<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ......... TO ..........
COMMISSION FILE NUMBER 1-10145
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LYONDELL PETROCHEMICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4160558
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1221 MCKINNEY STREET, SUITE 1600 77010
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 713-652-7200
----------------
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORT), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING AS OF
SEPTEMBER 30, 1994: 80,000,000.
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<PAGE>
PART I. FINANCIAL INFORMATION
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
- -------------------------------------------- -------------------- -------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C>
SALES AND OTHER OPERATING REVENUES:
Unrelated parties $ 951 $819 $2,524 $2,818
Related parties 89 66 240 212
------ ---- ------ ------
1,040 885 2,764 3,030
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties 818 751 2,227 2,684
Related parties 62 66 183 202
Selling, general and administrative expenses 36 30 105 94
------ ---- ------ ------
916 847 2,515 2,980
------ ---- ------ ------
Operating income 124 38 249 50
Interest expense (19) (18) (56) (55)
Interest income 1 1 3 2
Minority interest in LYONDELL-CITGO Refining Company Ltd. (1) (3) (6) (3)
------ ---- ------ ------
Income (loss) before income taxes and cumulative effect
of accounting changes 105 18 190 (6)
Provision for income taxes 39 9 70 4
------ ---- ------ ------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGES 66 9 120 (10)
Cumulative effect on prior years of accounting changes - - - 22
------ ---- ------ ------
NET INCOME $ 66 $ 9 $ 120 $ 12
====== ==== ====== ======
EARNINGS (LOSS) PER SHARE:
Income (loss) before cumulative effect of accounting
changes $ .83 $.12 $ 1.51 $ (.12)
Cumulative effect on prior years of accounting changes - - - .27
------ ---- ------ ------
NET INCOME $ .83 $.12 $ 1.51 $ .15
====== ==== ====== ======
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
MILLIONS OF DOLLARS 1994 1993
- ------------------- ------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41 $ 40
Restricted cash and cash equivalents (Note 3) 48 73
Short-term investments (Note 3) 3 6
Accounts receivable:
Trade 274 179
Related parties 31 25
Inventories 197 191
Prepaid expenses and other current assets 11 9
------ ------
Total current assets 605 523
------ ------
Fixed assets:
Property, plant and equipment 2,695 2,545
Less accumulated depreciation and amortization 1,925 1,890
------ ------
770 655
Deferred charges and other assets 63 53
------ ------
Total assets $1,438 $1,231
====== ======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade $ 252 $ 203
Related parties 2 4
Notes payable 4 4
Current maturities of long-term debt 10 8
Other accrued liabilities 98 80
------ ------
Total current liabilities 366 299
------ ------
Long-term debt 707 717
Other liabilities and deferred credits 88 78
Deferred income taxes 102 101
Commitments and contingencies (Note 6)
Minority interest 197 124
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 80,000,000 shares
authorized, none outstanding
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 (260) (326)
------ ------
Total stockholders' deficit (22) (88)
------ ------
Total liabilities and stockholders' deficit $1,438 $1,231
====== ======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30
-------------------------
MILLIONS OF DOLLARS 1994 1993
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $120 $ 12
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting changes,
net of tax - (22)
Depreciation and amortization 46 43
Deferred taxes 6 4
Net change in accounts receivable, inventories
and accounts payable (66) 13
Net change in other working capital accounts 11 7
Minority interest 6 3
Other (9) 11
---- ----
Net cash provided by operating activities 114 71
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Minority owner contribution 65 57
Additions to fixed assets (144) (45)
Purchase of short-term investments (20) -
Proceeds from sales of short-term investments 23 13
---- ----
Net cash provided by (used in) investing
activities (76) 25
---- ----
CASH FLOWS FOR FINANCING ACTIVITIES:
Repayments of long-term debt (8) (29)
Dividends paid (54) (90)
---- ----
Net cash used in financing activities (62) (119)
---- ----
DECREASE IN CASH, RESTRICTED CASH AND CASH
EQUIVALENTS (24) (23)
Cash, restricted cash and cash equivalents at
beginning of period 113 108
---- ----
Cash, restricted cash and cash equivalents at
end of period $ 89 $ 85
==== ====
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal, recurring adjustments considered necessary for a fair
presentation, have been included. For further information, refer to the
consolidated financial statements and notes thereto for the year ended December
31, 1993 included in the Lyondell Petrochemical Company ("Company") 1993 Annual
Report and the Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. The year-end condensed balance sheet data was
derived from audited financial statements but does not include all disclosures
required by generally accepted accounting principles. Certain amounts from prior
periods have been reclassified to conform to current period presentation.
