<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1994.
REGISTRATION NO. 33-53483
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
----------------
LYONDELL PETROCHEMICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4160558
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1221 MCKINNEY STREET
SUITE 1600, HOUSTON, TEXAS 77002
(713) 652-7200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GERALD A. O'BRIEN
1221 MCKINNEY STREET
SUITE 1600, HOUSTON, TEXAS 77002
(713) 652-7200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
DIANA M. HUDSON KERRY A. GALVIN JOHN W. WHITE
MAYOR, DAY, CALDWELL & LYONDELL PETROCHEMICAL CRAVATH, SWAINE & MOORE
KEETON, L.L.P. COMPANY WORLDWIDE PLAZA,
700 LOUISIANA 1221 MCKINNEY STREET, 825 EIGHTH AVENUE
HOUSTON, TEXAS 77002 SUITE 1600 NEW YORK, NEW YORK 10019-
(713) 225-7000 HOUSTON, TEXAS 77002 7415
(713) 652-7200 (212) 474-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8 (A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGISTRATION S-K
<TABLE>
<CAPTION>
FORM S-3 ITEM NUMBER AND HEADING PROSPECTUS CAPTION OR PAGE
-------------------------------- --------------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Cover Pages of Registration Statement and
Cover Page of Prospectus.... Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus... Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information, Risk
Factors and Ratio of Prospectus Summary; Certain Investment
Earnings to Fixed Charges... Considerations
4. Use of Proceeds.............. *
5. Determination of Offering *
Price.......................
6. Dilution..................... *
7. Selling Security Holders..... Security Ownership by ARCO
8. Plan of Distribution......... Plan of Distribution
9. Description of Securities to Cover Page of Prospectus; Capitalization;
be Registered............... Description of Capital Stock
10. Interests of Named Experts Certain Legal Matters; Experts
and Counsel.................
11. Material Changes............. *
12. Incorporation of Certain
Information by Reference.... Incorporation of Certain Documents by
Reference
13. Disclosure of Commission *
Position on Indemnification
for Securities Act
Liabilities.................
</TABLE>
- --------
* Item is omitted either because it is inapplicable or the answer thereto is
negative.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS 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 REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
APPENDIX A
SUBJECT TO COMPLETION, DATED MAY 20, 1994
35,000,000 SHARES
LOGO
COMMON STOCK
(PAR VALUE $1.00 PER SHARE)
-----------
This Prospectus relates to 35,000,000 shares of common stock, par value $1.00
per share (the "Common Stock"), of Lyondell Petrochemical Company (the
"Company"), which may be delivered by Atlantic Richfield Company ("ARCO"), at
its option, pursuant to the terms of the % Exchangeable Notes due ,
1997 (the "Exchangeable Notes") of ARCO. This Prospectus is Appendix A to both
a U.S. prospectus of ARCO covering the sale of 30,000,000 Exchangeable Notes
and an international prospectus of ARCO covering the sale of 5,000,000
Exchangeable Notes. The Company will not receive any of the proceeds from the
sale of the Exchangeable Notes or the delivery thereunder of shares of Common
Stock covered hereby.
ARCO has granted the underwriters of the Exchangeable Notes a 30-day option
to purchase up to an additional 4,921,400 Exchangeable Notes, which may be
exchangeable at their maturity for additional shares of Common Stock. Such
option has been granted solely to cover over-allotments, if any.
SEE "CERTAIN INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
The Common Stock is traded on the New York Stock Exchange, Inc. ("NYSE")
under the symbol "LYO." On May 18, 1994, the last reported sale price of Common
Stock on the NYSE Composite Tape was $25.375 per share. See "Price Range of
Common Stock and Dividends."
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------
The date of this Prospectus is , 1994.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission may
be inspected and copied at the Public Reference Section of the Commission at
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
following Regional Offices of the Commission: Chicago Regional Office,
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and New York Regional Office, Seven World Trade Center,
New York, New York 10048. Copies of such material may also be obtained from the
Public Reference Section of the Commission at its principal office at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, at prescribed rates. The
Company's registration statements, reports, proxy statements and other
information may also be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
This Prospectus, which constitutes a part of a registration statement on Form
S-3 (the "Registration Statement") filed by the Company with the Commission
under the Securities Act of 1933, as amended (the "Securities Act"), omits
certain of the information set forth in the Registration Statement. Reference
is hereby made to the Registration Statement and to the exhibits thereto for
further information with respect to the Company and the securities offered
hereby. Statements contained herein concerning the provisions of such documents
are necessarily summaries of such documents, and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission. Copies of the Registration Statement and the
exhibits thereto are on file at the offices of the Commission and may be
obtained upon payment of the fee prescribed by the Commission, or may be
examined without charge at the public reference facilities of the Commission
described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31, 1993
("1993 Form 10-K Report") and the Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994 are incorporated herein by reference.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the
date of filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated herein by reference shall be
deemed to be modified or superseded for purposes of the Registration Statement
and this Prospectus to the extent that a statement contained herein or in any
other subsequently filed incorporated document or in any accompanying
prospectus supplement modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
Copies of all documents incorporated herein by reference other than exhibits
to such documents (unless such exhibits are specifically incorporated by
reference) will be provided without charge to each person who receives a copy
of this Prospectus upon request to the Company, 1221 McKinney Street, Suite
1600, Houston, Texas 77002, Attention: Assistant Secretary (telephone: (713)
652-7200).
The Company is incorporated in Delaware, and its executive offices are
located at 1221 McKinney Street, Suite 1600, Houston, Texas 77002 (telephone:
(713) 652-7200).
THE COMPANY HAS BEEN ADVISED THAT IN CONNECTION WITH THE OFFERING OF THE
EXCHANGEABLE NOTES BY ARCO, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE EXCHANGEABLE
NOTES OR THE COMMON STOCK OF THE COMPANY, OR EACH OF THEM, AT A LEVEL ABOVE
THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in connection with, the more detailed information and the
consolidated financial statements (including the notes thereto) appearing
elsewhere in this Prospectus as well as the information incorporated herein by
reference. Unless otherwise indicated or required by context, references to
"Lyondell" or the "Company" include its consolidated subsidiaries.
COMPANY OVERVIEW
Lyondell Petrochemical Company ("Lyondell" or the "Company") is a leading
manufacturer and marketer of petrochemicals and, through its interest in
LYONDELL-CITGO Refining Company Ltd. ("LCR"), of refined petroleum products.
The Company's corporate headquarters and manufacturing facilities are located
in the Houston, Texas area.
The Company produces a wide variety of petrochemicals, including olefins
(primarily ethylene, propylene and butadiene), polyolefins (low density
polyethylene and polypropylene), methanol, MTBE (methyl tertiary butyl ether)
and aromatics. Lyondell is the largest domestic merchant marketer of ethylene
and propylene, with rated production capacities of 3.6 and 2.1 billion pounds
per year, respectively. Lyondell's petrochemical products are primarily
commodity chemicals that are sold to customers for use in the manufacture of
chemicals, plastics and other synthetic materials. These materials are used, in
turn, to produce a wide variety of consumer goods and industrial products.
The Company's refining business is conducted through its approximate 90
percent interest in LCR, which operates a 265,000 barrels per day refinery (the
"Refinery"). LCR sells the majority of the gasoline, jet fuel and heating oil
it produces to CITGO Petroleum Corporation ("CITGO"), which currently has an
approximate 10 percent interest in LCR. LCR also produces fuel oil and
aromatics, as well as lubricants for the transportation, oil drilling and food
processing industries.
LYONDELL'S STRATEGY
Lyondell's management believes that the best means to create value for its
stockholders is to maximize free cash flow over the long term. Lyondell's
strategy is to achieve the lowest possible costs and the highest degree of
operational flexibility in order to capture the benefits of cyclical upturns in
its businesses and to minimize the impact of downturns. The following are the
key elements of the Company's strategy to achieve superior performance
throughout the business cycle:
. LOW COSTS AND UNIQUE OPERATING FLEXIBILITY IN PETROCHEMICALS
Management believes that Lyondell's cost to produce ethylene is the
lowest in the United States and that its olefins plants are the most
flexible in the industry. In order to enhance the Company's low cost
position, management strives to quickly identify and capitalize on
opportunities to use its operating and organizational flexibility,
including the ability to recover and upgrade by-products and to optimize
integration of its facilities. Lyondell is the only ethylene producer
with the flexibility to process from 100 percent petroleum liquids
feedstocks (including heavy liquids) to 90 percent natural gas liquids
feedstocks as market conditions change. Lyondell also has a unique
ability to vary the production ratios of ethylene and propylene in order
to capture more profitable market opportunities through its product
flexibility unit, which converts ethylene and other light hydrocarbons
into propylene. After a doubling of capacity in 1993, this unit is
designed to produce up to one billion pounds of propylene per year.
High productivity, lean staffing and a participative management style
also are key to the Company's low operating costs. Industry studies show
that Lyondell's olefins plants have the highest production per plant-
level employee in the industry. Lyondell's lean staff levels and
3
<PAGE>
minimal expenses have resulted in a five-year average for annual
selling, general and administrative expenses (which exclude certain
distribution costs) of 2.4 percent of sales, which management believes
is among the lowest in the industry.
. ENHANCING THE VALUE OF THE REFINING BUSINESS
Management believes the Company has significantly improved the outlook
for its refining business through a mutually advantageous arrangement
with CITGO and other affiliates of the Venezuelan national oil company,
Petroleos de Venezuela, S.A. ("PDVSA"), entered into in 1993.
A crude oil supply agreement (the "Crude Supply Agreement") provides
LCR with a 25-year supply of Venezuelan crude oil under a pricing
formula that incorporates market prices for refined products as well as
deemed yields, deemed operating costs and deemed margins. The Crude
Supply Agreement is expected to significantly diminish the impact of
market volatility on the refining business and stabilize its cash flow
at attractive levels relative to historic performance. Under this
arrangement, LCR currently is processing approximately 130,000 barrels
per day of heavy crude oil, and upon successful completion of the
upgrade project discussed below is expected to process approximately
200,000 barrels per day of very heavy crude oil.
LCR is undertaking a major upgrade project to create a world-class
facility capable of refining very heavy grades of crude oil into
valuable light products, including reformulated gasoline and low-sulfur
diesel. Completion of the upgrade project is anticipated in late 1996 or
early 1997. CITGO has entered into a long-term agreement to purchase the
upgraded Refinery's gasoline, jet fuel, heating oil and low-sulfur
diesel at market-based prices.
In 1993, CITGO contributed $100 million to LCR for on-going capital
projects other than the Refinery upgrade project, giving CITGO an
approximate 10 percent interest in LCR. The arrangement with CITGO
provides that the Refinery upgrade project will be funded primarily by
additional CITGO equity contributions and LCR borrowings, with CITGO
funding all interest and fees for the borrowings prior to completion.
Upon completion of the upgrade project, when it receives credit for its
project-related contributions, CITGO's interest in LCR will increase to
approximately 35 percent. CITGO also has a one-time option following
completion of the upgrade to make an additional contribution to LCR in
order to increase its interest up to 50 percent.
. DISCIPLINED CAPITAL SPENDING
The Company's discretionary capital spending strategy focuses on high-
return projects that enhance manufacturing efficiency, increase
production volume, upgrade product streams or achieve lower operating
costs. For example, through a low cost debottleneck project in 1989 the
Company increased its ethylene capacity from 2.8 to 3.6 billion pounds
per year. Lyondell continues to develop and review both internal and
external opportunities to enhance the value of the Company's business
through increased cash flow. Examples of this approach are the Company's
1990 acquisition of its polyolefins business and polymers facility,
which enhanced its petrochemicals business, and the LCR transaction,
which is improving its refining business.
----------------
Through the strategy described above, Lyondell expects to maximize cash flow
throughout the business cycle by emphasizing low operating costs, high
operating flexibility and stable refining margins. Specifically, management
expects refining operations to generate relatively stable cash flow, while the
Company's large petrochemical capacity positions Lyondell to capture higher
cash flows when the petrochemical cycle improves.
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR
--------------------------------------------------------
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------- ----------------------------------------
1994 1993 1993 1992 1991 1990 1989
------ ------ ------ ------ ------ ------ ------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AND CERTAIN OTHER
DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales and other
operating revenues.... $ 824 $1,065 $3,850 $4,809 $5,735 $6,499 $5,361
Cost of sales.......... 736 1,029 3,627 4,578 5,210 5,777 4,640
Selling, general and
administrative
expenses.............. 34 29 130 127 126 121 108
------ ------ ------ ------ ------ ------ ------
Operating income....... 54 7 93 104 399 601 613
Net interest expense... (17) (17) (72) (69) (60) (64) (57)
Minority interest...... (3) -- (5) -- -- -- --
Income tax (provision)
benefit............... (12) 2 (12) (9) (117) (181) (182)
------ ------ ------ ------ ------ ------ ------
Income (loss) before
cumulative effect of
accounting changes.... 22 (8) 4 26 222 356 374
Cumulative effect of
accounting changes(1). -- 22 22 (10) -- -- --
------ ------ ------ ------ ------ ------ ------
Net income............. $ 22 $ 14 $ 26 $ 16 $ 222 $ 356 $ 374
====== ====== ====== ====== ====== ====== ======
Net income (loss) per
common share:
Before cumulative
effect of accounting
changes............. $ .27 $ (.09) $ .06 $ .32 $ 2.78 $ 4.45 $ 4.67
From cumulative
effect of accounting
changes............. -- .27 .27 (.12) -- -- --
------ ------ ------ ------ ------ ------ ------
Net income........... $ .27 $ .18 $ .33 $ .20 $ 2.78 $ 4.45 $ 4.67
====== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA:
Cash, restricted cash
and short-term
investments(2)........ $ 103 $ 60 $ 119 $ 121 $ 307 $ 127 $ 245
Working capital........ 229 176 224 223 375 238 367
Property, plant and
equipment, net........ 676 627 655 623 569 568 455
Total assets........... 1,270 1,181 1,231 1,215 1,479 1,372 1,267
Long-term debt,
excluding current
portion............... 717 722 717 725 554 471 500
Capitalized lease
obligations, less
current portion....... -- -- -- -- 156 187 214
Common stockholders'
equity (deficit)...... (84) (28) (88) (6) 122 38 9
OTHER DATA:
Capital expenditures... $ 32 $ 15 $ 69 $ 97 $ 43 $ 145 $ 176
Depreciation and
amortization(1)....... 15 14 58 39 39 31 19
Cash flow provided by
operating activities.. 29 9 84 108 270 386 538
Distribution to ARCO... -- -- -- -- -- -- 500
Dividends per share.... $ .225 $ .45 $ 1.35 $ 1.80 $ 1.75 $ 4.10(3) $ 1.20
====== ====== ====== ====== ====== ====== ======
Ethylene, propylene and
polymers sales
(million pounds)...... 1,503 1,307 5,366 5,785 6,000 6,373 5,048
Refined product sales
average per day
(thousand barrels).... 239 296 263 277 288 301 298
</TABLE>
- --------
(1) See Note 4 of "Notes to Consolidated Financial Statements."
(2) As of March 31, 1994 and December 31, 1993, $46 million and $73 million of
cash and $22 million and $6 million of short-term investments,
respectively, were restricted for use in LCR capital projects and other
expenditures as determined by the LCR owners.
(3) Includes a $2.50 per share special dividend paid in the first quarter of
1990.
5
<PAGE>
CERTAIN INVESTMENT CONSIDERATIONS
Prospective investors should carefully consider the specific factors set
forth below as well as the other information contained in this Prospectus and
the information incorporated herein by reference.
IMPACT OF THE EXCHANGEABLE NOTES ON THE MARKET FOR LYONDELL COMMON STOCK
It is not possible to accurately predict how or whether the % Exchangeable
Notes due , 1997 (the "Exchangeable Notes") of Atlantic Richfield
Company ("ARCO") will trade in the secondary market or whether such market will
be liquid. Any market that develops for the Exchangeable Notes is likely to
influence, and be influenced by, the market for the common stock, par value
$1.00 per share (the "Common Stock"), of Lyondell Petrochemical Company
("Lyondell" or the "Company"). For example, the price of the Common Stock could
become more volatile and could be depressed by investors' anticipation of the
potential distribution into the market of substantial additional amounts of
Common Stock at the maturity of the Exchangeable Notes, by possible sales of
Common Stock by investors who view the Exchangeable Notes as a more attractive
means of equity participation in Lyondell and by hedging or arbitrage trading
activity that may develop involving the Exchangeable Notes and Common Stock.
CYCLICALITY AND VOLATILITY OF EARNINGS
The Company's historical operating results reflect the cyclical and volatile
nature of both the petrochemical and refining industries. Both industries are
mature and capital intensive, and industry margins are sensitive to supply and
demand cycles. As a result, the Company's earnings may be subject to
significant fluctuations. In general, external factors beyond the Company's
control, such as general economic conditions, competition, international events
and circumstances and governmental regulation, can cause volatility in crude
oil and other feedstock prices, as well as fluctuations in product prices,
volumes, and margins and can magnify the impact of economic cycles on the
Company's businesses.
UNCERTAIN PETROCHEMICAL INDUSTRY OUTLOOK
The petrochemical industry historically has experienced alternating periods
of tight supply, causing prices and margins to increase, followed by periods of
substantial capacity additions resulting in oversupply and declining prices and
margins. For example, during the mid 1980s, olefins capacity increases did not
keep pace with demand and by the 1987-1988 period domestic producers were
operating at high capacity utilization rates and prices and margins had
increased substantially. The high profitability experienced by the ethylene
industry during this period peaked in early 1989. As a result of a downturn in
general economic conditions experienced in the late 1980s, the rate of growth
in U.S. demand slowed, which in turn had an adverse effect on ethylene margins.
In addition, increased olefins and polyolefins capacity in the Far East, as
well as increased export sales from Europe and the Middle East to the Far East,
adversely affected net U.S. export sales of polyolefins and, therefore,
ethylene margins. As a consequence, since 1990, the olefins industry, including
the Company, has experienced an overcapacity condition that has resulted in
lower average selling prices and low profit margins. Two new ethylene plants,
along with other announced plant expansions, with an aggregate capacity of
approximately four billion pounds per year (approximately 8.6 percent of
current capacity), currently are scheduled to commence operations in the U.S.
prior to December 1995. There can be no assurance that future growth in demand
for ethylene and its by-products will be sufficient to utilize current and
anticipated capacity. Excess capacity, to the extent it occurs, may depress
volumes and margins. Furthermore, there can be no assurance that future
conditions will not be aggravated by unanticipated industry capacity additions.
COMPETITION; RELIANCE ON MERCHANT MARKET
Both the petrochemical and refining industries in which the Company operates
are highly competitive. Many of the Company's competitors, particularly in
petrochemicals, are larger and have greater financial resources than the
Company. Among Lyondell's petrochemical competitors are some
6
<PAGE>
of the world's largest chemical companies. In the last several years, there
have been a number of mergers, acquisitions and spin-offs in the petrochemical
industry. This restructuring activity may result in fewer but more competitive
producers with greater financial resources than the Company.
As a producer of olefins primarily for the merchant market, Lyondell may
experience greater variations in its sales volumes and profitability when
industry supply and demand relationships are at extremes in comparison to more
integrated competitors, i.e., those with a higher proportion of captive demand
for olefins derivatives production. Among the refining competitors of LYONDELL-
CITGO Refining Company Ltd. ("LCR") are major integrated petroleum companies
that have their own raw material resources and, in many cases, downstream
markets, both of which tend to decrease the impact of business cycles on these
competitors' sales volumes and profitability.
LCR TRANSACTION AND REFINERY UPGRADE PROJECT
REFINERY UPGRADE PROJECT COST AND POTENTIAL DELAYS. The ultimate cost to LCR
of the upgrade project at its refinery (the "Refinery") will have a significant
impact on the value to the Company of the LCR transaction with CITGO Petroleum
Corporation ("CITGO"). 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. LCR is
currently in the process of preparing definitive engineering, which includes
several enhancements that LCR's management believes will increase the upgraded
Refinery's profitability. Although this engineering is not sufficiently
developed to permit a formal update of the estimate, LCR's management currently
believes that, when updated later this year, the estimated cost of the upgrade
project will be higher than $800 million, although not in excess of the range
of the original estimate. 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. In addition, there can be no
assurance that LCR will be able to obtain the numerous required regulatory and
environmental approvals, or that this process will not result in unanticipated
delays.
FINANCING OF REFINERY UPGRADE PROJECT AND POTENTIAL LIMITATIONS ON LCR
DISTRIBUTIONS. A significant portion of the funds for the Refinery upgrade
project are to be provided pursuant to CITGO's contractual commitments to LCR
as well as by financing at the LCR level. To the extent that LCR cannot obtain
financing for its share of costs, CITGO and the Company each will fund one half
of the cost of the upgrade project in excess of $300 million. See "The
Company--Refining--LCR Transaction." There can be no assurance that CITGO will
meet its remaining funding obligations or that LCR will be able to obtain
either construction loans or any other financing of sufficient magnitude or on
terms acceptable to it or to the Company and CITGO. The failure to obtain such
funding or loans could delay or decrease the scope of the Refinery upgrade
project, require the Company to loan or contribute additional amounts to LCR or
to guarantee its borrowings, and affect the repayment by LCR of Company loans.
The Company's ability to make contributions to LCR may, under certain
circumstances, be restricted by the Company's $400 million credit facility. In
addition, the existence of significant levels of financing at the LCR level and
the terms of the related financing agreements could restrict LCR's ability to
make cash distributions or otherwise impair the financial flexibility of the
Company, including its ability to obtain additional financing or to renew its
existing long-term debt. In addition, LCR may enter into other financing
arrangements following the completion of the upgrade project.
CRUDE SUPPLY AGREEMENT. The pricing of the crude oil purchased by LCR under
the crude supply agreement (the "Crude Supply Agreement") is based upon
published market prices of refined products, deemed yields, deemed operating
costs and deemed margins. If the actual yields, costs or volumes
7
<PAGE>
differ substantially from those contemplated by the Crude Supply Agreement, the
benefits of this agreement to LCR could be substantially diminished, and it
could result in lower earnings and cash flow. Furthermore, there may be periods
during which LCR's costs for crude oil under the Crude Supply Agreement may be
higher than might otherwise be available to LCR from other sources.
The supplier of crude oil under the Crude Supply Agreement is Lagoven, S.A.
("Lagoven"), which like CITGO is a subsidiary of Petroleos de Venezuela, S.A.
("PDVSA"), the Venezuelan national oil company. There are risks associated with
enforcing the provisions of contracts with companies such as Lagoven that are
non-United States affiliates of a sovereign nation. It is impossible to predict
how governmental policies may change under the current or any subsequent
Venezuelan government. In addition, there are risks associated with enforcing
judgments of United States courts against entities whose assets may be located
outside of the United States and whose management does not reside in the United
States. Although the parties have negotiated alternative arrangements in the
event of certain force majeure conditions, including governmental or other
actions restricting or otherwise limiting Lagoven's ability to perform its
obligations, any such alternative arrangements may not be as beneficial as the
Crude Supply Agreement. In the event that CITGO transfers its interest in LCR
to an unaffiliated third party after the completion of the Refinery upgrade
project, Lagoven has an option to terminate the Crude Supply Agreement.
Depending on then current market conditions, breach or termination of the Crude
Supply Agreement could adversely affect the Company. There can be no assurance
that alternative crude oils with similar margins would be available for
purchase by LCR. Furthermore, the breach or termination of the Crude Supply
Agreement would require LCR to return to the practice of purchasing all of its
crude oil feedstocks in the merchant market and would again subject LCR to
significant volatility and price fluctuations.
HEAVY CRUDE OIL PROCESSING. The heavy (22 degree API gravity) Venezuelan
crude oil currently being processed by LCR under the Crude Supply Agreement
contains high levels of heavy metals, naphthenic acids, sulfur and residual
fuels, which make it more difficult to process than lighter, sweeter crude
oils. The Refinery began processing Venezuelan crude oil in the third quarter
of 1992. Although the Company and LCR have made significant progress in
identifying and overcoming obstacles inherent in processing high volumes of
heavy Venezuelan crude oil, unplanned shutdowns of two units were necessary
during 1993 to address limitations and improve processing efficiency. There can
be no assurance that there will not be additional operational interruptions or
that the current processing of approximately 130,000 barrels per day of
Venezuelan crude oil can be sustained. See "The Company--Refining-- LCR
Transaction."
The design of the Refinery upgrade project is based on proven technology and
is intended to result in the processing of 200,000 barrels per day of very
heavy (17 degree API gravity) Venezuelan crude oil after completion of the
project, which is currently expected in late 1996 or early 1997. To the
Company's knowledge, no refinery has previously processed this quantity of 17
degree API gravity crude oil. Although the Company does not presently
anticipate such developments, the design, construction, start up and testing of
the upgrade project are subject to all of the risks of and the consequential
expenses related to such matters as design errors, construction accidents,
fires, explosions and similar events that can potentially affect large complex
manufacturing projects built within substantial existing refining,
petrochemical or other manufacturing plant sites. In addition, there can be no
assurance that the anticipated post-upgrade processing of very heavy (rather
than heavy) Venezuelan crude oil will not require significant additional design
or operational modifications. Furthermore, unanticipated difficulties in
eventually achieving the designed processing capability of the upgraded
Refinery may under certain circumstances result in LCR not being able to
satisfy its minimum processing requirements under the Crude Supply Agreement.
As a consequence, LCR would be required to renegotiate or obtain other
contractual relief with respect to these minimum requirements. Any such risks,
modifications or delays could result in significantly increased costs for the
project or negatively affect LCR's operating results.
8
<PAGE>
FINANCING RISKS; POTENTIAL DILUTION
To the extent that the Company requires additional financing, whether to
pursue an expansion, acquisition or other enhancement of its business, or for
other purposes, the primary sources for such financing will be the Company's
internal cash flow, additional debt or equity financing or a combination
thereof. There can be no assurance that any such debt or equity financing can
be obtained on terms acceptable to the Company. In addition, the existence of
financing at the LCR level could impair the financial flexibility of the
Company. To the extent the Company finances such activities through the
issuance of additional equity securities, the equity interests of its holders
of Common Stock could be substantially diluted. In addition, the Company's $400
million credit facility may restrict under certain circumstances the Company's
ability to incur additional indebtedness. See "Financial Matters--Long-Term
Debt and Financing Arrangements."
OPERATING RISKS
Lyondell has two major operating facilities, the petrochemical complex in
Channelview, Texas (the "Channelview Complex") and the Refinery, and the loss
or shutdown over an extended period of operations at either such facility would
have a material adverse effect on the Company. The Company's operations are
subject to the usual hazards associated with petrochemical manufacturing,
petroleum refining, and the related storage (including in underground salt
domes) and transportation of feedstocks and products, including pipeline leaks
and ruptures, explosions, fires, inclement weather and natural disasters,
mechanical failure, unscheduled downtime, transportation interruptions, oil and
chemical spills, discharges or releases of toxic substances or gases, storage
tank leaks, and other environmental risks. These hazards can cause personal
injury and loss of life, severe damage to or destruction of property and
equipment and environmental damage, and may result in suspension of operations.
The Company maintains property, business interruption and casualty insurance
which it believes is in accordance with customary industry practices, but it is
not fully insured against all potential hazards incident to its business.
ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS
The Company's operations are subject to extensive environmental, health and
safety laws and regulations promulgated by federal, state and local
governments. Many of these laws and regulations provide for substantial fines
and criminal sanctions for violations. The nature of the petrochemical and
refining industries exposes the Company to risks of liability due to the
production, storage, transportation and sale of materials that can cause
contamination or personal injury if released into the environment. In addition,
environmental laws may have a significant effect on the nature and scope of
cleanup of contamination at operating facilities and the costs of
transportation and storage of feedstocks and finished products. The Company
believes that its business, operations and facilities have been and are being
operated in compliance in all material respects with all such applicable laws
and regulations. However, the operation of any petrochemical and refining
business entails risks in this area, and there can be no assurance that
material costs or liabilities will not be incurred.
Lyondell expects that the nature of its businesses will continue to subject
the Company to increasingly stringent environmental and other regulatory
standards. It is difficult to predict the future development of such laws and
regulations or their impact on future earnings and operations, but the Company
anticipates that these standards will continue to require increased capital
expenditures. In particular, the ultimate effect of the Clean Air Act on the
Company's operations will depend on how the law is interpreted and implemented
pursuant to regulations that are currently being developed and on additional
factors such as the evolution of environmental control technologies. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Environmental Matters" and "The Company--Environmental Matters."
