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1994
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 1-10145
LYONDELL PETROCHEMICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4160558
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1221 MCKINNEY STREET, 77010
SUITE 1600, HOUSTON,TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 652-7200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
COMMON STOCK ($1.00 PAR VALUE) NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.
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THERE WERE 80,000,000 SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING ON
DECEMBER 31, 1994. THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT ON MARCH 1, 1995 BASED ON THE CLOSING PRICE ON
THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE ON THAT DATE, WAS $849,396,870.
DOCUMENTS INCORPORATED BY REFERENCE
THE REGISTRANT'S DEFINITIVE PROXY STATEMENT, WHICH WILL BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS AFTER DECEMBER 31, 1994
(INCORPORATED BY REFERENCE UNDER PART III).
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TABLE OF CONTENTS
PART I
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Item Page
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1. and 2. Business and Properties............................ 1
The Company's Business............................. 1
Development of Business............................ 1
Summary Description of Business Segments........... 2
Petrochemical Segment.............................. 2
Overview........................................... 2
Feedstocks......................................... 4
Marketing and Sales................................ 4
Competition and Industry Conditions................ 5
Properties......................................... 6
Capital Program.................................... 7
Employee Relations................................. 7
Refining Segment................................... 8
Overview........................................... 8
Upgrade Project.................................... 8
Management of LCR.................................. 9
Feedstocks......................................... 10
Marketing and Sales................................ 11
Other Agreements................................... 11
Competition and Industry Conditions................ 11
Properties......................................... 12
Capital Program.................................... 12
Employee Relations................................. 13
Related Party Transactions......................... 13
Research and Technology; Patents and Trademarks.... 14
Finance Matters.................................... 14
Long-Term Debt and Financing Arrangements.......... 15
Environmental Matters.............................. 16
3. Legal Proceedings.................................. 17
4. Submission of Matters to a Vote of Security Holders 22
Executive Officers of the Registrant............... 22
Description of Capital Stock....................... 25
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................. 26
6. Selected Financial Data............................ 27
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 28
8. Financial Statements and Supplementary Data........ 36
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 57
PART III
10. Directors and Executive Officers of the
Registrant........................................ 57
11. Executive Compensation............................. 57
12. Security Ownership of Certain Beneficial Owners and
Management....................................... 57
13. Certain Relationships and Related Transactions..... 57
PART IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.............................. 58
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
THE COMPANY'S BUSINESS
Lyondell Petrochemical Company operates in two business segments: petrochemicals
and refining. As the context may require, all references hereafter to the
"Company" or "Lyondell" include Lyondell Petrochemical Company, its wholly-owned
subsidiaries and LYONDELL-CITGO Refining Company Ltd. ("LCR"). The Company
manufactures a wide variety of petrochemicals, including olefins (ethylene,
propylene, butadiene, butylenes and certain specialty products); polyolefins
(polypropylene and low density polyethylene); methanol, methyl tertiary butyl
ether ("MTBE") and aromatics and, through its interest in LCR, a Texas limited
liability company, refined petroleum products, including gasoline, heating oil,
jet fuel, fuel oil, aromatics and lubricants ("lube oils"). 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 industrial products. LCR sells its
principal refined products primarily to CITGO Petroleum Corporation ("CITGO").
DEVELOPMENT OF BUSINESS
Lyondell was formed in 1985 and was operated as a separate division ("Lyondell
Division") of Atlantic Richfield Company (ARCO) until June 1988. 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, along with certain pipeline assets that were not formerly a
part of the Lyondell Division, to its wholly-owned subsidiary, Lyondell
Petrochemical Company, a Delaware corporation. In exchange for the transfer of
such assets and liabilities, Lyondell issued additional shares of its Common
Stock to ARCO. On January 25, 1989, ARCO completed an initial public offering
of 43,000,000 shares of the Company's Common Stock.
In February 1990, the Company acquired a polypropylene plant and a low density
polyethylene plant located in Pasadena, Texas ("Polymers Facility").
In July 1993, pursuant to agreements between the Company and CITGO (and its
affiliates), the Company contributed its refining business including the
refinery (the "Refinery"), the lube oil blending and packaging plant in
Birmingport, Alabama and refining working capital to LCR and retained a
participation interest in LCR through its wholly-owned subsidiary, Lyondell
Refining Company. At December 31, 1994, the Company had an approximate 90
percent participation interest in LCR while CITGO held the remaining approximate
10 percent participation interest. The results of LCR currently are consolidated
into the Company's financial statements. For further discussion of this
transaction, see "REFINING SEGMENT - Overview".
In August 1994, ARCO completed an offering ("ARCO Note Offering") of three-year
debt securities ("Exchangeable Notes") exchangeable pursuant to the terms of the
Exchangeable Notes upon maturity, at ARCO's option, into Lyondell Common Stock
or cash with an equal value. If ARCO elects to deliver shares of Lyondell Common
Stock at the maturity of the Notes, ARCO's equity interest in Lyondell will be
substantially reduced or eliminated, depending on the price of Lyondell Common
Stock at such time. In connection with the ARCO Note Offering, the five ARCO
officers who were Directors of the Company, resigned from the Company's Board of
Directors. Until the maturity of the Exchangeable Notes, ARCO has indicated that
it generally intends to vote its shares in proportion to the votes of the non-
ARCO stockholders, except under certain limited circumstances. See "RELATED
PARTY TRANSACTIONS". As of March 1, 1995, ARCO owned 39,921,400 shares of
Lyondell Common Stock, representing 49.9 percent of the issued and outstanding
Common Stock of the Company.
For additional information relating to certain continuing relationships and
potential conflicts of interest among Lyondell, LCR, ARCO and ARCO Chemical
Company ("ARCO Chemical"), an 83.3 percent owned subsidiary of
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ARCO, see "RELATED PARTY TRANSACTIONS", included herein, and "Transactions
Between the Company and ARCO" and "Principal Stockholders" which are included in
the Company's 1995 Proxy Statement and incorporated herein by reference as part
of Item 13 of this Annual Report on Form 10-K.
See Note 21 - Segment Information of Notes to Consolidated Financial Statements.
SUMMARY DESCRIPTION OF BUSINESS SEGMENTS
PETROCHEMICAL SEGMENT
OVERVIEW
Channelview Complex -- Lyondell's Channelview petrochemical complex
("Channelview Complex"), located in Channelview, Texas, 20 miles east of
Houston, includes two large olefins plants, a methanol plant, a butadiene
recovery unit, a product flexibility unit (which has the capability to convert
ethylene and other light hydrocarbon streams into propylene), an aromatics
(benzene and toluene) recovery unit, two MTBE units, a butylene isomerization
unit, an isoprene recovery unit and other petrochemical processing units. The
Channelview Complex is connected by multiple pipelines to LCR's Refinery, which
is approximately 16 miles away. The Channelview Complex also is connected by a
comprehensive pipeline system to the Company's Mont Belvieu, Texas storage
facility ("Mont Belvieu Facility"), to leased storage terminals and to customers
along the Gulf Coast. Ethylene and propylene are shipped or exchanged through
this pipeline system. See "Properties".
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, resin oils and
piperylenes, along with gasoline blendstocks and heavy liquid fuels. The
Company's petrochemical products are used by its customers to manufacture
intermediate chemicals, which are used in a variety of consumer and industrial
products. The Company also produces methanol and MTBE. Petrochemicals are
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 petrochemical in terms of worldwide
production volume 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.
Ethylene is used as a feedstock to manufacture polyethylene, which is used in
products such as trash bags, packaging film, toys, housewares and milk
containers. Ethylene also is used to produce ethylene oxide (used to produce
ethylene glycol which is used to produce antifreeze and polyester fibers),
ethylene dichloride (used to produce polyvinyl chloride for pipe and other vinyl
products), ethylbenzene (used to produce styrene, which in turn is used to
produce polystyrene for packaging and containers) and alpha olefins (used in the
manufacture of detergents, as well as other intermediate chemicals).
Propylene is used to manufacture polypropylene, which is used in products such
as carpets, food packaging, upholstery, automobile parts and plastic bottles.
Propylene is also used to manufacture acrylonitrile (used in clothing and high
impact plastics), propylene oxide (used in polyurethane foams for furniture and
insulation) and oxo products (used in industrial solvents, as well as other
intermediate chemicals).
Butadiene is used to manufacture styrene butadiene rubber and polybutadiene
rubber, both of which are used in the manufacture of tires and other rubber
products. Butadiene is also used in the production of nylon and acrylonitrile-
butadiene-styrene plastics.
Aromatics products include benzene and toluene. Benzene is used to produce
styrene, phenol and nylon. Toluene is used as an octane enhancer, for benzene
production and in urethane chemicals. These products are used in the production
of plastics, rubber, fibers for carpet and apparel, in gasoline and in
polyurethane foams used in seat cushions.
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The Company's specialty products include various types of hydrocarbon resins and
unsaturated polyester resins. These products are used in the production of
inks, adhesives, paints and varnishes, rubber and fiberglass.
Methanol is used to produce MTBE and a variety of chemical intermediates,
including formaldehyde, acetic acid and methyl methacrylate. These
intermediates are used to produce bonding adhesives for plywood as well as in
polyester fibers and plastics. Other end uses include solvents and antifreeze
applications.
MTBE is an octane enhancer and clean fuel additive in reformulated gasoline.
All MTBE produced at the Channelview Complex and not produced for LCR for
gasoline blending is sold to a single customer. See "Competition and Industry
Conditions", "Properties" and "RELATED PARTY TRANSACTIONS".
The following table shows the current annual rated capacity for certain of the
Company's principal petrochemical products:
Rated Capacity (a)
at December 31,
1994
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(Millions)
Petrochemical Product
Ethylene (pounds)............................... 3,600 (b)
Propylene (pounds).............................. 2,100 (c)
Butadiene (pounds).............................. 615
Methanol (gallons).............................. 248 (d)
MTBE (gallons).................................. 199 (e)
Aromatics (gallons)............................. 130
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(a) The term "rated capacity", as used in this table and throughout this report,
is calculated by estimating the number of days in a typical year that a
production unit of a plant is expected to operate, after allowing for
downtime for regular maintenance, and multiplying that number by an amount
equal to the unit's optimal daily output based on the design feedstock mix.
Because the rated capacity of a production unit is an estimated amount, the
actual production volumes may be more or less than rated capacity.
(b) The Company anticipates undertaking a debottleneck project of its olefins
units that is expected to increase ethylene capacity by approximately 7%
over the next two years.
(c) Does not include refinery grade material or production from the product
flexibility unit, which has a current rated capacity of 1 billion pounds per
year of propylene.
(d) Capacity as shown includes equivalent methanol that could be produced from
reformed gas, an intermediate in the production of methanol. Capacity level
reflects an approximate 6 percent increase over previous years as a result
of a methanol unit turnaround completed during 1994.
(e) Includes a 19 percent capacity expansion as of January 1995 which was
completed in connection with the commercialization of the Company's ISOMPLUS
technology.
Bayport Polymers Facility -- The Polymers Facility converts propylene and
ethylene supplied by the Channelview Complex into polypropylene and low density
polyethylene that is sold into derivative markets. The Polymers Facility is
connected by pipeline to the Company's Mont Belvieu Facility for feedstock
supply. The following table shows the current annual rated capacity for each of
the Company's principal polyolefins products.
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Rated Capacity
at December 31,
1994
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(Millions)
Polyolefins Product
Polypropylene (pounds)............................ 300*
Low density polyethylene (pounds)................. 140
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*The Company is undertaking a debottleneck project that will expand
polypropylene capacity by approximately 33% to 400 million pounds and is
scheduled to be completed in 1996.
FEEDSTOCKS
The primary feedstocks used in the production of olefins are natural gas liquids
feedstocks including ethane, propane and butane (collectively "NGLs") and
naphtha, condensates and gas oils (collectively "Petroleum Liquids"). 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
January 1, 1995, approximately 43 percent of domestic ethylene plant capacity
was limited to NGL feedstocks, and the remaining approximately 57 percent could
process to some extent both NGLs and petroleum liquids feedstocks.
The Company's olefins plants can process 100 percent heavy petroleum liquids or
up to 90 percent NGL feedstocks. Liquid feedstocks have had a significant
historical margin advantage over ethane and propane. 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. The Company's olefins plants use
from 125,000 to 160,000 barrels per day of NGLs and/or heavy liquids feedstocks.
The Company obtains a portion of its olefins feedstock requirements from LCR
(NGLs, naphtha and gas oil) and additional olefins feedstock in the form of
petroleum condensates pursuant to a contract with an affiliate of a foreign
government. The remainder of its heavy liquids requirements are obtained under
short-term contracts or on the spot market from a variety of foreign and
domestic sources. The Company also purchases NGLs from a wide variety of
domestic sources, many of which have pipeline connections to the Company's
facilities.
The Company's methanol plant generally processes natural gas feedstocks but also
has the ability to process NGL feedstocks. The Company purchases natural gas
from a variety of domestic sources for use as fuel at its facilities and as
feedstock for the methanol plant and is connected to a diverse natural gas
supply network.
The Channelview Complex is currently the sole supplier of propylene and ethylene
feedstocks to the Polymers Facility, which uses them to make polypropylene and
low density polyethylene.
MARKETING AND SALES
Lyondell sells a majority of its olefins products to customers with whom it has
long-standing relationships. Sales generally are made pursuant to written
agreements which typically provide for monthly negotiation of price based upon
current market prices for products sold under contract. The parties are
contractually committed to use their best efforts to agree monthly on price
terms. Nonetheless, if the parties fail to agree on a monthly price, in some
cases deliveries may be suspended for the month. The term of these contracts is
typically three to five years with automatic one year term extension provisions
which cause the contract to remain in effect after the initial term unless
expressly terminated by one of the parties. Some of these contracts are subject
to early termination if deliveries have been suspended for several months. The
contracts typically require the customer to purchase a specified minimum
quantity while establishing a quantity range whereby the customer has the right
to purchase additional quantities up to a specified maximum.
The Company sells substantially all of its methanol output and most of its
aromatics output under contracts that have initial terms ranging from two to
three years and that typically contain automatic one year term extension
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provisions which cause the contracts to remain in effect after the initial term
expires unless expressly terminated by one of the parties. These contracts
generally provide for monthly or quarterly price adjustments based upon current
market prices. Aromatics produced at the Refinery, with the exception of
benzene, are marketed by Lyondell for LCR under contracts with similar terms to
its own. Benzene produced at the Refinery is sold directly to Lyondell at
market-related prices. 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 produced for LCR for gasoline
blending. In addition, Lyondell has entered into a joint development and
licensing arrangement to accelerate commercialization of two isomerization
processes that produce feedstocks for MTBE and tertiary amyl methyl ether
("TAME") which are blending components for reformulated gasoline. See "RESEARCH
AND TECHNOLOGY; PATENTS AND TRADEMARKS".
Most of the Company's ethylene and propylene is 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 Company, and substantially all of it is leased by the Company under a long-
term lease. See "Properties" and "RELATED PARTY TRANSACTIONS". The Company has
exchange agreements with other olefins producers which allow access to customers
who are not directly connected to the pipeline system. Some propylene is
shipped by ocean-going vessel. Butadiene, methanol, aromatics and other
petrochemicals are distributed by pipeline, railcar, truck, barge or ocean-going
vessel.
COMPETITION AND INDUSTRY CONDITIONS
The basis for competition in all of Lyondell's petrochemical products is price,
product quality and product deliverability. Lyondell competes with other large
domestic producers of olefins and polyolefins, including Amoco Chemical Company,
Chevron Chemical Company, Dow Chemical Company, Exxon Chemical Company,
Occidental Chemical Corporation, Mobil Chemical Company, Phillips Petroleum
Company and Shell Chemical Company.
The combined rated capacity of the Company's olefins units at January 1, 1995
was approximately 3.6 billion pounds of ethylene per year or approximately 7.3
percent of total domestic production capacity. Based on published rated
production capacities, the Company believes it is one of the six largest
producers of ethylene in the United States. Of the total ethylene production
capacity in the United States, approximately 94 percent is located along the
Gulf Coast, and approximately 75 percent is owned by ten manufacturers.
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. 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, generally outpaced ethylene demand growth in 1990-1992 and caused the
industry to experience a decline in margins through 1993. However, during 1994
domestic ethylene demand grew at the rate of approximately 6% and the domestic
olefins industry operated at close to maximum available capacity resulting in
higher industry margins. One new plant came on line during the second quarter
of 1994 and another plant came on line during the first quarter of 1995.
Capacity additions resulting from these two new plants, along with additional
plant expansions, is expected to total approximately 4.7 billion pounds, and is
relatively in balance with domestic demand growth in 1994 and anticipated growth
in 1995. Domestic industry ethylene rated capacity at January 1, 1995 was
approximately 49 billion pounds per year. There is no assurance that recent and
anticipated ethylene capacity increases, or other factors, will not adversely
affect the industry's supply and demand balance.
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 1994 the Company sold approximately 90
percent of its ethylene and propylene production into the merchant market.
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The provisions of the Clean Air Act Amendments of 1990 require the manufacture
and sale of alternative fuels, including reformulated gasoline. There is strong
competition between MTBE, derived from methanol, ethanol and ethyl tertiary
butyl ether ("ETBE") for the oxygenate market and it is difficult to predict the
outcome of this competition, which will depend, in part, on the future of tax
subsidies and possible market share mandates for ethanol. The Environmental
Protection Agency ("EPA") has specifically mandated that the nine metropolitan
areas in the United States with the most severe ozone problems begin using
reformulated gasoline year-round beginning in 1995 to prevent ozone formation.
In addition, a number of states opted to utilize reformulated gasoline on a
state-wide basis ("opting-in") although the EPA has subsequently allowed certain
areas to opt-out of the program and uncertainties have developed with respect to
the level of future use of reformulated gasolines. Because of the uncertainties
in the reformulated gasoline market, it is difficult to predict the impact of
this end-use on the future demands for MTBE and methanol.
Historically, petrochemical industry profitability has been affected by vigorous
price competition, which may intensify due to, among other things, new domestic
and foreign industry capacity. In general, weak economic conditions either in
the United States or in the world tend to reduce demand and put pressure on
margins. Petrochemical profitability can be affected by the level of derivative
exports which is affected by regional production throughout the world. It is not
possible to predict accurately how changes in feedstock costs, market conditions
or other factors will affect petrochemical industry margins in the future.
PROPERTIES
The Company owns all of the plant and equipment that comprise its two olefins
plants at its Channelview Complex and owns the approximately 2,945 acre parcel
on which the complex is situated. The Company also owns the methanol plant and
other petrochemical processing units which are located at the Channelview
Complex. These include the product flexibility unit, two MTBE units, a butylene
isomerization unit, the benzene and toluene recovery unit, the butadiene
recovery unit, the isoprene recovery unit and an isopropyl alcohol unit. One of
the MTBE units and the isopropyl alcohol unit are used exclusively to process
products for ARCO Chemical. The Company also operates a styrene maleic
anhydride unit ("SMA") and a polybutadiene unit which are owned by a third party
and are located on property leased from the Company within the Channelview
Complex. A third party owns and operates a facility on land leased from the
Company that is used to purify hydrogen from the Company's methanol plant. The
Company owns the real property, plant and equipment which comprise the Polymers
Facility, located on approximately 187 acres in Pasadena, Texas. Lyondell owns
several pipelines connecting the Channelview Complex, the Refinery and the Mont
Belvieu 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. The Company also owns a Barge Docking
Facility capable of berthing eight barges and its terminal equipment for loading
and unloading. It is utilized for loading methanol, pyrolysis fuel oil and
pyrolysis gas oil into barges for delivery to customers and unloading petroleum
condensate barges for olefins feedstocks.
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. In addition, 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. The Company is using its
proprietary butylene isomerization technology, known as ISOMPLUS, to efficiently
produce isobutylene from olefins plant butylene by-product streams. The project,
which started up in the first quarter of 1995, includes an MTBE unit
debottleneck which increased the Companys MTBE production capacity by 19
percent. See "RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS".
Lyondell also owns a storage facility, a brine pond facility and a tract of
vacant land at Mont Belvieu, Texas, located approximately 15 miles east of the
Channelview Complex. Storage capacity for up to 10 million barrels of NGL
feedstocks, ethylene, propylene and other products 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 Facility. This property, which is owned jointly with several other
companies that operate storage or processing facilities at Mont Belvieu, is
maintained as a greenbelt for these facilities. The Company has a long-term
lease on product pipelines from the Mont Belvieu Facility to most olefins
customers.
6
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Lyondell leases its executive offices and corporate headquarters in downtown
Houston. In addition, the Company leases storage facilities for the handling of
its products from various third parties, primarily in the Gulf Coast area.
CAPITAL PROGRAM
The petrochemical segment's fixed asset capital expenditures totaled $39 million
in 1994 and its capital budget for 1995 is $110 million. Major scheduled
capital projects include expansion of the alkylation unit at the Channelview
Complex, a debottleneck of the polypropylene plant at the Polymers Facility and
a debottleneck project at one of the two olefins units at the Channelview
Complex.
As part of its ongoing operations, the Company periodically conducts maintenance
turnarounds on its facilities. When conducting a maintenance turnaround on a
principal facility, capital expenditures and maintenance expenses as well as
lost operating income are typically incurred. 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. The methanol unit at the Channelview Complex was
shut down for a turnaround in the third quarter of 1994. The Company currently
has a turnaround scheduled for the second half of 1995 on one of its two olefins
units. The second olefins unit currently is scheduled for a turnaround in 1996.
In accordance with the Company's accounting policies, repair and maintenance
expenses associated with turnarounds exceeding $5 million are capitalized when
incurred and amortized on a straight-line basis until the next planned
turnaround, generally four to six years. Prior to 1993, all repair and
maintenance expenses associated with turnarounds were expensed as incurred. The
Company believes that the current method of accounting is preferable in that it
provides for a better matching of repair and maintenance expenses associated
with turnarounds with future product revenues. See Note 4 of "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS".
Lyondell continually evaluates opportunities to expand or diversify its
petrochemical operations through potential acquisitions, joint ventures and
other opportunities involving third parties. In the last several years, the
petrochemical industry has experienced significant joint venture, merger,
acquisition and divestiture activity. 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 stockholder value by making attractive investments.
This could be accomplished by applying the Company's experience in the efficient
and low-cost operation of its 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 outlets.
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
and produce returns in excess of the Company's cost of capital.
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. Both the
Company's ability to undertake and fund the particular strategies described
above, 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 "FINANCE
MATTERS".
EMPLOYEE RELATIONS
At year-end, Lyondell, excluding LCR, employed approximately 1,100 full-time
employees. The Company also uses the services of approximately 275 employees of
independent contractors in the routine conduct of its business.
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REFINING SEGMENT
OVERVIEW
The Refinery, located adjacent to the Houston Ship Channel in Pasadena, Texas,
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. It is connected by multiple pipelines to the
Channelview Complex and provides feedstocks to and receives production from that
facility.
Products manufactured at the Refinery include gasoline, heating oil, jet fuel,
aromatics, lubricants (industrial lubricants, motor oils, white oils, process
oils and base oils) carbon black oil, sulfur, residual fuel and petroleum coke
fuel and are sold to third parties. The aromatics recovery unit at the Refinery
produces benzene, toluene, paraxylene and orthoxylene. Aromatics are used to
manufacture a variety of intermediate chemicals, including ethylbenzene, cumene,
urethane foam components and polyester intermediates for films, fibers and
resins. End uses of these products include packaging and containers, furniture,
apparel and flooring.
