 1998**
10.22(c) -- Second Amendment to the Limited Partnership Agreement
dated as of February 16, 1999**
10.23(a) -- Asset Contribution Agreement ('Millennium Asset
Contribution Agreement') among Millennium Petrochemicals,
Millennium Petrochemicals LP LLC and Equistar (Filed as an
Exhibit to the Company's Current Report on Form 8-K dated
December 10, 1997)*
10.23(b) -- First Amendment to the Millennium Asset Contribution
Agreement dated as of May 15, 1998**
10.24(a) -- Asset Contribution Agreement ('Lyondell Asset
Contribution Agreement') among Lyondell, Lyondell
Petrochemicals L.P. Inc. and Equistar (Filed as an Exhibit
to the Company's Current Report on Form 8-K dated
December 10, 1997)*
10.24(b) -- First Amendment to Lyondell Asset Contribution Agreement
dated as of May 15, 1998**
10.25(a) -- Amended and Restated Parent Agreement among Lyondell, the
Company, Occidental, Oxy CH Corporation, Occidental
Chemical Corporation, and Equistar, dated as of May 15,
1998 (Filed as Exhibit 10.37 to the 1998 Form 10-K)*
10.25(b) -- First Amendment to Amended and Restated Parent Agreement,
dated as of June 30, 1998**
11.1 -- Statement re: computation of per share earnings**
13. -- Information incorporated by reference from the Annual
Report to Shareholders for the Year Ended December 31,
1999**
21.1 -- Subsidiaries of the Company**
23.1 -- Consent of PricewaterhouseCoopers LLP**
23.2 -- Consent of PricewaterhouseCoopers LLP**
27.1 -- Financial Data Schedule**
99.1 -- Form of Letter Agreement, dated July 3, 1996, between
Hanson and U.K. Inland Revenue (Filed as Exhibit 99.2 to
the Form 10)*
In addition, the Company hereby agrees to furnish to the
SEC, upon request, a copy of any instrument not listed
above which defines the rights of the holders of long-term
debt of the Company and its subsidiaries.
</TABLE>
- ---------
* Incorporated by reference
** Filed herewith
'D' Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c).
(B) REPORTS ON FORM 8-K None.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MILLENNIUM CHEMICALS INC.
By: /s/ WILLIAM M. LANDUYT
..................................
WILLIAM M. LANDUYT
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities indicated, and on the date set
forth above.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/S/ WILLIAM M. LANDUYT Chairman of the Board, President, Chief Executive
......................................... Officer and Director (principal executive officer)
(WILLIAM M. LANDUYT)
/S/ ROBERT E. LEE President and Chief Executive Officer of Millennium
......................................... Inorganic Chemicals and Director
(ROBERT E. LEE)
/S/ JOHN E. LUSHEFSKI Senior Vice President and Chief Financial Officer
......................................... (principal financial officer)
(JOHN E. LUSHEFSKI)
/S/ LORD BAKER Director
.........................................
(LORD BAKER)
/S/ WORLEY H. CLARK, JR. Director
.........................................
(WORLEY H. CLARK, JR.)
/S/ MARTIN D. GINSBURG Director
.........................................
(MARTIN D. GINSBURG)
/S/ LORD GLENARTHUR Director
.........................................
(LORD GLENARTHUR)
/S/ DAVID J. P. MEACHIN Director
.........................................
(DAVID J. P. MEACHIN)
/S/ MARTIN G. TAYLOR Director
.........................................
(MARTIN G. TAYLOR)
/S/ MARIE S. DREHER Vice President and Corporate Controller
......................................... (principal accounting officer)
(MARIE S. DREHER)
</TABLE>
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
SUPPLEMENTAL FINANCIAL INFORMATION AND
THE FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
MILLENNIUM CHEMICALS INC.
Our audits of the consolidated financial statements referred to in our
report dated January 31, 2000, appearing on page 25 of the 1999 Annual Report to
Shareholders of Millennium Chemicals Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the Supplemental Financial Information relating
to Millennium America Inc. and the Financial Statement Schedule listed in Item
14(a) of this Annual Report on Form 10-K. In our opinion, such Supplemental
Financial Information relating to Millennium America Inc. and the Financial
Statement Schedule present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements.
PRICEWATERHOUSECOOPERS LLP
Florham Park, NJ
January 31, 2000
F-1
<PAGE>
MILLENNIUM CHEMICALS INC.
SUPPLEMENTAL FINANCIAL INFORMATION
Millennium America Inc., a wholly owned indirect subsidiary of Millennium
Chemicals Inc. (the 'Company'), is a holding company for all of the Company's
operating subsidiaries other than its operations in the United Kingdom, France,
Brazil and Australia. Millennium America Inc. is the issuer of the 7% Senior
Notes due November 15, 2006, and the 7.625% Senior Debentures due November 15,
2026, and is the principal borrower under the Company's Revolving Credit
Agreement. The Senior Notes and Senior Debentures, as well as the borrowings
under the Revolving Credit Agreement, are guaranteed by the Company.
Accordingly, the Consolidated Balance Sheets and Consolidated Statements of
Operations are provided for Millennium America Inc. as supplemental financial
information of the Company.
MILLENNIUM AMERICA INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 34 $ 30
Trade receivables, net.................................. 141 136
Inventories............................................. 189 142
Other current assets.................................... 66 230
------ ------
Total current assets................................ 430 538
Property, plant and equipment, net.......................... 517 481
Investment in Equistar...................................... 800 1,519
Other assets................................................ 201 167
Due from parent and affiliates.............................. 519 491
Goodwill.................................................... 404 412
------ ------
Total assets........................................ $2,871 $3,608
------ ------
------ ------
LIABILITIES AND INVESTED CAPITAL
Current liabilities:
Notes payable........................................... $ 39 $ 9
Current maturities of long-term debt.................... 15 2
Trade accounts payable.................................. 64 55
Income taxes payable.................................... 89 1
Accrued expenses and other liabilities.................. 118 144
------ ------
Total current liabilities........................... 325 211
Non-current liabilities:
Long-term debt.......................................... 1,010 1,013
Deferred income taxes................................... -- 274
Due to parent and affiliates............................ 323 713
Other liabilities....................................... 662 345
------ ------
Total liabilities................................... 2,320 2,556
------ ------
Commitments and contingencies (Note 11 to the Consolidated
Financial Statements of the Company contained in the
Company's 1999 Annual Report to Shareholders)
Invested capital............................................ 551 1,052
------ ------
Total liabilities and invested capital.............. $2,871 $3,608
------ ------
------ ------
</TABLE>
F-2
<PAGE>
MILLENNIUM AMERICA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net Sales................................................... $ 920 $ 992 $ 2,714
Operating costs and expenses:
Cost of products sold................................... 628 727 1,915
Depreciation and amortization........................... 56 54 184
Selling, development and administrative expense......... 116 120 193
----- ------ -------
Operating income.................................... 120 91 422
Interest expense............................................ (67) (69) (128)
Interest income (primarily from a related party in 1999 and
1998)..................................................... 31 24 7
Equity in (loss) earnings of Equistar....................... (19) 40 18
Other expense, net.......................................... 27 29 19
Loss in value of Equistar investment........................ (639) -- --
----- ------ -------
(Loss) income from continuing operations before income
taxes..................................................... (547) 115 338
Benefit (provision) for income taxes........................ 203 (12) (152)
----- ------ -------
(Loss) income from continuing operations.................... (344) 103 186
Income (loss) from discontinued operations (net of income
taxes of $10, $1 and ($2))................................ 38 1 (3)
----- ------ -------
Net (loss) income........................................... $(306) $ 104 $ 183
----- ------ -------
----- ------ -------
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Governance Committee
of EQUISTAR CHEMICALS, LP:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of partners' capital and of cash flows
present fairly, in all material respects, the financial position of Equistar
Chemicals, LP (the 'Partnership') and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1999 and for the period from
December 1, 1997 (inception) to December 31, 1997, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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 18, 2000
F-4
<PAGE>
EQUISTAR CHEMICALS, LP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 108 $ 66
Accounts receivable:
Trade, net.......................................... 491 345
Related parties..................................... 209 142
Inventories............................................. 520 549
Prepaid expenses and other current assets............... 32 25
------ ------
Total current assets................................ 1,360 1,127
Property, plant and equipment, net.......................... 3,926 4,075
Investment in PD Glycol..................................... 52 55
Goodwill, net............................................... 1,119 1,151
Deferred charges and other assets........................... 279 257
------ ------
Total assets........................................ $6,736 $6,665
------ ------
------ ------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade............................................... $ 457 $ 311
Related parties..................................... 35 26
Payables to partners.................................... -- 6
Current maturities of long-term debt.................... 92 150
Other accrued liabilities............................... 200 142
------ ------
Total current liabilities........................... 784 635
Obligations under capital leases............................ -- 205
Long-term debt, less current maturities..................... 2,169 1,865
Other liabilities and deferred credits...................... 121 75
Commitments and contingencies
Partners' capital........................................... 3,662 3,885
------ ------
Total liabilities and partners' capital............. $6,736 $6,665
------ ------
------ ------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED PERIOD FROM
DECEMBER 31 DECEMBER 1, 1997
------------------- (INCEPTION) TO
1999 1998 DECEMBER 31, 1997
---- ---- -----------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Sales and other operating revenues:
Unrelated parties.................................... $4,352 $3,826 $334
Related parties...................................... 1,084 537 31
------ ------ ----
5,436 4,363 365
------ ------ ----
Operating costs and expenses:
Cost of sales:
Unrelated parties................................ 3,915 3,276 256
Related parties.................................. 929 491 30
Selling, general and administrative expenses......... 259 229 16
Research and development expense..................... 42 40 3
Amortization of goodwill and other intangibles....... 33 31 3
Restructuring and other unusual charges.............. 96 14 42
------ ------ ----
5,274 4,081 350
------ ------ ----
Operating income..................................... 162 282 15
Interest expense......................................... (182) (156) (10)
Interest income.......................................... 6 17 2
Other income, net........................................ 46 -- --
------ ------ ----
Net income and comprehensive income...................... $ 32 $ 143 $ 7
------ ------ ----
------ ------ ----
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
LYONDELL MILLENNIUM OCCIDENTAL TOTAL
-------- ---------- ---------- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Balance at 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 at 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 at December 31, 1998......................... 613 1,621 1,651 3,885
Net income....................................... 14 9 9 32
Distributions to partners........................ 105 (75) 75 (255)
------ ------ ------ ------
Balance at December 31, 1999......................... $ 522 $1,555 $1,585 $3,662
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR PERIOD FROM
ENDED DECEMBER 1, 1997
DECEMBER 31 (INCEPTION) TO
--------------- DECEMBER 31,
1999 1998 1997
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 32 $ 143 $ 7
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 300 268 19
Equity in losses of investment in PD Glycol......... 4 3 --
Net (gain) loss on disposition of assets............ 35 8 --
(Increase) decrease in accounts receivable.......... (213) 105 (100)
Decrease (increase) in receivables from partners.... -- 150 (101)
Decrease (increase) in inventories.................. 41 133 (5)
Increase in accounts payable........................ 152 98 188
(Decrease) increase in payables to partners......... (6) (66) 54
Increase in other accrued liabilities............... 49 64 48
Net change in other working capital accounts........ (5) 2 (15)
Other............................................... (21) (62) 7
----- ------- -----
Net cash provided by operating activities....... 368 846 102
----- ------- -----
Cash flows from investing activities:
Expenditures for property, plant and equipment.......... (157) (200) (12)
Proceeds from sales of assets........................... 75 3 --
Contributions and advances to affiliates................ (24) (15) --
----- ------- -----
Net cash used in investing activities........... (106) (212) (12)
----- ------- -----
Cash flows from financing activities:
Proceeds from issuance of long-term debt................ 993 757 50
Payment of debt issuance costs.......................... (6) -- --
Repayments of long-term debt............................ (747) (290) --
Repayments of obligations under capital leases.......... (205) -- --
Distributions to partners............................... (255) (1,421) (100)
Proceeds from Lyondell note repayment................... -- 345 --
Cash contributions from partners........................ -- -- 1
----- ------- -----
Net cash used in financing activities........... (220) (609) (49)
----- ------- -----
Increase in cash and cash equivalents....................... 42 25 41
Cash and cash equivalents at beginning of period............ 66 41 --
----- ------- -----
Cash and cash equivalents at end of period.................. $ 108 $ 66 $ 41
----- ------- -----
----- ------- -----
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS
1. FORMATION OF EQUISTAR AND OPERATIONS
Pursuant to a partnership agreement ('Partnership Agreement'), Lyondell
Chemical Company ('Lyondell') and Millennium Chemicals Inc. ('Millennium')
formed Equistar Chemicals, LP ('Equistar' or 'Partnership'), a Delaware limited
partnership, which commenced operations on December 1, 1997. From December 1,
1997 to May 15, 1998, Equistar was owned 57% by Lyondell and 43% by Millennium.
Lyondell owns its interest in Equistar through two wholly owned subsidiaries,
Lyondell Petrochemical G.P. Inc. and Lyondell Petrochemical L.P. Inc. ('Lyondell
LP'). Millennium also owns its interest in Equistar through two wholly owned
subsidiaries, Millennium Petrochemicals GP LLC and Millennium Petrochemicals LP
LLC ('Millennium LP').
On May 15, 1998, Equistar was expanded with the contribution of certain
assets from Occidental Petroleum Corporation ('Occidental') (see Note 3). These
assets included the ethylene, propylene and ethylene oxide ('EO') and EO
derivatives businesses and certain pipeline assets held by Oxy Petrochemicals
Inc. ('Oxy Petrochemicals'), a former subsidiary of Occidental, a 50% interest
in a joint venture ('PD Glycol') between PDG Chemical Inc. and E.I. DuPont de
Nemours and Company, and a lease to Equistar of the Lake Charles, Louisiana
olefins plant and related pipelines held by Occidental Chemical Corporation
('Occidental Chemical') (collectively, 'Occidental Contributed Business').
Occidental Chemical and PDG Chemical Inc. are both wholly owned, indirect
subsidiaries of Occidental. The Occidental Contributed Business included olefins
plants at Corpus Christi and Chocolate Bayou, Texas, EO/ethylene glycol ('EG')
and EG derivatives businesses located at Bayport, Texas, Occidental's 50%
ownership of PD Glycol which operates EO/EG plants at Beaumont, Texas, 950 miles
of owned and leased ethylene/propylene pipelines, and the lease to Equistar of
the Lake Charles, Louisiana olefins plant and related pipelines.
In exchange for the Occidental Contributed Business, two subsidiaries of
Occidental were admitted as limited partners and a third subsidiary was admitted
as a general partner in Equistar for an aggregate partnership interest of 29.5%.
In addition, Equistar assumed approximately $205 million of Occidental
indebtedness and Equistar issued a promissory note to an Occidental subsidiary
in the amount of $420 million, which was subsequently paid in cash in
June 1998. In connection with the contribution of the Occidental Contributed
Business and the reduction of Millennium's and Lyondell's ownership interests in
the Partnership, Equistar also issued a promissory note to Millennium LP in the
amount of $75 million, which was subsequently paid in June 1998. These payments
are included in 'Distributions to partners' in the accompanying Statements of
Partners' Capital and of Cash Flows. The consideration paid for the Occidental
Contributed Business was determined based upon arms-length negotiations between
Lyondell, Millennium and Occidental. In connection with the transaction,
Equistar and Occidental also entered into a long-term agreement for Equistar to
supply the ethylene requirements for Occidental Chemical's U.S. manufacturing
plants.
Upon completion of this transaction, Equistar is now owned 41% by Lyondell,
29.5% by Millennium and 29.5% by Occidental, all through wholly owned
subsidiaries.
Equistar owns and operates the petrochemicals and polymers businesses
contributed by Lyondell, Millennium and Occidental ('Contributed Businesses'),
which consist of 17 manufacturing facilities 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-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, and polymeric
powders. The
F-9
<PAGE>
concentrates and compounds business, which was part of performance polymers
products, was sold effective April 30, 1999 (see Note 18).
The Partnership Agreement provides that Equistar is governed by a
Partnership Governance Committee consisting of nine representatives, three
appointed by each partner. Most of the significant decisions of the Partnership
Governance Committee require unanimous consent, including approval of the
Partnership's Strategic Plan and annual updates thereof.
Pursuant to the Partnership Agreement, net income is allocated among the
partners on a pro rata basis based upon their percentage ownership of Equistar.
Distributions are made to the partners based upon their percentage ownership of
Equistar. Additional cash contributions required by the Partnership will also be
based upon the partners' percentage ownership of Equistar.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The consolidated financial statements include the
accounts of Equistar and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition -- Revenue from product sales is recognized upon
delivery of products to the customer.
Cash and Cash Equivalents -- Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. Equistar's policy
is to invest cash in conservative, highly rated instruments and limit the amount
of credit exposure to any one institution. Equistar performs periodic
evaluations of the relative credit standing of these financial institutions
which are considered in Equistar's investment strategy.
Equistar has no requirements for compensating balances in a specific amount
at a specific point in time. The Partnership does maintain compensating balances
for some of its banking services and products. Such balances are maintained on
an average basis and are solely at Equistar's discretion. As a result, none of
Equistar's cash is restricted.
Accounts Receivable -- Equistar sells its products primarily to companies in
the petrochemicals and polymers industries. Equistar performs ongoing credit
evaluations of its customers' financial condition and, in certain circumstances,
requires letters of credit from them. The Partnership's allowance for doubtful
accounts, which is reflected in the accompanying Consolidated Balance Sheets as
a reduction of accounts receivable, totaled $6 million and $3 million at
December 31, 1999 and 1998, respectively.
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, Equistar removes the cost
of the assets and the related accumulated depreciation from the accounts and
reflects any resulting gains or losses in the Consolidated Statements of Income.
Equistar's policy is to capitalize interest cost incurred on debt during the
construction of major projects exceeding one year.
Turnaround Maintenance and Repair Expenses -- Cost of major repairs and
maintenance incurred in connection with substantial overhauls or maintenance
turnarounds of production units at Equistar's manufacturing facilities are
deferred and amortized on a straight-line basis until the next planned
turnaround, generally five to seven years. These costs are maintenance, repair
and replacement costs that are necessary to maintain, extend and improve the
operating capacity and efficiency rates of the production units. Equistar
amortized $25 million, $20 million and $2 million of deferred turnaround
maintenance and repair costs for the years ended December 31, 1999 and 1998 and
during the period from December 1, 1997 (inception) to December 31, 1997,
respectively.
Deferred Software Costs -- Costs to purchase and develop software for
internal use are deferred and amortized on a straight-line basis over a range of
3 to 10 years. Equistar amortized $12 million, $6
F-10
<PAGE>
million and less than $1 million of deferred software costs for the years ended
December 31, 1999 and 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.
Accumulated amortization of goodwill was $199 million and $166 million at
December 31, 1999 and 1998, respectively.
Investment in PD Glycol -- Equistar holds a 50% interest in a joint venture
with E.I. DuPont de Nemours and Company that owns an ethylene glycol facility in
Beaumont, Texas. This investment was contributed by Occidental in 1998. The
investment in PD Glycol is accounted for using the equity method of accounting.
At December 31, 1999 and 1998, Equistar's underlying equity in the net assets of
PD Glycol exceeded the cost of the investment by $8 million. The excess is being
accreted into income on a straight-line basis over a period of 25 years.
Environmental Remediation Costs -- Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Estimates have not
been discounted to present value. Environmental remediation costs are expensed
or capitalized in accordance with generally accepted accounting principles.
Exchanges -- Inventory exchange transactions, which involve homogeneous
commodities in the same line of business and do not involve the payment or
receipt of cash, are not accounted for as purchases and sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance with
the normal LIFO valuation policy.
Income Taxes -- The Partnership is not subject to federal income taxes as
income is reportable directly by the individual partners; therefore, there is no
provision for income taxes in the accompanying financial statements.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Comprehensive Income -- Equistar had no items of other comprehensive income
during the years ended December 31, 1999 and 1998 and during the period from
December 1, 1997 (inception) to December 31, 1997.
Long-Lived Asset Impairment -- In accordance with SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, Equistar reviews its long-lived assets, including goodwill, for impairment
on an exception basis whenever events or changes in circumstances indicate a
potential loss in utility. Impairment losses are recognized in 'Restructuring
and other unusual charges' in the Consolidated Statements of Income.
Reclassifications -- Certain previously reported amounts have been restated
to conform to classifications adopted in 1999.
3. OCCIDENTAL CONTRIBUTED BUSINESS
On May 15, 1998, Equistar was expanded with the contribution of certain
assets from Occidental. The acquisition was accounted for using the purchase
method of accounting and, accordingly, the results of operations for these
assets are included in the accompanying Consolidated Statements of Income
prospectively from May 15, 1998. Occidental contributed assets and liabilities
to Equistar with a net fair value of $2.1 billion in exchange for a 29.5%
interest in the Partnership. Equistar also issued a promissory note to an
Occidental subsidiary in the amount of $420 million, which was subsequently paid
in cash in June 1998. The fair value was allocated to the assets contributed and
liabilities assumed based upon the estimated fair values of such assets and
liabilities at the date of the contribution. The fair value was determined based
upon a combination of internal valuations performed by Lyondell, Millennium
F-11
<PAGE>
and Occidental using the income approach. The fair value of the assets
contributed and liabilities assumed by the Partnership on May 15, 1998 is as
follows:
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS)
<S> <C>
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
------
------
</TABLE>
The unaudited pro forma combined historical results of Equistar as if the
Occidental Contributed Business had been contributed on January 1, 1998 is as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998
-----------------
(MILLIONS OF DOLLARS)
<S> <C>
Sales and other operating revenues................. $4,869
Restructuring and other unusual charges............ 14
Operating income................................... 320
Net income......................................... 154
</TABLE>
The unaudited pro forma data presented above are not necessarily indicative
of the results of operations of Equistar that would have occurred had such
transaction actually been consummated as of January 1, 1998, nor are they
necessarily indicative of future results.
4. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized as follows for the periods
presented:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED PERIOD FROM
DECEMBER 31, DECEMBER 1, 1997
--------------------- (INCEPTION) TO
1999 1998 DECEMBER 31, 1997
---- ---- -----------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Cash paid for interest.................................. $146 $154 $--
Noncash investing and financing activities:
Inventory transfer from PD Glycol................... $ 24 $ 15 $--
Noncash adjustments to contributed capital.......... -- 3 --
Other............................................... 2 -- --
</TABLE>
F-12
<PAGE>
Historical cost of assets contributed and liabilities assumed by the
Partnership in December 1997 (inception):
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS)
<S> <C>
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
------
------
</TABLE>
5. FINANCIAL INSTRUMENTS
Equistar does not buy or sell, or hold or issue financial instruments for
speculative trading purposes.
Beginning October 1999, Equistar entered into over-the-counter 'derivatives'
and price collar agreements for crude oil with Occidental Energy Marketing,
Inc., a subsidiary of Occidental, to help manage its exposure to commodity price
risk with respect to crude-oil related raw materials purchases. At December 31,
1999, 'derivatives' and collar agreements covering 2.4 million and 1.5 million
barrels, respectively, and maturing in January 2000, were outstanding. Both the
carrying value and fair market value of these derivative instruments at
December 31, 1999 represented an asset of $7 million and was based on quoted
market prices. Unrealized gains and losses on 'derivatives' and price collars
are deferred until realized at which time they are reflected in the cost of the
purchased raw material.
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
Equistar for debt with terms and average maturities similar to Equistar's debt
portfolio, the fair value of Equistar's long-term debt, including amounts due
within one year, was approximately $2.2 billion and $2.3 billion at
December 31, 1999 and 1998, respectively.
Equistar had issued letters of credit totaling $6 million and $3 million at
December 31, 1999 and 1998, respectively.
6. RELATED PARTY TRANSACTIONS
Product Transactions with Occidental Chemical -- Equistar and Occidental
Chemical entered into a Sales Agreement, dated May 15, 1998 ('Ethylene Sales
Agreement'). Under the terms of the Ethylene Sales Agreement, Occidental
Chemical agreed to purchase an annual minimum amount of ethylene from Equistar
equal to 100% 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. Equistar'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,
Equistar's maximum supply obligation in any calendar year under the Ethylene
Sales Agreement may be 'phased down' as set forth in the agreement, provided
that no phase down may occur prior to January 1, 2009. In accordance with the
phase down provisions of the agreement, the annual minimum requirements set
forth in the agreement must be phased down over at least a five year period so
that the annual required minimum cannot decline to zero prior to December 31,
2013 unless certain specified force majeure events occur.
F-13
<PAGE>
The Ethylene Sales Agreement provides for an ethylene sales price based on
market prices. In addition to ethylene, Equistar sells methanol, ethers, and
glycols to Occidental Chemical. During the year ended December 31, 1999 and the
period from May 15, 1998 to December 31, 1998, Equistar sold Occidental Chemical
$435 million and $171 million, respectively, of product, primarily under the
Ethylene Sales Agreement.
Equistar also purchases various products from Occidental Chemical. During
the year ended December 31, 1999 and the period from May 15, 1998 to
December 31, 1998, purchases from Occidental Chemical totaled $2 million and $4
million, respectively.
Product Transactions with Oxy Vinyls, LP -- Occidental Chemical owns 76% of
Oxy Vinyls, LP ('Oxy Vinyls'), a joint venture company formed with an unrelated
party effective May 1, 1999. Ethylene sales to Oxy Vinyls totaled $93 million
for the period from May 1, 1999 to December 31, 1999 and were based upon market
prices.
Product Transactions with Millennium -- Equistar sells ethylene to
Millennium at market-related prices pursuant to an agreement entered into in
connection with the formation of Equistar. Under this agreement, Millennium is
required to purchase 100% of its ethylene requirements for its LaPorte, Texas
facility (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, 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. Equistar
sold Millennium $54 million, $41 million and $4 million of ethylene in 1999,
1998 and December 1997, respectively.
Equistar purchases vinyl acetate monomer ('VAM') feedstock from Millennium
at market-related prices pursuant to an agreement entered into in connection
with the formation of Equistar. Under this agreement, Equistar is required to
purchase 100% of its VAM feedstock requirements for its LaPorte, Texas, Clinton,
Illinois, and Morris, Illinois plants (estimated to be 48 to 55 million pounds
per year), up to a maximum of 60 million pounds per year ('Annual Maximum') for
the production of ethylene vinyl acetate products at those locations. If
Equistar fails to purchase at least 42 million pounds of VAM in any calendar
year, Millennium has the right to reduce the Annual Maximum quantity by as much
as the total purchase deficiency for one or more successive years. In order to
reduce the Annual Maximum quantity, Millennium must notify Equistar within at
least 30 days prior to restricting the VAM purchases provided that the notice is
not later than 45 days after the year of the purchase deficiency. The initial
term of the contract expires December 31, 2000 and thereafter, renews annually.