The Company's policy is to accrue remediation costs when it is probable that
such efforts will be required and the related costs can be reasonably
estimated. Estimated costs for future environmental compliance and remediation
are necessarily imprecise due to such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and
application of technology, the
9
<PAGE>
identification of presently unknown remediation sites and the allocation of
costs among the responsible parties under applicable statutes. On a quarterly
basis, the Company evaluates the status of all significant existing or
potential environmental issues, develops or revises estimates of costs to
satisfy known remediation requirements and adjusts its accruals accordingly; as
of March 31, 1994, the reserve was $24 million. Based upon information
presently available, the Company does not expect that such future costs will
have a material adverse effect on its competitive or financial position or its
ongoing results of operations. However, it is not possible to predict
accurately the amount or timing of costs of any future environmental
remediation requirements. Such costs could be material to future quarterly or
annual results of operations. In addition, the "Superfund" statutes may impose
joint and several liability for the costs of remedial investigations and
actions on the entities that arranged for disposal of the wastes, the waste
transporters that selected the disposal sites and the past and present owners
and operators of such sites; responsible parties (or any one of them, including
the Company) may be required to bear all of such costs regardless of fault,
legality of the original disposal or ownership of the disposal site. In such
event, the amount owed by the Company for liabilities at Superfund sites would
be significantly greater.
CERTAIN RELATED PARTY MATTERS
ARCO and its affiliates are important customers and, in some cases, suppliers
of materials and services, of the Company. During 1993, for instance, the
Company sold $263 million (or 17 percent of petrochemical sales) of products
and services to ARCO Chemical Company, an affiliate of ARCO. Subject to the
contractual agreements that are currently in place with ARCO and its
affiliates, there can be no assurance that these existing business
relationships will be continued unchanged after the offering of the
Exchangeable Notes. ARCO has expressed its current intention as to how it will
vote its shares of Lyondell Common Stock, and ARCO and Lyondell have entered
into an agreement limiting certain of ARCO's rights as a stockholder of
Lyondell. See "Relationship with ARCO--General" and "--Registration Rights
Agreement with ARCO." Notwithstanding ARCO's current intentions and applicable
contractual restrictions, there is no assurance regarding the extent to which
its influence on the Company's actions and decisions will be limited.
POTENTIAL RESTRICTIONS ON DIVIDEND PAYMENTS
In 1993, the Company decreased the amount of its regular quarterly dividend
from $0.45 to $0.225 per share as a result of the Board of Directors' decision
that the previous level was no longer appropriate in light of current business
conditions. The future declaration and payment of dividends and the amount
thereof will depend upon the Company's results of operations, financial
condition, cash position and requirements, investment opportunities, future
prospects and other factors deemed relevant by the Board of Directors.
Pursuant to the terms of its $400 million unsecured credit facility (the
"Credit Facility"), the Company is subject to several restrictive covenants
including a restriction as to the payment of dividends. In addition, certain of
the Company's debt instruments contain provisions (the "Put Rights") that
provide that the holders of such debt may under certain circumstances require
the Company to repurchase the debt at par. The Put Rights may be triggered by,
among other things, the making of certain unearned distributions to
stockholders, other than regular dividends, that are followed by a specified
decline in the public ratings on such debt. Regular dividends are defined in
the Company's debt instruments as those quarterly cash dividends determined in
good faith by the Company's Board of Directors (whose determination is
conclusive) to be appropriate in light of the Company's results of operations
and capable of being sustained. See "Financial Matters--Long-Term Debt and
Financing Arrangements." The Credit Facility includes restrictive covenants
regarding the incurrence of additional debt, the maintenance of certain fixed
charge coverage and leverage ratios and the making of contributions to LCR, as
well as the payment of dividends to the extent the Company's net income after
January 1, 1994 generally does not exceed, over time, dividends declared or
paid after that date. As of March 31, 1994, approximately $90 million was
available for the payment of dividends, and the
10
<PAGE>
Company is currently in compliance with the financial and other covenants in
the Credit Facility and its other debt instruments. However, if the Company
were to fail to comply with any of its financial covenants, there can be no
assurance that as a condition to waiving any default or otherwise providing the
Company with continued access to credit, lenders would not impose certain
restrictions on the Company's operations, including a requirement that the
Company eliminate or severely restrict dividend payments.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock is listed on the New York Stock Exchange ("NYSE") under the
trading symbol "LYO." ARCO has advised the Company that, as of May 18, 1994,
ARCO owned 39,921,400 shares of the Common Stock, which represented 49.9
percent of the outstanding shares.
The reported high and low sale prices of the Common Stock based on the New
York Stock Exchange Composite Tape for each quarter from January 1, 1992
through May 18, 1994, inclusive, were:
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ------- -------
<S> <C> <C>
1992
First Quarter.......................................... $25 3/4 $22 1/8
Second Quarter......................................... 25 7/8 21 1/8
Third Quarter.......................................... 25 5/8 21 3/8
Fourth Quarter......................................... 25 1/2 23 1/8
1993
First Quarter.......................................... 29 1/2 23 3/4
Second Quarter......................................... 26 5/8 19
Third Quarter.......................................... 21 5/8 16 3/4
Fourth Quarter......................................... 21 1/2 18 3/8
1994
First Quarter.......................................... 23 7/8 20 5/8
Second Quarter (through May 18)........................ 25 1/2 21 1/8
</TABLE>
On May 18, 1994 the closing price of the Common Stock was $25.375 and there
were approximately 3,000 record holders of the Common Stock.
On May 4, 1994, the Board of Directors declared a quarterly dividend in the
amount of $0.225 per share payable on June 15, 1994 to stockholders of record
on May 20, 1994. During the last two full years, Lyondell has declared per
share quarterly cash dividends (which were paid in the subsequent quarter) as
follows:
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1992...................... $0.45 $0.45 $0.45 $0.45
1993...................... $0.45 $0.225* $0.225 $0.225
</TABLE>
*On July 23, 1993, the Board of Directors decreased the amount of the regular
quarterly dividend from $0.45 to $0.225 per share. For a discussion of this
dividend reduction, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Current Business Outlook."
The declaration and payment of dividends is at the discretion of the Board of
Directors of the Company. The future declaration and payment of dividends and
the amount thereof will be dependent upon the Company's results of operations,
financial condition, cash position and requirements, investment opportunities,
future prospects and other factors deemed relevant by the Board of Directors.
11
<PAGE>
Subject to these considerations and to the legal considerations discussed in
the following paragraph, the Company currently intends to distribute to its
stockholders cash dividends on its Common Stock at a quarterly rate of $0.225
per share.
In order to declare and pay dividends in the future, the Company's Board of
Directors will have to make the determination that for purposes of the General
Corporation Law of the State of Delaware (the "Delaware Law") there is a
sufficient amount of surplus (the amount by which its assets exceed its
liabilities and capital) or sufficient net profits at that time. In determining
the amount of surplus of the Company for purposes of Delaware Law, the
Company's assets, including the stock of any of its subsidiaries, may be valued
by the Board of Directors at their current market value. If prior to or as a
result of any future dividend the Company had a negative stockholders' equity
(as is currently the case), the Company's Board of Directors would have to make
the determination that, based upon its familiarity with the Company's business,
prospects and financial condition, the Company's recent earnings history, an
appraisal of the Company's assets and discussions with the Company's executive
officers, legal department and accountants, the dividend was a permitted
dividend under Delaware Law.
For a discussion of possible restrictions on the payment of dividends, see
"Certain Investment Considerations--Potential Restrictions on Dividend
Payments."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1994. This table should be read in conjunction with the historical
financial statements of the Company and the related notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31,
1994
---------
<S> <C>
Long-term debt, excluding current portion............................ $ 717
Stockholders' equity (deficit):
Common stock, $1 par value, 250,000,000 shares authorized,
80,000,000 issued and outstanding(1).............................. 80
Additional paid-in capital......................................... 158
Accumulated deficit................................................ (322)
-----
Total stockholders' deficit........................................ (84)
-----
Total capitalization................................................. $ 633
=====
</TABLE>
- --------
(1) Excludes 1,464,328 shares of Common Stock issuable pursuant to outstanding
employee stock options at March 31, 1994.
12
<PAGE>
SELECTED FINANCIAL DATA
The following selected income statement and balance sheet data for each of
the five years in the period ending December 31, 1993, have been derived from
financial statements audited by Coopers and Lybrand, independent accountants.
Their report on the Company's financial statements as of December 31, 1993 and
1992 and for each of the three years for the period ended December 31, 1993 is
included elsewhere in this Prospectus. The historical financial data set forth
with respect to the Company as of and for the three months ended March 31,
1994 and 1993 have been derived from unaudited financial statements that, in
the opinion of management, reflect all normal recurring adjustments necessary
for a fair presentation of such data. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF OR FOR
-------------------------------------------------------
THREE MONTHS
ENDED MARCH
31, YEAR ENDED DECEMBER 31,
------------- ----------------------------------------
1994 1993 1993 1992 1991 1990 1989
----- ------ ------ ------ ------ ------ ------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AND CERTAIN
OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales and other
operating revenues.... $ 824 $1,065 $3,850 $4,809 $5,735 $6,499 $5,361
Cost of sales.......... 736 1,029 3,627 4,578 5,210 5,777 4,640
Selling, general and
administrative
expenses.............. 34 29 130 127 126 121 108
----- ------ ------ ------ ------ ------ ------
Operating income....... 54 7 93 104 399 601 613
Net interest expense... (17) (17) (72) (69) (60) (64) (57)
Minority Interest...... (3) -- (5) -- -- -- --
Income tax (provision)
benefit............... (12) 2 (12) (9) (117) (181) (182)
----- ------ ------ ------ ------ ------ ------
Income (loss) before
cumulative effect of
accounting changes.... 22 (8) 4 26 222 356 374
Cumulative effect of
accounting changes(1). -- 22 22 (10) -- -- --
----- ------ ------ ------ ------ ------ ------
Net income............. $ 22 $ 14 $ 26 $ 16 $ 222 $ 356 $ 374
===== ====== ====== ====== ====== ====== ======
Net income (loss) per
common share:
Before cumulative
effect of accounting
changes............. $ .27 $ (.09) $ .06 $ .32 $ 2.78 $ 4.45 $ 4.67
From cumulative
effect of accounting
changes............. -- .27 .27 (.12) -- -- --
----- ------ ------ ------ ------ ------ ------
Net income........... $ .27 $ .18 $ .33 $ .20 $ 2.78 $ 4.45 $ 4.67
===== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA:
Cash, restricted cash
and short-term
investments(2)........ $ 103 $ 60 $ 119 $ 121 $ 307 $ 127 $ 245
Working capital........ 229 176 224 223 375 238 367
Property, plant and
equipment, net........ 676 627 655 623 569 568 455
Total assets........... 1,270 1,181 1,231 1,215 1,479 1,372 1,267
Long-term debt,
excluding current
portion............... 717 722 717 725 554 471 500
Capitalized lease
obligations, less
current portion....... -- -- -- -- 156 187 214
Common stockholders'
equity (deficit)...... (84) (28) (88) (6) 122 38 9
OTHER DATA:
Capital expenditures... $ 32 $ 15 $ 69 $ 97 $ 43 $ 145 $ 176
Depreciation and
amortization(1)....... 15 14 58 39 39 31 19
Cash flow provided by
operating activities.. 29 9 84 108 270 386 538
Distribution to ARCO... -- -- -- -- -- -- 500
Dividends per share.... $.225 $ .45 $ 1.35 $ 1.80 $ 1.75 $ 4.10(3) $ 1.20
===== ====== ====== ====== ====== ====== ======
Ethylene, propylene and
polymers sales
(million pounds)...... 1,503 1,307 5,366 5,785 6,000 6,373 5,048
Refined product sales
average per day
(thousand barrels).... 239 296 263 277 288 301 298
</TABLE>
- -------
(1) See Note 4 of "Notes to Consolidated Financial Statements."
(2) As of March 31, 1994 and December 31, 1993, $46 million and $73 million of
cash and $22 million and $6 million of short-term investments,
respectively, were restricted for use in LCR capital projects and other
expenditures as determined by the LCR owners.
(3) Includes a $2.50 per share special dividend paid in the first quarter of
1990.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
On July 1, 1993, the Company and CITGO announced the commencement of
operations of 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. 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 Supply Agreement with
Lagoven, 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 PDVSA, the national oil company of Venezuela.
Prior to 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.
14
<PAGE>
The following table sets forth sales volumes for the Company's major
products, for the periods indicated. Sales volumes include production,
purchases of products for resale, propylene production from the product
flexibility unit and draws from inventory.
<TABLE>
<CAPTION>
FOR THREE
MONTHS
ENDED MARCH
31, FOR YEAR ENDED DECEMBER 31,
----------- -----------------------------
1994 1993 1993 1992 1991
----- ----- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Selected petrochemical products
(millions)
(excluding intersegment sales):
Ethylene, propylene and polymers
(pounds).......................... 1,503 1,307 5,366 5,785 6,000
Other olefins (pounds)............. 329 287 1,150 1,158 1,112
Methanol (gallons)................. 54 49 225 212 224
Aromatics (gallons)................ 36 28 125 112 108
Refined products (thousand barrels
per day)
(excluding intersegment sales):
Gasoline........................... 112 140 120 125 131
Heating oil (no. 2 distillate)..... 50 64 62 60 74
Jet fuel........................... 24 39 30 38 33
Aromatics.......................... 9 11 10 11 11
Other refined products............. 44 42 41 43 39
----- ----- --------- --------- ---------
Total refined products volumes... 239 296 263 277 288
===== ===== ========= ========= =========
</TABLE>
The following table sets forth the Company's sales and other revenues,
excluding intersegment sales, for the periods indicated:
<TABLE>
<CAPTION>
FOR THREE
MONTHS
ENDED MARCH FOR YEAR ENDED
31, DECEMBER 31,
----------- --------------------
1994 1993 1993 1992 1991
---- ------ ------ ------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Petrochemical products:
Ethylene, propylene and polymers............ $208 $ 204 $ 808 $ 939 $1,135
Other olefins............................... 43 41 169 177 171
Methanol.................................... 27 19 89 77 100
Aromatics................................... 32 30 120 121 130
Other petrochemical products and other
revenues................................... 30 30 140 95 130
---- ------ ------ ------ ------
Total petrochemical products sales........ 340 324 1,326 1,409 1,666
---- ------ ------ ------ ------
Refined products:
Gasoline.................................... 187 285 950 1,123 1,289
Heating oil (no. 2 distillate).............. 85 128 481 510 667
Jet fuel.................................... 43 82 245 342 316
Aromatics................................... 37 45 167 193 195
Other refined products and other revenues... 71 74 280 339 294
---- ------ ------ ------ ------
Total refined products sales.............. 423 614 2,123 2,507 2,761
---- ------ ------ ------ ------
Crude oil resales(*).......................... 61 127 401 893 1,308
---- ------ ------ ------ ------
Total..................................... $824 $1,065 $3,850 $4,809 $5,735
==== ====== ====== ====== ======
</TABLE>
- --------
(*) Crude oil resales consist of revenues from the resale of previously
purchased crude oil and from locational exchanges of crude oil that are
settled on a cash basis. Crude oil exchanges and resales facilitate the
operation of the Company's petroleum processing business by allowing the
Company to optimize the crude oil feedstock mix in response to market
conditions and refinery maintenance turnarounds and also to reduce
transportation costs.
15
<PAGE>
RESULTS OF OPERATIONS
OVERVIEW
Three Months Ended March 31, 1994 and 1993
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.
Years Ended December 31, 1993, 1992 and 1991
Net income for 1993 was $26 million or $0.33 per share compared with $16
million or $0.20 per share in 1992 and $222 million or $2.78 per share in 1991.
Earnings for 1993 included a net $13 million after-tax benefit associated with
a change in accounting for major maintenance turnarounds consisting of a $22
million favorable adjustment for the cumulative effect related to prior
periods, partially offset by a $9 million charge to current operations.
Earnings for 1992 reflect a net after-tax charge of $10 million for the
cumulative effect related to prior periods of adopting Financial Accounting
Standards Board mandated accounting standards for postretirement benefits and
income taxes. Excluding the effect of these accounting changes, the earnings
decline was primarily due to lower ethylene sales volumes and lower polyolefins
margins, partially offset by higher refined products margins. The decrease in
1992 versus 1991 resulted primarily from lower refining and ethylene margins as
well as higher maintenance expenses for scheduled and unscheduled downtime at
the Refinery.
The 1993 results included after-tax charges of $11 million consisting of the
cancellation of a capital project, an increase in the environmental reserve and
a workforce reduction and realignment and an additional charge of $3 million
for an adjustment to deferred income taxes associated with an increase in the
federal income tax rate. These charges were partially offset by a benefit of $7
million due to a contract adjustment and LIFO inventory profits. Net income in
1992 included a benefit of $3 million due to an insurance recovery. This
compares to a benefit of $25 million in 1991 primarily associated with
insurance and litigation settlements and LIFO inventory profits.
PETROCHEMICAL SEGMENT
Three Months Ended March 31, 1994 and 1993
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.
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
16
<PAGE>
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.
Years Ended December 31, 1993, 1992 and 1991
Revenues. Sales and other operating revenues, including intersegment sales,
were $1.5 billion in 1993 compared to $1.7 billion in 1992 and $2.0 billion in
1991. The 1993 decrease of $169 million compared to 1992 was primarily due to
lower olefins and polyolefins sales volumes and prices caused by continued weak
demand associated with poor worldwide industry conditions and higher industry
production due to reduced maintenance downtime during 1993.
The 1992 decrease in sales and other operating revenues of $284 million
versus 1991 was primarily due to lower sales prices for olefins and methanol.
Olefins sales prices were negatively affected by the continued weak worldwide
economy and by additional industry production capability due to capacity
additions.
Cost of Sales. Cost of sales was $1.4 billion in 1993 compared to $1.5
billion in 1992 and $1.7 billion in 1991. The 1993 decrease of $124 million
compared to 1992 and the 1992 decrease of $175 million compared to 1991 were
principally due to lower olefins feedstock costs due to the curtailment of
production resulting from the poor economic conditions and to a lesser extent
to lower feedstock prices.
Cost of sales was reduced in 1993 and 1992 by $5 million and $2 million,
respectively, and was increased $2 million in 1991 relating to LIFO inventory
adjustments.
Operating Income. Operating income amounted to $57 million in 1993 compared
to $102 million in 1992 and $213 million in 1991. The decrease of $45 million
in operating income in 1993 compared to 1992 was primarily due to lower
ethylene sales volumes and lower polyolefins margins. Ethylene sales volumes
and polyolefins margins were lower primarily due to poor industry and economic
conditions.
The decrease of $111 million in operating income in 1992 compared to 1991 was
primarily due to lower ethylene and methanol margins. Ethylene margins were
negatively affected by the continued weak worldwide economy and by industry
capacity additions. Methanol sales prices were lower due to the dissipation
during 1992 of the Gulf War related price premium created during 1990 and 1991.
Contributing to the decrease in operating income was the absence of a $12
million one-time gain recorded in 1991 for proceeds received from an out-of-
period settlement of litigation.
REFINING SEGMENT
Three Months Ended March 31, 1994 and 1993
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
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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.
Years Ended December 31, 1993, 1992 and 1991
Revenues. Sales and other operating revenues, including intersegment sales,
were $2.8 billion in 1993 compared to $3.7 billion in 1992 and $4.5 billion in
1991. The 1993 decrease of $973 million compared to 1992 was due to lower crude
oil resale volumes, lower sales prices for refined products and lower resale
volumes of purchased light products. Crude oil resale volumes were lower due to
reduced logistical purchases required to meet refinery feedstock requirements
which were impacted by higher Venezuelan crude oil volumes purchased under the
Crude Supply Agreement. Refined products sales prices were lower as additional
industry supply exceeded demand growth due to additions of oxygenates,
primarily MTBE to meet stricter environmental standards, as well as new
industry conversion capacity. The purchase and resale activity for light
refined products conducted for logistic and other reasons was curtailed during
the current period because, effective with the beginning of LCR operations on
July 1, 1993, a majority of the refined products produced at the Refinery are
now sold to CITGO under the Products Agreement.
The 1992 decrease in sales and other operating revenues of $790 million
versus 1991 was primarily due to lower crude oil resales and to lower sales
prices and volumes for refined products. The price premium that existed for
refined products during 1991 that was caused by the 1990-1991 Gulf War
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dissipated in 1992 resulting in lower prices. Refined products sales volumes
were lower primarily due to lower production resulting from scheduled and
unscheduled downtime of major units.
Cost of Sales. Cost of sales was $2.6 billion in 1993, compared to $3.6
billion in 1992 and $4.2 billion in 1991. The 1993 decrease compared to 1992 of
$1,010 million was principally due to lower quantities of crude oil purchased,
lower light refined products purchased and lower crude oil prices. Crude oil
purchases were lower due to the reduced logistical purchases. Purchases of
light refined products were lower primarily due to lower purchases for resale
activity. Lower crude oil prices were due to generally lower industry-wide
crude oil prices and to the processing of higher volumes of lower priced heavy
Venezuelan crude oil purchased under the Crude Supply Agreement.
The 1992 decrease compared to 1991 of $605 million was principally due to
lower crude oil purchases that were resold and to lower refining feedstock
costs. Refining feedstock costs were lower primarily due to lower production
resulting from the scheduled and unscheduled downtime and a reduction in crude
oil runs due to unfavorable margins. Partially offsetting this decrease were
higher maintenance expenses related to the scheduled and unscheduled downtime.
Cost of sales was reduced in 1991 by $8 million relating to LIFO inventory
profits.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $48 million in 1993, compared to $43 million in
1992 and $42 million in 1991. The increase in 1993 compared to 1992 of $5
million resulted primarily from higher personnel and realignment expenses
associated with ongoing operations of LCR starting on July 1, 1993.
Operating Income. Operating income amounted to $81 million in 1993, compared
to $49 million in 1992 and $235 million in 1991. The $32 million increase in
1993 compared to 1992 was primarily due to improved refined products margins,
partially offset by higher selling, general and administrative expenses.
Refined products margins were higher due to processing higher volumes of lower
priced heavy Venezuelan crude oil purchased under the Crude Supply Agreement.
The decrease in operating income of $186 million in 1992 compared to 1991
resulted primarily from lower refined products margins and to higher
maintenance expenses. Refined products margins were lower primarily because
decreasing product prices more than offset reductions in crude oil costs.
Product prices were lower due to the dissipation during 1992 of the Gulf War
related price premium created in 1990 and 1991. Higher maintenance expenses and
the reduced ability to process higher margin heavy crude oils which resulted
from the scheduled and unscheduled downtime of major units during 1992
contributed to lower operating profits. Also contributing to the decrease in
operating income during 1992 compared to 1991 was a net reduction in benefits
of $11 million from insurance settlements and lower LIFO inventory profits of
$8 million.
UNALLOCATED AND HEADQUARTERS
Three Months Ended March 31, 1994 and 1993
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.
Years Ended December 31, 1993, 1992 and 1991
Selling, General and Administrative. General and administrative expenses were
$45 million in 1993, $47 million in 1992 and $49 million in 1991. The reduction
of $2 million in general and administrative
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expenses in 1993 compared to 1992 and in 1992 compared to 1991 primarily
resulted from lower personnel related costs.
Interest Expense and Interest Income. Interest expense was $74 million in
1993 compared to $79 million in 1992 and $74 million in 1991. The $5 million
reduction in interest expense in 1993 compared to 1992 was primarily caused by
a reduction of outstanding debt due to the prepayment of amounts due under
capitalized leases during April, 1992. The $5 million increase in 1992 compared
to 1991 resulted from higher average debt outstanding in 1992 which more than
offset lower interest rates.
Interest income was $2 million in 1993 compared to $10 million in 1992 and
$14 million in 1991. The $8 million decrease in 1993 versus 1992 was primarily
due to lower amounts of cash available for investment. The $4 million decrease
in 1992 versus 1991 was primarily due to lower interest rates and to a lesser
extent to lower amounts of cash available for investment.
Minority Interest in LYONDELL-CITGO Refining Company Ltd. Minority interest
was $5 million in 1993 representing CITGO's allocation of LCR's income.
Income Tax. The effective income tax rate during 1993 from continuing
operations was 73.1 percent compared to 27.3 percent for 1992 and 34.6 percent
for 1991. The difference for 1993, between the effective tax rate and the
federal statutory rate was primarily due to a charge to state deferred taxes
related to Texas franchise taxes and the unfavorable impact on federal deferred
taxes of the increase in the federal tax rate. The difference for 1992 was
primarily due to a state income tax adjustment, tax exempt income related to
company owned life insurance and tax exempt interest.
FINANCIAL CONDITION
Three Months Ended March 31, 1994 and 1993
Operating Activities. 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.
Investing Activities. 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.
Financing Activities. 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.
Years Ended December 31, 1993, 1992 and 1991
Investing Activities. Cash flows associated with investing activities during
1993 included capital expenditures of $60 million, excluding $9 million related
to the Refinery upgrade project, of which $38 million was for environmentally
related projects at the Refinery and the Channelview Complex. During 1992,
capital expenditures were $97 million, of which $57 million was for
environmentally related projects. The 1994 capital expenditures budget,
excluding the Refinery upgrade project, has been set at $90 million. The budget
provides approximately $60 million for refinery projects, $26 million of which
are to be funded by Lyondell according to the terms of the agreement with LCR
and $34 million to be funded from the restricted cash balance which was created
by CITGO's 1993 contributions to LCR. The remaining $30 million is for
petrochemical projects at the Channelview Complex. In addition to the capital
expenditures budget, $150 million of spending in 1994, funded by CITGO, is
planned for the Refinery upgrade project designed to increase the Refinery's
ability to process larger volumes of very heavy Venezuelan crude oil.
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As of December 31, 1993, $73 million of cash and $6 million of short-term
investments were restricted for use in LCR capital projects, including the
Refinery upgrade project and other expenditures as determined by the LCR
owners.
Financing Activities. Cash flows associated with financing activities during
1993 included $108 million of dividend payments, $29 million for scheduled
repayments of medium-term notes and $4 million of net proceeds from short-term
debt.
In December 1993, the Company completed a five-year, $400 million revolving
Credit Facility with a group of banks, representing an increase in amount and
term compared to the Company's previous $300 million bank credit facility,
which was scheduled to terminate in July, 1994. Borrowings under the new Credit
Facility bear interest based on Euro-Dollar, CD or prime rates, at the
Company's option. The facility is available for working capital and general
corporate purposes as needed. This Credit Facility contains covenants relating
to dividend payments, debt incurrence, liens, disposition of assets, mergers
and consolidations, fixed charge and leverage ratios and certain investments in
LCR. At December 31, 1993, no amounts were outstanding under this Credit
Facility. See Note 11 of "Notes to Consolidated Financial Statements."
Effective July 1, 1993, LCR entered into a 364 day unsecured $100 million
revolving credit facility with a group of banks. Under terms of the credit
facility, LCR may borrow with interest based on prime, LIBOR or CD rates at
LCRs option or have letters of credit issued on its behalf. The facility is
available for working capital and general corporate purposes as needed. At
December 31, 1993, no amounts were outstanding under this credit facility. See
Note 11 of "Notes to Consolidated Financial Statements."
On January 21, 1994, the Board of Directors declared a quarterly dividend in
the amount of $0.225 per share of common stock, payable March 15, 1994 to
stockholders of record on February 18, 1994.
During 1993, all of the $108 million of dividend payments exceeded earnings
and profits in 1993, as computed for federal income tax purposes subject to
final determination by the Internal Revenue Service, and will be considered a
return of capital to all stockholders. See Note 13 of "Notes to Consolidated
Financial Statements."
ENVIRONMENTAL MATTERS
Various environmental laws and regulations impose substantial requirements
upon the operations of the Company. The Company's policy is to be in compliance
with such laws and regulations, which include, among others, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as
amended, the Resource Conservation and Recovery Act ("RCRA") and the Clean Air
Act and Clean Air Act Amendments of 1990. ARCO, along with many other
companies, has been named a potentially responsible party ("PRP") under CERCLA
in connection with the past disposal of waste at third party waste sites. The
Company may have an obligation to reimburse ARCO for a portion of the
remediation costs for two of those sites pursuant to a cross-indemnity
agreement. For a discussion of this agreement, see "Relationship with ARCO--
Cross-Indemnity Agreement."