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
also has entered into a long-term crude supply contract ("Crude Supply
Contract") with Lagoven, S.A. ("LAGOVEN"), an affiliate of CITGO. In addition,
under the terms of a long-term product sales agreement ("Products Agreement"),
CITGO purchases from LCR a majority of the refined products produced at the
Refinery. Both LAGOVEN and CITGO are direct or indirect wholly-owned
subsidiaries of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company
of Venezuela.
Pursuant to agreements between the Company and CITGO (and their affiliates), the
Company contributed its refining assets (including the lube oil blending and
packaging plant in Birmingport, Alabama) 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 ten percent participation interest in LCR. Prior to the in-service
date for the upgrade project, CITGO has committed to reinvest its share of LCR's
operating cash flow and thereby increase its participation interest in LCR.
These contributions are used for ongoing LCR capital projects other than (i) the
upgrade project and (ii) certain environmental capital projects for which
liability has been retained by the Company. 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. In addition to the funding related to the upgrade
project described below, CITGO has one additional contribution commitment of $30
million to be made upon completion of the upgrade project and it has a one-time
option to make an additional equity contribution sufficient to increase its
participation interest in LCR to 50 percent.
The Company believes that the principal benefit from its participation in LCR
will be stabilized and increased earnings and cash flow from the refining
business resulting from the upgrade project as well as the long-term Crude
Supply Contract and the long-term Products Agreement, all of which are described
below. The expected stabilization of earnings and cash flows resulting from the
agreement with CITGO will not be fully realized until the projected completion
of the Refinery upgrade project described below. The Refinery began processing
Venezuelan crude oil in the third quarter of 1992. Since that time, improved
operating efficiency has enabled the Refinery to increase the volume of heavy
Venezuelan crude oil processed enabling LCR to realize increased benefits
associated with processing heavy Venezuelan crude oil. Following the upgrade,
the earnings potential of LCR is expected to be enhanced due to higher margins
expected to be associated with the resulting heavier crude oil mix and LCR's
increased coking capability, enhanced reformulated fuels and low sulfur diesel
production capability and other yield improvements. However, as described
above, the Company's participation interest following the upgrade project will
decrease.
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.
CITGO is providing a major portion of the funds for the upgrade project.
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Definitive cost engineering for the upgrade is substantially complete and at the
present time, LCR management anticipates the cost for the project, which is
scheduled to be completed in late 1996, will be approximately $955 million,
including an allowance for contingency costs. The upgrade project is intended to
increase the heavy crude oil processing capability of the Refinery from 130,000
barrels per day of 22 degree API gravity crude oil to 200,000 barrels per day of
17 degree API gravity crude oil. 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 includes expansion of the Refinery's
reformulated gasoline and low sulfur diesel production capability. Major
components of the upgrade include new coking, crude distillation and sulfur
recovery units. Modifications to the Refinery's largest existing crude
distillation unit related to the upgrade project were completed in late 1994.
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 would be
$455 million based on an estimated $955 million upgrade project cost, is
expected to commence in late 1995 and is anticipated to be funded (i) 50 percent
through an LCR borrowing, (ii) 25 percent through contributions from CITGO and
(iii) 25 percent through subordinated loans from the Company. Prior to
completion of the upgrade project, the financing costs for the upgrade project
loans will 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 participation interest in LCR is expected to
increase to approximately 40 percent effective as of the in-service date. CITGO
will have a one-time option to increase its participation interest in LCR up to
50 percent following the in-service date by making an additional equity
contribution. 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 and on LCR's ability to obtain construction financing. 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 participation
interest in LCR as of the in-service date will be dependent upon its actual
contributions.
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 ("Regulations")
of LCR. The Regulations govern, among other things, ownership and cash
distribution rights. CITGO has committed to reinvest its share of operating cash
flow during the upgrade project which will increase its participation
percentage, while the Company has unrestricted access to its share of operating
cash flow from LCR. The initial term of the Regulations is 25 years, although
they may be terminated under certain circumstances, including insolvency of LCR
or either Owner and uncured material breaches by either Owner. Under the terms
of a reciprocal Performance Guarantee and Control Agreement ("Performance
Guarantee"), Lyondell and CITGO each unconditionally guarantee the obligations
and performance of their respective subsidiary-Owner under the terms of the
Regulations.
The Regulations provide that LCR is managed by an Owners Committee, which has
three representatives ("Representatives") from each Owner. Certain actions
require unanimous consent of the Representatives, including, without limitation,
amendment of the Regulations, borrowing money in excess of LCR's existing credit
facility, delegation of authority to committees, certain purchase commitments
and capital expenditures in excess of designated amounts and budgetary approval.
All actions not requiring unanimous consent can be determined by Lyondell so
long as it is a 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 are consolidated into
Lyondell's financial statements.
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FEEDSTOCKS
The following table sets forth the Refinery's runs of blended crude oils (which
include crude oil and other petroleum liquids, unfinished oils and other
hydrocarbons) and unfinished stock.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1994 1993 1992
------- ------- ---------
(Thousand barrels per day)
<S> <C> <C> <C>
Refinery Runs
Blended crude oils.. 209 234 236
Unfinished stock.... 64 50 50
---- ---- ----
Total................ 273 284 286
==== ==== ====
</TABLE>
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 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 80,000 barrels per day of light sour crude oil in a cracking
mode. It currently has a capacity rating of 265,000 barrels per day of crude
oil and related feedstocks which is based on running West Texas Sour ("WTS") or
equivalent crude oil in a "full conversion mode". Full conversion mode means
processing crude oil feedstocks into a product output mix that consists of a
significant percentage of high value products, such as gasoline, heating oil,
jet fuel, aromatics, lube oils and olefins feedstocks which are used by the
Channelview Complex. The actual operating capability varies with the type of
crude oil it processes.
Prior to the completion of the upgrade project, LCR is required to purchase and
LAGOVEN is required to sell a minimum of the Refinery's coking capacity, or
125,000 barrels per day of heavy Venezuelan crude oil. For amounts above the
coking capacity minimum LAGOVEN is contractually obligated to supply an
additional 10,000 barrels per day if LCR so requests. LAGOVEN has the right,
but not the obligation, to supply any incremental amounts above 135,000 barrels
per day. Following completion of the upgrade project that minimum is increased
to 200,000 barrels per day (allowing for scheduled or unscheduled downtime).
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 refining costs, adjustable for inflation;
(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. These adjustments are based on, but less than, the rate
of inflation. Because deemed operating costs and the slate of refined products
deemed to be produced for a given barrel of crude oil or other feedstock do not
necessarily reflect the actual costs and yields in any period and also because
the market value of the refined products used in the pricing formula does not
necessarily reflect the actual price received for the refined products, the
actual refining margin earned by LCR under the Crude Supply Contract will vary
depending on, among other things, the efficiency with which LCR conducts its
operations during such period.
The heavy (22 degree API gravity) Venezuelan crude oil currently being processed
by LCR under the Crude Supply Contract 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. Since that time, the Company
and LCR have identified and overcome 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 improved
unit reliability and increased unit processing capability has increased the
Refinery's capability of running high volumes of heavy Venezuelan crude oil and
raised the capacity to 130,000 barrels per day. The remainder of the Refinery's
capacity is used to process lighter crude oils and feedstocks.
There are risks associated with enforcing the provisions of contracts with an
affiliate of a foreign government such as LAGOVEN, including the 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. Depending on
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then current market conditions, breach or termination of the Crude Supply
Contract could adversely affect the Company. 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 Contract. 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
Contract 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. However, the Company believes
that this transaction holds substantial economic and other incentives for all
parties to perform their obligations. Lyondell believes that PDVSA has a
strategic interest in expanding its crude oil refining operations in the United
States in order to increase the markets for its heavy, sour crude oil and that
the financial commitments of CITGO should provide an economic incentive for all
PDVSA affiliates to perform their obligations under the various agreements.
MARKETING AND SALES
The Refinery produces gasoline, heating oil, jet fuel, aromatics, lube oils and
certain industrial products. On a weekly basis, LCR evaluates and determines the
optimal product output mix for the Refinery, based on spot market prices and
conditions. LCR and CITGO have entered into a long-term (25 years) Products
Agreement pursuant to which CITGO purchases the majority of gasoline, jet fuel
and heating oil manufactured at the Refinery. CITGO is currently purchasing
between 80-85% of the light refined products produced at the Refinery. These
products are purchased by CITGO at market-based prices. For example, the price
for gasoline is based on published Platts prices.
Lube oils are manufactured and sold by LCR directly to industrial consumers and
to distributors throughout the United States and international markets. Branded
lubricants marketed by LCR include both paraffinic and naphthenic oils, rubber
process oils, base oils used to blend into finished lubricant products, food-
grade white oils and an extensive variety of engine oils and industrial
lubricants. Lyondell is the sole marketing agent for LCR's aromatics (see
"PETROCHEMICAL SEGMENT - Marketing and Sales") with the exception of benzene
which is sold directly to Lyondell at market-related prices.
OTHER AGREEMENTS
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 the Channelview Complex 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.
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 entered
into a variety of contracts providing for the assignment or licensing of
intellectual property rights associated with the refining business.
COMPETITION AND INDUSTRY CONDITIONS
The Company formerly competed with many other refiners for sales of gasoline,
heating oil, and jet fuel in the domestic and international merchant market.
With the formation of LCR, the majority of these products are sold to CITGO
under the Products Agreement. LCR continues to sell lube oils directly to major
industrial consumers and through distributors in domestic and international
markets.
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
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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.
Industry refined products supply is also dependent on industry operating
capabilities and on long-term refining capacity trends. However, management
believes that the combination of the Crude Supply Contract and the Products
Agreement have and will continue to stabilize future earnings and cash flows and
reduce the market driven aspects of such volatility. Prior to the completion of
the upgrade project, the keys to operational success for LCR will be to maximize
the amount of heavy Venezuelan crude oil processed in the coking mode, to
optimize the efficient utilization of the remaining cracking capacity and to
maintain an overall focus on low cost operations.
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. Many of the domestic refiners are
owned by or affiliated with major integrated oil companies. Based on published
industry data, as of January 1, 1995, there were 173 crude oil refineries in
operation in the United States and total domestic refinery capacity was
approximately 15 million barrels per day. During 1994, LCR processed an average
of 209,000 barrels per day of crude oil and other petroleum liquids, or
approximately one percent of domestic capacity.
PROPERTIES
LCR owns the real property, plant and equipment which comprise the Refinery,
located on an approximately 700-acre site in Houston, Texas. Units include the
fluid catalytic cracking unit, the coker, reformers, crude distillation units,
sulfur recovery plants and hydrodesulfurization units, as well as lube oil
manufacturing and packaging facilities and an aromatics recovery unit. 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 used to
transport gasoline, kerosene and heating oil from the Refinery to the GATX
Terminal to interconnect with common carrier pipelines.
Lyondell owns several pipelines connecting the Channelview Complex, the Refinery
and the Mont Belvieu 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.
CAPITAL PROGRAM
The refining segment's capital expenditures for additions to fixed assets
(excluding spending on the upgrade project) totaled $75 million in 1994. The
refining segment's capital budget (excluding the upgrade project) for 1995 is
approximately $60 million. Of the total 1995 capital budget, approximately $32
million is expected to be spent on environmentally-related capital projects,
including a wastewater management plan developed in response to state
regulations regarding emissions. See "ENVIRONMENTAL MATTERS". The funds
contributed by CITGO in the previous two years (see "REFINING SEGMENT -
Overview") were used for capital spending by LCR and will reduce the total
capital expenditures that the Company otherwise would have been required to make
in connection with Refinery operations through 1995. (See "Upgrade Project" for
a discussion of spending on the upgrade project.)
As part of its ongoing operations, LCR periodically conducts maintenance
turnarounds on its facilities. When conducting a maintenance turnaround on a
principal facility, capital expenditures as well as repair and maintenance
expenses and lost operating income are typically incurred. 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 LCR's control. Scheduled turnarounds on the coker and one of
the major crude distillation units were completed during the fourth quarter of
1994. During these turnarounds, which lasted approximately eight weeks, work was
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.
In accordance with the Company's accounting policies, repair and maintenance
expenses associated with turnarounds exceeding $5 million are capitalized when
incurred and amortized on a straight-line basis until the next planned
turnaround, generally four to six years. Prior to 1993, all repair and
maintenance expenses associated with turnarounds were expensed as incurred. The
Company believes that the current method of
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<PAGE>
accounting is preferable in that it provides for a better matching of repair and
maintenance expenses associated with turnarounds with future revenues. See Note
4 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS".
The Company remains obligated to fund certain Refinery environmental projects
initiated prior to the creation of LCR as well as its share of a base level of
Refinery capital improvements; the total of these obligations is estimated to be
approximately $75 million through the completion of the upgrade project, of
which approximately $35 million has been spent through 1994. The level and
timing of these anticipated capital commitments and expenditures will be
affected by changes in applicable governmental regulations, including
environmental and tax laws.
EMPLOYEE RELATIONS
At year-end, LCR employed approximately 1,200 full-time employees. LCR also uses
the services of approximately 200 employees of independent contractors in the
routine conduct of its business. Certain hourly workers at the Refinery are
covered by collective bargaining agreements between LCR and the Oil, Chemical
and Atomic Workers Union (approximately 700 employees).
RELATED PARTY TRANSACTIONS
In connection with the transfer of assets and liabilities to Lyondell and the
initial public offering of Lyondell's common stock in January 1989, the Company
and ARCO entered into a number of agreements for the purpose of defining their
ongoing relationships. In addition, in July 1987, Lyondell and ARCO Chemical,
then a wholly-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 Lyondell, 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 arrangements. The Audit Committee of the Board of Directors
of the Company, whose members are not affiliated with the Company, ARCO or its
affiliates, has determined that such agreements, taken as a whole, were fair to
the Company and its stockholders. Because of the complexity of the various
relationships between Lyondell, ARCO, its direct and indirect subsidiaries,
including ARCO Chemical (together, "ARCO Affiliates"), 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 parties.
The terms and provisions of many of these initial agreements have subsequently
been modified or supplemented and additional or modified agreements,
arrangements and transactions will be determined through negotiation among the
Company and ARCO Affiliates, and it is possible that conflicts of interest will
be involved. Future contractual relations between the Company and ARCO
Affiliates will be subject to certain provisions of the Company's Certificate of
Incorporation. In addition, the Audit Committee of the Board of Directors of
the Company 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 fair to the Company and its stockholders.
During 1994, Lyondell purchased certain of its feedstock requirements from ARCO
Affiliates and paid them fees for transportation of product. For the year ended
December 31, 1994, Lyondell paid ARCO Affiliates approximately $45 million.
During 1994, Lyondell sold products to and provided services for ARCO
Affiliates, including sales of benzene, MTBE, ethylene, propylene and methanol
to ARCO Chemical and crude oil resales and sales of lube oil to other ARCO
Affiliates. For the year ended December 31, 1994, Lyondell received
approximately $314 million from sales to and services for ARCO Affiliates, of
which $310 million represented sales to and services for ARCO Chemical. See
Note 8 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS".
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In connection with the ARCO Note Offering, the Company and ARCO entered into
agreements governing their ongoing relationships, including a Registration
Rights Agreement that provides ARCO with rights under certain circumstances to
compel the Company to file a registration statement with the SEC with respect to
all or a portion of the shares of Common Stock held by ARCO. At the same time,
ARCO announced its intention to vote its shares in proportion to the votes of
the non-ARCO stockholders, except under certain limited circumstances.
For a summary of agreements, arrangements and transactions among the Company,
ARCO Chemical and ARCO see "TRANSACTIONS BETWEEN THE COMPANY AND ARCO", which is
included in the 1995 Proxy Statement and incorporated herein by reference as
part of Item 13 of this Annual Report on Form 10-K.
RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS
The Company uses numerous patents in its operations, many of which are
licensed from third parties, including ARCO. See Item 13 -- "Certain
Relationships and Related Transactions" (incorporated by reference). 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 1994 to protect new processes it developed.
In 1992, the Company introduced a new technology called ISOMPLUS for producing
low-cost isobutylene by isomerizing normal butylenes. Isobutylene is a key
ingredient in MTBE, and management believes that ISOMPLUS will play an important
role in the next increments of capacity that the industry will need to supply
the demand for MTBE in reformulated gasoline. In an effort to accelerate
worldwide commercialization of Lyondell's butylene isomerization process,
Lyondell has commercialized the technology through a joint development and
licensing relationship with CDTECH, a leading supplier of ethers technologies
used in reformulated fuels production and has entered into licensing
arrangements with third parties. The arrangement with CDTECH is intended to
commercialize two processes, isomerization and etherification, to produce
blending agents for cleaner burning gasolines. During the first quarter of
1995, the ISOMPLUS unit at the Channelview Complex became operational and
commercial production of isobutylene using the new technology began. In
connection with this project, the existing MTBE unit at the Channelview Complex
was expanded. Research efforts are continuing on 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. Lyondell's research and development efforts have
resulted in the invention of KromaLon TM, an enhanced polyolefin fiber for the
carpet market. This advancement in fiber technology enables the production of a
recyclable fiber with advanced coloring capabilities. In addition to the
inherent stain resistance of polypropylene, the new fiber is dyeable and
printable, providing advantages for commercial and residential applications.
The Company 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 1994 to protect
product line names and to foster its marketing position.
FINANCE MATTERS
The Company uses cash flow to enhance total return to stockholders. To achieve
this, the Company's first priority for cash use is to make high return
investments in its businesses. As a result of improved business conditions,
the Company has currently identified more high return opportunities. The
Company increased its level of capital spending during 1994 and anticipates
spending levels in 1995 in excess of 1994 levels.
The Company's goals include achieving and maintaining an investment-grade debt
rating while maintaining sufficient liquidity and debt capacity through all
phases of the industry cycle to provide for what it deems to be sufficient
capability to invest in attractive capital projects and possible external
business opportunities. The
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Company continues to have an interest in pursuing external business
opportunities with positive cash flow and returns in excess of its cost of
capital that would allow it to increase downstream integration or leverage its
operating expertise and increase operating flexibility across a larger olefins
asset base. These opportunities may take the form of acquisitions or other
business structures. See "PETROCHEMICAL SEGMENT - Capital Program".
In the near term, the next priority for cash flow after such investments is to
build liquidity and reduce debt in order to progress toward these financial
goals. The Company intends that excess cash flow above the amounts needed to
fund its capital projects, external business opportunities and appropriate
liquidity needs, would be returned to the stockholders. The Company views its
current dividend as sustainable and intends that any future dividend decisions
be based on maintaining a sustainable dividend level. See "Item 5 - Market for
Registrants Common Equity and Related Stockholder Matters". The Company has not
established specific financial targets for such matters as capital spending,
cash and debt levels, but instead anticipates that such matters will be adjusted
to reflect current business conditions and opportunities. Substantial changes
in business conditions or new opportunities may also change cash flow
priorities.
LONG-TERM DEBT AND FINANCING ARRANGEMENTS
As of December 31, 1994, 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 provisions that
would allow the holders to require the Company to repurchase the debt upon the
occurrence of certain events combined with specified declines in public ratings
on the Notes due 1996 and 1999 ("Put Rights"). Events which may trigger the Put
Rights include, among other things, 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 "special" dividends. See "Item 5 - Market for
Registrant's Common Equity and Related Stockholder Matters". The foregoing
summary of the Put Rights is not intended to be complete and it is subject to,
and qualified in its entirety by reference to, the terms of the Indenture for
the Notes due 1996 and 1999 which has been filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1989 and is
incorporated herein by reference.
Company Unsecured Revolving Credit Facility- During December 1993, the Company
finalized a five year, $400 million unsecured revolving credit facility
("Facility"). At the present time, the Company views the Facility as a back-up
source of liquidity that is also potentially available to fund investment
opportunities. The Company does not believe that the covenants or the other
terms of the Facility described below are reasonably likely to materially affect
or restrict the future operation of the Company's business or its ability to pay
dividends on its Common Stock. At December 31, 1994, no amounts were
outstanding under the Facility.
Under the terms of the Facility, the interest rate for borrowings is based on
Euro-Dollar, certificate of deposit ("CD") or prime rates, at the Company's
option, and also is dependent upon the Facility utilization rate and the
Company's debt ratings. The Facility contains 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 December
31, 1993 generally does not exceed, over time, dividends declared or paid after
that date.
The Facility's debt incurrence covenant restricts the incurrence by the Company
of additional debt, including debt under the 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 Facility. However, the debt incurrence
covenant does not become applicable until the debt incurred by the Company after
December 31, 1993 exceeds $75 million.
In addition to other customary events of default, the Facility provides that an
event of default will occur (i) if the Company fails to pay when due (whether by
scheduled maturity, acceleration or otherwise) an aggregate amount of
indebtedness or
15
<PAGE>
interest thereon (other than with respect to loans under the Facility) in excess
of $15 million, or (ii) if the Company is determined (upon exhaustion of all
appeals and expiration of all cure periods) to be in default of a material
obligation under the LCR Regulations. The foregoing summary of the Facility is
not intended to be complete and it is subject to, and qualified in its entirety
by reference to, the terms of the Facility which has been filed as an exhibit to
the Company's Annual Report on Form 10-K for the year ended December 31, 1993
and incorporated herein by reference.
LCR Unsecured Revolving Credit Facility- Effective July 1, 1994, LCR entered
into a 364 day unsecured $70 million revolving credit facility with a group of
banks, including Bank of America (formerly Continental Bank, N.A.), as agent
("LCR Facility"). Under terms of the LCR Facility, LCR may borrow with interest
based on prime, LIBOR or CD rates at LCR's option or have letters of credit
issued on its behalf. The LCR Facility may be extended at the request of LCR
upon consent of the bank group. The LCR Facility contains covenants that limit
LCR's ability to modify certain significant contracts, dispose of assets or
merge or consolidate with other entities. This agreement replaced a $100 million
revolving credit facility with substantially the same terms which expired on
June 30, 1994. At December 31, 1994, $20 million was outstanding under the LCR
Facility. The foregoing summary of the LCR Facility is not intended to be
complete and it is subject to, and qualified in its entirety by reference to,
the terms of the LCR Facility which has been filed as an exhibit to this Annual
Report on Form 10-K.
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 13 of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS".
ENVIRONMENTAL MATTERS
Lyondell's production facilities are generally required to have permits and
licenses regulating air emissions, discharges to water and generation, storage,
treatment and disposal of hazardous wastes. Companies such as Lyondell that are
permitted to treat, store or dispose of hazardous waste and maintain underground
storage tanks pursuant to the Resource Conservation and Recovery Act ("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 also is committed to Responsible Care(R), a chemical industry
initiative to enhance the industry's responsible management of chemicals. The
Company (together with the industries 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. 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. For example, in April 1994, new regulations relating to
emission standards for a large number of petrochemicals such as methanol,
butadiene and toluene, were announced by the EPA. The Company is in the process
of analyzing the impact that these new regulations will have on its businesses.
