<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1994.
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 1-10145
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LYONDELL PETROCHEMICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4160558
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1221 MCKINNEY STREET, SUITE 1600 77010
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 713-652-7200
----------------
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORT), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING AS OF MARCH
31, 1994: 80,000,000.
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<PAGE>
PART I. FINANCIAL INFORMATION
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the three months
ended March 31
---------------------------
Millions of dollars except per share amounts 1994 1993
- - -------------------------------------------- --------- --------
<S> <C> <C>
Sales and other operating revenues:
Unrelated parties $ 755 $ 996
Related parties 69 69
--------- --------
824 1,065
Operating costs and expenses:
Cost of sales:
Unrelated parties 682 963
Related parties 54 66
Selling, general and administrative expenses 34 29
--------- --------
770 1,058
--------- --------
Operating income 54 7
Interest expense (18) (18)
Interest income 1 1
Minority interest in LYONDELL-CITGO Refining Company Ltd. (3) -
--------- --------
Income (loss) before income taxes and cumulative effect
of accounting changes 34 (10)
Income tax provision (benefit) 12 (2)
--------- --------
Income (loss) before cumulative effect of accounting changes 22 (8)
Cumulative effect on prior years of accounting changes - 22
--------- --------
Net income $ 22 $ 14
========= ========
Earnings (loss) per share:
Income (loss) before cumulative effect of accounting changes $ 0.27 (.09)
Cumulative effect on prior years of accounting changes - 0.27
--------- --------
Net income $ 0.27 $ 0.18
--------- --------
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31 December 31
Millions of dollars 1994 1993
- - ------------------- ----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35 $ 40
Restricted cash (Note 3) 46 73
Short-term investments 22 6
Accounts receivable:
Trade 213 179
Related parties 26 25
Inventories 190 191
Prepaid expenses and other current assets 12 9
----------- -----------
Total current assets 544 523
----------- -----------
Fixed assets:
Property, plant and equipment 2,577 2,545
Less accumulated depreciation and amortization 1,901 1,890
----------- -----------
676 655
Deferred charges and other assets 50 53
----------- -----------
Total assets $1,270 $1,231
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade $ 230 $ 203
Related parties 3 4
Notes payable 2 4
Current maturities of long-term debt 5 8
Other accrued liabilities 75 80
----------- -----------
Total current liabilities 315 299
----------- -----------
Long-term debt 717 717
Other liabilities and deferred credits 83 78
Deferred income taxes 102 101
Commitments and contingencies (Note 6)
Minority interest 137 124
Stockholders' equity (deficit):
Common stock, $1 par value, 250,000,000 shares
authorized, 80,000,000 issued and outstanding 80 80
Additional paid-in capital 158 158
Accumulated deficit (322) (326)
----------- -----------
Total stockholders' deficit (84) (88)
----------- -----------
Total liabilities and stockholders' deficit $1,270 $1,231
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months ended
March 31
--------------------------
Millions of dollars 1994 1993
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 22 $ 14
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of accounting changes, net of tax - (22)
Depreciation and amortization 15 14
Deferred taxes 3 -
Net change in accounts receivable, inventories
and accounts payable (8) 18
Net change in other working capital accounts (10) (22)
Minority interest 3 -
Other 4 7
---------- ----------
Net cash provided by operating activities 29 9
---------- ----------
Cash flows from investing activities:
Minority owner contribution 10 -
Additions to fixed assets (32) (15)
Purchases of short-term investments (19) -
Proceeds from sales of short-term investments 3 13
---------- ----------
Net cash used in investing activities (38) (2)
---------- ----------
Cash flows from financing activities:
Proceeds from short-term debt 15 -
Repayments of short-term debt (17) -
Repayments of long-term debt (3) (19)
Dividends paid (18) (36)
---------- ----------
Net cash used in financing activities (23) (55)
---------- ----------
Decrease in cash, restricted cash and cash equivalents (32) (48)
Cash, restricted cash and cash equivalents at beginning of period 113 108
---------- ----------
Cash, restricted cash and cash equivalents at end of period $ 81 $ 60
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal, recurring adjustments considered necessary for a fair
presentation, have been included. For further information, refer to the
consolidated financial statements and notes thereto for the year ended December
31, 1993 included in the Lyondell Petrochemical Company (Company) 1993 Annual
Report and the Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. The year-end condensed balance sheet data was
derived from audited financial statements but does not include all disclosures
required by generally accepted accounting principles. Certain amounts from prior
periods have been reclassified to conform to current period presentation.