Either party may terminate on one year's notice of termination. The initial term
will extend until December 31, 2002 if Millennium elects to increase the amount
of ethylene purchased under the Ethylene Sales Agreement. During the years
ending December 31, 1999 and 1998 and for the period December 1, 1997
(inception) to December 31, 1997, purchases from Millennium, primarily for vinyl
acetate monomer, were $12 million, $14 million, and $2 million, respectively.
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
Equistar. Accordingly, certain refinery products are sold to Equistar as
feedstocks, and certain olefins by-products are sold to LCR for processing into
gasoline. Sales of product to LCR were $250 million, $223 million and $26
million and purchases from LCR were $190 million, $131 million and $10 million
for the years ended December 31, 1999 and 1998 and for the period from
December 1, 1997 (inception) to December 31, 1997, respectively. Equistar also
assumed certain processing arrangements as well as storage obligations between
Lyondell and LCR and provides certain marketing and information processing
services for LCR. Aggregate charges under these various service agreements of
$13 million, $15 million and $1 million were made to LCR by Equistar for the
years ended December 31, 1999 and 1998 and for the period from December 1, 1997
(inception) to December 31, 1997, respectively. All of the agreements between
LCR and Equistar are on terms generally representative of prevailing market
prices.
F-14
<PAGE>
Product Transactions with 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 $242 million and $89 million for
the year ended December 31, 1999 and for the period from August 1, 1998 to
December 31, 1998, respectively. Purchases from Lyondell, primarily for normal
butane, totaled $6 million and $2 million for the year ended December 31, 1999
and for the period from August 1, 1998 to December 31, 1998, respectively.
Product transactions between Equistar and Lyondell are based upon market prices.
Transactions with LMC -- Lyondell Methanol Company, L.P. ('LMC') sells all
of its products to Equistar. For the years ending December 31, 1999 and 1998 and
during the period from December 1, 1997 (inception) to December 31, 1997,
purchases from LMC were $95 million, $103 million and $15 million, respectively.
Equistar sells natural gas to LMC at prices generally representative of its
cost. Purchases by LMC of natural gas feedstock from Equistar totaled $46
million, $44 million and $4 million for the years ended December 31, 1999 and
1998 and during the period from December 1, 1997 (inception) to December 31,
1997, respectively. Equistar provides operating and other services for LMC under
the terms of existing agreements that were assumed by Equistar from Lyondell,
including the lease to LMC by Equistar of the real property on which its
methanol plant is located. Pursuant to the terms of those agreements, LMC pays
Equistar a management fee and reimburses certain expenses of Equistar at cost.
Management fees charged by Equistar to LMC totaled $6 million during each of the
years ending December 31, 1999 and 1998 and less than $1 million during the
period from December 1, 1997 (inception) to December 31, 1997.
Shared Services Agreement with Lyondell -- Lyondell provides certain
corporate, general and administrative services to Equistar, including tax,
treasury, risk management and other services pursuant to a shared services
agreement. During the years ended December 31, 1999 and 1998, Lyondell charged
Equistar $9 million and $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, Equistar
provides certain general and administrative services to Lyondell, such as
health, safety and environmental services, materials management services, human
resource services, information services and legal services. During the year
ended December 31, 1999, Equistar charged Lyondell $8 million for these
services. During the year ended December 31, 1998 and for the period December 1,
1997 (inception) to December 31, 1997, Equistar charged Lyondell less than $1
million for these services.
Shared Services and Shared-Site Agreements with Millennium -- Equistar and
Millennium have entered into a variety of operating, manufacturing and technical
service agreements related to the business of Equistar and the businesses
retained by Millennium Petrochemicals. These agreements include the provision by
Equistar to Millennium Petrochemicals of materials management, certain
utilities, administrative office space, and health and safety services. During
the years ended December 31, 1999 and 1998, Equistar charged Millennium
Petrochemicals $3 million and $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 Equistar of certain operational
services, including barge dock access. During each of the years ended
December 31, 1999 and 1998 and during the period December 1, 1997 (inception) to
December 31, 1997, Millennium Petrochemicals charged Equistar less than $1
million for these services.
Operating Agreement with Occidental Chemical -- On May 15, 1998, Occidental
Chemical and Equistar entered into an Operating Agreement ('Operating
Agreement') whereby Occidental Chemical agreed to operate and maintain the
Occidental Contributed Business and to cause third-parties to continue to
provide equipment, products and commodities to those businesses upon
substantially the same terms and conditions as provided prior to the transfer.
The Operating Agreement terminated on June 1, 1998. During the term of the
Operating Agreement, Equistar paid Occidental Chemical an administrative fee of
$1 million.
Transition Services Agreement with Occidental Chemical -- On June 1, 1998,
Occidental Chemical and Equistar entered into a Transition Services Agreement.
Under the terms of the Transition Services Agreement, Occidental Chemical agreed
to provide Equistar certain services in connection with the
F-15
<PAGE>
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. Predominantly all services under the Transition Services Agreement
ceased in June 1999 in accordance with the terms of the agreement. Health,
safety, and environmental services were extended until December 31, 1999 as
permitted by the Transition Services Agreement. During the year ended
December 31, 1999 and the period from June 1, 1998 to December 31, 1998,
Equistar expensed $2 million and $6 million, respectively, in connection with
services provided pursuant to the Transition Service Agreement.
Loans to Millennium and Occidental -- In connection with Occidental's
admission into Equistar in May 1998, Equistar executed promissory notes to
Millennium and Occidental in the principal amounts of $75 million and $420
million, respectively. Each of the notes provided for the annual accrual of
interest at a rate equal to LIBOR plus 0.6%. These notes were paid in full in
June 1998. Interest expense incurred on these notes during 1998 was $3 million.
Note Receivable from Lyondell LP -- Upon formation of the Partnership,
Lyondell LP contributed capital to Equistar in the form of a $345 million
promissory note ('Lyondell Note'). The Lyondell Note bore interest at LIBOR plus
a market spread. The note was repaid in full by Lyondell in July 1998. Interest
income on the Lyondell Note totaled $13 million and $2 million during 1998 and
during the period from December 1, 1997 (inception) to December 31, 1997,
respectively.
7. ACCOUNTS RECEIVABLE
In December 1998, Equistar entered into a purchase agreement with an
independent issuer of receivables-backed commercial paper. Under the terms of
the agreement, Equistar agreed to sell on an ongoing basis and without recourse,
designated accounts receivable. To maintain the balance of the accounts
receivable sold, Equistar is obligated to sell new receivables as existing
receivables are collected. The agreement was renewed through December 2000 on
predominantly the same terms.
At December 31, 1998 and 1999, Equistar's gross accounts receivable that had
been sold to the purchasers aggregated $130 million. Increases and decreases in
the amount have been reported as operating cash flows in the Consolidated
Statements of Cash Flows. Costs related to the sale are included in 'Selling,
general and administrative expenses' in the Consolidated Statements of Income.
8. INVENTORIES
Inventories at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C>
Finished goods............................................ $278 $301
Work-in-process........................................... 10 11
Raw materials............................................. 137 149
Materials and supplies.................................... 95 88
---- ----
Total inventories..................................... $520 $549
---- ----
---- ----
</TABLE>
The excess of the current cost of inventories over book value was
approximately $109 million at December 31, 1999.
F-16
<PAGE>
9. PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, at cost, and the related
accumulated depreciation at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C>
Land................................................... $ 78 478
Manufacturing facilities and equipment................. 5,656 5,349
Manufacturing equipment acquired under capital
leases............................................... -- 236
Construction in progress............................... 134 189
------ ------
Total property, plant and equipment................ 5,868 5,852
Less accumulated depreciation.......................... 1,942 1,777
------ ------
Property, plant and equipment, net................. $3,926 $4,075
------ ------
------ ------
</TABLE>
Depreciation expense for the years ending December 31, 1999 and 1998 and for
the period from December 1, 1997 (inception) to December 31, 1997 was $221
million, $200 million and $15 million, respectively. At December 31, 1998, $10
million of the accumulated depreciation reported in the accompanying
Consolidated 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, primarily
manufacturing facilities and equipment, were increased from a range of 5 to 25
years to a range of 5 to 30 years. The change was made to more accurately
reflect the estimated periods during which such assets will remain in service,
based upon Equistar's actual experience with those assets. This change was
accounted for as a change in accounting estimate and resulted in a $33 million
decrease in depreciation expense for 1998.
10. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets at December 31, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C>
Deferred turnaround costs, net............................ $ 74 $ 84
Deferred software costs, net.............................. 76 70
Deferred pension asset.................................... 32 30
Other..................................................... 97 73
---- ----
Total deferred charges and other assets............... $279 $257
---- ----
---- ----
</TABLE>
11. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C>
Accrued property taxes.................................... $ 68 $ 76
Accrued payroll costs..................................... 68 44
Accrued interest.......................................... 50 18
Other..................................................... 14 4
---- ----
Total other accrued liabilities....................... $200 $142
---- ----
---- ----
</TABLE>
12. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
In February 1999, Equistar and Equistar Funding Corporation ('Equistar
Funding') co-issued $900 million of debt securities. Equistar Funding, a wholly
owned subsidiary of Equistar, is a Delaware corporation formed for the sole
purpose of facilitating the financing activities of Equistar. Equistar is
jointly and severally liable with Equistar Funding on the outstanding notes and
new notes. The debt
F-17
<PAGE>
securities include $300 million of 8.50% Notes, which will mature on
February 15, 2004, and $600 million of 8.75% Notes, which will mature on
February 15, 2009. Equistar used the net proceeds from this offering (i) to
repay the $205 million outstanding under a capitalized lease obligation relating
to Equistar's Corpus Christi facility, (ii) to repay the outstanding balance
under the $500 million credit agreement, after which the $500 million credit
agreement was terminated, (iii) to repay the outstanding $150 million, 10.00%
Notes due in June 1999, and (iv) to the extent of the remaining net proceeds, to
reduce outstanding borrowing under the five-year credit facility and for
Partnership working capital purposes.
Equistar has a five-year, $1.25 billion credit facility with a group of
banks expiring November 2002. Borrowing under the facility bears interest at
either the Federal Funds rate plus 1/2 of 1%, LIBOR plus 1/2 of 1%, a fixed rate
offered by one of the sponsoring banks or interest rates that are based on a
competitive auction feature wherein the interest rate can be established by
competitive bids submitted by the sponsoring banks, depending upon the type of
borrowing made under the facility. Borrowing under the facility had a weighted
average interest rate of 6.0% and 5.8% at December 31, 1999 and 1998,
respectively. Millennium America Inc., a subsidiary of Millennium, provided
limited guarantees with respect to the payment of principal and interest on a
total of $750 million principal amount of indebtedness under the $1.25 billion
revolving credit facility. However, the lenders may not proceed against
Millennium America Inc. until they have exhausted their remedies against
Equistar. The guarantee will remain in effect indefinitely, but at any time
after December 31, 2004, Millennium America Inc. may elect to terminate the
guarantee if certain conditions are met including financial ratios and
covenants. In addition, Millennium America Inc. may elect to terminate the
guarantee if Millennium Petrochemicals Inc. sells its interests in Millennium GP
and Millennium LP or if those entities sell their interests in Equistar,
provided certain conditions are met including financial ratios and covenants.
The terminated $500 million credit agreement was entered into on June 12,
1998. Borrowing under the agreement bore interest at either the Federal Funds
rate plus 1/2 of 1%, LIBOR plus 0.625%, a fixed rate, offered by one of the
sponsoring banks or interest rates that were based on a competitive auction
feature. At December 31, 1998, the weighted average interest rate for borrowing
under the subsequently terminated $500 million credit agreement was 6.1%.
The credit facility is available for working capital and general Partnership
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.
Long-term debt at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C>
Bank credit facilities:
5-year term credit facility........................ $ 800 $1,150
$500 million credit agreement...................... -- 152
Other debt obligations:
Medium-term notes (due 2000-2005).................. 163 163
10.00% Notes due 1999.............................. -- 150
9.125% Notes due 2002.............................. 100 100
8.50% Notes due 2004............................... 300 --
6.50% Notes due 2006............................... 150 150
8.75% Notes due 2009............................... 598 --
7.55% Debentures due 2026.......................... 150 150
------ ------
Total long-term debt............................... 2,261 2,015
Less current maturities................................ 92 150
------ ------
Long-term debt, net................................ 2,169 1,865
Capital lease obligations (5.89% due 2000)............. -- 205
------ ------
Total long-term debt and lease obligations......... $2,169 $2,070
------ ------
------ ------
</TABLE>
F-18
<PAGE>
Aggregate maturities of long-term debt during the five years subsequent to
December 31, 1999 are as follows: 2000-$92 million; 2001-$90 million; 2002-$851
million; 2003-$29 million; 2004-$300 million. A subsidiary of Millennium has
guaranteed $750 million of the credit facility. Lyondell remains an obligor on
the medium-term notes, the 9.125% Notes, the 6.5% Notes and the 7.55%
Debentures, all of which total $563 million. Occidental and Equistar are parties
to an agreement with respect to the 8.75% Notes due 2009 pursuant to which
Occidental has agreed, under certain limited circumstances, to contribute to
Equistar up to $420 million. The 8.75% Notes have a face amount of $600 million
and are shown net of unamortized discount.
The medium-term notes mature at various dates from 2000 to 2005 and had a
weighted average interest rate of 10.0% and 9.9% at December 31, 1999 and 1998,
respectively.
13. RESTRUCTURING AND OTHER UNUSUAL CHARGES
During the fourth quarter 1999, Equistar recorded a charge of $96 million
associated with decisions to shut down certain polymer reactors and to
consolidate certain administrative functions between Lyondell and Equistar.
The decision to shut down the reactors was based on their high production cost,
current market conditions in the polyethylene industry and the flexibility to
utilize more efficient reactors to meet customer requirements. Accordingly,
Equistar recorded a charge of $72 million to adjust the asset carrying values.
The remaining $24 million of the total charge represents severance and other
employee-related costs for approximately 500 employee positions that are being
eliminated. The eliminated positions, primarily administrative functions,
resulted from opportunities to share such services between Lyondell and Equistar
and, to a lesser extent, positions associated with the shut down polymer
reactors. Through December 31, 1999, no employees had been terminated for were
any payments made. Equistar expects that severance payments will take place
in the first quarter of 2000.
During 1997 and 1998, Equistar incurred restructuring charges related to the
initial merger and integration of the businesses contributed by Lyondell and
Millennium upon formation of the Partnership. Equistar recorded $42 million of
these costs in December 1997. These charges included severance and other
employee related termination costs of $21 million related to a workforce
reduction, which were substantially paid in 1998. The workforce reduction
included approximately 430 employees, primarily in duplicate corporate overhead
functions. All of these 430 employees were terminated in 1998. Additionally,
these restructuring charges included employee relocation costs of $6 million and
various other charges of $7 million, all of which were recorded and paid as
incurred during 1997. In 1997, Equistar also recorded and paid as incurred $8
million of transaction closing costs.
In 1998, Equistar recorded and paid, as incurred, an additional $12 million
in restructuring charges related to the initial merger and integration of
Equistar. These costs included costs associated with the consolidation of
operations and facilities of $11 million and other miscellaneous charges of $1
million. The restructuring actions related to the initial merger and integration
were substantially completed in 1998 and there were no other significant changes
to Equistar's original estimate of costs that were accrued as of December 31,
1997. Equistar also incurred restructuring charges of $2 million related to the
merger and integration of the Occidental Contributed Business into the
Partnership. These charges were recorded and paid as incurred during 1998. There
were no amounts accrued as of December 31, 1998 related to the initial merger
and integration of Equistar or the merger and integration of the Occidental
Contributed Business. The restructuring actions related to the merger and
integration of the Occidental Contributed Business into Equistar were
substantially completed as of December 31, 1998. All restructuring charges were
included in the Unallocated segment. (See Note 17)
F-19
<PAGE>
14. LEASE COMMITMENTS AND PURCHASE OBLIGATIONS
At December 31, 1999, future minimum lease payments relating to
noncancelable operating leases with lease terms in excess of one year were as
follows:
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS)
<S> <C>
2000................................................ $ 94
2001................................................ 72
2002................................................ 58
2003................................................ 50
2004................................................ 44
Thereafter.......................................... 482
----
Total minimum lease payments.................... $800
----
----
</TABLE>
Operating lease net rental expense was $112 million and $110 million for the
years ending December 31, 1999 and 1998, respectively, and $11 million for the
period from December 1, 1997 (inception) to December 31, 1997.
Equistar is party to various unconditional purchase obligation contracts as
a purchaser for product and services. At December 31, 1999, future minimum
payments under these contracts with noncancelable contract terms in excess of
one year were as follows:
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS)
<S> <C>
2000................................................ $ 33
2001................................................ 31
2002................................................ 28
2003................................................ 27
2004................................................ 25
Thereafter.......................................... 147
----
Total minimum contract payments................. $291
----
----
</TABLE>
Equistar's total purchases under these agreements were $39 million and $35
million for the years ending December 31, 1999 and 1998, respectively, and $3
million during the period from December 1, 1997 (inception) to December 31,
1997.
15. PENSION AND OTHER POSTRETIREMENT BENEFITS
All full-time regular employees of the Partnership are covered by defined
benefit pension plans sponsored by Equistar. The plans became effective
January 1, 1998, except for union represented employees formerly employed by
Millennium, whose plans were contributed to Equistar on December 1, 1997, and
union represented employees formerly employed by Occidental, whose plans were
contributed to Equistar on May 15, 1998. In connection with the formation of
Equistar, there were no pension assets or obligations contributed to Equistar,
except for the union represented plans described above. Retirement benefits are
based upon years of service and the employee's highest three consecutive years
of compensation during the last ten years of service. Equistar accrues pension
costs based upon an actuarial valuation and funds the plans through periodic
contributions to pension trust funds as required by applicable law. Equistar
also has unfunded supplemental nonqualified retirement plans, which provide
pension benefits for certain employees in excess of the tax qualified plans'
limits.
In addition, Equistar sponsors unfunded postretirement benefit plans other
than pensions ('OPEB') for both salaried and non-salaried employees, which
provide medical and life insurance benefits. These postretirement health care
plans are contributory while the life insurance plans are noncontributory.
Currently, Equistar pays approximately 80% of the cost of the health care plans,
but reserves the right to modify the cost-sharing provisions at any time.
F-20
<PAGE>
The following table provides a reconciliation of benefit obligations, plan
assets and the funded status of these plans:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, January 1..................... $ 88 $ 21 $ 69 $ 50
Benefit obligation contributed by Occidental...... -- 46 -- 14
Service cost...................................... 22 16 4 3
Interest cost..................................... 7 5 6 4
Actuarial (gain) loss............................. (8) 5 (2) (2)
Benefits paid..................................... (10) (5) -- --
---- ---- ---- ----
Benefit obligation, December 31................... 99 88 77 69
---- ---- ---- ----
Change in plan assets:
Fair value of plan assets, January 1.............. 88 40 -- --
Fair value of plan assets contributed by
Occidental...................................... -- 51 -- --
Actual return of plan assets...................... 7 1 -- --
Partnership contributions......................... 16 1 -- --
Benefits paid..................................... (10) (5) -- --
---- ---- ---- ----
Fair value of plan assets, December 31............ 101 88 -- --
---- ---- ---- ----
Funded status..................................... 2 -- (77) (69)
Unrecognized actuarial loss....................... 5 13 13 16
---- ---- ---- ----
Net amount recognized $ 7 $ 13 $(64) $(53)
---- ---- ---- ----
---- ---- ---- ----
Amounts recognized in the Consolidated Balance Sheets
consist of:
Prepaid benefit cost.............................. $ 33 $ 30 -$- -$-
Accrued benefit liability......................... (26) (17) (64) (53)
---- ---- ---- ----
Net amount recognized............................. $ 7 $ 13 $(64) $(53)
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
The benefit obligation, accumulated benefit obligation and fair value of
assets for pension plans with benefit obligations in excess of plan assets were
$40 million, $26 million and $13 million, respectively, as of December 31, 1999
and $24 million, $17 million and $5 million, respectively, as of December 31,
1998. Net periodic pension and other postretirement benefit costs included the
following components:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost...................................... $ 22 $ 16 $ 4 $ 3
Interest cost..................................... 7 5 6 4
Amortization of actuarial (gain) loss............. 1 -- 1 --
Expected return of plan assets.................... (8) (6) -- --
----- ----- ----- -----
Net periodic benefit cost after settlement........ $ 22 $ 15 $ 11 $ 7
----- ----- ----- -----
----- ----- ----- -----
Weighted-average assumptions as of December 31:
Discount rate..................................... 8.00% 6.75% 8.00% 6.75%
Expected return on plan assets.................... 9.50% 9.50% -- --
Rate of compensation increase..................... 4.75% 4.75% 4.75% 4.75%
</TABLE>
The non-union plans became effective January 1, 1998; therefore, Equistar
did not recognize any net periodic pension cost during the period from
December 1, 1997 (inception) to December 31, 1997. The accrued postretirement
benefit liabilities at December 31, 1997 were calculated and contributed as
F-21
<PAGE>
of December 31, 1997; therefore, there were 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, 1999 was 7.0% for
2000-2001 and 5.0% thereafter. The health care cost trend rate assumption does
not have a significant effect on the amounts reported. To illustrate, increasing
or decreasing the assumed health care cost trend rates by one percentage point
in each year would change the accumulated postretirement benefit liability as of
December 31, 1999 by less than $2 million and would not have a material effect
on the aggregate service and interest cost components of the net periodic
postretirement benefit cost for the year then ended.
Equistar also maintains voluntary defined contribution savings plans for
eligible employees. Contributions to the plans by Equistar were $20 million, $15
million and less than $1 million for the years ended December 31, 1999 and 1998
and during the period from December 1, 1997 (inception) to December 31, 1997,
respectively.
16. COMMITMENTS AND CONTINGENCIES
Equistar has various purchase commitments for materials, supplies and
services incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market. See also Note 6,
describing related party commitments.
The Partnership is also subject to various lawsuits and proceedings. Subject
to the uncertainty inherent in all litigation, management believes the
resolution of these proceedings will not have a material adverse effect upon the
financial statements or liquidity of Equistar.
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 years ended December 31, 1999 and 1998, Equistar
incurred $11 million and $5 million, respectively, 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.
Equistar's policy is to be in compliance with all applicable environmental
laws. Equistar is subject to extensive environmental laws and regulations
concerning emissions to the air, discharges to surface and subsurface waters and
the generation, handling, storage, transportation, treatment and disposal of
waste materials. Some of these laws and regulations are subject to varying and
conflicting interpretations. In addition, Equistar cannot accurately predict
future developments, such as increasingly strict requirements of environmental
laws, inspection and enforcement policies and compliance costs therefrom which
might affect the handling, manufacture, use, emission or disposal of products,
other materials or hazardous and non-hazardous waste. Equistar had no reserves
for environmental matters as of December 31, 1999 and 1998.
In the opinion of management, any liability arising from the matters
discussed in this Note is not expected to have a material adverse effect on the
financial statements or liquidity of Equistar. However, the adverse resolution
in any reporting period of one or more of these matters discussed in this Note
could have a material impact on Equistar's results of operations for that period
without giving effect to contribution or indemnification obligations of
co-defendants or others, or to the effect of any insurance coverage that may be
available to offset the effects of any such award.
17. SEGMENT INFORMATION AND RELATED INFORMATION
Using the guidelines set forth in SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, Equistar has identified two 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
F-22
<PAGE>
oxygenated chemicals include ethylene oxide, ethylene glycol, ethanol and MTBE.
Aromatics include benzene and toluene. The polymers segment consists of
polyolefins, including high-density polyethylene, low-density polyethylene,
linear low-density polyethylene, polypropylene, and performance polymers. The
performance polymers include enhanced grades of polyethylene, including wire and
cable resins, and polymeric powders. The concentrates and compounds business,
which was part of performance polymers products, was sold effective April 30,
1999 (see Note 18).
No customer accounted for 10% or more of sales during the years ended
December 31, 1999 and 1998 or the one-month ended December 31, 1997.
The accounting policies of the segments are the same as those described in
'Summary of Significant Accounting Policies' (see Note 2).
Summarized financial information concerning Equistar's reportable segments
is shown in the following table. Intersegment sales between the petrochemicals
and polymers segments were made at prices based on current market values.