2. ACCOUNTING CHANGES
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("Statement"). The Company adopted the provisions
of the Statement for investments held as of or acquired after January 1, 1994.
In accordance with the Statement, prior period financial statements have not
been restated to reflect the change in accounting principle. The effect of
adopting the Statement had no impact on income.
In the first quarter of 1993, effective January 1, 1993, the Company changed its
method of accounting for the cost of repairs and maintenance incurred in
connection with turnarounds of major units at its manufacturing facilities.
Under the new method, turnaround costs exceeding $5 million are deferred and
amortized on a straight-line basis until the next planned turnaround, generally
four to six years. In prior years, all turnaround costs were expensed as
incurred. The Company believes that the new method of accounting is preferable
in that it provides for a better matching of turnaround costs with future
product revenues. The cumulative effect of this accounting change for years
prior to 1993 resulted in a benefit of $33 million ($22 million or $0.27 per
share after income taxes) and was included in first quarter 1993 income.
3. RESTRICTED FUNDS
As of September 30, 1994 and December 31, 1993, cash in the amount of $48
million and $73 million, respectively, was restricted for use in connection with
LYONDELL-CITGO Refining Company Ltd. ("LCR") capital projects, including the
Refinery upgrade project, and other expenditures as determined by the LCR
owners. At September 30, 1994 and December 31, 1993, in addition to restricted
cash, all short-term investments were restricted for use in connection with LCR
capital projects, including the Refinery upgrade project, and other expenditures
as determined by the LCR owners.
4
<PAGE>
3. RESTRICTED FUNDS - (CONTINUED)
Presented below is a reconciliation of changes in restricted funds, including
amounts classified as short-term investments, for the nine-month period ended
September 30, 1994:
<TABLE>
<S> <C>
Restricted cash, cash equivalents and
short-term investments at December 31, 1993 $ 79
Minority owner investments:
Contributions 65
Distributable cash reinvested 10
Interest on restricted funds 2
Additions to fixed assets:
Refinery upgrade project (66)
Refining segment-other (39)
----
Restricted-cash, cash equivalents and
short-term investments at September 30, 1994 $ 51
====
</TABLE>
4. INVESTMENTS
As of September 30, 1994, the Company held approximately $57 million of
investments in debt securities composed primarily of commercial paper, including
$54 million classified as cash equivalents. As of January 1, 1994, the Company
held approximately $70 million of investments in debt securities composed
primarily of commercial paper, including $64 million classified as cash
equivalents. The cost of securities held at September 30, 1994 and January 1,
1994 approximated their estimated fair value and were classified as available-
for-sale.
The Company realized no gains or losses on sales of securities during the nine-
month period ended September 30, 1994. All securities held by the Company as of
September 30, 1994 have remaining maturities of less than one year. At September
30, 1994 and December 31, 1993, in addition to restricted cash and cash
equivalents, 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 September 30, 1994 and
December 31, 1993 were:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1994 1993
- ------------------- ---- ----
<S> <C> <C>
Crude oil $ 36 $ 68
Refined products 46 29
Petrochemicals 80 57
Materials and supplies 35 37
----- -----
$ 197 $ 191
===== =====
</TABLE>
5
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
The Company has various purchase commitments for materials, supplies and
services incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market.