2. ACCOUNTING CHANGE
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (Statement). The Company adopted the provisions of
the Statement for investments held as of or acquired after January 1, 1994. In
accordance with the Statement, prior period financial statements have not been
restated to reflect the change in accounting principle. The effect of adopting
the Statement did not have a material impact on income for the three month
period ended March 31, 1994.
In the first quarter of 1993, effective January 1, 1993, the Company changed its
method of accounting for the cost of repairs and maintenance incurred in
connection with turnarounds of major units at its manufacturing facilities.
Under the new method, turnaround costs exceeding $5 million are deferred and
amortized on a straight-line basis until the next planned turnaround, generally
four to six years. In prior years, all turnaround costs were expensed as
incurred. The Company believes that the new method of accounting is preferable
in that it provides for a better matching of turnaround costs with future
product revenues. The cumulative effect of this accounting change for years
prior to 1993 resulted in a benefit of $33 million ($22 million or $0.27 per
share after income taxes), and was included in first quarter 1993 income.
3. RESTRICTED CASH
As of March 31, 1994 and December 31, 1993, $46 million and $73 million,
respectively, was restricted for use in connection with LYONDELL-CITGO Refining
Company Ltd. (LCR) capital projects, including the Refinery upgrade project, and
other expenditures as determined by the LCR owners. (See Note 4 for discussion
of additional restricted funds.)
4. SHORT-TERM INVESTMENTS
As of March 31, 1994, the Company held $10 million and $12 million of U.S.
corporate securities and other debt securities, respectively. As of January 1,
1994, the Company held approximately $3 million each of U.S. corporate
securities and other debt securities. As of March 31, 1994 and January 1, 1994,
the cost of securities held approximated their estimated fair value and were
classified as available-for-sale.
4
<PAGE>
4. SHORT-TERM INVESTMENTS - (CONTINUED)
The Company realized no gains or losses on sales of securities during the three-
month period ended March 31, 1994. All securities held by the Company as of
March 31, 1994 have contractual maturities of less than one year. At March 31,
1994 and December 31, 1993, in addition to restricted cash, all short-term
investments were restricted for use in connection with LCR capital projects,
including the Refinery upgrade project, and other expenditures as determined by
the LCR owners.
5. INVENTORIES
The categories of inventory and their book values at March 31, 1994 and December
31, 1993 were:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1994 1993
- - ------------------------ ----- -----
<S> <C> <C>
Crude oil $ 59 $ 68
Refined products 27 29
Petrochemicals 67 57
Materials and supplies 37 37
----- -----
$ 190 $ 191
===== =====
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company has various purchase commitments for materials, supplies and
services incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market.
In connection with the transfer of assets and liabilities from ARCO to the
Company, the Company agreed to assume certain liabilities arising out of the
operation of the Company's integrated petrochemical and petroleum processing
business prior to July 1, 1988. In connection with the transfer of such
liabilities, the Company and ARCO entered into an agreement (Cross-Indemnity
Agreement) whereby the Company has agreed to defend and indemnify ARCO against
certain uninsured claims and liabilities which ARCO may incur relating to the
operation of the business of the Company prior to July 1, 1988, including
certain liabilities which may arise out of pending and future lawsuits.
ARCO indemnified the Company under the Cross-Indemnity Agreement with respect to
other claims or liabilities and other matters of litigation not related to the
assets or business included in the consolidated financial statements. ARCO has
also indemnified the Company for all federal taxes which might be assessed upon
audit of the operations of the Company included in the consolidated financial
statements prior to January 12, 1989, and for all state and local taxes for the
period prior to July 1, 1988.