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PETROCHEMICALS POLYMERS UNALLOCATED ELIMINATIONS CONSOLIDATED
-------------- -------- ----------- ------------ ------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Sales and other operating
operating revenues:
Customers................. $3,412 $2,024 $-- $-- $5,436
Intersegment.............. 1,324 -- -- (1,324) --
------ ------ ------ ------- ------
$4,736 $2,024 $-- $(1,324) $5,436
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Restructuring and other
unusual charges............. $ -- $ -- $ 96 $ -- $ 96
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Operating income.............. $ 447 $ 51 $ (336) $ -- $ 162
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Total assets.................. $3,671 $1,551 $1,514 $ -- $6,736
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Capital expenditures.......... $ 61 $ 83 $ 13 $ -- $ 157
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Depreciation and amortization
expense..................... $ 194 $ 53 $ 53 $ -- $ 300
------ ------ ------ ------- ------
------ ------ ------ ------- ------
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PETROCHEMICALS POLYMERS UNALLOCATED ELIMINATIONS CONSOLIDATED
-------------- -------- ----------- ------------ ------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Sales and other operating
operating revenues:
Customers................. $2,351 $2,012 $ -- $ -- $4,363
Intersegment.............. 1,112 46 -- (1,158) --
------ ------ ------ ------- ------
$3,463 $2,058 $ -- $(1,158) $4,363
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Restructuring and other
unusual charges............. $ -- $ -- $ 14 $ -- $ 14
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Operating income.............. $ 319 $ 177 $ (214) $ -- $ 282
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Total assets.................. $3,625 $1,563 $1,477 $ -- $6,665
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Capital expenditures.......... $ 71 $ 116 $ 13 $ -- $ 200
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Depreciation and amortization
expense..................... $ 152 $ 65 $ 51 $ -- $ 268
------ ------ ------ ------- ------
------ ------ ------ ------- ------
</TABLE>
F-23
<PAGE>
FOR THE PERIOD FROM DECEMBER 1, 1997 (INCEPTION) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
PETROCHEMICALS POLYMERS UNALLOCATED ELIMINATIONS CONSOLIDATED
-------------- -------- ----------- ------------ ------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Sales and other operating
revenues:
Customers................. $ 179 $ 186 $ -- $ -- $ 365
Intersegment.............. 105 -- -- (105) --
------ ------ ------ ------- ------
$ 284 $ 186 $ -- $ (105) $ 365
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Restructuring and other
unusual charges............. $ -- $ -- $ 42 $ -- $ 42
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Operating income.............. $ 47 $ 22 $ (54) $ -- $ 15
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Total assets.................. $1,668 $1,504 $1,428 $ -- $4,600
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Capital expenditures.......... $ 7 $ 4 $ 1 $ -- $ 12
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Depreciation and amortization
expense..................... $ 7 $ 7 $ 5 $ -- $ 19
------ ------ ------ ------- ------
------ ------ ------ ------- ------
</TABLE>
The following table presents the details of 'Operating income' as presented
above in the 'Unallocated' column for the years ended December 31, 1999 and 1998
and for the period from December 1, 1997 (inception) to December 31, 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Expenses not allocated to petrochemicals and polymers:
Principally general and administrative expenses......... $(240) $(200) $ (12)
Restructuring and other unusual charges................. (96) (14) (42)
----- ----- -----
Total-Unallocated................................... $(336) $(214) $ (54)
----- ----- -----
----- ----- -----
</TABLE>
The following table presents the details of 'Total assets' as presented
above in the 'Unallocated' column as of December 31, for the years indicated:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Cash........................................................ $ 108 $ 66 $ 41
Accounts receivable-trade and related parties............... 18 14 --
Receivable with partners.................................... -- -- 150
Prepaids and other current assets........................... 22 25 24
Property, plant and equipment, net.......................... 58 48 16
Goodwill, net............................................... 1,119 1,151 1,139
Deferred charges and other assets........................... 189 173 58
------ ------ ------
$1,514 $1,477 $1,428
------ ------ ------
------ ------ ------
</TABLE>
18. SALE OF CONCENTRATES AND COMPOUNDS BUSINESS
Effective April 30, 1999, Equistar completed the sale of its concentrates
and compounds business. The transaction included two manufacturing facilities,
located in Heath, Ohio and Crockett, Texas, and related inventories. Equistar
recorded a net gain on the sale of approximately $42 million reported in 'Other
income, net' in the Consolidated Statements of Income.
F-24
<PAGE>
SCHEDULE II
MILLENNIUM CHEMICALS INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
CHARGED
BALANCE AT TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
--------- -------- -------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
DESCRIPTION
Year ended December 31, 1997
Deducted from asset accounts:
Allowance for doubtful
accounts....................... $ 8 $ -- $ (2)(a) $ (4)(b) $ 2
Valuation Allowance.............. 112 31(c) 143
Year ended December 31, 1998
Deducted from asset accounts:
Allowance for doubtful
accounts....................... 2 1 3
Valuation Allowance.............. 143 (7) 136
Year ended December 31, 1999
Deducted from asset accounts:
Allowance for doubtful
accounts....................... 3 (1) 2
Valuation Allowance.............. 136 (60) 76
</TABLE>
- ---------
(a) Reclassed to other current assets as net receivable from Equistar.
(b) Uncollected accounts written off, net of recoveries.
(c) Valuation allowance for capital loss carryover.
S-1
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as..................... 'r'
Characters normally expressed as subscript shall be expressed as
baseline characters
<PAGE>
CONFORMED COPY
THIRD AMENDMENT dated as of December 31, 1999 (this
"Amendment"), to the Credit Agreement dated as of July 26, 1996 (as
amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among MILLENNIUM AMERICA INC., a Delaware
corporation referred to as "HAI" under the Credit Agreement
("Millennium America"); MILLENNIUM CHEMICALS INC., a Delaware
corporation, ("Millennium"), as Guarantor; the lenders from time to
time party thereto, initially consisting of those listed on Schedule
2.01 to the Credit Agreement (the "Lenders"); THE CHASE MANHATTAN
BANK, as Documentation Agent; and BANK OF AMERICA, N.A.,as
administrative agent (in such capacity, the "Administrative Agent").
A. The parties hereto have agreed, subject to the terms and conditions
hereof, to amend the Credit Agreement on the terms and subject to the conditions
provided herein.
B. Capitalized terms used and not otherwise defined herein shall have
the meanings assigned to such terms in the Credit Agreement.
SECTION 1. Amendment to Section 1.01 of the Credit Agreement. Section
1.01 of the Credit Agreement is hereby amended by:
(a) inserting, prior to the "." at the end of the definition of
"Indebtedness", the following:
", excluding, at any time when Millennium shall directly or indirectly own
the interest owned by it on the date hereof in Equistar, the Guarantee
(whether by HAI or any of its subsidiaries) of up to $750,000,000 of
Indebtedness of Equistar under the Equistar Credit Agreement (it being
agreed that HAI may cause any of its subsidiaries to assume its obligations
under such Guarantee)"
(b) inserting in the appropriate alphabetical order the following
definition:
"'Equistar Credit Agreement' shall mean the Amended and Restated Credit
Agreement dated as of November 25, 1997, as amended and restated February
5, 1999, and as further amended from time to time, among Equistar; HAI, as
Guarantor; the lenders party thereto; Bank of America, N.A., as servicing
Agent,
<PAGE>
2
documentation agent and administrative agent; and The Chase Manhattan Bank,
as syndication agent and administrative agent."
SECTION 2. Amendment to Article VI of the Credit Agreement. Article VI
of the Credit Agreement is hereby amended by adding the following as Section
6.12:
"SECTION 6.12. Restriction on Guarantees of Equistar. Enter into or
permit to exist any Guarantee of obligations of Equistar other than the
Guarantee (whether by HAI or any of its subsidiaries) of up to $750,000,000
of Indebtedness under the Equistar Credit Agreement, as such Guarantee is
in effect on the date hereof (it being agreed that HAI may cause any of
its subsidiaries to assume its obligations under such Guarantee)."
SECTION 3. Representations and Warranties. Millennium America and
Millennium hereby represent and warrant to the Lenders and the Administrative
Agent that on and as of the date hereof, and after giving effect to this
Amendment:
(a) This Amendment has been duly executed and delivered by Millennium
America and Millennium and constitutes a legal, valid and binding
obligation of Millennium America and Millennium enforceable against
Millennium America and Millennium in accordance with its terms.
(b) The representations and warranties of Millennium America or
Millennium, as the case may be, contained in the Credit Agreement and the
other Loan Documents are true and correct in all material respects.
(c) No Default or Event of Default has occurred and is continuing.
SECTION 4. Amendment Fee. Millennium America and Millennium agree to
pay to the Administrative Agent, for the account of each Lender that shall have
executed and delivered to the Administrative Agent a counterpart of this
Amendment on or prior to January 13, 2000, an amendment fee equal to .20% of
the Standby Commitment of such Lender, whether used or unused, on the date
hereof.
<PAGE>
3
SECTION 5. Effectiveness. This Amendment shall become effective as of
the date first set forth above and upon the Administrative Agent's receipt
of (a) duly executed counterparts of this Amendment which, when taken
together, bear the authorized signatures of Millennium America, Millennium
and the Required Lenders and (b) the Amendment Fees payable to the Lenders
under Section 4 above.
SECTION 6. Effect of Amendment. Except as expressly set forth herein,
this Amendment shall not by implication or otherwise limit, impair,
constitute a waiver of or otherwise affect the rights and remedies of the
Lenders under the Credit Agreement or any other Loan Document, and shall
not alter, modify, amend or in any way affect any of the terms, conditions,
obligations, covenants or agreements contained in the Credit Agreement or
any other Loan Document, all of which are ratified and affirmed in all
respects and shall continue in full force and effect. Nothing herein shall
be deemed to entitle Millennium America or Millennium to a 'consent to, or
a waiver, amendment, modification or other change of, any of the terms,
conditions, obligations, covenants or agreements contained in the Credit
Agreement or any other Loan Document in similar or different circumstances.
This Amendment shall apply and be effective only with respect to the
provisions of the Credit Agreement specifically referred to herein.
SECTION 7. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall constitute an original but all of which
when taken together shall constitute but one contract. Delivery of an
executed counterpart of a signature page by facsimile transmission shall be
effective as delivery of a manually executed counterpart of this Amendment.
SECTION 8. APPLICABLE LAW. THIS AMENDMENT SHALL HE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 9. Credit Agreement. Except as expressly amended hereby, the
Credit Agreement shall continue in full force and effect in accordance with
the provisions thereof. As used in the Credit Agreement, the terms
"Agreement", "herein", "hereinafter", "hereunder", "hereto", and words of
similar import shall mean, from and after the date hereof, the Credit
Agreement as amended by this Amendment.
<PAGE>
4
SECTION 10. Expenses. Millennium America (and Millennium, as Guarantor)
shall pay all reasonable out-of-pocket expenses incurred by the
Administrative Agent in connection with the preparation, negotiation,
execution and delivery of this Amendment, including the reasonable fees and
disbursements of Cravath, Swaine & Moore, counsel to the Administrative
Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their duly authorized officers, all as of the day and year
first above written.
MILLENNIUM AMERICA INC.,
by /s/ Christine Wubbolding
------------------------------
Name: Christine Wubbolding
Title: Vice President and Treasurer
MILLENNIUM CHEMICALS INC.,
by /s/ Christine Wubbolding
----------------------------------
Name: Christine Wubbolding
Title: Vice President and Treasurer
BANK OF AMERICA, N.A., individually and
as Administrative Agent,
by /s/ Eileen C. Higgins
------------------------------------
Name: Eileen C. Higgins
Title: Vice President
<PAGE>
5
THE CHASE MANHATTAN BANK,
individually and as Documentation
Agent,
by
/s/ Lawrence Palumbo, Jr.
-------------------------------------
Name: Lawrence Palumbo, Jr.
Title: Vice President
ABN AMRO BANK N.V., NEW YORK BRANCH,
by
/s/ Kimberly S. Logsdon
--------------------------------------
Name: Kimberly S. Logsdon
Title: Vice President
by
/s/ John W. Deegan
--------------------------------------
Name: John W. Deegan
Title: Group Vice President
BBL INTERNATIONAL (V.R.) LIMITED,
by
--------------------------------------
Name:
Title:
by
--------------------------------------
Name:
Title:
THE BANK OF NEW YORK,
by
/s/ Randolph E.J. Medrano
----------------------------------------
Name: Randolph E.J. Medrano
Title: Vice President
<PAGE>
6
BANK OF TOKYO-MITSUBISHI TRUST COMPANY,
by
/s/ W.A. DiNicola
------------------------------------
Name: W.A. DiNicola
Title: Vice President
BANQUE NATIONALE DE PARIS,
by
/s/ Richard L. Sted
------------------------------------
Name: Richard L. Sted
Title: Senior Vice President
by
/s/ Sophie Revillard Kaufman
------------------------------------
Name: Sophie Revillard Kaufman
Title: Vice President
PARIBAS,
by
/s/ Duane Helkowski
------------------------------------
Name: Duane Helkowski
Title: Vice President
by
/s/ Shayn P. March
-------------------------------------
Name: Shayn P. March
Title: Assistant Vice President
BARCLAYS BANK PLC,
by
/s/ L. Peter Yetman
-------------------------------------
Name: L. Peter Yetman
Title: Director
<PAGE>
7
CIBC INC.,
by
/s/ Lindsay Gordon
-----------------------------------
Name: Lindsay Gordon
Title: Executive Director
CIBC World Markets Corp
As Agent
CITIBANK, N.A.,
by
/s/ Diane L. Pockaj
------------------------------------
Name: Diane L. Pockaj
Title: Vice President
COMMERZBANK AG, NEW YORK AND/OR GRAND
CAYMAN BRANCHES,
by
/s/ Robert Donohue
------------------------------------
Name: Robert Donohue
Title: Senior Vice President
by
/s/ Peter Doyle
------------------------------------
Name: Peter Doyle
Title: Assistant Vice President
CREDIT LYONNAIS UNITED KINGDOM CREDIT LYONNAIS NEW YORK BRANCH,
MAIN OFFICE,
by by
/s/ Scott R. Chappelka
----------------------------------- -----------------------------------
Name: Name: Scott R. Chappelka
Title: Title: Vice President
<PAGE>
8
CREDIT SUISSE,
by
/s/ David Kratovil
-----------------------------------
Name: David W. Kratovil
Title: Director
by
/s/ James P. Moran
-----------------------------------
Name: James P. Moran
Title: Director
BANKONE, N.A.,
by
/s/ Robert McMillan
-----------------------------------
Name: Robert McMillan
Title: Assistant Vice President
FLEET BANK,
by
/s/ John P. O'Loughlin
-----------------------------------
Name: John P. O'Loughlin
Title: Vice President
THE FUJI BANK, LIMITED, NEW YORK BRANCH,
by
/s/ Raymond Venture
-----------------------------------
' Name: Raymond Ventura
Title: Vice President & Manager
HSBC BANK USA,
by
/s/ D.M. Zieske
-----------------------------------
Name: D.M. Zieske
Title: Assistant Vice President
<PAGE>
9
THE INDUSTRIAL BANK OF JAPAN TRUST COMPANY,
by
/s/ John Dippo
------------------------------------
Name: John Dippo
Title: Senior Vice President
LLOYDS BANK PLC,
by
/s/ Windsor R. Davies
------------------------------------
Name: Windsor R. Davies
Title: Director, Corporate
Banking, USA D061
by
/s/ Paul D. Briamonte
------------------------------------
Name: Paul D. Briamonte
Title: Director-Project Finance
(USA) B374
MELLON BANK, N.A.,
by
/s/ Jeffrey R. Dickson
------------------------------------
Name: Jeffrey R. Dickson
Title: Vice President
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
by
/s/ Robert Bottamedi
-----------------------------------
Name: Robert Bottamedi
Title: Vice President
<PAGE>
10
NATIONAL WESTMINSTER BANK PLC, NATIONAL WESTMINSTER BANK PLC,
NASSAU BRANCH,
by by
/s/ David Apps /s/ David Apps
-------------------------------- -----------------------------------
Name: David Apps Name: David Apps
Title: Senior Vice President Title: Senior Vice President
PNC BANK, N.A.,
by
/s/ Virginia Alling
-----------------------------------
Name: Virginia Alling
Title: Vice President
ROYAL BANK OF CANADA,
by
/s/ Lori Ross
------------------------------------
Name: Lori Ross
Title: Manager
THE SAKURA BANK, LIMITED,
by
/s/ Yoshikazu Nagura
------------------------------------
Name: Yoshikazu Nagura
Title: Senior Vice President
TIM SANWA BANK, LIMITED, NEW YORK BRANCH,
by
/s/ Jean-Michel Fatovic
------------------------------------
Name: Jean-Michel Fatovic
Title: Vice President
<PAGE>
11
SOCIETE GENERALE,
by
/s/ Karen M. Sager
------------------------------------
Name: Karen M. Sager
Title: Vice President
THE SUMITOMO BANK, LIMITED, NEW YORK BRANCH,
by
/s/ Edward D Henderson Jr.
------------------------------------
Name: Edward D. Henderson, Jr.
Title: Senior Vice President
<PAGE>
FIRST AMENDMENT TO
AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
OF
EQUISTAR CHEMICALS, LP
<PAGE>
FIRST AMENDMENT TO AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
OF
EQUISTAR CHEMICALS, LP
This First Amendment to the Amended and Restated Limited Partnership
Agreement of Equistar Chemicals, LP, dated as of June, 30, 1998 (the "First
Amendment") is entered into by and among Lyondell Petrochemical G.P. Inc., a
Delaware corporation ("Lyondell GP"), Lyondell Petrochemical L.P. Inc., a
Delaware corporation ("Lyondell LP"), Millennium Petrochemicals GP LLC, a
Delaware limited liability company ("Millennium GP"), Millennium Petrochemicals
LP LLC, a Delaware limited liability company ("Millennium LP"), PDG Chemical
Inc., a Delaware corporation ("Occidental GP"), Occidental Petrochem Partner 1,
Inc., a Delaware corporation ("Occidental LP1"), Occidental Petrochem Partner 2,
Inc., a Delaware corporation ("Occidental LP2"), and Occidental Petrochem
Partner GP, Inc., a Delaware corporation ("New Oxy GP").
WHEREAS, reference is here made for all purposes to the Amended and
Restated Limited Partnership Agreement of Equistar Chemicals, LP, dated May 15,
1998 (the "Partnership Agreement"); and
WHEREAS, all capitalized terms that are defined in the Partnership
Agreement, but are not defined in this First Amendment, shall have the same
meanings as defined in the Partnership Agreement; and
WHEREAS, Occidental GP wishes to convert 294 of its General Partner Units
in the Partnership to Limited Partner Units, and to transfer such Units to
Occidental LP2, and each of the other Partners are willing to consent to such
conversion and transfer; and
WHEREAS, Occidental GP wishes to transfer its remaining General Partner
Unit to New Oxy GP, and to withdraw from the Partnership, and New Oxy GP wishes
to be admitted to the Partnership as a General Partner, and each of the other
Partners are willing to consent to such transfer, withdrawal, and admission;
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
1. Transfers and Withdrawal. (a) Occidental GP hereby converts 294 of its
295 General Partner Units in the Partnership into 294 Limited Partner Units in
the Partnership.
(b) Occidental GP does hereby transfer its 294 Limited Partner Units
to Occidental LP2.
(c) Occidental GP does hereby transfer its remaining 1 General
Partner Unit to New Oxy GP. Concurrently, New Oxy GP is hereby admitted
into the Partnership as a
<PAGE>
General Partner of the Partnership. Concurrently, Occidental GP hereby
withdraws from the Partnership.
(d) New Oxy GP assumes all of the obligations of Occidental GP under
or in respect of the Partnership.
2. Amendments. (a) Any reference in the Partnership Agreement to
Occidental GP shall hereafter be deemed for all purposes to mean New Oxy GP.
(b) As a result of the conversions, the withdrawal and the transfers
described herein, Section 2.1 of the Partnership Agreement is restated in
its entirety as follows:
"2.1 Holdings of Partners. Effective as of the close of business on
June 30, 1998, the Units shall be owned as follows:
Partner Units
------- -----
Lyondell GP 802
Millennium GP 590
Occidental GP 1
Lyondell LP 40,180
Millennium LP 28,910
Occidental LP1 6,623
Occidental LP2 22,876
TOTAL 100,000
===== =======
The Units shall entitle the holder to the distributions set forth in
Section 3 and to the allocation of Profits, Losses and other items as set
forth in Section 4. Units shall not be represented by certificates."
3. References to and Effect on Partnership Agreement. (a) The provisions
of the Partnership Agreement (as amended by this First Amendment) shall remain
in full force and effect in accordance with their terms following the
effectiveness of this First Amendment. Each Partner, by executing this First
Amendment, (i) consents to the admission of New Oxy GP into the Partnership and
as a General Partner, (ii) consents to the withdrawal of PDG Chemical, Inc. as a
General Partner and (iii) ratifies all actions done in contemplation of items
(i) and (ii) herein.
(b) On and after the date first written above, each reference in the
Partnership Agreement to "this Agreement", "hereunder", "hereof", "herein"
or words of like import, and
-2-
<PAGE>
any reference to the Partnership Agreement in any certificate or document
delivered in connection therewith, shall mean and be a reference to the
Partnership Agreement as amended hereby.
(c) The General Partners shall, or shall cause the Partnership to,
execute, swear to, acknowledge, deliver, file or record in public offices
and publish all such certificates, notices, statements or other
instruments, and take all such other actions, as may be required by law
for the purpose of reflecting the withdrawals and admissions herein,
including, but not limited to, an amendment of the Certificate of Limited
Partnership of the Partnership pursuant to Section 17-204 of the Act.
4. Representations and Warranties. Each of Occidental GP and New Oxy GP
represent and warrant to the other Partners as follows:
(a) Due Organization; Good Standing and Power. New Oxy GP is a
corporation duly organized, validly existing and in good standing under
the laws of its state of organization. New Oxy GP has all requisite power
and authority to enter into this First Amendment and to perform its
obligations hereunder. New Oxy GP is duly authorized, qualified or
licensed to do business as a foreign corporation and is in good standing
in the State of Texas and in each of the other jurisdictions in which its
right, title or interest in or to any of its assets or properties requires
such authorization, qualification or licensing, except where the failure
to so qualify or to be in good standing would not reasonably be expected
to have a material adverse effect.
(b) Authorization and Validity of Agreements. The execution,
delivery and performance of this First Amendment by New Oxy GP and the
consummation by it of the transactions contemplated hereby have been duly
authorized by the Board of Directors of New Oxy GP. Except to the extent
heretofore obtained, no other corporate action or action by stockholders
is necessary for the authorization, execution, delivery and performance by
New Oxy GP of this First Amendment and the consummation by New Oxy GP of
the transactions contemplated hereby. This First Amendment has been duly
executed and delivered by New Oxy GP and constitutes a legal, valid and
binding obligation of New Oxy GP, enforceable in accordance with its
terms, except as the same may be limited by bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting
creditors' rights generally and by general equity principles.
(c) No Consents Required; No Conflict with Instruments to which New
Oxy GP is a Party. The execution, delivery and performance of this First
Amendment by New Oxy GP, the performance by New Oxy GP of its obligations
under the Partnership Agreement (as amended by this First Amendment) and
the consummation by New Oxy GP of the transactions contemplated hereby or
thereby (i) will not require any consent except for such consents the
failure of which to be obtained or made, would not in the aggregate
reasonably be expected to have a material adverse effect; and (ii) will
not violate (with or without the
-3-
<PAGE>
giving of notice or the lapse of time or both) or conflict with, or result
in the breach or termination of any provision of, or constitute a default
under, or result in the acceleration of the performance of the obligations
of New Oxy GP, any agreement or instrument to which New Oxy GP is a party,
except for such obligations, conflicts, breaches, terminations, defaults
or accelerations or which would not in the aggregate reasonably be
expected to have a material adverse effect.
5. Secretary's Certificate. New Oxy GP shall provide to each of the other
General Partners and the Partnership a copy of a secretary's certificate in the
form attached as Appendix I hereto.
6. Counterparts. This First Amendment may be executed by one or more of
the parties hereto in any number of separate counterparts, and all of such
counterparts taken together shall be deemed to constitute one and the same
instrument.
7. Governing Law. This First Amendment shall be governed by and construed
in accordance with the laws of the State of Delaware, without giving effect to
any conflicts of law principles.
[Remainder of this page left blank]
-4-
<PAGE>
IN WITNESS WHEREOF, this First Amendment has been executed on behalf of
each of the parties hereto, by their respective officers thereunto duly
authorized, effective as of the date first written above.
GENERAL PARTNERS:
LYONDELL PETROCHEMICAL G.P. INC.
By: /s/ Kerry A. Galvin
---------------------------------------
Name:
Title:
MILLENNIUM PETROCHEMICALS GP LLC
By: Millennium Petrochemicals Inc., its
Manager
By: /s/ George H. Hempstead, III
---------------------------------
Name: George H. Hempstead, III
Title: Vice President
OCCIDENTAL PETROCHEM PARTNER GP, INC.
By: /s/ David C. Yen
---------------------------------------
Name: David C. Yen
Title: Vice President and Treasurer
WITHDRAWING GENERAL PARTNER:
PDG CHEMICAL INC.
By: /s/ J.R. Havert
---------------------------------------
Name: J.R. Havert
Title: Vice President and Assistant Treasurer
-5-
<PAGE>
LIMITED PARTNERS:
LYONDELL PETROCHEMICAL L.P. INC.
By: /s/ Kerry A. Galvin
--------------------------------------
Name:
Title:
MILLENNIUM PETROCHEMICALS GP LLC
By: Millennium Petrochemicals Inc., its
Manager
By: /s/ George H. Hempstead, III
---------------------------------
Name: George H. Hempstead, III
Title: Vice President
OCCIDENTAL PETROCHEM PARTNER GP, INC.
By: /s/ David C. Yen
---------------------------------------
Name: David C. Yen
Title: Vice President and Treasurer
WITHDRAWING GENERAL PARTNER:
PDG CHEMICAL INC.
By: /s/ J.R. Havert
---------------------------------------
Name: J.R. Havert
Title: Vice President and Assistant Treasurer
-6-
<PAGE>
Second Amendment to Amended and Restated
Limited Partnership Agreement
This Second Amendment to the Amended and Restated Limited Partnership
Agreement of Equistar Chemicals, LP, dated as of February 16, 1999 (this "Second
Amendment"), is entered into by and among Lyondell Petrochemical G.P. Inc.,
Lyondell Petrochemical L.P. Inc., Millennium Petrochemicals GP LLC, Millennium
Petrochemicals LP LLC, Occidental Petrochem Partner 1, Inc., Occidental
Petrochem Partner 2, Inc., and Occidental Petrochem Partner GP, Inc.
("Occidental GP").
Whereas, on May 15, 1998, PDG Chemical Inc. and the parties hereto other
than Occidental GP entered into the Amended and Restated Limited Partnership
Agreement of Equistar Chemicals, LP;
Whereas, as of June 30, 1998, PDG Chemical Inc. and the parties hereto
entered into the First Amendment to Amended and Restated Limited Partnership
Agreement of Equistar Chemicals, LP (the "First Amendment"; the Amended and
Restated Limited Partnership Agreement of Equistar Chemicals, LP, as amended by
the First Amendment is herein referred to as the "1998 Partnership Agreement"),
whereby, among other things, PDG Chemical Inc. withdrew from Equistar Chemicals,
LP, and Occidental GP became a general partner thereof; and
Whereas, the parties hereto wish to amend the 1998 Partnership Agreement
to, among other things, revise the definition of "Oxy Guaranteed Debt" in the
Appendix thereof.
Now, Therefore, the parties to this Second Amendment agree as follows:
1. All capitalized terms that are defined in the 1998 Partnership
Agreement, but are not defined in this Second Amendment, shall have the same
meanings as defined in the 1998 Partnership Agreement.
2. Clause (xxii) of Section 6.7 of the 1998 Partnership Agreement is
amended (a) to delete the words "Oxy Guaranteed Debt" the four times they appear
in such clause (xxii) and substitute the words "Oxy Reference Debt" in their
place and (b) to add in the proviso, after the words "or its successors", the
following words: "or the reference for determination of the amount of the
obligation of OCC to contribute to the Partnership pursuant to an indemnity by
OCC in favor of the Partnership issued pursuant to the Letter Agreement, dated
as of February 16, 1999, between OCC and the Partnership,".