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. In general, however, with respect to the
capital expenditures and risks described above, 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 can only be achieved by capital expenditures. In the years ended
December 31, 1994 and 1993, the Company spent approximately $48 million and $38
million, respectively, for environmentally related capital expenditures at
existing facilities. For 1995 and 1996, the Company currently estimates that
environmentally related capital expenditures at existing facilities will be
approximately $42 million and $49 million, respectively. The timing and amount
of these
16
<PAGE>
expenditures are subject to the regulatory and other uncertainties described
above as well as obtaining of the necessary permits and approvals. For periods
beyond 1996, 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 generated at this facility. It is anticipated that
corrective measures 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 Natural Resource Conservation Commission ("TNRCC"), for
assessment and remediation of groundwater and soil contamination at the
Refinery. The Company's policy is to accrue remediation expenses when it is
probable that such efforts will be required and the related expenses 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 identification of presently unknown
remediation sites and the allocation of costs among the responsible parties
under applicable statutes. 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. In the opinion of management, there is no
material range of loss in excess of the amount recorded. Based on the
establishment of such reserves, and the status of discussions with regulatory
agencies described in this paragraph, and although the reserves are subject to
increase, the Company does not anticipate any material adverse effect upon its
financial statements or competitive position as a result of compliance with the
laws and regulations described in this or the preceding paragraphs. See also
Item 3 -- Legal Proceedings - "Claims Relating To Waste Disposal Sites", "Other
Matters" and "Management's Discussion and Analysis".
ITEM 3. LEGAL PROCEEDINGS
GENERAL
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 Item 3. See Item 13 -- "Certain Relationships and Related
Transactions". Prior to November 20, 1990, ARCO's insurance carriers had assumed
the defense of most of the lawsuits described in this Item 3. Since that date,
ARCO's insurance carriers have refused to advance defense costs in those
lawsuits relating to certain of the waste disposal sites. See "Claims Relating
To Waste Disposal Sites - ARCO Insurance Litigation".
In addition to the proceedings specifically described in this Item 3, 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 Item 3, 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 statements of the Company, however the
adverse 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. See Note 20 of "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS".
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. The following sections of this Item 3
describe these types of pending proceedings. Lyondell (either directly or
through ARCO as its indemnitee) is the real party at interest in these
proceedings.
17
<PAGE>
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 petrochemical and petroleum processing
businesses 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. Issues common to
these cases include: (1) whether the plaintiff can identify a specific product
to which he was allegedly exposed; (2) whether the Company supplied the
identified product to which plaintiff claims he was exposed; (3) whether the
plaintiff has a medical condition which, based upon competent scientific and
medical evidence, is causally related to the identified product; (4) whether,
and under what conditions, the plaintiff was exposed to the identified product;
and (5) if the plaintiff was exposed, whether the Company has any legal defenses
to the plaintiff's claims and whether there are other parties or defendants to
whom the Company can turn for contribution or indemnification. 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
statements, 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. 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 third-
party landfills. Two of these facilities, known as the "French Ltd." and the
"Brio" sites, both of which are located near Houston, Texas, have been
classified as "Superfund" sites under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"). The EPA has named many
potentially responsible parties ("PRPs") at each site from whom wastes were
allegedly received. 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 statements of
the Company. It is possible, however, that the Company may be involved in future
CERCLA and comparable state law investigations and clean-ups. The Superfund law
is scheduled for reauthorization during 1995. The proposal has generated strong
reactions from business, insurance companies, lenders, municipalities and
environmentalists. The Company is not able to determine with specificity what
the impact of a revised Superfund law would be on the Company.
French Ltd. Site Remediation -- At the French Ltd. site, ARCO and the other PRPs
have entered into a settlement agreement relating to the allocation of clean-up
costs. The EPA approved the clean-up plan and a Consent Decree was entered in
the Federal District Court for the Southern District of Texas in the first
quarter of 1990. An amendment to the Consent Decree relating to natural
resource damages has been negotiated and submitted to the court for approval.
The total costs associated with the Consent Decree are currently expected to be
approximately $90 million and the remediation work is expected to be completed
in 1996. The Company believes that its share of
18
<PAGE>
clean-up costs (as allocated pursuant to the Cross-Indemnity Agreement) will be
no more than five percent of total costs recovered without giving effect to any
insurance coverage which may be available to offset these costs.
French Ltd. Site Litigation -- Approximately 2,500 plaintiffs have made claims
related to wastes in the French Ltd. site. In each of these cases, ARCO is one
of many defendants. These suits generally allege that unspecified chemical
waste sent to the site by the defendants caused a decrease in property value, a
decrease in plaintiffs' ability to enjoy their property, and unspecified adverse
effects on plaintiffs' health. Although some of the lawsuits request relief in
the form of unspecified monetary damages, the aggregate amount of actual damages
sought in those cases where damages are specified exceeds $5 billion. The
aggregate amount of punitive damages sought in those cases where damages are
specified exceeds $20 billion. In December 1992, after mediation, ARCO, along
with several other defendants, entered into a preliminary agreement to settle
claims of approximately 2,200 plaintiffs. The remaining claims are in pretrial
discovery. The Company's obligation, if any, under the Cross-Indemnity
Agreement, to reimburse ARCO for a portion of its defense costs and settlements
related to the French Ltd. site has not been determined.
Brio Site Remediation -- At the Brio site, a definitive agreement allocating
these remedial costs among ARCO and the other PRPs was reached. The EPA
approved the plan and a Consent Decree between the Department of Justice and a
group of PRPs (including ARCO on behalf of its former divisions and
subsidiaries) was entered in Federal District Court for the Southern District of
Texas, in April 1991. The total clean-up cost under the original consent decree
is currently estimated to be approximately $60 million. Various objections have
been raised with respect to the provisions of the original remediation plan, and
the EPA and the PRPs have agreed to fund a new feasibility study to evaluate
alternatives for remediation. The Company believes that its share of the clean-
up costs (as allocated pursuant to the Cross-Indemnity Agreement) will be no
more than one percent of total costs without giving effect to any insurance
coverage which may be available to offset these costs.
Brio Site Litigation -- There currently are eight separate pending legal
proceedings filed against ARCO or its affiliates and numerous others in
connection with the Brio Superfund site. In these proceedings, there are
approximately 600 plaintiffs, many of whom are suing in their capacity as next
friend of minor children. In each of these cases, ARCO is one of many
defendants. Plaintiffs allege personal injury as a result of exposure to
various substances that were disposed of or stored at the Brio site. These
suits generally allege that defendants were negligent in sending chemical
substances to the site and also contain allegations of nuisance and strict
liability. The suits involve: a school district alleging damages as a result of
the closing of Weber Elementary; employees of the various entities who operated
the refining and reprocessing facilities at the Brio site; and other plaintiffs.
All of the lawsuits request relief in the form of unspecified compensatory and
exemplary damages. These suits are in pretrial discovery.
ARCO (or its affiliate) is the named defendant in the above proceedings. Under
the provisions of the Cross-Indemnity Agreement, Lyondell is not obligated to
indemnify ARCO for costs arising out of this litigation for which ARCO is
insured. Although ARCO is currently litigating the nature and extent of its
coverage with its insurance carriers (see "ARCO Insurance Litigation"), Lyondell
believes that the ultimate resolution of the above described lawsuits, ARCO's
insurance litigation and related issues will not result in any material
obligation on the part of Lyondell to ARCO with respect to the Brio and the
French Ltd. sites.
Other Waste Disposal Site Litigation -- The Company and ARCO are named
defendants in three of four presently pending lawsuits filed on behalf of 73
plaintiffs in the state district court in Galveston County, Texas involving the
alleged release of toxic and hazardous substances from the Hall's Bayou Ranch.
LCR sends and, prior to July 1, 1993, Lyondell and its predecessor, ARCO, sent
surface water runoff and process waste water from the Refinery to Gulf Coast
Waste Disposal Authority ("GCWDA") and a portion of the solids output from GCWDA
is sent for storage to the Halls Bayou Ranch site. Plaintiffs claim personal
injury, diminution of property value and loss of use and enjoyment of the
property. They are seeking $7 billion in actual damages and $28 billion in
punitive damages. In March 1994, the Company and ARCO entered a settlement
agreement to resolve these proceedings with all but seven of the plaintiffs.
While the Company's portion of the settlement and the availability of insurance
coverage to offset these costs has not been determined, the settlement and
remaining plaintiffs' actions are not expected to have a material adverse effect
on the Company's business or financial statements.
19
<PAGE>
ARCO Insurance Litigation -- 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 -- Mont Belvieu
Litigation") as well as the litigation involving the French Ltd. and the Brio
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 is currently paying the defense costs in the Mont Belvieu
proceedings, as well as the French Ltd. and Brio Site litigation, pending the
resolution of the coverage dispute.
CLAIMS RELATED TO COMPANY OPERATIONS
Mont Belvieu Litigation -- Several organizations and groups of citizens who own
property in the vicinity of Mont Belvieu, Texas, have instituted suits for
monetary damages and injunctive relief against ARCO and others who own
underground storage and transportation facilities in the city of Mont Belvieu.
In September 1980, Warren Petroleum Company ("Warren") experienced a leak in one
of its underground hydrocarbon storage wells in Mont Belvieu. On March 18,
1983, suit was brought by 34 plaintiffs, naming Warren, ARCO and other companies
with operations in Mont Belvieu as defendants. These plaintiffs claimed
property damage, and, in some instances, personal injuries allegedly resulting
from storage operations in Mont Belvieu. Later, 83 additional plaintiffs joined
the suit. Because of the number of plaintiffs, the court divided this lawsuit
into three separate lawsuits. In February 1986, ARCO was granted a directed
verdict as to all of the claims of the plaintiffs in the first of the three
lawsuits to be tried which had the effect of dismissing all the pending claims
without the ability to refile. Thereafter, the plaintiffs in the two remaining
cases dropped their claims against ARCO. ARCO remains in these two cases as a
result of cross claims for contribution filed by other defendants. These suits
have not been set for trial.
In 1986, a number of companies that operated facilities in Mont Belvieu,
including ARCO, instituted a program to make offers to purchase certain
properties in Mont Belvieu. The purpose of the purchase program was to give
persons within a certain area the opportunity to move, if they so desired. A
number of residents and litigants participated in the program.
The implementation of the purchase program described above led to the filing of
a new set of lawsuits. There are two separate legal proceedings which have
resulted from eight lawsuits filed against ARCO, the Company, and a number of
other companies that operate facilities in Mont Belvieu. These claims are made
by persons outside of the area designated by the purchase program and are
pending in state and federal court. The lawsuits name ARCO and the Company as
well as every other company that participated in the purchase program as
defendants. In six of the cases, which involve a total of 94 plaintiffs, the
city of Mont Belvieu also is named as a defendant. These plaintiffs claim that
industry operations, together with incidents that occurred at certain
facilities, and the publicity surrounding those incidents, destroyed the value
of their property. The plaintiffs also assert that they were discriminated
against by the purchase program and that their civil rights were violated since
they did not receive an offer to buy their property. The plaintiffs further
claim that the purchase violated antitrust provisions of state law, and that the
defendants were negligent in their operations and trespassed onto plaintiffs'
properties.
In December 1991, the District Court in Chambers County entered a take nothing
summary judgment in favor of ARCO, the Company and other companies who were
named as defendants in that lawsuit. The plaintiff sought injunctive relief,
recovery of more than $9 million in actual damages and more than $28 million in
punitive damages in this case. The plaintiff appealed the adverse ruling. In
July 1992, the State Court of Appeals reversed and remanded the case for retrial
in Harris County based on its interpretation of proper venue. In September
1993, a summary judgment in the state district court in the 270th District Court
in Harris County was granted in favor of all defendants in this matter. In
December 1994 the Texas First District Court of Appeals affirmed the summary
judgment.
All other Mont Belvieu cases were consolidated in the Federal District Court in
the Southern District of Texas. In addition to unspecified damages, the
aggregate amount of actual damages sought from all defendants in all of these
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<PAGE>
Mont Belvieu cases exceeds $241 million. The aggregate amount of punitive
damages sought exceeds $675 million. These lawsuits went to trial on December
1, 1992. On January 11, 1993, after the plaintiffs concluded their offer of
evidence, the trial court granted the defendants' motion for directed verdict
which dismissed plaintiffs' claims without the ability to refile. An appeal is
pending.
ARCO is paying all defense costs in all of the Mont Belvieu litigation and the
Company does not expect that a claim for reimbursement will be made under the
Cross-Indemnity Agreement.
Channelview Nuisance Litigation -- In 1992 and 1993, the Company, together with
Arco Chemical and one other defendant, was named as a defendant in two separate
lawsuits that were filed in two state district courts in Harris County, Texas.
The consolidated lawsuits generally allege that operations of the defendants'
facilities caused diminution in property value, interference with the use and
enjoyment of their property and personal injuries and sought unspecified actual
damages in excess of $5 million and punitive damages in excess of $20 million.
A settlement agreement has been reached with each of the individuals in the
consolidated lawsuits. The Company's share of the aggregate settlement amounts
will not result in any material adverse effect on the business or financial
statements of the Company.
OTHER MATTERS
In July 1994 the Company reported results of an independent investigation
conducted by the Audit Committee of the Board of Directors regarding the
compliance status of two process waste water streams under the applicable
Benzene National Emissions Standard for Hazardous Air Pollutants ("NESHAPS")
regulations and certain issues raised by an employee. Noncompliance with the
Benzene NESHAPS regulations and the related reporting requirements can result in
civil penalties and, under certain circumstances, substantial civil and,
potentially, criminal penalties. The Company received a notice of violation
from the TNRCC regarding the two streams and consented to pay a fine of $10,200.
In addition, the Company incurred approximately $1 million in capital costs in
connection with these waste water streams to achieve on-going compliance with
the benzene NESHAPS regulations. Although the EPA has not yet made a final
determination as to whether it will initiate separate enforcement proceedings,
the Company does not believe that any aspects of the matters described above
will subject the Company to criminal liability or have a material adverse effect
on the Company's business or financial statements.
In the fourth quarter of 1992, the Refinery underwent an EPA multi-media
inspection. At this time, the EPA has not formally notified the Company of the
enforcement action to be taken, if any. In March 1995, the Occupational Safety
and Health Administration ("OSHA") cited LCR for alleged violations at the
Refinery. The citations resulted from an investigation conducted in the second
half of 1994 and carry proposed fines in the aggregate of $208,500. The alleged
violations primarily involve record-keeping, reporting, incident investigation
and monitoring procedures. A portion of the citations were settled for $13,000
and LCR intends to contest the remaining $90,500 of citations.
In addition to the matters reported in this Item 3, 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). In the opinion of management, there is no material
range of loss in excess of the amount recorded.
21
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of Registrant as of March 1, 1995.
<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, and Planning on July 1, 1993. Mr. Beard was
Quality, Supply and appointed Vice President, Planning and Evaluations
Planning in May 1992. He served as the Site Manager of
Lyondell's Houston Refinery from 1988 until April
1992. From 1985 until 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.
Clifton B. Currin, Jr., 40. Mr. Currin was elected Vice President, Olefins, on
Vice President, Olefins October 21, 1994 with primary responsibility for
olefins marketing. Mr. Currin was previously
commercial manager for light olefins. From 1985
until 1990 he served in assignments in evaluations
and marketing. Prior to 1985 he served in various
engineering, health, safety and environmental,
manufacturing and evaluations positions for ARCO
Products Company.
Bob G. Gower, 57 ........ Mr. Gower was elected Chairman of the Board of
President, Directors of the Company on August 31, 1994. Mr.
Chairman of the Board and Gower has served as Chief Executive Officer of the
Chief Executive Officer Company since October 24, 1988 and has been a
Director of the Company since June 27, 1988. He
was President of Lyondell and its predecessor, the
Lyondell Division, since formation of the Lyondell
Division in April 1985. Prior thereto, Mr. Gower
served in various positions with ARCO, including
Senior Vice President of ARCO.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S)
--------------------------- ---------------------------------------------------
<S> <C>
Richard W. Park, 55........ Mr. Park was elected Vice President, Human
Vice President, Resources on June 27, 1988. He previously served
Human Resources as Vice President of Employee Relations of the
Lyondell Division from February 1987. From 1985
to 1987 he served as Manager of Personnel for the
Specialty Chemicals and International Units of the
ARCO Chemical Division. Prior to 1985 he held
other employee relations positions with divisions
of ARCO.
Jeffrey R. Pendergraft, 46. Mr. Pendergraft was named Senior Vice President on
Senior Vice President, May 6, 1993. Mr. Pendergraft was elected Vice
General Counsel and President and General Counsel on June 27, 1988 and
Secretary Secretary on October 24, 1988. From September
1985 to June 1988, he served as General Attorney
of the Lyondell Division. Prior thereto, he
served as an attorney for various operating
divisions and corporate units of ARCO at
increasing levels of responsibility.
W. Norman Phillips, Jr., 40 Mr. Phillips was elected Vice President,
Vice President, Channelview Operations on May 6, 1993. From May
Channelview Operations 1992 until May 1993, he served as Site Manager of
Channelview 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.
Joseph M. Putz, 54 ....... Mr. Putz was elected Vice President and Controller
Vice President on October 24, 1988. Previously he was Vice
and 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.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S)
--------------------------- ---------------------------------------------------
<S> <C>
Dan F. Smith, 48........... Mr. Smith was elected President of the Company on
President, August 31, 1994. Mr. Smith was Executive Vice
Chief Operating Officer President from May 1993 to August 1994 and has
and Director been Chief Operating Officer since May 1993. Mr.
Smith was elected a Director of the Company on
October 24, 1988. 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
management positions with ARCO.
Debra L. Starnes, 42....... Ms. Starnes was named Senior Vice President on
Senior Vice President, October 21, 1994. Ms. Starnes previously served
Petrochemicals Business as Vice President, Petrochemicals Business
Management Management and Marketing from July 1, 1993. She
and Marketing also served as Vice 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.
Russell S. Young, 46....... Mr. Young was elected Senior Vice President, Chief
Senior Vice President, Financial Officer and Treasurer on May 7, 1992.
Chief Financial Officer He previously served as Vice President and
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.
Prior to September 1986 he served in various
finance positions for ARCO including Assistant
Treasurer.
</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.
24
<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 and 80,000,000 shares of
preferred stock, par value $.01 per share. The following summary description of
the capital stock of the Company is qualified in its entirety by reference to
the Certificate of Incorporation, as amended and the Amended and Restated By-
Laws of the Company, copies of which are filed as exhibits to this Annual Report
on Form 10-K.
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 ("Stockholders") 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 this Annual Report on Form 10-K.
The holders of a majority of the shares of Common Stock represented at a meeting
can elect all of the directors. See Item 12 -- "Security Ownership of Certain
Beneficial Owners and Management" which is incorporated herein by reference.
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
In July 1994, the Stockholders approved an amendment to the Certificate of
Incorporation of the Company authorizing the issuance of up to 80,000,000 shares
of Preferred Stock, $0.01 par value per share. Pursuant to the terms of the
amendment, 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 no present intention to issue any series 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
of Directors (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 persons desire to pursue a takeover of the
Company.
25
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the New York Stock Exchange. ARCO has advised the
Company that, as of March 1, 1995, 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 on the New York Stock
Exchange (New York Stock Exchange Composite Tape) for each quarter from January
1, 1993 through December 31, 1994, inclusive, were:
<TABLE>
<CAPTION>
Period High Low
---------- ------ ------
<S> <C> <C>
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 27 21-1/4
Third Quarter 32-7/8 23-5/8
Fourth Quarter 31-1/8 23
</TABLE>
On March 1, 1995, the closing price of the Common Stock was $23.375, and there
were approximately 3,000 holders of record of the Common Stock.
During the last two years, Lyondell has declared per share quarterly cash
dividends (which were paid in the subsequent quarter) as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
1993............. $0.45 $0.225* $0.225 $0.225
1994............. $0.225 $0.225 $0.225 $0.225
* On July 23, 1993, the Board of Directors decreased the amount of the
regular quarterly dividend from $0.45 to $0.225 per share.
The declaration and payment of dividends is at the discretion of the Board of
Directors. 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.
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 Board of Directors will
have to make the determination that for purposes of the General Corporation Law
of the State of Delaware ("Delaware Law") there is a sufficient amount of
surplus (the amount by which its assets exceed its liabilities and capital) at
that time or sufficient net profits. 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. In connection with each dividend declaration, the Board of
Directors makes a determination that,
26
<PAGE>
based upon its familiarity with the Company's business, prospects and financial
condition, the Company's recent earnings history and forecast, an appraisal of
the Company's assets and discussions with the Company's executive officers,
attorneys and accountants, the dividend is a permitted dividend under Delaware
Law.
As detailed on page 15 herein, certain of the Company's debt instruments contain
provisions that generally provide that the holders of such debt may, under
certain limited circumstances, require the Company to repurchase the debt ("Put
Rights"). In addition to the occurrences described on page 15 herein, the Put
Rights may be triggered by the making of certain unearned distributions to
Stockholders, other than regular dividends, that are followed by a specified
decline in public ratings on such debt. Regular dividends are those quarterly
cash dividends determined in good faith by the Board of Directors (whose
determination is conclusive) to be appropriate in light of the Company's results
of operations and capable of being sustained.
The determinations described in the paragraphs above were made prior to the
declaration of $0.225 per share dividend to be made on March 15, 1995.
The Companys $400 million Facility also could limit the Company's ability to pay
dividends under certain circumstances. See "Items 1 and 2 -- FINANCE MATTERS".
During 1994, the Company paid $72 million in dividends. All regular dividend
payments in 1994 represent taxable income and not a return of capital as has
occurred in prior years.
The operation of certain of the Company's employee benefit plans may result in
the issuance of Common Stock upon the exercise of options granted to employees
of the Company, including its officers. Although the terms of these plans
provide that additional shares may be issued to satisfy the Company's
obligations under the options, the Company from time to time may cause Common
Stock to be repurchased in the market in order to satisfy these obligations.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the Company:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
MILLIONS OF DOLLARS, EXCEPT PER SHARE -------------------------------------
AMOUNTS 1994 1993 1992 1991 1990
---------------------------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues...... $3,857 $3,850 $4,809 $5,735 $6,499
Income before cumulative effect of
accounting changes..................... 223 4 26 222 356
Net income (*).......................... 223 26 16 222 356
Earnings per share before cumulative
effect of accounting changes........... 2.78 .06 .32 2.78 4.45
Earnings per share...................... 2.78 .33 .20 2.78 4.45
Dividends per share..................... .90 1.35 1.80 1.75 4.10
Total assets............................ 1,663 1,231 1,215 1,479 1,372
Capitalized lease obligations, less
current portion........................ --- --- --- 156 187
Long-term debt, less current portion.... 707 717 725 554 471
</TABLE>
(*) The 1993 amount includes an increase in net income from the cumulative
effect of the accounting change for turnarounds of $22 million, or $0.27 per
share. The 1992 amount includes a net decrease in net income of $10 million,
or $.12 per share related to the cumulative effect of accounting changes for
postretirement benefits other than pensions and income taxes. See Note 4 of
Notes to Consolidated Financial Statements.
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
As discussed in Note 3 of Notes to Consolidated Financial Statements, on July 1,
1993, Lyondell Petrochemical Company (the "Company" or "Lyondell") 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. Definitive cost
engineering for the upgrade is substantially complete and at the present time,
LCR management anticipates the cost for the project, which is scheduled to be
completed in late 1996, will be approximately $955 million, including an
allowance for contingency costs.
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 approximately 80 to 85 percent 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 completion of the upgrade project, the Crude Supply Contract requires
LCR to purchase and LAGOVEN to supply a minimum of the Refinery's coking
capacity, 125,000 barrels per day of heavy Venezuelan crude oil. 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 refining costs, adjustable for inflation; (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 costs are adjusted periodically based on inflation
rates for specific deemed cost components. Adjustments to margins track, but
are less than, inflation rates. Because deemed operating costs and the slate of
refined products deemed to be produced for a given barrel of crude oil or other
feedstock do not necessarily reflect the actual costs and yields in any period
and also because the market value of the refined products used in the pricing
formula does not necessarily reflect the actual price received for the refined
products, the actual refining margin earned by LCR under the Crude Supply
Contract will vary depending on, among other things, the efficiency with which
LCR conducts its operations during such period.