In addition to lawsuits for which the Company has indemnified ARCO, the Company
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 Company's
operations.
The Company's policy is to be in compliance with all applicable environmental
laws. The Company is subject to extensive environmental laws and regulations
concerning emissions to the air, discharges to surface and subsurface waters and
the generation, handling, storage, transportation, treatment and disposal of
waste materials. Some of these laws and regulations are subject to varying and
conflicting interpretations. In addition, the Company cannot accurately predict
future developments, such as increasingly strict 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.
5
<PAGE>
6. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
Subject to the terms of the Cross-Indemnity Agreement, the Company is currently
contributing funds to ARCO for the cleanup of two waste sites (French Ltd. and
Brio, both of which are located near Houston, Texas) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) as amended and
the Superfund Amendments and Reauthorization Act of 1986. The Company is also
subject to certain assessment and remedial actions at the Refinery under the
Resource Conservation and Recovery Act (RCRA). In addition, the Company has
negotiated an order with the Texas Natural Resource Conservation Commission
(TNRCC), formerly the Texas Water Commission, for assessment and remediation of
groundwater and soil contamination at the Refinery.
The Company has accrued $24 million related to future CERCLA, RCRA and TNRCC
assessment and remediation costs, of which $7 million is included in current
liabilities while the remaining amounts are expected to be incurred over the
next three to seven years. However, it is possible that new information about
the sites for which the reserve has been established, or future developments
such as involvement in other CERCLA, RCRA, TNRCC or other comparable state law
investigations could require the Company to reassess its potential exposure
related to environmental matters.
In the opinion of management, any liability arising from these matters will not
have a material adverse effect on the consolidated financial condition of the
Company, although the resolution in any reporting period of one or more of these
matters could have a material impact on the Company's results of operations for
that period.
7. DIVIDENDS
On March 15, 1994, the Company paid a regular quarterly dividend of $0.225 per
share to stockholders of record on February 18, 1994. Additionally, on May 4,
1994, the Board of Directors declared a regular quarterly dividend of $0.225 per
share of common stock, payable June 15, 1994 to stockholders of record on May
20, 1994.
8. EARNINGS PER SHARE
Earnings per share for all periods presented are computed based on the weighted
average number of shares outstanding for the periods, which was 80,000,000
shares.
9. SUBSEQUENT EVENT
On May 5, 1994, Lyondell filed a Registration Statement on Form S-3 under the
Securities Exchange Act of 1933 relating to 39,921,400 shares of Lyondell common
stock held by ARCO (representing approximately 49.9% of the 80,000,000 shares of
Lyondell common stock outstanding as of that date). Also on May 5, 1994, ARCO
filed a Registration Statement on Form S-3 relating to the issuance of debt
securities (Exchangeable Notes) exchangeable upon maturity, at ARCO's option,
into Lyondell common stock or cash. If the Exchangeable Notes offering is
consummated, ARCO intends to cause the ARCO officers who currently serve on the
Lyondell Board of Directors to resign; however, ARCO has not limited its right
to nominate and vote for candidates for Lyondell's Board of Directors. In
addition, if the offering is consummated, ARCO has advised Lyondell that ARCO
generally intends to vote its shares in proportion to the votes of the non-ARCO
stockholders, except under certain limited circumstances. However, there can be
no assurances that the Exchangeable Notes will be issued. ARCO has further
stated that even if the Exchangeable Notes offering is not consummated, ARCO's
management intends to continuously review all aspects of its investment in
Lyondell. The implementation of any transaction relating to ARCO's investment in
Lyondell's common stock will depend upon the market price of Lyondell common
stock, conditions in the securities markets generally, prospects for ARCO's own
business, the approval of ARCO's Board of Directors, and other future
developments.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
On July 1, 1993, the Company and CITGO Petroleum Corporation (CITGO) announced
the commencement of operations of LYONDELL-CITGO Refining Company Ltd. (LCR), a
new entity owned by subsidiaries of the Company and CITGO. LCR owns and
operates the refining business formerly owned by the Company, including the
full-conversion refinery (Refinery). LCR is undertaking a major upgrade project
at the Refinery to enable the facility to process substantial additional volumes
of very heavy crude oil. CITGO is providing a major portion of the funds for
the upgrade project and has provided in excess of $100 million for funding other
capital projects.