In connection with the transfer of assets and liabilities from ARCO to the
Company, the Company agreed to assume certain liabilities arising out of the
operation of the Company's integrated petrochemical and petroleum processing
business prior to July 1, 1988. In connection with the transfer of such
liabilities, the Company and ARCO entered into an agreement ("Cross-Indemnity
Agreement") whereby the Company has agreed to defend and indemnify ARCO against
certain uninsured claims and liabilities which ARCO may incur relating to the
operation of the business of the Company prior to July 1, 1988, including
certain liabilities which may arise out of pending and future lawsuits.
ARCO indemnified the Company under the Cross-Indemnity Agreement with respect to
other claims or liabilities and other matters of litigation not related to the
assets or business included in the consolidated financial statements. ARCO has
also indemnified the Company for all federal taxes which might be assessed upon
audit of the operations of the Company included in the consolidated financial
statements prior to January 12, 1989, and for all state and local taxes for the
period prior to July 1, 1988.
In addition to lawsuits for which the Company has indemnified ARCO, the Company
is also subject to various lawsuits and proceedings. Subject to the uncertainty
inherent in all litigation, management believes the resolution of these
proceedings will not have a material adverse effect upon the Company's
operations.
The Company's policy is to be in compliance with all applicable environmental
laws. The Company is subject to extensive environmental laws and regulations
concerning emissions to the air, discharges to surface and subsurface waters and
the generation, handling, storage, transportation, treatment and disposal of
waste materials. Some of these laws and regulations are subject to varying and
conflicting interpretations. In addition, the Company cannot accurately predict
future developments, such as increasingly strict requirements of environmental
laws, inspection and enforcement policies and compliance costs therefrom which
might affect the handling, manufacture, use, emission or disposal of products,
other materials or hazardous and non-hazardous waste.
Subject to the terms of the Cross-Indemnity Agreement, the Company is currently
contributing funds to ARCO for the cleanup of two waste sites (French Ltd. and
Brio, both of which are located near Houston, Texas) under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as amended and
the Superfund Amendments and Reauthorization Act of 1986. The Company is also
subject to certain assessment and remedial actions 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 $18 million related to future CERCLA, RCRA and TNRCC
assessment and remediation costs, of which $1 million is included in current
liabilities while the remaining amounts are expected to be incurred over the
next three to seven years. However, it is possible that new information about
the sites for which the reserve has been established, or future developments
such as involvement in other CERCLA, RCRA, TNRCC or other comparable state law
investigations, could require the Company to reassess its potential exposure
related to environmental matters.
6
<PAGE>
6. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
From April 1993 to June 1994, two process waste water streams at the Channelview
petrochemical complex ("Channelview Complex") were not in compliance with
applicable Benzene National Emissions Standards for Hazardous Air Pollutants
("NESHAPS") regulations. After learning that these streams were not controlled
in accordance with the Benzene NESHAPS regulations, Company employees determined
that the streams did not create a discernible impact on health or safety and
achieved compliance with the regulations. The Company estimates that it will
incur approximately $1 million in capital costs in connection with these waste
water streams to achieve on-going compliance with the Benzene NESHAPS
regulations. The Company notified the TNRCC and the EPA that the two streams
were not controlled in accordance with the Benzene NESHAPS regulations. On June
6, 1994, the Company received a Notice of Violation from the TNRCC regarding the
two streams. The TNRCC is proceeding with an administrative enforcement action,
and the Company expects that the TNRCC will impose an administrative fine.
In the opinion of management, any liability arising from these matters will not
have a material adverse effect on the consolidated financial condition of the
Company, although the resolution in any reporting period of one or more of the
matters discussed in this note could have a material impact on the Company's
results of operations for that period.
7. DIVIDENDS
On September 15, 1994, the Company paid a regular quarterly dividend of $0.225
per share to stockholders of record on August 12, 1994. Additionally, on
October 21, 1994, the Board of Directors declared a regular quarterly dividend
of $0.225 per share of common stock, payable December 15, 1994 to stockholders
of record on November 25, 1994.