Notwithstanding the limitations discussed above, however, the Crude Supply
Contract is designed to reduce the inherent earnings and cash flow volatility of
the refining operations of LCR irrespective of market fluctuations of either
crude oil or refined products. Specifically, should the market value of refined
products "deemed" to be produced from the Venezuelan crude oil increase, the
"deemed" cost of crude oil to LCR will also increase. Alternatively, if the
market value of refined products "deemed" to be produced from the Venezuelan
crude oil decreases, the deemed cost of crude oil to LCR will also decrease.
This results in relatively stable "deemed" margins regardless of refined
products market volatility. If the actual yields, costs or volumes differ
substantially from those contemplated by the Crude Supply Contract, the benefits
of this agreement to LCR could be substantially different than anticipated.
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. See Note 21 - Segment
Information, of Notes to Consolidated Financial Statements.
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
petrochemical complex ("Channelview Complex") including benzene and toluene;
methanol and refinery blending stocks.
28
<PAGE>
The refining segment consists of refined petroleum products, including gasoline,
heating oil and jet fuel; aromatics produced at the Refinery, including benzene,
toluene, paraxylene and orthoxylene; lubricants, including industrial and motor
oils; olefins feedstocks and crude oil resales.
The following table sets forth 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 THE YEAR ENDED DECEMBER 31
------------------------------
1994 1993 1992
-------- ------- -----
<S> <C> <C> <C>
Selected petrochemical products
(millions) (excluding intersegment
sales):
Ethylene, propylene and polymers
(pounds)............................ 6,090 5,366 5,785
Other olefins (pounds) *............. 1,048 1,150 1,158
Methanol (gallons) *................. 169 225 212
Aromatics (gallons).................. 160 125 112
Refined products (thousand barrels per
day)
(excluding intersegment sales):
Gasoline............................. 109 120 125
Heating oil (no. 2 distillate)....... 44 62 60
Jet fuel............................. 24 30 38
Aromatics............................ 8 10 11
Other refined products............... 46 41 43
----- ----- -----
Total refined products volumes.... 231 263 277
===== ===== =====
</TABLE>
--------------------------
* Due to a change in a sales contract with a customer effective January 1,
1994, these products are now consumed in the manufacture of methyl tertiary
butyl ether ("MTBE"). The 1993 sales volumes, if restated in a manner
consistent with 1994, would be 797 million pounds and 195 million gallons for
Other Olefins and Methanol, respectively and the 1992 sales volumes would be
802 million pounds and 178 million gallons for Other Olefins and Methanol,
respectively.
The following table sets forth the Company's sales and other revenues for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
------------------------------
MILLIONS OF DOLLARS 1994 1993 1992
------------------- ------- ------- -------
<S> <C> <C> <C>
Petrochemical products
(excluding intersegment sales):
Ethylene, propylene and polymers..... $1,113 $ 808 $ 939
Other olefins (a).................... 173 169 177
Methanol (a)......................... 133 89 77
Aromatics............................ 171 120 121
Other petrochemical products and
other revenues...................... 193 140 95
------ ------ ------
Total petrochemical products
sales.......................... 1,783 1,326 1,409
------ ------ ------
Refined products
(excluding intersegment sales):
Gasoline............................. 813 950 1,123
Heating oil (no. 2 distillate)....... 311 481 510
Jet fuel............................. 178 245 342
Aromatics............................ 152 167 193
Other refined products and other
revenues............................ 324 280 339
------ ------ ------
Total refined products sales.... 1,778 2,123 2,507
------ ------ ------
Crude oil resales (b)................... 296 401 893
------ ------ ------
Total............................. $3,857 $3,850 $4,809
</TABLE> ====== ====== ======
29
<PAGE>
__________________________
(a) Due to a change in a sales contract with a customer effective January 1,
1994, these products are now consumed in the manufacture of MTBE. The 1993
sales values, if restated in a manner consistent with 1994, would be $126
million and $77 million for Other Olefins and Methanol, respectively and the
1992 sales value would be $128 million and $64 million for Other Olefins and
Methanol, respectively.
(b) 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 refining segment 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.
RESULTS OF OPERATIONS
OVERVIEW
Net income for 1994 was $223 million or $2.78 per share compared with $26
million or $.33 per share in 1993 and $16 million or $.20 per share in 1992.
Earnings for 1993 included a $22 million after-tax benefit for the cumulative
effect related to prior periods associated with a change in accounting for major
maintenance turnarounds. 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 $219 million earnings increase in 1994 versus 1993 was
due primarily to higher petrochemical margins and higher olefins sales volumes,
partially offset by lower refining margins. The $22 million earnings decline in
1993 versus 1992 was due primarily to lower ethylene sales volumes and
polyolefins margins, partially offset by higher refined products margins.
The Company implemented a cost reduction program in 1993 at the trough of the
petrochemical cycle with the goal of reducing period costs by approximately $30
million to $50 million annually from 1992 levels, assuming continued depressed
petrochemical industry conditions. After the program was implemented, a change
in industry conditions and therefore in the Company's operating and maintenance
plans and other factors reduced the realized savings of the cost reduction
program. For example, during the latter half of 1993 and first half of 1994,
the Company chose to extend the run lengths of several of its major production
units by performing incremental preventive maintenance work. The cost of this
unscheduled maintenance totaled approximately $13 million. Also, during 1994,
the petrochemical industry experienced a significant upturn which caused the
Company's net income to significantly exceed the budgeted amount. This improved
profit performance triggered the accrual of various employee incentive and
profit sharing plan expenses and salary and wage increases all of which were
based, in part, on the Company's profit performance and totaled approximately
$23 million. In addition to the above, other unbudgeted expenses were incurred
during 1994 which were required to capture the opportunities presented by the
economic upturn in the petrochemical industry.
PETROCHEMICAL SEGMENT
REVENUES Sales and other operating revenues, including intersegment sales, were
$2.0 billion in 1994 compared to $1.5 billion in 1993 and $1.7 billion in 1992.
The 1994 increase of $467 million compared to 1993 was primarily caused by
higher petrochemical sales prices and volumes. Higher demand for olefins and
polyolefins was caused by an improved worldwide economy, particularly in the
U.S. automotive and construction sectors, which has created better market
conditions for petrochemicals generally. Methanol sales prices were higher due
to higher demand caused by the improvement in the worldwide economy and
increased use of MTBE, of which methanol is a significant component, as well as
industry supply disruptions.
The 1993 decrease in sales and other operating revenues of $169 million
compared to 1992 was primarily due to lower olefins and polyolefins sales
volumes and prices caused by continued poor worldwide industry conditions and
higher industry production due to reduced maintenance downtime during 1993.
30
<PAGE>
COST OF SALES Cost of sales was $1.5 billion in 1994 compared to $1.4 billion
in 1993 and $1.5 billion in 1992. The 1994 increase of $108 million compared to
1993 was principally due to higher olefins feedstock costs resulting from higher
production rates, partially offset by lower feedstock prices.
The 1993 decrease in cost of goods sold of $124 million compared to 1992 was due
principally to lower olefins feedstock costs caused by 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 associated with a reduction in inventories accounted for under the
LIFO method of accounting.
SELLING EXPENSES Selling expenses amounted to $40 million in 1994 compared to
$37 million in 1993 and $37 million in 1992. The $3 million increase in selling
expenses in 1994 compared to 1993 was primarily due to higher terminal and
freight expenses caused by higher petrochemical sales volumes.
OPERATING INCOME Operating income amounted to $413 million in 1994 compared to
$57 million in 1993 and $102 million in 1992. The $356 million operating income
increase in 1994 compared to 1993 was primarily due to higher petrochemical
sales margins and higher olefins sales volumes. Improved olefins sales margins
resulted primarily from higher sales prices and to a lesser extent lower
feedstock prices. Olefins sales prices and volumes were higher due to higher
industry-wide demand caused by the improved worldwide economies. Contributing
to the improved operating income during 1994 compared to 1993 were higher
methanol sales margins, partially offset by lower methanol sales volumes.
Methanol sales margins were higher primarily due to higher sales prices caused
in part by the improved worldwide economy. Methanol sales volumes were lower
due to scheduled and unscheduled downtime of the methanol unit.
The $45 million operating income decrease in 1993 compared to 1992 was primarily
due to lower ethylene sales volumes and polyolefins margins. Ethylene sales
volumes and polyolefins margins were lower primarily due to poor industry and
economic conditions.
REFINING SEGMENT
REVENUES Sales and other operating revenues, including intersegment sales, were
$2.3 billion in 1994 compared to $2.8 billion in 1993 and $3.7 billion in 1992.
The 1994 decrease of $489 million compared to 1993 was due primarily to lower
resale volumes of purchased light products, lower sales prices for refined
products and lower crude oil resale volumes. The purchase and resale activity
for light refined products conducted for logistic and other reasons was
curtailed 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. Refined products sales prices were lower
due primarily to lower industry crude oil prices. Lower crude oil resale
volumes resulted from reduced logistical purchases required to meet refinery
feedstock requirements which was caused by a change in crude oil market supply
factors.
The 1993 decrease in sales and other operating revenues of $973 million versus
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 resulting from higher Venezuelan crude oil volumes
purchased under the Crude Supply Contract. Refined products sales prices were
negatively affected by additions to industry supply which exceeded demand
growth. The increase in industry supply resulted from additions of larger
volumes of oxygenates, primarily MTBE, to gasoline 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.
COST OF SALES Cost of sales was $2.2 billion in 1994 compared to $2.6 billion
in 1993 and $3.6 billion in 1992. The 1994 decrease compared to 1993 of $468
million was principally due to lower purchases for resale of light
31
<PAGE>
refined products, lower feedstock costs primarily due to lower crude oil prices
and lower logistical purchases of crude oil that were resold. Cost of sales was
increased by $1 million in 1994 associated with a reduction in LIFO inventories.
The 1993 decrease compared to 1992 of $1 billion was principally due to lower
quantities of purchased crude oil and light refined products and lower crude oil
prices. Crude oil purchases were lower due to the reduced logistical purchases.
Purchases of light refined products were lower due primarily 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 Contract.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses were $54 million in 1994 compared to $48 million in 1993
and $43 million in 1992. The $6 million increase in 1994 compared to 1993 and
the $5 million increase in 1993 compared to 1992 resulted primarily from higher
general and administrative expenses for personnel and realignment expenses
associated with ongoing operations of LCR starting on July 1, 1993.
OPERATING INCOME Operating income amounted to $54 million in 1994 compared to
$81 million in 1993 and $49 million in 1992. The $27 million decrease in 1994
compared to 1993 was due primarily to lower refined products margins and sales
volumes and higher general and administrative expenses, partially offset by
improved profitability for aromatics. Refined products earnings were negatively
affected in 1994 by poor industry conditions as well as lower volumes of heavy
Venezuelan crude oil processed in the coking mode which was caused by downtime
for turnarounds on the coker and largest crude distillation unit and operating
problems prior to the turnarounds. Aromatics earnings were higher in 1994
compared to 1993 due primarily to higher sales prices.
The $32 million increase in 1993 compared to 1992 was due primarily 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 heavy, low cost Venezuelan crude oil purchased under the Crude
Supply Contract.
UNALLOCATED
INTEREST EXPENSE AND INTEREST INCOME Interest expense was $74 million in 1994
compared to $74 million in 1993 and $79 million in 1992. The $5 million
reduction in interest expense in 1993 compared to 1992 was caused primarily by a
reduction of outstanding debt due to the prepayment of amounts due under
capitalized leases during April 1992.
Interest income was $5 million in 1994 compared to $2 million in 1993 and $10
million in 1992. The $3 million increase in 1994 compared with 1993 was due
principally to higher amounts of cash associated with LCR minority owner cash
contributions available for investment. The $8 million decrease in 1993 versus
1992 was due primarily to lower amounts of cash available for investment.
MINORITY INTEREST IN LYONDELL-CITGO REFINING COMPANY LTD. Minority interest was
$6 million in 1994 and $5 million in 1993 representing CITGO's allocated share
of LCR's income.
INCOME TAX The effective income tax rate during 1994 from continuing operations
was 36.2 percent compared to 73.1 percent for 1993 and 27.3 percent for 1992.
State income tax was the primary difference between the effective tax rate and
the 35 percent federal statutory rate during 1994. The difference for 1993
between the effective tax rate and the federal statutory rate was due primarily
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 due primarily to a state income tax
adjustment, tax exempt income related to company owned life insurance and tax
exempt interest.
32
<PAGE>
FINANCIAL CONDITION
CASH FLOW FROM OPERATIONS Lyondell's cash flow from operations totaled $155
million during 1994, a strong improvement over the $84 million generated in
1993. This increase was directly attributable to the more than eight-fold
increase in net income over 1993. The increase in net income was partially
offset by a significant increase in accounts receivable associated with
increased sales levels in the fourth quarter of 1994 versus the same period for
1993 and to a lesser extent from an increase in inventory levels over 1993
balances.
INVESTING ACTIVITIES Excluding refinery upgrade expenditures totaling $135
million, the Company made capital expenditures totaling $117 million during
1994, of which $48 million related to environmental projects at the Refinery and
Channelview Complex that were required to satisfy applicable environmental laws.
Refinery upgrade expenditures during 1994 were funded by the $136 million of
contributions from CITGO, the minority owner of LCR.
The 1995 capital expenditures budget, excluding the Refinery upgrade project,
has been set at $170 million. The budget provides $60 million for Refinery
projects of which $10 million is to be funded by Lyondell and $50 million is to
be funded from CITGO's reinvested earnings and the restricted cash balance which
was created by CITGO's contributions to LCR. The remaining $110 million is for
petrochemical projects. In addition to the capital expenditures budget, $579
million of spending is planned for the Refinery upgrade project designed to
increase the Refinery's ability to process larger volumes of very heavy
Venezuelan crude oil, of which $211 million is to be funded by CITGO, $56
million is to be funded by Lyondell in the form of subordinated loans to LCR and
the remainder is expected to be funded through an LCR external borrowing.
As of December 31, 1994, $42 million of cash was 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
1994 included $72 million for dividend payments, $8 million and $4 million for
scheduled repayments of Medium-Term notes and other borrowings, respectively,
and $20 million of proceeds from borrowings under the LCR $70 million working
capital facility, discussed below.
The Company has a five-year, $400 million revolving credit facility ("Facility")
with a group of banks. Borrowings under the Facility bear interest based on
Euro-Dollar, certificate of deposit ("CD") or prime rates, at the Company's
option. The Facility is available for working capital and general corporate
purposes as needed and contains covenants relating to dividend payments, debt
incurrence, liens, disposition of assets, mergers and consolidations, fixed
charge and leverage ratios and certain payments to LCR. At December 31, 1994, no
amounts were outstanding under this Facility.
Effective July 1, 1994, LCR elected to replace its unsecured $100 million
revolving credit facility with an unsecured $70 million revolving credit
facility ("LCR Facility") on substantially similar terms. Under terms of the LCR
Facility, LCR may borrow with interest based on prime, Euro-Dollar or CD rates
at LCR's option or have letters of credit issued on its behalf. The LCR Facility
is available for working capital and general corporate purposes as needed. At
December 31, 1994, $20 million was outstanding under the LCR Facility.
On January 20, 1995, the Board of Directors declared a regular quarterly
dividend in the amount of $.225 per share of common stock, payable March 15,
1995 to stockholders of record on February 24, 1995.
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 has an obligation
33
<PAGE>
to reimburse ARCO for a portion of its uninsured remediation costs for two of
those sites pursuant to the 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 established 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, 1994 was $17 million. The
environmental reserve includes $0.8 million of estimated future payments to ARCO
for remediation costs associated with CERCLA waste disposal sites and $16.2
million of estimated remediation costs related to waste disposal sites located
within the Company's facilities associated with RCRA. The Company spent
$488,000, $627,000 and $593,000 in 1994, 1993 and 1992, respectively, relating
to CERCLA matters. The Company also spent $6 million, $2 million and $158,000
in 1994, 1993 and 1992, respectively, in conjunction with RCRA matters. The
Company estimates it will pay approximately $1 million in conjunction with
CERCLA and RCRA matters in 1995 which is included in the December 31, 1994
environmental reserve.
CURRENT BUSINESS OUTLOOK
Lyondell's 1994 results reflect an improved business environment for
petrochemicals. These results were partially offset by lower refining
profitability which reflected depressed industry margins and also scheduled and
unscheduled downtime at the Refinery for turnarounds and repair and maintenance
of two major processing units. 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 industry supply and demand, feedstock cost volatility, capital
expenditures required to meet 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. The Company currently intends to perform a turnaround on one of its
two olefins units during the second half of 1995. During this turnaround, work
will be completed to debottleneck the unit which will increase its capacity by
approximately 120 million pounds per year.
Management believes that the low cost, operating flexibility and large
production capacity of the Company's petrochemical business position it to
capitalize on the current favorable petrochemical business environment. During
most of 1994, the domestic olefins industry operated at close to maximum
available capacity. However, additional olefins capacity scheduled to come on
stream in early 1995 may negatively affect operating rates and margins. This
expected increase in supply may be partially offset by higher demand if the
worldwide economies continue to expand or by the replenishment of inventories
that as of year-end 1994 were close to historical lows.
In 1994, the methanol market benefited from increased product demand, including
rapid growth in its use for MTBE, and also from production disruptions which
limited supply. This led to unprecedented prices and margins in the methanol
business. In early 1995, increased uncertainty about MTBE demand for
reformulated gasoline and improving methanol supply began to exert downward
pressure on methanol prices. The outlook for methanol in 1995 and future years
is uncertain but is less positive than late in 1994.
34
<PAGE>
Management believes the Company has improved 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 flows at attractive levels relative to historic performance,
although the remaining portion of LCR's crude oil volume not purchased under the
Crude Supply Contract continues to be sensitive to market conditions.
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.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants............................ 37
Financial Statements
Consolidated Statement of Income and Accumulated Deficit.. 38
Consolidated Balance Sheet................................ 39
Consolidated Statement of Cash Flows...................... 40
Notes to Consolidated Financial Statements................ 41
</TABLE>
Financial statement schedules have been omitted because they are either not
applicable or the required information is shown in the financial statements or
related notes.
36
<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, 1994 and 1993, 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, 1994. 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, 1994 and 1993, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1994 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.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 10, 1995
37
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF INCOME AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-------------------------------
MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS 1994 1993 1992
-------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES:
Unrelated parties $ 3,543 $ 3,572 $ 4,480
Related parties 314 278 329
------- ------- -------
3,857 3,850 4,809
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties 3,066 3,359 4,283
Related parties 230 268 295
Selling, general and administrative expenses 137 130 127
------- ------- -------
3,433 3,757 4,705
------- ------- -------
Operating income 424 93 104
Interest expense (74) (74) (79)
Interest income 5 2 10
Minority interest in LYONDELL-CITGO
Refining Company Ltd. (6) (5) --
------- ------- -------
Income before income taxes and
cumulative effect of accounting changes 349 16 35
Provision for income taxes 126 12 9
------- ------- -------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGES 223 4 26
Cumulative effect on prior years of accounting
changes, net of tax -- 22 (10)
------- ------- -------
NET INCOME $ 223 $ 26 $ 16
======= ======= =======
EARNINGS (LOSS) PER SHARE:
Income before cumulative effect of
accounting changes $ 2.78 $ .06 $ .32
Cumulative effect on prior years of
accounting changes -- .27 (.12)
------- ------- -------
Net income $ 2.78 $ .33 $ .20
======= ======= =======
PRO FORMA AMOUNTS, ASSUMING RETROACTIVE
APPLICATION OF NEW ACCOUNTING METHOD
FOR TURNAROUNDS:
Income before cumulative effect of
accounting changes $ 31
=======
Income per share before cumulative effect
accounting changes $ .39
=======
Net income $ 223 $ 4 $ 22
======= ======= =======
Net income per share $ 2.78 $ .06 $ .27
======= ======= =======
ACCUMULATED DEFICIT AT BEGINNING OF YEAR $ (326) $ (244) $ (116)
Net income 223 26 16
Cash dividends (72) (108) (144)
------- ------- -------
ACCUMULATED DEFICIT AT END OF YEAR $ (175) $ (326) $ (244)
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
MILLIONS OF DOLLARS 1994 1993
------------------- ------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 52 $ 40
Restricted cash and cash equivalents (Note 6) 42 73
Short-term investments (Note 6) -- 6
Accounts receivable:
Trade 331 179
Related parties 29 25
Inventories 229 191
Prepaid expenses and other current assets 14 9
------ ------
Total current assets 697 523
------ ------
Fixes assets:
Property, plant and equipment 2,810 2,545
Less accumulated depreciation and amortization 1,930 1,890
------ ------
880 655
Deferred charges and other assets 86 53
------ ------
Total assets $1,663 $1,231
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade $ 287 $ 203
Related parties 1 4
Notes payable 20 4
Current maturities of long-term debt 10 8
Other accrued liabilities 115 80
------ ------
Total current liabilities 433 299
------ ------
Long-term debt 707 717
Other liabilities and deferred credits 83 78
Deferred income taxes 109 101
Commitments and contingencies (Note 20)
Minority interest 268 124
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 (175) (326)
------ ------
Total stockholders' equity (deficit) 63 (88)
------ ------
Total liabilities and stockholders' equity $1,663 $1,231
====== ======
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
------------------------------
MILLIONS OF DOLLARS 1994 1993 1992
------------------- ------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 223 $ 26 $ 16
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 65 58 39
Deferred taxes 10 7 2
(Increase) decrease in accounts receivable (156) 50 117
(Increase) decrease in inventory (38) (11) 17
Increase (decrease) in accounts payable 59 (50) (80)
Net change in other working
capital accounts 28 16 (20)
Minority interest 6 5 --
Other (42) 5 7
------ ------ ------
Net cash provided by
operating activities 155 84 108
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (252) (69) (97)
Purchases of short-term investments (20) (9) --
Proceeds from sales of short-term investments 26 16 88
------ ------ ------
Net cash used in investing activities (246) (62) (9)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Minority owner contribution 136 116 --
Net proceeds from short-term debt 16 4 --
Proceeds from long-term debt -- -- 200
Repayments of long-term debt (8) (29) (67)
Repayments of capitalized lease obligations -- -- (186)
Dividends paid (72) (108) (144)
------ ------ ------
Net cash provided by (used in)
financing activities 72 (17) (197)
------ ------ ------
INCREASE (DECREASE) IN CASH, RESTRICTED CASH
AND CASH EQUIVALENTS (19) 5 (98)
Cash, restricted cash and cash equivalents at
beginning of period 113 108 206
------ ------ ------
Cash, restricted cash and cash equivalents at
end of period $ 94 $ 113 $ 108
====== ====== ======
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION OF THE COMPANY AND OPERATIONS
Lyondell was formed in 1985 and was operated as a separate division ("Lyondell
Division") of Atlantic Richfield Company ("ARCO") until June 1988. 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, along with certain pipeline assets that were not formerly
a part of the Lyondell Division, to its wholly- owned subsidiary, Lyondell
Petrochemical Company, a Delaware corporation. 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. As the context may require, all
references hereafter to the "Company" or "Lyondell" include Lyondell
Petrochemical Company, its wholly-owned subsidiaries and LYONDELL-CITGO Refining
Company Ltd. ("LCR").
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.