The cost of the upgrade project, based on preliminary engineering, was initially
estimated to be approximately $800 million. Preliminary engineering, or
"scoping quality" estimates, are generally regarded as valid within a range of
plus or minus 30 percent of the ultimate installed costs, assuming no
significant changes to the scope of a project. Definitive engineering for the
upgrade project is still in progress and design enhancements have been made to
the project scope. LCR's management expects the next cost estimate for the
project (which may be available in the second quarter of 1994) to be higher than
$800 million, although not in excess of the range of the original estimate.
On July 1, 1993, LCR entered into a long-term crude oil supply contract (Crude
Supply Contract) with LAGOVEN, S.A., an affiliate of CITGO. In addition, under
terms of a long-term product sales agreement (Products Agreement), CITGO is
purchasing a substantial portion of the refined products produced at the
Refinery. Both LAGOVEN and CITGO are subsidiaries of Petroleos de Venezuela,
S.A., the national oil company of Venezuela.
Prior to commencement of LCR operations on July 1, 1993, the petrochemical and
refining operations of the Company were considered to be a single segment due to
the integrated nature of their operations. However, these operations are now
considered to be separate segments due to the formation of LCR and the related
separate management and operations of that entity.
The petrochemical segment consists of olefins, including ethylene, propylene,
butadiene, butylenes and specialty products; polyolefins, including
polypropylene and low density polyethylene; aromatics produced at the
Channelview Complex, including benzene and toluene; methanol and refinery
blending stocks.
The refining segment consists of refined petroleum products, including gasoline,
heating oil and jet fuel; aromatics produced at the Refinery, including benzene,
toluene, paraxylene and orthoxylene; lubricants; olefins feedstocks and crude
oil resales. Crude oil resales amounted to $61 million and $127 million for the
three-month periods ended March 31, 1994 and 1993, respectively. The following
table sets forth the Company's major product volumes sold for the periods
indicated.
7
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------------
1994 1993
----- -----
<S> <C> <C>
SELECTED PETROCHEMICAL
PRODUCTS (MILLIONS)
(EXCLUDING INTERSEGMENT
SALES):
Ethylene, propylene and
polyolefins (lbs.) 1,503 1,307
Other olefins (lbs.) 329 287
Methanol (gallons) 54 49
Aromatics (gallons) 36 28
REFINED PRODUCTS (THOUSAND
BARRELS PER DAY)
(EXCLUDING INTERSEGMENT
SALES):
Gasoline 112 140
Heating oil (no. 2
distillate) 50 64
Jet fuel 24 39
Aromatics 9 11
Other refined products 44 42
------ ------
Total refined products
volumes 239 296
====== ======
</TABLE>
Summarized below is the segment data for the Company which includes certain pro
forma adjustments necessary to present the petrochemical and refining operations
as individual segments for periods prior to the commencement of LCR operations
on July 1, 1993. These adjustments relate principally to allocations of costs
and expenses between the two segments and are based on current agreements
between the Company and LCR. The refining segment is primarily composed of LCR
operations. Intersegment sales between petrochemical and refining segments
include olefins feedstocks produced at the Refinery and gasoline blending stocks
produced at the Channelview Complex and were made at prices that are based on
current market values.
<TABLE>
<CAPTION>
Three months ended
March 31
------------------------
(Millions of dollars) 1994 1993
- - --------------------- ---- ----
<S> <C> <C>
Sales and other operating revenues:
Petrochemical segment $ 384 $ 390
Refining segment 535 814
Intersegment sales (95) (139)
------- -------
$ 824 $ 1,065
------- -------
Cost of sales:
Petrochemical segment $ 335 $ 369
Refining segment 496 799
Intersegment sales (95) (139)
------- -------
$ 736 $ 1,029
------- -------
Selling, general and
administrative expense:
Petrochemical segment $ 10 $ 9
Refining segment 13 10
Unallocated 11 10
------- -------
$ 34 $ 29
------- -------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Three months ended
March 31
------------------------
(Millions of dollars) 1994 1993
- - --------------------- ---- ----
<S> <C> <C>
Operating income:
Petrochemical segment $ 39 $ 12
Refining segment 26 5
Unallocated (11) (10)
------ ------
$ 54 $ 7
------ ------
</TABLE>
Summarized below are intersegment sales
for the two segments.