8. EARNINGS PER SHARE
Earnings per share for all periods presented are computed based on the weighted
average number of shares outstanding for the periods, which was 80,000,000
shares.
9. SUBSEQUENT EVENTS
Due to pipeline disruptions caused by flooding conditions on the San Jacinto
River and the rupture of a nearby pipeline, the Company was forced to
temporarily reduce olefins production rates at the Channelview Complex on
October 20, 1994. The Company resumed full production by October 31, 1994.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
On July 1, 1993, the Company and CITGO Petroleum Corporation ("CITGO") announced
the commencement of operations of LYONDELL-CITGO Refining Company Ltd. ("LCR"),
a new entity owned by subsidiaries of the Company and CITGO. LCR owns and
operates the refining business formerly owned by the Company, including the
full-conversion refinery ("Refinery"). LCR is undertaking a major upgrade
project at the Refinery to enable the facility to process substantial additional
volumes of very heavy crude oil. CITGO is providing a major portion of the
funds for the upgrade project and has provided in excess of $100 million for
funding other capital projects.
The cost of the upgrade project, based on the detailed engineering completed to
date, currently is estimated to be approximately $830 million. In addition, LCR
has estimated a 15 percent ($125 million) allowance for contingency costs, which
would increase the total project cost estimate to approximately $955 million.
The final cost of the project will be influenced by numerous factors, many of
which are beyond LCR's control, including the timing and terms of necessary
construction, operating and regulatory permits, as well as construction schedule
delays whether caused by adverse weather conditions, material shortages, labor
disputes or otherwise.
On July 1, 1993, LCR entered into a long-term crude oil supply contract ("Crude
Supply Contract") with LAGOVEN, S.A., an affiliate of CITGO. In addition, under
terms of a long-term product sales agreement ("Products Agreement"), CITGO is
purchasing a substantial portion of the refined products produced at the
Refinery. Both LAGOVEN and CITGO are subsidiaries of Petroleos de Venezuela,
S.A., the national oil company of Venezuela.
Prior to commencement of LCR operations on July 1, 1993, the petrochemical and
refining operations of the Company were considered to be a single segment due to
the integrated nature of their operations. However, these operations are now
considered to be separate segments due to the formation of LCR and the related
separate management and operations of that entity.
The petrochemical segment consists of olefins, including ethylene, propylene,
butadiene, butylenes and specialty products; polyolefins, including
polypropylene and low density polyethylene; aromatics produced at the
Channelview Complex, including benzene and toluene; methanol and refinery
blending stocks.
The refining segment, which is primarily composed of LCR operations, consists of
refined petroleum products, including gasoline, heating oil and jet fuel;
aromatics produced at the Refinery, including benzene, toluene, paraxylene and
orthoxylene; lubricants, including industrial and motor oils; olefins feedstocks
and crude oil resales. The refining segment sales revenue includes crude oil
resales amounting to $84 million and $98 million for the three-month periods
ended September 30, 1994 and 1993, respectively and $203 million and $323
million for the nine-month periods ended September 30, 1994 and 1993,
respectively.
8
<PAGE>
The following table sets forth the Company's major product volumes sold for the
periods indicated. Sales volumes include production, purchases of products for
resale, propylene production from the product flexibility unit and draws from
inventory.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------- -----------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED PETROCHEMICAL PRODUCTS (MILLIONS)
(EXCLUDING INTERSEGMENT SALES):
Ethylene, propylene and polymers (lbs.) 1,545 1,248 4,506 4,010
Other olefins (lbs.) * 271 267 756 866
Methanol (gallons) * 36 60 128 171
Aromatics (gallons) 45 36 122 90
REFINED PRODUCTS (THOUSAND BARRELS PER DAY)
(EXCLUDING INTERSEGMENT SALES):
Gasoline 112 102 109 122
Heating oil (no. 2 distillate) 39 57 47 64
Jet fuel 25 27 26 33
Aromatics 7 8 8 10
Other refined products 48 41 46 44
----- ----- ----- -----
Total refined products volumes 231 235 236 273
===== ===== ===== =====
- --------------------------
</TABLE>
* The 1994 amounts exclude volumes now sold as MTBE.