On August 8, 1994, ARCO completed an offering of three-year debt securities
("Exchangeable Notes") exchangeable upon maturity, at ARCO's option, into
Lyondell common stock or cash with an equal value ("ARCO Note Offering"). If
ARCO elects to deliver shares of Lyondell common stock at the maturity of the
Exchangeable Notes, ARCO's equity interest in Lyondell will be substantially
reduced or eliminated, depending on the price of Lyondell common stock at such
time. In connection with the ARCO Note Offering, the five ARCO officers who were
Directors of the Company resigned from the Company's Board of Directors;
however, ARCO did not limit its right to nominate and vote for candidates for
Lyondell's Board of Directors. Until the maturity of the Exchangeable Notes,
ARCO generally intends to vote its shares in proportion to the votes of the
non-ARCO stockholders, except under certain limited circumstances. As of
December 31, 1994, ARCO owned 39,921,400 shares of Lyondell common stock,
representing 49.9 percent of the issued and outstanding common stock of the
Company.
The Company operates 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 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 Companys investment strategy.
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 6).
41
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
All investments in debt and equity securities are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" which the Company adopted
as of January 1, 1994. Management determines the appropriate classification of
investments in debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date.
Accounts Receivable - The Company sells its products primarily to companies in
the petrochemical and refining industries. The Company performs ongoing credit
evaluations of its customer's 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 $3 million and $2 million at December
31, 1994 and 1993, respectively.
Inventories - Inventories are stated at the lower of cost or market. Cost is
determined on the last-in, first-out ("LIFO") basis except for materials and
supplies, which are valued at average cost.
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:
Manufacturing facilities and equipment - 5 to 30 years
Leased assets and improvements - 5 to 20 years
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.
Environmental remediation costs are expensed or capitalized in accordance with
generally accepted accounting principles.
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 income taxes result from temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes
and are calculated, in accordance with SFAS No. 109, "Accounting for Income
Taxes", based upon cumulative book/tax differences in the balance sheet.
3. LYONDELL-CITGO REFINING COMPANY LTD.
The Company and CITGO announced, on July 1, 1993, the commencement of operations
of LCR, a new entity formed and owned by subsidiaries of the Company and CITGO
in order to own and operate the Company's refining business, including the full-
conversion Houston refinery ("Refinery"). LCR is a limited liability company
organized under the laws of the state of Texas. At December 31, 1994, CITGO had
an approximate 10 percent participation interest in LCR.
42
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LYONDELL-CITGO REFINING COMPANY LTD. - (CONTINUED)
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
also has entered into a long-term crude supply contract ("Crude Supply
Contract") with Lagoven, S.A. ("LAGOVEN"), an affiliate of CITGO. In addition,
under the terms of a long-term product sales agreement ("Products Agreement"),
CITGO purchases from LCR a majority of the refined products produced at the
Refinery. Both LAGOVEN and CITGO are direct or indirect wholly-owned
subsidiaries of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company
of Venezuela.
Under the terms of the transaction, 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. Definitive cost engineering for the upgrade is
substantially complete and at the present time, LCR management anticipates the
cost for the project, which is scheduled to be completed in late 1996, will be
approximately $955 million, including an allowance for contingency costs. 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.
4. ACCOUNTING CHANGES
In May 1993 the Financial Accounting Standards Board issued SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". The Company
adopted the provisions of SFAS No. 115 for investments held as of or acquired
after January 1, 1994. In accordance with SFAS No. 115, prior period financial
statements have not been restated to reflect the change in accounting principle.
The effect of adopting SFAS No. 115 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 $.27 per
share after income taxes), and was included in first quarter income.
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" ("OPEB"), 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 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.
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.
43
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1994 1993 1992
------------------- ----- ----- -----
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 72 $ 76 $ 77
Income taxes $ 90 $ 7 $ 22
</TABLE>
At December 31, 1994, fixed assets included $36 million of non-cash additions
which related to accounts payable accruals. As of December 31, 1993, fixed
assets included $16 million of non-cash additions of which $14 million related
to accounts payable accruals.
6. RESTRICTED FUNDS
At December 31, 1994 and 1993, cash in the amount of $42 million and $73
million, respectively, was restricted for use in connection with LCR capital
projects, including the Refinery upgrade project, and other expenditures as
determined by the LCR owners. At December 31, 1993, in addition to restricted
cash, short-term investments in the amount of $6 million were restricted for use
in connection with LCR capital projects, including the Refinery upgrade project,
and other expenditures as determined by the LCR owners.
Presented below is a reconciliation of changes in restricted funds, including
amounts classified as short-term investments, for the year ended December 31,
1994:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS
---------------------
<S> <C>
Restricted - cash, cash equivalents and
short-term investments at December 31, 1993 $ 79
Minority owner investments:
Contributions 136
Distributable cash reinvested 10
Interest on restricted funds 3
Additions to fixed assets:
Refinery upgrade project (135)
Refining segment - other (51)
-----
Restricted - cash and cash equivalents $ 42
at December 31, 1994 =====
</TABLE>
7. FINANCIAL INSTRUMENTS
At December 31, 1994, the Company held approximately $65 million of investments
in debt securities composed primarily of commercial paper and 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 December 31, 1994 and January 1, 1994 approximated their estimated fair
value due to their short maturity and were classified as available-for-sale. The
Company realized no gains or losses on sales of securities during the year ended
December 31, 1994. All securities held by the Company as of December 31, 1994
have remaining maturities of less than one year.
44
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. FINANCIAL INSTRUMENTS - (CONTINUED)
The fair value of all other financial instruments included in current assets and
current liabilities, including accounts receivable, accounts payable and notes
payable, approximated their carrying value due to their short maturity. 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
the Companys long-term debt, including amounts due within one year, was $689
million at December 31, 1994.
At December 31, 1994, the Company had issued letters of credit totaling $26
million.
The Company is party to various take-or-pay contracts as a purchaser for product
and pipeline usage. At December 31, 1994, future minimum payments under these
take-or-pay contracts with noncancelable contract terms in excess of one year
were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS AMOUNT
------------------- ------
<S> <C>
1995 $ 1
1996 3
1997 10
1998 10
1999 10
Thereafter 102
----
Total minimum contract payments $136
====
</TABLE>
8. RELATED PARTY TRANSACTIONS
Related party transactions with ARCO are summarized as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1994 1993 1992
---------------------------------- ----- ----- -----
<S> <C> <C> <C>
Costs
Crude oil purchases $ 16 $ 53 $ 140
Product purchases 2 3 9
Transportation fees 28 27 24
Other, net 3 2 2
----- ----- -----
Total $ 49 $ 85 $ 175
===== ===== =====
Sales of crude oil and products $ 4 $ 15 $ 33
===== ===== =====
</TABLE>
In addition, sales to an affiliate, ARCO Chemical Company, consisting of
benzene, MTBE, ethylene, propylene, methanol and other products and services,
were $310 million, $263 million and $296 million for the years ended December
31, 1994, 1993 and 1992, respectively.
9. INVENTORIES
The categories of inventory and their book values at December 31, 1994 and
1993 were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1994 1993
------------------- ----- -----
<S> <C> <C>
Crude oil $ 62 $ 68
Refined products 30 29
Petrochemicals 102 57
Materials and supplies 35 37
----- -----
$ 229 $ 191
===== =====
</TABLE>
45
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INVENTORIES - (CONTINUED)
For the year ended December 31, 1994, the Company increased cost of sales by
approximately $1 million associated with the reduction in LIFO inventories. For
the years ended December 31, 1993 and 1992, the Company reduced cost of sales by
approximately $6 million and $1 million, respectively, associated with the
reduction in LIFO inventories. The excess of the current cost of inventories
over book value was approximately $105 million and $56 million at December 31,
1994 and 1993, respectively.
10. FIXED ASSETS
The components of fixed assets at December 31, 1994 and 1993 were as follows:
MILLIONS OF DOLLARS 1994 1993
------------------- ---- -----
Manufacturing facilities
and equipment $2,781 $2,516
Land 26 26
Leased assets and improvements 3 3
------ ------
$2,810 $2,545
====== ======
Repair and maintenance expenses for 1994, 1993 and 1992 were $109 million, $101
million and $109 million, respectively. The 1994 and 1993 amounts include
amortization of deferred turnaround costs of $12 million and $15 million,
respectively.
11. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets at December 31, 1994 and 1993 was comprised of
the following:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1994 1993
---------------------------------------------- ----- -----
<S> <C> <C>
Deferred turnaround costs (Note 4) $ 36 $ 18
Company owned life insurance 25 17
Other 25 18
----- -----
$ 86 $ 53
===== =====
</TABLE>
12. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1994 1993
------------------------------------------- ----- -----
<S> <C> <C>
Income taxes $ 28 $ ---
Accrued taxes other than income 32 29
Accrued interest 11 11
Accrued payroll 28 20
Other 16 20
----- -----
$ 115 $ 80
===== =====
</TABLE>
46
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt at December 31, 1994 and 1993 was comprised of the following:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1994 1993
------------------- ----- -----
<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 217 225
----- -----
717 725
Less current portion 10 8
----- -----
Total long-term debt $ 707 $ 717
===== =====
</TABLE>
Aggregate maturities of long-term debt during the five years subsequent to
December 31, 1994 are as follows: 1995-$10 million; 1996-$150 million; 1997-$112
million; 1998-$32 million; 1999-$150 million.
Effective July 1, 1994, LCR elected to replace its $100 million revolving credit
facility with a $70 million 364 day unsecured revolving credit facility ("LCR
Facility") with substantially similar terms. Under terms of the $70 million LCR
Facility, LCR may borrow a maximum of $70 million in the form of cash or letters
of credit with interest based on prime, Euro-Dollar or certificate of deposit
("CD") rates at LCR's option. The LCR Facility may be extended at the request of
LCR upon consent of the bank group. The LCR 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, 1994, $20 million
was outstanding under the LCR Facility while no amounts were outstanding under
the former credit facility at December 31, 1993. The weighted average interest
rate of borrowings under the LCR Facility was 5.1 percent and 3.6 percent during
the years ended December 31, 1994 and 1993, respectively.
During December 1993, the Company entered into a five year, $400 million
unsecured revolving credit facility ("Facility") which replaced its existing
$300 million credit facility that was due to expire in July 1994. In connection
with the Facility, the Company paid administrative, arrangement and commitment
fees totaling $3 million during 1993 and administrative and commitment fees
totaling $2 million during 1994. At December 31, 1994 and 1993, no amounts were
outstanding under the Facility.
Under the terms of the Facility, the interest rate is based on Euro-Dollar,
prime or CD rates, at the Company's option, and also is dependent upon the
Facility utilization rate and the Company's debt ratings. The Facility contains
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 that
the Company's net income after January 1, 1994 generally does not exceed, over
time, dividends declared or paid after that date.
The Facility's debt incurrence covenant restricts the incurrence by the Company
of additional debt, including debt under the 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 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
("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 retired $8 million of the Medium-Term Notes during 1994 while the
remaining Medium-Term Notes mature at various dates from 1995 to 2005 and have a
weighted average interest rate at December 31, 1994 and 1993 of 9.85 percent.
47
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. LONG-TERM DEBT AND FINANCING ARRANGEMENTS - (CONTINUED)
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.
14. 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, 1994, 1993 and 1992.
15. STOCKHOLDERS' EQUITY
Dividends - During 1994, the Company paid regular quarterly dividends of $.225
per share. 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.
Preferred Stock - The Company has authorized 80,000,000 shares of preferred
stock, $.01 par, of which none were issued or outstanding at December 31, 1994.
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 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, 1994, options covering 985,496 shares were
outstanding under the LTI Plan of which 430,775 were exercisable at a weighted
average price of $22.60 per share. The following summarizes stock option
activity for the LTI Plan:
<TABLE>
<CAPTION>
Option Price
Number of Average
Shares Per Share Total
---------- ------------ ------------
<S> <C> <C> <C>
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
Granted 230,800 23.13 5,337,250
Exercised (7,036) 22.04 (155,091)
------- -----------
Balance, December 31, 1994 985,496 23.34 $22,999,026
======= ===========
</TABLE>
48
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. STOCKHOLDERS' EQUITY - (CONTINUED)
The Company's Incentive Stock Option Plan ("ISO Plan") became effective January
12, 1989. The last stock options granted under the ISO Plan were granted on
March 5, 1993. No additional grants will be made under the ISO Plan. The ISO
Plan is a tax qualified plan which provided 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 were not on the executive payroll were 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. As of December 31, 1994, options covering 204,715
shares were outstanding at an average exercise price of $29.31 per share. These
options were held by 901 eligible employees. At December 31, 1994, 5,511 stock
options were exercisable at an exercise price of $19.44. During 1995, effective
July 1, 1993, the stock options held by those participants in the ISO Plan who
became employees of LCR on or after July 1, 1993 were canceled. Consequently,
the stock option activity for the year 1993 shown in the table below reflects
the revised amounts.
<TABLE>
<CAPTION>
Option Price
Number Average
of Shares Per Share Total
---------- ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1992 504,019 $29.31 $14,772,840
Canceled (289,500) 29.36 (8,499,419)
-------- -----------
Balance, December 31, 1993 214,519 29.24 $ 6,273,421
-------- -----------
Canceled (9,804) 27.83 (272,799)
-------- -----------
Balance, December 31, 1994 204,715 29.31 $ 6,000,622
======== ===========
</TABLE>
16. LEASES
At December 31, 1994, future minimum rental payments for operating leases with
noncancelable lease terms in excess of one year were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS AMOUNT
------------------- ------
<S> <C>
1995 $ 36
1996 34
1997 31
1998 27
1999 17
Thereafter 253
----
Total minimum lease payments $398
====
</TABLE>
Operating lease net rental expenses for 1994, 1993 and 1992 were $50 million,
$43 million and $35 million, respectively.
17. 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 highest
three years of compensation during the last ten years of service. The funding
policy for these plans is to make periodic contributions as required by
applicable law. Lyondell and LCR accrue pension costs based on an actuarial
valuation and fund the plans through contributions to pension trust funds
separate 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 tax qualified plans' limits.
49
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. RETIREMENT PLANS - (CONTINUED)
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, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
------------------------ ------------------------
Plans with Plans with Plans with Plans with
assets in ABO in assets in ABO in
excess of excess of excess of excess of
ABO assets ABO assets
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
MILLIONS OF DOLLARS
-------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $46 $ 21 $ 53 $ 21
=== ===== ===== ====
Accumulated benefit obligation ("ABO") $49 $ 22 $ 54 $ 25
=== ===== ===== ====
Projected benefit obligation $77 $ 37 $ 84 $ 42
Plan assets at fair value, primarily stocks and bonds 68 18 62 18
--- ----- ----- ----
Projected benefit obligation in excess of plan assets (9) (19) (22) (24)
Unrecognized net loss 15 6 22 14
Prior service cost not yet recognized in
pension cost (3) 3 (2) 3
Remaining unrecognized net asset (4) --- (4) ---
--- ----- ----- ----
Net pension liability $(1) $ (10) $ (6) $ (7)
=== ===== ===== ====
</TABLE>
The Company's net pension cost for 1994, 1993 and 1992 included the following
components:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1994 1993 1992
------------------- ------ ------ ------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 8 $ 5 $ 4
Interest cost on projected benefit obligations 9 8 6
Actual (gain) loss on plan assets 3 (14) (4)
Net amortization and deferral (10) 7 (2)
----- ----- -----
Net periodic pension cost $ 10 $ 6 $ 4
===== ===== =====
</TABLE>
The assumptions used as of December 31, 1994, 1993 and 1992, in determining the
pension costs and pension liability shown above were as follows:
<TABLE>
<CAPTION>
PERCENT 1994 1993 1992
------- ---- ---- ----
<S> <C> <C> <C>
Discount rate 8.25 7.25 8.75
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 employees base salary for the Savings plans. Lyondell and LCR
contributions to these plans totaled $8 million, $8 million and $7 million
during the years ended December 31, 1994, 1993 and 1992, respectively.
50
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Lyondell and LCR sponsor unfunded postretirement plans other than pensions for
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, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
---------------- ----------------
MILLIONS OF DOLLARS MEDICAL LIFE MEDICAL LIFE
------------------- -------- ------ -------- ------
<S> <C> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ (3) $ (1) $ (2) $ (1)
Fully eligible active plan participants (5) (1) (5) (1)
Other active plan participants (26) (5) (37) (6)
---- ----- ---- -----
(34) (7) (44) (8)
Unrecognized prior service cost (5) --- --- ---
Unrecognized net loss 2 --- 12 2
---- ----- ---- -----
Accrued postretirement benefit liability $(37) $ (7) $(32) $ (6)
==== ===== ==== =====
</TABLE>
Net periodic postretirement benefit costs for 1994 and 1993 included the
following components:
<TABLE>
<CAPTION>
1994 1993
------------- -------------
MILLIONS OF DOLLARS MEDICAL LIFE MEDICAL LIFE
------------------- ------- ---- ------- ----
<S> <C> <C> <C> <C>
Service cost - benefits attributed to service during
the period $2 $2
Interest cost on accumulated postretirement benefit
obligation 3 $1 3 $1
-- -- ----- --
Net periodic postretirement benefit cost $5 $1 $ 5 $1
== == ===== ==
</TABLE>
For measurement purposes, the assumed annual rate of increase in the per capita
cost of covered health care benefits as of December 31, 1994 was 10 percent for
1995-1996, 8 percent for 1997-2001, and 6 percent thereafter. The assumed annual
rate of increase in the per capita cost of covered health care benefits as of
December 31, 1993 was 13 percent for 1994-1996, 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,
1994 by $8 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 8.25 percent and 7.25 percent at December 31,
1994 and 1993, 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.
51
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. INCOME TAXES
Significant components of the Company's provision for income taxes attributable
to continuing operations follow.
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1994 1993 1992
--------------------- ------ ----- ------
<S> <C> <C> <C>
Current
Federal $ 106 $ 5 $ 6
State 11 - 1
----- ----- -----
Total current 117 5 7
----- ----- -----
Deferred
Federal 13 2 4
State (4) 5 (2)
----- ----- -----
Total deferred 9 7 2
----- ----- -----
$ 126 $ 12 $ 9
===== ===== =====
</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, 1994 and
1993 were as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS 1994 1993
------------------- ----- -----
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 127 $ 126
Deferred turnaround costs 10 6
LIFO inventory 7 8
----- -----
Total deferred tax liabilities 144 140
----- -----
Deferred tax assets:
OPEB obligation 14 13
Environmental and other long-term liabilities 9 12
Alternative minimum tax credit receivable --- 7
Pension and other compensation related 11 6
Other 3 5
----- -----
Total deferred tax assets 37 43
----- -----
Net deferred tax liabilities $ 107 $ 97
===== =====
</TABLE>
Pretax income from continuing operations for the years ended December 31, 1994,
1993 and 1992 was taxed by 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. 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.
<TABLE>
<CAPTION>
DESCRIPTION 1994 1993 1992
----------- ------ ------ ------
<S> <C> <C> <C>
U.S. statutory income tax rates 35.0 % 35.0 % 34.0 %
State income taxes, net of federal 1.2 19.3 (1.5)
Company owned life insurance (0.3) 3.8 (2.1)
Deferred tax liability rate change --- 15.6 ---
Other, net 0.3 (0.6) (3.1)
----- ----- -----
Effective income tax rate 36.2 % 73.1 % 27.3 %
===== ===== =====
</TABLE>
52
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. 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 financial
statements.
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 Natural Resource Conservation Commission ("TNRCC"),
formerly the Texas Water Commission, for assessment and remediation of
groundwater and soil contamination at the Refinery.
In July 1994 the Company reported results of an independent investigation
conducted by the Audit Committee of the Board of Directors regarding the
compliance status of two process waste-water streams under the applicable
Benzene National Emissions Standard for Hazardous Air Pollutants ("NESHAPS")
regulations and certain issues raised by an employee. Noncompliance with the
Benzene NESHAPS regulations and the related reporting requirements can result in
civil penalties and, under certain circumstances, substantial civil and,
potentially, criminal penalties. The Company has received a notice of violation
from the TNRCC regarding the two streams and consented to pay a fine of $10,200.
The Company incurred approximately $1 million in capital costs in connection
with these waste water streams to achieve on-going compliance with the benzene
NESHAPS regulations. The EPA has not yet made a final determination as to
whether it will initiate separate enforcement proceedings. However, the Company
does not believe that any aspects of the matters described above will subject
the Company to criminal liability or have a material adverse effect on the
Company's business or financial statements.
53
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
The Company has accrued $17 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. In the opinion of management, there is currently no
material range of loss in excess of the amount recorded. However, it is
possible that new information about the sites for which the reserve has been
established, new technology 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 the matters discussed
above will not have a material adverse effect on the consolidated financial
statements or liquidity of the Company, although the adverse resolution in any
reporting period of one or more of these matters discussed in this note could
have a material impact on the Company's results of operations for that period.
21. 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, 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. 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 $296 million, $401 million and $893 million for years
ended December 31, 1994, 1993 and 1992, respectively.
Consolidated sales to CITGO totaled $1.1 billion in 1994, $864 million in 1993
and $282 million in 1992. No other customer accounted for 10 percent or more of
consolidated sales.
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 operating
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 based on current market values.
54
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. SEGMENT INFORMATION - (CONTINUED)
<TABLE>
<CAPTION>
Petrochemical Refining
MILLIONS OF DOLLARS Segment Segment Unallocated Eliminations Consolidated
------------------------ ------------- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
1994
----
Sales and other
operating revenues:
Customers $1,783 $2,074 $3,857
Intersegment 190 198 $(388) ---
------ ------ ----- ------
1,973 2,272 (388) 3,857
------ ------ ----- ------
Cost of sales 1,520 2,164 (388) 3,296
Selling, general and
administrative
expenses 40 54 $ 43 --- 137
------ ------ ---- ----- ------
Operating income $ 413 $ 54 $(43) $ --- $ 424
====== ====== ==== ===== ======
Depreciation and
amortization expense $ 44 $ 20 $ 1 $ 65
====== ====== ==== ======
Capital expenditures $ 39 $ 210 $ 3 $ 252
====== ====== ==== ======
Identifiable assets $ 925 $ 739 $ 49 $ (50) $1,663
====== ====== ==== ===== ======
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 $ 719 $ 514 $ 37 $ (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 $ 797 $ 385 $ 33 $1,215
====== ====== ==== ======
</TABLE>
55
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22. UNAUDITED QUARTERLY RESULTS
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------ -----------
<S> <C> <C> <C> <C>
MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS
--------------------------------------------
1994
----
Sales and other operating revenues $ 824 $ 900 $1,037 $1,096
Operating income 54 71 124 175
Income before income taxes 34 51 105 159
Net income 22 32 66 103
Earnings per share .27 .40 .83 1.28
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
</TABLE>
(*) The first two quarters of 1993 include 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.
56
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding executive officers of the Company is included in Part I.
For the other information called for by Items 10, 11, 12 and 13, reference is
made to the Registrants definitive proxy statement for its Annual Meeting of
Stockholders, to be held on June 2, 1995, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1994, and
which is incorporated herein by reference.
57
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1 and 2 -- Consolidated Financial Statements and Financial Statement
Schedules: these documents are listed in the Index to
Consolidated Financial Statements and Financial Statement
Schedules.
<TABLE>
<CAPTION>
EXHIBITS:
-------------------------------
<S> <C>
3.1 - Restated Certificate of Incorporation of the Registrant, and Amendment No. 1.*
3.2 - Amendment No. 1 to the Restated Certificate of Incorporation of the Registrant.+
3.3 - Amended and Restated By-Laws of the Registrant.