The Company reserves for contingencies, including those based upon unasserted
claims, that are probable and reasonably estimable. In connection with
environmental matters, the Company establishes reserves based upon known facts
and circumstances. Based on current environmental laws and regulations, the
Company believes that it has adequately reserved for the matters described
above and, based upon such reserves, does not anticipate any material adverse
effect upon its earnings, operations or competitive position, 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.
The environmental reserve on December 31, 1993 was $24 million. The
environmental reserve includes $0.5 million of estimated advances to ARCO for
remediation costs associated with CERCLA waste disposal sites and $23.5 million
of estimated remediation costs related to waste disposal sites
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located within the Company's facilities associated with RCRA. The Company spent
$627,000, $593,000 and $1 million in 1993, 1992 and 1991, respectively,
relating to CERCLA matters. The Company also spent $2 million, $158,000 and
$224,000 in 1993, 1992 and 1991, respectively, in conjunction with RCRA
matters. The Company estimates it will incur approximately $7 million of costs
in conjunction with CERCLA and RCRA matters in 1994, an amount which is
included in the December 31, 1993 environmental reserve.
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.
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.
----------------
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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FINANCIAL MATTERS
OVERVIEW
The Company's primary financial strategy is to use its cash position and cash
flow to enhance total return to stockholders as determined by stock
appreciation and dividends, while maintaining suitable credit ratings and
appropriate financial liquidity. The Company believes that its ability to
maintain suitable debt ratings, to fund a capital program appropriate to its
asset base, to pay dividends on its Common Stock and to position the Company to
benefit from upturns in the business cycle are critical factors in maximizing
total return to stockholders.
In 1993, as it became apparent that the downturn in petrochemicals would be
broader and more prolonged than previously expected, the Company took action
consistent with the strategies described above to improve its ability to
generate cash flow. These actions included implementation of a cost reduction
program, a reduction of the capital budget and a decrease in the regular
quarterly dividend. These and the other actions, as well as management's
continued commitment to keep working capital at minimal levels, have better
positioned the Company to benefit from an upturn in the business cycle. See
"Managements' Discussion and Analysis of Financial Condition and Results of
Operations--Current Business Outlook."
CAPITAL SPENDING
The Company invests discretionary capital in order to improve operating
efficiency, increase production capability in a cost-effective manner, lower
operating costs or upgrade the petrochemical components in its product streams.
A significant portion of the Company's non-discretionary capital spending is
used for projects to improve the health, safety and environmental aspects of
its operations, including compliance with government regulations, and for
replacing capital assets.
Lyondell places major emphasis on finding innovative solutions to improve its
operations without a high level of discretionary capital spending. As one
example of this strategy, in order to take advantage of the strong market for
its petrochemical products and to reduce operating costs, the Company
debottlenecked its two olefins plants and related units in 1989, which
increased the rated ethylene capacity from 2.8 to 3.6 billion pounds per year
and also increased the capacities of certain downstream units at less than half
of the estimated cost of new "grassroots" capacity. Another example of this
strategy is the LCR transaction. The funds contributed to LCR by CITGO (other
than for the upgrade project) are required to be used for capital spending and
other expenditures as determined by the LCR owners, and will substantially
reduce the total capital spending that the Company otherwise would be required
to make in connection with Refinery operations. See "The Company--Refining--LCR
Transaction--Contributions of the Parties."
The petrochemical business capital expenditures totaled $15 million in 1993,
and its capital budget for 1994 is $30 million, of which approximately $3
million is for environmentally-related capital projects. The refining business
capital expenditures (excluding spending on the upgrade project) totaled $45
million in 1993. The refining business capital budget (excluding the upgrade
project) for 1994 is approximately $60 million, of which $48 million is
expected to be spent on environmentally-related capital projects. There can be
no assurance that the actual capital expenditures spent in 1994 for either
business segment will not exceed the amounts budgeted therefor. See "The
Company--Environmental Matters" for a discussion of these environmentally-
related capital projects.
The Company remains obligated to fund certain Refinery environmentally-
related capital projects begun prior to the creation of LCR as well as its
share of ongoing Refinery capital improvements; the total of these obligations
is estimated to be approximately $75 million through the completion of the
upgrade project. The level and timing of these anticipated capital expenditures
will be affected by changes in applicable governmental regulations, including
environmental and tax laws. See "The Company--Refining--LCR Transaction--
Contributions of the Parties."
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As part of its ongoing operations, the Company periodically conducts
maintenance turnarounds on its facilities, during which capital expenditures
and maintenance expenses as well as lost operating income are typically
incurred. In addition, it may become necessary to shut down units between major
turnarounds in order to perform less extensive maintenance. Such shutdowns were
necessary on the two olefins units at the Channelview Complex during 1993. In
addition to the required repairs, other work was performed during the shutdowns
which is expected to postpone the next major turnaround on the Company's
olefins units. Shutdowns also were necessary on two units at the Refinery
during 1993. The methanol unit at the Channelview Complex is currently expected
to be shut down for approximately six weeks to perform maintenance later this
year. Although turnarounds on principal facilities are usually scheduled well
in advance, the timing of such turnarounds can be accelerated or delayed
because of numerous factors, many of which are beyond the Company's control.
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 on the crude distillation unit to "tie-in" this unit to the
upgrade project, thereby preventing or reducing downtime of the unit that
otherwise would be necessary as part of the upgrade project.
LONG-TERM DEBT AND FINANCING ARRANGEMENTS
As of December 31, 1993, the Company had $717 million of long-term debt
consisting of $300 million of notes due 1996 and 1999, $200 million of notes
due 1997 and 2002 and $217 million of medium-term notes due from 1995 to 2005.
The notes due 1996 and 1999 and the medium-term notes contain Put Rights that
would allow the holders to require the Company to repurchase the debt at par
upon the occurrence of certain events combined with specified declines in
public ratings on the notes due 1996 and 1999. Events that may trigger the Put
Rights include, among other things, (i) acquisitions by persons other than ARCO
or the Company of more than 20 percent of the Company's Common Stock, (ii) any
merger or transfer of substantially all of the Company's assets in connection
with which the Company's Common Stock is changed into or exchanged for cash,
securities or other property and (iii) payment of dividends other than regular
dividends. See "Certain Investment Considerations--Potential Restrictions on
Dividend Payments."
Company Unsecured Revolving Credit Facility
During December, 1993, the Company executed the Credit Facility, a five year,
$400 million unsecured revolving credit facility that replaced its existing
$300 million credit facility which was due to expire in July, 1994. At March
31, 1994, no amounts were outstanding under the Credit Facility.
Under the terms of the Credit Facility, the interest rate for borrowings is
based on Euro-Dollar, CD or prime rates, at the Company's option, and also is
dependent upon the Credit Facility utilization rate and the Company's debt
ratings. The Credit Facility contains restrictive covenants regarding the
incurrence of additional debt, the maintenance of certain fixed charge coverage
and leverage ratios and the provision of contributions to LCR, as well as the
payment of dividends. The Company is currently in compliance with the financial
and other covenants in the Credit Facility. See "Certain Investment
Considerations--Potential Restrictions on Dividend Payments."
LCR Unsecured Revolving Credit Facility
Effective July 1, 1993, LCR entered into a 364-day unsecured $100 million
revolving credit facility with a group of banks, including Continental Bank,
N.A. as agent. Under terms of the credit facility, LCR may borrow with interest
based on prime, LIBOR or CD rates at LCR's option or have letters of credit
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issued on its behalf. The revolving credit facility may be extended at the
request of LCR upon consent of the bank group. The credit facility contains
covenants that limit LCR's ability to modify certain significant contracts,
dispose of assets or merge or consolidate with other entities. At March 31,
1994, no amounts were outstanding under this credit facility. It is currently
anticipated that this facility will be renewed or replaced at a level less than
$100 million prior to its expiration.
Petrochemical Financing Strategy
Potential funding sources for long-term capital projects, whether involving
transactions with third parties or otherwise, could include, without
limitation, the Company's current financial resources, potential earnings
growth, future borrowings and future issuance of equity securities, as well as
possible contractual arrangements such as joint ventures or partnerships. See
"The Company--Business Strategy." There is no assurance that such funding could
be obtained on terms acceptable to the Company. Both the Company's ability to
undertake and fund its business strategies, and the general level of the
Company's capital commitments and expenditures from period to period, will be
affected by a variety of factors including, without limitation, the general
business environment, as well as changes in applicable government regulations
and tax laws. See "Certain Investment Considerations--Financing Risks;
Potential Dilution."
For a further discussion of the Company's long-term debt and financing
arrangements, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition" and Note 11 of "Notes to
Consolidated Financial Statements."
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THE COMPANY
COMPANY OVERVIEW
Lyondell is a leading manufacturer and marketer of petrochemicals and,
through its interest in LCR, of refined petroleum products. The Company's
corporate headquarters and manufacturing facilities are located in the Houston,
Texas area.
The Company produces a wide variety of petrochemicals, including olefins
(primarily ethylene, propylene and butadiene), polyolefins (low density
polyethylene and polypropylene), methanol, MTBE (methyl tertiary butyl ether)
and aromatics. Lyondell is the largest domestic merchant marketer of ethylene
and propylene, with rated production capacities of 3.6 and 2.1 billion pounds
per year, respectively. Lyondell's petrochemical products are primarily
commodity chemicals that are sold to customers for use in the manufacture of
chemicals, plastics and other synthetic materials. These materials are used, in
turn, to produce a wide variety of consumer goods and industrial products.
The Company's refining business is conducted through its approximate 90
percent interest in LCR, which operates the Refinery. LCR sells the majority of
the gasoline, jet fuel and heating oil it produces to CITGO, which currently
has an approximate 10 percent interest in LCR. LCR also produces fuel oil and
aromatics, as well as lubricants for the transportation, oil drilling and food
processing industries.
Lyondell was originally created by ARCO as a separate division (the "Lyondell
Division") in 1985 through the combination of the operations of the Channelview
Complex and the Refinery. Effective July 1, 1988, ARCO transferred
substantially all the assets and liabilities relating to the integrated
petrochemical and petroleum processing business of the Lyondell Division to a
wholly-owned subsidiary incorporated under the laws of the state of Delaware.
In February, 1990, the Company acquired a polypropylene plant and a low density
polyethylene plant located in Pasadena, Texas (the "Polymers Facility"). On
July 1, 1993 the Company and CITGO announced the commencement of operations of
LCR, a new entity formed and owned by the Company and CITGO in order to own,
operate and upgrade the Company's refining business.
In exchange for the initial transfer of petrochemical and refining assets and
liabilities in 1988, Lyondell issued ARCO additional shares of its Common
Stock, bringing ARCO's stock ownership to 80,000,000 shares, which represented
all of the then outstanding Common Stock. In January 1989, ARCO completed an
initial public offering of shares of Lyondell's Common Stock, and ARCO
currently owns 39,921,400 shares, or 49.9 percent of the outstanding shares.
For information relating to certain continuing relationships and potential
conflicts of interest among Lyondell, LCR and ARCO, including their respective
subsidiaries and affiliates, see "Relationship with ARCO."
BUSINESS STRATEGY AND MANAGEMENT PHILOSOPHY
The Company's primary objective is to maximize total return to stockholders
(as measured by stock price appreciation plus dividends). Lyondell's management
believes that in its petrochemical and refining commodity businesses maximizing
free cash flow over the long term is the best means to create value for
stockholders. Lyondell's strategy is to position the Company to capture the
opportunities of the upturns and to minimize the impact of downturns in the
inevitable cycles of its commodity businesses. The Company's assets are managed
to maintain low costs and high operational flexibility and management strives
to quickly identify and capitalize on opportunities to use its operating and
organizational flexibility to improve profitability. Lyondell believes that it
has the lowest cost, most flexible operations among its competitors in the
domestic olefins industry. Through its interest in LCR, the Company is
enhancing the value of its refining business by undertaking a major upgrade of
the Refinery in connection with entering into the long-term Crude Supply
Agreement and the Products Agreement. In both of its businesses, the Company
employs a disciplined approach to capital spending, with discretionary capital
spending focused on high-return projects. See "Financial Matters."
26
<PAGE>
Lyondell evaluates, on an ongoing basis, opportunities to expand or diversify
its petrochemical operations through potential acquisitions, joint ventures and
other opportunities involving third parties. The petrochemical industry is
currently experiencing significant merger, acquisition and divestiture
activity, and the Company believes the industry ultimately will be left with
fewer but more competitive participants. Although management does not believe
that the Company will be required to undertake such a transaction in order to
maintain its competitive position, management believes that there may be
opportunities to create incremental cash flow for the Company's petrochemical
business by applying its experience in the efficient and low-cost operation of
the Company's facilities to a larger asset base. Vertical integration with an
ethylene or propylene consumer could increase olefins plant operating rates
during weak market periods by providing captive demand. Horizontal integration
with another olefins producer could improve operating efficiencies by spreading
costs across larger volumes and enhancing operating flexibility. Consistent
with the Company's overall strategy, however, management's intent is to
undertake such a transaction only if it expects that the transaction would
produce both near-term and long-term improved cash flow. While management has
publicly stated the Company's interest in pursuing such transactions, no
assurance can be given with respect to the size, scope, timing or likelihood,
or the financial or business effect of, any possible transaction. See "Certain
Investment Considerations--Financing Risks; Potential Dilution."
Management believes that Lyondell's productive work force, lean
organizational structure and participative management style enable the Company
to quickly identify and take advantage of profit opportunities in rapidly
changing marketplaces. The Company's team-based approach and management style
emphasize low costs, quality, customer satisfaction and the responsibility and
accountability of each employee. In addition, industry studies have shown that
Lyondell's olefins plants have the highest production per plant-level employee
in the industry.
Lyondell also emphasizes superior safety performance in order to safeguard
employees, the community and the Company's assets. Lyondell's safety
performance at the Channelview Complex and the Refinery has been better than
industry averages in each of the past four years, and has improved over that
time period. The recordable incidence rates for the Channelview Complex were
1.69 and 1.39 in 1992 and 1993, respectively, both well below the petrochemical
industry average rate of 3.3 in 1992 (the year of the most recently available
industry data). The LCR recordable incidence rates were 3.9 and 2.8 in 1992 and
1993, respectively, also well below the refining industry average rate of 4.4
in 1992 (the year of the most recently available industry data). Recent
comparative data for the polymers industry is not available, but the Polymer
Facility's recordable incidence rate was 4.4 in 1993, and it has completed
seven and one half years of operations without a lost-workday injury. In 1993,
the Channelview Complex received Star certification for plant safety under the
Voluntary Protection Programs established by the Occupational Safety and Health
Administration ("OSHA"), for which less than one-tenth of one percent of
eligible sites have qualified to date.
INDUSTRY OVERVIEW
The manufacture and marketing of petrochemicals is fundamental to many
segments of the economy, including the production of consumer products, housing
components, automotive products and other durable and non-durable goods.
Ethylene is the largest single petrochemical in terms of volume of production
worldwide and is the key building block for a large number of chemicals. With
the wide proliferation of end-use products derived from ethylene during the
past 20 years, especially as plastics have developed into low-cost, high
performance substitutes for a wide range of materials such as metals and paper,
U.S. ethylene consumption has grown by an average annual rate of approximately
four percent.
The supply of and demand for ethylene in the various geographic regions of
the world, and the movement of ethylene and its derivatives between regions,
significantly affects a large segment of the petrochemical business. Foreign
consumption of ethylene derivatives has, on a per capita basis,
27
<PAGE>
substantially lagged that in the U.S. However, as other regions develop
economically, this gap could narrow.
The petrochemical industry historically has experienced periods of high
demand and high capacity utilization which result in increasingly high
operating margins and profitability. This generally leads to new capacity
investment until supply exceeds demand. The overcapacity in turn leads to
periods of decreasing capacity utilization and declining operating margins
until demand exceeds supply and the cycle is repeated. For example, during the
mid 1980's, olefins capacity increases did not keep pace with demand and, by
1987-1988, domestic producers were operating at high capacity utilization rates
and prices and margins had increased substantially as a result of ethylene
demand growth. Ethylene demand growth peaked at 6.7 percent in 1987 resulting
in average industry operating rates of 97 and 100 percent (of nameplate
capacity), in 1987 and 1988, respectively. The high profitability experienced
by the ethylene industry during this period peaked in early 1989. Over 7.7
billion pounds was added to domestic ethylene capacity from the end of 1989 to
the beginning of 1994 (a 20 percent increase). The additional capacity,
combined with poor overall U.S. and world economic conditions and further
additions to supply in other parts of the world, outpaced ethylene demand
growth and caused the industry to experience a decline in margins. During 1992
and 1993, U.S. industry operating rates were 89 and 92 percent, respectively.
The data in this paragraph with respect to industry operating rates, demand and
capacity is based on reports by Chemical Data, Inc.
Domestic ethylene demand grew at approximately three percent during 1993 and
increased in the fourth quarter, with growth at more than four percent.
Scheduled U.S. capacity additions in 1994 and 1995 are expected to total four
billion pounds, or 8.6 percent. No new additional ethylene plants have been
announced for the U.S. after 1995. The Company estimates that the average
length of time to design, obtain necessary permits for, construct and begin to
operate a new ethylene plant on the U.S. Gulf Coast is approximately four
years. See "Certain Investment Considerations--Uncertain Petrochemical Industry
Outlook."
Due to the Company's large ethylene capacity, a small change in ethylene
margin causes a large change in the Company's profitability and cash flow. For
example, assuming that the Company operates at its rated capacity, a one cent
per pound annual increase in ethylene margins can result in a $36 million
annual increase in the Company's pre-tax operating income. The Company's other
major commodity chemical products all experience cyclical market conditions
similar to (although not necessarily coincident with) those of ethylene. As a
producer of olefins primarily for the merchant market, Lyondell may experience
greater variations in its sales volumes and profitability when industry supply
and demand relationships are at extremes in comparison to more integrated
competitors, i.e., those with a higher proportion of captive demand for olefins
derivatives production. In 1993 the Company sold approximately 90 percent of
its ethylene and propylene production into the merchant market.
The refining business tends to be volatile as well as cyclical. Crude oil
prices, which are impacted by worldwide political events and the economics of
exploration and production in addition to refined products demand, are the
largest source of this volatility. Demand for refined products is influenced by
seasonal and short-term factors such as weather and driving patterns, as well
as by longer term issues such as energy conservation and alternative fuels. The
refined products supply is also dependent on industry operating capabilities
and on long-term refining capacity trends. Among LCR's refining competitors are
major integrated petroleum companies that have their own raw material resources
and, in many cases, downstream markets, both of which tend to decrease the
impact of business cycles on these competitors' sales volumes and
profitability.
Although 1990 and 1991 were generally viewed as good years for the refining
industry, industry profitability returned to lower levels beginning in 1992.
Although apparent demand for refined products has shown a slight increase
consistent with growth in the overall economy, supply has been more than
adequate to meet this demand. Capacity increases have occurred in the form of
debottlenecks to
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<PAGE>
conversion units and additional oxygenate capacity, including new MTBE plants,
which have added to gasoline supply. To date, this has more than offset the
declines in industry crude oil distillation capacity, which are beginning to
occur as smaller, less efficient plants are shut down. The resulting lower
refining profitability has been more evident for merchant refiners, who do not
have retail outlets for their products.
PETROCHEMICALS
The Company believes, based on the most recently available ethylene industry
survey by Solomon Associates, Inc. (which used 1991 data), that it is the
lowest cost producer of ethylene in the U.S. industry. Factors contributing to
the Company's low-cost position include flexibility in feedstock supply and
product output, integration of manufacturing, storage and transportation
facilities and the ability to upgrade by-product streams.
Petrochemical Products
The Company's olefins plants and related processing units produce ethylene,
propylene, butadiene, butylenes, benzene, toluene, hydrogen and certain
specialty products, such as isoprene, dicyclopentadiene, piperylenes and resin
oils along with gasoline blendstocks and heavy liquid fuels. The Company's
petrochemical products are used by its customers to manufacture intermediate
chemicals for plastics and other synthetic materials that are used in a variety
of consumer and industrial products. The Company also produces methanol and
MTBE.
PETROCHEMICAL PRODUCTS AND RATED CAPACITIES
<TABLE>
<CAPTION>
PRODUCT PRIMARY USES
------- ------------
<S> <C>
ETHYLENE Polyethylene, ethylene oxide used to produce
Produced at Channelview ethylene glycol, ethylene dichloride used to produce
Complex. Current rated polyvinyl chloride, ethylbenzene used to produce
capacity: 3.6 billion styrene. Major end uses: trash bags, packaging film,
pounds/year. toys, blow-molded bottles, pipe, anti-freeze,
polyester fibers and resins.
PROPYLENE Polypropylene, acrylonitrile, propylene oxide. Major
Produced at Channelview end uses: carpet backing, luggage, high impact
Complex. Current rated plastics, polypropylene fibers, polyurethane foams,
capacity: 2.1 billion cleaning compounds and coatings.
pounds/year (excludes
product flexibility
unit).
BUTADIENE Styrene butadiene rubber (SBR), ABS copolymer
Produced at Channelview (acrylonitrile butadiene styrene). Major end uses:
Complex. Current rated rubber for tires, hoses, surgical gloves (SBR),
capacity: 615 million high-impact plastics (ABS).
pounds/year.
AROMATICS Benzene: styrene, phenol nylon.
Benzene and toluene Toluene: octane enhancers, benzene production,
produced at Channelview urethane chemicals. Major end uses: plastics, rubber
Complex. Benzene current markets, fibers for carpet and apparel, polyurethane
rated capacity: 90 foams for seat cushions, gasoline.
million gallons/year.
Toluene current rated
capacity: 40 million
gallons/year.
SPECIALTY PRODUCTS Various types of hydrocarbon resins and unsaturated
Dicyclopentadiene (DCPD), polyester resins. Major end uses: inks, adhesives,
LRO (Lyondell resin oil), paints and varnishes, rubber market, fiberglass
piperylenes, isoprene products.
produced at Channelview
Complex. Total current
rated capacity: 388
million pounds/year.
METHANOL MTBE, formaldehyde, acetic acid. Major end uses:
Produced at Channelview gasoline, adhesive resins, textiles, paints,
Complex. Current rated coatings.
capacity: 233 million
gallons/year.
MTBE Blending component for oxygenated gasoline.
Produced at Channelview
Complex. Current rated
capacity: 167 million
gallons/year.
LOW DENSITY POLYETHYLENE Trash bags, packaging film, toys, housewares, paper
Produced at Polymers coatings.
Facility. Current rated
capacity: 140 million
pounds/year.
POLYPROPYLENE Plastics for auto parts, household products, carpet
Produced at Polymers backing, fibers, films.
Facility. Current rated
capacity: 300 million
pounds/year.
</TABLE>
29
<PAGE>
Petrochemical Marketing and Product Distribution
Lyondell sells substantially all of its olefins products to long-term
customers. Sales are made pursuant to written agreements, which typically
provide for monthly negotiations of prices based upon then current market
prices. Contract volumes are established within a range, and the contracts
generally allow the customer to take up to 10 to 20 percent less than the
maximum contract commitment. The terms of these contracts are fixed for a
period (typically three to five years), although earlier terminations may occur
if the parties fail to agree on price and deliveries are suspended for a period
of several months. In some cases, these contracts also contemplate extension of
the term unless specifically terminated by one of the parties.
The Company sells substantially all of its methanol output and the majority
of the benzene volumes under long-term contracts having terms similar to those
contained in the olefins contracts. A significant portion of the Company's
benzene production is sold under contract to ARCO Chemical at market-based
prices. See "Relationship with ARCO." Lyondell licenses MTBE technology from
ARCO Chemical and sells MTBE produced at one of its two units to ARCO Chemical
at market-based prices. The production from the second unit is tolled for LCR
for gasoline blending.
Ethylene and propylene are shipped or exchanged via a comprehensive pipeline
system which has connections to numerous Gulf Coast ethylene and propylene
consumers. The pipeline system is owned by ARCO Pipe Line, and substantially
all of it is leased by the Company under a long-term lease. See "--Facilities
and Properties" and "Relationship with ARCO--Agreements Between the Company and
ARCO Pipe Line Company." The Company has exchange agreements with other olefins
producers which allow access to customers who are not directly connected to the
pipeline system. Butadiene, methanol, aromatics and other petrochemicals are
distributed by one or more of the following means: pipeline, railcar, truck or
barge.
Feedstock Flexibility
The primary feedstocks used in the production of ethylene are natural gas
liquids feedstocks (ethane, propane and butane, collectively "NGLs") and
petroleum liquids. However, olefins plants with the flexibility to consume a
wide range of feedstocks are better able to maintain higher levels of
profitability during periods of changing energy and petrochemical prices than
olefins plants that are restricted in their feedstock processing capability.
Prior to the mid 1970s, the feedstocks used at most ethylene plants in the
United States consisted predominantly of NGLs. As of March 1, 1994,
approximately 46 percent of domestic ethylene plant capacity was limited to NGL
feedstocks, and the remaining 54 percent could process to some extent both NGLs
and petroleum liquids feedstocks.
Management believes that the Channelview Complex has the highest degree of
feedstock flexibility in the domestic industry, and management continuously
evaluates both the optimum use of the Company's current feedstock flexibility
and opportunities to increase its capacity to process low-cost feeds. The
Channelview olefins units are capable of processing not only 100 percent
petroleum liquids feedstocks (for which the plants were originally designed)
but also up to 90 percent NGLs. Liquid feedstocks have had a significant
historical margin advantage over ethane and propane, with an average light
naphtha to ethane variable cost advantage over the last five years of three
cents per pound of ethylene. The industry margin differential between these
feedstocks has been typically between one and four cents per pound of ethylene.
The Company has the capability to capture this differential due to its
feedstock flexibility. Lyondell is one of only five U.S. producers that has the
ability to process a full range of liquid feedstocks through light vacuum gas
oil. The factors described above historically have given the Company a
competitive advantage that has contributed to the Company's low operating
costs.
The Company obtains a portion of its petroleum liquids requirements from the
Refinery (primarily naphtha and gas oil), a portion of its petroleum liquids
requirements in the form of petroleum condensates pursuant to a contract with a
foreign government affiliate, and the remainder of its
30
<PAGE>
petroleum liquids requirements under short-term contracts or on the spot market
from a variety of foreign and domestic sources. The Company purchases NGLs from
a wide variety of domestic sources, many of which have storage facilities in
the Mont Belvieu area.
The Company consumed an average of 186 million standard cubic feet per day of
natural gas in 1993 for use as fuel in its operations at the Refinery and the
Channelview Complex and as feedstock for its methanol plant. The Channelview
Complex is connected to a diverse natural gas supply network, which provides
the Channelview Complex with a choice of natural gas suppliers (including
producers) at competitive prices. During 1993, the Company's natural gas costs
averaged $0.27 less per thousand cubic feet than the published Texas Average
Industrial Price, resulting in $18.3 million of savings. If NGLs or residual
oils are more favorably priced than natural gas, the Company substitutes them
for natural gas in some applications in order to lower its average fuel costs.
The primary feedstock and fuel used in the methanol plant is natural gas,
although the plant has the flexibility to process NGL feedstocks as well.
Product Flexibility
The Company has the flexibility to adjust its product output mix in response
to changing market conditions to capture the highest available margins. The two
major factors contributing to this flexibility are (i) the adjustment of
olefins plants operating conditions and (ii) the product flexibility unit at
the Channelview Complex. The product flexibility unit uses technology licensed
from a third party as well as the Company's patented technology to convert
ethylene and other light petrochemical streams into propylene. Improvements to
this unique unit in 1993 included a doubling of capacity, so that the unit
currently is designed to produce one billion pounds per year of propylene in
addition to the Company's base capacity of 2.1 billion pounds. Adjustment of
olefins plants operating conditions can result in production of up to an
additional 0.4 billion pounds of propylene with some reduction in ethylene
production.
By-Product Stream Upgrading
Another key component of Lyondell's low-cost position is the Company's
capability to upgrade by-products from its olefins production. At the
Channelview Complex, the Company recovers and sells valuable petrochemical
components contained in a number of intermediate product streams.