Summarized below is the segment data for the Company which includes certain pro
forma adjustments necessary to present the petrochemical and refining operations
as individual segments for periods prior to the commencement of LCR operations
on July 1, 1993. These adjustments relate principally to allocations of costs
and expenses between the two segments and are based on current agreements
between the Company and LCR. Intersegment sales between the 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- ------------------
(MILLIONS OF DOLLARS) 1994 1993 1994 1993
- --------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES:
Petrochemical segment $ 540 $ 362 $1,363 $1,152
Refining segment 601 614 1,706 2,217
Intersegment sales (101) (91) (305) (339)
------ ----- ------ ------
$1,040 $ 885 $2,764 $3,030
====== ===== ====== ======
COST OF SALES:
Petrochemical segment $ 408 $ 339 $1,105 $1,101
Refining segment 573 569 1,610 2,124
Intersegment purchases (101) (91) (305) (339)
------ ----- ------ ------
$ 880 $ 817 $2,410 $2,886
====== ===== ====== ======
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE:
Petrochemical segment $ 9 $ 9 $ 28 $ 27
Refining segment 14 13 41 35
Unallocated 13 8 36 32
------ ----- ------ ------
$ 36 $ 30 $ 105 $ 94
====== ===== ====== ======
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -----------------------
(MILLIONS OF DOLLARS) 1994 1993 1994 1993
- --------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
OPERATING INCOME:
Petrochemical segment $ 123 $ 14 $ 230 $ 24
Refining segment 14 32 55 58
Unallocated (13) (8) (36) (32)
------ ----- ------ ------
$ 124 $ 38 $ 249 $ 50
====== ===== ====== ======
Summarized below are intersegment sales
for the two segments.
Petrochemical segment $ 50 $ 35 $ 147 $ 145
Refining segment 51 56 158 194
------ ----- ------ ------
$ 101 $ 91 $ 305 $ 339
====== ===== ====== ======
</TABLE>
RESULTS OF OPERATIONS
OVERVIEW
Net income for the third quarter of 1994 was $66 million or $0.83 per share
compared to a net income of $9 million or $0.12 per share for the third quarter
of 1993. The $57 million improvement was primarily due to higher petrochemical
margins and sales volumes, partially offset by reduced refining profitability.
Net income for the third quarter of 1994 was $34 million higher than the second
quarter of 1994. This increase was primarily due to higher petrochemical
margins and sales volumes.
Net income for the first nine months of 1994 was $120 million or $1.51 per share
compared to a net income of $12 million or $0.15 per share for the first nine
months of 1993. Earnings for the first nine months of 1993 included a $22
million favorable adjustment for the cumulative effect related to prior periods
associated with a change in accounting for major maintenance turnarounds.
Excluding the effect of this accounting change, earnings improved $130 million
during the first nine months of 1994 compared to the first nine months of 1993.
This improvement was primarily due to higher petrochemical sales margins and
volumes.
PETROCHEMICAL SEGMENT
REVENUES Sales and other operating revenues for the third quarter of 1994 were
$540 million compared to $362 million for the third quarter of 1993. The $178
million increase was due to higher petrochemical sales prices and volumes
reflecting an improved worldwide economy, particularly in the U.S. automotive
and construction sectors, which has created better market conditions for
petrochemicals generally.
Sales and other operating revenues for the first nine months of 1994 were $1.4
billion compared to $1.2 billion for the first nine months of 1993, an increase
of $211 million. This increase was primarily caused by higher petrochemical
sales volumes and prices. Higher demand for olefins was caused by the improved
worldwide economy. Methanol sales prices were higher due to higher demand caused
by the improvement in the worldwide economy and industry supply disruptions as
well as increased use of MTBE.
