<PAGE>
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- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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 JUNE 30, 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
----------------
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 JUNE 30,
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 FOR THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
-------------------- ------------------
MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS 1994 1993 1994 1993
- - -------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales and other operating revenues:
Unrelated parties $818 $1,003 $1,573 $1,999
Related parties 82 77 151 146
---- ------ ------ ------
900 1,080 1,724 2,145
Operating costs and expenses:
Cost of sales:
Unrelated parties 727 970 1,409 1,933
Related parties 67 70 121 136
Selling, general and administrative expenses 35 35 69 64
---- ------ ------ ------
829 1,075 1,599 2,133
---- ------ ------ ------
Operating income 71 5 125 12
Interest expense (19) (19) (37) (37)
Interest income 1 -- 2 1
Minority interest in LYONDELL-CITGO
Refining Company Ltd. (2) -- (5) --
---- ------ ------ ------
Income (loss) before income taxes and cumulative
effect of accounting changes 51 (14) 85 (24)
Provision (benefit) for income taxes 19 (3) 31 (5)
---- ------ ------ ------
Income (loss) before cumulative effect of
accounting changes 32 (11) 54 (19)
Cumulative effect on prior years of accounting changes -- -- -- 22
---- ------ ------ ------
Net income (loss) $ 32 $ (11) $ 54 $ 3
==== ====== ====== ======
Earnings (loss) per share:
Income (loss) before cumulative effect of
accounting changes $.40 $ (.14) $ .68 $ (.23)
Cumulative effect on prior years of accounting changes -- -- -- .27
---- ------ ------ ------
Net income (loss) $.40 $ (.14) $ .68 $ .04
==== ====== ====== ======
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
Millions of dollars June 30 December 31
1994 1993
- - ------------------- ------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35 $ 40
Restricted cash and cash equivalents (Note 3) 45 73
Short-term investments (Note 3) 12 6
Accounts receivable:
Trade 220 179
Related parties 32 25
Inventories 184 191
Prepaid expenses and other current assets 14 9
------- -------
Total current assets 542 523
------- -------
Fixed assets:
Property, plant and equipment 2,629 2,545
Less accumulated depreciation and amortization 1,913 1,890
------- -------
716 655
Deferred charges and other assets 50 53
------- -------
Total assets $ 1,308 $ 1,231
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade $ 249 $ 203
Related parties 2 4
Notes payable _ 4
Current maturities of long-term debt 10 8
Other accrued liabilities 67 80
------- -------
Total current liabilities 328 299
------- -------
Long-term debt 707 717
Other liabilities and deferred credits 86 78
Deferred income taxes 101 101
Commitments and contingencies (Note 6)
Minority interest 156 124
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 (308) (326)
------- -------
Total stockholders' deficit (70) (88)
------- -------
Total liabilities and stockholders' deficit $ 1,308 $ 1,231
======= =======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MILLIONS OF DOLLARS JUNE 30
- - ------------------- ------------------------
1994 1993
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 54 $ 3
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of accounting changes, net
of tax _ (22)
Depreciation and amortization 29 28
Deferred taxes 4 1
Net change in accounts receivable, inventories
and accounts payable (2) 34
Net change in other working capital accounts (22) (17)
Minority interest 5 _
Other 4 10
------- -------
Net cash provided by operating activities 72 37
------- -------
Cash flows from investing activities:
Minority owner contribution 28 _
Additions to fixed assets (79) (28)
Purchases of short-term investments (19) _
Proceeds from sales of short-term investments 13 13
------- -------
Net cash used in investing activities (57) (15)
------- -------
Cash flows from financing activities:
Net repayments of short-term debt (4) _
Repayments of long-term debt (8) (29)
Dividends paid (36) (72)
------- -------
Net cash used in financing activities (48) (101)
------- -------
Decrease in cash, restricted cash and cash equivalents (33) (79)
Cash, restricted and cash equivalents at beginning of
period 113 108
------- -------
Cash, restricted cash and cash equivalents at end of
period $ 80 $ 29
======= =======
</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 CHANGES
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 had no impact on income.