The Channelview Complex includes units for butadiene recovery and aromatics
recovery. The Company has further enhanced the value of its product slate by
expanding its capability to recover other high value products. The Channelview
Complex has recovered valuable components such as high purity isoprene,
piperylenes and dicyclopentadiene ("DCPD"), and resin oils from its gasoline
products since 1986. In 1993, the Company increased resin oil capacity by 14
percent and increased piperylenes capacity by 20 percent with debottlenecks and
instrumentation improvements.
The Company plans to utilize its proprietary butylene isomerization
technology, known as ISOMPLUS, to efficiently produce isobutylene from olefins
plant butylene by-product streams. The project, which will start up in 1994,
includes a MTBE unit debottleneck. See "--Research and Technology; Patents and
Trademarks."
31
<PAGE>
Integration
The Company takes advantage of the integration of operations among the
Channelview Complex, the LCR Refinery and the Polymers Facility to capture
additional opportunities to increase profits by upgrading product streams or
providing feedstocks for downstream processes.
The Company and LCR have entered into multiple agreements designed to
preserve much of the synergy between the Refinery and the Channelview Complex.
Economic evaluations at the Channelview Complex and the Refinery are based on
sending products to the highest-value disposition, which may be local use, use
at the other site, or third party sales. Certain refinery products (propane,
butane, low-octane naphthas, heating oils, and gas oils) can be used as
feedstocks for olefins production, and certain Channelview Complex olefins by-
products (pyrolysis gasoline and pyrolysis gas oil) can be processed by the
Refinery into gasoline, jet fuel or heating oil. Butylenes from the LCR
Refinery are tolled through Channelview for the production of alkylate and MTBE
for gasoline blending. Hydrogen from the Channelview Complex is used at the
Refinery for sulfur removal and product stabilization. Ethylene and propylene
produced at the Channelview Complex are used as feedstocks for the Polymers
Facility.
[Paste up Graph]
32
<PAGE>
REFINING
Through its interest in LCR, the Company is undertaking a major upgrade
project at the Refinery in connection with securing a long-term supply of crude
oil and a long-term arrangement to sell its light refined products. Management
believes that this strategic initiative will stabilize cash flow from the
refining business and reduce the Company's exposure to market volatility. See
"-- LCR Transaction" and "Certain Investment Considerations--LCR Transaction
and Refinery Upgrade Project."
Refined Products
The Refinery produces gasoline, heating oil and jet fuel, for sale primarily
to CITGO, aromatics and lube oils (white oils, industrial lubricants, motor
oils and process oils) and certain industrial products for sale to others, and
feedstocks for the Channelview Complex. The Refinery's aromatics recovery unit
produces benzene, toluene, paraxylene and orthoxylene which are marketed by the
Company. Benzene and toluene also are produced at the Channelview Complex.
The Refinery has a crude distillation rated capacity of 265,000 barrels per
day. In 1993, the Refinery produced approximately 293,000 barrels per day of
total products.
The following table shows the typical ranges of production for the Refinery's
principal products based on 1993 actual production. It is not possible to
produce the maximum amount of all products at the same time. Specific product
mix (and thus production volume) is dependent on feedstock type and operating
conditions, which are selected based on market conditions.
<TABLE>
<CAPTION>
TYPICAL
PRODUCT PRODUCTION
------- ----------------
(BARRELS PER
DAY)
<S> <C>
Gasoline................................................. 80,000 - 120,000
Heating Oil.............................................. 35,000 - 70,000
Jet Fuel/Kerosene........................................ 10,000 - 35,000
Lube Oils................................................ 3,000 - 7,000
</TABLE>
The Refinery has maintained a low-cost position in the best one-third of the
domestic industry, according to the two most recent refining industry surveys
by Solomon Associates, Inc. The Refinery's flexibility to process a wide range
of crude oils as well as its access to numerous sources of crude oil are
important factors in maximizing the margins of its cracking operations. The
Refinery also has the capability to produce lubricants and aromatics, process
purchased intermediates such as fluid and reformer feed, and produce oxygenated
gasoline and other specialty products when market conditions are favorable.
Marketing and Product Distribution
CITGO purchases gasoline, heating oil and jet fuel from LCR under the long-
term Products Agreement at market-based prices. See "--LCR Transaction--
Products Agreement." Lube oils are manufactured and sold directly to end
consumers and to distributors throughout the United States and international
markets. Aromatics produced at the Refinery are marketed on LCR's behalf by
Lyondell.
33
<PAGE>
LCR Transaction
Overview. Management believes that the LCR transaction, entered into in July
1993, accomplishes the Company's strategy for the refining business by
significantly upgrading the quality of the refining assets and securing an
economically favorable long-term supply of crude oil while reducing the
exposure of the refining business to market volatility. The LCR transaction is
expected to stabilize cash flow from the refining business at attractive levels
relative to historic performance. Major components of the LCR transaction
include:
. An upgrade project to increase heavy crude oil processing capability;
. Asset contributions by the Company, cash contributions by CITGO and the
resulting ownership positions;
. A long-term crude supply contract for heavy Venezuelan crude oil; and
. A long-term product arrangement to sell light products to CITGO.
Prior to completion of the upgrade project, the keys to operational success
for LCR will be (i) to maximize the amount of heavy Venezuelan crude oil
processed in the coking mode, (ii) to optimize the efficient utilization of the
remaining cracking capacity, and (iii) to maintain an overall focus on low-cost
operations. The Refinery currently is processing approximately 130,000 barrels
per day of heavy (22 degree API gravity) Venezuelan crude in a coking mode on
its largest crude distillation unit. This crude is supplied pursuant to the
Crude Supply Agreement, which is intended to stabilize cash flow from this
portion of the refinery. Prior to completion of the Refinery upgrade project,
when the full benefits of the upgrade and the Crude Supply Agreement should be
realized, the margins realized from the remaining crude processed at the
Refinery in a cracking mode will continue to be subject to the volatile
refining business environment. The Refinery's low cost, flexibility and access
to numerous sources of crude oil supply continue to be important factors in
maximizing margins on this portion of the Refinery's operations. See "Certain
Investment Considerations--LCR Transaction and Refinery Upgrade Project."
Upgrade Project. LCR is undertaking a major upgrade project at the Refinery
to enable the facility to process substantial additional volumes of very heavy
crude oil. Project engineering for the upgrade is currently underway. The
upgrade project, which is subject to regulatory approvals and the resolution of
certain other matters, is intended to increase the heavy crude oil processing
capability of the Refinery from approximately 130,000 barrels per day of 22
degree API gravity crude oil to approximately 200,000 barrels per day of 17
degree API gravity Venezuelan crude oil in a full conversion mode. The upgrade
is not intended to increase the total throughput of the Refinery, but rather
its ability to process heavier, higher margin crude oils. The project also will
include expansion of the Refinery's reformulated gasoline capability and the
addition of low sulfur diesel production capability. Major components of the
upgrade include new coking, hydrotreating and sulfur recovery units; a new
crude distillation unit and modifications to the Refinery's largest existing
crude distillation unit and various hydrodesulfurization units.
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 thirty 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. 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.
Following the upgrade, the earnings potential of the Refinery is expected to
be enhanced because of the higher margins expected to be associated with the
resulting heavier crude oil mix and the
34
<PAGE>
Refinery's increased coking capability, enhanced reformulated fuel and low
sulfur diesel production capability and other yield improvements.
Contributions of the Parties. Pursuant to agreements between the Company and
CITGO (and their affiliates), the Company contributed its refining business and
refining working capital to LCR in July 1993. CITGO contributed $100 million to
LCR in 1993 (excluding its contribution towards the upgrade project described
below) giving it an approximate 10 percent interest in LCR. Prior to the in-
service date for the upgrade project, CITGO is required to reinvest its share
of LCR's operating cash flow and thereby increase its interest in LCR. These
contributions by CITGO will be used for ongoing LCR capital projects, other
than (i) the upgrade project and (ii) certain Refinery environmental capital
projects for which liability has been retained by the Company and that the
Company will fund with cash contributions. Any additional ongoing LCR capital
requirements prior to the in-service date (for purposes other than the upgrade
project) will be funded substantially by Lyondell, primarily in the form of
subordinated loans to LCR. The Company estimates that during 1994 to 1996 its
total contributions to LCR with respect to the capital requirements described
in this paragraph will be approximately $75 million, with a significant portion
of this amount being in the form of subordinated loans to LCR.
Funding for the upgrade project will occur in three phases. The first phase,
the initial $300 million, will be funded by CITGO. As of January 1, 1994, CITGO
had contributed $150 million, including letters of credit and cash, toward this
phase. The second phase is expected to be funded by an LCR borrowing of
approximately $200 million. The third phase (which would be $300 million based
on an estimated $800 million cost for the upgrade project and is expected to
occur toward the end of the upgrade project) is anticipated to be funded (i) 50
percent through an LCR borrowing estimated at $150 million, (ii) 25 percent
through contributions from CITGO estimated at $75 million and (iii) 25 percent
through subordinated loans from the Company estimated at $75 million. Prior to
completion of the upgrade project, the financing costs for the third party
borrowings are required to be funded by CITGO. In exchange for CITGO's upgrade
project contributions described above and an additional $30 million cash
contribution at the in-service date, CITGO's interest in LCR is expected to
increase to approximately 35 percent effective as of the in-service date. The
timing of the third phase and the level of contributions from the Company and
CITGO will depend on the total cost of the upgrade project and on LCR's ability
to obtain construction financing. See "Certain Investment Considerations--LCR
Transaction and Refinery Upgrade Project--Refinery Upgrade Project Cost and
Potential Delays." In the event that LCR is unable to obtain construction
financing for the refinery upgrade project, the Company and CITGO each are
obligated to fund one-half of the cost of the upgrade project in excess of $300
million. In turn, CITGO's interest in LCR as of the in-service date will be
dependent upon the actual contributions of CITGO as discussed in this and the
preceding paragraph. CITGO will have a one-time option to increase its interest
in LCR up to 50 percent during the 20-month period following the in-service
date. See "Certain Investment Considerations--LCR Transaction and Refinery
Upgrade Project--Financing of Refinery Upgrade Project and Potential
Limitations on LCR Distributions."
Crude Supply Agreement. LCR also has entered into the Crude Supply Agreement
with Lagoven. The Crude Supply Agreement requires Lagoven to supply and LCR to
purchase specified quantities of crude oil for 25 years. The contract
incorporates a formula price based on the market value of a slate of refined
products deemed to be produced from each particular crude oil or feedstock,
less: (i) certain deemed operating costs; (ii) certain actual costs, including
crude transportation costs, import duties and taxes; and (iii) a deemed margin,
which varies according to the grade of crude oil or other feedstock delivered.
Deemed margins and deemed costs are adjusted periodically by a formula
primarily based on the rate of inflation. Because deemed operating costs and
the slate of refined products deemed to be produced from a given barrel of
crude oil or other feedstock do not necessarily reflect the actual costs and
yields in any period, the actual refining margin earned by LCR under the
contract will vary depending on, among other things, the efficiency with which
LCR conducts its operations during such period. See "Certain Investment
Considerations--LCR Transaction and Refinery Upgrade Project--Crude Supply
Agreement."
35
<PAGE>
Products Agreement. CITGO also has entered into the long-term Products
Agreement with LCR to purchase at market-based prices the full volume of
gasoline, jet fuel and heating oil manufactured at the Refinery following the
expiration of one contract retained by Lyondell. LCR evaluates and determines
the optimal product output mix based on spot market prices and conditions. The
Products Agreement thus provides a secure outlet for the Refinery's products
without imposing an economic penalty caused by production requirements based on
retail outlet needs.
Other Agreements. Effective July 1, 1993, LCR and Lyondell entered into
multiple agreements for feedstock and product sales designed to preserve much
of the synergy between the Refinery and the Company's petrochemical business.
Under the terms of these agreements, various feedstock and product streams will
be transferred between the Refinery and Lyondell's Channelview Complex at
market-related prices. LCR and Lyondell also have entered into tolling
agreements, pursuant to which alkylate and MTBE attributable to Refinery
feedstocks will be produced for LCR at Lyondell's Channelview Complex.
Also effective July 1, 1993, the majority of the employees formerly employed
by Lyondell in its refining business became employees of LCR. Pursuant to the
terms of a number of service agreements, Lyondell has contracted with LCR to
continue to perform services in certain areas, including employee services,
administrative services and marketing services. Lyondell and LCR also have
entered into a variety of contracts providing for the assignment or licensing
of intellectual property rights associated with the refining business.
Management of LCR. LCR is a limited liability company organized under the
laws of the state of Texas, and has pass-through tax characteristics similar to
those of a partnership for federal income tax purposes. The Company owns its
interest in LCR through a wholly-owned subsidiary, Lyondell Refining Company.
CITGO holds its interest through CITGO Refining Investment Company, a wholly-
owned subsidiary of CITGO (together with Lyondell Refining Company, the
"Owners"). The operative agreement with respect to the rights of each of the
Owners and their parent companies is the Amended and Restated Limited Liability
Company Regulations (the "Regulations") of LCR. The Regulations govern
ownership and cash distribution rights. CITGO has committed to reinvest its
share of operating cash flow during the upgrade project which will increase its
interest in LCR. Under the Regulations, the Company has unrestricted access to
its share of operating cash flow from LCR. See "Certain Investment
Considerations--LCR Transaction and Refinery Upgrade Project--Financing of
Refinery Upgrade Project and Potential Limitations on LCR Distributions." The
term of the Regulations is 25 years, although they may be terminated under
certain circumstances, including the insolvency of LCR or either Owner, uncured
material breaches by either Owner or failure to obtain permits for the upgrade
project. Under the terms of a reciprocal Performance Guarantee and Control
Agreement, Lyondell and CITGO each have unconditionally guaranteed the
obligations and performance of their respective Owner under the terms of the
Regulations.
The Regulations provide that LCR is managed by an Owners Committee, which has
three representatives from each Owner. Certain actions require unanimous
consent of the representatives, including, without limitation, amendment of the
Regulations, borrowing money outside of LCR's existing credit facility,
delegation of authority to committees, certain purchase commitments and capital
expenditures in excess of designated amounts. All actions not requiring
unanimous consent can be determined by Lyondell so long as it is the majority
owner. The day-to-day operations of the Refinery are managed by the executive
officers of LCR, including former Lyondell officers with responsibility for
manufacturing and refining operations and refined products marketing. The
results of LCR's operations currently are consolidated into Lyondell's
financial statements.
Refining Feedstocks
The Refinery can process a wide variety of domestic and foreign crude oil
feedstocks, including heavy (low API gravity, high viscosity) and sour (high
sulfur content) crude oils. In addition to 45,000
36
<PAGE>
barrels per day of light sweet crude oil for lubricants production, the
Refinery can process up to (i) approximately 220,000 barrels per day of light
sour crude oil in a coking mode, or (ii) in the mode in which it currently
operates, approximately 130,000 barrels per day of heavy sour crude oil (22
degree API gravity) primarily in a coking mode plus approximately 80,000
barrels per day of light crude oil in a cracking mode. The upgrade project is
intended to increase the Refinery's processing capability to 200,000 barrels
per day of very heavy Venezuelan crude oil (17 degree API gravity) in a coking
mode.
The Refinery began processing Venezuelan crude oil in the third quarter of
1992. Since that time, the Company and LCR have identified and overcome a
number of obstacles inherent in processing high rates of heavy Venezuelan crude
oil, including making operational changes to the coker and physical
modifications to one of the crude distillation units. The resulting improved
unit reliability and increased unit processing capability has increased the
Refinery's capability of running high volumes of heavy Venezuelan crude oil to
approximately 130,000 barrels per day. The remainder of the Refinery's capacity
currently is used to process lighter crude oils and feedstocks. See "Certain
Investment Considerations--LCR Transaction and Refinery Upgrade Project--Heavy
Crude Oil Processing."
Domestic crude oil is transported to the Refinery primarily by common carrier
pipeline systems. Foreign crude oil is transported by tankers either directly
to the Refinery or to the connecting deepwater terminals at Texas City or on
the Houston Ship Channel.
FACILITIES AND PROPERTIES
Channelview Petrochemical Complex
The Channelview petrochemical complex, located on an approximately 2,900 acre
site in Channelview, Texas, 20 miles east of Houston, includes two large
olefins plants, two MTBE units, a methanol plant, a butadiene recovery unit, a
product flexibility unit, an aromatics (benzene and toluene) recovery unit, an
isoprene recovery unit, a DCPD recovery unit, a piperylenes recovery unit, an
alkylation unit and other petrochemical processing units. This complex is
connected by pipeline systems to Lyondell's salt dome storage facility at Mont
Belvieu, Texas, which has approximately 10 million barrels of storage capacity
for NGL feedstocks and for the Company's ethylene and propylene production. The
Channelview Complex also is connected by pipeline systems to the LCR Refinery,
which is approximately 16 miles away and provides a portion of the petroleum
liquids feedstock requirements for the Channelview Complex. See "--Other
Properties."
The combined rated capacity of the two olefins plants at January 1, 1994 was
approximately 3.6 billion pounds of ethylene per year or approximately 7.7
percent of total domestic production capacity. Based on published rated
production capacities, the Company believes it is one of the five largest
producers of ethylene in the United States. Of the total ethylene production
capacity in the United States, approximately 93 percent is located along the
Gulf Coast, and approximately 77 percent is owned by ten manufacturers.
Lyondell licenses MTBE technology from ARCO Chemical and sells MTBE produced
at one of its two units to ARCO Chemical at market-based prices. The production
from the second unit is tolled for LCR for gasoline blending. The Channelview
Complex also includes an isopropyl alcohol ("IPA") unit, which the Company uses
for the manufacture of IPA for ARCO Chemical. See "Relationship with ARCO--
Agreements Between the Company and ARCO Chemical Company."
Polymers Facility
The Polymers Facility, located on approximately 200 acres in Pasadena, Texas,
converts propylene and ethylene supplied by the Channelview Complex into
polypropylene and low density polyethylene that is sold into the derivative
markets and transported by railcar and truck. The Polymers Facility is
connected by pipeline systems to the Company's Mont Belvieu, Texas storage
facility for feedstock supply.
37
<PAGE>
LCR Refinery
The LCR Refinery, located on an approximately 700 acre site alongside the
Houston Ship Channel, currently includes a coker, a fluid catalytic cracking
unit, three reformers, four crude distillation units, two sulfur recovery
plants and several hydrodesulfurization units, as well as lube oil
manufacturing and packaging facilities and an aromatics recovery unit. The
upgrade project will include new coker, hydrotreater, sulfur recovery and crude
distillation units, as well as modifications to the largest existing crude
distillation unit and various hydrodesulfurization units. The Refinery is
connected by pipeline to the Channelview Complex and provides feedstocks to and
receives by-products from that complex.
Historically, the Refinery has operated in a "full conversion" mode,
processing the heaviest portion of crude oil through the coker unit without
producing lower-value residual fuel. The Refinery currently produces residual
fuel as a result of processing the heavy Venezuelan crude oil. The upgrade
project will enhance the Refinery's conversion capability so that very heavy 17
degree API gravity Venezuelan crude oil can be processed in a full conversion
mode.
Other Properties
In addition to the real property, plant and equipment that comprise its
Channelview Complex and the real property, plant and equipment which comprise
the Polymers Facility, Lyondell owns several pipelines connecting the
Channelview Complex, the Refinery and the Mont Belvieu storage facility,
including six lines used to transport heavy liquid feedstocks, butylenes,
benzene, hydrogen, butane, MTBE and unfinished gasolines between the
Channelview Complex and the Refinery. Lyondell also owns the storage facility,
a brine pond facility and a tract of vacant land at Mont Belvieu, Texas.
Storage capacity for up to 10 million barrels of NGL feedstocks, ethylene,
propylene and butylenes is provided in salt domes at the Mont Belvieu facility.
The Company also owns an approximate 10 percent undivided joint interest in
much of the real property surrounding the Mont Belvieu site which is maintained
as a greenbelt for these facilities. The Company has a lease on product
pipelines from Mont Belvieu to most olefins customers. See "Relationship with
ARCO--General" and "--Agreements Between the Company and ARCO Pipeline."
In addition to the real property, plant and equipment which comprise the
Refinery, LCR also owns the real property, plant and equipment which comprise a
lube oil blending and packaging plant in Birmingport, Alabama. LCR owns a
pipeline and utilizes another pipeline to transport refined products from the
Refinery to the GATX Terminal to interconnect with common carrier pipelines.
RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS
The Company maintains a small, focused research and development effort that
builds on the Company's strengths and existing businesses. Recent efforts have
concentrated on Lyondell's position in butylenes. In 1992, the Company
introduced a new technology called ISOMPLUS for producing low-cost isobutylene
by isomerizing normal butylenes. Management believes that ISOMPLUS will play an
important role in the next increments of capacity that the industry will need
to supply the growing MTBE demand in reformulated gasoline. Lyondell is seeking
to take advantage of this opportunity by commercializing the technology through
a joint development and licensing relationship with CDTECH, a joint venture
that is a leading supplier of ethers technologies used in reformulated fuels
production. The arrangement with CDTECH is intended to commercialize two
isomerization processes that produce blending agents for cleaner burning
gasolines. If successful, the alliance is expected to accelerate worldwide
commercialization of Lyondell's butene isomerization process. Research efforts
are continuing on a similar technology to produce isoamylene, a feedstock used
to produce TAME, another oxygenate used in the production of reformulated
gasoline. The Company also has product development efforts aimed at tailoring
products to meet specific customer needs, especially in such areas as resins,
fibers, adhesives and sealants.
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<PAGE>
The Company, including LCR, uses numerous patents in its operations, many of
which are licensed from third parties, including ARCO. See "Relationship with
ARCO." Although the Company's licenses from ARCO and others are significant to
its operations, the Company is not dependent upon any particular patent, trade
secret or the like, and it believes that the loss of any individual patent,
trade secret, or similar proprietary right would not have a material adverse
effect on the operations of the Company. The Company submitted several new
patent applications during 1993 to protect processes it developed.
The Company, including LCR, uses numerous trademarks in its marketing
operations, a portion of which are licensed from third parties, including ARCO.
The Company is not dependent upon any particular trademark, and it believes the
loss of any individual trademark would not have a material adverse effect on
its operations. The Company submitted several new trademark applications during
1993 to protect product line names and to foster its marketing position.
ENVIRONMENTAL MATTERS
The Company's production facilities generally are required to have permits
and licenses regulating air emissions, discharges to water and generation,
storage, treatment and disposal of hazardous wastes. Companies that are
permitted to treat, store or dispose of hazardous waste and maintain
underground storage tanks pursuant to RCRA also are required to meet certain
financial responsibility requirements. The Company believes that it has all
permits and licenses generally necessary to conduct its business or, where
necessary, is applying for additional, amended or modified permits, and that it
meets applicable financial responsibility requirements.
The Company's policy is to be in compliance with all applicable environmental
laws. The Company is committed to Responsible Care(R), a chemical industry
initiative to enhance the industry's responsible management of chemicals. The
Company (together with the industry in which it operates) is subject to
extensive federal, state and local environmental laws and regulations
concerning emissions to the air, discharges onto land or waters and the
generation, handling, storage, transportation, treatment and disposal of waste
materials. 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. For example, a revised
testing procedure under RCRA, the toxicity characteristic leachate procedure
("TCLP"), resulted in the reclassification of some wastes at the Company's
facilities which has required changes in the Company's waste management
practices. These changes have caused the Company to make expenditures in 1993
and will cause the Company to make substantial additional expenditures in 1994.
Some risk of environmental costs and liabilities is inherent in particular
operations and products of the Company, as it is with other companies engaged
in similar businesses, and there is no assurance that material costs and
liabilities will not be incurred. With respect to the capital expenditures and
risks described above, however, the Company does not expect that it will be
affected differentially from the rest of the domestic petrochemical and
refining industry.
In some cases, compliance with environmental, health and safety laws and
regulations require capital expenditures. In the years ended December 31, 1992
and 1993, the Company spent approximately $57 million and $38 million,
respectively, for environmentally-related capital expenditures at existing
facilities. For 1994 and 1995, the Company currently estimates that
environmentally-related capital expenditures at existing facilities (including
the Refinery) will be approximately $51 million and $50 million, respectively.
The timing and amount of these expenditures are subject to the regulatory and
other uncertainties described above as well as obtaining of the necessary
permits and approvals. The Company's 1994 capital budget includes the following
environmentally-related projects: (1) work on installation of a wet gas
scrubber that will reduce sulfur dioxide and particulate emissions from the
39
<PAGE>
Refinery's fluid catalytic cracking unit; (2) TCLP-related projects at the
Refinery, including closure of some surface impoundments, source reductions and
rerouting of streams; (3) completion of a number of projects to reduce benzene
emissions in compliance with federal regulations; (4) a marine vapor recovery
project at the Refinery; and (5) compliance costs at the Channelview Complex
and the Refinery related to nitrogen oxide emissions from combustion sources.
Additional projects may be required as a result of various enforcement orders
that the Company is negotiating with the appropriate regulatory authorities.
For periods beyond 1995, additional environmentally related capital
expenditures will be required, although the Company cannot accurately predict
the levels of such expenditures at this time.
The Refinery contains on-site solid-waste landfills which were used in the
past to dispose of waste, and it is anticipated that corrective actions will be
necessary to comply with federal and state requirements with respect to this
facility. In addition, the Company negotiated an order with the Texas Water
Commission, now the Texas Natural Resource Conservation Commission (the
"TNRCC"), for assessment and remediation of groundwater and soil contamination
at the Refinery. The Company has reserved an amount (without regard to
potential insurance recoveries or other third party reimbursements) it believes
to be sufficient to cover current estimates of the cost for remedial measures
at its manufacturing facilities based upon its interpretation of current
environmental standards. Based on the establishment of such reserves, and the
status of discussions with the applicable regulatory agencies, and although the
reserves are subject to increase, the Company does not anticipate any material
adverse effect upon its earnings, operations or competitive position as a
result of compliance with the laws and regulations described in this or the
preceding paragraphs. See also "Legal Proceedings--Claims Relating to Waste
Disposal Sites."
LEGAL PROCEEDINGS
General
Although Lyondell is involved in numerous and varied legal proceedings, a
significant portion of its litigation arises in three contexts: (1) claims for
personal injury or death allegedly arising out of exposure to the Company's
products; (2) claims for personal injury or death, and/or property damage
allegedly arising out of the generation and disposal of chemical wastes at
Superfund and other waste disposal sites; and (3) claims for personal injury
and/or property damage and air and noise pollution allegedly arising out of the
operation of the Company's facilities. Lyondell (either directly or through
ARCO as its indemnitee) is the real party at interest in these proceedings, all
of which are described at greater length in the Company's periodic filings with
the Commission.
In connection with the transfer of assets and liabilities from ARCO to
Lyondell, Lyondell 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. At that time, the Company and ARCO entered into
an agreement ("Cross-Indemnity Agreement") whereby the Company agreed to defend
and indemnify ARCO against certain uninsured claims and liabilities which ARCO
may incur relating to the operation of the business of the Company prior to
July 1, 1988, including liabilities which may arise out of certain of the legal
proceedings described in this section. See "Relationship with ARCO."
Prior to November 20, 1990, ARCO's insurance carriers had assumed the defense
of most of the lawsuits described in this section. Since that date, ARCO's
insurance carriers have refused to advance defense costs in those lawsuits
relating to certain of the waste disposal sites. On November 21, 1990, ARCO
filed suit against certain of its insurers with respect to insurance policies
in effect at times during past years. This litigation involves claims for
reimbursement of defense costs and environmental expenses incurred by ARCO in
connection with ARCO's activities at sites and locations throughout the United
States. ARCO's insurers had been participating in the defense of the Company
and ARCO for the Mont Belvieu proceedings (see "--Claims Related to Company
Operations") as well as the litigation
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<PAGE>
involving the French Ltd. and the Brio Superfund sites (see "--Claims Related
to Waste Disposal Sites"); however, subsequent to the filing of ARCO's lawsuit,
the insurers have refused to advance defense costs for these proceedings (and
certain other proceedings relating to the Company's products) until the
coverage dispute has been resolved. ARCO currently is paying the defense costs
in these proceedings, as well as certain other waste disposal site litigation,
pending the resolution of the coverage dispute. It has not been determined
whether or not the Company has an obligation to reimburse ARCO for defense
costs related to the coverage dispute.