10
<PAGE>
COST OF SALES Cost of sales was $408 million in the third quarter of 1994
compared to $339 million in the third quarter of 1993, an increase of $69
million. This increase was primarily due to higher olefins feedstock costs
resulting from higher production rates. Cost of sales for the first nine months
of 1994 was essentially unchanged compared to the first nine months of 1993.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses for the third quarter of 1994 compared to the third
quarter of 1993 and for the first nine months of 1994 compared to the first nine
months of 1993 were relatively unchanged.
OPERATING INCOME Operating income for the third quarter of 1994 was $123
million compared to an operating income of $14 million in the third quarter of
1993. The $109 million increase was primarily due to higher petrochemical sales
margins and volumes. Improved olefins margins resulted primarily from higher
olefins sales prices. Olefins sales prices and volumes were higher due to
higher industry-wide demand caused by the improved economy. Contributing to the
improved operating income during the third quarter of 1994 compared to the third
quarter of 1993 were higher methanol sales margins, partially offset by lower
methanol sales volumes. Methanol margins were higher primarily due to higher
sales prices. Methanol sales volumes were lower due to scheduled and
unscheduled downtime of the methanol unit.
Operating income for the third quarter of 1994 compared to the second quarter of
1994 increased $55 million. The increase was due to higher olefins sales
margins and volumes. Olefins sales margins continued to improve during the
third quarter due to higher sales prices. Higher olefins sales prices and
volumes were attributable to the improved economy.
Operating income for the first nine months of 1994 was $230 million compared to
an operating income of $24 for the first nine months of 1993. The $206 million
increase was primarily due to higher olefins and methanol sales margins and to
higher olefins sales volumes. The higher olefins sales margins were principally
due to lower olefins feedstock costs which were caused by lower crude oil costs.
The higher olefins sales volumes and higher methanol sales margins were caused
by higher demand due in part to improvement in the economy.
REFINERY SEGMENT
REVENUES Sales and other operating revenues for the third quarter of 1994 were
$601 million compared to $614 million for the third quarter of 1993, a decrease
of $13 million. The decrease was primarily due to lower crude oil resale
activity.
Sales and other operating revenues for the first nine months of 1994 were $1.7
billion, a $511 million reduction compared to the first nine months of 1993.
This decrease was due to lower resale volumes of purchased light refined
products, lower sales prices for refined products and lower crude oil resales.
Effective with the beginning of LCR operations on July 1, 1993, a majority of
the refined products produced at the Refinery is sold to CITGO under the
Products Agreement, and as a result, the purchase and resale activity for light
refined products conducted for logistic and other reasons declined during the
current period. Refined products sales prices were lower primarily due to lower
industry crude oil prices. Crude oil resale volumes were lower due to reduced
logistical purchases required to meet refinery feedstock requirements, a
significant percentage of which are satisfied by Venezuelan crude oil purchased
under the Crude Supply Contract.
COST OF SALES Cost of sales was $573 million in the third quarter of 1994,
essentially unchanged compared to the third quarter of 1993.
11
<PAGE>
Cost of sales was lower by $514 million in the first nine months of 1994
compared to the first nine months of 1993. This decrease was primarily due to
lower purchases for resale of light refined products, lower feedstock costs
primarily due to lower crude oil prices and lower purchases of crude oil that
were resold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses were $14 million in the third quarter of 1994, an
increase of $1 million compared to the third quarter of 1993.
Selling, general and administrative expenses increased by $6 million in the
first nine months of 1994 compared to the first nine months of 1993. This
increase was primarily due to general and administrative expenses attributable
to the creation of LCR as a separate entity and the treatment of ongoing costs
beginning July 1, 1993.
OPERATING INCOME Operating income for the third quarter of 1994 was $14 million
compared to $32 million for the third quarter of 1993. The $18 million decrease
was primarily due to lower industry refining margins, various operating issues
and the absence of favorable crude oil purchasing and processing timing effects
that occurred in the third quarter of 1993, partially offset by higher
Venezuelan crude oil processing rates and improved profits from aromatics.