3. The definition of "Amended and Restated Indemnity Agreement" in
Appendix A of the 1998 Partnership Agreement is deleted and the following
definition is substituted in its place"
"Amended and Restated Indemnity Agreement. The Second Amended and Restated
Indemnity Agreement, dated as of February 16, 1999, among Lyondell GP,
-1-
<PAGE>
Lyondell LP, Millennium GP, Millennium LP, Millennium America, PDG Chemical
Inc., Occidental LP1, Occidental LP2, OCC, and Occidental GP, as amended from
time to time."
4. The definition of "Oxy Guaranteed Debt" in Appendix A of the 1998
Partnership Agreement is deleted and the following definition is substituted in
its place:
"Oxy Reference Debt. The $419,700,000 drawdown under the Bank Credit
Agreement pursuant to Section 8.6(a) and the portion, if any, of any debt that
refinances the $419,700,000 drawdown under the Bank Credit Agreement or any
subsequent refinancing thereof (in any case, not to exceed an aggregate of
$419,700,000 principal amount), in each case to the extent (a) (i) such debt is
guaranteed by OCC or an Affiliate thereof and (ii) and the proceeds thereof have
been distributed to Occidental LP2 pursuant to Section 3.1(g) or (b) such debt
is the reference for determination of the amount of the obligation of OCC to
contribute to the Partnership pursuant to an indemnity by OCC in favor of the
Partnership issued pursuant to the Amended and Restated Letter Agreement, dated
as of February 16, 1999, between OCC and the Partnership.
5. Except as amended by this Second Amendment, all the terms and
provisions of the 1998 Partnership Agreement shall remain in full force and
effect.
6. This Second Amendment may be executed by one or more of the parties
hereto in any number of separate counterparts, and all of such counterparts
taken together shall be deemed to constitute one and the same instrument.
7. This Second Amendment shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to any conflicts
of law principles.
-2-
<PAGE>
In Witness Whereof, the parties hereto have executed and delivered this
Second Amendment as of the date first above written.
LYONDELL PETROCHEMICAL G.P. INC.
By: /s/ Edward W. Rich
------------------------------------
Name: Edward W. Rich
Title: Vice President and Treasurer
LYONDELL PETROCHEMICAL L.P. INC.
By: /s/ Edward W. Rich
------------------------------------
Name: Edward W. Rich
Title: Vice President and Treasurer
MILLENNIUM PETROCHEMICALS GP LLC
By: MILLENNIUM PETROCHEMICALS INC.
as manager
By: /s/ C. William Carmean
------------------------------------
Name: C. William Carmean
Title: Vice President--Legal
MILLENNIUM PETROCHEMICALS LP LLC
By: MILLENNIUM PETROCHEMICALS INC.
as manager
By: /s/ C. William Carmean
------------------------------------
Name: C. William Carmean
Title: Vice President--Legal
OCCIDENTAL PETROCHEM PARTNER 1, INC.
By: /s/ J.R. Havert
------------------------------------
Name: J.R. Havert
Title: Assistant Treasurer
-3-
<PAGE>
OCCIDENTAL PETROCHEM PARTNER 2, INC.
By: /s/ J.R. Havert
------------------------------------
Name: J.R. Havert
Title: Vice President and Treasurer
OCCIDENTAL PETROCHEM PARTNER GP, INC.
By: /s/ J.R. Havert
------------------------------------
Name: J.R. Havert
Title: Assistant Treasurer
-4-
<PAGE>
FIRST AMENDMENT TO MILLENNIUM ASSET CONTRIBUTION AGREEMENT
This First Amendment to Millennium Asset Contribution Agreement (this
"First Amendment"), dated as of May 15, 1998, is entered into by and among
Millennium Petrochemicals Inc., a Virginia corporation (the "Contributor"),
Millennium Petrochemicals LP LLC, a Delaware limited liability company (the
"Contributing Partner") and Equistar Chemicals, LP, a Delaware limited
partnership (the "Partnership").
RECITALS
A. The Contributor, the Contributing Partner and the Partnership are
parties to that certain Asset Contribution Agreement dated as of December 1,
1997 (the "1997 Asset Contribution Agreement");
B. Pursuant to that certain Master Transaction Agreement, dated as of May
15, 1998, by and among Millennium Chemicals Inc., the Partnership, Occidental
Petroleum Corporation ("OPC") and Lyondell Petrochemical Company, certain
affiliates of OPC shall become partners in the Partnership as of the date
hereof; and
C. The Contributor, the Contributing Partner and the Partnership desire to
amend the 1997 Asset Contribution Agreement on the terms set forth herein.
AGREEMENT
NOW THEREFORE, in consideration of the premises and of the mutual
covenants of the parties hereto, it is hereby agreed that the 1997 Asset
Contribution Agreement is amended as follows:
A. Capitalized terms used herein and not otherwise defined herein shall
have the meanings given such terms in the 1997 Asset Contribution Agreement.
B. The following definition shall be added to Section 1 of the 1997 Asset
Contribution Agreement:
"1998 MTA" shall mean that certain Master Transaction Agreement, dated as
of May 15, 1998, by and among Millennium Chemicals Inc., the Partnership,
Occidental Petroleum Corporation and Lyondell Petrochemical Company.
C. The definition of "Third Party Claim" as set forth in Section 1 of the
1997 Asset Contribution Agreement shall be amended and restated as follows:
"Third Party Claim" means any allegation, claim, civil or criminal action,
proceeding, charge or prosecution brought by a Person other than a Contributor,
any Affiliate thereof, the Partnership,
<PAGE>
any member of the Millennium Group (as defined in the 1998 MTA), any member of
the Lyondell Group (as defined in the 1998 MTA) or any member of the Occidental
Group (as defined in the 1998 MTA).
D. Subsection 6.2(a)(i) of the 1997 Asset Contribution Agreement shall be
amended and restated as follows:
(i) Any misrepresentation in or breach of the representations and
warranties of the Contributor or any of its Affiliates in this Agreement,
the Assignment and Assumption Agreements, the Master Intellectual Property
Agreement, or the Master Transaction Agreement, provided that any
Liability arising out of, in connection with or relating to any breach of
the warranties in any Assignment and Assumption Agreement that is not a
breach of the warranties in this Agreement shall not be indemnified
against pursuant to this Section 6;
E. Subsection 6.2(b) of the 1997 Asset Contribution Agreement shall be
amended and restated as follows:
(b) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, TO THE
FULLEST EXTENT PERMITTED BY LAW, NEITHER THE CONTRIBUTOR NOR ANY OF ITS
AGENTS, EMPLOYEES, REPRESENTATIVES OR AFFILIATES SHALL BE LIABLE FOR
CONSEQUENTIAL, INCIDENTAL, INDIRECT OR PUNITIVE DAMAGES IN CONNECTION WITH
DIRECT CLAIMS BY AN INDEMNIFIED PARTY (I.E., A CLAIM BY AN INDEMNIFIED
PARTY THAT DOES NOT SEEK REIMBURSEMENT FOR A THIRD PARTY CLAIM PAID OR
PAYABLE BY SUCH INDEMNIFIED PARTY) WITH RESPECT TO THEIR INDEMNIFICATION
OBLIGATIONS UNDER THIS AGREEMENT UNLESS ANY SUCH CLAIM ARISES OUT OF THE
FRAUDULENT ACTIONS OF THE CONTRIBUTOR. IN DETERMINING THE AMOUNT OF ANY
LOSS, LIABILITY, OR EXPENSE FOR WHICH AN INDEMNIFIED PARTY IS ENTITLED TO
INDEMNIFICATION UNDER THIS AGREEMENT, THE GROSS AMOUNT THEREOF WILL BE
REDUCED (BUT NOT BELOW ZERO) BY THE NET PRESENT VALUE OF ANY CORRELATIVE
INSURANCE PROCEEDS ACTUALLY REALIZED BY SUCH INDEMNIFIED PARTY UNDER
POLICIES TO THE EXTENT THAT THE FUTURE PREMIUM RATE WILL NOT BE INCREASED
BY CLAIM EXPERIENCE RELATING TO SUCH LOSS, LIABILITY OR EXPENSE.
F. Subsection 6.2(e) of the 1997 Asset Contribution Agreement shall be
amended and restated as follows:
(e) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, TO THE
FULLEST EXTENT PERMITTED BY LAW, NEITHER THE PARTNERSHIP NOR ANY OF ITS
AGENTS, EMPLOYEES, REPRESENTATIVES OR AFFILIATES SHALL BE LIABLE FOR
CONSEQUENTIAL, INCIDENTAL, INDIRECT
<PAGE>
OR PUNITIVE DAMAGES IN CONNECTION WITH DIRECT CLAIMS BY AN INDEMNIFIED
PARTY (I.E., A CLAIM BY AN INDEMNIFIED PARTY THAT DOES NOT SEEK
REIMBURSEMENT FOR A THIRD PARTY CLAIM PAID OR PAYABLE BY SUCH INDEMNIFIED
PARTY) WITH RESPECT TO THEIR INDEMNIFICATION OBLIGATIONS UNDER THIS
AGREEMENT UNLESS ANY SUCH CLAIM ARISES OUT OF THE FRAUDULENT ACTIONS OF
THE PARTNERSHIP. IN DETERMINING THE AMOUNT OF ANY LOSS, LIABILITY, OR
EXPENSE FOR WHICH AN INDEMNIFIED PARTY IS ENTITLED TO INDEMNIFICATION
UNDER THIS AGREEMENT, THE GROSS AMOUNT THEREOF WILL BE REDUCED (BUT NOT
BELOW ZERO) BY THE NET PRESENT VALUE OF ANY CORRELATIVE INSURANCE PROCEEDS
ACTUALLY REALIZED BY SUCH INDEMNIFIED PARTY UNDER POLICIES TO THE EXTENT
THE FUTURE PREMIUM RATE WILL NOT BE INCREASED BY CLAIM EXPERIENCE RELATING
TO SUCH LOSS, LIABILITY OR EXPENSE.
G. Appendix A to the 1997 Asset Contribution Agreement shall be amended
and restated in its entirety in the form attached hereto as Exhibit A.
H. Except as amended by this First Amendment, all the terms and provisions
of the 1997 Asset Contribution Agreement shall remain in full force and effect.
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this First
Amendment as of the date first above written.
MILLENNIUM PETROCHEMICALS INC.,
a Virginia corporation.
By: /s/ George H. Hempstead, III
-----------------------------------
Name: George H. Hempstead, III
--------------------------------
Title: Senior Vice President
--------------------------------
MILLENNIUM PETROCHEMICALS LP LLC,
a Delaware limited liability company.
By:
-----------------------------------
Name: George H. Hempstead, III
--------------------------------
Title: Senior Vice President
--------------------------------
EQUISTAR CHEMICALS, LP,
a Delaware limited partnership
By: /s/ Eugene R. Allspach
-----------------------------------
Name: Eugene R. Allspach
--------------------------------
Title: President and Chief Operating Officer
--------------------------------
[Signature Page to First Amendment To Millennium Asset Contribution Agreement]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this First
Amendment as of the date first above written.
MILLENNIUM PETROCHEMICALS INC.,
a Virginia corporation.
By: /s/ George H. Hempstead, III
-----------------------------------
Name: George H. Hempstead, III
--------------------------------
Title: Senior Vice President
--------------------------------
MILLENNIUM PETROCHEMICALS LP LLC,
a Delaware limited liability company.
By: /s/ George H. Hempstead, III
-----------------------------------
Name: George H. Hempstead, III
--------------------------------
Title: Senior Vice President
--------------------------------
EQUISTAR CHEMICALS, LP,
a Delaware limited partnership
By:
-----------------------------------
Name: Eugene R. Allspach
--------------------------------
Title: President and Chief Operating Officer
--------------------------------
[Signature Page to First Amendment To Millennium Asset Contribution Agreement]
<PAGE>
EXHIBIT A
Appendix A
Dispute Resolution Procedures
(1) Binding and Exclusive Means. The dispute resolution provisions set
forth in this Appendix A shall be the binding and exclusive means to resolve all
disputes arising under this Agreement (each a "Dispute").
(2) Standards and Criteria. In resolving any Dispute, the standards and
criteria for resolving such dispute shall, unless the Contributors and the
Partnership in their discretion jointly stipulate otherwise, be as set forth in
Appendix 1 to this Appendix A.
(3) ADR and Binding Arbitration Procedures. If a Dispute arises, the
following procedures shall be implemented:
(a) Any party to this Agreement may at any time invoke the dispute
resolution procedures set forth in this Appendix A as to any Dispute by
providing written notice of such action to the other party or parties to the
Dispute, who within five Business Days after such notice shall schedule a
meeting to be held in Houston, Texas between the parties. The meeting shall
occur within 10 Business Days after notice of the meeting is delivered to the
other party or parties. The meeting shall be attended by representatives of each
party having decision-making authority regarding the Dispute as well as the
dispute resolution process and who shall attempt in a commercially reasonable
manner to negotiate a resolution of the Dispute.
(b) The representatives of the parties shall cooperate in a commercially
reasonable manner and shall explore whether techniques such as mediation,
minitrials, mock trials or other techniques of alternative dispute resolution
might be useful. In the event that a technique of alternative dispute resolution
is so agreed upon, a specific timetable and completion date for its
implementation shall also be agreed upon. The representatives will continue to
meet and discuss settlement until the date (the "Interim Decision Date") that is
the earliest to occur of the following events: (i) an agreement shall be reached
by the parties resolving the Dispute; (ii) one of the parties shall determine
and notify the other party in writing that no agreement resolving the Dispute is
likely to be reached; (iii) if a technique of alternative dispute resolution is
agreed upon, the completion date therefor shall occur without the parties having
resolved the Dispute; or (iv) if another technique of alternative dispute
resolution is not agreed upon, two full meeting days (or such other time period
as may be agreed upon) shall expire without the parties having resolved the
Dispute.
<PAGE>
(c) If, as of the Interim Decision Date, the parties have not succeeded in
negotiating a resolution of the dispute pursuant to subsection (b), the parties
shall proceed under subsections (d), (e) and (f).
(d) After satisfying the requirements above, such Dispute shall be
submitted to mandatory and binding arbitration at the election of any party
involved in the Dispute (the "Disputing Party"). The arbitration shall be
subject to the Federal Arbitration Act as supplemented by the conditions set
forth in this Appendix. The arbitration shall be conducted in accordance with
the Commercial Arbitration Rules of the American Arbitration Association in
effect on the date the notice of arbitration is served, other than as
specifically modified herein. In the absence of an agreement to the contrary,
the arbitration shall be held in Houston, Texas. The Arbitrator (as defined
below) will allow reasonable discovery in the forms permitted by the Federal
Rules of Civil Procedure, to the extent consistent with the purpose of the
arbitration. During the pendency of the Dispute, each party shall make available
to the Arbitrator and the other parties all books, records and other information
within its control requested by the other parties or the Arbitrator subject to
the confidentiality provisions contained herein, and provided that no such
access shall waive or preclude any objection to such production based on any
privilege recognized by law. Recognizing the express desire of the parties for
an expeditious means of dispute resolution, the Arbitrator may limit the scope
of discovery between the parties as may be reasonable under the circumstances.
In deciding the substance of the parties' claims, the laws of the State of
Delaware shall govern the construction, interpretation and effect of this
Agreement (including this Appendix) without giving effect to any conflict of law
principles. The arbitration hearing shall be commenced promptly and conducted
expeditiously, with each party involved in the Dispute being allocated an equal
amount of time for the presentation of its case. Unless otherwise agreed to by
the parties, the arbitration hearing shall be conducted on consecutive days.
Time is of the essence in the arbitration proceeding, and the Arbitrator shall
have the right and authority to issue monetary sanctions against any of the
parties if, upon a showing of good cause, that party is unreasonably delaying
the proceeding. To the fullest extent permitted by law, the arbitration
proceedings and award shall be maintained in confidence by the Arbitrator and
the parties.
(e) The Disputing Party shall notify the American Arbitration Association
("AAA") and the other parties involved in the Dispute in writing describing in
reasonable detail the nature of the Dispute (the "Dispute Notice"). The
arbitrator (the "Arbitrator") shall be selected within 15 days of the date of
the Dispute Notice by all of the parties from the members of a panel of
arbitrators of the AAA or, if the AAA fails or refuses to provide a list of
potential arbitrators, of the Center for Public Resources and shall be
experienced in commercial arbitration. In the event that the parties are unable
to agree on the selection of the Arbitrator, the AAA shall select the
Arbitrator, using the criteria set forth in this Appendix, within 30 days of the
date of the Dispute Notice. In the event that the Arbitrator is unable to serve,
his or her replacement will be selected in the same manner as the Arbitrator to
be replaced. The Arbitrator shall be neutral. The Arbitrator shall have the
authority to assess the costs and expenses of the arbitration proceeding
(including the arbitrators', and attorneys' fees and expenses) against any or
all parties.
<PAGE>
(f) The Arbitrator shall decide all Disputes and all substantive and
procedural issues related thereto, and shall enforce this Agreement in
accordance with its terms. Without limiting the generality of the previous
sentence, the Arbitrator shall have the authority to issue injunctive relief;
however, the Arbitrator shall not have any power or authority to (i) award
consequential, incidental, indirect or punitive damages or (ii) amend this
Agreement. The Arbitrator shall render the arbitration award, in writing, within
20 days following the completion of the arbitration hearing, and shall set forth
the reasons for the award. In the event that the Arbitrator awards monetary
damages in favor of either party, the Arbitrator must certify in the award that
no indirect, consequential, incidental, indirect or punitive damages are
included in such award. If the Arbitrator's decision results in a monetary
award, the interest to be granted on such award, if any, and the rate of such
interest shall be determined by the Arbitrator in his or her discretion. The
arbitration award shall be final and binding on the parties, and judgment
thereon may be entered in any court of competent jurisdiction, and may not be
appealed except to the extent permitted by the Federal Arbitration Act.
(4) Continuation of Business. Notwithstanding the existence of any Dispute
or the pendency of any procedures pursuant to this Appendix A, the parties agree
and undertake that all payments not in dispute shall continue to be made and all
obligations not in dispute shall continue to be performed.
<PAGE>
Appendix 1
(a) First priority shall be given to maximizing the consistency of the
resolution of the Dispute with the satisfaction of all express obligations of
the parties and their Affiliates as set forth in the Agreement.
(b) Second priority shall be given to resolution of the Dispute in a
manner which best achieves the objectives of the business activities and
arrangements under the Agreement and permits the parties to realize the benefits
intended to be afforded thereby.
(c) Third priority shall be given to such other matters, if any, as the
parties or the Arbitrator shall determine to be appropriate under the
circumstances.
<PAGE>
FIRST AMENDMENT TO LYONDELL ASSET CONTRIBUTION AGREEMENT
This First Amendment to Lyondell Asset Contribution Agreement (this "First
Amendment"), dated as of May 15, 1998, is entered into by and among Lyondell
Petrochemical Company, a Delaware corporation (the "Contributor"), Lyondell
Petrochemical L.P. Inc., a Delaware corporation (the "Contributing Partner") and
Equistar Chemicals, LP, a Delaware limited partnership (the "Partnership").
RECITALS
A. The Contributor, the Contributing Partner and the Partnership are
parties to that certain Asset Contribution Agreement dated as of December 1,
1997 (the "1997 Asset Contribution Agreement");
B. Pursuant to that certain Master Transaction Agreement, dated as of May
15, 1998, by and among the Contributor, the Partnership, Occidental Petroleum
Corporation ("OPC") and Millennium Chemicals Inc, certain affiliates of OPC
shall become partners in the Partnership as of the date hereof; and
C. The Contributor, the Contributing Partner and the Partnership desire to
amend the 1997 Asset Contribution Agreement on the terms set forth herein.
AGREEMENT
NOW THEREFORE, in consideration of the premises and of the mutual
covenants of the parties hereto, it is hereby agreed that the 1997 Asset
Contribution Agreement is amended as follows:
A. Capitalized terms used herein and not otherwise defined herein shall
have the meanings given such terms in the 1997 Asset Contribution Agreement.
B. The following definition shall be added to Section 1 of the 1997 Asset
Contribution Agreement:
"1998 MTA" shall mean that certain Master Transaction Agreement, dated as
of May 15, 1998, by and among the Contributor, the Partnership, Occidental
Petroleum Corporation and Millennium Chemicals Inc.
C. The definition of "Third Party Claim" as set forth in Section 1 of the
1997 Asset Contribution Agreement shall be amended and restated as follows:
"Third Party Claim" means any allegation, claim, civil or criminal action,
proceeding, charge or prosecution brought by a Person other than a Contributor,
any Affiliate thereof, the Partnership,
<PAGE>
any member of the Millennium Group (as defined in the 1998 MTA), any member of
the Lyondell Group (as defined in the 1998 MTA) or any member of the Occidental
Group (as defined in the 1998 MTA).
D. Subsection 6.2(a)(i) of the 1997 Asset Contribution Agreement shall be
amended and restated as follows:
(i) Any misrepresentation in or breach of the representations and
warranties of the Contributor or any of its Affiliates in this Agreement,
the Assignment and Assumption Agreements, the Master Intellectual Property
Agreement, or the Master Transaction Agreement, provided that any
Liability arising out of, in connection with or relating to any breach of
the warranties in any Assignment and Assumption Agreement that is not a
breach of the warranties in this Agreement shall not be indemnified
against pursuant to this Section 6;
E. Subsection 6.2(b) of the 1997 Asset Contribution Agreement shall be
amended and restated as follows:
(b) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, TO THE
FULLEST EXTENT PERMITTED BY LAW, NEITHER THE CONTRIBUTOR NOR ANY OF ITS
AGENTS, EMPLOYEES, REPRESENTATIVES OR AFFILIATES SHALL BE LIABLE FOR
CONSEQUENTIAL, INCIDENTAL, INDIRECT OR PUNITIVE DAMAGES IN CONNECTION WITH
DIRECT CLAIMS BY AN INDEMNIFIED PARTY (I.E., A CLAIM BY AN INDEMNIFIED
PARTY THAT DOES NOT SEEK REIMBURSEMENT FOR A THIRD PARTY CLAIM PAID OR
PAYABLE BY SUCH INDEMNIFIED PARTY) WITH RESPECT TO THEIR INDEMNIFICATION
OBLIGATIONS UNDER THIS AGREEMENT UNLESS ANY SUCH CLAIM ARISES OUT OF THE
FRAUDULENT ACTIONS OF THE CONTRIBUTOR. IN DETERMINING THE AMOUNT OF ANY
LOSS, LIABILITY, OR EXPENSE FOR WHICH AN INDEMNIFIED PARTY IS ENTITLED TO
INDEMNIFICATION UNDER THIS AGREEMENT, THE GROSS AMOUNT THEREOF WILL BE
REDUCED (BUT NOT BELOW ZERO) BY THE NET PRESENT VALUE OF ANY CORRELATIVE
INSURANCE PROCEEDS ACTUALLY REALIZED BY SUCH INDEMNIFIED PARTY UNDER
POLICIES TO THE EXTENT THAT THE FUTURE PREMIUM RATE WILL NOT BE INCREASED
BY CLAIM EXPERIENCE RELATING TO SUCH LOSS, LIABILITY OR EXPENSE.
F. Subsection 6.2(e) of the 1997 Asset Contribution Agreement shall be
amended and restated as follows:
(e) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, TO THE
FULLEST EXTENT PERMITTED BY LAW, NEITHER THE PARTNERSHIP NOR ANY OF ITS
AGENTS, EMPLOYEES, REPRESENTATIVES OR
<PAGE>
AFFILIATES SHALL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, INDIRECT OR
PUNITIVE DAMAGES IN CONNECTION WITH DIRECT CLAIMS BY AN INDEMNIFIED PARTY
(I.E., A CLAIM BY AN INDEMNIFIED PARTY THAT DOES NOT SEEK REIMBURSEMENT
FOR A THIRD PARTY CLAIM PAID OR PAYABLE BY SUCH INDEMNIFIED PARTY) WITH
RESPECT TO THEIR INDEMNIFICATION OBLIGATIONS UNDER THIS AGREEMENT UNLESS
ANY SUCH CLAIM ARISES OUT OF THE FRAUDULENT ACTIONS OF THE PARTNERSHIP. IN
DETERMINING THE AMOUNT OF ANY LOSS, LIABILITY, OR EXPENSE FOR WHICH AN
INDEMNIFIED PARTY IS ENTITLED TO INDEMNIFICATION UNDER THIS AGREEMENT, THE
GROSS AMOUNT THEREOF WILL BE REDUCED (BUT NOT BELOW ZERO) BY THE NET
PRESENT VALUE OF ANY CORRELATIVE INSURANCE PROCEEDS ACTUALLY REALIZED BY
SUCH INDEMNIFIED PARTY UNDER POLICIES TO THE EXTENT THE FUTURE PREMIUM
RATE WILL NOT BE INCREASED BY CLAIM EXPERIENCE RELATING TO SUCH LOSS,
LIABILITY OR EXPENSE.
G. Appendix A to the 1997 Asset Contribution Agreement shall be amended
and restated in its entirety in the form attached hereto as Exhibit A.
H. Except as amended by this First Amendment, all the terms and provisions
of the 1997 Asset Contribution Agreement shall remain in full force and effect.
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this First
Amendment as of the date first above written.
LYONDELL PETROCHEMICAL COMPANY,
a Delaware corporation.
By: /s/ Dan F. Smith
-----------------------------------------
Name: Dan F. Smith
Title: President and Chief Executive Officer
LYONDELL PETROCHEMICAL L.P. INC.,
a Delaware corporation.
By: /s/ Dan F. Smith
-----------------------------------------
Name: Dan F. Smith
Title: President and Chief Executive Officer
EQUISTAR CHEMICALS, LP,
a Delaware limited partnership
By: /s/ Eugene R. Allspach
-----------------------------------------
Name: Eugene R. Allspach
Title: President and Chief Operating Officer
[Signature Page to First Amendment to Lyondell Asset Contribution Agreement]
<PAGE>
EXHIBIT A
Appendix A
Dispute Resolution Procedures
(1) Binding and Exclusive Means. The dispute resolution provisions set
forth in this Appendix A shall be the binding and exclusive means to resolve all
disputes arising under this Agreement (each a "Dispute").
(2) Standards and Criteria. In resolving any Dispute, the standards and
criteria for resolving such dispute shall, unless the Contributors and the
Partnership in their discretion jointly stipulate otherwise, be as set forth in
Appendix 1 to this Appendix A.