4.1 - Indenture, as supplemented by a First Supplemental Indenture, between the Registrant and Texas
Commerce Bank National Association, as Trustee.**
4.2 - Indenture, as supplemented by a First Supplemental Indenture, between the Registrant and
Continental Bank, National Association, as Trustee.+++
4.3 - Specimen certificate.*
4.4 - LYONDELL-CITGO Refining Company Ltd. $70,000,000 Credit Agreement.++++++
4.5 - Lyondell Petrochemical Company $400,000,000 Credit Agreement.++++++
EXECUTIVE COMPENSATION:
10.1 - Lyondell Petrochemical Company Executive Supplementary Savings Plan.**
10.2 - Lyondell Petrochemical Company Amended and Restated Executive Long-Term Incentive Plan.***
10.3 - Lyondell Petrochemical Company Supplementary Executive Retirement Plan.***
10.4 - Lyondell Petrochemical Company Executive Medical Insurance Plan - Summary Plan Description.***
10.5 - Lyondell Petrochemical Company Executive Deferral Plan.****
10.6 - Lyondell Petrochemical Company Executive Long-Term Disability Plan.+++
10.7 - Lyondell Petrochemical Company Executive Life Insurance Plan.+++
10.8 - Lyondell Petrochemical Company Supplemental Executive Benefit Plans Trust Agreement.****
10.9 - Lyondell Petrochemical Company Restricted Stock Plan.
10.10 - Lyondell Petrochemical Value Share Plan.
10.11 - Form of Executive Severance Agreement with Executive Officers.
10.12 - Form of Registrant's Indemnity Agreement with Officers and Directors.*
10.13 - Lyondell Petrochemical Company Elective Deferral Plan for Outside Directors.****
10.14 - Lyondell Petrochemical Company Amended and Restated Retirement Plan for Outside Directors.****
10.15 - Form of Restricted Stock Agreement with Outside Directors.
MATERIAL CONTRACTS WITH
ARCO AFFILIATES:
10.16 - Joint Pipeline Use Agreement between ARCO Chemical Company and the Registrant.*
10.17 - MTBE Purchase, Transportation & Storage Agreement between ARCO Chemical Company and the
Registrant.*
10.18 - Agreements Implementing Transfer of Pipeline Rights from ARCO Pipe Line Company to Registrant.*
10.19 - Conveyance (conformed without exhibits) between the Registrant and ARCO.*
10.20(a) - Cross-Indemnification Agreement between the Registrant and ARCO and Amendment No. 1 to the
Cross-Indemnification Agreement.*
10.20(b) - Dispute Resolution Agreement between the Registrant, ARCO and ARCO Chemical Company.++++++
10.20(c) - Employee Services Agreement between the Registrant and ARCO.+
</TABLE>
58
<PAGE>
<TABLE>
<S> <C>
10.20(d) - Investment Management Agreement between the Registrant and ARCO.++++++
10.20(e) - Form of Registration Rights Agreement between the Registrant and ARCO.+
10.21(a) - Immunity From Suit Agreement between ARCO and the Registrant.*
10.21(b) - Amendment to Immunity From Suit Agreement between ARCO and the Registrant.***
10.22(a) - License Agreement between ARCO and the Registrant.*
10.22(b) - License Agreement Amendment between ARCO and the Registrant.***
10.23(a) - Technology Agreement between ARCO and the Registrant.**
10.23(b) - Technology Agreement Amendment between ARCO and the Registrant.***
10.24 - Assignment of Patents and Patent Applications between ARCO and the Registrant.**
10.25 - Assignment of Technology Agreement, as amended, between ARCO and the Registrant.**
OTHER MATERIAL CONTRACTS:
10.26 - Asset Purchase Agreement (conformed without exhibits) between the Registrant and Rexene Products
Company.**
10.27 - Crystalline Polymers License and Block Copolymer License between Phillips Petroleum Co. and the
Registrant.**
10.28(a) - Amended and Restated Limited Liability Company Regulations of LYONDELL-CITGO Refining Company
Ltd.++++
10.28(b) - Contribution Agreement between Lyondell Petrochemical Company and LYONDELL-CITGO Refining Company
Ltd.++++
10.28(c) - Crude Oil Supply Agreement between LYONDELL-CITGO Refining Company Ltd. and Lagoven, S.A.++++
22 - Subsidiaries of the Registrant.
24 - Consent of Coopers & Lybrand L.L.P.
25 - Powers of Attorney.
27 - Financial Data Schedule.
------------
</TABLE>
* Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
33-25407) and incorporated herein by reference.
** Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for
the year ended December 31, 1989 and incorporated herein by reference.
*** Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for
the year ended December 31, 1990 and incorporated herein by reference.
**** Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for
the year ended December 31, 1991 and incorporated herein by reference.
+++ Filed as an exhibit to Registrant's Annual Report on Form 10-K Report
for the year ended December 31, 1992 and incorporated herein by reference.
++++ Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as
of July 1, 1993 and incorporated herein by reference.
++++++ Filed as an exhibit to Registrants Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by reference.
+ Filed as an exhibit to Registrants Registration Statement on Form S-3 dated
as of May 5, 1994 and incorporated herein by reference.
++ Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994 and incorporated herein by reference.
59
<PAGE>
(b) Consolidated Financial Statements and Financial Statement Schedules
(1) Consolidated Financial Statements
Consolidated Financial Statements filed as part of this Annual
Report on Form 10-K are listed in the Index to Consolidated Financial
Statements on page 36.
(2) Financial Statement Schedules
All financial statement schedules are omitted because they are not
applicable or the required information is contained in the Financial
Statements or notes thereto.
Copies of exhibits will be furnished upon prepayment of 25 cents per page.
Requests should be addressed to the Secretary.
(c) Reports on Form 8-K:
No Current Reports on Form 8-K were filed during the quarter ended
December 31, 1994 or thereafter through March 29, 1995.
60
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 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
By: BOB G. GOWER
-------------------------------------------------
Bob G. Gower
Chairman of the Board and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
BOB G. GOWER Chairman of the Board and Chief March 29, 1995
------------ Executive Officer
(Bob G. Gower,
Principal Executive Officer)
WILLIAM T. BUTLER* Director March 29, 1995
------------------
(William T. Butler)
STEPHEN F. HINCHLIFFE, JR.* Director March 29, 1995
----------------------------
(Stephen F. Hinchliffe, Jr.)
DUDLEY C. MECUM II* Director March 29, 1995
-------------------
(Dudley C. Mecum II)
DAN F. SMITH President, Chief Operating Officer March 29, 1995
------------- and Director
(Dan F. Smith)
PAUL R. STALEY* Director March 29, 1995
----------------
(Paul R. Staley)
RUSSELL S. YOUNG Senior Vice President, Chief March 29, 1995
---------------- Financial Officer and Treasurer
(Russell S. Young,
Principal Financial Officer)
JOSEPH M. PUTZ Vice President and Controller March 29, 1995
--------------
(Joseph M. Putz, Principal
Accounting Officer)
*By: BOB G. GOWER March 29, 1995
------------
(Bob G. Gower,
as Attorney-in-fact)
</TABLE>
61
<PAGE>
EXHIBIT 3.3
BY-LAWS OF LYONDELL PETROCHEMICAL COMPANY
(amended and restated as of January 20, 1995)
ARTICLE I
---------
STOCKHOLDERS
------------
Section 1.1. Annual Meeting. The Board of Directors by resolution
----------- --------------
shall designate the time, place and date (which shall be not more than 13 months
after the date of the last annual meeting of stockholders) of the annual meeting
of stockholders for the election of directors and transactions of such other
business as may come before it.
Section 1.2. Notice. Written notice stating the place, day and hour
----------- ------
of each meeting of stockholders and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be mailed either by
the Secretary, or, in the case of a special meeting called by the stockholders
in accordance with Article V of the Certificate of Incorporation, by the
applicable stockholders, at least ten days and not more than sixty days before
the meeting to each stockholder of record entitled to vote at the meeting to his
address appearing on the books of the Company.
Section 1.3. Special Meetings: Purpose; Notification of Stockholder
----------- ------------------------------------------------------
Business. At any special meeting of stockholders only such business shall be
--------
conducted as shall have been set forth in the notice of special meeting.
For business to be properly brought before a special meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Company. To be timely, a stockholder's notice must be
either delivered to or mailed and received at the principal office of the
Company not later than 90 days in advance of such meeting. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the special meeting (a) a brief description of the
business desired to be brought before the special meeting and the reasons for
conducting such business at the special meeting, (b) the name and address, as
they appear on the Company's books, of the stockholder intending to propose such
business, (c) the class and number of shares of capital stock of the Company
which are beneficially owned by the stockholder, (d) a representation that the
stockholder is a holder of record of capital stock of the Company entitled to
vote at such meeting and intends to appear in person or by proxy at the meeting
to present such business, and (e) any material interest of the stockholder in
such business.
Notwithstanding anything in these By-laws to the contrary, no business
shall be conducted at a special meeting except in accordance with the procedures
set forth in this Article I. The
<PAGE>
chairman of the special meeting shall, if the facts warrant, determine and
declare to the meeting that (i) the business proposed to be brought before the
meeting was not a proper subject therefor and/or (ii) such business was not
properly brought before the meeting and in accordance with the provisions of
this Article I, and, if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting or not a
proper subject therefor shall not be transacted.
Section 1.4. Place. Each annual or special meeting of stockholders
----------- -----
shall be held at the principal office of the Company or at such other place in
Delaware or elsewhere as the Board of Directors may designate.
Section 1.5. Quorum. The presence, in person or by proxy, of
----------- ------
stockholders entitled to cast at least a majority of the votes which all
stockholders are entitled to cast on a particular matter shall constitute a
quorum for the purpose of considering such matter at a meeting of stockholders.
If a quorum is not present in person or by proxy, those present may adjourn from
time to time to reconvene at such time and place as they may determine without
further notice to the stockholders.
Section 1.6. Record Dates. The Board of Directors may fix a time not
----------- ------------
less than ten and not more than sixty days prior to the date of any meeting of
stockholders as a record date and not more than sixty days prior to the date
fixed for the payment of any dividend or distribution, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
shares will be made or go into effect, as a record date for the determination of
the stockholders entitled to notice of and to vote at such meeting, or to
receive payment of any such dividend or distribution, or to receive any such
allotment of rights, or to exercise the rights in respect to any such change,
conversion or exchange of shares or for the purpose of any other lawful action.
In such case, only such stockholders as shall be stockholders of record at the
close of business on the date so fixed shall be entitled to notice of or to vote
at such meeting, or to receive payment of such dividend or distribution, or to
receive such allotment of rights, or to exercise such rights in respect to any
change, conversion or exchange of shares, as the case may be, notwithstanding
any transfer of any shares on the books of the Company after the record date
fixed as aforesaid.
Section 1.7. Voting Rights of Stockholders and Proxies. Each
----------- -----------------------------------------
stockholder of record entitled to vote in accordance with the laws of the State
of Delaware, the Certificate of Incorporation or these By-Laws, shall at every
meeting of the stockholders be entitled to one vote in person or by proxy for
each share of stock entitled to vote standing in his name on the books of the
Company, but no proxy shall be voted on after three years from its date, unless
the proxy provides for a longer period.
2
<PAGE>
ARTICLE II
----------
DIRECTORS
---------
Section 2.1. Management of Business. The business of the Company
----------- ----------------------
shall be managed by its Board of Directors.
Section 2.2. Number. The number of directors constituting the entire
----------- ------
Board of Directors shall be such number as shall be fixed from time to time by
resolution of the Board of Directors. Any such action by the Board of Directors
shall require the vote of a majority of the Board of Directors then in office.
Section 2.3. Age Qualification. No person who has reached seventy-
----------- -----------------
two years of age prior to January 1 of any year shall be elected or re-elected a
director in any year.
Section 2.4. (a) Election and Term. The directors shall be elected
----------- -----------------
at the annual meeting of the stockholders, and each director shall be elected to
hold office until his successor shall be elected and qualified, or until his
earlier resignation or removal.
(b) Notification of Nominations. Except for directors selected by or
---------------------------
pursuant to the provisions of Section 2.6 hereof, only individuals nominated for
election to the Board of Directors pursuant to and in accordance with the
provision of this Section 2.4(b) may be elected to and may serve upon the Board
of Directors of the Company. Subject to the rights of holders of any class or
series of stock of the Company having a preference over the Common Stock as to
dividends or upon liquidation to elect directors under specified circumstances,
nominations for the election of directors may be made by the Board of Directors
or by any stockholder entitled to vote in the election of directors generally.
Subject to the foregoing, only a stockholder of record entitled to vote in the
election of directors generally may nominate one or more persons for election as
directors at a meeting of stockholders and only if written notice of such
stockholder's intent to make such nomination or nominations has been given,
either by personal delivery or by United States mail, postage prepaid, to the
Secretary of the Company and has been received by the Secretary not later than
the following dates: (i) with respect to an election to be held at an annual
meeting of stockholders, 60 days in advance of such meeting if such meeting is
to be held on a day which precedes the anniversary of the previous year's annual
meeting by 30 or more days, or 90 days in advance of such meeting if such
meeting is to be held either less than 30 days prior to or after the anniversary
of the previous year's annual meeting and (ii) with respect to an election to be
held at a special meeting of stockholders for the election of directors, the
close of business on the tenth day following the date on which notice of such
meeting is first given to stockholders. For purposes of this Section 2.4(b),
notice of the meeting shall be deemed to first be given to stockholders when
3
<PAGE>
disclosure of such date is first made in a press release reported by the Dow
Jones News Services, Associated Press or comparable national news service or in
a document publicly filed by the Company with the Securities and Exchange
Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act
of 1934, as amended.
Each such notice to the Company of a nomination shall set forth:
(i) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated;
(ii) a representation that the stockholder will be a holder of record
of stock of the Company entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice;
(iii) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are
to be made by the stockholder; and
(iv) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission, had
the nominee been nominated, or intended to be nominated, by the Board of
Directors.
To be effective, each notice of intent to make a nomination given
hereunder shall be accompanied by the written consent of each nominee to serve
as a director of the Company if elected.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not properly brought before the
meeting in accordance with the provisions hereof and, if he should so determine,
he shall declare to the meeting that such nomination was not properly brought
before the meeting and, as a result, shall not be considered.
Section 2.5. Resignations. Any director of the Company may resign at
----------- ------------
any time by giving written notice to the Company, delivered to the Secretary.
Such resignation shall take effect at the time specified therein, if any, or if
no time is specified therein, then upon receipt of such notice by the Company;
and, unless otherwise provided therein, the acceptance of such resignation shall
not be necessary to make it effective.
Section 2.6. Vacancies and Newly Created Directorships. Vacancies
----------- -----------------------------------------
and newly created directorships resulting from any
4
<PAGE>
increase in the authorized number of directors or any vacancy on the Board of
Directors resulting from death, resignation, disqualification, removal or other
cause may be filled by a majority of the directors then in office, though less
than a quorum, or by a sole remaining director or by the affirmative vote of the
majority of all votes entitled to be cast by holders of stock of the Company at
a duly called annual or special meeting of such holders or by consent in writing
of such holders. Any director so chosen shall hold office until his or her
successor shall be elected and qualified, or until his or her earlier
resignation or removal. When one or more directors shall resign from the Board,
effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or resignations
shall become effective, and each director so chosen shall hold office as herein
provided in the filling of other vacancies.
Section 2.7. Annual Meeting. An annual meeting of the Board of
----------- --------------
Directors shall be held each year in conjunction with the annual meeting of
stockholders, at the place where such meeting of stockholders was held or at
such other place as the Board of Directors may determine, for the purposes of
organization, election or appointment of officers and the transaction of such
other business as shall come before the meeting. No notice of the meeting need
be given.
Section 2.8. Regular Meetings. Regular meetings of the Board of
----------- ----------------
Directors may be held without notice at such times and at such places in
Delaware or elsewhere as the Board of Directors may determine.
Section 2.9. Special Meetings. Special meetings of the Board of
----------- ----------------
Directors may be called by the Chairman of the Board, the President or a
majority of the directors in office, to be held at such time (as will permit the
giving of notice as provided in this section) and at such place (in Delaware or
elsewhere) as may be designated by the person or persons calling the meeting.
Notice of the place, day and hour of each special meeting shall be given to each
director by the Secretary by written notice mailed on or before the third full
business day before the meeting or by notice received personally or by other
means at least twenty-four hours before the meeting. The notice need not refer
to the business to be transacted at the meeting. However, whenever notice is
required to be given under these By-Laws, a written waiver thereof, signed by
the person entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to notice and the attendance of a person at a meeting
shall constitute a waiver of notice of such meeting.
Section 2.10. Quorum of Directors. Except as provided in Sections
------------ -------------------
2.6 and 2.13 hereof, a majority of the directors in office shall constitute a
quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which
5
<PAGE>
there is a quorum shall be the act of the Board of Directors.
A majority of the directors present, whether or not a quorum is
present, may adjourn any meeting of the directors to another time and place.
Notice of any adjournment need not be given if such time and place are announced
at the meeting.
Section 2.11. Meeting by Telephone. One or more directors may
------------ --------------------
participate in a meeting of the Board of Directors or of a committee of the
Board of Directors by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other.
Section 2.12. Compensation. Directors shall receive such
------------ ------------
compensation for their services and expenses for attendance as shall be
determined by the Board of Directors; provided, however, that nothing herein
contained shall be construed to preclude any director from serving the Company
in any other capacity and receiving compensation therefore.
Section 2.13. Committees. The Board of Directors may, by resolution
------------ ----------
adopted by a majority of the whole board then in office, appoint an Executive
Committee of three or more directors. To the extent provided in such
resolution, the Executive Committee shall have and may, subject to applicable
law, exercise the authority of the Board of Directors in the management of the
business and affairs of the Company (when the Board of Directors is not in
session), except that the Executive Committee shall have no power (a) to elect
directors; (b) to alter, amend or repeal these By-Laws or any resolution or
resolutions of the directors designating an Executive Committee; (c) to declare
any dividend or make any other distribution to the stockholders of the Company;
or (d) to appoint any member of the Executive Committee. The Board of Directors
may appoint such other committees as it may deem advisable, and each such
committee shall have such authority and perform such duties as the Board of
Directors may determine. At each meeting of the Board of Directors all action
taken by each committee since the preceding meeting of the Board of Directors
shall be reported to it.
Section 2.14. Consent Action. Any action required or permitted to be
------------ --------------
taken at any meeting of the Board of Directors, or any committee thereof may be
taken without a meeting if all members of the board or committee, as the case
may be, consent thereto in writing, and the writings are filed with the minutes
of proceedings of the board or the committee.
6
<PAGE>
ARTICLE III
-----------
Officers and Agents
-------------------
Section 3.1. Number; Compensation. The officers of the Company shall
----------- --------------------
be chosen by the Board of Directors. The officers shall be a Chairman of the
Board, a President, a Secretary, a Treasurer, and such number of Vice-
Presidents, Assistant Secretaries and Assistant Treasurers, and such other
officers, if any, as the Board of Directors may from time to time determine.
The Board of Directors may choose such other agents as it shall deem necessary.
Any number of offices may be held by the same person. The officers shall
receive such compensation for their services as may be determined by the Board
of Directors or in a manner approved by it.
Section 3.2. Term. Each officer and each agent shall hold office
----------- ----
until the next annual meeting of the Board of Directors or until that officer's
or agent's successor is elected or appointed and qualified or until that officer
or agent's earlier resignation or removal.
Section 3.3. Removal. Any officer or agent may be removed from
----------- -------
office at any time by the Board of Directors with or without cause pursuant to a
resolution adopted by a majority of the whole Board then in office.
Section 3.4. Authority. The officers and agents, if any, shall have
----------- ---------
the authority, perform the duties and exercise the powers in the management of
the Company usually incident to the offices held by them, respectively, and/or
such other authority, duties and powers as may be assigned to them from time to
time by the Board of Directors or (except in the case of the Chief Executive
Officer) by the Chairman of the Board. In addition to the authority to perform
the duties and exercise the powers in the management of the Company usually
incident to the office held by him or her, and/or such other authority, duties
and powers as may be assigned to him or her from time to time by the Board of
Directors, the Chairman of the Board or the President, the Secretary shall
record all of the proceedings of the meetings of the stockholders and directors
in a book to be kept for that purpose. In the absence or disability of the
Secretary, an Assistant Secretary shall have the authority and shall perform the
duties of the Secretary.
Section 3.5. Voting Securities Owned by the Company. Powers of
----------- --------------------------------------
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Company may be executed in the name of and
on behalf of the Company by the Chairman of the Board, the President or any
Vice-President and any such officer may, in the name of and on behalf of the
Company, take all such action as any such officer may deem advisable to vote in
person or by proxy at any meeting of security holders of any
7
<PAGE>
corporation in which the Company may own securities and at any such meeting
shall possess and may exercise any and all rights and powers incident to the
ownership of such securities and which, as the owner thereof, the Company might
have exercised and possessed if present. The Board of Directors may, by
resolution, from time to time confer like powers upon any other person or
persons.
Section 3.6. Corporate Seal. A corporate seal shall be prepared and
----------- --------------
shall be kept in the custody of the Secretary of the Company. The seal or a
facsimile thereof may be impressed, affixed or reproduced, and attested to by
the Secretary or an Assistant Secretary, for the authentication of documents or
instruments requiring the seal and bearing the signature of a duly authorized
officer or agent.
ARTICLE IV
----------
CAPITAL STOCK
-------------
Section 4.1. Stock Certificates. Every holder of stock in the
----------- ------------------
Company shall be entitled to have a certificate signed by, or in the name of the
Company by, the Chairman of the Board of Directors, or the President or a Vice-
President, and by the Secretary or an Assistant Secretary of the Company,
certifying the number of shares owned by him in the Company. Where such
certificate is signed (1) by a transfer agent other than the Company or its
employee, or (2) by a registrar other than the Company or its employee, the
signatures of the officers of the Company may be facsimiles. In case any
officer who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the Company with the same effect as if he were such
officer at the date of issue.
Section 4.2. Transfers. Stock of the Company shall be transferable
----------- ---------
in the manner prescribed by the laws of the State of Delaware.
Section 4.3. Registered Holders. Prior to due presentment for
----------- ------------------
registration of transfer of any security of the Company in registered form, the
Company shall treat the registered owner as the person exclusively entitled to
vote, to receive notifications and to otherwise exercise all the rights and
powers of an owner, and shall not be bound to recognize any equitable or other
claim to, or interest in, any security, whether or not the Company shall have
notice thereof, except as otherwise provided by the laws of the State of
Delaware.
Section 4.4. New Certificates. The Company shall issue a new
----------- ----------------
certificate of stock in the place of any certificate theretofore issued by it,
alleged to have been lost, stolen or destroyed, if
8
<PAGE>
the owner: (1) so requests before the Company has notice that the shares of
stock represented by that certificate have been acquired by a bona fide
purchaser; (2) files with the Company a bond sufficient (in the judgment of the
Secretary) to indemnify the Company against any claim that may be made against
it on account of the alleged loss or theft of that certificate or the issuance
of a new certificate; and (3) satisfies any other requirements imposed by the
Secretary that are reasonable under the circumstances. A new certificate may be
issued without requiring any bond when, in the judgment of directors, it is
proper so to do.
ARTICLE V
---------
MISCELLANEOUS
-------------
Section 5.1. Indemnification.
------------ ---------------
(a) Indemnification of Officers and Directors. The Company shall
-----------------------------------------
indemnify the officers and directors of the Company with respect to all matters
to which Section 145 of the General Corporation Law of the State of Delaware may
in any way relate, to the fullest extent permitted or allowed by the laws of the
State of Delaware, whether or not specifically required, permitted or allowed by
said Section 145. 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 that may have previously arisen hereunder.