Operating income for the third quarter of 1994 was $1 million lower than the
second quarter of 1994. The decrease was primarily due to reduced benefit of
processing crude oil in the coking mode due to unit downtime.
Operating income for the first nine months of 1994 was $55 million compared to
$58 million for the first nine months of 1993. The $3 million decrease was
primarily due to poor refining industry conditions and higher selling, general
and administrative expenses, partially offset by improved profitability from
lubricants and aromatics.
UNALLOCATED
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were
$13 million in the third quarter of 1994 compared to $8 million in the third
quarter of 1993, an increase of $5 million. General and administrative expenses
were $36 million in the first nine months of 1994, a $4 million increase
compared to the first nine months of 1993. These increases were primarily due
to anticipated distributions under the Company's long-term incentive and
employee profit-sharing plans.
MINORITY INTEREST IN LYONDELL-CITGO REFINING COMPANY LTD. Minority interest was
$1 million in the third quarter of 1994 and $6 million for the first nine months
of 1994, representing CITGO's allocated share of LCR's income. As of September
30, 1994, the Company held an approximate 90% participation interest in LCR.
INCOME TAX The effective income tax rate during the third quarter of 1994 on
income before cumulative effect of accounting changes was 37 percent compared to
50 percent for the third quarter of 1993. The third quarter 1993 income tax
provision included a charge for federal deferred taxes due to an increase in the
statutory tax rate from 34 percent to 35 percent which was retroactive to
January 1, 1993.
The effective income tax rates during the first nine months of 1994 and 1993 on
income (loss) before cumulative effect of accounting changes were 37 percent and
71 percent, respectively. Although the Company incurred a taxable loss through
the first nine months of 1993, the 1993 income tax provision included charges
for state deferred taxes related to Texas franchise taxes and federal deferred
taxes due to the increase in the statutory tax rate from 34 percent to 35
percent.
12
<PAGE>
FINANCIAL CONDITION
Cash flow from operating activities for the nine months ended September 30, 1994
was $114 million which was net of an increase in accounts receivable of $101
million. Accounts receivable increased primarily due to higher sales revenues.
Cash flow associated with investing activities during the nine months ended
September 30, 1994 included capital expenditures of $144 million, of which $40
million was for environmentally related projects and $66 million for the
Refinery upgrade project. The Refinery upgrade project was funded by
contributions from CITGO during the current and prior year. Cash flow associated
with financing activities during the nine months ended September 30, 1994
included $54 million of dividend payments and $8 million for long-term debt
repayments.
On October 21, 1994, the Board of Directors declared a regular quarterly
dividend of $0.225 per share of common stock payable December 15, 1994 to
stockholders of record on November 25, 1994.
During the third quarter 1994, the Board of Directors approved an increase in
Lyondell's 1994 capital budget from $90 million to $110 million. This increase
includes projects to debottleneck the Company's alkylation unit and to improve
olefins feedstock logistics.
In addition, the Board of Directors recently approved a 33 percent debottleneck
of the Company's polypropylene capacity which will increase rated capacity to
400 million pounds by early 1996.
CURRENT BUSINESS OUTLOOK
Lyondell's third quarter and first nine months of 1994 results reflect a
business environment for petrochemicals which has continued to improve. These
results were partially offset by refining industry conditions which reflect
depressed margins. The effect of the depressed industry margins on LCR was
partially offset by the benefits of the Crude Supply Contract.
Profitability and cash flows for the petrochemical and refining businesses are
affected by market conditions, feedstock cost volatility, capital expenditures
required to meet increasingly more stringent environmental standards, repair and
maintenance costs and downtime of production units due to turnarounds.
Turnarounds on major units can have significant financial impacts 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. Several operating units at the Refinery, including the coker and the
largest crude distillation unit, were shut down for turnarounds in October 1994.