<TABLE>
<CAPTION>
Three months ended
March 31
------------------------
(Millions of dollars) 1994 1993
- - --------------------- ---- ----
<S> <C> <C>
Petrochemical segment $ 44 $ 66
Refining segment 51 73
------ ------
$ 95 $ 139
------ ------
</TABLE>
Results of Operations
Overview
Net income for the first quarter of 1994 was $22 million or $0.27 per share
compared to a net income of $14 million or $0.18 per share for the first quarter
of 1993. First quarter 1993 earnings included a $22 million favorable
adjustment for the cumulative effect, for prior periods, associated with a
change in accounting for major maintenance turnarounds. Excluding the effect of
this accounting change, earnings improved $30 million during the first quarter
of 1994 compared to the first quarter of 1993. This improvement was primarily
due to higher margins for refined products and certain petrochemical products
and higher ethylene sales volumes.
Net income was $8 million higher for the first quarter of 1994 compared to the
fourth quarter of 1993. This increase was primarily due to higher ethylene
sales volumes and higher petrochemical margins. Partially offsetting these
improvements was the absence during the current period of net favorable
adjustments of $4 million recorded in the earlier period consisting of a
contract amendment and LIFO inventory adjustments, partially offset by increases
in the environmental reserve.
Petrochemical Segment
Revenues Sales and other operating revenues for the first quarter of 1994 were
essentially unchanged from period to period at $384 million compared to $390
million for the first quarter of 1993. Increases in sales volumes, particularly
in olefins, were offset by lower sales prices.
Cost of Sales Cost of sales was $335 million in the first quarter of 1994
compared to $369 million in the first quarter of 1993, a decrease of $34
million. This decrease was primarily due to lower feedstock prices, reflecting
generally lower crude oil costs.
9
<PAGE>
Operating Income Operating income for the first quarter of 1994 was $39
million compared to $12 million in the first quarter of 1993. The $27 million
increase was primarily due to higher ethylene sales volumes and higher margins
for certain petrochemical products. Ethylene and other olefins sales volumes
were higher in part due to increased demand driven by improvement in the overall
U.S. economy, particularly in the automotive and construction sectors. Improved
ethylene margins resulted primarily from lower feedstock costs which more than
offset lower ethylene sales prices. Methanol sales margins and volumes were
substantially above the earlier period. Methanol margins were higher due to
higher sales prices, which more than offset higher feedstock costs.
Operating income for the first quarter of 1994 compared to the fourth quarter of
1993 increased $6 million. The increase was primarily due to higher ethylene
sales volumes and higher margins for petrochemical products. These improvements
were partially offset by the absence during the current period of net favorable
adjustments amounting to $11 million (before tax) recorded in the earlier period
for the contract amendment and for LIFO inventory adjustments. Higher ethylene
and other olefins sales volumes resulted from the increase in demand caused in
part by the improvement in certain sectors of the U.S. economy. Margins for
methanol and polymers increased primarily due to higher sales prices.
Refining Segment
Revenues Sales and other operating revenues for the first quarter of 1994 were
$535 million compared to $814 million for the first quarter of 1993. The $279
million decrease was primarily due to lower resale volumes of purchased light
products, lower crude oil resales and lower sales prices for refined products.
The purchase and resale activity for light refined products conducted for
logistic and other reasons declined during the current period as a result of the
Products Agreement. Effective with the beginning of LCR operations on July 1,
1993, a majority of the refined products produced at the Refinery is sold to
CITGO under the Products Agreement. Crude oil resale volumes were lower due to
reduced logistical purchases required to meet refinery feedstock requirements, a
significant percentage of which are satisfied by Venezuelan crude oil purchased
under the Crude Supply Contract. Refined products sales prices were lower
primarily due to lower industry crude oil prices.