(3) ADR and Binding Arbitration Procedures. If a Dispute arises, the
following procedures shall be implemented:
(a) Any party to this Agreement may at any time invoke the dispute
resolution procedures set forth in this Appendix A as to any Dispute by
providing written notice of such action to the other party or parties to the
Dispute, who within five Business Days after such notice shall schedule a
meeting to be held in Houston, Texas between the parties. The meeting shall
occur within 10 Business Days after notice of the meeting is delivered to the
other party or parties. The meeting shall be attended by representatives of each
party having decision-making authority regarding the Dispute as well as the
dispute resolution process and who shall attempt in a commercially reasonable
manner to negotiate a resolution of the Dispute.
(b) The representatives of the parties shall cooperate in a commercially
reasonable manner and shall explore whether techniques such as mediation,
minitrials, mock trials or other techniques of alternative dispute resolution
might be useful. In the event that a technique of alternative dispute resolution
is so agreed upon, a specific timetable and completion date for its
implementation shall also be agreed upon. The representatives will continue to
meet and discuss settlement until the date (the "Interim Decision Date") that is
the earliest to occur of the following events: (i) an agreement shall be reached
by the parties resolving the Dispute; (ii) one of the parties shall determine
and notify the other party in writing that no agreement resolving the Dispute is
likely to be reached; (iii) if a technique of alternative dispute resolution is
agreed upon, the completion date therefor shall occur without the parties having
resolved the Dispute; or (iv) if another technique of alternative dispute
resolution is not agreed upon, two full meeting days (or such other time period
as may be agreed upon) shall expire without the parties having resolved the
Dispute.
<PAGE>
(c) If, as of the Interim Decision Date, the parties have not succeeded in
negotiating a resolution of the dispute pursuant to subsection (b), the parties
shall proceed under subsections (d), (e) and (f).
(d) After satisfying the requirements above, such Dispute shall be
submitted to mandatory and binding arbitration at the election of any party
involved in the Dispute (the "Disputing Party"). The arbitration shall be
subject to the Federal Arbitration Act as supplemented by the conditions set
forth in this Appendix. The arbitration shall be conducted in accordance with
the Commercial Arbitration Rules of the American Arbitration Association in
effect on the date the notice of arbitration is served, other than as
specifically modified herein. In the absence of an agreement to the contrary,
the arbitration shall be held in Houston, Texas. The Arbitrator (as defined
below) will allow reasonable discovery in the forms permitted by the Federal
Rules of Civil Procedure, to the extent consistent with the purpose of the
arbitration. During the pendency of the Dispute, each party shall make available
to the Arbitrator and the other parties all books, records and other information
within its control requested by the other parties or the Arbitrator subject to
the confidentiality provisions contained herein, and provided that no such
access shall waive or preclude any objection to such production based on any
privilege recognized by law. Recognizing the express desire of the parties for
an expeditious means of dispute resolution, the Arbitrator may limit the scope
of discovery between the parties as may be reasonable under the circumstances.
In deciding the substance of the parties' claims, the laws of the State of
Delaware shall govern the construction, interpretation and effect of this
Agreement (including this Appendix) without giving effect to any conflict of law
principles. The arbitration hearing shall be commenced promptly and conducted
expeditiously, with each party involved in the Dispute being allocated an equal
amount of time for the presentation of its case. Unless otherwise agreed to by
the parties, the arbitration hearing shall be conducted on consecutive days.
Time is of the essence in the arbitration proceeding, and the Arbitrator shall
have the right and authority to issue monetary sanctions against any of the
parties if, upon a showing of good cause, that party is unreasonably delaying
the proceeding. To the fullest extent permitted by law, the arbitration
proceedings and award shall be maintained in confidence by the Arbitrator and
the parties.
(e) The Disputing Party shall notify the American Arbitration Association
("AAA") and the other parties involved in the Dispute in writing describing in
reasonable detail the nature of the Dispute (the "Dispute Notice"). The
arbitrator (the "Arbitrator") shall be selected within 15 days of the date of
the Dispute Notice by all of the parties from the members of a panel of
arbitrators of the AAA or, if the AAA fails or refuses to provide a list of
potential arbitrators, of the Center for Public Resources and shall be
experienced in commercial arbitration. In the event that the parties are unable
to agree on the selection of the Arbitrator, the AAA shall select the
Arbitrator, using the criteria set forth in this Appendix, within 30 days of the
date of the Dispute Notice. In the event that the Arbitrator is unable to serve,
his or her replacement will be selected in the same manner as the Arbitrator to
be replaced. The Arbitrator shall be neutral. The Arbitrator shall have the
authority to assess the costs and expenses of the arbitration proceeding
(including the arbitrators', and attorneys' fees and expenses) against any or
all parties.
<PAGE>
(f) The Arbitrator shall decide all Disputes and all substantive and
procedural issues related thereto, and shall enforce this Agreement in
accordance with its terms. Without limiting the generality of the previous
sentence, the Arbitrator shall have the authority to issue injunctive relief;
however, the Arbitrator shall not have any power or authority to (i) award
consequential, incidental, indirect or punitive damages or (ii) amend this
Agreement. The Arbitrator shall render the arbitration award, in writing, within
20 days following the completion of the arbitration hearing, and shall set forth
the reasons for the award. In the event that the Arbitrator awards monetary
damages in favor of either party, the Arbitrator must certify in the award that
no indirect, consequential, incidental, indirect or punitive damages are
included in such award. If the Arbitrator's decision results in a monetary
award, the interest to be granted on such award, if any, and the rate of such
interest shall be determined by the Arbitrator in his or her discretion. The
arbitration award shall be final and binding on the parties, and judgment
thereon may be entered in any court of competent jurisdiction, and may not be
appealed except to the extent permitted by the Federal Arbitration Act.
(4) Continuation of Business. Notwithstanding the existence of any Dispute
or the pendency of any procedures pursuant to this Appendix A, the parties agree
and undertake that all payments not in dispute shall continue to be made and all
obligations not in dispute shall continue to be performed.
<PAGE>
Appendix 1
(a) First priority shall be given to maximizing the consistency of the
resolution of the Dispute with the satisfaction of all express obligations of
the parties and their Affiliates as set forth in the Agreement.
(b) Second priority shall be given to resolution of the Dispute in a
manner which best achieves the objectives of the business activities and
arrangements under the Agreement and permits the parties to realize the benefits
intended to be afforded thereby.
(c) Third priority shall be given to such other matters, if any, as the
parties or the Arbitrator shall determine to be appropriate under the
circumstances.
<PAGE>
FIRST AMENDMENT TO AMENDED AND RESTATED
PARENT AGREEMENT
This First Amendment to the Amended and Restated Parent Agreement, dated
as of June 30, 1998 (this "First Amendment"), is entered into by and among
Occidental Chemical Corporation, a New York corporation ("OCC"), Oxy CH
Corporation, a California corporation ("Oxy CH"), Occidental Petroleum
Corporation, a Delaware corporation ("OPC"), Occidental Chemical Holding
Corporation, a California corporation ("OCHC"), Lyondell Petrochemical Company,
a Delaware corporation ("Lyondell"), Millennium Chemicals, Inc., a Delaware
corporation ("Millennium"), and Equistar Chemicals, LP, a Delaware limited
partnership ("Equistar").
WHEREAS, OCC, Oxy CH, OPC, Lyondell, Millennium and Equistar entered into
that certain Amended and Restated Parent Agreement dated as of May 15, 1998 (the
"Parent Agreement");
WHEREAS, OCC, Oxy CH and OCHC effected an assignment and assumption of
certain guarantees, undertakings, promises, rights, covenants and obligations of
OCC and Oxy CH under the Parent Agreement as of June 19, 1998; and
WHEREAS, the parties hereto wish to amend the list of Related Agreements
set forth in Appendix A to the Parent Agreement.
NOW THEREFORE, in consideration of the foregoing and the mutual promises
and covenants of the parties hereto, the parties hereto hereby agree as follows:
1. All capitalized terms that are defined in the Parent Agreement, but are not
defined in this First Amendment, shall have the same meanings as defined in the
Parent Agreement.
2. The following shall be added to the list of Related Agreements in Appendix A
to the Parent Agreement:
"122. First Amendment to Amended and Restated Limited Partnership
Agreement of Equistar Chemicals, LP, dated as of June 30, 1998, by
and among Lyondell LP, Lyondell GP, Millennium LP, Millennium GP,
Occidental GP, Occidental LP1, Occidental LP2 and Occidental
Petrochem Partner GP, Inc., a Delaware corporation."
3. Except as amended by this First Amendment, all the terms and provisions of
the Parent Agreement shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
First Amendment as of the date first above written.
OCCIDENTAL CHEMICAL CORPORATION
By: /s/ David C. Yen
-----------------------------------
Name: David C. Yen
Title: Vice President and Treasurer
OXY CH CORPORATION
By: /s/ David C. Yen
-----------------------------------
Name: David C. Yen
Title: Vice President and Treasurer
OCCIDENTAL PETROLEUM CORPORATION
By: /s/ David C. Yen
-----------------------------------
Name: David C. Yen
Title: Vice President and Treasurer
OCCIDENTAL CHEMICAL HOLDING
CORPORATION
By: /s/ David C. Yen
-----------------------------------
Name: David C. Yen
Title: Vice President and Treasurer
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
By: /s/ T. Kevin De Nicola
--------------------------------------
Name: T. Kevin De Nicola
Title: Vice President
MILLENNIUM CHEMICALS INC.
By: /s/ George H. Hempstead, III
--------------------------------------
Name: George H. Hempstead, III
Title: Senior Vice President
EQUISTAR CHEMICALS, LP
By: /s/ Eugene R. Allspach
--------------------------------------
Name: Eugene R. Allspach
Title: President and Chief Operating
Officer
<PAGE>
EXHIBIT 11.1
MILLENNIUM CHEMICALS INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
EARNINGS
WEIGHTED (LOSS)
SHARES AVERAGE PER
OUTSTANDING # OF SHARES SHARE
----------- ----------- -------------
<S> <C> <C> <C>
BASIC
Shares of Common Stock outstanding at December 31,
1997................................................ 75,099,648 74,484,588
----------- ----------
----------- ----------
Income from continuing operations................. $ 188,000,000
-------------
Weighted average shares outstanding............... 74,484,588
Basic earnings per share from continuing
operations...................................... $ 2.52
Net income........................................ $ 185,000,000
-------------
Weighted average shares outstanding............... 74,484,588
Basic earnings per share.......................... $ 2.48
Shares of Common Stock outstanding at December 31,
1997................................................ 75,099,648 75,099,648
April 1998........................................ 5,600 4,200
July 1998......................................... 36,000 18,000
October 1998...................................... 11,444 2,861
December 1998..................................... 18,000 1,500
----------- ----------
Shares of Common Stock outstanding at December 31,
1998................................................ 75,170,692 75,126,209
----------- ----------
----------- ----------
Income from continuing operations................. $ 163,000,000
-------------
Weighted average shares outstanding............... 75,126,209
Basic earnings per share from continuing
operations...................................... $ 2.17
Net income........................................ $ 164,000,000
-------------
Weighted average shares outstanding............... 75,126,209
Basic earnings per share.......................... $ 2.18
Shares of Common Stock outstanding at December 31,
1998................................................ 75,170,692 75,170,692
Shares repurchased
January 1999.................................. (82,800) (82,800)
February 1999................................. (1,240,300) (1,136,942)
March 1999.................................... (1,449,500) (1,207,917)
April 1999.................................... (639,000) (479,250)
May 1999...................................... (2,125,100) (1,416,733)
June 1999..................................... (1,651,100) (963,142)
July 1999..................................... (435,200) (217,600)
August 1999................................... (1,270,600) (529,417)
October 1999.................................. (10,594) (2,648)
Shares issued
April 1999.................................... 6,000 4,500
June 1999..................................... 3,000 1,750
August 1999................................... 8,960 3,733
October 1999.................................. 201,773 50,443
October 1999.................................. 5,868 1,467
November 1999................................. 9,000 1,500
December 1999................................. 7,468 622
----------- ----------
Shares of Common Stock outstanding at December 31,
1999................................................ 66,508,567 69,198,258
----------- ----------
----------- ----------
<PAGE>
(table continued from previous page)
</TABLE>
<TABLE>
<CAPTION>
EARNINGS
WEIGHTED (LOSS)
SHARES AVERAGE PER
OUTSTANDING # OF SHARES SHARE
----------- ----------- -------------
<S> <C> <C> <C>
Loss from continuing operations................... $(326,000,000)
-------------
Weighted average shares outstanding............... 69,198,258
Basic loss per share from continuing operations... $ (4.71)
Net loss.......................................... $(288,000,000)
-------------
Weighted average shares outstanding............... 69,198,258
Basic loss per share.............................. $ (4.16)
DILUTED
Shares of Common Stock outstanding at December 31,
1997................................................ 75,099,648 74,646,434
----------- ----------
----------- ----------
Income from continuing operations................. $ 188,000,000
-------------
Weighted average shares outstanding............... 74,646,434
Diluted earnings per share from continuing
operations...................................... $ 2.52
Net income........................................ $ 185,000,000
-------------
Weighted average shares outstanding............... 74,646,434
Diluted earnings per share........................ $ 2.48
Shares of Common Stock outstanding at December 31,
1997................................................ 75,099,648 75,099,648
April 1998........................................ 5,600 4,200
July 1998......................................... 36,000 18,000
October 1998...................................... 11,444 2,861
December 1998..................................... 18,000 1,500
Options........................................... 505,000 119,939
Time-vested restricted stock...................... 614,327 357,813
Performance-based restricted stock................ 1,842,982 92,687
----------- ----------
Shares of Common Stock outstanding at December 31,
1998................................................ 78,133,001 75,696,648
----------- ----------
----------- ----------
Income from continuing operations................. $ 163,000,000
-------------
Weighted average shares outstanding............... 75,696,648
Diluted earnings per share from continuing
operations...................................... $ 2.15
Net income........................................ $ 164,000,000
-------------
Weighted average shares outstanding............... 75,696,648
Diluted earnings per share........................ $ 2.17
Shares of Common Stock outstanding at December 31,
1998................................................ 75,170,692 75,170,692
Shares repurchased
January 1999.................................. (82,800) (82,800)
February 1999................................. (1,240,300) (1,136,942)
March 1999.................................... (1,449,500) (1,207,917)
April 1999.................................... (639,000) (479,250)
May 1999...................................... (2,125,100) (1,416,733)
June 1999..................................... (1,651,100) (963,142)
July 1999..................................... (435,200) (217,600)
August 1999................................... (1,270,600) (529,417)
October 1999.................................. (10,594) (2,648)
Shares issued
April 1999.................................... 6,000 4,500
June 1999..................................... 3,000 1,750
August 1999................................... 8,960 3,733
</TABLE>
<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
EARNINGS
WEIGHTED (LOSS)
SHARES AVERAGE PER
OUTSTANDING # OF SHARES SHARE
----------- ----------- -------------
<S> <C> <C> <C>
October 1999.................................. 201,773 50,443
October 1999.................................. 5,868 1,467
November 1999................................. 9,000 1,500
December 1999................................. 7,468 622
Options........................................... 538,000 --
Time-vested restricted stock...................... 396,128 --
Performance-based restricted stock................ 1,816,096 --
-----------
Shares of Common Stock outstanding at December 31,
1999................................................ 69,258,791 69,198,258
----------- ----------
----------- ----------
Loss from continuing operations................... $(326,000,000)
-------------
Weighted average shares outstanding............... 69,198,258
Diluted loss per share from continuing
operations...................................... $ (4.71)
Net loss.......................................... $(288,000,000)
-------------
Weighted average shares outstanding............... 69,198,258
Diluted loss per share............................ $ (4.16)
</TABLE>
<PAGE>
MILLENNIUM CHEMICALS INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Major Factors Affecting 1999 Earnings
Competitive conditions in European and North American titanium dioxide
("TiO2") markets
Lower production costs offset lower selling prices in acetyls
Weak demand and industry oversupply in global fragrance markets
Lower equity income from Equistar
$400 million after-tax charge for loss in value of Equistar investment
Results of Consolidated Operations
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(Dollars in millions, except share data) 1999 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ................................. $ 1,589 $ 1,597 $ 3,048
Operating income .......................... 168 205 449
Equity in (loss) earnings of Equistar ..... (19) 40 18
Net (loss) income ......................... (288) 164 185
Basic (loss) earnings per share ........... (4.16) 2.18 2.48
Diluted (loss) earnings per share ......... (4.16) 2.17 2.48
</TABLE>
The results for 1999, 1998 and 1997 included the effects of unusual items. These
items should be considered in the comparison of annual results.
During 1998, the Company announced its intention to dispose of its remaining
Suburban Propane partnership interests ("Suburban Propane"), and entered into an
agreement to sell this interest to Suburban Propane and its management for $75
million. This transaction was completed in May 1999 and resulted in a gain of
approximately $48 million ($38 million after tax, or $0.55 per share).
In 1999, results were decreased by net after-tax expense of $351 million, or
$5.07 per share, for unusual items. The components of unusual items on a before-
and after-tax basis were: a loss in value of the Equistar investment of $639
million ($400 million after tax, or $5.78 per share); a charge of $28 million
($18 million after tax, or $0.26 per share) for the Company's share of costs
incurred by Equistar associated with a decision to mothball certain polymer
reactors and the consolidation of certain functions at Equistar with Lyondell
Chemical Company ("Lyondell"); income from insurance and legal settlements of
$24 million ($15 million after tax, or $0.21 per share); $14 million ($0.20 per
share) of tax benefits related to prior years; $12 million gain ($5 million
after tax, or $0.08 per share) representing the Company's share of Equistar's
gain on the sale of its colors and compounds business; charges of $7 million ($5
million after tax, or $0.07 per share) for costs of an early retirement program
and the initial devaluation of Brazil's currency on local debt levels; and, the
above mentioned gain of $48 million ($38 million after tax, or $0.55 per share)
from the sale of the Company's interest in Suburban Propane.
During 1998, results were increased by net after-tax income of $54 million, or
$0.72 per share, for unusual items. The components of unusual items on a before-
and after-tax basis were: income from insurance settlements of $27 million ($18
million after tax, or $0.24 per share); $42 million ($0.56 per share) of tax
benefits related to prior years; a gain of $5 million ($3 million after tax, or
$0.04 per share) from the sale of excess property; a charge of $11 million ($6
million after tax, or $0.08 per share) for the Company's share of transition
costs incurred by Equistar to form the venture; $3 million ($2 million after
tax, or $0.03 per share) of strike costs incurred at one of the TiO2 facilities;
and, $2 million ($1 million after tax, or $0.01 per share) of equity losses from
the Suburban Propane investment.
During 1997, results were decreased by $12 million, or $0.16 per share, for
unusual items. The components of unusual items on a before- and after-tax basis
were: a charge of $47 million ($37 million after tax, or $0.50 per share) for
the Company's share of transition costs to form the Equistar venture; income
from insurance settlements of $46 million ($28 million after tax, or $0.38 per
share); and, equity losses of $5 million ($3 million after tax, or $0.04 per
share) from the Company's investment in Suburban Propane.
Exclusive of Unusual Items
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(Dollars in millions, except share data) 1999 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ................................. $ 1,589 $ 1,597 $ 3,048
Operating income .......................... 168 205 449
Equity in (loss) earnings of Equistar ..... (2) 40 18
Net income ................................ 63 110 197
Basic earnings per share .................. 0.91 1.46 2.64
Diluted earnings per share ................ 0.91 1.45 2.64
</TABLE>
During 1999, market conditions for all of the Company's businesses, including
Equistar, were very competitive. Net sales for 1999 were relatively unchanged
from 1998 at $1.589 billion. Operating income, however, declined 18% from $205
million in 1998 to $168 million in 1999. The titanium dioxide and related
products and specialty chemicals segments generated income that was 18% and 33%
lower than 1998, respectively. The acetyls segment had results that were
slightly above 1998. Equity earnings from Equistar turned negative in 1999, from
income of $40 million in 1998 to a loss of $2 million, exclusive of unusual
items, in 1999.
<PAGE>
MILLENNIUM CHEMICALS INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The factors influencing these performances are detailed below. The resulting
basic earnings per share, excluding unusual items, would have been $0.91, a
$0.55 or 38% decline.
1998 marked the first full year of operations after the formation of Equistar.
Accordingly, net sales declined from $3.048 billion to $1.597 billion in 1998
and operating income fell from $449 million to $205 million. Prior to December
1, 1997, the Company consolidated the operations of its polyethylene, alcohol
and related products businesses that were contributed to the Equistar joint
venture formed with Lyondell on that date. Since December 1, 1997, the Company
has accounted for its share of Equistar's results on an equity basis.
Operating income from the Company's wholly owned businesses increased 45% from
$141 million in 1997 to $205 million in 1998. The titanium dioxide and related
products and specialty chemicals segments generated income that was 127% and 2%
higher, respectively, in 1998 than in 1997. The acetyls segment generated income
in 1998, that was 33% lower than in 1997. A full year's 1998 post-interest
equity earnings from Equistar of $40 million compares to December 1997 equity
earnings of $18 million and $308 million of operating income from the
contributed businesses prior to the venture's formation. The improved business
conditions in the TiO2 business were not sufficient to offset the impact of the
downturn of the petrochemicals cycle on Equistar's results. The resulting basic
earnings per share, excluding unusual items, would have been $1.46, a $1.18 or
45% decline.
Segment Analysis
A description of the products and markets for each of the business segments
is included on pages 4 and 5 of this Annual Report. Additional segment
information is included in Note 12 to the consolidated financial statements.
Titanium Dioxide and Related Products
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ................ $ 1,237 $ 1,203 $ 843
Operating income ......... 112 136 60
</TABLE>
1999 versus 1998
Net sales for 1999 of $1.237 billion increased 3% above 1998's level, even
though profitability for TiO2 was disappointingly lower in 1999. Operating
income for 1999 of $112 million was $24 million, or 18% below 1998 income of
$136 million. Weak demand and strong competition in Europe, and pricing pressure
in North America, offset rebounding economic conditions in Asia/Pacific and
strong demand in Brazil. The impact of lower selling prices, higher functional
costs and unfavorable currency exchange partially offset increased sales volumes
and lower manufacturing costs for 1999. Higher production levels, year-on-year,
and a lower number of operating difficulties resulted in lower manufacturing
costs. The worldwide implementation of an SAP-based enterprise resource planning
system, increased research and development spending and costs to reorganize the
sales and marketing organization resulted in functional costs being higher than
expected during the first three-quarters of the year. Fourth-quarter results
reflected the beginning of improved conditions as costs came under control and
volumes improved.
The average TiO2 selling price for 1999 was slightly lower (less than 1%) than
1998. Prices were under pressure during much of the year due to strong
competition in many markets, particularly Europe, where selling prices declined
3%. Brazil's currency, the real, which was devalued in January, remained
volatile for much of the year. Asia/Pacific prices increased 3% due to improved
economic conditions and prices increased 2% in North America. Price increases
were announced late in 1999 for most markets, with realization expected in early
2000. Demand is currently above prior year levels and supply for certain
products is limited in many markets.
Sales volumes for 1999 were 4% above 1998. Slow demand in Europe and competitive
price actions in Europe and North America resulted in 1999 volumes that were 8%
and 6% lower than 1998, respectively. The strengthening of Asian and Australian
economies resulted in a 21% increase in volumes to the region versus 1998.
The overall 1999 TiO2 operating rate was 88% based on annual effective
capacity of 712 thousand metric tons per year, versus last year's rate of 93% on
671 thousand metric tons per year of capacity. The decline in the operating rate
was due to planned and unplanned production shutdowns at certain facilities.
Planned cutbacks in production were made early during 1999 in response to
seasonal slowness in demand and price competition in Europe. In addition,
operational difficulties were experienced during 1999 in connection with an
expansion of capacity and new technology introduction at the Stallingborough,
United Kingdom, facility. Although the difficulties are largely resolved, work
continues to increase output levels to nameplate capacity.
1998 versus 1997
During 1998, profitability improved from increased selling prices, which began
to be realized in mid-1997. Operating income for 1998 increased over
two-and-one-quarter times to $136 million, compared to $60 million in 1997. Net
sales for 1998 increased 43% to $1.203 billion compared to $843 million
2
<PAGE>
MILLENNIUM CHEMICALS INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
for 1997. Higher average selling prices from worldwide price increases accounted
for the majority of the improvement in operating income. Newly acquired
operations also contributed to the increased sales and profits of this segment.
On December 31, 1997, the Company acquired Rhone-Poulenc Chimie S.A.'s French
TiO2 operations, which included two plants providing 125 thousand metric tons
per year of TiO2 capacity along with certain specialty and intermediate chemical
businesses. On July 1, 1998, the Company acquired 99% of the voting shares and
72% of the outstanding shares of Titanio do Brazil S.A. ("Tibras") in Brazil,
consisting of a plant having approximately 60 thousand metric tons per year of
TiO2 capacity and a mineral sands mine with over two million metric tons of
recoverable reserves.
While strong demand existed in the North American and European markets for much
of 1998, depressed markets in the Asia/Pacific region negatively impacted
shipments to that area. Overall sales volumes were 25% higher than 1997, due to
sales attributable to the acquired French and Brazilian operations. Excluding
such operations, sales volumes were 4% lower than in 1997. Toward the end of the
year, increased price competition in Europe limited volumes sold to these
markets and seasonal slowness was evident in North America.
Pricing trends continued upward during 1998 as global price increases were
implemented despite depressed markets in Asia. The average TiO2 selling price
for 1998 was 11% higher than 1997, including the French operations which
historically experienced lower pricing than the balance of this segment. Price
gains by region were 8% in the Americas, 13% in Europe and 31% in Asia/Pacific,
where previous price declines were the most dramatic. Price competition
increased in Europe toward the end of the year due to economic and seasonal
slowness along with competitor actions to increase market share.
The impact of higher prices was partially offset by higher manufacturing and
functional costs. The TiO2 plants operated at approximately 93% of capacity
during 1998, compared to 97% during 1997. The Stallingborough, United Kingdom,
plant was shut down in the fall of 1998 to complete a project to expand capacity
by 41 thousand metric tons per year. Some difficulties in its December start-up
were experienced, lowering production and increasing costs in December 1998 and
into 1999. In addition, production at certain other facilities was slowed in
December in response to the seasonal slowdown in demand and price competition in
Europe, increasing costs for the fourth quarter.