During these turnarounds, which are expected to last approximately seven weeks,
work will be completed to modify the crude distillation unit for the upgrade
project, thereby avoiding downtime of the unit that otherwise would be necessary
for the completion of the upgrade project. Although refinery operations will be
impacted by the turnaround activity, the operational benefits resulting from the
turnaround are expected to be realized beginning upon completion in the fourth
quarter.
Management believes that the low cost and operating flexibility of its
petrochemical business as well as its large production capacity have positioned
the Company to capitalize on the improved petrochemical business environment.
In the first nine months of 1994, the domestic olefins and methanol industries
operated at close to maximum available capacity. However, additional olefins
capacity scheduled to come on stream in early 1995 may negatively affect 1995
and future years' operating rates and margins. This expected increase in supply
may be at least partially absorbed by the market because of (a) higher demand
if the worldwide economies continue to expand, (b) lower supply caused by
industry shut-downs for turnarounds previously planned for 1994 but delayed
until 1995 in addition to turnarounds previously scheduled for 1995 and (c) the
replenishment of inventories that are currently at or close to historical lows.
Management believes the Company has 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
historical performance, although crude oil not purchased under the Crude Supply
Contract continues to be sensitive to market conditions.
13
<PAGE>
The Company believes that business conditions will be such that cash balances,
cash generated from operating activities and existing lines of credit will be
adequate to meet future cash requirements for scheduled debt repayments,
necessary capital expenditures and to sustain for the reasonably foreseeable
future the regular quarterly dividend. However, the Company continually
evaluates its cash requirements and allocates cash in order to maximize
stockholder returns.
__________________________
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 current and potential United States governmental
regulatory actions.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. Reference is made to the disclosure on page 17 of the 1993 Form 10-K Report
for the year ended December 31, 1993 regarding nuisance lawsuits filed
against the Company. The lawsuits involve approximately 30 residents of
the Channelview, Texas area who allege that the Company's facilities emit
loud noises, bright lights and noxious fumes in proximity to the
plaintiffs' homes. A preliminary settlement agreement has been reached
with each of these individuals. Lyondell believes that the aggregate
settlement amounts will not result in any material adverse effect on the
business or financial condition of the Company.
2. Reference is made to the Company's Report on Form 8-K dated as of July 11,
1994 and Quarterly Report on Form 10-Q for the period ending June 30, 1994
regarding a notice of violation received from the Texas Natural Resource
Conservation Commission ("TNRCC") with regard to the compliance status of
two process waste water streams under the applicable Benzene National
Emissions Standards for Hazardous Air Pollutants ("NESHAPS") regulations.
The TNRCC has notified the Company that it is proceeding with an
administrative enforcement action.
ITEM 5. OTHER INFORMATION
1. On August 8, 1994, the closing date of ARCO's offering of notes
exchangeable into Lyondell Common Stock, the five ARCO officers who were
Directors of the Company, including Mike R. Bowlin, the Chairman of the
Board, resigned from the Company's Board. The number of authorized
Directors of the Company was decreased from eleven to six. The directors
who resigned were:
Mike R. Bowlin
Allan L. Comstock
Terry G. Dallas
William C. Rusnack
William E. Wade, Jr.
2. On August 21, 1994, the Board named Bob G. Gower Chairman of the Board of
Directors. Mr. Gower retained his title of Chief Executive Officer of the
Company. The Board also promoted Dan F. Smith from Executive Vice
President to President. Mr. Smith retained his title of Chief Operating
Officer.
3. On October 21, 1994, the Board of Directors promoted Debra L. Starnes to
Senior Vice President and elected Clifton B. Currin, Jr. as a Vice
President.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits:
27. Financial Data Schedule
2. Reports on Form 8-K
None
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lyondell Petrochemical Company
(Registrant)
Dated: November 10, 1994 JOSEPH M. PUTZ
------------------------------
(Signature)
Joseph M. Putz
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
16
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