In addition to the types of proceedings specifically described in this
section, ARCO, the Company and its subsidiaries are defendants in other suits,
some of which are not covered by insurance. Many of these additional suits
involve smaller amounts than the matters described herein, or make no specific
claim for relief. Although final determination of legal liability and the
resulting financial impact with respect to the litigation described in this
section, as well as the other litigation affecting the Company, cannot be
ascertained with any degree of certainty, the Company does not believe that any
ultimate uninsured liability resulting from the legal proceedings in which it
currently is involved (directly or indirectly) will individually, or in the
aggregate, have a material adverse effect on the business or financial
condition of the Company. See Note 18 of "Notes to Consolidated Financial
Statements."
Claims Related to Company Products
ARCO and the Company are involved in numerous suits arising in whole or in
part from the operation of the Company's integrated petrochemical and petroleum
processing business and the assets related thereto in which the plaintiffs
allege damages arising from exposure to allegedly toxic chemical products, such
as benzene and butadiene. Plaintiffs in these cases usually worked at a
manufacturing facility as employees of one of Lyondell's customers, were
employees of the Company's contractors, or were employees of companies involved
in the transportation of the Company's products to its customers. These suits
allege toxic effects of exposure to chemicals sold in the ordinary course of
business to third parties by various industrial concerns, including ARCO or the
Company, or allege toxic chemical exposures at the Company's manufacturing
facilities. The Company believes that it has always followed a policy of not
only complying with all mandated standards related to product warnings and
exposure levels but also of complying with Company specific standards that were
more strict than those imposed by the law. As a result, the Company believes
that it has a basis to avail itself of legal defenses against claims regarding
its products due to exposures by employees and by claims of exposures from
third parties to whom the Company sold its products.
The vast majority of chemical exposure cases name a large number of
industrial concerns, in addition to the Company, as defendants and are at
various stages of discovery. Although the Company does not believe that the
pending chemical exposure cases will have a material adverse effect on its
business or financial condition, it is difficult to determine the potential
outcome of this type of case. The majority of the plaintiffs in chemical
exposure legal proceedings request relief in the form of unspecified monetary
damages. Furthermore, when specific amounts are requested they often bear no
objective relation to the merits of the case. Notwithstanding the foregoing, it
is possible that if one or more of the presently pending chemical exposure
cases were resolved against ARCO or the Company, the resulting damage award
could be material to the Company 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.
Claims Relating to Waste Disposal Sites
Wastes generated from products produced by facilities transferred from ARCO
and now owned by the Company have, from time to time, been disposed of at waste
disposal landfill sites owned by third parties. Two of these waste disposal
facilities, known as the "French Ltd." and the "Brio" sites, both of
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which are located near Houston, Texas, have been classified as "Superfund"
sites under CERCLA. The Environmental Protection Agency ("EPA") has entered
into consent decrees with numerous PRPs, including ARCO, from whom wastes were
allegedly received at each site. Based on the current law, the Company does not
believe that its obligation to ARCO related to ARCO's share of clean-up costs
at either of these sites will result in a liability that will have,
individually or in the aggregate, a material adverse effect on the business or
financial condition of the Company. In addition, numerous private plaintiffs
have made claims and filed lawsuits involving the French Ltd. and Brio sites.
ARCO (or its affiliate) is the named defendant in the above described
proceedings. Under the provisions of the Cross-Indemnity Agreement, Lyondell is
not obligated to indemnify ARCO for costs and losses arising out of litigation
for which ARCO is insured. Lyondell believes that the ultimate resolution of
these matters will not result in any material obligation on the part of
Lyondell to ARCO with respect to the Brio and the French Ltd. Superfund sites.
It is possible that the Company may be involved in future CERCLA and
comparable state law investigations and clean-ups. The Administration recently
proposed a plan to revise significantly the Superfund law which is scheduled
for reauthorization this year. Because the proposal is so recent and because it
has generated strong reactions from business, insurance companies, lenders,
municipalities and environmentalists, the Company is not able to predict
whether the Administration's plan will be enacted or to determine with
specificity what the impact of such legislation would be on the Company.
Claims Related To Company Operations
Several organizations and groups of citizens who own property in the vicinity
of Mont Belvieu, Texas, have instituted lawsuits against ARCO and others who
own underground storage and transportation facilities in the city of Mont
Belvieu. ARCO is paying all defense costs in all of the Mont Belvieu litigation
and the Company does not expect that a claim will be made under the Cross-
Indemnity Agreement. The Company also is a defendant in lawsuits alleging the
emission of loud noises, bright lights and noxious fumes from the Channelview
Complex in proximity to the plaintiffs homes as well as a diminished quality of
well water.
Other Matters
In the fourth quarter of 1992, the Refinery underwent an EPA multi-media
inspection and an OSHA Process Quality Verification Audit. The OSHA inspection
of the Refinery was resolved in an informal settlement agreement in April 1993.
At this time, the EPA has not formally notified the Company of the enforcement
action to be taken, if any.
The Company has reached a preliminary settlement agreement with the City of
Houston, Texas and the TNRCC to resolve a lawsuit filed by the City of Houston
alleging violations of the Texas Clean Air Act at the Refinery. 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. See "The Company--Refining--LCR Transaction--Contributions
of the Parties."
In addition to the matters reported herein, from time to time the Company
receives notices from federal, state or local governmental entities of alleged
violations of environmental laws and regulations pertaining to, among other
things, the disposal, emission and storage of chemical and petroleum
substances, including hazardous wastes. Although the Company has not been the
subject of significant penalties to date, such alleged violations may become
the subject of enforcement actions or other legal proceedings and may
(individually or in the aggregate) involve monetary sanctions of $100,000 or
more (exclusive of interest and costs).
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MANAGEMENT
Five of the eleven members of the Board of Directors of Lyondell are officers
of ARCO, which owns 49.9 percent of the outstanding Common Stock. Following
consummation of the offering of the Exchangeable Notes, ARCO has informed the
Company that it will cause the ARCO officers who currently serve on the Board
of Directors to resign. Although the Board of Directors has not made a final
determination with respect to the size of the Board following these proposed
resignations, the Nominating Committee of the Board intends to nominate persons
unaffiliated with either the Company or ARCO to fill any vacancies. Set forth
below are the directors of the Company as of April 1, 1994.
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT
POSITION WITH LYONDELL BUSINESS EXPERIENCE DURING PAST FIVE YEARS
---------------------- ------------------------------------------
<S> <C>
Mike R. Bowlin, 51........... Mr. Bowlin was elected a Director of the Company
Chairman of the Board on July 23, 1993 and Chairman of the Board on
August 13, 1993. On March 28, 1994 Mr. Bowlin was
elected Chief Executive Officer of ARCO, effective
on July 1, 1994. He has been President and Chief
Operating Officer of ARCO since June 1, 1993 and a
director of ARCO since June 1992. He was an
Executive Vice President of ARCO from June 1992 to
May 1993. He was a Senior Vice President of ARCO
from August 1985 to June 1992 and President of
ARCO International Oil and Gas Company from
November 1987 to June 1992. He was Senior Vice
President of International Oil and Gas
Acquisitions from July 1987 to November 1987. He
was President of ARCO Coal Company from August
1985 to July 1987. He was a Vice President of ARCO
from October 1984 to July 1985. From April 1981 to
December 1984, he was Vice President of ARCO Oil
and Gas Company. He has been an officer of ARCO
since October 1984. He originally joined ARCO in
1969.
William T. Butler, 61........ Dr. Butler was elected a Director of the Company
on December 21, 1988, effective as of January 25,
1989. He has held his current position as
President and Chief Executive Officer of Baylor
College of Medicine (education and research) since
1979. He is also a director of First City
Bancorporation of Texas, Inc., C. R. Bard, Inc.
and Browning-Ferris Industries Inc.
Allan L. Comstock, 50........ Mr. Comstock was elected a Director of the Company
on July 23, 1993. He has been a Vice President and
Controller of ARCO since June 1993. He was a Vice
President of ARCO Chemical from October 1989
through May 1993. From November 1985 to September
1989 he was General Auditor of ARCO. He originally
joined ARCO in 1969.
Terry G. Dallas, 43.......... Mr. Dallas was elected a Director of the Company
on July 23, 1993. He has been a Vice President of
ARCO since June 1993 and Treasurer of ARCO since
January 24, 1994. He was Vice President, Corporate
Planning of ARCO from June 1993 to January 1994.
He served as Assistant Treasurer for ARCO
Corporate Finance from 1990 to 1993. He was Vice
President of Finance, Control
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT
POSITION WITH LYONDELL BUSINESS EXPERIENCE DURING PAST FIVE YEARS
---------------------- ------------------------------------------
<S> <C>
and Planning for ARCO British, Ltd. from 1988 to
1990 and Manager of International Acquisitions for
ARCO International Oil and Gas Company from 1986
to 1988. He originally joined ARCO in 1979.
Bob G. Gower, 56............ Mr. Gower was elected Chief Executive Officer of
President and Chief the Company on October 24, 1988 and a Director and
Executive Officer President of the Company on June 27, 1988. He has
been President of Lyondell and its predecessor,
the Lyondell Division, since the formation of the
Lyondell Division in April 1985. Mr. Gower was a
Senior Vice President of ARCO from June 1984 until
his resignation as an officer of ARCO in January
1989. Prior to 1984 he served in various
capacities with the then ARCO Chemical Division.
He originally joined ARCO in 1963. Mr. Gower is
also a director of Texas Commerce Bank-Houston and
Keystone International Inc.
Stephen F. Hinchliffe, Jr., Mr. Hinchliffe was elected a Director of the
60......................... Company on March 1, 1991. Since 1988, he has held
his current position of Chairman of the Board and
Chief Executive Officer of BHH Management, Inc.,
the managing partner of Leisure Group, Inc.
Previously, he served as Chairman of the Board of
Leisure Group, Inc. (a manufacturer of consumer
products), which he founded in 1964.
Dudley C. Mecum II, 59...... Mr. Mecum was elected a Director of the Company on
November 28, 1988, effective as of January 25,
1989. He has held his current position as a
partner with G. L. Ohrstrom & Company (merchant
banking) since August 1989. Previously he was
Chairman of Mecum Associates, Inc. (management
consulting) from December 1987 to August 1989. He
served as Group Vice President and director of
Combustion Engineering Inc. from 1985 to December
1987, and as a managing partner of the New York
region of Peat, Marwick, Mitchell & Co. from 1979
to 1985. He is also a director of The Travelers,
Inc., Dyncorp, VICORP Restaurants, Inc., Fingerhut
Companies, Inc. and Roper Industries, Inc.
William C. Rusnack, 49...... Mr. Rusnack was elected a Director of the Company
on October 24, 1988. He has been a Senior Vice
President of ARCO since July 1990 and President of
ARCO Products Company since June 1993. He was
President of ARCO Transportation Company from July
1990 to May 1993. He was Vice President, Corporate
Planning, of ARCO from July 1987 to July 1990. He
was Senior Vice President, Marketing and Employee
Relations, of the ARCO Oil and Gas Division from
August 1985 to July 1987 and Vice President,
Manufacturing, of the ARCO Products Division from
July 1984 to August 1985. From June 1983 to July
1984 he was Vice President, Planning
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT
POSITION WITH LYONDELL BUSINESS EXPERIENCE DURING PAST FIVE YEARS
---------------------- ------------------------------------------
<S> <C>
and Control, of the ARCO Products Division. He
originally joined ARCO in 1966. Mr. Rusnack is
also a director of BWIP Holding, Inc.
Dan F. Smith, 47............ Mr. Smith was elected a Director of the Company on
Executive Vice President October 24, 1988. He was elected Executive Vice
and Chief Operating Officer President and Chief Operating Officer on May 6,
1993. He served as Vice President Corporate
Planning of ARCO from October 1991 until May 1993.
He previously served as Executive Vice President
and Chief Financial Officer of the Company from
October 1988 to October 1991 and as Senior Vice
President of Manufacturing of Lyondell, and its
predecessor, the Lyondell Division, from June 1986
to October 1988. From August 1985 to June 1986 Mr.
Smith served as Vice President of Manufacturing
for the Lyondell Division. He joined the Lyondell
Division in April 1985 as Vice President, Control
and Administration. Prior to 1985, he served in
various financial, planning and manufacturing
positions with ARCO. He originally joined ARCO in
1968.
Paul R. Staley, 64.......... Mr. Staley was elected a Director of the Company
on November 28, 1988, effective as of January 25,
1989. He has held his current position as Chairman
of the Executive Committee of the Board of
Directors of P. Q. Corporation (an industry
supplier of silicates) since January 1991. He held
the positions of President and Chief Executive
Officer of P.Q. Corporation from 1973 and 1981,
respectively, until January 1991.
William E. Wade, Jr., 51.... Mr. Wade was elected a director of the Company on
August 13, 1993. He has been Executive Vice
President of ARCO since June 1, 1993 and a
director of ARCO since June 1, 1993. He was a
Senior Vice President of ARCO from May 1987 to May
1993 and President of ARCO Oil and Gas Company
from October 1990 to May 1993. He was President of
ARCO Alaska, Inc. from July 1987 to July 1990. He
was a Vice President of ARCO from 1985 to May
1987. From 1981 to 1985, he was Vice President of
ARCO Exploration Company. He has been an officer
of ARCO since 1985. He originally joined ARCO in
1968.
</TABLE>
Set forth below are the executive officers of the Company as of April 1,
1994.
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S)
---------------------- ------------------------------------------
<S> <C>
John R. Beard, 42............ Mr. Beard became Vice President Quality, Supply
Vice President, Quality, and Planning on July 1, 1993. Mr. Beard was
Supply and Planning appointed Vice President, Planning and Evaluations
in May 1992. He served as the Site Manager of
Lyondell's Houston Refinery from 1988 until April
1992. From 1985 until
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S)
---------------------- ------------------------------------------
<S> <C>
1988, he served in management assignments in
evaluations, marketing and manufacturing. Prior to
1985, he served in various management positions
for ARCO Products Company and the ARCO Chemical
Division. He originally joined ARCO in 1974.
Bob G. Gower, 56............ Mr. Gower was elected Chief Executive Officer of
Chief Executive Officer, the Company on October 24, 1988 and Director and
President and Director President of the Company on June 27, 1988. He has
been President of Lyondell and its predecessor,
the Lyondell Division, since formation of the
Lyondell Division in April, 1985. Mr. Gower was a
Senior Vice President of ARCO from June, 1984
until his resignation as an officer of ARCO in
January, 1989. Prior to 1984, he served in various
capacities with the then ARCO Chemical Division.
He originally joined ARCO in 1963.
Robert H. Ise, 59........... Mr. Ise was appointed Vice President, Marketing,
Vice President, Lyondell Supply and Evaluations of LYONDELL-CITGO Refining
Petrochemical Company Company Ltd. on July 1, 1993. He previously served
Vice President, Marketing, Lyondell as Vice President, Marketing and Sales,
Supply and Evaluations, Polymers and Petroleum Products from April, 1992
LYONDELL-CITGO Refining until June, 1993 and continues to serve as a Vice
Company Ltd. President of Lyondell. He served as Vice
President, Marketing and Sales, Petroleum
Products, from December, 1988 until April, 1992.
He served as Vice President of Industrial Products
Marketing of the Lyondell Division from June, 1987
to December, 1988. From May, 1985 to June, 1987 he
served as Director, Industrial Products Marketing
for the Lyondell Division. Prior thereto, he
served in various marketing capacities for the
ARCO Products Division. He originally joined ARCO
in 1959.
Richard W. Park, 54......... Mr. Park was elected Vice President, Human
Vice President, Human Resources on June 27, 1988. He previously served
Resources as Vice President of Employee Relations of the
Lyondell Division since February, 1987. From 1985
to 1987 he served as Manager of Personnel for the
then ARCO Chemical Division's Specialty Chemicals
and International Units. Prior to 1985 he held
other employee relations positions with divisions
of ARCO. He originally joined ARCO in 1965.
Jeffrey R. Pendergraft, 45.. Mr. Pendergraft was named Senior Vice President on
Senior Vice President, May 6, 1993. Mr. Pendergraft was elected Vice
Secretary and General President and General Counsel on June 27, 1988 and
Counsel Secretary on October 24, 1988. From September,
1985 to June, 1988, he served as General Attorney
of the Lyondell Division. Prior to September,
1985, he served as an attorney for various
operating divisions and corporate units of ARCO at
increasing levels of responsibility. He originally
joined ARCO in 1972.
W. Norman Phillips, Jr., 39. Mr. Phillips was elected Vice President,
Vice President, Channelview Channelview Operations on May 6, 1993. From May
Operations 22, 1992 until May 6, 1993, he served as Site
Manager of Channelview
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S)
---------------------- ------------------------------------------
<S> <C>
Operations. He previously served as Manager,
Planning from August, 1991 until May, 1992. Prior
to August, 1991, he served in various positions in
manufacturing and marketing for ARCO and Lyondell,
including Sales Manager in the Petroleum Products
Marketing Department from September, 1987 until
August, 1991. He originally joined ARCO in 1977.
Joseph M. Putz, 53.......... Mr. Putz was elected Vice President and Controller
Vice President and on October 24, 1988. Previously he was Vice
Controller President, Control and Administration of Lyondell,
and its predecessor, the Lyondell Division, from
June 1987 to October 1988. From 1986 to 1987 he
served as Director, Internal Control of ARCO. From
1985 to 1986 he served as Manager of Special
Projects for ARCO. Prior to 1985, he held various
financial positions with divisions of ARCO. He
originally joined ARCO in 1965.
Dan F. Smith, 47............ Mr. Smith was elected a Director of the Company on
Executive Vice President October 24, 1988. He was elected Executive Vice
and Chief Operating Officer President and Chief Operating Officer on May 6,
1993. He served as Vice President Corporate
Planning of ARCO from October 1991 until May 1993.
He previously served as Executive Vice President
and Chief Financial Officer of the Company from
October 1988 to October 1991 and as Senior Vice
President of Manufacturing of Lyondell, and its
predecessor, the Lyondell Division, from June 1986
to October 1988. From August 1985 to June 1986,
Mr. Smith served as Vice President of
Manufacturing for the Lyondell Division. He joined
the Lyondell division in April 1985 as Vice
President, Control and Administration. Prior to
1985, he served in various financial, planning and
manufacturing positions with ARCO. He originally
joined ARCO in 1968.
Debra L. Starnes, 41........ Ms. Starnes was appointed Vice President,
Vice President, Petrochemicals Business Management and Marketing
Petrochemicals Business on July 1, 1993. She previously served as Vice
Management and Marketing President, Petrochemicals Business Management from
May 22, 1992 to July 1993. She served as Vice
President, Corporate Planning from September 1991
until May 1992. From January 1989 to September
1991, she served as Director, Planning. Prior to
1989, she held various manufacturing, marketing
and planning positions with ARCO and Lyondell. She
originally joined ARCO in 1975.
Russell S. Young, 45........ Mr. Young was elected Senior Vice President, Chief
Senior Vice President, Financial Officer and Treasurer on May 7, 1992. He
Chief Financial Officer and previously served as Vice President and Treasurer
Treasurer from November 1988 until May 1992. Mr. Young
served as Controller of the ARCO Products Division
from September 1986 to January, 1989. From July
1984 to September 1986 he served as Assistant
Treasurer of ARCO. Prior thereto he served in
corporate finance positions for ARCO. He
originally joined ARCO in 1980.
</TABLE>
The By-Laws of the Company provide that each officer shall hold office until
the officer's successor is elected or appointed and qualified or until the
officer's death, resignation or removal by the Board of Directors.
47
<PAGE>
RELATIONSHIP WITH ARCO
GENERAL
As described in "The Company," Lyondell was first a division and then a
wholly-owned subsidiary of ARCO until January 1989, when ARCO completed an
initial public offering of Lyondell's Common Stock. ARCO currently owns
39,921,400 shares, or 49.9 percent of the outstanding Common Stock. The Company
and ARCO have entered into various intercompany transactions and arrangements
as described below. Five of the eleven directors of Lyondell are officers of
ARCO. Following consummation of the offering of the Exchangeable Notes, ARCO
has informed the Company that it intends to cause the ARCO officers who
currently serve on the Board of Directors to resign; however, ARCO has not
limited its right to nominate and vote for candidates for Lyondell's Board of
Directors. ARCO has also stated its current intent to vote its shares of
Lyondell Common Stock proportionately to the votes of the non-ARCO
stockholders, including with respect to the election of directors; provided,
that in the event a person other than ARCO is deemed to own more than 10
percent of the Common Stock within the meaning of Section 13(d) of the Exchange
Act and there occurs a contested proxy solicitation within the meaning of Rule
14a-11(a) of the Exchange Act, ARCO intends to vote its shares as it deems
appropriate.
REGISTRATION RIGHTS AGREEMENT WITH ARCO
Subject to the terms and conditions of a registration rights agreement
("Registration Rights Agreement") to be entered into with Lyondell concurrently
with the U.S. and international underwriting agreements with respect to the
offerings of the Exchangeable Notes ("Underwriting Agreements"), ARCO will
agree that it will not, without the prior approval of Lyondell's Board of
Directors, prior to the maturity of the Exchangeable Notes, (i) initiate or
solicit proposals by a single entity or a group of affiliated entities to
acquire all or substantially all of ARCO's Lyondell Common Stock or otherwise
to acquire Lyondell (ii) take action by written consent in lieu of a meeting of
Lyondell's stockholders or cause to be called any special meeting of Lyondell's
stockholders, (iii) initiate or propose, or solicit proxies in respect of,
stockholder proposals with respect to the Company, or (iv) solicit proxies or
written consents in respect of replacing or adding members of the Lyondell
Board of Directors.
Under the terms and conditions of the Registration Rights Agreement, ARCO
will also agree that it will not, without the prior approval of Lyondell's
Board of Directors or except upon exchange of the Exchangeable Notes as
contemplated by the prospectus for the Exchangeable Notes, prior to one year
following maturity date of the Exchangeable Notes dispose of (or enter into an
agreement contemplating the disposition of) all or any portion of its Lyondell
Common Stock in a private sale to a single entity or a group of affiliated
entities, provided that this agreement will not restrict ARCO from selling all
or any portion of its Lyondell Common Stock (i) in a public offering intended
to result in widespread distribution; (ii) in a Rule 144 transaction under the
Securities Act in accordance with the volume limitations set forth therein;
(iii) in a Rule 144A transaction intended to result in widespread distribution
to institutional buyers; or (iv) pursuant to a tender offer or exchange offer
by Lyondell or a third party or a merger or other business combination
including Lyondell that is not solicited by ARCO and in which ARCO is treated
on substantially comparable terms with other holders of Lyondell Common Stock.
Notwithstanding the foregoing, ARCO is not precluded from (i) participating in
any self tender offer or exchange offer or open market purchase program
conducted by Lyondell, (ii) voting its shares of Lyondell Common Stock as it
deems proper, or (iii) disclosing (including in response to private inquiries)
either its intentions concerning matters to be brought before Lyondell's
stockholders or making such disclosures as ARCO determines appropriate in
compliance with its obligation under the federal securities laws.
Pursuant to the Registration Rights Agreement, ARCO will have the right to
require the Company to use its best efforts to file up to three registration
statements under the Securities Act covering ARCO
48
<PAGE>
shares of Lyondell Common Stock. ARCO will also have the right, if the Company
files a registration statement, to require the Company to register ARCO's
shares of Common Stock for sale under the Securities Act on such registration
statement. If the exercise by ARCO of such "piggyback registration rights"
would result in the registration of a number of shares of Common Stock, that in
the judgment of the managing underwriter for the proposed offering exceeds the
number which can be sold in the offering, the number of shares that ARCO
initially intended to register shall be reduced. ARCO has agreed to pay all
costs and expenses relating to the exercise of ARCO's "demand" registration
rights. In the event of a "demand" registration, ARCO and the Company will
indemnify the underwriters of the offering for certain liabilities, including
liabilities under the Securities Act in connection with any such registration,
except that in the event that ARCO owns less than 20 percent of the Lyondell
Common Stock, the Company will indemnify both ARCO and the underwriters.
ARCO will pay all costs and expenses incurred by Lyondell in connection with
this Prospectus, the Registration Statement and the offering of the
Exchangeable Notes. For a further description of expense reimbursement and
indemnification agreements, see "Plan of Distribution."
RELATIONSHIP BETWEEN LYONDELL AND ARCO
In connection with the transfer of assets and liabilities to Lyondell in
1988, the Company and ARCO entered into a number of agreements for the purpose
of defining their ongoing relationships. In addition, in July 1987 the Lyondell
Division and ARCO Chemical Company ("ARCO Chemical"), then a wholly-owned (and
now an 83.3 percent owned) subsidiary of ARCO, entered into a number of
agreements in connection with the organization of ARCO Chemical. None of these
agreements was the result of arm's-length negotiations between independent
parties. It was the intention of the Company, ARCO and ARCO Chemical that such
agreements and the transactions provided for therein, taken as a whole,
accommodate the parties' interests in a manner that was fair to the parties,
while continuing certain mutually beneficial joint arrangements. The Audit
Committee of the Board of Directors of the Company, none of the members of
which are affiliated with the Company (including LCR), ARCO or ARCO
Chemical has determined that such agreements, taken as a whole, were in its
opinion fair to the Company and its stockholders. Because of the complexity of
the various relationships between the Company, ARCO and its direct and indirect
subsidiaries, including ARCO Chemical (together, "ARCO Affiliates"), however,
there can be no assurance that each of such agreements, or the transactions
provided for therein, has been effected on terms at least as favorable to the
Company as could have been obtained from unaffiliated third parties.
The terms and provisions of many of those initial agreements have been
modified subsequently or supplemented and additional or modified agreements,
arrangements and transactions have been and will continue to be entered into by
the Company and ARCO Affiliates. Any such future agreements, arrangements and
transactions will be determined through negotiation between the Company and
ARCO Affiliates and it is possible that conflicts of interest will be involved.
Future contractual relations among the Company and ARCO Affiliates will be
subject to certain provisions of the Company's Certificate of Incorporation.
See "--Certificate of Incorporation Provisions Relating to Corporate Conflicts
of Interest." In addition, the Audit Committee of the Board of Directors has
adopted a set of guidelines for the review of all agreements entered into
between the Company and ARCO Affiliates. These guidelines include a provision
that, at least annually, the Audit Committee will review such agreements, or
the transactions provided for therein, to assure that such agreements are, in
its opinion, fair to the Company and its stockholders.
For the year ended December 31, 1993, Lyondell (including LCR) paid ARCO
Affiliates an aggregate of approximately $80 million. For the year ended
December 31, 1993, Lyondell recorded revenues of approximately $278 million
from sales to ARCO Affiliates, of which $263 million represented sales to ARCO
Chemical. Sales to ARCO Chemical accounted for approximately 17 percent of
total revenues from sales of petrochemical products, and approximately seven
percent of revenues from gross sales.
49
<PAGE>
TECHNOLOGY TRANSFERS AND LICENSES
Effective July 1, 1988, ARCO assigned to the Company numerous domestic and
foreign trademarks and certain U.S. and foreign patents and granted the Company
a nonexclusive license to use other trademarks which contain the word "ARCO,"
to use ARCO's spark symbol as a logo and to use ARCO's color striping scheme,
which license was royalty-free for a period of four years. The Company paid
ARCO approximately $80,000 under the terms of this license in 1993.
In connection with the transfer of assets and liabilities relating to the
Lyondell Division from ARCO to the Company, the Company and ARCO, effective
July 1, 1988, entered into (i) a License Agreement pursuant to which ARCO
licensed to the Company on a nonexclusive, royalty-free basis certain rights
(including Lyondell's right to sublicense to third parties, in some cases
without accounting to ARCO) to ARCO's technology and intellectual property
related to certain operations or assets of the Company, (ii) a technology
assignment agreement pursuant to which legal title to certain other technology
and intellectual property useful in the Company's business (including, without
limitation, technology relating to olefins, including product flexibility) was
transferred to the Company; provided, however, that except for technology
relating to the product flexibility unit, ARCO retained a nonexclusive license
to use the technology and property rights in ARCO's other operations, and (iii)
an immunity from suit agreement in respect of the Company's right to practice
all remaining technology in the possession of the Company prior to July 1,
1988. During 1990, the Company and ARCO entered into a series of amendments to
these agreements designed to clarify the parties' rights under the original
technology transfer. In addition, Lyondell and ARCO executed a patent
maintenance agreement pursuant to which ARCO agreed to maintain certain patents
licensed to Lyondell. Lyondell and ARCO also entered into a letter agreement
granting Lyondell the right to obtain additional licensing rights.