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 FUNDS
As of June 30, 1994 and December 31, 1993, cash in the amount of $45 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. At
June 30, 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.
4
<PAGE>
3. RESTRICTED FUNDS - (CONTINUED)
Presented below is a reconciliation of changes in restricted funds, including
amounts classified as short-term investments, for the six-month period ended
June 30, 1994:
<TABLE>
<S> <C>
Restricted-cash, cash equivalents and
short-term investments at December
31, 1993....................................... $79
Minority owner investments:
Contributions................................. 28
Reinvestments................................. 6
Additions to fixed assets:
Refinery upgrade project...................... (28)
Refining segment - other...................... (28)
-----
Restricted - cash, cash equivalents
and short-term investments at
June 30, 1994.................................. $ 57
=====
</TABLE>
4. INVESTMENTS
As of June 30, 1994 the Company held approximately $84 million of investments in
debt securities composed primarily of commercial paper, including $72 million
classified as cash equivalents. As of January 1, 1994 the Company held
approximately $70 million of investments in debt securities composed primarily
of commercial paper, including $64 million classified as cash equivalents. The
cost of securities held at June 30, 1994 and January 1, 1994 approximated their
estimated fair value and were classified as available-for-sale.
The Company realized no gains or losses on sales of securities during the six-
month period ended June 30, 1994. All securities held by the Company as of June
30, 1994 have remaining maturities of less than one year. At June 30, 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 June 30, 1994 and December
31, 1993 were:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1994 1993
- - ------------------- ----- -----
<S> <C> <C>
Crude oil $ 46 $ 68
Refined products 23 29
Petrochemicals 75 57
Materials and supplies 40 37
----- -----
$ 184 $ 191
===== =====
</TABLE>
5
<PAGE>
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.
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 $19 million related to future CERCLA, RCRA and TNRCC
assessment and remediation costs, of which $2 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.
6
<PAGE>
6. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
From April 1993 to June 1994, two process waste water streams at the Channelview
Complex were not in compliance with applicable Benzene National Emissions
Standards for Hazardous Air Pollutants (NESHAPS) regulations. After learning
that these streams were not controlled in accordance with the Benzene NESHAPS
regulations, Company employees determined that the streams did not create a
discernible impact on health or safety and achieved compliance with the
regulations. The Company estimates that it will incur approximately $1 million
in capital costs in connection with these waste water streams to achieve
on-going compliance with the Benzene NESHAPS regulations. The Company notified
the TNRCC and the EPA that the two streams were not controlled in accordance
with the Benzene NESHAPS regulations. On June 6, 1994, the Company received a
Notice of Violation from the TNRCC regarding the two streams. In an initial
enforcement conference the TNRCC has indicated that it intends to proceed with
an administrative enforcement action, and the Company expects that the TNRCC
will impose an administrative fine.
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 the
matters discussed in this note could have a material impact on the Company's
results of operations for that period.
7. DIVIDENDS
On June 15, 1994, the Company paid a regular quarterly dividend of $0.225 per
share to stockholders of record on May 20, 1994. Additionally, on July 22,
1994, the Board of Directors declared a regular quarterly dividend of $0.225 per
share of common stock, payable September 15, 1994 to stockholders of record on
August 12, 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. CURRENT DEVELOPMENTS
On July 11, 1994, Lyondell filed Amendment No. 2 to its 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 July 11, 1994, ARCO filed Amendment No. 2 to its 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 has informed the
Company that it 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 also stated its current
intent to vote its shares of Lyondell common stock proportionately to the votes
of the non-ARCO stockholders, except under certain circumstances. However, there
can be no assurances that the Exchangeable Notes offering will be consummated.
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 and other future developments.