Acetyls
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ....................... $ 227 $ 253 $ 271
Operating income ................ 27 26 39
</TABLE>
1999 versus 1998
On January 18, 1999, the Company completed transactions with Linde AG ("Linde")
relating to the Company's synthesis gas ("syngas") unit in Texas and a 15%
interest in its methanol business whereby the Company received $123 million in
cash. No gain or loss resulted from these transactions. Linde now operates the
syngas facility and holds a 15% interest in the methanol operation.
Net sales for 1999 of $227 million were 10% below 1998 levels of $253 million
while operating income of $27 million was slightly above prior year. Compared to
the prior year, the slightly higher income was primarily due to lower production
costs, realized in part from Linde operating the syngas unit, which offset lower
selling prices during the year.
Despite competitors idling methanol plants and plant mechanical problems at
offshore producers' facilities, 1999 methanol sales volumes were 14% below prior
year due to over-supply in the industry. Strong spot markets in the second and
third quarters increased spot prices in the United States triggering an influx
of imports. Combined with increased United States production, supply/demand was
brought back in balance by September, reducing spot pricing and demand. Overall
selling prices for the year were 7% below 1998. In addition, rising natural gas
costs negatively impacted margins for much of the year. Conditions in the
methanol businesses are expected to remain challenging in 2000 as new industry
capacity enters the market.
Markets for acetic acid were weak during much of 1999 but had a strong finish.
Selling prices in 1999 were 11% below 1998. Prices remained weak, particularly
in export markets and in anticipation of new capacity coming on-stream in 2000.
Volumes were hampered by softness in the polyester fiber business, a downstream
market for acetic acid, during much of 1999, with only a 2% rise in overall
sales volumes during the year. However, strong demand and limited supply
bolstered prices and volumes in the fourth quarter. Short-term conditions look
favorable with strong demand in both the United States and overseas markets
combined with limited supply. Conditions are expected to deteriorate in 2000, as
new capacity comes on-stream.
3
<PAGE>
MILLENNIUM CHEMICALS INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Similarly, conditions in vinyl acetate monomer ("VAM") were weak the first half
of 1999, but improved in the second half. Volumes were 2% behind 1998 due to the
loss of sales from a major customer. However, fourth-quarter volumes were 13%
above the same quarter of 1998. The downstream United States synthetic latex
polymer business and export markets were strong. Selling prices in 1999 were
slightly below prior year. Two $0.03 per pound price increases were largely
successful in 1999. A favorably tighter supply/demand balance is expected
through 2000.
1998 versus 1997
Depressed markets in Asia, combined with overcapacity for some products,
resulted in decreased profits in acetyls during 1998 compared to 1997. Net sales
of acetyls decreased $18 million, or 7%, to $253 million, while operating income
decreased $13 million, or 33% to $26 million. These market conditions resulted
in declining selling prices for all product offerings with prices down 12%, 14%
and 34% for VAM, acetic acid and methanol, respectively, compared to 1997. The
impact of lower prices was partially offset by favorable costs as a result of
the 1997 La Porte, Texas, plant conversion to natural gas feedstock. Initial
difficulties resulting from this conversion were corrected during 1997, with the
full benefit of lower production costs being realized during 1998.
VAM pricing during 1998 was adversely affected by high export volumes at low
prices and competitive pressures. However, sales volumes were 9% above 1997.
Similarly, sales volumes for acetic acid increased 9% in 1998 over 1997 despite
weak Asian markets. A scheduled turnaround of the acetic acid plant was
completed during the year with the shutdown extended in light of weak market
conditions.
Selling prices for methanol were adversely impacted by oversupply due to new
competitor capacity and higher imports. While prices fell an average of 34%
during 1998, sales volumes were 14% higher compared to 1997.
Specialty Chemicals
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Net sales .................... $ 125 $ 141 $ 148
Operating income ............. 29 43 42
</TABLE>
1999 versus 1998
Very competitive conditions existed in the specialty fragrance chemical markets
during 1999. Net sales declined 11% to $125 million for 1999 from $141 million
in 1998. Millennium Specialty Chemicals' operating income of $29 million for
1999 was 33% below the $43 million for 1998. The unfavorable results, compared
to the prior year, were due primarily to lower sales volumes and declining sales
prices for most products in Specialties' main fragrance chemical business. In
addition, 1999 profits from the Colors & Silica business were lower than in 1998
due to lower volumes and related underabsorbed fixed costs.
Sales volumes in 1999 were 13% below prior year due to highly competitive
markets overseas. Attempts to hold pricing resulted in lost volume, in many
instances. Fourth-quarter volumes were 15% above last year's fourth quarter and
12% above the third quarter, indicative of modest recovery in the worldwide
fragrance markets.
Average selling prices for the fragrance business were 3% above prior year
solely from the mix of products sold during the year. Prices have eroded
in most products and these lower price levels are expected to continue in
the year 2000.
The cost of crude sulfate turpentine ("CST"), the principal raw material for
fragrance chemicals, continued on a downward trend during the whole of 1999,
with an average purchase cost of $1.27 per gallon versus $1.97 per gallon last
year. Prices in December hit an historical low of $0.50 per gallon. However,
reduced raw material costs were offset by higher production costs due to lower
plant utilization levels, adverse weather conditions and mechanical problems
occurring in the third quarter.
1998 versus 1997
In 1998, fragrance chemicals had a record year with operating income of $43
million, $1 million higher than 1997. Net sales were down $7 million or 5% to
$141 million as compared to 1997.
While average selling prices were up 4% over 1997, primarily due to favorable
product mix, price competition during the second half of 1998 was experienced,
and continued during 1999. Business conditions were strong through the first
half of the year but became competitive in the third quarter as weakness in the
Asian markets, entry into the markets by new competitors and capacity additions
made mid-year price negotiations difficult.
The continued emphasis on high-margin products during 1998 was partially offset
by lower overall volumes and higher CST costs. Although CST costs declined
during the second half of 1998, the average price for 1998 of $1.97 per gallon
was 15% higher than 1997.
4
<PAGE>
MILLENNIUM CHEMICALS INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Polyethylene,Alcohol and Related Products
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Equity in (loss) earnings of Equistar .... $ (19) $ 40 $ 18
Equity in (loss) earnings of Equistar -
excluding unusual items ............... (2) 40 18
</TABLE>
1999 versus 1998
Equistar's business, which experienced trough conditions in the fourth quarter
of 1998, showed some promise during 1999 as a result of unexpectedly strong
demand and limited supply during much of the year. However, conditions
deteriorated late in 1999. An equity loss from the interest in Equistar,
excluding unusual items, of $2 million in 1999 compared to income of $40 million
in 1998. The unusual items in 1999 included Equistar's sale of its colors and
compounds business (the Company's share--$12 million before tax) and a fourth
quarter $96 million charge for asset write-downs from mothballing certain plant
facilities and severance costs associated with those shutdowns and other
reorganization efforts (the Company's share--$28 million before tax), as
described below.
On an operating basis, Equistar's income (in total) decreased to $258 million in
1999 from $282 million in 1998. Both ethylene and polymer prices rose during the
year after a decline that began in mid-1998. Equistar temporarily shut down some
capacity early in 1999 to help stabilize the supply/demand balance for ethylene.
With good demand for much of the year thereafter, volumes were steady and
similar to 1998 levels. Unfortunately, a run-up in feedstock prices, which began
mid-year, offset much of the price increases. With new capacity expected to come
on-stream in 2000, several steps are planned to manage production and close down
higher-cost facilities. Certain polyethylene reactors are planned to be
mothballed and, accordingly, Equistar wrote down its assets by $77 million in
the fourth quarter of 1999. In addition, a reorganization of support services
for Equistar will result in a reduction in its workforce; severance costs of $19
million were accrued in the fourth quarter of 1999.
Average selling prices for ethylene in 1999 increased 33% above the 1998
average. While the demand for ethylene remained strong for most of the year,
spot prices began to decline in December as supply constraints became less
evident. Sales volumes, which were 6% above 1998 for the full year, dropped at
the end of 1999. Industry inventories remain low. Recently, higher feedstock
costs and low producer inventories have put upward pressure on ethylene pricing.
Similarly, sales prices for polyethylene increased on average 7%, 6% and 8% from
1998 in the high-density, low-density and linear-low-density product lines,
respectively. Again, however, margins were squeezed by the increased cost of
ethylene as feed stock costs rose. Four price increases were implemented in
1999. Demand remained steady for most of the year.
Feedstock costs rose dramatically during the year and offset most of the margin
improvement from selling price increases. Crude oil prices rose to over $27 per
barrel, with Equistar hedging about 50% of its requirements for heavy feeds for
several months late in the year. About 40% of production from heavy feeds are
by-products that are naturally hedged, as sales prices generally fluctuate with
the price of crude oil. Liquid feedstock costs continued to be volatile while
the price of heavy feeds continues to rise.
Synergies achieved through 1999 resulting from combining the operations
contributed by each of Equistar's partners helped to offset the negative impact
of the depressed markets. For 1999, total synergies before transition costs,
were an estimated $282 million.
1998 versus 1997
Equity earnings for 1998, which reflect the Company's share of Equistar's
post-interest profits, were $40 million.
Ethylene and ethylene derivative markets started to decline near the end of the
first quarter of 1998 and reached trough conditions during the fourth quarter of
1998. Equistar reported an operating loss (before interest) of $10 million for
the fourth quarter of 1998 compared to income of $68 million in the third
quarter. While volumes were relatively stable during the year, excess industry
supply, announced new capacity coming on-stream and low feedstock prices put
severe pressure on selling prices. By year-end, ethylene prices had dropped 30%
from January 1998. Following this trend, polyethylene prices also dropped over
25% during 1998, as price competition resulted from overcapacity in those
markets. Other ethylene derivative products have also experienced declines in
prices during 1998, but not as dramatic as polyethylene.
Feedstock costs were at relatively low levels during 1998, offsetting somewhat
the margin of declining prices. Prices for crude oil were down 11% in the month
of December 1998 alone.
5
<PAGE>
MILLENNIUM CHEMICALS INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Interest Expense
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense, net............... $ 69 $ 72 $ 121
</TABLE>
Interest expense in 1999 decreased $3 million. Lower average outstanding debt
levels more than offset the unfavorable impact of higher interest rates.
Compared to 1997, 1998 interest expense decreased significantly as $1 billion of
debt was repaid with the proceeds of forming Equistar on December 1, 1997. Since
70% of the Company's debt is at fixed interest rates, the recent market increase
in rates should not materially affect interest expense or cash flows in 2000.
Liquidity
The Company maintained a solid financial condition throughout 1999. Cash flows
from operations, supplemented with proceeds from the sale of certain of its
interests, provided funding for the Company's dividends, share repurchases and
capital spending programs during 1999 and 1998. In addition, during 1999, the
Company received $75 million in distributions from Equistar and utilized $7
million for working capital requirements. During 1998, the Company utilized $130
million in working capital, primarily due to the payment of various obligations
related to the businesses contributed to Equistar on December 1, 1997, and
increased inventories in contemplation of the temporary shut down and stepped
start-up of the Stallingborough, United Kingdom, facility to complete expansion
efforts there.
The Company believes that, during 2000, cash flows from operations, expected
distributions from Equistar and availability under existing borrowing facilities
will provide adequate support for all of the Company's cash flow needs for
working capital, dividends and capital expenditures for its existing businesses,
as well as the share repurchase program described below.
The Company is in the final stages of talks with the IRS to settle certain
issues relating to the tax years 1986 through 1988. If these issues are
resolved, a payment of about $100 million in taxes and interest could be made
during 2000. This amount has been included in Income taxes payable in the
consolidated balance sheet as of December 31, 1999.
Share Repurchase Programs
In January 1999, the Board of Directors authorized the Company to spend up to
$200 million to repurchase shares of the Company's outstanding common stock
("Common Stock"), from time to time, in the open market and in privately
negotiated transactions, subject to market conditions. This program was
completed in October 1999 with a total of 8,893,600 shares, over 10% of total
outstanding shares, repurchased. In March 2000, the Board of Directors
authorized the repurchase of up to an additional 3,500,000 shares.
Capital Expenditures
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Additions to property,
plant and equipment............. $ 109 $215 $ 152
Acquisitions...................... -- 85 169
</TABLE>
Capital expenditures in 1999 totaled $109 million, a 49% decrease from 1998.
Additions to plant and equipment in 1999 were largely in support of completing
SAP implementations worldwide, excluding Brazil, creating a new research and
technology center for the TiO2 business and various cost reduction and yield
improvement projects across the business units. The Company spent $98 million
over the course of 1999 and 1998 related to the company-wide, excluding Brazil,
implementation of SAP. In connection with this implementation, $80 million of
costs were capitalized and $18 million were expensed. Capital expenditures are
expected to approximate the level of depreciation and amortization in 2000.
Capital expenditures in 1998 and 1997 were primarily related to the expansion of
capacity at the Stallingborough, United Kingdom, facility, the worldwide,
excluding Brazil, SAP implementation, and various cost reduction and yield
improvement projects.
Financing and Capital Structure
[GRAPHIC]
Net debt (short-term and long-term debt less cash) was $992 million at December
31, 1999, compared to $979 million at December 31, 1998. A subsidiary of the
Company guarantees certain debt obligations of Equistar up to $750 million. At
December 31, 1999, the Company had approximately $328 million of unused
availability under short-term lines of credit and its bank credit agreement.
Results from operations before interest, taxes, other income, equity earnings
(losses), depreciation and amortization ("EBITDA") as a factor to interest
expense was 4.0 times during 1999 compared to 4.3 times in 1998. The Company
maintains an investment grade rating with Standard & Poor's and Moody's Investor
Services and is currently in compliance with its bank credit agreement and bond
indentures. The Company recently amended one of the financial convenants in its
credit agreement to remain compliant after the 1999 charge for loss in value of
the Equistar investment.
6
<PAGE>
MILLENNIUM CHEMICALS INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Inflation
The financial statements are presented on an historical cost basis. While the
United States inflation rate has been modest for several years, the Company
operates in many international areas with both inflation and currency issues.
The ability to pass on inflation costs is an uncertainty due to general economic
conditions and competitive situations.
Foreign Currency Matters
The functional currency of each of the Company's non-United States operations
(principally, the TiO2 operations in the United Kingdom, France, Brazil and
Australia) is the local currency. The impact of currency translation in
combining the results of operations and financial position of such operations
has not, historically, been material to the consolidated financial position of
the Company. The 1999 devaluation of Brazil's currency, the real, had a $6
million negative impact on the Company's consolidated operations despite a
majority of sales in Brazil being referenced to U.S. dollar prices. In addition,
partially as a result of translating the Brazilian financial statements into
U.S. dollars, consolidated shareholders' equity decreased approximately $46
million during 1999 due to exchange rate changes. Future events, which may
significantly increase or decrease the risk of future movement in the real, or
other currencies in which the Company conducts business, cannot be predicted.
The Company generates revenue from export sales and revenue from operations
conducted outside the United States that may be denominated in currencies other
than the relevant functional currency. Revenues made outside the United States
accounted for 62%, 53% and 22% of total revenues in 1999, 1998 and 1997,
respectively, with only a portion denominated in currencies other than the U.S.
dollar. The Company hedges certain revenues and costs to minimize the impact of
changes in the exchange rates of those currencies compared to the functional
currencies. At December 31, 1999, the Company had forward exchange contracts to
sell Australian dollars for U.S. dollars aggregating in U.S. dollars $7 million,
which mature within 90 days and approximate fair value.
The Company does not use derivative financial instruments for trading or
speculative purposes. Foreign currency losses aggregated $13 million in 1999
(including the impact from Brazil's currency devaluation), and $4 million in
each of 1998 and 1997.
Financial Instruments and
other Market Related Risks
The fair value of all short-term financial instruments (i.e., trade receivables,
notes payable, etc.) and restricted cash approximates their carrying value due
to their short maturity or ready availability. The fair value of the Company's
other financial instruments are based upon estimates received from independent
financial advisors as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(Dollars in millions) 1999 1998
- ----------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Borrowings under
the Revolving Credit Agreement....... $ 261 $ 258 $ 235 $ 235
Senior Notes and Debentures........... $ 749 $ 661 $ 749 $ 695
</TABLE>
In addition, the Company has various contractual obligations to purchase raw
materials used in the production of its products - titanium ores for TiO2,CST
for fragrance and flavor chemicals, methanol for acetic acid and ethylene for
VAM. Commitments for such materials are generally at market prices or at fixed
prices but subject to escalation for inflation. Accordingly, the fair value of
such obligations approximates their contractual value.
Historical Cyclicality of Certain Products
The markets for ethylene and polyethylene, in which the Company participates
through its interest in Equistar, are highly cyclical, resulting in volatile
profits over the business cycle. The global markets for TiO2 and acetyls are
also cyclical, although to a lesser degree. In contrast, the Company believes
that, over a business cycle, the markets for specialty chemicals are generally
more stable in terms of industry demand, selling prices and operating margins.
Demand for ethylene and its derivatives has fluctuated from year to year.
However, over the last ten years, demand for ethylene and its primary
derivative, polyethylene, has increased an average of approximately 4% per year.
The industry is particularly sensitive to capacity additions, and producers have
historically experienced alternating periods of inadequate ethylene and/or
polyethylene capacity, resulting in increased selling prices and operating
margins, followed by periods of large capacity additions, resulting in declining
capacity utilization rates, selling prices and operating margins. The
cyclicality of petrochemicals' profitability is further influenced by
fluctuations in the price of feedstocks for ethylene, which generally follow
price trends for crude oil. Producers of ethylene for merchant supply to
unaffiliated customers typically experience greater variations in profitability
when industry supply and demand relationships are at extremes, in comparison to
more
7
<PAGE>
MILLENNIUM CHEMICALS INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
integrated competitors. Equistar currently consumes or sells approximately 75%
of its ethylene production in its or its partners' downstream derivative
facilities, which has the effect of reducing volatility. It is not possible to
predict accurately the effect that future changes in feedstock costs, market
conditions and other factors will have on Equistar's profitability.
TiO2 is considered an intermediate, performance chemical, the demand for which
is influenced by changes in the gross domestic product of various regions of the
world. The worldwide TiO2 industry has experienced cyclical demand, supply and
pricing, although to a lesser degree than the petrochemical industry. Demand for
TiO2, which has fluctuated from year to year and varies among the regional
marketplaces in the world, has increased an average of approximately 3% per year
over the last five years. The industry is also sensitive to changes in its
customers' marketplaces, which are primarily the paint and coatings, plastics
and paper industries. In recent history, consolidations and negative business
conditions within certain of those industries have put pressure on TiO2 prices
as companies compete to keep volumes placed.
Euro Conversion
On January 1, 1999, eleven of fifteen member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
("legacy currencies") and the European Union's common currency, the euro. As of
that date, the euro began trading on currency exchanges and may be used in
business transactions. Thus far, the euro has not had a significant impact on
the Company's product-pricing strategy as prices are more dependent on local
demand requirements, production costs and costs to serve local markets.
- -------------------------------------------------------------------------------
Report of Independent Accountants
To the Board of Directors and Shareholders
of Millennium Chemicals Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
shareholders' equity present fairly, in all material respects, the financial
position of Millennium Chemicals Inc. (the "Company") at December 31, 1999 and
1998, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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
- --------------------------
PricewaterhouseCoopers LLP
Florham Park, New Jersey
January 31, 2000
8
<PAGE>
MILLENNIUM CHEMICALS INC.
Consolidated Balance Sheets
(Dollars in millions,except share data)
<TABLE>
<CAPTION
- ----------------------------------------------------------------------------------------------
As of December 31 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents ............................................ $ 110 $ 103
Trade receivables, net ............................................... 268 242
Inventories .......................................................... 361 334
Assets of discontinued interests ..................................... -- 148
Other current assets ................................................. 118 109
------- -------
Total current assets ................................................ 857 936
Property, plant and equipment, net .................................... 995 1,044
Investment in Equistar ................................................ 800 1,519
Other assets .......................................................... 194 189
Goodwill .............................................................. 404 412
------- -------
Total assets ......................................................... $ 3,250 $ 4,100
------- -------
------- -------
Liabilities and shareholders' equity
Current liabilities
Notes payable ........................................................ $ 56 $ 29
Current maturities of long-term debt ................................. 23 14
Trade accounts payable ............................................... 153 113
Income taxes payable ................................................. 97 23
Accrued expenses and other liabilities ............................... 166 200
------- -------
Total current liabilities ........................................... 495 379
Long-term debt ........................................................ 1,023 1,039
Deferred income taxes ................................................. -- 334
Other liabilities ..................................................... 701 755
------- -------
Total liabilities ................................................... 2,219 2,507
------- -------
------- -------
Commitments and contingencies (Note 11)
Minority interest ..................................................... 16 15
Shareholders' equity
Preferred stock (par value $0.01 per share,
authorized 25,000,000 shares; none issued and
outstanding) ........................................................ -- --
Common stock (par value $0.01 per share,
authorized 225,000,000 shares; issued
77,891,586 and 77,873,586 shares in 1999 and 1998, respectively) ...... 1 1
Paid in capital ....................................................... 1,335 1,333
Retained (deficit) earnings ........................................... (32) 294
Unearned restricted shares ............................................ (28) (35)
Cumulative other comprehensive loss ................................... (61) (15)
Treasury stock (at cost, 9,567,263 and 502,572 shares in 1999 and 1998,
respectively) ........................................................ (210) (7)
Deferred compensation ................................................. 10 7
------- -------
Total shareholders' equity ........................................... 1,015 1,578
------- -------
Total liabilities and shareholders' equity ............................ $ 3,250 $ 4,100
------- -------
------- -------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
9
<PAGE>
MILLENNIUM CHEMICALS INC.
Consolidated Statements of Operations
(Dollars in millions,except share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Year Ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ....................................................... $1,589 $1,597 $3,048
Operating costs and expenses:
Cost of products sold .......................................... 1,112 1,134 2,180
Depreciation and amortization .................................. 105 102 203
Selling, development and administrative expense ................ 204 156 216
------ ------ ------
Operating income .............................................. 168 205 449
Interest expense ................................................ (72) (76) (131)
Interest income ................................................. 3 4 10
Equity in (loss) earnings of Equistar ........................... (19) 40 18
Other income, net ............................................... 29 29 1
Loss in value of Equistar investment ............................ (639) -- --
------ ------ ------
(Loss) income from continuing operations before provision for
income taxes and minority interest ............................. (530) 202 347
Benefit (provision) for income taxes ............................ 209 (37) (159)
------ ------ ------
(Loss) income from continuing operations before minority interest (321) 165 188
Minority interest ............................................... (5) (2) --
------ ------ ------
(Loss) income from continuing operations ........................ (326) 163 188
Income (loss) from discontinued operations (net of income
taxes of $10, $1, and ($2), respectively) ...................... 38 1 (3)
------ ------ ------
Net (loss) income ............................................... $ (288) $ 164 $ 185
------ ------ ------
------ ------ ------
(Loss) income per share from continuing operations .............. $(4.71) $ 2.17 $ 2.52
------ ------ ------
Income (loss) per share from discontinued operations ............ $ 0.55 $ 0.01 $(0.04)
------ ------ ------
Net (loss) income per share--basic .............................. $(4.16) $ 2.18 $ 2.48
------ ------ ------
Net (loss) income per share--diluted ............................ $(4.16) $ 2.17 $ 2.48
------ ------ ------
</TABLE>
See Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10
<PAGE>
MILLENNIUM CHEMICALS INC.
Consolidated Statements of Cash Flows
(Dollars in millions)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Year Ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
(Loss) income from continuing operations ............................... $ (326) $ 163 $ 188
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ......................................... 105 102 203
Loss in value of Equistar investment .................................. 639 -- --
Deferred income tax (benefit) provision ............................... (247) 54 122
Restricted stock amortization ......................................... 8 6 23
Equity in loss (earnings) of Equistar ................................. 19 (40) (18)
Minority interest ..................................................... 5 2 --
Changes in assets and liabilities (net of acquisitions and dispositions):
(Increase) decrease in trade receivables ............................ (29) 24 141
(Increase) decrease in inventories .................................. (43) (42) 14
(Increase) in other current assets .................................. (11) (45) (40)
(Increase) decrease in investments and other assets ................. (27) 86 58
Increase (decrease) in trade accounts payable ....................... 45 15 (97)
Increase (decrease) in accrued expenses and other
liabilities and income taxes payable ............................... 31 (82) (124)
Decrease in other liabilities ....................................... (146) (93) (87)
------ ------ ------
Cash provided by operating activities ................................... 23 150 383
Cash flows from investing activities
Capital expenditures ................................................... (109) (215) (152)
Acquisition of businesses .............................................. -- (85) (169)
Proceeds from Equistar ................................................. -- -- 750
Accounts receivable collection through Equistar ........................ -- 225 25
Distributions from Equistar ............................................ 75 317 18
Proceeds from syngas transaction ....................................... 123 -- --
Proceeds from sale of Suburban Propane investment ...................... 75 -- --
Proceeds from sale of fixed assets ..................................... 13 10 2
------ ------ ------
Cash provided by investing activities ................................. 177 252 474
Cash flows from financing activities
Dividends to shareholders .............................................. (38) (47) (46)
Repurchases of common stock ............................................ (200) -- --
Contribution to Suburban Propane ....................................... -- -- (22)
Proceeds from long-term debt ........................................... 118 172 185
Repayment of long-term debt ............................................ (93) (519) (1,217)
Increase (decrease) in notes payable ................................... 27 29 (98)
------ ------ ------
Cash used in financing activities ..................................... (186) (365) (1,198)
Effect of exchange rate changes on cash ................................. (7) 2 (3)
------ ------ ------
Increase (decrease) in cash and cash equivalents ........................ 7 39 (344)
Cash and cash equivalents at beginning of year .......................... 103 64 408
------ ------ ------
Cash and cash equivalents at end of year ................................ $ 110 $ 103 $ 64
------ ------ ------
------ ------ ------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
11
<PAGE>
MILLENNIUM CHEMICALS INC.