Cost of Sales Cost of sales was $496 million in the first quarter of 1994, a
decrease of $303 million compared to the first quarter of 1993. This decrease
was primarily due to lower volume purchases of light refined products and crude
oil and to lower crude oil prices. Purchases of light refined products declined
because of the reduction in resale activity. Crude oil purchases were lower
primarily due to the reduced need for logistical purchases required to meet
refinery feedstock requirements. Lower crude oil prices were due to generally
lower industry crude oil prices and to the processing of higher volumes of lower
priced Venezuelan crude oil.
Selling, General and Administrative Expenses Selling, general and
administrative expenses were $13 million in the first quarter of 1994, an
increase of $3 million compared to the first quarter of 1993. Contributing to
this increase were higher expenses associated with the ongoing operations of LCR
commencing on July 1, 1993.
Operating Income Operating income for the first quarter of 1994 was $26 million
compared to $5 million for the first quarter of 1993. The $21 million increase
was primarily due to improved refined products margins. Lower period costs were
offset by higher selling, general and administrative expenses. Refined products
margins were higher due to processing higher volumes of Venezuelan crude oil
purchased under the Crude Supply Contract and to lower industry crude oil
prices, which together more than offset lower refined products sales prices.
Operating income for the first quarter of 1994 was higher by $3 million compared
to the fourth quarter of 1993. Refining results benefited from higher
Venezuelan crude oil volumes and higher industry margins; however, this
improvement was offset by the early January 1994 downtime on two major refining
units for completion of maintenance which began in late December 1993.
Additionally, lubricants and aromatics showed strong sales improvements in the
first quarter of 1994 compared to the fourth quarter of 1993.
10
<PAGE>
Unallocated and Headquarters
Minority Interest in LYONDELL-CITGO Refining Company Ltd. Minority interest was
$3 million in the first quarter of 1994, representing CITGO's allocation of
LCR's income. LCR began operations on July 1, 1993.
Income Tax The effective income tax rate during the first quarter of 1994 from
continuing operations was 35 percent compared to 24 percent (tax benefit) for
the first quarter of 1993. The tax benefit in the first quarter of 1993 was
reduced by a charge to state deferred taxes related to Texas franchise taxes.
Financial Condition
Cash flow from operations for the first quarter of 1994 was $29 million which
was net of the annual property tax payments of $28 million. Cash flows
associated with investing activities during the first quarter of 1994 included
capital expenditures of $32 million, of which $12 million was for
environmentally related projects and $10 million was for the upgrade project at
the Refinery. CITGO, the minority owner of LCR, contributed $10 million to LCR
for the upgrade project. Cash flows associated with financing activities during
the first three months of 1994 included $18 million of dividend payments and net
$5 million for debt repayments. On May 4, 1994, the Board of Directors declared
a regular quarterly dividend in the amount of $0.225 per share of common stock,
payable June 15, 1994 to stockholders of record on May 20, 1994.
Current Business Outlook
Lyondell's first quarter 1994 results reflect an improved business environment
for both petrochemicals and refining, as well as actions that were taken over
the prior year to strengthen the Company. Those actions included the formation
of LCR, a significant reduction in capital expenditures from the budgeted
amount, implementation of a cost reduction program and the reduction of regular
quarterly dividends from $0.45 per share to $0.225 per share beginning with the
dividend paid in the third quarter of 1993. Profitability and cash flows for
the petrochemical and refining businesses are affected by market conditions,
feedstock cost volatility, capital expenditures required to meet increasing
environmental standards, repair and maintenance costs, and downtime of
production units due to turnarounds. Turnarounds on major units can have
significant financial impact due to the repair and maintenance costs incurred as
well as the associated loss of production, resulting in lower profitability
during the period of the turnaround. The methanol unit at the Channelview
Complex is currently expected to be shut down for maintenance for approximately
six weeks within the next few quarters. In addition, turnarounds on the coker
and one of the major crude distillation units at the Refinery currently are
scheduled during late 1994; however, the timing of such turnarounds may be
accelerated or delayed because of numerous factors, some of which are beyond the
Company's control. During these Refinery turnarounds, work will be completed to
"tie-in" the crude distillation unit to the upgrade project, thereby preventing
or reducing downtime of the unit that otherwise would be necessary at the
completion of the upgrade project.