7
<PAGE>
10. SUBSEQUENT EVENT
Effective July 1, 1994, LCR elected to replace its $100 million revolving credit
facility with a $70 million revolving credit facility with substantially similar
terms. No amounts were outstanding under the previous credit facility as of June
30, 1994. The new credit facility may be extended at the request of LCR upon
consent of the bank group.
8
<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 the detailed engineering completed to
date, currently is estimated to be approximately $830 million. In addition, LCR
has estimated a 15 percent ($125 million) allowance for contingency costs, which
would increase the total project cost estimate to approximately $955 million.
The final cost of the project will be influenced by numerous factors, many of
which are beyond LCR's control, including the timing and terms of necessary
construction, operating and regulatory permits, as well as construction schedule
delays whether caused by adverse weather conditions, material shortages, labor
disputes or otherwise.
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, including industrial and motor
oils; olefins feedstocks and crude oil resales. The following table sets forth
the Company's major product volumes sold for the periods indicated. Sales
volumes include production, purchases of products for resale, propylene
production from the product flexibility unit and draws from inventory. The
refining segment sales revenue includes crude oil resales amounting to $58
million and $98 million for the three-month periods ended June 30, 1994 and
1993, respectively and $119 million and $225 million for the six-month periods
ended June 30, 1994 and 1993, respectively.
9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ --------------------
1994 1993 1994 1993
--------- ------- -------- --------
<S> <C> <C> <C> <C>
SELECTED PETROCHEMICAL PRODUCTS (MILLIONS)
(EXCLUDING INTERSEGMENT SALES):
Ethylene, propylene and polymers (lbs.) 1,458 1,454 2,961 2,761
Other olefins (lbs.) * 249 312 486 599
Methanol (gallons) * 46 62 92 111
Aromatics (gallons) 41 26 77 54
REFINED PRODUCTS (THOUSAND BARRELS PER DAY)
(EXCLUDING INTERSEGMENT SALES):
Gasoline 103 124 108 132
Heating oil (no. 2 distillate) 51 72 50 68
Jet fuel 29 33 26 36
Aromatics 7 12 8 12
Other refined products 50 47 47 44
----- ----- ----- -----
Total refined products volumes 240 288 239 292
===== ===== ===== =====
</TABLE>
* The 1994 amounts exclude volumes now sold as MTBE.
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 SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- -------------------
(MILLIONS OF DOLLARS) 1994 1993 1994 1993
- - -------------------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES:
Petrochemical segment $ 439 $ 400 $ 823 $ 790
Refining segment 570 789 1,105 1,603
Intersegment sales (109) (109) (204) (248)
----- ------ ------ ------
$ 900 $1,080 $1,724 $2,145
===== ====== ====== ======
COST OF SALES:
Petrochemical segment $ 362 $ 393 $ 697 $ 762
Refining segment 541 756 1,037 1,555
Intersegment purchases (109) (109) (204) (248)
----- ------ ------ ------
$ 794 $1,040 $1,530 $2,069
===== ====== ====== ======
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE:
Petrochemical segment $ 9 $ 9 $ 19 $ 18
Refining segment 14 12 27 22
Unallocated 12 14 23 24
----- ------ ------ ------
$ 35 $ 35 $ 69 $ 64
===== ====== ====== ======
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- -------------------
(MILLIONS OF DOLLARS) 1994 1993 1994 1993
- - --------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING INCOME:
Petrochemical segment $ 68 $ (2) $ 107 $ 10
Refining segment 15 21 41 26
Unallocated (12) (14) (23) (24)
----- ----- ----- -----
$ 71 $ 5 $ 125 $ 12
===== ===== ===== =====
Summarized below are intersegment sales
for the two segments.