Consolidated Statements of Changes in Shareholders' Equity
(In millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock
------------------
Issued and Unearned Cumulative Other
Outstanding Treasury Deferred Paid In Retained Restricted Comprehensive
Shares Amount Stock Compensation Capital Earnings Shares Loss Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 77 $ 1 $ -- $ -- $ 1,319 $ 38 $ (50) $ 10 $1,318
Comprehensive income
Net income 185 185
Other comprehensive income
--Currency translation adjustment (16) (16)
------ ------ ------ ------ ------- ----- ----- ------ ------
Total comprehensive income -- -- -- -- -- 185 -- (16) 169
Amortization and adjustment of
unearned restricted shares (1) 15 8 23
Dividends to shareholders (46) (46)
------ ------ ------ ------ ------- ----- ----- ------ ------
Balance at December 31, 1997 76 1 -- -- 1,334 177 (42) (6) 1,464
Comprehensive income
Net income 164 164
Other comprehensive income
-Currency translation adjustment (9) (9)
------ ------ ------ ------ ------- ----- ----- ------ ------
Total comprehensive income -- -- -- -- -- 164 -- (9) 155
Amortization and adjustment of
unearned restricted shares 1 (1) 7 6
Shares purchased by rabbi trust (1) (7) 7 --
Dividends to shareholders (47) (47)
------ ------ ------ ------ ------- ----- ----- ------ ------
Balance at December 31, 1998 76 1 (7) 7 1,333 294 (35) (15) 1,578
Comprehensive loss
Net loss (288) (288)
Other comprehensive income
- -Currency translation adjustment (46) (46)
------ ------ ------ ------ ------- ----- ----- ------ ------
Total comprehensive loss -- -- -- -- -- (288) -- (46) (334)
Amortization and adjustment of
unearned restricted shares 1 1 7 8
Shares repurchased (9) (200) (200)
Shares purchased by rabbi trust (3) 3 --
Options exercised 1 1
Dividends to shareholders (38) (38)
------ ------ ------ ------ ------- ----- ------ ------ ------
Balance at December 31, 1999 68 $ 1 $ (210) $ 10 $ 1,335 $ (32) $ (28) $ (61) $1,015
====== ====== ====== ====== ======= ===== ====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
12
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions,except share data)
Note 1--Description of Company
Millennium Chemicals Inc. (the "Company") is a major international chemical
company, with leading market positions in a broad range of commodity,
industrial, performance and specialty chemicals, operating through its
subsidiaries: Millennium Inorganic Chemicals Inc. (and its non-United States
affiliates), Millennium Petrochemicals Inc. and Millennium Specialty Chemicals
Inc.; and, beginning December 1, 1997, through its interest in Equistar
Chemicals, LP ("Equistar"), a joint venture formed by the Company and Lyondell
Chemical Company ("Lyondell") to jointly own and operate the petrochemical and
polymer businesses of the Company and Lyondell. On May 15, 1998, the Company's
interest in Equistar was reduced to 29.5% with the addition of the ethylene,
propylene, ethylene oxide and derivatives businesses of Occidental Petroleum
Corporation's ("Occidental") chemical subsidiary (see Note 3).
The Company was incorporated on April 18, 1996, and has been publicly owned
since October 1, 1996, when Hanson PLC ("Hanson") transferred its chemical
operations to the Company and, in consideration, all of the then outstanding
shares of the Company's common stock ("Common Stock") were distributed pro rata
to Hanson's shareholders (the "Demerger").
On December 31, 1997, the Company completed the purchase of the shares of
Rhone-Poulenc Chimie S.A.'s Thann et Mulhouse titanium dioxide ("TiO2") and
related intermediate and specialty chemical operations in France for $185,
including assumed debt. The operations in France provide capacity to produce
approximately 125 thousand metric tons per year of TiO2. The acquisition was
accounted for using the purchase method and the purchase price was allocated to
the net assets acquired, principally property, plant and equipment and working
capital, based on their fair value.
On July 1, 1998, the Company completed the acquisition of 99% of the voting
shares and 72% of the outstanding shares of Titanio do Brazil S.A. ("Tibras"),
Brazil's only integrated TiO2 producer, for $129, including assumed debt. This
acquisition was also accounted for using the purchase method of accounting with
the purchase price allocated to the net assets acquired, principally property,
plant and equipment and working capital, based on their fair value. The two
operations comprising Tibras included a plant which has capacity to produce
approximately 60 thousand metric tons per year of TiO2 and a mineral sands mine
with over 2 million metric tons of recoverable reserves.
On January 18, 1999, the Company completed transactions with Linde AG ("Linde")
relating to the Company's synthesis gas ("syngas") unit in La Porte, Texas, and
a 15% interest in its methanol business, whereby the Company received $123 in
cash. Linde operates the syngas facility under a long-term lease with a purchase
option. In addition, Linde operates and holds a 15% interest in the methanol
facility. No gain or loss resulted from these transactions.
On May 26, 1999, the Company sold its 26.4% combined subordinated and general
partnership interest in Suburban Propane Partners, L.P. and Suburban Propane,
L.P. (collectively "Suburban Propane") to Suburban Propane and its management
for $75 in cash, resulting in an after-tax gain of $38. As such, Suburban
Propane is reflected as a discontinued operation for all periods presented.
Note 2--Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries. Minority interest
represents the minority ownership of Tibras at cost. All significant
intercompany accounts and transactions have been eliminated.
Estimates and Assumptions: 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 at the date of the financial statements, 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.
Reclassification: Certain prior year balances have been reclassified to conform
with the current year presentation.
Revenue Recognition: Revenue is recognized upon shipment of product to the
customer or upon usage of the product by the customer in the case of consignment
inventories.
Cash Equivalents: Cash equivalents represent investments in short-term deposits
and commercial paper with banks which have original maturities of 90 days or
less. In addition, other assets include approximately $29 and $31 in restricted
cash at December 31, 1999 and 1998, respectively, which is on deposit to satisfy
insurance claims.
Inventories: Inventories are stated at the lower of cost or market value. For
certain United States operations representing 47% and 41% of consolidated
inventories at December 31, 1999 and 1998, respectively, cost is determined
under the last-in, first-out (LIFO) method. The first-in, first-out (FIFO)
method, or methods which approximate FIFO, are used by all other subsidiaries.
13
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions,except share data)
Property, Plant and Equipment: Property, plant and equipment is stated on the
basis of cost. Depreciation is provided by the straight-line method over the
estimated useful lives of the assets, generally 20 to 40 years for buildings and
5 to 25 years for machinery and equipment. Major renewals and improvements are
capitalized, while maintenance and repair costs are expensed as incurred.
Capitalized Software Costs: The Company capitalizes costs incurred in the
acquisition and modification of computer software used internally, including
consulting fees and costs of employees dedicated solely to a specific project.
Such costs are amortized over periods not exceeding 7 years and are subject to
impairment evaluation under SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of".
Goodwill: Goodwill represents the excess of the purchase price over the fair
value of net assets allocated to acquired companies. Goodwill is being amortized
using the straight-line method over 40 years. Management periodically evaluates
goodwill for impairment based on the anticipated future cash flows attributable
to its 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 is adjusted. In the
opinion of management, no impairment of goodwill existed at December 31, 1999.
Environmental Liabilities and Expenditures: Accruals for environmental matters
are recorded in operating expenses when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated. Accrued
liabilities are exclusive of claims against third parties, except where payment
has been received or the amount of liability or contribution by such other
parties, including insurance companies, has been agreed, and are not discounted.
In general, costs related to environmental remediation are charged to expense.
Environmental costs are capitalized if the costs increase the value of the
property and/or mitigate or prevent contamination from future operations.
Foreign Currency: Assets and liabilities of the Company's foreign subsidiaries
are translated at the exchange rates in effect at the balance sheet dates, while
revenue, expenses and cash flows are translated at average exchange rates for
the reporting period. Resulting translation adjustments are recorded in the
currency translation account in Shareholders' equity. Gains and losses resulting
from changes in foreign currency on transactions denominated in currencies other
than the functional currency of the respective subsidiary are generally
recognized in income as they occur. Forward exchange contracts are used to
manage the exposure to foreign currency fluctuations on certain of these
transactions. Unrealized gains and losses related to these contracts are
deferred and reported as part of the underlying transaction when settled. The
cash flows from such contracts are classified consistent with cash flows from
the transactions or events being hedged.
Federal Income Taxes: Deferred income taxes result from temporary differences
between the financial statement basis and income tax basis of assets and
liabilities and are computed using enacted marginal tax rates of the respective
tax jurisdictions. Valuation allowances are provided against deferred tax assets
which are not likely to be realized in full. The Company and certain of its
subsidiaries have entered into tax-sharing and indemnification agreements with
Hanson or its subsidiaries in which the Company and/or its subsidiaries
generally agreed to indemnify Hanson or its subsidiaries for income tax
liabilities attributable to periods when such other operations were included in
the consolidated tax returns of the Company's subsidiaries.
Research and Development: The cost of research and development efforts is
expensed as incurred. Such costs aggregated $26, $21 and $28 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Earnings per share: The weighted-average number of equivalent shares of Common
Stock outstanding used in computing earnings per share for 1999, 1998 and 1997
was as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Basic ....................... 69,198,258 75,126,209 74,484,588
Options ..................... -- 119,939 31,846
Restricted shares ........... -- 450,500 130,000
Diluted ..................... 69,198,258 75,696,648 74,646,434
</TABLE>
The 1999 computation of diluted earnings per share does not include 33,628
options to purchase Common Stock and 464,079 restricted shares issued under the
Long Term Stock Incentive Plan ("Stock Incentive Plan"), as their effect would
be antidilutive.
14
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 3--Investment in Equistar
On December 1, 1997, the Company and Lyondell completed the formation of
Equistar, a joint venture partnership created to own and operate the
petrochemical and polymer businesses of the Company and Lyondell. The Company
contributed to Equistar substantially all of the net assets of its polyethylene,
performance polymer and ethyl alcohol businesses. The Company retained $250 from
the proceeds of accounts receivable collections and substantially all the
accounts payable and accrued expenses of its contributed businesses existing on
December 1, 1997, and received proceeds of $750 from borrowings under a new
credit facility entered into by Equistar. The Company used the $750 that it
received to repay debt. A subsidiary of the Company guarantees $750 of
Equistar's credit facility. Equistar was owned 57% by Lyondell and 43% by the
Company until May 15, 1998, when the Company and Lyondell expanded Equistar with
the addition of the ethylene, propylene, ethylene oxide and derivatives
businesses of Occidental's chemical subsidiary. Occidental contributed the net
assets of those businesses (including approximately $205 of related debt) to
Equistar. In exchange, Equistar borrowed an additional $500, $420 of which was
distributed to Occidental and $75 to the Company. Equistar is now owned 41% by
Lyondell, 29.5% by Occidental and 29.5% by the Company. No gain or loss resulted
from these transactions.
Equistar is managed by a Partnership Governance Committee consisting of
representatives of each partner. Approval of Equistar's strategic plans and
other major decisions requires the consent of the representatives of the three
partners. All decisions of Equistar's Governance Committee that do not require
unanimity among the partners may be made by Lyondell's representatives alone.
The investment in Equistar at the date of contribution represented the carrying
value of the Company's contributed net assets, less cash received, and
approximated the fair market value of its interest in Equistar based upon
independent valuation. The Company accounts for its interest in Equistar using
the equity method. The difference between the carrying value of the Company's
investment and its underlying equity in the net assets of Equistar ("goodwill")
has been amortized over 25 years.
In furthering the Company's business strategy to de-emphasize commodity
chemicals, the Board of Directors of the Company in December 1999 approved two
actions to advance the Company's efforts to dispose of its Equistar investment.
One such action was an offer to Equistar's other partners to sell to them the
Company's 29.5% interest ("the Offer"). Both partners have notified the Company
that the Offer has been declined. The Company has a 180-day period to sell its
interest to a third party on terms at least as favorable as the Offer. In
addition, the Board authorized the Company to retain an independent financial
advisor to aid in the marketing and sale of its Equistar investment.
The actions authorized by the Board resulted in an assessment that the carrying
amount of the Equistar investment exceeded its net realizable value, given the
strategy to dispose of this investment in the short term. Accordingly, 1999
income includes a charge of $639 ($400 after tax) to reduce the carrying amount
of the Equistar investment (including underlying goodwill) to an estimated fair
value of $800. The estimated fair value was determined by evaluating, among
other things, the estimated discounted future cash flows of Equistar, current
market interest for this investment and estimated disposal costs, including
income taxes.
During 1999, 1998 and 1997, Equistar recorded income and expense from various
unusual items, for which the Company's share is included in Equity in (loss)
earnings from Equistar. In the fourth quarter of 1999, Equistar announced the
closure of certain of its facilities and the reorganization of certain support
services together with Lyondell. A charge of $96 was made, which included asset
write-downs and severance and related costs of $77 and $19, respectively. The
Company's share of such charge was $28. Also in 1999, Equistar recorded a gain
of $41 on the sale of its colors and compounds business. The Company's share of
such gain was $12. In addition, certain costs related to the formation of
Equistar were incurred, the Company's share of which was $1, $11 and $47, during
1999, 1998 and 1997, respectively.
Because of the significance of the Company's interest in Equistar to its total
results of operations, the separate financial statements of Equistar are
included in the Company's 1999 Annual Report filed on Form 10-K.
15
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions,except share data)
Note 4--Supplemental Information
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Trade receivables
Trade receivables ................................ $ 270 $ 245
Allowance for doubtful accounts .................. (2) (3)
----- -----
$ 268 $ 242
===== =====
Inventories
Finished products ................................ $ 167 $ 139
In-process products .............................. 29 28
Raw materials .................................... 116 117
Other inventories ................................ 49 50
----- -----
$ 361 $ 334
===== =====
</TABLE>
Inventories valued on a LIFO basis were approximately $31 and $41 less than the
amount of such inventories valued at current cost at December 31, 1999 and 1998,
respectively.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Property, Plant and Equipment
Land and buildings ........................... $ 247 $ 267
Machinery and equipment ...................... 1,419 1,377
====== ======
1,666 1,644
Allowance for depreciation
and amortization ............................ (671) (600)
------ ------
$ 995 $1,044
====== ======
Goodwill ..................................... $ 484 $ 480
Accumulated amortization ..................... (80) (68)
------ ------
$ 404 $ 412
====== ======
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------
<S> <C> <C> <C>
Amortization expense ............ $ 12 $ 14 $ 45
</TABLE>
Rental expense for operating leases is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals .................. $ 13 $ 12 $ 55
</TABLE>
Future minimum rental commitments under non-cancelable operating leases, as of
December 31, 1999, are as follows:
<TABLE>
<C> <C>
2000 ........................ $13
2001 ........................ 8
2002 ........................ 6
2003 ........................ 4
2004 ........................ 3
Thereafter .................. 19
</TABLE>
Cash paid for interest and taxes:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Interest (net of interest income) ............ $ 67 $ 72 $129
Taxes (net of refunds) ....................... $ 41 $ 40 $ 53
</TABLE>
Note 5--Income Taxes
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Pretax (loss) income is
generated from
United States .............................. $(556) $ 101 $ 321
Foreign .................................... 26 101 26
----- ----- -----
$(530) $ 202 $ 347
===== ===== =====
Income tax (benefit) provision
is comprised of
Federal
Current .................................. $ 9 $ (36) $ 19
Deferred ................................. (247) 43 116
Foreign .................................... 22 23 6
State and local ............................ 17 8 16
----- ----- -----
$(199) $ 38 $ 157
===== ===== =====
Income tax (benefit) provision
is classified as
Continuing operations ...................... $(209) $ 37 $ 159
Discontinued operations .................... 10 1 (2)
----- ----- -----
$(199) $ 38 $ 157
===== ===== =====
</TABLE>
The Company's effective income tax rate differs from the amount computed by
applying the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Continuing Operations
Statutory federal income tax rate ....... (35.0)% 35.0% 35.0%
State and local income taxes,
net of federal benefit ................. 1.0 2.4 3.0
Provision for non-deductible
expenses, primarily
goodwill amortization .................. 2.5 7.6 5.2
Foreign rate differential ................ (2.5) (5.1) --
Loss in value of Equistar ................ (2.9) -- --
Tax benefit from previous years .......... (1.6) (20.8) --
Other .................................... (0.9) (0.8) 2.6
----- ----- -----
Effective income tax rate ................ (39.4)% 18.3% 45.8%
===== ===== =====
Discontinued operations
Effective income tax rate ............... 20.8% 38.9% 45.8%
===== ===== =====
</TABLE>
As a result of favorable tax settlements and judgements, the Company recorded
benefits of $14 and $42 in 1999 and 1998, respectively, related to taxes
recoverable from previous years' tax filings. The difference between the
statutory tax rate and effective tax rate for discontinued operations relates to
the difference in tax basis of stock sold compared to the carrying value of
related assets.
16
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions,except share data)
Significant components of deferred taxes are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Environmental and legal obligations .................. $ 22 $ 54
Other postretirement benefits
and pension obligations ............................ 32 47
Net operating loss carryforwards .................... 45 20
Capital loss carryforwards .......................... 76 136
AMT credits ......................................... 80 98
Other accruals ...................................... 90 40
---- ----
345 395
Valuation allowance against
capital loss carryforwards ......................... (76) (136)
---- ----
Total deferred tax assets ......................... 269 259
---- ----
Deferred tax liabilities
Excess of book over tax basis in property,
plant and equipment ................................ 66 400
Taxes related to potential disposal of Equistar ..... 184 --
Other ............................................... 19 183
---- ----
Total deferred tax liabilities ..................... 269 583
---- ----
Net deferred tax liabilities ($1 in 1999 and
$10 in 1998, classified in Other current assets) .. $ -- $324
==== ====
</TABLE>
At December 31, 1999, certain foreign subsidiaries of the Company had available
net operating loss carryforwards aggregating $157, which are subject to certain
limitations on their use. The capital loss carryforwards expire in 2001, while
the AMT credits and net operating loss carryforwards have no expiration.
Certain of the income tax returns of the Company's subsidiaries are currently
under examination by the Internal Revenue Service and various state tax
agencies. In the opinion of management, any assessments which may result will
not have a material adverse effect on the financial position or results of
operations of the Company. The Company is in the final stages of talks with the
IRS to settle certain issues relating to the tax years 1986 through 1988. If
these issues are resolved, a payment of about $100 million in taxes and interest
could be made during 2000. This amount has been included in Income taxes payable
in the consolidated balance sheet as of December 31, 1999.
Note 6--Long-Term Debt and Credit
Arrangements
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit Agreement bearing interest at
the bank's prime lending rate, or at LIBOR
or NIBOR plus .275%, at the option of the
Company, plus a Facility Fee of .15% to be
paid quarterly .................................. $ 261 $ 235
7% Senior Notes due 2006 .......................... 500 500
7.625% Senior Debentures due 2026 ................. 249 249
Debt payable through 2007 at interest rates
ranging from 2.4% to 22% ........................ 36 69
Less current maturities of long-term debt ......... (23) (14)
------ -------
$1,023 $ 1,039
====== =======
</TABLE>
Under the Revolving Credit Agreement, as most recently amended on January 12,
2000, certain of the Company's subsidiaries may borrow up to $500 under an
unsecured multi-currency revolving credit facility, which matures in July 2001
(the "Credit Agreement"). The Company guarantees borrowings under this facility.
Borrowings under the Credit Agreement may consist of standby loans or
uncommitted competitive loans offered by syndicated banks through an auction bid
procedure. Loans may be borrowed in U.S. dollars and/or other currencies. The
proceeds from the borrowings may be used to provide working capital and for
general corporate purposes.
The weighted-average interest rate for borrowings under this Credit Agreement
was 4.1%, 5.6% and 6.4% for 1999, 1998 and 1997, respectively.
The Credit Agreement contains covenants and provisions that restrict, among
other things, the ability of the Company and its material subsidiaries to: (i)
create liens on any of its property or assets, or assign any rights to or
security interests in future revenues; (ii) engage in sale-and-leaseback
transactions; (iii) engage in mergers, consolidations or sales of all or
substantially all of their assets on a consolidated basis; (iv) enter into
agreements restricting dividends and advances by their subsidiaries; and, (v)
engage in transactions with affiliates other than those based on arm's-length
negotiations. The Credit Agreement also limits the ability of certain
subsidiaries of the Company to incur indebtedness or issue preferred stock. In
addition, the Credit Agreement requires the Company to satisfy certain financial
performance criteria. On January 12, 2000, one of the financial covenants in the
Credit Agreement was amended to permit the Company to remain compliant after the
1999 charge for loss in value of the Equistar investment (see Note 3).
The Senior Notes and Senior Debentures were issued by Millennium America Inc., a
wholly owned subsidiary of the Company, and are guaranteed by the Company. The
indenture under which the Senior Notes and Senior Debentures were issued
contains certain covenants that limit, among other things: (i) the
17
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions,except share data)
ability of Millennium America Inc. and its Restricted Subsidiaries (as defined)
to grant liens or enter into sale-and-leaseback transactions; (ii) the ability
of the Restricted Subsidiaries to incur additional indebtedness; and, (iii) the
ability of Millennium America Inc. and the Company to merge, consolidate or
transfer substantially all of their respective assets.
The Company had outstanding notes payable of $56 and $29 as of December 31, 1999
and 1998, respectively, bearing interest at an average rate of approximately 6%
with maturity of 30 days or less. At December 31, 1999, the Company had
outstanding standby letters of credit amounting to $70 and had unused
availability under short-term lines of credit and the Credit Agreement of $328.
In addition, Millennium America Inc. has guaranteed certain debt obligations of
Equistar up to $750.
The maturities of long-term debt during the next five years are as follows:
2000--$23; 2001--$264; 2002--$3; 2003--$3; 2004--$4; and, thereafter --$749.
Note 7--Financial Instruments
Fair Value of Financial Instruments: The fair value of all short-term financial
instruments and restricted cash approximates their carrying value due to their
short maturity or ready availability. The fair value of the Company's other
financial instruments are based upon estimates received from independent
financial advisors as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Borrowings under
the Revolving Credit Agreement $ 261 $ 258 $ 235 $ 235
Senior Notes and Debentures 749 661 749 695
</TABLE>
Off Balance Sheet Risk: The Company has certain receivables, payables and
borrowings denominated in currencies other than the functional currency of the
Company and/or its subsidiaries. The Company hedges certain of these exposures
by entering into forward exchange contracts. Gains and losses related to these
hedges are recognized in income as part of, and concurrent with, the hedged
transactions. The Company does not use derivative financial instruments for
trading or speculative purposes.
During 1999, 1998 and 1997, the Company incurred losses of $13, $4 and $4,
respectively, from changes in the foreign currency rates on unhedged
transactions.
The table below summarizes the contractual amounts of the Company's forward
exchange contracts at December 31, 1999, all of which mature within 90 days. The
foreign currency amounts have been translated into U.S. dollars using applicable
exchange rates at December 31, 1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Contract Unrealized
Amount Gain (Loss)
- ------------------------------------------------------------------------
<S> <C> <C>
US/Australian Dollars $ 7 $ -
</TABLE>
SFAS 137: In June 1999, the Financial Accounting Standards Board issued SFAS
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of SFAS 133," which defers the effective date of SFAS 133 for
one year. The Company plans to adopt SFAS 133 in the first quarter of 2001. SFAS
133 requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in Net income or as Comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company is currently evaluating the implications of
this new pronouncement but, due to the Company's limited use of derivative
instruments, the adoption of SFAS 133 is not expected to have a significant
effect on the financial position, results of operations or cash flows of the
Company.
Note 8--Pension and Other Postretirement Benefits
Domestic Benefit Plans: On January 1, 1999, the Company merged and amended its
noncontributory defined benefit pension plans and its other postretirement
benefit plans that cover substantially all of its United States employees. The
benefits for the pension plans continue to be based primarily on years of
credited service and average compensation as defined under the respective plan
provisions. The Company's funding policy is to contribute amounts to the pension
plans sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional amounts as
the Company may determine to be appropriate from time to time. The pension
plans' assets are held in a master asset trust and are managed by independent
portfolio managers. Such assets include the Company's Common Stock, which
accounts for less than 1% of master trust assets at December 31, 1999.
The Company also sponsors defined contribution plans for its salaried and
certain union employees. Contributions relating to defined contribution plans
are made based upon the respective plan provisions.
Foreign Benefit Arrangements: Certain of the Company's foreign subsidiaries
have defined benefit plans. The assets of these plans are held separately from
the Company in independent funds.
18
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions,except share data)
During 1999, the Company offered an early retirement program to certain eligible
non-United States employee groups. Costs of $7 were recorded in 1999 related to
this program.
The following table provides a reconciliation of the changes in the benefit
obligations and the fair value of the plan assets over the two-year period
ending December 31, 1999, and a statement of the funded status as of December 31
for both years.
<TABLE>
<CAPTION>
Pension Other Post-
Benefits retirement Benefits
- -------------------------------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reconciliation of benefit obligation
Projected benefit obligation at
beginning of year ..................... $ 804 $ 752 $ 127 $ 127
Service cost, including interest ........ 17 14 8 10
Interest in PBO ......................... 47 46 -- --
Participant contributions -- -- -- 2
Benefit payments ........................ (81) (86) (10) (14)
Special termination benefits ............ -- 6 -- --
Curtailments ............................ -- (2) -- --
Net experience (gain) loss .............. (27) 50 (2) 2
Amendments .............................. 2 24 (13) --
Liability transfer ...................... (4) -- -- --
Translation adjustment .................. (1) -- -- --
----- ----- ----- -----
Projected benefit obligation at
end of year ........................... $ 757 $ 804 $ 110 $ 127
----- ----- ----- -----
Reconciliation of fair value of plan assets
Fair value of plan assets at
beginning of year ..................... $ 915 $ 889 $ -- $ --
Return on plan assets ................... 187 104 -- --
Employer contributions .................. 3 4 10 11
Participant contributions -- -- -- 2
Benefit payments ........................ (81) (82) (10) (13)
Asset transfer .......................... (3) -- -- --
Translation adjustment .................. (8) -- -- --
----- ----- ----- -----
Fair value of plan assets at
end of year .......................... $1,013 $ 915 $ -- $ --
----- ----- ----- -----
Funded status
Funded status at December 31 ............ $ 257 $ 106 $(110) $(127)
Unrecognized net asset .................. (1) (1) -- --
Unrecognized prior-service cost ......... 10 23 (12) --
Unrecognized (gain) loss ................ (130) 3 (24) (23)
Additional minimum liability ............ (2) (8) -- --
----- ----- ----- -----
Prepaid (accrued) benefit cost .......... $ 134 $ 123 $(146) $(150)
===== ===== ===== =====
</TABLE>
The projected benefit obligation, accumulated benefit obligation and the fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of the plan assets were $53, $47 and $32, respectively, at December 31,
1999; and, $42, $40 and $28, respectively, at December 31, 1998.