CROSS-INDEMNITY AGREEMENT
In connection with the transfer by ARCO of substantially all of the assets
and liabilities of its Lyondell Division to the Company, the Company and ARCO
executed the Cross-Indemnity Agreement. In the Cross-Indemnity Agreement, the
Company agreed generally to indemnify ARCO against substantially all fixed and
contingent liabilities relating to the integrated petrochemical and petroleum
processing business and certain assets of the Lyondell Division. The
liabilities assumed by the Company include the following, to the extent not
covered by ARCO's insurance: (1) all liabilities and obligations of the Company
and its combined subsidiaries, as of July 1, 1988; (2) all liabilities and
obligations under contracts and commitments relating to the business of the
Lyondell Division and certain assets relating thereto; (3) employment and
collective bargaining agreements affecting the Company's employees; (4)
specified pending litigation and other proceedings; (5) federal, state, foreign
and local income taxes to the extent provided in the Cross-Indemnity Agreement;
(6) liabilities for other taxes associated with the Lyondell Division's
business and certain assets relating thereto; (7) liabilities for any past,
present or future violations of federal, state or other laws (including
environmental laws), rules, regulations or other requirements of any
governmental authority in connection with the business of the Lyondell Division
and certain assets relating thereto; (8) existing or future liabilities for
claims based on breach of contract, breach of warranty, personal or other
injury or other torts relating to such integrated petrochemical and petroleum
processing businesses and certain assets relating thereto; and (9) any other
liabilities relating to the assets transferred to the Company or its
subsidiaries. ARCO has indemnified the Company with respect to other claims or
liabilities and other matters of litigation not related to the assets or
business transferred by ARCO to the Company.
The Cross-Indemnity Agreement includes procedures for notice and payment of
indemnification claims and provides that a party entitled to indemnification
for a claim or suit brought by a third party may require the other party to
assume the defense of such claim. The Cross-Indemnity Agreement also includes a
defense cost-sharing agreement, whereby the Company will bear its allocated
defense costs for certain lawsuits.
50
<PAGE>
SERVICES AGREEMENTS
The Company and ARCO entered into an agreement effective January 1, 1991 and
amended as of February, 1992 (the "Administrative Services Agreement") under
which ARCO agreed to continue to provide various transitional services to the
Company that ARCO had been providing pursuant to previous administrative
service agreements. The services which ARCO now provides the Company pursuant
to the Administrative Services Agreement include telecommunications and certain
computer-related services. The Administrative Services Agreement terminates no
later than December 31, 1997, although it may be terminated in its entirety
earlier than such date upon the terminating party providing the other party
with at least two years prior notice, and a party may elect to terminate some
of the services it is receiving upon 30 days prior notice to the other party.
The Administrative Services Agreement provides for an annual renegotiation of
fees. ARCO earned a fee of approximately $2 million during 1993 for all of the
services (some of which are now provided under other agreements as discussed
below) which it provided under the Administrative Services Agreement.
Effective January 1, 1994, certain services that ARCO had previously been
providing under the Administrative Services Agreement began to be provided
pursuant to an agreement (the "Employee Services Agreement") covering various
employee benefits administration and payroll services and an agreement (the
"Investment Management Agreement") covering investment services with regard to
the management of Lyondell's qualified employee benefit plan funds. Each of
these agreements terminates on May 1, 1998, although it may be terminated in
its entirety by ARCO (provided that ARCO no longer owns at least five percent
of the outstanding Common Stock) by giving Lyondell at least two years prior
notice. In addition, Lyondell may elect to terminate some or all of the
services being provided upon 30 days prior notice. Upon termination of any or
all services, ARCO will provide Lyondell with support and assistance to
accomplish an orderly transition from ARCO's provision of the services to
Lyondell's acquisition of comparable services. The Employee Services Agreement
provides for substantially all services to be provided at a fee based on ARCO's
costs and for the other services to be provided at mutually-agreed fees. The
Investment Management Agreement provides for a renegotiation of fees from time
to time.
Effective January 1, 1991, the Company and ARCO entered into an agreement
which terminated the insurance coverage previously provided by ARCO and
established procedures for the resolution of pending and future claims that are
or will be covered under ARCO's policies in effect prior to January 1, 1991.
AGREEMENTS BETWEEN THE COMPANY AND ARCO PIPE LINE COMPANY
The Company has entered into several contracts with ARCO Pipe Line Company
("ARCO Pipe Line") pursuant to which the Company (1) leased certain pipelines
and pipeline segments from ARCO Pipe Line at annual rental rates which include
recovery of operating costs, return on capital investment and inflation
escalators, (2) acquired the services of ARCO Pipe Line to operate various
groups of pipelines owned by the Company, and (3) entered into a throughput and
deficiency commitment for volumes at tariff rates for transportation of crude
oil and other products. Certain of these contracts that relate to the refining
business were assigned to LCR as of July 1, 1993. The Company and LCR paid ARCO
Pipe Line approximately $20 million during 1993 for rental fees and services
under these contracts. In April 1994, the Company and ARCO Pipe Line concluded
negotiations that extend the term of the Company's lease of ARCO Pipe Line's
pipeline system described in (1) above through December 31, 2023. Absent any
major regulatory changes, the terms and conditions of this lease extension will
not be materially different from the current lease.
ARCO Pipe Line also owns various easements and licenses for its pipelines and
related equipment located on the property of the Company or LCR and has
performed services relating to the pipeline
51
<PAGE>
systems. The Company (including LCR) also ships products over common carrier
pipelines owned and operated by ARCO Pipe Line pursuant to filed tariffs on the
same basis as other non-affiliated customers.
AGREEMENTS BETWEEN THE COMPANY AND ARCO CHEMICAL COMPANY
Lyondell provides to ARCO Chemical a large portion of the feedstocks
(including ethylene, propylene and methanol) purchased by ARCO Chemical for its
manufacturing facilities located at Channelview, Texas. Pricing arrangements
under these contracts are generally representative of prevailing market prices.
Lyondell also provides certain nominal plant services at the aforementioned
plants. ARCO Chemical in turn provides certain feedstocks and supplies to
Lyondell at market-based prices.
The Company sells MTBE produced at one of its two MTBE units to ARCO Chemical
at market-based prices. The term of this agreement extends through December
1995. In addition, the Company has agreed to sell to ARCO Chemical MTBE
produced at the Company's second MTBE unit that is in excess of LCR's
requirements at market-based prices.
DISPUTE RESOLUTION AGREEMENT
In April 1993, the Company, ARCO and ARCO Chemical entered into a Dispute
Resolution Agreement that mandates a procedure for negotiation and binding
arbitration of significant commercial disputes among any two or more of the
parties.
OTHER AGREEMENTS BETWEEN THE COMPANY AND ARCO
Lyondell has purchased and LCR continues to purchase certain of its crude oil
requirements from affiliates of ARCO under short-term arrangements at prices
based on market values at the time of delivery. LCR also purchases crude oil
from affiliates of ARCO from time to time on the spot market at then-current
spot market prices. The Company and LCR also purchased natural gas and natural
gas liquids from affiliates of ARCO during 1993 on the spot market at then-
current spot market prices.
The Company (including LCR) also sold products to ARCO Affiliates, including
crude oil resales and sales of heating oil and lube oil at market-based prices.
CERTIFICATE OF INCORPORATION PROVISIONS RELATING TO CORPORATE CONFLICTS OF
INTEREST
In order to address certain potential conflicts of interest between the
Company and ARCO (for purposes of this section the term "ARCO" also includes
ARCO's successors and any corporation, partnership or other entity in which
ARCO owns fifty percent or more of the voting securities or other interests),
the Company's Certificate of Incorporation contains provisions regulating and
defining the conduct of certain affairs of the Company as they may involve ARCO
and its officers and directors, and the powers, rights, duties and liabilities
of the Company and its officers, directors and stockholders in connection
therewith. In general, these provisions recognize that from time to time the
Company and ARCO may engage in the same or similar activities or lines of
business and have an interest in the same areas of corporate opportunities. The
Certificate of Incorporation provides that ARCO has no duty to refrain from (1)
engaging in business activities or lines of business that are the same as or
similar to those of the Company, (2) doing business with any customer of the
Company or (3) employing any officer or employee of the Company. The
Certificate of Incorporation provides that ARCO is not under any duty to
present any corporate opportunity to the Company which may be a corporate
opportunity for both ARCO and the Company, and that ARCO will not be liable to
the Company or its stockholders for breach of any fiduciary duty as a
stockholder of the Company by reason of the fact that ARCO pursues or acquires
such corporate opportunity for itself, directs such corporate opportunity to
another person or does not present the corporate opportunity to the Company.
ARCO currently owns interests in certain chemical companies and refiners (other
than the Company) and has advised the Company that it may continue to acquire
additional interests in chemical companies and refiners.
52
<PAGE>
The Certificate of Incorporation provides that directors and officers of the
Company will not be liable to the Company or its stockholders for breach of any
fiduciary duty if they comply with the following provisions of the Certificate
of Incorporation. When a corporate opportunity is offered in writing to an
officer or an officer and a director of the Company who is also an officer or
an officer and a director of ARCO, solely in his or her designated capacity
with one of the two companies, such opportunity shall be first presented to
whichever company was so designated. No person is currently in this category.
Otherwise, (1) a corporate opportunity offered to any person who is an officer
or officer and director of the Company and who is also a director of ARCO,
shall be first presented to the Company, (2) a corporate opportunity offered to
a person who is a director of the Company and who is also an officer or officer
and director of ARCO shall be first presented to ARCO, (3) in all other cases,
a corporate opportunity offered to any person who is an officer and/or a
director of both the Company and ARCO shall be first presented to the Company.
Mr. Bowlin, Mr. Comstock, Mr. Dallas, Mr. Rusnack and Mr. Wade are in category
(2) and no persons currently are in categories (1) and (3).
Another section of the Certificate of Incorporation provides that no
contract, agreement, arrangement or transaction between the Company and ARCO or
between the Company and a director or officer of the Company or of ARCO would
be void or voidable for the reason that ARCO or any director or officer of the
Company or of ARCO are parties thereto or because any such director or officer
were present or participated in the meeting of the Board of Directors which
authorized the contract if the material facts about the contract, agreement,
arrangement or transaction were disclosed or known to the Board of Directors or
the stockholders and the Board of Directors in good faith authorizes the
contract by a vote of a majority of the disinterested directors or the majority
of stockholders approves such contract, agreement, arrangement or transaction.
The foregoing Certificate of Incorporation provisions describe the
obligations of officers and directors of the Company with respect to
presentation of corporate opportunities, but do not limit the ability of the
Company or of ARCO to consider and act upon such opportunities whether or not
such provisions have been followed.
SECURITY OWNERSHIP BY ARCO
ARCO currently owns, and immediately following the offering of the
Exchangeable Notes will own, 39,921,400 shares, or 49.9 percent, of the
outstanding Common Stock. Pursuant to the terms of the Exchangeable Notes, ARCO
may, at its option, consummate the mandatory exchange at maturity thereof by
delivering to holders thereof shares of Common Stock or cash with an equal
value. ARCO's ownership interest after maturity of the Exchangeable Notes could
remain at 49.9 percent of the presently outstanding number of shares of Common
Stock (if it elects to deliver cash) or could be reduced to less than one
percent of the presently outstanding shares of Common Stock if (a) at maturity
of the Exchangeable Notes the "Maturity Price" is less than or equal to the
"Initial Price" (each as defined in the prospectus for the Exchangeable Notes),
(b) the underwriters of the offering of the Exchangeable Notes elect to
exercise their over-allotment option in full and (c) ARCO elects to deliver
Common Stock instead of cash. However, ARCO is under no obligation to, and
there can be no assurance that ARCO will, elect to exercise its option to
deliver Common Stock pursuant to the terms of the Exchangeable Notes.
For a description of expense reimbursement and indemnification agreements
with respect to this Prospectus, the Registration Statement and the offering of
the Exchangeable Notes, see "Plan of Distribution," and for a description of
ARCO's intentions with respect to the Company and of the Registration Rights
Agreement between ARCO and the Company, see "Relationship with ARCO--General"
and "--Registration Rights Agreement with ARCO."
For additional information concerning the relationship between the Company
and ARCO, see "Relationship with ARCO."
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of 250,000,000
shares of Common Stock, par value $1 per share. ARCO, which owns 49.9 percent
of the outstanding Common Stock, has entered into a Registration Rights
Agreement with the Company regarding certain voting, transfer and other matters
with respect to the shares of Common Stock it owns. See "Relationship with
ARCO--Registration Rights Agreement with ARCO."
COMMON STOCK
The Company is currently authorized to issue 250,000,000 shares of Common
Stock, of which 80,000,000 shares of Common Stock are outstanding at the date
hereof.
Holders of Common Stock are entitled (i) to receive such dividends as may
from time to time be declared by the Board of Directors of the Company; (ii) to
one vote per share on all matters on which the stockholders are entitled to
vote; (iii) to act by written consent in lieu of voting at a meeting of
stockholders; and (iv) to share ratably in all assets of the Company available
for distribution to the stockholders, in the event of liquidation, dissolution
or winding up of the Company. For additional information regarding the
Company's dividend policy, see Item 5 of the Company's 1993 Form 10-K Report,
which report is incorporated herein by reference. The holders of a majority of
the shares of Common Stock represented at a meeting can elect all of the
directors.
Shares of Common Stock are not liable to further calls or assessments by the
Company for any liabilities of the Company that may be imposed on its
stockholders under the laws of the State of Delaware, the state of
incorporation of the Company. There are no preemptive rights for the Common
Stock in the Certificate of Incorporation.
The Transfer Agent, Registrar and Dividend Disbursing Agent for the Common
Stock is The Bank of New York.
PREFERRED STOCK
The Board of Directors has adopted a resolution declaring the advisability of
an amendment to the Certificate of Incorporation of the Company to authorize
the issuance of up to 80,000,000 shares of Preferred Stock, $0.01 par value
(the "Preferred Stock"). The proposed amendment to the Certificate of
Incorporation is included in the 1994 Proxy Statement and incorporated herein
by reference. The discussion hereunder is qualified in its entirety by
reference to Appendix A of the 1994 Proxy Statement. If this proposal is
approved by the stockholders, the Board will be able to specify the precise
characteristics of the Preferred Stock to be issued, in light of current market
conditions and the nature of specific transactions, and will not be required to
solicit further authorization from stockholders for any specific issue of
Preferred Stock.
The Board of Directors has adopted a policy providing that no future issuance
of Preferred Stock will be effected without stockholder approval unless the
Board (whose decision shall be conclusive) determines in good faith (i) that
such issuance is primarily for the purpose of facilitating a financing, an
acquisition or another proper corporate objective or transaction, and (ii) that
any anti-takeover effects of such issuance are not the Company's primary
purpose for effecting such issuance. The Board of Directors will not amend or
revoke this policy without giving written notice to the holders of all
outstanding shares of the Company's stock, however, no such amendment or
revocation will be effective, without stockholder approval, to permit a
subsequent issuance of Preferred Stock for the primary purpose of obstructing a
takeover of the Company by any person who has, prior to such written notice to
stockholders, notified the Board of Directors of such person's desire to pursue
a takeover of the Company. As of the date hereof, the Board of Directors has no
present intention to issue any series of Preferred Stock.
54
<PAGE>
The authorization of preferred stock could have the effect of discouraging a
tender offer or unsolicited attempt to acquire control of the Company in a
transaction that a stockholder might deem desirable, including takeover
attempts that might result in a premium over the market price of the Common
Stock. Preferred stock issuances involving certain voting or conversion
privileges can be used to make the acquisition of a company more difficult or
more costly. The Company is not aware of any present effort by any person to
accumulate the Company's Common Stock or to obtain control of the Company.
Adoption of the proposed amendment to the Certificate of Incorporation will
require the affirmative vote of a majority of the outstanding shares of Common
Stock.
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
FOR NON-UNITED STATES HOLDERS OF COMMON STOCK
The following is a summary of certain United States federal income tax
consequences of the acquisition, ownership and disposition of Common Stock by a
holder that, for United States federal income and estate tax purposes, is a
Non-United States Holder. For purposes of this discussion, a "Non-United States
Holder" means a corporation, individual or partnership, that is, as to the
United States, a foreign corporation, a non-resident alien individual or a
foreign partnership, or a trust, other than one the income of which is subject
to United States federal income tax regardless of its source. This summary does
not address all aspects of the United States federal income and estate taxation
and does not deal with foreign, state and local tax consequences that may be
relevant to non-United States Holders in light of their specific circumstances.
Furthermore, this summary is based upon the provisions of the United States
Internal Revenue Code of 1986, as amended and the regulations, rulings and
judicial decisions thereunder, all of which are subject to change. PROSPECTIVE
INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
UNITED STATES TAX CONSEQUENCES TO THEM OF ACQUIRING, HOLDING AND DISPOSING OF
COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES WHICH MAY ARISE UNDER THE LAWS OF
ANY FOREIGN, STATE, LOCAL OR OTHER TAXING JURISDICTION.
DIVIDENDS
Dividends paid to a Non-United States Holder generally will be subject to
withholding of United States federal income tax at a rate of 30 percent (or a
lower rate prescribed by an applicable tax treaty). If the dividends are
effectively connected with the conduct of a trade or business within the United
States by the Non-United States Holder, the dividends will be subject to the
ordinary United States federal income tax on net income that applies to United
States persons and will not be subject to withholding if the Non-United States
Holder files a United States Internal Revenue Service Form 4224 with the
Company or its dividend paying agent. In the case of corporate holders, such
dividends might also be subject to the United States branch profits tax at a
rate of 30 percent (or a lower rate prescribed by an applicable tax treaty). A
Non-United States Holder may be required to satisfy certain certification
requirements in order to obtain any reduction of or exemption from withholding
under the foregoing rules and may obtain a refund of any excess amounts
currently withheld by filing an appropriate refund claim with the United States
Internal Revenue Service.
Distributions in excess of the Company's current and accumulated earnings and
profits, as determined for United States federal income tax purposes, will be
treated first as a return of capital to the extent of the Non-United States
Holder's tax basis in the Common Stock (and will be applied against and reduce
such holder's tax basis in the Common Stock) and thereafter as gain from the
sale of Common Stock. The portion treated as a return of capital will not be
subject to United States federal income tax and the portion, if any, treated as
gain will be subject to the rules described below under "--Gain on
Disposition." Because the Company will not be able to determine whether a
distribution
55
<PAGE>
should properly be treated as a dividend or as a return of capital at the time
of payment, it is required to treat all distributions as dividends for United
States withholding tax purposes. Non-United States Holders will be eligible to
claim a refund to the extent that a distribution represents a return of capital
and may in certain circumstances be eligible to claim a refund to the extent
that a distribution is treated as gain. Non-United States Holders should
consult their own tax advisors with respect to distributions in excess of
current and accumulated earnings and profits.
GAIN ON DISPOSITION
General Rule. Subject to special rules for individuals described below, a
Non-United States Holder generally will not be subject to United States federal
income tax on gain recognized on a sale or other disposition of Common Stock
unless (i) the gain is effectively connected with the conduct of a trade or
business within the United States by the Non-United States Holder (in which
case the United States branch profits tax described above may also apply to
corporate holders) or (ii) the gain is treated as effectively connected with
the conduct of a trade or business within the United States because the Company
is or has been a "United States real property holding corporation" for United
States federal income tax purposes (in which case, withholding of such tax may
also apply). The Company believes that it is currently, and is likely to
remain, a United States real property holding corporation. The preceding
sentence notwithstanding, under currently effective United States federal
income tax laws, gain recognized by a Non-United States Holder will not be
treated as effectively connected with the conduct of a trade or business within
the United States (or subject to withholding) unless such Non-United States
Holder held, directly or indirectly, at any time during the five-year period
ending on the date of disposition, more than five percent of the Common Stock.
Non-United States Holders should consult applicable tax treaties, which may
provide for different rules (including possibly the exemption of certain
capital gains from tax).
Individuals. In addition to the rules described above, an individual Non-
United States Holder who holds Common Stock as a capital asset generally will
be subject to tax on any gain recognized on the disposition of such stock if
such individual is present in the United States for 183 days or more in the
taxable year of disposition and (i) has a "tax home" in the United States (as
specifically defined under the United States federal income tax laws) or (ii)
maintains an office or other fixed place of business in the United States to
which the gain from the sale of the stock is attributable. Certain individual
Non-United States Holders may also be subject to tax pursuant to provisions of
United States federal income tax law applicable to certain United States
expatriates.
FEDERAL ESTATE TAX
Common Stock owned or treated as owned by an individual Non-United States
Holder at the date of death will be subject to United States federal estate
tax, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company or its designated paying agent (the "payor") must report annually
to the United States Internal Revenue Service and to each Non-United States
Holder the amount of dividends paid to and the tax, if any, withheld with
respect to such holder. That information may also be made available to the tax
authorities of the country in which the Non-United States Holder resides.
United States information reporting requirements (other than the reporting of
dividend payments described in the preceding paragraph ) and United States
backup withholding (imposed at a 31 percent rate) generally will not apply to
dividends paid to a Non-United States Holder at an address outside the United
States, unless the payor has knowledge that the payee is a United States
person. Otherwise, information reporting and backup withholding may apply to
dividends paid on the Common Stock to a
56
<PAGE>
Non-United States Holder who fails to furnish certain information, including a
tax identification number, in the manner required by United States law and
applicable regulations.
Payment of the proceeds of a disposition of Common Stock by a United States
office of a broker is subject to backup withholding and information reporting,
unless the holder certifies to the broker under penalties of perjury as to its
name, address and status as a Non-United States Holder or the holder otherwise
establishes an exemption. Neither backup withholding nor information reporting
generally will apply to a payment of the proceeds of a disposition of Common
Stock by a foreign office of a foreign broker that is not a United States
Related Person. Information reporting requirements (but not backup withholding)
will apply to a payment of the proceeds of a disposition of Common Stock by a
foreign office of a broker that is a United States person or a United States
Related Person, unless the broker has documentary evidence in its records that
the holder is a Non-United States Related Person, unless the broker has no
knowledge to the contrary and certain other conditions are met. For this
purpose, a "United States Related Person" is (i) a foreign broker, 50 percent
or more of whose gross income for certain periods is effectively connected with
the conduct of a trade or business in the United States or (ii) a foreign
broker that is a "controlled foreign corporation" for United States federal
income tax purposes.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that
required information is furnished to the United States Internal Revenue
Service.
PLAN OF DISTRIBUTION
The offering of the Exchangeable Notes by ARCO is being made through
concurrent offerings in the United States and outside the United States.
Subject to the terms and conditions of the Underwriting Agreement for the
offering in the United States, ARCO has agreed to sell to each of the
underwriters named below, and each of such underwriters, for whom Goldman,
Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Salomon
Brothers Inc are acting as representatives, has severally agreed to purchase
from ARCO the respective number of Exchangeable Notes set forth opposite its
name below:
<TABLE>
<CAPTION>
NUMBER OF
EXCHANGEABLE
UNDERWRITER NOTES
----------- ------------
<S> <C>
Goldman, Sachs & Co..........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................
Salomon Brothers Inc.........................................
Total.................................................... 30,000,000
==========
</TABLE>
57
<PAGE>
Subject to the terms and conditions of the Underwriting Agreement for the
offering outside of the United States, ARCO has agreed to sell to each of the
international underwriters named below, and each of such international
underwriters, for whom Goldman Sachs International, Merrill Lynch International
Limited and Salomon Brothers International Limited are acting as
representatives, has severally agreed to purchase from ARCO the respective
number of Exchangeable Notes set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
EXCHANGEABLE
UNDERWRITER NOTES
----------- ------------
<S> <C>
Goldman Sachs International..................................
Merrill Lynch International Limited..........................
Salomon Brothers International Limited.......................
Total.................................................... 5,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreements, the
underwriters are committed to take and pay for all of the Exchangeable Notes
offered pursuant to the applicable prospectus related thereto, if any are
taken.
The underwriters propose to offer the Exchangeable Notes in part directly to
the public at the initial public offering price set forth on the cover page of
the applicable prospectus for the Exchangeable Notes; and in part to certain
securities dealers at such price less a concession of $ per Exchangeable
Note. The underwriters may allow, and each of such dealers may reallow, a
concession not exceeding $ per Exchangeable Note to certain dealers and
brokers. After the Exchangeable Notes are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
representatives.
ARCO and Lyondell have entered into separate U.S. and international
Underwriting Agreements providing for the concurrent offer and sale by ARCO of
30,000,000 Exchangeable Notes in the United States and 5,000,000 Exchangeable
Notes outside the United States. The offering price and underwriting discount
per Exchangeable Note for the two offerings are identical. The closing of the
offering made in the United States is a condition to the closing of the
offering outside the United States, and vice versa.
ARCO has granted the underwriters an option exercisable for 30 calendar days
after the date of this Prospectus to purchase up to an aggregate of an
additional 4,921,400 Exchangeable Notes solely to cover over-allotments, if
any. If the underwriters exercise their over-allotment option, the underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof that the number of the Exchangeable Notes to be
purchased by each of them, as shown in the foregoing table, bears to the
aggregate of 35,000,000 Exchangeable Notes being offered. The underwriters may
exercise such option only to cover over-allotments in connection with the sale
of the Exchangeable Notes being offered.
58
<PAGE>
ARCO and Lyondell have agreed that during the period beginning from the date
of this Prospectus and continuing to and including the date 120 days after the
date of this Prospectus, subject to certain exceptions set forth in the
Underwriting Agreements, they will not offer, sell, contract to sell or
otherwise dispose of, without the prior written consent of the representatives
of the underwriters, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock.
The Exchangeable Notes will be a new issue of securities with no established
trading market. The representatives have advised ARCO that they intend to make
a market in the Exchangeable Notes but will not be obligated to do so and may
discontinue any market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the Exchangeable Notes.
Lyondell has agreed to indemnify the underwriters of the Exchangeable Notes
against certain civil liabilities, including liabilities under the Securities
Act. ARCO has agreed to reimburse Lyondell for any legal and other expenses
reasonably incurred by Lyondell in the preparation, printing and filing of, and
in connection with investigating or defending any action or claim relating to,
this Prospectus, the Registration Statement or the offering of the Exchangeable
Notes.
This Prospectus relates to the 35,000,000 shares of Common Stock that may be
delivered by ARCO pursuant to the Exchangeable Notes and is Appendix A to both
the U.S. prospectus and the international prospectus of ARCO covering the sale
of the Exchangeable Notes (individually, an "ARCO Prospectus"). At maturity of
the Exchangeable Notes the principal amount of each such note will be
mandatorily exchanged by ARCO into shares of Common Stock or, at ARCO's option,
cash with an equal value. For a description of the Exchangeable Notes, see
"Description of the Exchangeable Notes" in the applicable ARCO Prospectus.
CERTAIN LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Jeffrey R.
Pendergraft, Esq., Senior Vice President, Secretary and General Counsel of
Lyondell. Mr. Pendergraft beneficially owns 25,521 shares of Common Stock.
Certain legal matters will be passed upon for the underwriters by Cravath,
Swaine & Moore. Cravath, Swaine & Moore provides legal services to ARCO from
time to time, and is currently doing so on certain matters relating to ARCO's
investment in the Company.
EXPERTS
The consolidated balance sheet as of December 31, 1993 and 1992 and the
consolidated statements of income and accumulated deficit, and cash flows for
each of the three years in the period ended December 31, 1993, included in this
Prospectus, have been included herein in reliance on the report of Coopers &
Lybrand, independent accountants, given on the authority of that firm as
experts in accounting and auditing.