Management believes that the low costs and operating flexibility of its
petrochemical business, as well as its large production capacity, position it to
capture higher cash flows if the petrochemical cycle continues to improve. In
the first quarter of 1994, the domestic olefins industry operated at close to
maximum available capacity. However, additional capacity scheduled to come on-
stream in 1994 and rising feedstock prices may negatively affect future
operating rates and margins. Management believes the Company has significantly
improved the outlook for its refining business by forming LCR which has entered
into the Crude Supply Contract and Products Agreement. These arrangements are
designed to diminish the impact of market volatility and stabilize cash flow at
attractive levels relative to historic performance, although the remaining
portion of LCR's crude oil volume continues to be sensitive to market
conditions.
11
<PAGE>
Although the future economic environment cannot be known with certainty, the
Company believes that the cash flow management, cost reduction and other steps
recently taken have positioned it to capitalize on the anticipated improvement
in the business environment. Further, the Company believes that business
conditions will be such that cash balances, cash generated from operating
activities and existing lines of credit will be adequate to meet future cash
requirements for scheduled debt repayments, necessary capital expenditures and
to sustain for the reasonably foreseeable future the revised regular quarterly
dividend. However, the Company continually evaluates its cash requirements and
allocates cash in order to maximize stockholder returns.
Recent Developments
On May 5, 1994, Lyondell filed a Registration Statement on Form S-3 under the
Securities Exchange Act of 1933 relating to 39,921,400 shares of Lyondell common
stock held by ARCO (representing approximately 49.9% of the 80,000,000 shares of
Lyondell common stock outstanding as of that date). Also on May 5, 1994, ARCO
filed a Registration Statement on Form S-3 relating to the issuance of debt
securities (Exchangeable Notes) exchangeable upon maturity, at ARCO's option,
into Lyondell common stock or cash. If the Exchangeable Notes offering is
consummated, ARCO intends to cause the ARCO officers who currently serve on the
Lyondell Board of Directors to resign; however, ARCO has not limited its right
to nominate and vote for candidates for Lyondell's Board of Directors. In
addition, if the offering is consummated, ARCO has advised Lyondell that ARCO
generally intends to vote its shares in proportion to the votes of the non-ARCO
stockholders, except under certain limited circumstances. However, there can be
no assurances that the Exchangeable Notes will be issued. ARCO has further
stated that even if the Exchangeable Notes offering is not consummated, ARCO's
management intends to continuously review all aspects of its investment in
Lyondell. The implementation of any transaction relating to ARCO's investment in
Lyondell's common stock will depend upon the market price of Lyondell common
stock, conditions in the securities markets generally, prospects for ARCO's own
business, the approval of ARCO's Board of Directors, and other future
developments.
___________________
Management cautions against projecting any future results based on present or
prior earnings levels because of the cyclical nature of the refining and
petrochemical industries and uncertainties associated with the United States and
worldwide economies and United States governmental regulatory actions.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the disclosure on Page 18 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1993 (hereinafter referred to as the
"1993 Form 10-K Report") regarding the City of Houston's lawsuit against the
Company alleging violations of the Texas Clean Air Act and the Texas
Administrative Code. The Company has reached a preliminary settlement agreement
("Preliminary Settlement Agreement") with the City of Houston and the TNRCC.