The following table provides the components of net periodic benefit cost:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Pension Other post-
benefits retirement benefits
1999 1998 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net periodic benefit cost
Service cost, including interest ................ $ 18 $ 9 $ 8 $ 10
Interest on PBO ................................. 47 46 -- --
Return on plan assets ........................... (70) (61) -- --
Amortization of unrecognized net loss ........... -- 2 (1) (2)
Amortization of prior-service cost .............. 2 1 (1) --
Special termination benefits .................... -- 6 -- --
Recognition of prior-service cost ............... -- 5 -- --
---- ---- ---- ----
Net periodic benefit cost ....................... (3) 8 6 8
Defined contribution plans ...................... 1 1 -- --
---- ---- ---- ----
Net periodic benefit cost ....................... $ (2) $ 9 $ 6 $ 8
==== ==== ==== ====
</TABLE>
Pension benefit costs were $4 and other postretirement benefit costs were $8 for
the year ended December 31, 1997. The assumptions used in the measurement of the
Company's benefit obligations are shown in the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Other post-
Pension benefits retirement benefits
1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted-average
assumptions as of December 31
Discount rate 6.50%-7.50% 6.00%-7.00% 7.50% 7.00%
Expected return
on plan assets 8.00%-9.00% 7.00%-9.00% -- --
Rate of compensation
increase 4.00%-5.00% 3.50%-4.25% 4.25% 4.25%
</TABLE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. The assumed health care cost trend rate used
in measuring the health care portion of the postretirement cost for 1999 was
8.0% declining to 6.0% for 2001 and thereafter. A 1% increase or decrease in
assumed health care cost trend rates would affect service and interest
components of postretirement health care benefit costs by $1 in each of the
years ended December 31, 1999 and 1998. The effect on the accumulated
postretirement benefit obligation would be $4 and $8 at December 31, 1999 and
1998, respectively.
19
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions,except share data)
Note 9--Stock Option and Award Plans
Long-Term Stock Incentive Plan: The Company adopted a Long Term Stock Incentive
Plan ("Stock Incentive Plan") for the purpose of enhancing the profitability and
value of the Company for the benefit of its shareholders. A maximum of 3,909,000
shares of Common Stock may be issued or used for reference purposes pursuant to
the Stock Incentive Plan.
The Stock Incentive Plan provides for the following types of awards to
employees: (i) stock options, including incentive stock options and
non-qualified stock options; (ii) stock appreciation rights; (iii) restricted
shares; (iv) performance units; and, (v) performance shares. The vesting
schedule for granted restricted share awards is as follows: (i) three equal
tranches aggregating 25% of the total award vesting in each of October 1999,
2000 and 2001; and, (ii) three equal tranches aggregating 75% of the total award
subject to the achievement of "value creation" performance criteria established
by the Compensation Committee for each of the three performance cycles
commencing January 1, 1997 and ending December 31, 1999, 2000 and 2001,
respectively. If and to the extent such criteria are achieved, half of the
earned portion of a tranche relating to a particular performance-based cycle of
the award vests immediately and the remainder vests in five equal annual
installments commencing on the first anniversary of the end of the cycle.
Options granted under the Stock Incentive Plan vest three years from the date of
grant and expire ten years from the date of grant. All grants under the Stock
Incentive Plan fully vest in the event of a change-in-control (as defined by the
plan) of the Company, or in the case of employees of a subsidiary of the
Company, a change-in-control of the relevant subsidiary.
The Company has authorization under the Stock Incentive Plan to grant awards for
up to an additional 154,272 shares at December 31, 1999.
Unearned restricted shares, based on the market value of the shares at each
balance sheet date, is included as a separate component of Shareholders' equity
and amortized over the restricted period. Compensation expense of $8, $6 and $23
was recognized for the years ended December 31, 1999, 1998 and 1997,
respectively. Expense for 1997 included $12 as a result of the change-in-control
provisions being triggered by the formation of Equistar for certain restricted
stock awards and options held by employees of Millennium Petrochemicals.
A summary of changes in the awards under the Stock Incentive Plan (other than
awards to non-employee directors) is as follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
Restricted Average Share Average
Shares Grant Options Exercise Price
Price
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
December 31, 1996 2,912,322 $ 22.32 523,000 $ 19.00
Vested and issued (683,273) 22.32 -- --
Canceled (226,491) 22.32 (200,000) 19.00
Granted 174,736 23.72 81,000 22.15
---------- --------
Balance at
December 31, 1997 2,177,294 $ 22.43 404,000 $ 19.79
Vested and issued (5,600) 22.32 (59,000) 19.00
Canceled (25,538) 22.32 -- --
Granted 311,153 33.15 160,000 23.91
---------- --------
Balance at
December 31, 1998 2,457,309 $ 23.81 505,000 $ 21.15
Vested and issued (218,201) 23.89 (18,000) 19.00
Canceled (26,884) 29.27 (31,000) 21.23
Granted -- -- 82,000 24.52
---------- --------
Balance at
December 31, 1999 2,212,224 $ 23.71 538,000 $ 21.75
========== ======== ======== ========
</TABLE>
For options outstanding at December 31, 1999, the range of exercise prices was
$18.00 to $34.875 per share, and the estimated weighted-average remaining
contractual life was 8 years. The weighted-average fair value of stock options
at grant date approximated $10.00 for each of 1999, 1998 and 1997, using a
Black-Scholes model with the following assumptions: expected volatility of 50%,
expected dividend yield of 2.4%, risk-free interest rate of 6% and an expected
life of 5 years. At December 31, 1999, 230,000 options were exercisable at a
price of $19.00 per share option.
Salary and Bonus Deferral Plan: The Company has a deferred compensation plan
that permits officers, directors and certain management employees to defer a
portion of their compensation on a pre-tax basis in the form of Common Stock. A
rabbi trust (the "Trust") has been established to hold shares of Common Stock
purchased in open market transactions to fund this obligation. Shares purchased
by the Trust are reflected as Treasury stock, at cost and, along with the
related obligation for this plan, are included in Shareholders' equity. At
December 31, 1999, 396,468 shares have been purchased at a cost of $10 and are
held in the Trust.
Long-Term Incentive Plan: The Company has a Long-Term Incentive Plan for certain
management employees. The plan provides for awards of Common Stock to be granted
if annual EVA'r' targets are achieved. Such earned shares are held in a trust
until certain vesting provisions are satisfied. Such awards will vest upon the
achievement of cumulative positive EVA'r' during any three of six years
following the first day of the award year. Unvested shares will be forfeited
after six years. Compensation expense was not significant in 1999 or 1998.
20
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions,except share data)
SFAS 123: The Company adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation". The impact on net income and earnings
per share would have been $1 and $0.01 per share, in each of 1999, 1998 and
1997, had compensation expense for the Company's incentive plans been determined
based on the fair value of such grants on the grant date in accordance with the
provisions of SFAS 123.
Note 10--Related Party Transactions
One of the Company's subsidiaries purchases ethylene from Equistar at
market-related prices pursuant to an agreement made in connection with the
formation of Equistar. Under the agreement the subsidiary is required to
purchase 100% of its ethylene requirements for its La Porte, Texas, facility up
to a maximum of 330 million pounds per year. The initial term of the contract
expires December 1, 2000. Thereafter, the contract automatically renews
annually. Either party may terminate on one year's notice. The subsidiary
incurred charges of $54 and $41 in 1999 and 1998, respectively, under this
contract.
One of the Company's subsidiaries sells vinyl acetate monomer ("VAM") to
Equistar at formula-based prices pursuant to an agreement entered into in
connection with the formation of Equistar. Under this agreement, Equistar is
required to purchase 100% of its VAM feedstock requirements for its La Porte,
Texas, Clinton and Morris, Illinois plants, estimated to be 48 to 55 million
pounds per year, up to a maximum of 60 million pounds per year ("Annual
Maximum") for the production of ethylene vinyl acetate products at those
locations. If Equistar fails to purchase at least 42 million pounds of VAM in
any calendar year, the Annual Maximum quantity may be reduced by as much as the
total purchase deficiency for one or more successive years. In order to reduce
the Annual Maximum quantity, Equistar must be notified within at least 30 days
prior to restricting the VAM purchases provided that the notice is not later
than 45 days after the year of the purchase deficiency. The initial term of the
contract expires December 31, 2000, and, thereafter, renews annually. Either
party may terminate on one year's notice. During the years ending December 31,
1999 and 1998, sales to Equistar were $12 and $14, respectively.
One of the Company's subsidiaries and Equistar have entered into various
operating, manufacturing and technical service agreements. These agreements
provide the subsidiary with certain utilities, administrative office space, and
health, safety and environmental services. The subsidiary incurred charges of $3
and $5 in 1999 and 1998, respectively, for such services.
Note 11--Commitments and Contingencies
The Company and various of its subsidiaries are defendants in a number of
pending legal proceedings incidental to present and former operations. These
include several proceedings alleging injurious exposure of the plaintiffs to
various chemicals and other materials manufactured by the Company's current and
former subsidiaries. Typically, such proceedings involve large claims made by
many plaintiffs against many defendants in the chemical industry. The Company
does not expect that the outcome of these proceedings, either individually or in
the aggregate, will have a material adverse effect upon the consolidated
financial position, results of operations or cash flows of the Company.
Together with other alleged past manufacturers of lead pigments for use in paint
and lead-based paint, a former subsidiary of a discontinued operation has been
named as a defendant or third party defendant in various legal proceedings
alleging that it and other manufacturers are responsible for personal injury and
property damage allegedly associated with the use of lead pigments in paint. The
legal proceedings seek recovery under a variety of theories, including
negligence, failure to warn, breach of warranty, conspiracy, market share
liability, fraud, misrepresentation and nuisance. The plaintiffs in these
actions generally seek to impose on the defendants responsibility for alleged
damages and health concerns associated with the use of lead-based paints. These
cases are in various pre-trial stages. The Company is vigorously defending all
litigation related to the use of lead. Although liability, if any, that may
result is not reasonably capable of estimation, the Company believes that, based
on information currently available, the disposition of such claims in the
aggregate should not have a material adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
Certain Company subsidiaries have been named as defendants, potentially
responsible parties ("PRPs"), or both, in a number of environmental proceedings
associated with waste disposal sites and facilities currently or previously
owned, operated or used by the Company's subsidiaries or their predecessors,
some of which disposal sites or facilities are on the Superfund National
Priorities List of the United States Environmental Protection Agency ("EPA") or
similar state lists. These proceedings seek cleanup costs, damages for personal
injury or property damage, or both. Certain of these proceedings involve claims
for substantial amounts, individually ranging in estimates from less than $0.3
to $45. One potentially significant matter in which a Company subsidiary is a
PRP concerns alleged PCB contamination of a section of the Kalamazoo River from
Kalamazoo, Michigan, to Lake Michigan for which a remedial
investigation/feasibility study is currently being undertaken.
21
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
The Company believes that the range of potential liability for environmental and
other legal contingencies, collectively, but which primarily relates to
environmental remediation activities and other environmental proceedings, is
between $144 and $147 and has accrued $147 as of December 31, 1999. The
Company's ultimate liability in connection with these proceedings may depend on
many factors, including the volume of material contributed to the sites, the
number of other PRPs and their financial viability and the remediation methods
and technologies to be used.
In addition, during 1999, 1998 and 1997, the Company reached favorable
settlement agreements for recovery from its insurance carriers or received
favorable judgements on several open legal matters. As a result of the
conclusions on these matters, other income for 1999, 1998 and 1997 includes $24,
$27, and $46, respectively.
The Company has various contractual obligations to purchase raw materials used
in its production of TiO2 and fragrance and flavor chemicals. Commitments to
purchase ore used in the production of TiO2 are generally 1- to 3-year contracts
with competitive prices generally determined at a fixed amount subject to
escalation for inflation. Total commitments to purchase ore for TiO2 aggregate
approximately $682 and expire between 2000 and 2002. Commitments to acquire
crude sulfate turpentine, used in the production of fragrance chemicals, are
generally pursuant to 1- to 5-year contracts with prices based on the market
price and which expire between 2000 and 2003.
The Company is organized under the laws of Delaware and is subject to United
States federal income taxation of corporations. However, in order to obtain
clearance from the United Kingdom Inland Revenue as to the tax-free treatment of
the Demerger stock dividend for United Kingdom tax purposes for Hanson and
Hanson's shareholders, Hanson agreed with the United Kingdom Inland Revenue that
the Company will continue to be centrally managed and controlled in the United
Kingdom at least until September 30, 2001. Hanson also agreed that the Company's
Board of Directors will be the only medium through which strategic control and
policy-making powers are exercised, and that board meetings almost invariably
will be held in the United Kingdom during this period. The Company has agreed
not to take, or fail to take, during such five-year period, any action that
would result in a breach of, or constitute non-compliance with, any of the
representations and undertakings made by Hanson in its agreement with the United
Kingdom Inland Revenue and to indemnify Hanson against any liability and
penalties arising out of a breach of such agreement. The Company's By-Laws
provide for similar constraints. The Company and Hanson estimate that such
indemnification obligation would have amounted to approximately $421 if it had
arisen during the twelve months ended September 30, 1997, and that such
obligation will decrease by approximately $84 on each October 1st prior to
October 1, 2001, when it will expire.
If the Company ceases to be a United Kingdom tax resident at any time, the
Company will be deemed for purposes of United Kingdom corporation tax on
chargeable gains to have disposed of all of its assets at such time. In such a
case, the Company would be liable for United Kingdom corporation tax on
chargeable gains on the amount by which the fair market value of those assets at
the time of such deemed disposition exceeds the Company's tax basis in those
assets. The tax basis of the assets would be calculated in pounds sterling,
based on the fair market value of the assets (in pounds sterling) at the time of
acquisition of the assets by the Company, adjusted for United Kingdom inflation.
Accordingly, in such circumstances, the Company could incur a tax liability even
though it has not actually sold the assets and even though the underlying value
of the assets may not actually have appreciated (due to currency movements).
Since it is impossible to predict the future value of the Company's assets,
currency movements and inflation rates, it is impossible to predict the
magnitude of such liability, should it arise.
Note 12--Operations by Business Segment and Geographic Area
Using the guidelines set forth in SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," the Company's principal operations are
managed and grouped as three separate business segments: titanium dioxide and
related products; acetyls; and, specialty chemicals. The accounting policies of
the segments are the same as those described in Note 2--Significant Accounting
Policies.
Most of the Company's foreign operations are conducted by subsidiaries in the
United Kingdom, France, Brazil and Australia. Sales between the Company's
operations are made on terms similar to those of its third-party distributors.
Income and expense not allocated to business segments in computing operating
income include interest income and expense, other income and expense of a
general corporate nature and equity in (loss) earnings of Equistar.
Export sales from the United States for the years ended December 31, 1999, 1998
and 1997 were approximately $144, $157 and $273, respectively.
22
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales
Titanium dioxide and related products .... $1,237 $ 1,203 $ 843
Acetyls .................................. 227 253 271
Specialty chemicals ...................... 125 141 148
Polyethylene, alcohol and
related products (1) .................... -- -- 1,786
------ ------- -------
Total .................................... $1,589 $ 1,597 $ 3,048
====== ======= =======
Operating income
Titanium dioxide and related products .... $ 112 $ 136 $ 60
Acetyls .................................. 27 26 39
Specialty chemicals ...................... 29 43 42
Polyethylene, alcohol and
related products (1) .................... -- -- 308
------ ------- -------
Total .................................... $ 168 $ 205 $ 449
====== ======= =======
Depreciation and amortization
Titanium dioxide and related products .... $ 79 $ 72 $ 44
Acetyls .................................. 18 25 28
Specialty chemicals ...................... 8 5 6
Polyethylene, alcohol and
related products (1) .................... -- -- 125
------ ------- -------
Total .................................... $ 105 $ 102 $ 203
====== ======= =======
Capital expenditures
Titanium dioxide and related products .... $ 91 $ 154 $ 77
Acetyls .................................. 11 31 24
Specialty chemicals ...................... 7 27 10
Polyethylene, alcohol and
related products (1) .................... -- -- 41
Corporate ................................ -- 3 --
------ ------- -------
Total .................................... $ 109 $ 215 $ 152
====== ======= =======
Identifiable assets
Titanium dioxide and related products .... $1,474 $1,459
Acetyls .................................. 578 792
Specialty chemicals ...................... 126 133
Corporate (2) ............................ 1,072 1,716
------ ------
Total .................................... $3,250 $4,100
====== ======
</TABLE>
(1) The polyethylene, alcohol and related products businesses were contributed
to Equistar on December 1, 1997. The Company's partnership interest in Equistar
is accounted for using the equity method; accordingly, the Company's underlying
interest in the operations of Equistar have been excluded in the segment
disclosures above since December 1, 1997.
(2) Corporate assets consists primarily of cash and cash equivalents, equity
investments (including Equistar) and other assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Net sales
United States $ 921 $ 993 $ 2,677
Non-United States
United Kingdom 325 220 255
France 213 228 --
Asia/Pacific 157 160 138
Brazil 144 76 --
------- ------- -------
$ 839 $ 684 $ 393
Inter-area elimination (171) (80) (22)
------- ------- -------
Total $ 1,589 $ 1,597 $ 3,048
======= ======= =======
Operating income (loss)
United States $ 173 $ 147 $ 462
Non-United States
United Kingdom (17) 23 10
France 4 22 --
Asia/Pacific 34 54 17
Brazil 27 16 --
------- ------- -------
48 115 27
Inter-area elimination (53) (57) (40)
------- ------- -------
Total $ 168 $ 205 $ 449
======= ======= =======
Identifiable assets
United States $ 2,315 $ 3,098
Non-United States
United Kingdom 418 354
France 209 288
Asia/Pacific 97 121
Brazil 155 181
All Other 56 58
------- -------
935 1,002
------- -------
Total $ 3,250 $ 4,100
======= =======
</TABLE>
23
<PAGE>
MILLENNIUM CHEMICALS INC.
Selected Financial Data
(Dollars in millions, except share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Fiscal Year
Ended Ended
Year Ended December 31 December 31 September 30
---------------------------------------------------------- ----------- ------------
1999 1998(1) 1997(2) 1996 1995 1994 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Net sales ......................... $1,589 $1,597 $3,048 $ 3,040 $3,156 $ 723 $ 2,610
Operating income .................. 168 205 449 283(3) 787 177 268
(Loss) income from continuing
operations ....................... (326)(8) 163 188 83(3) 296 68 34
Basic (loss) earnings per share
from continuing operations ....... (4.71) 2.17 2.52 0.44 -- -- --
Net (loss) income ................. (288) 164 185 (2,701)(3)(4)(5) 349 96 94
Dividends declared per share
plus United Kingdom Notional
Tax Credit ....................... 0.60 0.60(7) 0.60(7) -- -- -- --
Balance sheet data (at period end)
Total assets (6) ................... $3,250 $4,100 $4,326 $5,601 $9,678 $ 9,603 $ 9,268
Total liabilities .................. 2,219 2,507 2,862 4,283 4,877 4,745 4,630
Minority interest .................. 16 15 -- -- -- -- --
Shareholders' equity (6) ........... 1,015 1,578 1,464 1,318 4,801 4,858 4,638
Other data (with respect to
continuing operations)
Depreciation and amortization ...... $ 105 $ 102 $ 203 $ 201 $ 207 $ 50 $ 213
Capital expenditures ............... 109 215 152 285 247 23 89
</TABLE>
(1) Includes six months of earnings of the Brazilian TiO2 business acquired on
July 1, 1998, and twelve months of earnings of the French TiO2 business acquired
on December 31, 1997.
(2) Includes 11 months of polyethylene, alcohol and related products businesses
that were contributed to Equistar on December 1, 1997. Since December 1, 1997,
the equity method is used to account for the Company's partnership interest.
(3) Includes the effects of non-recurring charges of $75 ($48 after tax) to
reduce the carrying value of certain facilities employed in the sulfate-process
manufacturing of TiO2 and to provide for the costs associated with the closure
of certain of these facilities.
(4) Includes gain of $210 ($86 after tax) resulting from Millennium
Petrochemicals' sale in March 1996 of a 73.6% equity interest in Suburban
Propane Partners. In 1995 and fiscal 1994, Suburban Propane is included as a
continuing operation.
(5) Includes the effects of a non-cash after-tax charge of $3,206 relating to
one of the discontinued businesses of a subsidiary of the Company ("Discontinued
Businesses"), as a result of the Company's adoption of the Long-Lived Asset
carrying value methodology provided by SFAS 121. The Discontinued Businesses
were sold to Hanson on October 6, 1996.
(6) Includes net assets of the Discontinued Businesses: $3,772 at December 31,
1995; $3,757 at December 31, 1994; and, $3,757 at September 30, 1994.
(7) Includes United Kingdom Advance Corporation Tax which was eliminated
effective April 6, 1999.
(8) Includes non-recurring charge for loss in value of Equistar investment of
$639 ($400 after tax) to reduce the carrying value of the Equistar investment to
estimated fair value.
24
<PAGE>
MILLENNIUM CHEMICALS INC.
Quarterly Financial Data
(Dollars in millions,except share data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Net sales $ 383 $ 406 $ 396 $ 404
Operating income 40 45 38 45
Net income (loss) from continuing operations 9 17 38 (390)(1)
Net income (loss) 9 48 45 (390)(1)
Basic earnings (loss) per share from continuing operations 0.12 0.24 0.57 (5.86)
Basic earnings (loss) per share 0.12 0.69 0.68 (5.86)
Diluted earnings (loss) per share from continuing operations 0.12 0.24 0.56 (5.86)
Diluted earnings (loss) per share 0.12 0.68 0.67 (5.86)
1998
Net sales $ 399 $ 408 $ 408 $ 382
Operating income 58 66 58 23
Net income from continuing operations 46 46 32 39
Net income 50 43 32 39
Basic earnings per share from continuing operations 0.61 0.61 0.43 0.52
Basic earnings per share 0.67 0.57 0.43 0.52
Diluted earnings per share from continuing operations 0.61 0.62 0.42 0.52
Diluted earnings per share 0.66 0.57 0.42 0.52
1997
Net sales $ 794 $ 813 $ 816 $ 625
Operating income 66 132 157 94
Net income from continuing operations 17 85 70 16
Net income 20 82 67 16
Basic earnings per share from continuing operations 0.23 1.14 0.94 0.21
Basic earnings per share 0.27 1.10 0.90 0.21
Diluted earnings per share from continuing operations 0.23 1.14 0.94 0.21
Diluted earnings per share 0.27 1.10 0.90 0.21
</TABLE>
(1) Includes charge for loss in value in Equistar investment of $639 ($400 after
tax) and the Company's share of Equistar's charge for severance costs and
mothballing certain polymer facilities of $28 ($18 after tax).
- --------------------------------------------------------------------------------
25
<PAGE>
MILLENNIUM CHEMICALS INC.
Common Stock and Dividend Data
The Common Stock of the Company is traded on the New York Stock Exchange (the
"NYSE") under the symbol "MCH". The following table sets forth the high and low
closing prices per share of Common Stock in each quarter, as reported by the
NYSE since October 2, 1996, the commencement of "regular way" trading:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
High Low High Low High Low High Low
- --------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 .......... $ 21.250 $ 16.625 $ 27.625 $ 19.500 $ 26.187 $ 17.937 $ 22.750 $ 18.000
1998 .......... 33.625 20.250 36.875 31.375 32.625 18.625 25.250 18.500
1997 .......... 20.875 16.875 22.750 17.500 23.500 20.250 24.063 22.250
1996 .......... 23.000 17.250
</TABLE>
As of March 17, 2000, there were 23,096 record holders of Common Stock. The
closing price per share of Common Stock as reported by the NYSE on such date was
$17.4375.
The Company paid a dividend of $0.12 per share of Common Stock, plus a
United Kingdom Advance Corporation Tax of $0.03 per share, in each quarter of
1997, and 1998. The Company paid a dividend of $0.135 per share of Common Stock,
plus a United Kingdom Notional Tax Credit of $0.015 per share, in respect of
each quarter of 1999. On March 31, 2000, the Company paid a dividend of $0.135
per share of Common Stock, plus a United Kingdom Notional Tax Credit of $0.015
per share.
26
<PAGE>
EXHIBIT 21.1
MILLENNIUM CHEMICALS INC.
<TABLE>
<CAPTION>
STATE OR COUNTRY
OF INCORPORATION
----------------
<S> <C>
Millennium Chemicals Inc. Delaware/U.K. Resident
Millennium Overseas Holdings Limited United Kingdom
Millennium Chemicals UK Holdings Limited United Kingdom
Millennium Inorganic Chemicals Limited United Kingdom
Millennium Inorganic Chemicals S.A. France
Societe Immobiliere de la Cote Societe Anonyme France
Thann Chimie SNC France
Millennium Holdings Brasil Ltda. Brazil
Millennium Inorganic Chemicals do Brasil S.A.
(1) Brazil
Rutile Holdings Ltd. United Kindgom
SCMC Holdings B.V. Netherlands
Millennium Inorganic Chemicals Ltd. Australia
Millennium America Holdings Inc. Delaware
Millennium America Inc. Delaware
Millennium Holdings Inc. Delaware
Millennium Specialty Chemicals Inc. Delaware
Millennium Petrochemicals Inc. Virginia
Millennium Petrochemicals GP LLC (2) Delaware
Millennium Petrochemicals LP LLC (2) Delaware
Millennium Methanol LP Inc. (3) Delaware
Millennium Methanol GP Inc. (3) Delaware
Millennium Inorganic Chemicals Inc. Delaware
HMB Holdings Inc. Delaware
MHC Inc. Delaware
LeMean Property Holdings Corporation Delaware
</TABLE>
- ---------
(1) Millennium Holdings Brasil Ltda. owns 99% of the voting shares and 72% of
the outstanding shares of Millennium Inorganic Chemicals do Brasil S.A.
(2) Millennium Petrochemicals GP LLC and Millennium Petrochemicals LP LLC
together own a 29.5% interest in Equistar Chemicals, LP.
(3) Millennium Methanol LP Inc. and Millennium Methanol GP Inc. together own an
85% interest in La Porte Methanol Company, L.P.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-13143, 333-13717 and 333-53139) of Millennium
Chemicals Inc. of our report dated January 31, 2000 relating to the consolidated
financial statements, which appears in the Annual Report to Shareholders, which
is incorporated by reference in this Annual Report on Form 10-K. We also consent
to the incorporation by reference of our report dated January 31, 2000 relating
to the supplemental financial information and the financial statement schedule,
which appear in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 29, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-13143, 333-13717 and 333-53139) of Millennium
Chemicals Inc. of our report dated February 18, 2000 on the Equistar Chemicals,
LP financial statements, which appears in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 29, 2000
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