With respect to the unaudited consolidated interim financial information for
the three-month periods ended March 31, 1994 and 1993 included in this
Prospectus, the independent accountants have reported that they have applied
limited procedures in accordance with professional standards for a review of
such information. However, their separate report, appearing elsewhere herein
states that they did not audit and they do not express an opinion on that
interim financial information. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. The accountants are not subject to the
liability provisions of Section 11 of the Securities Act of 1933 for their
report on the unaudited consolidated interim financial information because that
report is not a "report" or a "part" of the Registration Statement prepared or
certified by the accountants within the meaning of Sections 7 and 11 of the
Securities Act.
59
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Financial Statements
Consolidated Statement of Income and Accumulated Deficit for the Years
Ended December 31, 1993, 1992 and 1991................................. F-3
Consolidated Balance Sheet as of December 31, 1993 and 1992............. F-4
Consolidated Statement of Cash Flows for the Years Ended December 31,
1993, 1992 and 1991.................................................... F-5
Notes to Consolidated Financial Statements.............................. F-6
Independent Accountants' Review Report ................................... F-22
Unaudited Financial Statements
Consolidated Statement of Income for the Three Months Ended March 31,
1994 and 1993.......................................................... F-23
Consolidated Balance Sheet as of March 31, 1994 and December 31, 1993... F-24
Consolidated Statement of Cash Flows for the Three Months Ended March
31, 1994 and 1993...................................................... F-25
Notes to Unaudited Consolidated Financial Statements.................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Lyondell Petrochemical Company
We have audited the accompanying consolidated balance sheet of Lyondell
Petrochemical Company as of December 31, 1993 and 1992, and the related
consolidated statements of income and accumulated deficit and cash flows for
each of the three years in the period ended December 31, 1993. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lyondell
Petrochemical Company as of December 31, 1993 and 1992, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1993, in conformity with generally accepted
accounting principles.
As discussed in Note 4 to the consolidated financial statements, during 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 and in 1992, the Company changed its method of
accounting for income taxes and for postretirement benefits other than
pensions.
Coopers & Lybrand
Houston, Texas
February 11, 1994
F-2
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF INCOME AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
----------------------
1993 1992 1991
------ ------ ------
MILLIONS OF DOLLARS
EXCEPT
PER SHARE AMOUNTS
<S> <C> <C> <C>
Sales and other operating revenues:
Unrelated parties................................... $3,572 $4,480 $5,209
Related parties..................................... 278 329 526
------ ------ ------
3,850 4,809 5,735
Operating costs and expenses:
Cost of sales:
Unrelated parties................................. 3,359 4,283 4,801
Related parties................................... 268 295 409
Selling, general and administrative expenses........ 130 127 126
------ ------ ------
3,757 4,705 5,336
------ ------ ------
Operating income.................................... 93 104 399
Interest expense...................................... (74) (79) (74)
Interest income....................................... 2 10 14
Minority interest in LYONDELL-CITGO Refining Company
Ltd.................................................. (5) -- --
------ ------ ------
Income before income taxes and cumulative effect of
accounting changes................................. 16 35 339
Provision for income taxes............................ 12 9 117
------ ------ ------
Income before cumulative effect of accounting
changes............................................ 4 26 222
Cumulative effect on prior years of acounting changes,
net of tax........................................... 22 (10) --
------ ------ ------
Net income............................................ $ 26 $ 16 $ 222
====== ====== ======
Earnings (loss) per share:
Income before cumulative effect of accounting
changes............................................ $ .06 $ .32 $ 2.78
Cumulative effect on prior years of accounting
changes............................................ .27 (.12) --
------ ------ ------
Net income.......................................... $ .33 $ .20 $ 2.78
====== ====== ======
Pro forma amounts, assuming retroactive application of
new accounting method for turnarounds:
Income before cumulative effect of accounting
changes............................................ $ 31 $ 216
====== ======
Income per share before cumulative effect of
acounting changes.................................. $ .39 $ 2.70
====== ======
Net income.......................................... $ 4 $ 22 $ 216
====== ====== ======
Net income per share................................ $ .06 $ .27 $ 2.70
====== ====== ======
Accumulated deficit at beginning of year.............. $ (244) $ (116) $ (200)
Net income.......................................... 26 16 222
Cash dividends...................................... (108) (144) (140)
Other............................................... -- -- 2
------ ------ ------
Accumulated deficit at end of year.................... $ (326) $ (244) $ (116)
====== ====== ======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1993 1992
------ ------
ASSETS MILLIONS OF
------ DOLLARS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 40 $ 108
Restricted cash (Note 3)..................................... 73 --
Short-term investments....................................... 6 13
Accounts receivable:
Trade...................................................... 179 227
Related parties............................................ 25 26
Inventories.................................................. 191 180
Prepaid expenses and other current assets.................... 9 14
------ ------
Total current assets....................................... 523 568
------ ------
Fixed assets:
Property, plant and equipment................................ 2,545 2,470
Less accumulated depreciation and amortization............... 1,890 1,847
------ ------
655 623
Deferred charges and other assets.............................. 53 24
------ ------
Total assets................................................... $1,231 $1,215
====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable:
Trade...................................................... $ 203 $ 234
Related parties............................................ 4 9
Notes payable................................................ 4 --
Current maturities of long-term debt......................... 8 29
Other accrued liabilities.................................... 80 73
------ ------
Total current liabilities.................................. 299 345
------ ------
Long-term debt................................................. 717 725
Other liabilities and deferred credits......................... 78 72
Deferred income taxes.......................................... 101 79
Commitments and contingencies (Note 18)
Minority interest.............................................. 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.......................................... (326) (244)
------ ------
Total stockholders' deficit................................ (88) (6)
------ ------
Total liabilities and stockholders' deficit.................... $1,231 $1,215
====== ======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER
31
----------------
1993 1992 1991
---- ---- ----
MILLIONS OF
DOLLARS
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 26 $ 16 $222
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of accounting changes, net of tax...... (22) 10 --
Depreciation and amortization............................ 58 39 39
Deferred taxes........................................... 7 2 18
Net change in accounts receivable, inventories and
accounts payable........................................ (11) 54 (1)
Net change in other working capital accounts............. 16 (20) 3
Minority interest........................................ 5 -- --
Other.................................................... 5 7 (11)
---- ---- ----
Net cash provided by operating activities.............. 84 108 270
---- ---- ----
Cash flows from investing activities:
Minority owner contribution................................ 116 -- --
Additions to fixed assets.................................. (69) (97) (43)
Purchases of short-term investments........................ (9) -- (104)
Proceeds from sales of short-term investments.............. 16 88 3
---- ---- ----
Net cash provided by (used in) investing activities.... 54 (9) (144)
---- ---- ----
Cash flows from financing activities:
Proceeds from short-term debt.............................. 16 -- --
Repayments of short-term debt.............................. (12) -- --
Proceeds from long-term debt............................... -- 200 150
Repayments of long-term debt............................... (29) (67) (29)
Repayments of capitalized lease obligations................ -- (186) (28)
Dividends paid............................................. (108) (144) (140)
---- ---- ----
Net cash used in financing activities.................. (133) (197) (47)
---- ---- ----
Increase (decrease) in cash, restricted cash and cash
equivalents................................................. 5 (98) 79
Cash and cash equivalents at beginning of period............. 108 206 127
---- ---- ----
Cash, restricted cash and cash equivalents at end of period.. $113 $108 $206
==== ==== ====
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION OF THE COMPANY AND OPERATIONS
In 1985, Atlantic Richfield Company (ARCO) established the Lyondell
Petrochemical Company as a division of ARCO (Lyondell Division). Lyondell
Petrochemical Corporation, a wholly-owned subsidiary of ARCO, was incorporated
in the state of Delaware in 1985 and subsequently changed its name to Lyondell
Petrochemical Company (Company). Effective July 1, 1988, ARCO transferred
substantially all the assets and liabilities relating to the integrated
petrochemical and petroleum processing business of the Lyondell Division to the
Company. In addition, certain pipeline assets were transferred to the Company.
For financial reporting purposes, the transfer of these assets and liabilities
was recorded at the historical net book value of $127 million as of July 1,
1988.
On January 25, 1989, ARCO completed an initial public offering of 43,000,000
shares of the Company's 80,000,000 shares of common stock owned by ARCO. The
Company received none of the proceeds from the sale. As of December 31, 1993,
ARCO owned 39,921,400 shares, which represents 49.9 percent of the outstanding
common stock.
The Company and LYONDELL-CITGO Refining Company Ltd. (LCR) operate in two
business segments: petrochemicals and refining. The Company generally sells its
petrochemical products to customers for use primarily in the manufacture of
other chemicals and products, which in turn are used in the production of a
wide variety of consumer and end-use products. LCR sells its principal refined
products primarily to CITGO Petroleum Corporation (CITGO) and to a lesser
extent, other marketers of petroleum products. See Note 3.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant transactions
between the entities of the Company have been eliminated from the consolidated
financial statements. Certain amounts from prior years have been reclassified
to conform to current year presentation.
Cash, Cash Equivalents and Short-Term Investments--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. Short-term investments consist of similar investments
maturing in more than three months from purchase. The Company's policy is to
invest cash in conservative, highly rated instruments and limit the amount of
credit exposure to any one institution. The Company performs periodic
evaluations of the relative credit standing of these financial institutions
which are considered in the Company's investment strategy. Cash equivalents and
short-term investments are stated at cost which approximates market value
because of the short maturity of these instruments.
The Company has no requirements for compensating balances in a specific
amount at a specific point in time. The Company does maintain compensating
balances for some of its banking services and products. Such balances are
maintained on an average basis and are solely at the Company's discretion, so
that effectively on any given date, none of the Company's cash is restricted
with the exception of cash held for use in connection with LCR capital projects
and other expenditures as determined by the LCR owners (see Note 3).
Accounts Receivable--The Company sells its products primarily to companies in
the petrochemical and refining industries. The Company performs ongoing credit
evaluations of its customers' financial condition and in certain circumstances
requires letters of credit from them. The Company's allowance for doubtful
accounts receivable, which is reflected in the consolidated balance sheet as a
reduction in accounts receivable, totaled $2 million at December 31, 1993 and
1992.
F-6
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined on the last-in, first-out (LIFO) basis except for materials and
supplies, which are valued at average cost.
Fixed Assets--Fixed assets are recorded at cost. Depreciation of fixed assets
is computed using the straight-line method over the estimated useful lives of
the related assets as follows:
<TABLE>
<S> <C> <C>
Manufacturing facilities and equipment -- 5 to 30 years
Leased assets and improvements -- 5 to 20 years
</TABLE>
Upon retirement or sale, the Company removes the cost of the assets and the
related accumulated depreciation from the accounts and reflects any resulting
gains or losses in income.
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 that a liability has been
incurred and the amount of that liability can reasonably be estimated. These
costs are expensed or capitalized in accordance with generally accepted
accounting principles.
Futures Contracts--The Company executes futures contracts primarily to hedge
fluctuations in product prices and feedstock costs. Changes in the market value
of hedging contracts are reported as an adjustment to cost of sales upon
completion of the hedged transaction.
Exchanges--Crude oil and finished product exchange transactions, which are of
a homogeneous nature of commodities in the same line of business, that do not
involve the payment or receipt of cash, are not accounted for as purchases and
sales. Any resulting volumetric exchange balances are accounted for as
inventory in accordance with the normal LIFO valuation policy. Exchanges that
are settled through payment and receipt of cash are accounted for as purchases
and sales.
Income Taxes--Deferred taxes result from temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes
and are calculated, effective in 1992 with the adoption of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes",
based upon cumulative book/tax differences in the balance sheet.
3. FORMATION OF LYONDELL-CITGO REFINING COMPANY LTD.
On July 1, 1993, the Company and CITGO announced the commencement of
operations of LCR, a new entity formed and owned by the Company and CITGO in
order to own and operate the Company's refining business, including the full-
conversion Houston 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.
LCR is a limited liability company organized under the laws of the state of
Texas. The Company owns its interest in LCR through a wholly-owned subsidiary,
Lyondell Refining Company. CITGO holds its interest through CITGO Refining
Investment Company, a wholly-owned subsidiary of CITGO. CITGO has committed to
reinvest its share of operating cash flow during the upgrade project, while the
Company has unrestricted access to its share of operating cash flow from LCR.
Under the terms of the transaction, CITGO will provide a major portion of the
funds for the upgrade project, as well as certain funds for general refinery
capital projects. Project engineering for the upgrade is currently underway and
at the present time, LCR management anticipates the cost over the next three to
four years to be approximately $800 million.
F-7
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Funding for the upgrade project will occur in three phases. The first phase,
the initial $300 million, will be funded by CITGO. The second phase will be
funded by an LCR borrowing of $200 million. The third phase, which is expected
to occur toward the end of the upgrade project, will be a combination of LCR
borrowing and contributions from CITGO and the Company. Prior to completion of
the upgrade project, the financing costs for the upgrade project loans will be
funded by CITGO. The timing of the third phase and the level of contributions
from the Company and CITGO will be dependent upon the total cost of the upgrade
project. It is currently anticipated that the Company will contribute, in the
form of a subordinated loan, 25 percent of the cost of the upgrade project in
excess of $500 million ($75 million if the cost of the upgrade project equals
$800 million).
On July 1, 1993, the Company contributed its refining assets (including the
lube oil blending and packaging plant in Birmingport, Alabama) and refining
working capital to LCR and retained an approximate 95 percent interest in LCR.
CITGO contributed $50 million for future capital projects of LCR and in
exchange received an approximate five percent interest in LCR. CITGO also made
an additional $50 million contribution for future capital projects of LCR on
December 31, 1993. At December 31, 1993, CITGO had an approximate 10 percent
interest in LCR. In addition to the funding related to the upgrade project
described in the prior paragraph, CITGO has one additional contribution
commitment of $30 million to be made upon completion of the upgrade project and
it has an option to make an additional equity contribution sufficient to
increase its interest to 50 percent.
On July 1, 1993, LCR entered into a long-term crude oil supply agreement with
LAGOVEN, S.A., an affiliate of CITGO. In addition, under the terms of a long-
term product sales agreement, CITGO will purchase a majority 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.
Also effective July 1, 1993, the parties entered into multiple agreements for
feedstock and product sales between LCR and the Company. These agreements
generally are aimed at preserving much of the synergy that previously existed
between the Company's refining and petrochemical businesses. LCR and the
Company also have entered into a tolling agreement, pursuant to which alkylate
and MTBE will be produced at the Channelview Complex for LCR, and various
administrative services agreements.
With respect to liabilities associated with LCR, the Company generally has
retained liability for events that occurred prior to July 1, 1993 and certain
on-going environmental projects at the Refinery. LCR generally is responsible
for liabilities associated with events occurring after June 30, 1993 and on-
going environmental compliance inherent to the operation of the Refinery.
At December 31, 1993, $73 million of cash and $6 million of 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. ACCOUNTING CHANGES
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
F-8
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
resulted in a benefit of $33 million ($22 million or $.27 per share after
income taxes), and was included in first quarter income. The change resulted in
$9 million after-tax (or $.11 per share) of additional amortization expenses
during the year ended December 31, 1993.
In the fourth quarter of 1992, the Company adopted, effective January 1,
1992, the provisions of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", requiring the accrual of postretirement
benefits. The applicable postretirement benefits include medical and life
benefit plans. In prior years, expenses for these plans were recognized on a
pay-as-you-go basis. The change resulted in a decrease of 1992 net income
before cumulative effect of accounting changes of approximately $3 million (or
$.04 per share). The unfavorable effect of this accounting change through
December 31, 1991 amounted to $28 million before taxes or $18 million (or $.22
per share) net of tax and was charged against 1992 income.
In the fourth quarter of 1992, the Company adopted, effective January 1,
1992, the provisions of SFAS No. 109, "Accounting for Income Taxes". The
Statement requires, among other things, a change from the deferred to the
liability method of computing deferred income taxes. The favorable cumulative
effect of this accounting change on years prior to 1992 was an $8 million (or
$.10 per share) reduction in the Company's deferred tax liability and was
included in 1992 income. The favorable effect of the change on 1992 net income,
excluding the cumulative effect upon adoption, was $2 million (or $.02 per
share).
Effective January 1, 1992, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits". The standard requires companies to
accrue the cost of postemployment (prior to retirement) benefits either during
the years that the employee renders the necessary service or at the date of the
event giving rise to the benefit, depending upon whether certain conditions are
met. The effect of adoption did not have a material impact on 1992 net income.
5. RELATED PARTY TRANSACTIONS
Related party transactions with ARCO are summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
MILLIONS OF
DOLLARS
<S> <C> <C> <C>
Costs
Crude oil purchases..................................... $53 $140 $299
Product purchases....................................... 3 9 13
Transportation fees..................................... 27 24 24
Other, net.............................................. 2 2 2
--- ---- ----
Total................................................. $85 $175 $338
=== ==== ====
Sales of crude oil and products........................... $15 $ 33 $171
=== ==== ====
</TABLE>
In addition, sales to an affiliate, ARCO Chemical Company, consisting of
benzene, ethylene, propylene, butylene, methanol and other products and
services, were $263 million, $296 million and $355 million for the years ended
December 31, 1993, 1992 and 1991, respectively.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
MILLIONS OF
DOLLARS
<S> <C> <C> <C>
Cash paid during the year for:
Interest................................................. $76 $77 $72
Income taxes............................................. $ 7 $23 $98
</TABLE>
F-9
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1993, fixed assets included $16 million of non-cash
additions of which $14 million related to accounts payable accruals.
7. INVENTORIES
The categories of inventory and their book values at December 31, 1993 and
1992, were as follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
MILLIONS
OF
DOLLARS
<S> <C> <C>
Crude oil....................................................... $ 68 $ 51
Refined products................................................ 29 26
Petrochemicals.................................................. 57 68
Materials and supplies.......................................... 37 35
---- ----
$191 $180
==== ====
</TABLE>
For the years ended December 31, 1993, 1992 and 1991, the Company reduced
cost of sales by approximately $6 million, $1 million and $6 million,
respectively, associated with the reduction in LIFO inventories. The excess of
the current cost of inventories over book value was approximately $56 million
and $135 million at December 31, 1993 and 1992, respectively.
8. FIXED ASSETS
The components of fixed assets at December 31, 1993 and 1992, were as
follows:
<TABLE>
<CAPTION>
1993 1992
------ ------
MILLIONS OF
DOLLARS
<S> <C> <C>
Manufacturing facilities and equipment..................... $2,516 $2,441
Land....................................................... 26 26
Leased assets and improvements............................. 3 3
------ ------
$2,545 $2,470
====== ======
</TABLE>
9. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets at December 31, 1993 and 1992, was
comprised of the following:
<TABLE>
<CAPTION>
1993 1992
---- ----
MILLIONS
OF
DOLLARS
<S> <C> <C>
Deferred turnaround costs (Note 4).............................. $18 $--
Company owned life insurance.................................... 17 12
Other........................................................... 18 12
--- ---
$53 $24
=== ===
</TABLE>
F-10
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1993 and 1992, were as follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
MILLIONS
OF
DOLLARS
<S> <C> <C>
Income taxes.................................................... $-- $ 5
Accrued taxes other than income................................. 29 26
Accrued interest................................................ 11 11
Accrued payroll................................................. 20 19
Other........................................................... 20 12
--- ---
$80 $73
=== ===
</TABLE>
11. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt at December 31, 1993 and 1992, was comprised of the following:
<TABLE>
<CAPTION>
1993 1992
---- ----
MILLIONS
OF
DOLLARS
<S> <C> <C>
9.95% Notes due in 1996......................................... $150 $150
10.00% Notes due in 1999........................................ 150 150
8.25% Notes due in 1997......................................... 100 100
9.125% Notes due in 2002........................................ 100 100
Medium-Term Notes............................................... 225 254
---- ----
725 754
Less current portion............................................ 8 29
---- ----
Total long-term debt.......................................... $717 $725
==== ====
</TABLE>
Aggregate maturities of long-term debt during the five years subsequent to
December 31, 1993 are as follows: 1994-$8 million; 1995-$10 million; 1996-$150
million; 1997-$112 million; 1998-$32 million.
Effective July 1, 1993, LCR entered into a 364 day unsecured revolving credit
facility with a group of banks with Continental Bank, N.A., as agent. Under
terms of the credit facility, LCR may borrow a maximum of $100 million in the
form of cash or letters of credit with interest based on prime, LIBOR or CD
rates at LCR's option. The credit facility may be extended at the request of
LCR upon consent of the bank group. The credit facility contains covenants that
limit LCR's ability to modify certain significant contracts, dispose of assets
or merge or consolidate with other entities. At December 31, 1993, no amounts
were outstanding under this credit facility.
During December, 1993, the Company finalized a five year, $400 million
unsecured revolving credit facility (Credit Facility) which replaced its
existing $300 million credit facility which was due to expire in July, 1994. In
connection with the Credit Facility, the Company paid administrative,
arrangement and commitment fees totaling $3.2 million. At December 31, 1993, no
amounts were outstanding under the Credit Facility.
Under the terms of the Credit Facility, the interest rate is based on Euro-
Dollar or CD rates, at the Company's option, and also is dependent upon the
Credit Facility utilization rate and the Company's debt ratings. The Credit
Facility contains restrictive covenants regarding the incurrence of additional
debt, the maintenance of certain fixed charge coverage and leverage ratios and
the making of
F-11
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contributions to LCR, as well as the payment of dividends to the extent that
the Company's net income after January 1, 1994 generally does not exceed, over
time, dividends declared or paid after that date.
The Credit Facility's debt incurrence covenant restricts the incurrence by
the Company of additional debt, including debt under the Credit Facility,
unless, immediately after giving effect to the additional borrowing, the ratio
of earnings before depreciation, amortization, interest and income taxes, to
interest expense exceeds the limits set forth in the Credit Facility. However,
the debt incurrence covenant does not become applicable until the debt incurred
by the Company after December 31, 1993 exceeds $75 million.
During March, 1992, the Company completed the placement of $200 million of
Notes consisting of $100 million of 8.25 percent Notes due 1997 and $100
million of 9.125 percent Notes due 2002. A majority of the proceeds was used in
April, 1992 to prepay amounts due under capitalized leases relating to the
olefins plants, which allowed the Company to terminate the leases and acquire
ownership of the plants.
The Company's Medium-Term Notes mature at various dates from 1994 to 2005 and
have a weighted average interest rate at December 31, 1993 and 1992 of 9.85
percent.
The Notes due 1996 and 1999, and the Medium-Term Notes contain provisions
that would allow the holders to require the Company to repurchase the debt upon
the occurrence of certain events together with specified declines in public
ratings on the Notes due 1996 and 1999. Certain events include acquisitions by
persons other than ARCO or the Company of more than 20 percent of the Company's
common stock, any merger or transfer of substantially all of the Company's
assets, in connection with which the Company's common stock is changed into or
exchanged for cash, securities or other property and payment of certain
"special" dividends.
At December 31, 1993, the Company had letters of credit outstanding totaling
$33.8 million.
Based on the borrowing rates currently available to the Company for debt with
terms and average maturities similar to the Company's debt portfolio, the fair
value of long-term debt is $776 million.
12. EARNINGS PER SHARE
Earnings per share were computed based on the weighted average number of
shares outstanding of 80,000,000 for the years ended December 31, 1993, 1992
and 1991.
13. STOCKHOLDERS' EQUITY (DEFICIT)
Dividends--During 1993, the Company paid a regular dividend to stockholders
in the amount of $.45 per share during the first and second quarters and a
regular dividend to stockholders in the amount of $.225 per share during each
of the remaining two quarters. During 1992, the Company paid regular quarterly
dividends of $.45 per share. During 1991, the Company paid a regular dividend
to stockholders in the amount of $.40 per share during the first quarter and
$.45 per share during each of the remaining three quarters.
Return of Capital--During 1993, the Company paid $108 million in dividends.
Total dividends paid during the year exceeded cumulative earnings and profits,
as computed for federal income tax purposes. Subject to final determination by
the Internal Revenue Service, 100 percent of each of the 1993 quarterly
dividend payments was considered a return of capital.
Stock Options--The Company's Executive Long-Term Incentive Plan (LTI Plan),
became effective November 7, 1988. The LTI Plan provides, among other things,
for the granting to officers and other
F-12
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
key management employees of non-qualified stock options for the purchase of up
to 1,295,000 shares of the Company's common stock. The number of options
exercisable each year is equal to 25 percent of the number granted after each
year of continuous service starting one year from the date of grant. The LTI
Plan provides that the option price per share will not be less than 100 percent
of the fair market value of the stock on the effective date of the grant. As of
December 31, 1993, options covering 761,732 shares were outstanding under the
LTI Plan of which 283,056 were exercisable at a weighted average price of
$22.10 per share.
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF AVERAGE
SHARES PER SHARE TOTAL
------- ------------ -----------
<S> <C> <C> <C>
Balance, December 31, 1991............. 373,560 $21.42 $ 8,002,196
Granted.............................. 222,290 23.00 5,112,670
Exercised............................ (12,115) 18.67 (226,205)
Canceled............................. (7,433) 22.84 (169,768)
------- -----------
Balance, December 31, 1992............. 576,302 22.07 $12,718,893
------- -----------
Granted.............................. 259,490 26.00 6,746,740
Exercised............................ (1,808) 21.01 (37,984)
Canceled............................. (72,252) 22.29 (1,610,782)
------- -----------
Balance, December 31, 1993............. 761,732 23.39 $17,816,867
======= ===========
</TABLE>
The Company's Incentive Stock Option Plan (ISO Plan) became effective January
12, 1989. The ISO Plan is a qualified plan which provides for the granting of
stock options for the purchase of up to 550,000 shares of the Company's common
stock. All employees of the Company who are not on the executive payroll are
eligible to participate in the ISO Plan, subject to certain restrictions.
Various restrictions apply as to when and to the number of stock options that
may be exercised during any year. In no event, however, may a stock option be
exercised prior to the first anniversary of the date the stock option was
granted. As of December 31, 1993, options covering 476,665 shares were
outstanding at an average exercise price of $29.35 per share. These options
were held by 2,053 eligible employees. At December 31, 1993, no stock options
were exercisable. The following summarizes stock option activity for the ISO
Plan:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF AVERAGE
SHARES PER SHARE TOTAL
------- ------------ -----------
<S> <C> <C> <C>
Balance, December 31, 1991............. 528,614 $29.06 $15,362,755
Granted.............................. 8,729 30.00 261,870
Exercised............................ (5,614) 19.44 (109,136)
Canceled............................. (27,710) 26.80 (742,649)
------- -----------
Balance, December 31, 1992............. 504,019 29.31 $14,772,840
------- -----------
Granted.............................. -- -- --
Exercised............................ -- -- --
Canceled............................. (27,354) 28.59 (782,034)
------- -----------
Balance, December 31, 1993............. 476,665 29.35 $13,990,806
======= ===========
</TABLE>
F-13
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. LEASES
At December 31, 1993, future minimum rental payments for operating leases
with noncancelable lease terms in excess of one year were as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------------
MILLIONS OF DOLLARS
<S> <C>
1994.................................................. $ 36
1995.................................................. 30
1996.................................................. 22
1997.................................................. 20
1998.................................................. 19
Thereafter............................................ 17
----
Total minimum lease payments........................ $144
====
</TABLE>
Operating lease net rental expenses for 1993, 1992 and 1991 were $43 million,
$35 million and $33 million, respectively.
15. RETIREMENT PLANS
All Lyondell and LCR employees are covered by defined benefit pension plans.
Retirement benefits are based on years of service and the employee's
compensation primarily during the last three years of service. The funding
policy for these plans is to make periodic contributions as required by
applicable regulations. Lyondell and LCR accrue pension costs based on an
actuarial valuation and fund the plans through contributions to separate trust
funds that are kept apart from Lyondell or LCR's funds. Lyondell and LCR also
have unfunded supplemental nonqualified retirement plans which provide pension
benefits for certain employees in excess of the qualified plans' limits.