Petrochemical segment $ 53 $ 44 $ 97 $ 110
Refining segment 56 65 107 138
----- ----- ----- -----
$ 109 $ 109 $ 204 $ 248
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
OVERVIEW
Net income for the second quarter of 1994 was $32 million or $.40 per share
compared to a net loss of $11 million or $.14 per share for the second quarter
of 1993. The net loss in the second quarter of 1993 included charges of $6
million resulting from a write-off of engineering costs associated with the
cancellation of a capital project and $2 million for a workforce reduction and
realignment. Excluding the effects of these adjustments, earnings improved $35
million during the second quarter of 1994 compared to the second quarter of
1993. This improvement was primarily due to higher margins for petrochemicals.
Net income for the second quarter of 1994 was $10 million higher compared to the
first quarter of 1994. This increase was primarily due to higher petrochemical
margins, partially offset by lower ethylene sales volumes and lower
profitability within the refining segment.
Net income for the first six months of 1994 was $54 million or $.68 per share
compared to a net income of $3 million or $.04 per share for the first six
months of 1993. First six months 1993 earnings included a $22 million favorable
adjustment for the cumulative effect related to prior periods associated with a
change in accounting for major maintenance turnarounds. Excluding the effect of
this accounting change, earnings improved $73 million during the first six
months of 1994 compared to the first six months of 1993. This improvement was
primarily due to higher margins for petrochemicals and refined products as well
as higher ethylene sales volumes.
PETROCHEMICAL SEGMENT
REVENUES Sales and other operating revenues for the second quarter of 1994 were
$439 million compared to $400 million for the second quarter of 1993. The $39
million increase was primarily due to higher petrochemical sales prices
reflecting the improved worldwide economy which has created better market
conditions for petrochemicals generally.
11
<PAGE>
Sales and other operating revenues for the first six months of 1994 were $823
million compared to $790 million for the first six months of 1993, an increase
of $33 million. The increase was caused by higher petrochemical sales volumes,
partially offset by generally lower petrochemical sales prices except for sales
prices of methanol which were higher. Higher demand for petrochemicals was
caused by the improved worldwide economy. Methanol sales prices were higher due
to higher demand caused by the improvement in the worldwide economy and
increased use for MTBE as well as industry supply disruptions.
COST OF SALES Cost of sales was $362 million in the second quarter of 1994
compared to $393 million in the second quarter of 1993, a decrease of $31
million. Cost of sales for the first six months of 1994 was $65 million lower
compared to the first six months of 1993. Contributing to these decreases were
lower feedstock costs generally caused by lower crude oil prices and the write-
off during the second quarter of 1993 of engineering costs associated with the
cancellation of the capital project.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses for the second quarter of 1994 were unchanged at $9
million compared to the second quarter of 1993. Selling, general and
administrative expenses were $1 million higher for the first six months of 1994
compared to the first six months of 1993.
OPERATING INCOME Operating income for the second quarter of 1994 was $68
million compared to an operating loss of $2 million in the second quarter of
1993. The $70 million increase was primarily due to higher ethylene and
methanol sales margins. Improved ethylene margins resulted primarily from
lower feedstock costs and higher ethylene sales prices. Olefins feedstock
costs were lower due to lower crude oil prices. Ethylene sales prices
were higher due to higher demand caused by improvement in the worldwide economy,
particularly in the U.S. automotive and construction sectors. Methanol margins
were higher primarily due to higher sales prices.
Operating income for the second quarter of 1994 compared to the first quarter of
1994 increased $29 million. The increase was primarily due to higher ethylene
margins, partially offset by lower ethylene sales volumes. Ethylene margins
continued to improve during the current quarter due to higher sales prices
caused by improvement in the worldwide economy. Although industry demand for
ethylene was strong and production rates remained high, the Company's ethylene
sales volumes were lower during the current period due to the repayment of
product as a result of inventory exchanges entered into during prior periods.
Operating income for the first six months of 1994 was $107 million compared to
$10 million for the first six months of 1993. The $97 million increase was
primarily due to higher ethylene and methanol sales margins and to higher
ethylene sales volumes. The higher methanol sales margins and higher ethylene
sales volumes were caused by the higher demand brought about by the improvement
in the worldwide economy. The higher ethylene sales margins were due to lower
olefins feedstock costs.