(b) 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 or officer or to serve another entity at the request of
the Company.
(c) 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.
(d) Indemnity Agreements. The Company may from time to time enter
--------------------
into indemnity agreements with the persons who are members of
9
<PAGE>
its Board of Directors, its elected officers and with such other persons as the
Board of Directors may designate, the form of such indemnity agreements to be
approved by a majority of the Board then in office.
(e) 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 Article V.
Section 5.2. Fiscal Year and Annual Report.
----------- -----------------------------
(a) Fiscal Year. The fiscal year of the Company shall be the calendar
-----------
year.
(b) Annual Report. The Board of Directors shall cause an annual
-------------
report to be prepared and mailed to the stockholders in accordance with the
rules and regulations of the Securities and Exchange Commission and the New York
Stock Exchange.
Section 5.3. Offices. The registered office of the Company in the
----------- -------
State of Delaware shall be at Corporation Trust Center, 1209 Orange Street, in
the City of Wilmington, County of New Castle. The Company may also have offices
at other places within and/or without the State of Delaware.
Section 5.4. Waivers of Notice; Dispensing with Notice. Whenever any
----------- -----------------------------------------
notice whatever is required to be given under the provisions of the General
Corporation Law of the State of Delaware, of the Certificate of Incorporation of
the Company, or of these By-Laws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice.
Attendance of a person at a meeting of stockholders shall constitute a
waiver of notice of such meeting, except when the stockholder attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
Whenever any notice whatever is required to be given under the
provisions of the General Corporation Law of the State of Delaware, of the
Certificate of Incorporation of the Company, or of these By-Laws, to any person
with whom communication is made unlawful by any law of the United States of
America, or by any rule, regulation, proclamation or executive order issued
under any such law, then the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental authority or
10
<PAGE>
agency for a license or permit to give such notice to such person; and any
action or meeting which shall be taken or held without notice to any such person
or without giving or without applying for a license or permit to give any such
notice to any such person with whom communication is made unlawful as aforesaid,
shall have the same force and effect as if such notice had been given as
provided under the provisions of the General Corporation Law of the State of
Delaware, or under the provisions of the Certificate of Incorporation of the
Company or of these By-Laws. In the event that the action taken by the Company
is such as to require the filing of a certificate under any of the other
sections of this title, the certificate shall state, if such is the fact and if
notice is required, that notice was given to all persons entitled to receive
notice except such persons with whom communication is unlawful.
Section 5.5. Amendment of Bylaws. These By-Laws may be altered,
----------- -------------------
amended or repealed at any meeting of the Board of Directors. Any such action
shall require a vote of the majority of the Board of Directors then in office.
Section 5.6. Section Headings and Statutory References. The headings
----------- -----------------------------------------
of the Articles and Sections of these By-Laws have been inserted for convenience
of reference only and shall not be deemed to be a part of these By-Laws.
ARTICLE VI
----------
Emergency By-laws
-----------------
Section 6.1. When Operative. The emergency By-Laws provided by the
----------- --------------
following sections shall be operative during any emergency resulting from an
attack on the United States, any nuclear disaster, earthquake, or other natural
disaster or during the existence of any catastrophe, as a result of which a
quorum of the Board of Directors or the Executive Committee thereof cannot be
readily convened for action notwithstanding any different provision in the
preceding sections of the By-Laws or in the Certificate of Incorporation of the
Company or in the General Corporation Law of the State of Delaware. To the
extent not inconsistent with the emergency By-Laws, the By-Laws provided in the
preceding sections shall remain in effect during such emergency and upon the
termination of such emergency, the emergency By-Laws shall cease to be operative
unless and until another such emergency shall occur.
Section 6.2. Meetings. During any such emergency:
----------- --------
(a) Any meeting of the Board of Directors may be called by any
director. Whenever any officer of the Company who is not a director has reason
to believe that no director is available to participate in a meeting, such
officer may call a meeting to be held under the
11
<PAGE>
provisions of this section.
(b) Notice of each meeting called under the provisions of this section
shall be given by the person calling the meeting or at his request by any
officer of the Company. The notice shall specify the time and the place of the
meeting, which shall be the principal office of the Company at the time if
feasible and otherwise any other place specified in the notice. Notice need be
given only to such of the directors as it may be feasible to reach at the time
and may be given by such means as may be feasible at the time, including
publication or radio. If given by mail, messenger, telephone or telegram, the
notice shall be addressed to the director at his residence or business address
or such other place as the person giving the notice shall deem suitable. In the
case of meetings called by an officer who is not a director, notice shall also
be given similarly, to the extent feasible, to the persons named on the list
referred to in part (c) of this section. Notice shall be given at least two
days before the meeting if feasible in the judgment of the person giving the
notice and otherwise the meeting may be held on any shorter notice that he shall
deem to be suitable.
(c) At any meeting called under the provisions of this section, the
director or directors present shall constitute a quorum for the transaction of
business. If no director attends a meeting called by an officer who is not a
director and if there are present at least three of the persons named on a
numbered list of personnel approved by the Board of Directors before the
emergency, those present (but not more than nine appearing highest in priority
on such list) shall be deemed directors for such meeting and shall constitute a
quorum for the transaction of business.
Section 6.3. Lines of Succession. The Board of Directors, during as
----------- -------------------
well as before any such emergency, may provide, and from time to time modify,
lines of succession in the event that during such an emergency any or all
officers or agents of the Company shall for any reason be rendered incapable of
discharging their duties.
Section 6.4. Offices. The Board of Directors, during as well as
----------- -------
before any such emergency, may, effective during the emergency, change the
principal office or designate several alternative principal offices or regional
offices, or authorize the officers so to do.
Section 6.5. Liability. No officer, director or employee acting in
----------- ---------
accordance with these emergency By-Laws shall be liable except for willful
misconduct.
Section 6.6. Repeal or Change. The emergency By-Laws shall be
----------- ----------------
subject to repeal or change by action of the Board of Directors or by the
affirmative vote of at least 66-2/3% of all votes entitled to be cast by the
holders of Capital Stock of the Company entitled to vote generally in the
election of directors, except
12
<PAGE>
that no such repeal or change shall modify the provisions of the next preceding
section with regard to action or inaction prior to the time of such repeal or
change.
13
<PAGE>
EXHIBIT 10.9
RESTRICTED STOCK PLAN
OF LYONDELL PETROCHEMICAL COMPANY
Section 1 Purpose.
-------
The Restricted Stock Plan of Lyondell Petrochemical Company (the "Plan") is
intended to provide key employees (including executive officers) of
Lyondell Petrochemical Company and its subsidiaries and affiliates (the
"Company") with a proprietary interest in the Company's success and
progress by granting them shares of the Company's Common Stock ("Common
Stock"), that are restricted in accordance with the terms and conditions
set forth below ("Restricted Shares"). The Plan is intended to increase
the alignment of key employees with the interests of the Company's
shareholders in terms of both risk and reward and to strengthen the
Company's ability to continue to attract and retain highly qualified
employees.
Section 2 Eligibility.
-----------
Executive officers who are eligible to participate in the Company's
Value Share Plan ("Value Share Plan Participants") shall automatically be
eligible to participate in this Plan. In addition, the Company's Chief
Executive Officer may designate key employees of the Company, other than
Value Share Plan Participants, who he determines to be in a position to
contribute directly to the Company's continued economic success, as
eligible to participate in this Plan. These participants, together with
the Value Share Plan Participants, shall be referred to as "Participants".
No non-employee director shall be eligible to participate in this Plan.
Section 3 Shares Reserved Under the Plan
------------------------------
The shares of Common Stock covered by grants under this Plan as Restricted
Shares will not exceed one (1) million shares in the aggregate, subject to
adjustment as provided below, and in accordance with and subject to Rule
16b-3 of the Securities and Exchange Act of 1934, ("Exchange Act") as
amended. Restricted Shares may be originally issued or treasury shares or
a combination of both.
Any shares of Common Stock granted as Restricted Shares that are
terminated, forfeited or surrendered or which expire for any reason will be
available again for issuance under this Plan, provided that those shares
shall not be reissued if any Participant subject to Section 16 of the
Exchange Act, directly or indirectly received any of the benefits of
ownership of those shares of Common Stock prior to termination, forfeiture
or surrender.
In the event of a recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation, rights offering,
separation, reorganization or liquidation, or any other change in the
Company's corporate structure or shares, the Compensation Committee
("Committee") of the Board of Directors ("Board") of the Company may make
1
<PAGE>
such equitable adjustments in the number and class of shares authorized to
be granted as Restricted Shares, as it deems appropriate to prevent
dilution or enlargement of rights. Shares issued as a consequence of any
such change shall be issued subject to the same restrictions and provisions
applicable to the original grant of Restricted Shares.
Section 4 Grants.
------
The Chief Executive Officer of the Company may from time to time authorize
grants of Restricted Shares to Participants, other than Value Share Plan
Participants, who have been designated as eligible under Section 2 of this
Plan. At least annually, the Chief Executive Officer shall notify the
Committee of key employees designated as eligible and the amount of
authorized grants of Restricted Shares to those key employees under this
Plan.
If the Participant has been awarded Restricted Stock under the Value Share
Plan, the Committee shall grant each Value Share Plan Participant a number
of Restricted Shares under this Plan equal one third of the total award
under the Value Share Plan, divided by the average daily closing share
price of Common Stock during the last month of the Performance Cycle on
which the award is based. If the Participant has been awarded Restricted
Stock as a separate award under the Value Share Plan, the Committee shall
grant the Value Share Participant a number of Restricted Shares equal to
that separate award based on the share price described above.
Grants of Restricted Shares to Participants shall be on the terms and
conditions and with the restrictions determined from time to time by the
Committee under Section 5 of this Plan.
Section 5 Terms and Conditions of Restricted Shares.
-----------------------------------------
(a) General. Each grant of Restricted Shares shall be subject to the
-------
restrictions under subsection (c) for the Restricted Period of the
grant.
(b) Restricted Period. The Restricted Period shall begin on the date of
-----------------
the grant and shall continue for a period of time determined on the
date of the grant, subject to the following conditions: (i) the
Restricted Period for a grant to a Value Share Plan Participant shall
lapse on the last day of each year following the grant as to one third
of the grant of Restricted Shares, until, on the last day of the third
year following the grant, the Restricted Period has totally lapsed as
to all Restricted Shares for that particular grant; and (ii) the
Restricted Period for a grant to Participants who are not Value Share
Plan Participants shall not be less than the Restricted Period for a
grant to Value Share Plan Participants.
(c) Restrictions. One or more of these restrictions shall be a restriction
------------
which constitutes a substantial risk of forfeiture. The Participant
shall have all ownership rights and privileges of a shareholder as to
the Restricted Shares, including the right to vote such Restricted
Shares, except as follows: (i) the Participant shall not be entitled
to delivery of a stock certificate representing the number of
Restricted Shares granted until the lapse of the Restricted Period;
(ii) none of the Restricted Shares may be sold, transferred, assigned,
pledged, or otherwise encumbered or disposed of during the Restricted
Period; and (iii) except as provided in subsection
2
<PAGE>
(d), all grants of Restricted Shares shall be forfeited if the
Participant fails to satisfy the terms of the grant of Restricted
Shares by the end of the Restricted Period. During the Restricted
Period, the Restricted Shares may be held on an uncertificated basis
or a stock certificate representing the number of Restricted Shares
granted may be registered in each Participant's name but held in
custody by the Company for the Participant's account and not released
to the Participant until the Restricted Period lapses.
(d) Forfeiture.
----------
All rights of a Participant to any grant of Restricted Shares shall be
forfeited without any further obligation on the Company's part if (i)
a Participant ceases to be an employee of the Company for a reason
other than Death, Disability, Retirement, Change of Control, or
transfer to the Atlantic Richfield Company, LYONDELL-CITGO Refining
Company Ltd. or an entity substantially owned or controlled by the
Company; or (ii) if the restrictions imposed by the Committee are not
otherwise satisfied by the end of the Restricted Period, unless the
Committee makes an affirmative decision that any or all of the
Participant's grant of Restricted Shares shall not be forfeited.
Restricted Shares that are forfeited may be used for other grants of
Restricted Shares.
(e) Lapse of Restrictions.
---------------------
If a Participant ceases to be an employee of the Company by reason of
Disability, Death or Retirement or, if a Change of Control occurs, any
restrictions on an outstanding grant of Restricted Shares shall
immediately lapse and the Participant's right to the grant shall be
fully vested.
For purposes of thve section, the following definitions apply:
(i) "Disability", for Participants other than Value Share Plan
Participants, means a permanent and total disability as defined
in Section 22(e)(3) of the Internal Revenue Code. "Disability",
for Value Share Plan Participants, means the Participant is
totally disabled according to the provisions of the Company's
Executive Long-Term Disability Plan.
(ii) "Retirement" means a termination of employment with a right to
commence an immediate retirement allowance under a retirement
plan maintained by the Company.
(iii)"Change of Control" means a change of control as defined in a
Participant's Executive Severance Agreement between the
Participant and the Company or, if the Participant does not have
an Executive Severance Agreement with the Company, as defined in
the Company's Supplemental Executive Benefit Plans Trust
Agreement.
3
<PAGE>
(f) Delivery of Restricted Shares. A stock certificate for the number of
-----------------------------
Restricted Shares which have vested shall be delivered free of all
such restrictions to the Participant or the Participant's beneficiary
or estate, as the case may be, on the lapse of the Restricted Period.
Section 6 Regulatory Compliance.
---------------------
A Participant or Participant's beneficiary or estate shall not receive or
sell any Common Stock granted pursuant to this Plan until all appropriate
listing, registration and qualification requirements and consents and
approvals have been satisfied or obtained, free of any condition
unacceptable to the Board of Directors.
The Committee shall have the authority to remove any or all of the
restrictions on the Restricted Shares, including restrictions under the
Restricted Period, whenever it determines that such action is appropriate
as a result of changes in applicable laws or other circumstances after the
date of the grant.
Section 7 Administration.
--------------
The Plan shall be supervised and administered by the Committee or any
successor committee with responsibility for executive compensation. The
Committee shall have all necessary authority and discretion to interpret
any provision of this Plan or to determine any questions regarding grants
of Restricted Shares under this Plan. Any determination or interpretation
by the Committee shall be final, conclusive and binding on all persons.
Any Committee determination may be made in writing signed by a majority of
Committee members, without notice or meeting.
Section 8 Termination or Amendment of the Plan.
------------------------------------
The Board may at any time terminate the Plan and may from time to time
alter or amend the Plan or any part (including any amendment deemed
necessary to ensure that the Company may comply with any regulatory
requirement referred to in Section 6) without shareholder approval, unless
otherwise required by law or by the rules of the Securities and Exchange
Commission or New York Stock Exchange. No termination or amendment of the
Plan may impair a Participant's rights with respect to outstanding grants
of Restricted Shares under the Plan without the Participant's consent.
Section 9 Miscellaneous.
-------------
(a) The Company shall have the right to require that the Participant pay
any taxes required by law with respect to the issuance or delivery of,
or the lapse of restrictions on, Restricted Shares prior to issuance
or delivery.
4
<PAGE>
(b) Nothing in the Plan shall be deemed to create any right in a
Participant to continued employment or other service with the Company.
Participants shall have no rights under this Plan other than as
general creditors of the Company.
Section 10 Governing Law.
-------------
The Plan shall be construed according to the law of the State of Texas to
the extent federal law does not supersede and preempt State law.
Section 11 Effective Date.
--------------
The Plan shall become effective as of January 1, 1995, provided that a
majority of the holders of the Company's Common Stock shall have approved
the Plan at the Company's 1995 Annual Meeting of Stockholders.
5
<PAGE>
EXHIBIT 10.10
LYONDELL PETROCHEMICAL COMPANY
-------------------------------
VALUE SHARE PLAN
Effective January 1, 1995
<PAGE>
TABLE OF CONTENTS
I.PURPOSE
II.DESCRIPTION OF PLAN OPERATION
III.OTHER PLAN PROVISIONS
IV.DEFINITIONS
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
VALUE SHARE PLAN
I. PURPOSE
The purpose of the Lyondell Petrochemical Company Value Share Plan (the
"Plan") is to:
. Focus Participants on key measures of value creation for the Company's
shareholders and on operating measures that lead to the creation of
value
. Provide significant upside and downside award potential commensurate
with shareholder value creation
. Encourage a long-term management perspective and reward for sustained
long-term performance
. Enhance the ability of Lyondell to attract and retain highly talented
and competent individuals
. Reinforce a team orientation among top management
. Encourage ownership of the Company's stock among top management
II. DESCRIPTION OF PLAN OPERATION
II.1 GENERAL PLAN DESCRIPTION
The Value Share Plan (the "Plan") provides the opportunity for top executives
of Lyondell Petrochemical Company ("Lyondell" or the "Company") to receive
incentive awards based on:
(1) Performance measured against two key indicators of shareholder value:
. Economic Value Added
. Market Value Added
(2) Performance measured against four key indicators of operating success:
. Financial Results
. Customer Satisfaction Ranking
. Corporate Responsibility Ranking
. Employee Productivity Ranking
At the beginning of each Performance Cycle (or in some cases during the
Performance Cycle), certain top executive officers of the Company will be
selected to participate in the Plan for that Performance Cycle. Upon selection,
each Participant will be assigned an Allocation Percentage, which will indicate
the extent to which each Participant will share in the amounts generated by the
Plan.
Following the end of each Performance Cycle, two award pools will be created:
(1) a Value Award Pool and (2) an Operating Award Pool. The Value Award Pool
will be created based upon Lyondell's performance over the Performance Cycle.
The Value Award Pool will equal the sum of [a+b], as follows:
(a) 4.0% of Average Economic Value Added, plus
(b) 1.25% of Average Market Value Added
An Operating Award Pool will be created based on Lyondell's operating
performance in the areas of financial results, customer satisfaction, corporate
responsibility and employee productivity. This pool may be adjusted downward by
the Compensation Committee (the "Committee") of the Board of Directors of the
Company based on its assessment of Lyondell's financial and strategic
performance against any criteria that it deems appropriate.
1
<PAGE>
The Value Award Pool and the Operating Award Pool will then be allocated to
Participants in accordance with each Participant's Allocation Percentage.
Awards to Participants typically will be paid out in three parts [a+b+c], as
follows:
(a) One-third in cash paid within 90 days following the end of the
Performance Cycle;
(b) One-third in Restricted Stock issued within 90 days following the end
of the Performance Cycle; and
(c) One-third in Deferred Cash paid at the time that the related Restricted
Stock vests
The number of shares of Restricted Stock to be granted to each Participant
will be calculated by dividing the Participant's award in (b) above by the
Company's average daily closing stock price during the last month of the
Performance Cycle. The Restricted Stock will vest annually in three equal
installments over three years following the end of the Performance Cycle, and
will earn dividends and have voting rights over the restriction period.
The Deferred Cash award will be paid out at the time that the related
Restricted Stock vests in an amount equal to the value of the Restricted Stock
at the time of its vesting.
In addition, Participants will receive the cash equivalent to first quarter
dividends which otherwise would have been earned on the Restricted Stock if the
Restricted Stock grants were made immediately after the end of the Performance
Cycle.
A detailed description of how the Plan works is presented in the following
sections of this document.
II.2 ELIGIBILITY
Plan participation will be extended to the top executives of the Company who,
in the opinion of the Compensation Committee of Lyondell, have the opportunity
to significantly impact the long-range success and value of the Company. These
executives, referred to as Participants, will be notified in writing of their
selection to participate in the Plan within 90 days of being elected an
executive officer of the Company. No non-employee directors shall be eligible
to participate in this Plan.
II.3 ALLOCATION PERCENTAGE
All Participants will be assigned an Allocation Percentage for each
Performance Cycle by March 30 of the first year of each Performance Cycle. The
initial and maximum Allocation Percentages for the Chief Executive Officer and
the Chief Operating Officer are 35% and 20%, respectively. Other Allocation
Percentages will be determined by the Compensation Committee, based on the
number of Participants in the Plan, the position level of each Participant, and
other considerations, as deemed appropriate by the Committee.
If a Participant is selected to participate in the Plan after March 30 of the
first year of the Performance Cycle, the Participant will be assigned an
Allocation Percentage commensurate with his/her position level in the
organization, as well as other factors that the Committee may consider. The
Participant will be notified of the Allocation Percentage within 90 days of
selection to participate. Adding new Participants to the Plan during a
Performance Cycle may result in Allocation Percentages which total more than
100% for that Performance Cycle. If a Participant ceases to participate in the
Plan, Allocation Percentages for ongoing Performance Cycles will not be
readjusted for remaining Participants.
The Allocation Percentages for Performance Cycles ending in 1995, 1996, 1997,
1998 and 1999 will be established prior to March 30, 1995.
2
<PAGE>
II.4 VALUE AWARD POOL
Within 60 days following the end of the Performance Cycle, a Value Award Pool
will be established based on Lyondell's performance over the Performance Cycle.
The Value Award Pool will equal the sum of [a+b] for the Performance Cycle, as
follows:
(a) 4.0% of Average Economic Value Added, plus
(b) 1.25% of Average Market Value Added
II.5 AVERAGE ECONOMIC VALUE ADDED
Economic Value Added measures the Company's cash flow relative to the return
that debt and equity holders expect to receive on the Company's capital. Each
year of a Performance Cycle, Economic Value Added will be measured by the
difference between (i) cash generated by Company operations and (ii) the sum of
the Company's debt and equity capital, multiplied by a factor representing
investors' expected rate of return on that capital, as calculated under the
formula in Schedule A.
Average Economic Value Added will be determined by calculating the sum of
Economic Value Added for each year of a Performance Cycle and dividing the
total by the number of years in that cycle.
II.6 AVERAGE MARKET VALUE ADDED
Average Market Value Added measures changes in total return to shareholders
during a Performance Cycle, including the value of dividend reinvestment, as
calculated under the formula in Schedule B.
II.7 OPERATING AWARD POOL
Within 60 days following the end of the Performance Cycle, an Operating Award
Pool shall be established. The extent to which this pool is created will be
contingent upon Lyondell meeting certain criteria during the Performance Cycle.
Operating Award Pool amounts to be made available upon the achievement of these
criteria include:
<TABLE>
<CAPTION>
OPERATING
OPERATING PERFORMANCE STANDARD AWARD POOL
------------------------------ ----------
<C> <S> <C>
(1) Financial Performance refers to Net Income in the final year
of the Performance Cycle greater than or equal to dividends
paid in the final year of the Performance Cycle.............. $ 300,000
(2) Customer Satisfaction Ranking................................ 200,000
(3) Corporate Responsibility Ranking............................. 200,000
(4) Employee Productivity Ranking................................ 300,000
----------
Total Operating Award Pool................................... $1,000,000
==========
</TABLE>
Within 60 days following the end of the Performance Cycle, the Compensation
Committee also will evaluate the Company's performance in the final year of the
Performance Cycle on any criteria that it deems appropriate. These criteria may
be financial or strategic in nature and could include, but are not limited to,
environmental and health measures, key strategic accomplishments, and quality
measures. Based on this subjective assessment, the Compensation Committee will
rate Lyondell's annual performance and, in its discretion, reduce the Operating
Award Pool, if appropriate. The extent of any reduction will be contingent upon
Lyondell's performance rating as follows:
<TABLE>
<CAPTION>
DOWNWARD TOTAL OPERATING
PERFORMANCE RATING ADJUSTMENT(1) AWARD POOL
------------------ ------------- ---------------
<S> <C> <C>
Exceptional....................................... $ 0 $1,000,000
Good.............................................. $ 500,000 $ 500,000
Partially meets expectations...................... $ 850,000 $ 150,000
Deficient......................................... $1,000,000 $ 0
</TABLE>
--------
(1) Interpolate for performance between discrete points
3
<PAGE>
II.8 AWARD CALCULATION
Each Participant's award under the Plan for a Performance Cycle will be
determined by multiplying the Participant's Allocation Percentage by the sum of
the Value Award Pool and the Operating Award Pool in accordance with the
formula [a*(b+c)], as follows:
(a) Participant's Allocation Percentage, multiplied by the sum of:
(b) Value Award Pool, plus
(c) Operating Award Pool.