Pursuant to the Preliminary Settlement Agreement, the Company has agreed to pay
fines of $175,000 to each of the City of Houston and the TNRCC and has agreed to
cover attorneys' fees of $50,000. In addition, LCR has committed to construct a
larger flare as part of the Refinery upgrade project and to tie-in certain
atmospheric relief valves. Lyondell will fund $1.5 million of the costs of these
modifications, which is the current estimate of the costs of the tie-in to the
flare system.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was convened on May 5, 1994 and was
adjourned. The meeting will be re-convened at a later date. Formal notice of the
new date and supplemental proxy materials will be furnished to all stockholders
of record.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99. Press Release dated May 5, 1994
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed since the date of the last
report and through the date hereof.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lyondell Petrochemical Company
(Registrant)
Dated: May 5, 1994 JOSEPH M. PUTZ
------------------------------
(Signature)
Joseph M. Putz
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
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EXHIBIT 99
[Logo of Lyondell
appears here]
News
- - --------------------------------------------------------------------------------
One Houston Center, 1221 McKinney Ave., P.O. Box 3646, Houston, Texas 77253-
3646 (713) 652-7200
FOR IMMEDIATE RELEASE
LYONDELL REPORTS IMPROVED 1994 OUTLOOK AT ANNUAL MEETING
HOUSTON, May 5, 1994--"Actions which Lyondell took in 1993 to strengthen the
company have improved Lyondell's outlook for 1994, even if industry conditions
remain the same as they were in 1993," Bob G. Gower, president and chief
executive officer of Lyondell Petrochemical Company, told stockholders today at
the company's Annual Meeting. "However, so far the business environment for
both petrochemicals and refining looks significantly better than last year."
"We believe that we are beginning to see results from our constant focus on
cash flow to maximize shareholder returns," Gower said. "The same management
priorities and strategies that have served us well through the tough times have
positioned Lyondell to perform very well as conditions improve."
Following an announcement earlier in the day that ARCO and Lyondell have
filed registration statements related to a proposed offering of debt securities
exchangeable upon maturity, at ARCO's option, into Lyondell common stock or
cash with an equal value, Gower told the stockholders that Lyondell management
is cooperating fully with ARCO's proposed offering. "We do not believe this
transaction, if completed, will have any impact on the company's operations,"
he said.
Mike R. Bowlin, chairman of the board of Lyondell Petrochemical Company, told
the stockholders that, "ARCO's plan to go forward with this debt offering has
been motivated by ARCO's financial strategy and does not reflect any adverse
view of Lyondell's future. On the contrary, we have structured this transaction
so that ARCO can continue to participate in Lyondell's upside potential."
Bowlin also serves as president and chief operating officer of ARCO.
He also announced that, upon the closing of the debt offering which will
depend on market conditions, he and the other ARCO officers who currently serve
on the Lyondell Board intend to resign. ARCO further intends to vote its shares
in Lyondell in proportion to the votes of the other public stockholders while
the Notes are outstanding, except under certain circumstances.
Because of these announcements, voting on the proposals in the proxy
statement was deferred. The stockholders were told that, subsequent to today's
meeting, Lyondell's Board will take appropriate action and update the proxy
materials to reflect changes from the proposed transaction. The Board will
reconvene the annual meeting after stockholders have received the updated
materials and notice of the new meeting date.
<PAGE>
Lyondell Petrochemical Company produces a wide variety of petrochemicals,
including olefins (primarily ethylene, propylene, butadiene, butylenes and
specialty products), methanol and MTBE, low-density polyethylene and
polypropylene. Lyondell currently has an approximately 90 percent interest in
LYONDELL-CITGO Refining Company Ltd., which produces refined petroleum
products, including gasoline, heating oil, jet fuel, aromatics and lubricants.
* * * *
For information, contact:Media--Jackie Wilson (713) 652-4596
Investors--Dave Balderston (713) 652-4590
- - --------------------------------------------------------------------------------
Registration statements related to the Exchangeable Notes have been filed by
ARCO and Lyondell with the Securities and Exchange Commission, but have not yet
become effective. These securities may not be sold nor may offers to buy be
accepted prior to the time the registration statement becomes effective. This
communication shall not constitute an offer to sell or the solicitation of an
offer to buy, nor shall there be any sale of these securities in any state in
which such offer, solicitation or sale would be unlawful prior to the
registration or qualification under the securities laws of any such state.