REFINING SEGMENT
REVENUES Sales and other operating revenues for the second quarter of 1994 were
$570 million compared to $789 million for the second quarter of 1993, a
reduction of $219 million. Sales and other operating revenues for the first six
months of 1994 were $1,105 million, a $498 million reduction compared to the
first six months of 1993. These decreases were due to lower resale volumes of
purchased light refined products, lower sales prices for refined products and
lower crude oil resales. 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 and, as a result, the purchase and resale
activity for light refined products conducted for logistic and other reasons
declined during the current period. Refined products sales prices were lower
primarily due to lower industry crude oil prices. 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.
12
<PAGE>
COST OF SALES Cost of sales was $541 million in the second quarter of 1994
compared to $756 million in the second quarter of 1993, a decrease of $215
million. Cost of sales decreased by $518 million in the first six months of
1994 compared to the first six months of 1993. These decreases were primarily
due to lower purchases for resale of light refined products, lower purchases of
crude oil that were resold and lower feedstock costs primarily due to lower
crude oil prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses were $14 million in the second quarter of 1994, an
increase of $2 million compared to the second quarter of 1993. Selling, general
and administrative expenses increased by $5 million in the first six months of
1994 compared to the first six months of 1993. These increases were primarily
due to general and administrative expenses attributable to the creation of LCR
as a separate entity and the treatment of ongoing costs beginning July 1, 1993.
OPERATING INCOME Operating income for the second quarter of 1994 was $15
million compared to $21 million for the second quarter of 1993. The $6 million
decrease was primarily due to lower industry refining margins, partially offset
by higher Venezuelan crude oil processing rates and improved profits from
lubricants.
Operating income for the second quarter of 1994 was lower by $11 million
compared to the first quarter of 1994. The decrease was primarily due to lower
aromatics profitability and lower refined products margins. Also contributing
to the decrease was lower profitability for lubricants. Contributions from
aromatics declined from a very strong first quarter primarily due to unit
downtime for maintenance turnarounds. Refined products margins were lower
primarily due to crude oil costs increasing more rapidly than product prices.
Operating income for the first six months of 1994 was $41 million compared to
$26 million for the first six months of 1993. The $15 million increase was
primarily due to improved refined products margins. Refined products margins
were higher primarily due to processing higher volumes of Venezuelan crude oil
purchased under the Crude Supply Contract.
UNALLOCATED
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were
$12 million in the second quarter of 1994 compared to $14 million in the second
quarter of 1993, a decrease of $2 million. General and administrative expenses
were $23 million in the first six months of 1994, a $1 million decrease compared
to the first six months of 1993. The improvement was primarily due to the
charge during the second quarter of 1993 for the workforce reduction and
realignment.
MINORITY INTEREST IN LYONDELL-CITGO REFINING COMPANY LTD. Minority interest was
$2 million in the second quarter of 1994 and $5 million for the first six months
of 1994, representing CITGO's allocated share of LCR's income.
INCOME TAX The effective income tax rate during the second quarter of 1994 from
continuing operations was 37 percent compared to 22 percent (tax benefit) for
the second quarter of 1993. The effective income tax rate during the first six
months of 1994 from continuing operations was 36 percent compared to 23 percent
(tax benefit) for the year earlier period. The tax benefit in 1993 was reduced
by a charge to state deferred taxes related to Texas franchise taxes, resulting
in relatively low effective income tax benefit rates.