The following table sets forth the funded status of Lyondell and LCR's
retirement plans and the amounts recognized in the Company's consolidated
balance sheet at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
--------------------- ---------------------
PLANS WITH PLANS WITH PLANS WITH PLANS WITH
ASETS IN ABO IN ASSETS IN ABO IN
EXCESS OF EXCESS OF EXCESS OF EXCESS OF
ABO ASSETS ABO ASSETS
---------- ---------- ---------- ----------
MILLIONS OF DOLLARS
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation........ $53 $21 $46 $ 2
=== === === ===
Accumulated benefit obligation
(ABO)........................... $54 $25 $49 $ 2
=== === === ===
Projected benefit obligation..... $84 $42 $78 $ 4
Plan assets at fair value,
primarily stocks and bonds........ 62 18 69 --
--- --- --- ---
Projected benefit obligation in
excess of plan assets............. (22) (24) (9) (4)
Unrecognized net loss.............. 22 14 10 1
Prior service cost not yet
recognized in pension cost........ (2) 3 (1) --
Remaining unrecognized net asset... (4) -- (5) 1
--- --- --- ---
Net pension liability.............. $(6) $(7) $(5) $(2)
=== === === ===
</TABLE>
F-14
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's net pension cost for 1993, 1992 and 1991 included the following
components:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
MILLIONS OF
DOLLARS
<S> <C> <C> <C>
Service cost--benefits earned during the period......... $ 5 $ 4 $ 4
Interest cost on projected benefit obligations.......... 8 6 5
Actual (gain) loss on plan assets....................... (14) (4) (10)
Net amortization and deferral........................... 7 (2) 5
---- --- ----
Net periodic pension cost............................... $ 6 $ 4 $ 4
==== === ====
</TABLE>
The assumptions used as of December 31, 1993, 1992 and 1991, in determining
the pension costs and pension liability shown above were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
PERCENT
<S> <C> <C> <C>
Discount rate.............................................. 7.25 8.75 8.95
Rate of salary progression................................. 5.00 5.00 5.00
Long-term rate of return on assets......................... 9.50 9.50 9.50
</TABLE>
Lyondell and LCR also maintain voluntary defined contribution Capital
Accumulation and Savings plans for eligible employees. Under provisions of the
plans, Lyondell and LCR contribute an amount equal to 150 percent of employee
contributions up to a maximum Lyondell or LCR contribution of 6 percent of the
employee's base salary for the Capital Accumulation plans and 200 percent of
employee contributions up to a maximum Lyondell or LCR contribution of 2
percent of the employee's base salary for the Savings plans. Lyondell and LCR
contributions to these plans totaled $8 million in 1993, $7 million in 1992 and
$7 million in 1991.
16. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Lyondell and LCR sponsor unfunded defined benefit postretirement plans other
than pensions that cover both salaried and non-salaried employees which provide
medical and life insurance benefits. The postretirement health care plans are
contributory while the life insurance plans are non-contributory. Currently,
Lyondell and LCR pay approximately 80 percent of the cost of the health care
plans, but reserve the right to modify the cost-sharing provisions at any time.
The following table sets forth the plans' separate postretirement benefit
liabilities as of December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
------------ ------------
MEDICAL LIFE MEDICAL LIFE
------- ---- ------- ----
MILLIONS OF DOLLARS
<S> <C> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees..................................... $ (2) $(1) $ (2)
Fully eligible active plan participants...... (5) (1) (3) $(1)
Other active plan participants............... (37) (6) (23) (4)
---- --- ---- ---
(44) (8) (28) (5)
Unrecognized net loss.......................... 12 2 -- --
---- --- ---- ---
Accrued postretirement benefit liability....... $(32) $(6) $(28) $(5)
==== === ==== ===
</TABLE>
F-15
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net periodic postretirement benefit costs for 1993 and 1992 included the
following components:
<TABLE>
<CAPTION>
1993 1992
------------ ------------
MEDICAL LIFE MEDICAL LIFE
------- ---- ------- ----
MILLIONS OF DOLLARS
<S> <C> <C> <C> <C>
Service cost--benefits attributed to service dur-
ing the period.................................. $ 2 $ 2
Interest cost on accumulated postretirement bene-
fit obligation.................................. 3 $ 1 2 $ 1
--- --- --- ---
Net periodic postretirement benefit cost......... $ 5 $ 1 $ 4 $ 1
=== === === ===
</TABLE>
For measurement purposes, the assumed annual rate of increase in the per
capita cost of covered health care benefits was 13 percent for 1993-1996, 9
percent for 1997-2001, and 6 percent thereafter. The health care cost trend
rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit liability as of December 31, 1993 by $10 million and the net periodic
postretirement benefit cost for the year then ended by $1 million.
The accumulated postretirement benefit obligation was calculated utilizing a
weighted-average discount rate of 7.25 percent and 8.75 percent at December 31,
1993 and 1992, respectively, and an average rate of salary progression of 5
percent in each year. Lyondell and LCR's current policy is to fund the
postretirement health care and life insurance plans on a pay-as-you-go basis.
17. INCOME TAXES
Effective January 1, 1992, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by SFAS
No. 109, "Accounting for Income Taxes" (see Note 4). As permitted under the new
standard, prior years' financial statements have not been restated.
During 1993, the Company increased its provision for deferred income taxes by
$3 million due to an increase in the federal corporate income tax rate from 34
percent to 35 percent effective January 1, 1993. Significant components of the
Company's provision for income taxes attributable to continuing operations
follows:
<TABLE>
<CAPTION>
LIABILITY DEFERRED
METHOD METHOD
--------- --------
1993 1992 1991
---- ---- --------
MILLIONS OF
DOLLARS
<S> <C> <C> <C>
Current
Federal.............................................. $ 5 $ 6 $ 89
State................................................ -- 1 10
--- --- ----
Total current...................................... 5 7 99
Deferred
Federal.............................................. 2 4 17
State................................................ 5 (2) 1
--- --- ----
Total deferred..................................... 7 2 18
--- --- ----
$12 $ 9 $117
=== === ====
</TABLE>
F-16
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to the change in accounting methods, the components of the Company's
provision for deferred income taxes for the year ended December 31, 1991 were
as follows (millions of dollars):
<TABLE>
<S> <C>
Depreciation and amortization........................................ $19
Other................................................................ (1)
---
$18
===
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets as of December 31, 1993
and 1992 are as follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
MILLIONS
OF
DOLLARS
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation...................................... $126 $106
Change in accounting method for turnarounds..................... 6 --
LIFO inventory.................................................. 8 3
---- ----
Total deferred tax liabilities................................ 140 109
---- ----
Deferred tax assets:
OPEB obligation................................................. 13 12
Environmental and other long-term liabilities................... 12 10
Alternative minimum tax credit receivable....................... 7 2
Other........................................................... 11 6
---- ----
Total deferred tax assets..................................... 43 30
---- ----
Net deferred tax liabilities................................ $ 97 $ 79
==== ====
</TABLE>
Pretax income from continuing operations for the years ended December 31,
1993, 1992 and 1991 was taxed under domestic jurisdictions only.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to the Company's effective tax
rates follows:
<TABLE>
<CAPTION>
LIABILITY DEFERRED
METHOD METHOD
---------- ---------
DESCRIPTION 1993 1992 1991
----------- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. statutory income tax rates................... 35.0% 34.0% 34.0%
State income taxes, net of federal................ 19.3 (1.5) 2.3
Company owned life insurance...................... 3.8 (2.1) --
Deferred tax liability rate change................ 15.6 -- --
Other, net........................................ (0.6) (3.1) (1.7)
---- ---- ----
Effective income tax rate....................... 73.1% 27.3% 34.6%
==== ==== ====
</TABLE>
18. 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.
F-17
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 Water Commission, now the Texas Natural
Resource Conservation Commission (TNRCC), 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.
F-18
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. SEGMENT INFORMATION
As discussed in Note 3, the refining operations of the Company were
contributed to LCR effective July 1, 1993. Prior to 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 is primarily composed of the LCR venture (see Note 3)
and 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 consist of revenues from the resale of previously
purchased crude oil and from locational exchanges of crude oil that are settled
on a cash basis. Crude oil exchanges and resales facilitate the operation of
the Company's petroleum processing business by allowing the Company to optimize
the crude oil feedstock mix in response to market conditions and refinery
maintenance turnarounds and also to reduce transportation costs. Crude oil
resales amounted to $401 million, $893 million and $1,308 million for years
ended December 31, 1993, 1992 and 1991, respectively.
Consolidated sales to CITGO totaled $864 million in 1993, $282 million in
1992 and $181 million in 1991. No other customer accounted for 10 percent or
more of consolidated sales.
F-19
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 formation of LCR.
These adjustments relate principally to allocations of costs and expenses
between the two segments and are based on current operating agreements between
the Company and LCR. Intersegment sales between petrochemical and refining
segments include olefins feedstocks produced at the Refinery and gasoline and
fuel oil blending stocks produced at the Channelview Complex and were made at
prices based on current market values.
<TABLE>
<CAPTION>
PETROCHEMICAL REFINING
SEGMENT SEGMENT UNALLOCATED ELIMINATIONS CONSOLIDATED
------------- -------- ----------- ------------ ------------
MILLIONS OF DOLLARS
<S> <C> <C> <C> <C> <C>
1993
Sales and other
operating revenues:
Customers............. $1,326 $2,524 $3,850
Intersegment.......... 180 237 $(417) --
------ ------ ----- ------
1,506 2,761 (417) 3,850
------ ------ ----- ------
Cost of sales........... 1,412 2,632 (417) 3,627
Selling, general and
administrative
expenses............... 37 48 $ 45 -- 130
------ ------ ---- ----- ------
Operating income........ $ 57 $ 81 $(45) $ -- $ 93
====== ====== ==== ===== ======
Depreciation and
amortization expense... $ 44 $ 13 $ 1 $ 58
====== ====== ==== ======
Capital expenditures.... $ 14 $ 54 $ 1 $ 69
====== ====== ==== ======
Identifiable assets..... $ 688 $ 514 $ 68 $ (39) $1,231
====== ====== ==== ===== ======
1992
Sales and other
operating revenues:
Customers............. $1,409 $3,400 $4,809
Intersegment.......... 266 334 $(600) --
------ ------ ----- ------
1,675 3,734 (600) 4,809
------ ------ ----- ------
Cost of sales........... 1,536 3,642 (600) 4,578
Selling, general and
administrative
expenses............... 37 43 $ 47 -- 127
------ ------ ---- ----- ------
Operating income........ $ 102 $ 49 $(47) $ -- $ 104
====== ====== ==== ===== ======
Depreciation and
amortization expense... $ 33 $ 5 $ 1 $ 39
====== ====== ==== ======
Capital expenditures.... $ 43 $ 53 $ 1 $ 97
====== ====== ==== ======
Identifiable assets..... $ 716 $ 346 $153 $1,215
====== ====== ==== ======
1991
Sales and other
operating revenues:
Customers............. $1,666 $4,069 $5,735
Intersegment.......... 293 455 $(748) --
------ ------ ----- ------
1,959 4,524 (748) 5,735
------ ------ ----- ------
Cost of sales........... 1,711 4,247 (748) 5,210
Selling, general and
administrative
expenses............... 35 42 $ 49 -- 126
------ ------ ---- ----- ------
Operating income........ $ 213 $ 235 $(49) $ -- $ 399
====== ====== ==== ===== ======
Depreciation and
amortization expense... $ 34 $ 4 $ 1 $ 39
====== ====== ==== ======
Capital expenditures.... $ 21 $ 21 $ 1 $ 43
====== ====== ==== ======
Identifiable assets..... $ 754 $ 390 $335 $1,479
====== ====== ==== ======
</TABLE>
F-20
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. UNAUDITED QUARTERLY RESULTS
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------
JUNE
MARCH 31 30 SEPTEMBER 30 DECEMBER 31
-------- ------ ------------ -----------
MILLIONS OF DOLLARS EXCEPT PER SHARE
AMOUNTS
<S> <C> <C> <C> <C>
1993(*)
- -------
Sales and other operating revenues. $1,065 $1,080 $ 885 $ 820
Operating income................... 7 5 38 43
Income (loss) before income taxes
and cumulative effect of
accounting changes................ (10) (14) 18 22
Income (loss) before cumulative
effect of accounting changes...... (8) (11) 9 14
Cumulative effect of accounting
changes, net of tax............... 22 -- -- --
Net income (loss).................. 14 (11) 9 14
Earnings (loss) per share before
cumulative effect of accounting
changes........................... (.09) (.14) .12 .17
Earnings (loss) per share.......... .18 (.14) .12 .17
1992(*)
- -------
Sales and other operating revenues. $1,029 $1,221 $1,336 $1,223
Operating income (loss)............ (5) 33 33 43
Income (loss) before income taxes
and cumulative effect of
accounting changes................ (22) 15 17 25
Income (loss) before cumulative
effect of accounting changes...... (14) 10 12 18
Cumulative effect of accounting
changes, net of tax............... (10) -- -- --
Net income (loss).................. (24) 10 12 18
Earnings (loss) per share before
cumulative effect of accounting
changes........................... (.17) .13 .15 .22
Earnings (loss) per share.......... (.29) .13 .15 .22
</TABLE>
- --------
(*) The 1992 quarterly results have been restated to reflect the adoption
during the fourth quarter of 1992, of accounting changes which were
effective January 1, 1992. In addition, the first two quarters of 1993 and
all four quarters of 1992 include certain pro forma adjustments necessary
to present the petrochemical and refining operations as individual segments
for periods prior to the formation of LCR effective July 1, 1993.
F-21
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Stockholders and Board of Directors
of Lyondell Petrochemical Company
We have reviewed the accompanying condensed consolidated balance sheet of
Lyondell Petrochemical Company as of March 31, 1994, and the related condensed
consolidated statements of income and cash flows for the three month periods
ended March 31, 1994 and 1993. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1993, and the
related consolidated statements of income and accumulated deficit, and cash
flows for the year then ended; and in our report dated February 11,1994, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1993, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
Coopers & Lybrand
Houston, Texas
April 25, 1994
F-22
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED MARCH
31,
-------------------
1994 1993
-------- ---------
MILLIONS OF
DOLLARS EXCEPT
PER SHARE AMOUNTS
<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............................................... $ .27 $ (.09)
Cumulative effect on prior years of accounting changes. -- .27
-------- ---------
Net income............................................. $ .27 $ .18
======== =========
</TABLE>
See notes to consolidated financial statements--unaudited.
F-23
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
--------- ------------
ASSETS
------ MILLIONS OF DOLLARS
<S> <C> <C>
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
====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
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 autho-
rized, 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--unaudited.
F-24
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
THREE
MONTHS
ENDED
MARCH 31,
----------
1994 1993
---- ----
MILLIONS
OF
DOLLARS
<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--unaudited.
F-25
<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 $.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.)
F-26
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED--(CONTINUED)
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.
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>
1994 1993
---- ----
MILLIONS
OF
DOLLARS
<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
F-27
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED--(CONTINUED)
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 $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.
F-28
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED--(CONTINUED)
9. SEGMENT INFORMATION
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,
----------------
1994 1993
------- --------
(MILLIONS OF
DOLLARS)
<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 purchases................................ (95) (139)
------ --------
$ 736 $ 1,029
====== ========
Selling, general and administrative expense:
Petrochemical segment................................. $ 10 $ 9
Refining segment...................................... 13 10
Unallocated........................................... 11 10
------ --------
$ 34 $ 29
====== ========
Operating income:
Petrochemical segment................................. $ 39 $ 12
Refining segment...................................... 26 5
Unallocated........................................... (11) (10)
------ --------
$ 54 $ 7
====== ========
</TABLE>
F-29
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED--(CONTINUED)
Summarized below are intersegment sales for the two segments.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1994 1993
------- --------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Petrochemical segment.................................... $ 44 $ 66
Refining segment......................................... 51 73
------- --------
$95 $139
======= ========
</TABLE>
F-30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN SO AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UN-
LAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary........................................................ 3
Certain Investment Considerations......................................... 6
Price Range of Common Stock and Dividends................................. 11
Capitalization............................................................ 12
Selected Financial Data................................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 14
Financial Matters......................................................... 23
The Company............................................................... 26
Management................................................................ 43
Relationship with ARCO.................................................... 48
Security Ownership by ARCO................................................ 53
Description of Capital Stock.............................................. 54
Certain United States Federal Tax Consequences for Non-United States
Holders of Common Stock.................................................. 55
Plan of Distribution...................................................... 57
Certain Legal Matters..................................................... 59
Experts................................................................... 59
Financial Information..................................................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
35,000,000 SHARES
LOGO
COMMON STOCK
(PAR VALUE $1.00 PER SHARE)
------------------------
PROSPECTUS
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of estimated expenses incurred in connection
with the Common Stock being registered hereby, other than underwriting
discounts and commissions.
<TABLE>
<S> <C>
SEC Registration Fee..................................................... $100+
National Association of Securities Dealers, Inc. Filing Fee.............. -0-+
Printing and Engraving Expenses.......................................... *
Legal Fees and Expenses.................................................. *
Accounting Fees and Expenses............................................. *
Transfer Agent and Registrar Fees and Expenses........................... *
Blue Sky Fees and Expenses (including legal fees)........................ *
Miscellaneous............................................................ *
----
Total.................................................................. $ *
====
</TABLE>
- --------
+ Since the shares of Common Stock being offered hereby are deliverable only
upon exchange at the maturity of the Exchangeable Notes of ARCO and no
separate consideration will be received for the Common Stock, no additional
registration fee is required as provided in Rule 457.
* To be filed by amendment.
ARCO will pay all of the foregoing expenses.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's By-Laws provide that the Company will indemnify each of its
officers and directors to the fullest extent authorized by Section 145 of the
General Corporation Law of the State of Delaware. Section 25 of the By-Laws
reads as follows:
(a) Right to Indemnification. Each person who was or is a party or is
threatened to be made a party to or is involved or is threatened to be
involved (as a witness or otherwise) in or otherwise requires
representation by counsel in connection with any threatened, pending or
completed action, suit or proceeding, or any inquiry that such person in
good faith believes might lead to the institution of any such action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or
was a director or officer of the Company or is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, and the basis of
such proceeding is alleged action or inaction in an official capacity or in
any other capacity while serving as such a director, officer, employee or
agent, shall be indemnified and held harmless by the Company to the fullest
extent authorized by the General Corporation Law of Delaware, as the same
exists or may hereafter be amended (but, in the case of any such amendment
with reference to events occurring prior to the effective date thereof,
only to the extent that such amendment permits the Company to provide
broader indemnification rights than such law permitted the Company to
provide prior to such amendment), against all costs, charges, expenses,
liabilities and losses (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid in settlement) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a
director of officer (or to serve another entity at the request of the
Company) and shall inure to the benefit of such person's heirs, personal
representatives and estate; provided, however, that, except as provided in
paragraph (b) hereof, the Company shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated
by such person against the Company only if such proceeding (or part
thereof) was authorized prior to its
II-1
<PAGE>
initiation by a majority of the disinterested members of the Board of
Directors of the Company. The rights to indemnification conferred in this
Section shall include the right to be paid by the Company any expenses
incurred in defending any such proceeding in advance of its final
disposition; provided however, that, if the General Corporation Law of
Delaware requires, payment shall be made to or on behalf of a person only
upon delivery to the Company of an undertaking, by or on behalf of such
person, to repay all amounts so advanced if it shall ultimately be
determined that such person is not entitled to be indemnified under this
Section or otherwise. The rights to indemnification conferred in this
Section shall be deemed to be a contract between the Company and each
person who serves in the capacities described above at any time while this
Section is in effect. Any repeal or modification of this Section shall not
in any way diminish any rights to indemnification of such person or the
obligations of the Company arising hereunder.
(b) Right of Claimant to Appeal and to Bring Suit. If a claim under
paragraph (a) of this Section is not paid in full by the Company within
sixty days after a written claim has been received by the Company, the
claimant may at any time thereafter bring suit against the Company to
recover the unpaid amount of the claim. If successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting
or defending such claim. In any action brought by the claimant to enforce a
right to indemnification hereunder or by the Company to recover payments by
the Company for expenses incurred by a claimant in a proceeding in advance
of its final disposition, the burden of proving that the claimant is not
entitled to be indemnified under this Section or otherwise shall be on the
Company. Neither the failure of the Company (including its Board of
Directors or its independent legal counsel) to have made a determination
prior to the commencement of such action that indemnification of the
claimant is proper in the circumstances because the claimant has met the
applicable standard of conduct set forth in the General Corporation Law of
Delaware, nor an actual determination by the Company (including its Board
of Directors or its independent legal counsel) that the claimant has not
met such applicable standard of conduct, shall create a presumption that
the claimant has not met the applicable standard of conduct or, in the case
of such a action brought by the claimant, be a defense to the action.
(c) Non-Exclusivity of Rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Section shall not be exclusive of any
other right which any person may have or hereafter acquire under any
statute, the Company's Certificate of Incorporation, any By-Law, any
agreement, a vote of Company stockholders or of disinterested Company
directors or otherwise, both as to action in that person's official
capacity and as to action in any other capacity by holding such office, and
shall continue after the person ceases to serve the Company as a director
of officer or to serve another entity at the request of the Company.
(d) Insurance. The Company may maintain insurance, at its expense, to
protect itself and any director or officer of the Company or another
corporation, partnership, joint venture, trust or other enterprise against
any expense, liability or loss, whether or not the Company would have the
power to indemnify such person against such expense, liability or loss
under the General Corporation Law of Delaware.
(e) Indemnity Agreements. The Company may from time to time enter into
indemnity agreements with the persons who are members of its Board of
Directors, its elected officers and with such other persons as the Board
may designate, such indemnity agreements to provide in substance that the
Company will indemnify such persons to the fullest extent of the provisions
of this Section 25.
(f) Indemnification of Employees and Agents of the Company. The Company
may, under procedures authorized from time to time by the Board of
Directors, grant rights to indemnification, and to be paid by the Company
the expenses incurred in defending any proceeding in advance of its final
disposition to any employee or agent of the Company to the fullest extent
of the provisions of this Section 25.
Section 145 of the General Corporation Law of the State of Delaware provides:
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed
action, suit or proceeding, whether civil, criminal,
II-2
<PAGE>
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorney's fees), judgments, fines, and amounts
paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believes to be in
or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had reasonable cause to believe that
his conduct was unlawful,
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonable incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of
any action, suit, or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made
(1) by the board of directors by a majority vote of a quorum consisting of
directors who are not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director of officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation has authorized in this section. Such
expenses (including attorneys' fees) incurred by other employees and agents
may be paid upon such terms and conditions, if any, as the board of
directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any by-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to
action in his official capacity and as to action in another capacity while
holding such office.
II-3
<PAGE>
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising
out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers,
and employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is or was
serving at the request of such constituent corporation as director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit
plan; and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
The Company's Certificate of Incorporation limits the personal liability of
directors to the Company and its stockholders for monetary damages resulting
from certain breaches of the directors' fiduciary duties. Article VII of the
Certificate of Incorporation provides as follows:
To the fullest extent permitted by the General Corporation Law of
Delaware as the same exists or may hereafter be amended, a director of the
Company shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director. If the General
Corporation Law of Delaware is amended to authorize corporate action
further eliminating or limiting the personal liability of directors, then
the liability of a director of the Company shall be eliminated or limited
to the fullest extent permitted by the General Corporation Law of Delaware,
as so amended. Any repeal or modification of this Article VII by the
stockholders of the Company shall not adversely affect any right or
protection of a director of the Company existing at the time of such repeal
or modification or with respect to events occurring prior to such time.
Notwithstanding anything contained in this Certificate to the contrary, the
affirmative vote of the holders of not less than 66 2/3 percent of all
votes entitled to be cast by the holders of stock of the Company shall be
required to amend or repeal this Article VII or to adopt any provision
inconsistent herewith.
The Company maintains directors' and officers' liability insurance with a
limit of $100 million. It also has entered into indemnification agreements with
its directors and officers covering certain liabilities excluded from such
insurance.
II-4
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
1.1 --Form of U.S. Underwriting Agreement.*
1.2 --Form of International Underwriting Agreement.**
4 --Specimen certificate. Filed as Exhibit 4 to Registrant's Registration
Statement on Form S-1 (Registration No. 33-25407) and incorporated
herein by reference.
5 --Opinion and consent of Jeffrey R. Pendergraft, Esq.**
10.1 --Form of Registration Rights Agreement between Lyondell Petrochemical
Company and Atlantic Richfield Company.*
10.2 --Employee Services Agreement effective January 1, 1994 between Lyondell
Petrochemical Company and Atlantic Richfield Company.*
10.3 --Investment Management Agreement effective January 1, 1994 between
Lyondell Petrochemical Company and Atlantic Richfield Company.*
15 --Awareness Letter of Coopers & Lybrand.*
23.1 --Consent of Jeffrey R. Pendergraft, Esq. (included as part of Exhibit
5).**
23.2 --Consent of Coopers & Lybrand.*
24 --Powers of Attorney.*
</TABLE>
- --------
* Filed on May 5, 1994.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) that for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) that for purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) that for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED IN THE CITY OF HOUSTON, STATE OF TEXAS, ON MAY 20, 1994.
(Registrant)
Lyondell Petrochemical Company
Bob G. Gower*
By___________________________________
Bob G. Gower
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Mike R. Bowlin*
- ------------------------------------
(Mike R. Bowlin) Chairman of the Board and
Director May 20, 1994
Bob G. Gower*
- ------------------------------------
(Bob G. Gower, Principal Executive President, Chief Executive
Officer) Officer and Director May 20, 1994
William T. Butler*
- ------------------------------------
(William T. Butler) Director May 20, 1994
Allan L. Comstock*
- ------------------------------------
(Allan L. Comstock) Director May 20, 1994
Terry G. Dallas*
- ------------------------------------
(Terry G. Dallas) Director May 20, 1994
Stephen F. Hinchliffe, Jr.*
- ------------------------------------
(Stephen F. Hinchliffe, Jr.) Director May 20, 1994
Dudley C. Mecum II*
- ------------------------------------
(Dudley C. Mecum II) Director May 20, 1994
William C. Rusnack*
- ------------------------------------
(William C. Rusnack) Director May 20, 1994
Dan F. Smith
- ------------------------------------
(Dan F. Smith) Director May 20, 1994
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Paul R. Staley*
- ------------------------------------
(Paul R. Staley) Director May 20, 1994
William E. Wade, Jr.*
- ------------------------------------
(William E. Wade, Jr.) Director May 20, 1994
Russell S. Young*
- ------------------------------------
(Russell S. Young, Principal Senior Vice President, Chief
Financial Officer) Financial Officer and
Treasurer May 20, 1994
Joseph M. Putz
- ------------------------------------
(Joseph M. Putz, Principal Vice President and
Accounting Officer) Controller May 20, 1994
</TABLE>
<TABLE>
<S> <C> <C>
May 20, 1994
</TABLE>
*Joseph M. Putz
- -------------------------------
(Joseph M. Putz, as Attorney-
in-Fact)
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGES
------- ---------------------- ------------
<C> <S> <C>
1.1 --Form of U.S. Underwriting Agreement.*
1.2 --Form of International Underwriting Agreement.**
4 --Specimen certificate. Filed as Exhibit 4 to
Registrant's Registration Statement on Form S-1
(Registration No. 33-25407) and incorporated herein by
reference.
5 --Opinion and consent of Jeffrey R. Pendergraft, Esq.**
10.1 --Form of Registration Rights Agreement between
Lyondell Petrochemical Company and Atlantic Richfield
Company.*
10.2 --Employee Services Agreement effective January 1, 1994
between Lyondell Petrochemical Company and Atlantic
Richfield Company.*
10.3 --Investment Management Agreement effective January 1,
1994 between Lyondell Petrochemical Company and
Atlantic Richfield Company.*
15 --Awareness Letter of Coopers & Lybrand.*
23.1 --Consent of Jeffrey R. Pendergraft, Esq. (included as
part of Exhibit 5).**
23.2 --Consent of Coopers & Lybrand.*
24 --Powers of Attorney.*
</TABLE>
- --------
* Filed on May 5, 1994.
** To be filed by amendment.
<PAGE>
PAGE WHERE
GRAPHIC DESCRIPTION OF GRAPHIC OR CROSS-REFERENCE
APPEARS
- -------------------------------------------------------------------------------
TX]32 PLANT INTEGRATION CHART
This graph illustrates the integration of the Company's
two petrochemical manufacturing facilities and LCR's
Refinery. It identifies the primary feedstocks and primary
products for each of the three facilities and identifies
(i) the refinery products used as olefins feedstocks; (ii)
the Channelview Complex olefins by-products used at the
Refinery; and (iii) the Channelview Complex olefins
products used as feedstocks for the production of
polyolefins at the Bayport Facility.