13
<PAGE>
FINANCIAL CONDITION
Cash flow from operations for the six months ended June 30, 1994 was $72 million
which was net of annual property tax payments of $28 million made in the first
quarter of 1994 and federal income tax payments of $29 million made in the
second quarter of 1994. Cash flows associated with investing activities during
the six months ended June 30, 1994 included capital expenditures of $79 million,
of which $29 million was for environmentally related projects and $28 million
was for the upgrade project at the Refinery which was contributed by CITGO, the
minority owner. Cash flows associated with financing activities during the six
months ended June 30, 1994 included $36 million of dividend payments and a net
$12 million for debt repayments. On July 22, 1994, the Board of Directors
declared a regular quarterly dividend of $.225 per share of common stock,
payable September 15, 1994 to stockholders of record on August 12, 1994.
Management is currently considering additional capital projects which could
result in a moderate increase over budgeted 1994 capital expenditures.
CURRENT BUSINESS OUTLOOK
Lyondell's second quarter and first six months of 1994 results reflect a
petrochemicals business environment which has continued to improve. These
results were partially offset by refining industry conditions which reflect
depressed margins. The effect of the depressed industry margins on LCR was
partially offset by the benefits of LCR's Crude Supply Contract.
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 during the third quarter. In
addition, turnarounds on the coker and one of the major crude distillation units
at the Refinery currently are scheduled to begin in October 1994. During these
Refinery turnarounds, which are also expected to last approximately six weeks,
work will be completed to "tie-in" the crude distillation unit to the upgrade
project, thereby avoiding or reducing downtime of the unit that otherwise would
be necessary for the completion of the upgrade project. However, the timing of
such turnarounds may be accelerated or delayed because of numerous factors, some
of which are beyond the Company's control.
Management believes that the low costs and operating flexibility of its
petrochemical business, as well as its large production capacity, position it to
generate higher cash flows if the petrochemical cycle continues to improve. In
the first six months of 1994, the domestic olefins industry operated at close to
maximum available capacity. However, additional capacity scheduled to come on-
stream in 1994 and early 1995 (including one plant that came on stream during
the second quarter of 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.
Although the future economic environment cannot be known with certainty, the
Company believes that the cash flow management, cost reduction and other steps
taken during the past two years have positioned it to capitalize on the
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 regular
quarterly dividend. However, the Company continually evaluates its cash
requirements and allocates cash in order to maximize stockholder returns.
14
<PAGE>
RECENT DEVELOPMENTS
On July 11, 1994, Lyondell filed Amendment No. 2 to its 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 July 11, 1994, ARCO filed Amendment No. 2 to its 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 has informed the
Company that it 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 also stated its current
intent to vote its shares of Lyondell common stock proportionately to the votes
of the non-ARCO stockholders, except under certain circumstances. However, there
can be no assurances that the Exchangeable Notes offering will be consummated.
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 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.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
Reference is made to the disclosure on page 13 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1993 (hereinafter
referred to as "1993 Form 10-K Report") regarding Environmental
Matters. In April 1994, new regulations relating to emission
standards for a large number of petrochemicals such as methanol,
butadiene and toluene, were announced by the EPA. The Company is in
the process of analyzing the impact that these new regulations will
have on its petrochemical business.
Reference is made to the Company's Report on Form 8-K dated as of July
11, 1994, in which the Company reported the results of an independent
investigation conducted by the Audit Committee of the Board regarding
the compliance status of two process waste water streams under the
applicable Benzene National Emissions Standard for Hazardous Air
Pollutants ("NESHAPS") regulations and certain issues raised by an
employee. The Company has received a notice of violation from the
TNRCC regarding the two streams and in an initial enforcement
conference the TNRCC has indicated that it intends to proceed with an
administrative enforcement action. Although the Company expects that
the TNRCC will impose an administrative fine, the Company does not
believe that any aspects of the matters described above will subject
the Company to criminal liability or have a material adverse effect on
the Company's business or financial condition.
Reference is made to the disclosure on page 18 of the 1993 Form 10-K
Report for the year ended December 31, 1993, and on page 13 of the
Company's Quarterly Report on Form 10-Q for the period ending March
31, 1993, regarding the City of Houston's lawsuit against the Company
alleging violations of the Texas Clean Air Act and the Texas
Administrative Code and the preliminary settlement agreement relating
thereto. The settlement agreement was approved by the court in July of
1994.
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 was re-convened on July 22, 1994.
The stockholders elected all of the Company's eleven nominees for
director, approved an amendment to the Company's Certificate of
Incorporation authorizing the issuance of preferred stock and approved
the appointment of Coopers & Lybrand as the Company's independent
auditors for 1994. The votes were as follows:
1. Election of Directors:
<TABLE>
<CAPTION>
Nominee For Withheld
------- ---------- --------
<S> <C> <C>
Mike R. Bowlin 76,512,834 309,699
William T. Butler 76,515,997 306,536
Allan L. Comstock 76,481,842 340,691
Terry G. Dallas 76,480,741 341,792
Bob G. Gower 76,505,372 317,161
Stephen F. Hinchliffe, Jr. 76,515,765 306,768
Dudley C. Mecum, II 76,496,153 326,380
William R. Rusnack 76,486,877 335,656
Dan F. Smith 76,514,871 307,662
Paul R. Staley 76,497,861 324,672
William E. Wade, Jr. 76,497,002 325,531
</TABLE>
16
<PAGE>
2. Amendment to Certificate of Incorporation to Authorize Preferred
Stock:
For 60,368,843
Against 13,422,242
Abstain 265,435
Broker non-votes 2,766,013
3. Appointment of Coopers & Lybrand:
For 76,547,041
Against 181,651
Abstain 93,841
Broker non-votes 0
ITEM 5. OTHER MATTERS
The Company's Board of Directors has adopted a resolution reducing the
size of the Board from eleven to six members effective upon the
resignation of the Arco officers who currently serve on the Company's
Board.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3. Amendment to Restated Articles of Incorporation effective as of
July 22, 1994.
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed during the
quarter ended June 30, 1994 and through the date hereof:
<TABLE>
<CAPTION>
Date of Report Item No. Financial Statements
-------------- -------- --------------------
<S> <C> <C>
June 6, 1994 5 None
June 21, 1994 5 None
July 11, 1994 5 None
</TABLE>
17
<PAGE>
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: July 26, 1994 JOSEPH M. PUTZ
----------------------------------
(Signature)
Joseph M. Putz
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
18
<PAGE>
AMENDMENT OF CERTIFICATE OF INCORPORATION
OF LYONDELL PETROCHEMICAL COMPANY
(A DELAWARE CORPORATION)
AUTHORIZING ISSUANCE OF PREFERRED STOCK
Effective July 22, 1994, ARTICLE IV of the Certificate of Incorporation is
amended and restated to read in its entirety as follows:
ARTICLE IV
CAPITAL STOCK
A. AUTHORIZED SHARES
The total number of shares of capital stock that the Company shall have
authority to issue is 330,000,000 shares.
B. COMMON STOCK
1. The Company shall have authority to issue up to 250,000,000 shares of
Common Stock, par value of $1.00 per share.
2. Each holder of shares of Common Stock shall have the right to one vote
for each share of Common Stock held of record on the books of the Company.
C. PREFERRED STOCK
1. The Company shall have authority to issue up to 80,000,000 shares of
Preferred Stock, par value of $.01 per share.
2. Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby expressly authorized from time to time to
provide for the issuance of Preferred Stock in one or more series, and to
establish and fix by resolution or resolutions providing for the issuance of
each such series the number of shares to be included in such series and the
voting and other powers, designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, of each such series, to the full extent now or hereafter
permitted by law, subject to any other provision of this Certificate of
Incorporation. The number of authorized shares of Preferred Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of stock of the Company
entitled to vote thereon having a majority of the votes entitled to be cast,
without a separate vote of the holders of the Preferred Stock, or any series
thereof, unless a separate vote of any of such holders is required pursuant to
the resolution or resolutions establishing any such series of Preferred Stock.