The maximum award that can be paid based on the Value Award Pool and the
Operating Award Pool for any Participant for any Performance Cycle equals
$3,500,000. This maximum amount includes payments in cash, Restricted Stock,
and Deferred Cash, as described in Section II.9 below.
In addition, a Participant will receive an award in cash equal to the amount
of dividends which would have been paid on shares of Restricted Stock for the
first quarter in the year of the award, as if the Participant had been granted
Restricted Stock immediately after the end of the Performance Cycle. This award
shall not be paid if the Participant actually receives the dividends.
II.9 PAYOUT OF AWARDS
Earned awards (except for Deferred Cash) will be paid out within 90 days
following the end of the Performance Cycle. Except in the event of Termination
due to death, Retirement, or permanent Disability, awards will be paid out in
three parts as follows:
(a) One-third in cash paid within 90 days following the end of the
Performance Cycle;
(b) One-third in shares of Restricted Stock granted within 90 days following
the end of the Performance Cycle; and
(c) One-third in Deferred Cash paid at the time that the related Restricted
Stock vests.
Any award of cash equal to dividends under Section II.8 also shall be paid
within 90 days of the end of a Performance Cycle.
In the event of Termination due to death, Retirement, or permanent
Disability, pro-rata awards will be paid out in cash within 90 days following
the end of the Performance Cycle in accordance with the provisions of Section
III.3.
The number of shares of Restricted Stock to be granted to each Participant
will be calculated by dividing the Participant's award in (b) above by the
Company's average daily closing stock price during the last month of the
Performance Cycle. The Restricted Stock will vest in three equal installments
on the last day of the year in each of the three years following the end of the
Performance Cycle. Restricted Stock will vest immediately upon a Change in
Control or upon the Participant's death, Retirement, or permanent Disability.
The Restricted Shares will earn dividends, as paid, and have voting rights over
the restricted period.
The Deferred Cash award will be paid at the time that the related Restricted
Stock vests in an amount equal to the number of shares of Restricted Stock
vesting multiplied by the Company's closing stock price on the vesting date.
II.10 DISCRETION TO REDUCE AWARDS
The Committee may exercise negative discretion and reduce any awards based on
the Value Award Pool and the Operating Award Pool payable to any individual who
participates in the Plan.
4
<PAGE>
II.11 SEPARATE DISCRETIONARY AWARDS
The Committee may pay discretionary awards which are not based on Allocation
Percentages, in addition to any awards paid in accordance with Section II.8 of
the Plan, to any Participant in the Plan for any year in cash, Restricted
Stock, Deferred Cash, or any combination thereof.
II.12 DEFERRALS
The Participant may elect to defer cash and Deferred Cash amounts calculated
under the Plan under the terms of any deferred compensation plan in which
he/she is eligible to participate.
If any payment of any amount under this Plan would be disallowed under Code
Section 162(m) by reason of the fact that the Participant's applicable employee
remuneration, as defined in Code Section 162(m)(4), either exceeds or, if such
amount were paid, would exceed the $1,000,000 limitation in Code 162(m)(1), the
Committee may, in its sole discretion, defer the payment of this excess amount,
but only to the extent that, and for so long as, the Company's tax deduction
for the payment would be disallowed under Code Section 162(m). No such payment,
however, may be deferred beyond three months after the end of the Company's
fiscal year in which the Participant's termination of employment occurs. In
addition, the Committee may accelerate the payment of previously deferred
amounts if it determines that the amount of the tax deduction that would be
disallowed is not significant. Amounts which are deferred under this Section
II.12 will be credited with interest at a rate provided for in the Company's
Executive Deferral Plan at the time of the deferral or at the prime rate of
Citibank, N.A. in effect from time to time if no deferral plan is in effect at
the time of the award payout.
III. OTHER PLAN PROVISIONS
III.1 ACCRUAL OF AWARDS
This is an unfunded Plan. Awards will be charged to the Company's earnings
according to Generally Accepted Accounting Principles (GAAP). Accrual of awards
will not imply a promise by the Company to pay any of a Participant's award.
Awards will be paid only upon the completion of the Performance Cycle, in
accordance with provisions outlined elsewhere in this document.
III.2 EMPLOYMENT
In order to receive an award under the Plan, a Participant must be employed
by Lyondell at the end of the Performance Cycle, except as otherwise noted
below.
III.3 TERMINATION, DEMOTIONS, AND TRANSFERS
If Termination of the Participant's employment occurs during the Performance
Cycle by reason of death, Disability, or Retirement, or if Termination occurs
within one year following a Change in Control, or if the Participant is
rendered ineligible to Participate in the Plan due to a demotion or a transfer
by the Company to an Affiliate, such as LYONDELL-CITGO Refining Company Ltd.,
the Participant (or the Participant's beneficiary or estate in the event of
death) will be eligible to receive a pro-rata award, whereby the Participant's
award will be multiplied by the number of full months that the Participant was
employed by the Company during the Performance Cycle, divided by the number of
months in the Performance Cycle. Pro-rated awards earned pursuant to this
Section III.3 will be paid out in their entirety in cash within 120 days
following the end of the Performance Cycle.
A Participant who terminates employment with the Company prior to the end of
the Performance Cycle for any other reason (whether voluntary or involuntary)
in the absence of a Change in Control will forfeit the opportunity to earn an
award under the Plan.
Notwithstanding any other provision of the Plan, the Committee may, in its
sole discretion, permit continued participation, pro-ration or early
distribution (or a combination) of awards which would otherwise be forfeited.
5
<PAGE>
III.4 DESIGNATION OF BENEFICIARIES
A Participant may designate a beneficiary or beneficiaries to receive, in the
event of the Participant's death, all or part of the amounts to be distributed
to the Participant under the Plan.
III.5 NEW HIRES AND PROMOTIONS
Individuals who have been selected during the Performance Cycle to
participate in the Plan and who have a minimum of one month of service as a
Participant may be eligible, at the discretion of the Committee, to receive a
pro-rata award. If the Participant has been selected to receive a pro-rata
award, the Participant's award will be multiplied by the number of full months
that the Participant was eligible to participate in the Plan during the
Performance Cycle, divided by the number of months in the Performance Cycle.
Pro-rated awards earned pursuant to this Section III.5 will be paid out in a
combination of cash, Restricted Stock and Deferred Cash in accordance with
Section II. 8 of this document.
III.6 AMENDMENT OR TERMINATION OF THE PLAN
This Plan may be amended, suspended, or terminated at any time by the
Committee without notice, provided that no change to the Plan may be made,
unless required by law, that adversely affects a previously earned award. In
the case of termination of the Plan, the Committee, if it determines in its
sole discretion that it is advisable under the circumstances, may authorize the
pro-ration and/or early distribution of awards earned under the Plan. However,
no amendment or change in the Plan may, without the approval of the
shareholders of the Company, be effective with respect to an award which is
intended to satisfy the requirements of Code Section 162(m), if such approval
is required by Code Section 162(m)(4)(C).
III.7 PLAN ADMINISTRATION
The Committee has the full power and authority to construe, interpret, and
administer the Plan and to make rules and regulations in accordance with Plan
provisions. All Committee decisions, actions, determinations, or
interpretations will be at the Committee's sole discretion and will be final,
conclusive and binding on the Company, Participants and all other persons.
In making any determination under the Plan, the Committee will be entitled to
rely on opinions, reports, statements, or advice of officers of the Company,
and of counsel, public accountants, and other experts or third parties.
No member of the Committee will be personally liable for any action taken in
good faith, any exercise of power given to the Committee under the Plan, or any
action of any other member of the Committee.
III.8 LIMITATION OF EMPLOYEE RIGHTS
No Employee has a claim or right to be a Participant in the Plan, to continue
as a Participant, or to be granted an award under the Plan. Lyondell is not
obligated to give uniform treatment (e.g., the assignment of Allocation
Percentages) to Employees or Participants under the Plan. Participation in the
Plan does not give an Employee the right to be retained in the employment of
the Company, nor does it imply or confer any other employment rights.
Nothing contained in the Plan will be construed to create a contract of
employment with any Participant. Lyondell reserves the right to elect any
person to its offices and to remove Employees in any manner and upon any basis
permitted by law.
Nothing contained in the Plan will be deemed to require Lyondell to deposit,
invest or set aside amounts for the payment of any awards. Participation in the
Plan does not give a Participant any ownership, security or other rights in any
assets of the Company.
6
<PAGE>
III.9 WITHHOLDING TAX
Lyondell will deduct from all awards paid under the Plan any taxes required
by law to be withheld.
III.10 EFFECTIVE DATE
The Plan is effective as of January 1, 1995, and will remain in effect unless
otherwise terminated or amended by the Compensation Committee, provided that
the Plan is approved by the Company's shareholders on or before December 31,
1995.
III.11 VALIDITY
In the event any provision of the Plan is held invalid, void, or
unenforceable, the same will not affect, in any respect, the validity of any
other provision of the Plan.
III.12 APPLICABLE LAW
The Plan will be governed by and construed in accordance with the laws of the
State of Texas.
IV. DEFINITIONS
"AFFILIATE" means any entity substantially owned and/or controlled by
Lyondell, as determined by the Committee.
"ALLOCATION PERCENTAGE" refers to a percentage assigned to a Participant in
accordance with Section II.3 of the Plan.
"CHANGE IN CONTROL" will have the same meaning as a Participant's Executive
Severance Agreement between the Participant and the Company or the Company's
Supplemental Executive Benefit Plans Trust Agreement if the Participant does
not have an Executive Severance Agreement.
"CODE" refers to the Internal Revenue Code of 1986 or any successor statute,
as amended from time to time.
"COMPANY" refers to Lyondell Petrochemical Company.
"COMPENSATION COMMITTEE" OR "COMMITTEE" refers to the Compensation Committee
of the Board of Directors of Lyondell.
"CORPORATE RESPONSIBILITY RANKING" refers to Lyondell, during the final year
of a Performance Cycle, (a) achieving first or second quartile ranking (where
first signifies the best performance) in recordable incident rates as reported
for its category by the National Petroleum Refining Association (NPRA) and the
Chemical Manufacturers Association (CMA) and (b) meeting the CMA time
guidelines for implementation of the Responsible Care Guidelines. If the CMA
and NPRA no longer issue such reports, the Committee may choose alternate
reports issued by other companies or associations.
"CUSTOMER SATISFACTION RANKING" refers to Lyondell achieving first or second
quartile ranking (where first signifies the best performance) in (a) customer
audits of any Company plant or facility held during the final year of a
Performance Cycle and (b) customer surveys performed by the Company during the
final year of a Performance Cycle. Provided however, that if no customer audits
or surveys are done during such year than the Company must have maintained its
ISO-9000 rating in the most recent audit performed by the ISO-9000 auditing
agency.
"DEFERRED CASH" refers to an amount of cash equal to the value of the
Restricted Stock determined in accordance with Section II.9 of the Plan.
7
<PAGE>
"DISABILITY" refers to total and permanent disability, as defined in the
Company's Executive Long-Term Disability Plan.
"EMPLOYEE" refers to an Employee of Lyondell Petrochemical Company.
"EMPLOYEE PRODUCTIVITY RANKING" refers to Lyondell achieving first or second
quartile ranking (where first signifies the best performance) on production
cost for Lyondell's Channelview facility, as reported by Solomon Associates,
Inc. on its most recent report issued prior to the end of the Performance
Cycle. If Solomon Associates, Inc. no longer issues such reports, the Gulf
Coast cost of ethylene comparison shall be used as the measurement.
"ENDING SHARES OUTSTANDING" OR "ESO" refers to the number of shares
outstanding at the end of the final year of the Performance Cycle, adjusted for
stock splits and stock dividends.
"LYONDELL" refers to Lyondell Petrochemical Company, a Delaware corporation.
"NET INCOME" refers to the Company's net income after taxes, as reported in
the Company's audited financial statements.
"OPERATING AWARD POOL" is the award pool that is created upon Lyondell
meeting key operating performance criteria in accordance with Section II.9 of
this Plan.
"PARTICIPANT" refers to a key Employee and officer of Lyondell or Affiliate
selected by the Committee to participate in the Plan.
"PERFORMANCE CYCLE" refers to the following time periods, except as provided
below.
<TABLE>
<CAPTION>
PERFORMANCE
CYCLE PERFORMANCE MEASUREMENT PERIOD
----------- ----------------------------------
<S> <C>
1 January 1, 1991--December 31, 1995
2 January 1, 1992--December 31, 1996
3 January 1, 1993--December 31, 1997
4 January 1, 1994--December 31, 1998
5 January 1, 1995--December 31, 1999
6 January 1, 1996--December 31, 2000
Each cycle continues to advance by one year.
The first four Performance Cycles for the Chief Executive Officer and the Chief
Operating Officer are as follows:
</TABLE>
<TABLE>
<CAPTION>
PERFORMANCE
CYCLE PERFORMANCE MEASUREMENT PERIOD
----------- ----------------------------------
<S> <C>
1 January 1, 1995--December 31, 1995
2 January 1, 1995--December 31, 1996
3 January 1, 1995--December 31, 1997
4 January 1, 1995--December 31, 1998
</TABLE>
Thereafter, the Performance Cycle will be the same as the Performance Cycle
for other Plan Participants.
"PLAN" refers to the Lyondell Petrochemical Company Value Share Plan as set
forth in this document.
"RESTRICTED STOCK" refers to shares of the Company's common stock which will
be issued subject to vesting restrictions under the Company's Restricted Stock
Plan. These shares will earn dividends, as paid, and have voting rights during
the restriction period.
8
<PAGE>
"RETIREMENT" refers to a termination of employment with a right to commence
an immediate allowance under a retirement plan maintained by the Company.
"TAX RATE" refers to the combined maximum Texas and Federal corporate income
tax rate.
"TERMINATION" refers to the Participant's ceasing his/her service with the
Company for any reason whatsoever, whether voluntarily or involuntarily,
including by reason of death or permanent Disability.
"VALUE AWARD POOL" is the award pool created based on Lyondell's performance
on Average Economic Value Added and Average Market Value Added, calculated in
accordance with Section II.4 of this Plan.
9
<PAGE>
SCHEDULE A
I. ECONOMIC VALUE ADDED SHALL BE DETERMINED ACCORDING TO THE FOLLOWING FORMULA:
Economic Value Added = ECF-(ECI * WACC)
Weighted Average Cost of Capital ("WACC"), as used to calculate Economic
Value Added, shall be determined according to the following formula:
WACC = After tax cost of long-term debt * [LTD / (LTD + MVE)] + Cost of equity
* [MVE / (LTD + MVE)]
where [LTD / (LTD + MVE)] equals 30% and [MVE / (LTD + MVE)] equals 70%.
Note: These ratios may be amended due to a significant change in the
Company's capital structure.
ECF and ECI will be determined at year end during each Performance Cycle
based on the Company's audited financial statements, as adjusted to
recognize the effect of Lyondell's interest in LYONDELL-CITGO Refining
Company Ltd. consistent with the economics of the limited liability company
arrangement. For example, CITGO's contributions and minority interests,
loans for which Lyondell is not liable or interest relating to those loans
will not be included in these determinations, regardless of their inclusion
on audited financial statements. Similar adjustments consistent with the
economics of the LYONDELL-CITGO Refining Company Ltd. arrangement may be
warranted.
If extraordinary events occur during a Performance Cycle which alter the
basis upon which Economic Value Added is calculated, the effect of these
events, with the Committee's approval, may be amortized over a period of up
to three years, beginning with the year in which the event occurs, provided
the decision to amortize is made no later than 90 days following the end of
the year in which the event occurs. Events warranting such action may
include, but are not limited to, major acquisitions, divestitures, and a
recapitalization of the Company.
II. DEFINITIONS
For purposes of this Section, terms are defined as follows:
Cost of Equity means cost of equity as determined under the Capital Asset
Pricing Model.
Economic Capital Invested ("ECI") means the sum of
Common and preferred equity; plus
Long-term debt; plus
Current portion of long-term debt; plus
Other non-current liabilities; plus
Deferred taxes; plus
Accumulated depreciation, less $482,556,000 (the difference between
the gross book value and estimated market value of Lyondell's
refining assets in 1991); plus
Capitalized value of significant operating leases entered into after
January 1, 1995.
Economic Cash Flow ("ECF") means the sum of
Net income (after accrual of all expenses pursuant to this Plan);
plus
Depreciation and amortization; plus
Other non-cash items; plus
Deferred taxes; plus
After-tax interest, calculated by multiplying the Company's pre-tax
interest by (1-Tax Rate); plus
Implicit interest on significant operating leases entered into after
January 1, 1995.
<PAGE>
Long-Term Debt ("LTD") means the book value of Lyondell's long-term debt,
including the current portion of long-term debt.
Market Value of Equity ("MVE") means the Company's stock price multiplied
by the number of outstanding shares of common stock.
<PAGE>
SCHEDULE B
I. AVERAGE MARKET VALUE ADDED SHALL BE DETERMINED ACCORDING TO THE FOLLOWING
FORMULA:
Average Market Value Added = {[BSP*(l+TSR)n * ESO]-[BSP*BSO]} / n
II. TOTAL SHAREHOLDER RETURN, AS USED TO CALCULATE AVERAGE MARKET VALUE ADDED,
SHALL BE DETERMINED ACCORDING TO THE FOLLOWING FORMULA:
Total Shareholder Return =nX [square root of] [(Adjusted Shares*ESP) /
(1Share*BSP)] - 1
III.DEFINITIONS
For purposes of this section, terms are defined as follows:
Adjusted Shares means the number of shares a shareholder would own at the
end of a Performance Cycle if the shareholder owned one share of Lyondell
common stock on the last day of the year immediately prior to the
Performance Cycle and then reinvested any dividends paid during the
Performance Cycle at the end of each month in which the dividend was paid,
up to and including the last day of the Performance Cycle.
Beginning Shares Outstanding ("BSO") means the number of shares
outstanding, adjusted for stock splits and dividends, at the end of the
year immediately prior to the beginning of a Performance Cycle.
Beginning Share Price ("BSP") means Lyondell's average month-end closing
stock price, adjusted for stock splits and dividends, for the year
immediately prior to the beginning of a Performance Cycle. The Beginning
Share Price used in the Total Shareholder Return calculation for the
Performance Cycle beginning January 1, 1991 and ending December 31, 1995
will be $14.63.
Ending Shares Outstanding ("ESO") means the number of shares outstanding
at the end of the final year of a Performance Cycle, adjusted for stock
splits and dividends.
Ending Stock Price ("ESP") means the average month-end closing stock
price in the final year of a Performance Cycle, adjusted for stock splits
and dividends.
Total Shareholder Return ("TSR") means the compound annual growth rate of
Lyondell's common stock price from the end of the year immediately prior to
the first year of a Performance Cycle to the end of the final year of that
Performance Cycle, including the value of dividends paid during the
Performance Cycle, as if those dividends were reinvested at the end of each
month in which a dividend was paid.
Number of Years ("n") means number of years in a Performance Cycle.
<PAGE>
EXHIBIT 10.11
EXECUTIVE SEVERANCE AGREEMENT,
DATED AS OF MAY 27, 1994,
BETWEEN
LYONDELL PETROCHEMICAL COMPANY,
A DELAWARE CORPORATION (THE "COMPANY"), AND
______________________ ("EXECUTIVE")
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 1. Stock Options and Performance Units......... 1
(a) Stock Options............................... 1
(b) Performance Units........................... 2
Section 2. Termination Following Change in Control..... 3
(a) Termination Upon Change in Control.......... 3
(b) Change in Control........................... 4
Section 3. Rights and Benefits upon Termination........ 7
(a) Salary and Other Payment at Termination..... 8
(b) Prorated Targeted Bonus..................... 8
(c) Crediting of Additional Pension Benefit..... 8
(d) Stock Options............................... 9
(e) Executive Deferral Plan..................... 9
(f) Insurance and Other Benefits................ 10
(g) Financial Counseling........................ 11
(h) Outplacement................................ 11
(i) No Duty to Mitigate......................... 11
Section 4. Other Benefit Plans......................... 11
Section 5. Payment Obligations Absolute................ 12
Section 6. Combined Gross-up Payment; Tax Defense...... 12
(a) Combined Gross-up Payment................... 12
(b) Tax Defense................................. 12
Section 7. Conditions to the Obligations
of the Company............................ 13
Section 8. Confidentiality; Cooperation; Consultancy... 13
(a) Cooperation................................. 13
(b) Consultation................................ 14
(c) Release of Liability........................ 14
Section 9. Term of Agreement........................... 14
Section 10. Arbitration................................. 15
(a) Arbitrable Matters.......................... 15
(b) Submission to Arbitration................... 15
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C> <C>
(c) Arbitration Procedures...................... 16
(d) Compliance with Decisions................... 16
(e) Costs and Expenses.......................... 17
Section 11. Notices..................................... 17
Section 12. Miscellaneous............................... 17
(a) Assignment.................................. 17
(b) Construction of Agreement................... 18
(c) Amendment................................... 18
(d) Waiver...................................... 18
(e) Severability................................ 18
(f) Successors.................................. 18
(g) Taxes....................................... 18
(h) Governing Law............................... 19
(i) Entire Agreement............................ 19
</TABLE>
(ii)
<PAGE>
EXECUTIVE SEVERANCE AGREEMENT
THIS EXECUTIVE SEVERANCE AGREEMENT, is made and entered into this 27th day
of May, 1994, by and between LYONDELL PETROCHEMICAL COMPANY, a Delaware
corporation (hereinafter referred to as "Company"), and
________________________________, an individual (hereinafter referred to as
"Executive").
W I T N E S S E T H :
WHEREAS, the Compensation Committee of the Board of Directors of the
Company (the "Compensation Committee") has authorized the Company to enter into
a severance agreement in the form hereof with Executive;
WHEREAS, the Board of Directors of the Company (the "Board") has determined
that, in the event the Company becomes subject to any proposed or threatened
change in control, it is imperative that the Company and the Board be able to
rely upon Executive to continue in Executive's position, and that the Company be
able to receive and rely upon Executive's advice, if requested, as to the best
interests of the Company and its stockholders without concern that Executive
might be distracted by the personal uncertainties and risks created by such a
proposal or threat;
WHEREAS, in the event the Company receives any such proposal or threat,
Executive may, in addition to Executive's regular duties, be called upon to
assist in the assessment of such matters, advise management and the Board as to
whether such proposals or other matters would be in the best interests of the
Company and its stockholders, and to take such other actions as the Board might
determine to be appropriate;
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Executive and the availability of Executive's advice and counsel
notwithstanding the possibility, threat or occurrence of an effort to take over
control of the Company, and to induce Executive to remain in the employ of the
Company, and for other good and valuable consideration, the Company and
Executive agree as follows:
SECTION 1. STOCK OPTIONS AND PERFORMANCE UNITS.
-----------------------------------
(a) Stock Options. If a Change in Control occurs while Executive is
-------------
employed by the Company or any subsidiary thereof, then with respect to any
stock options granted to Executive under the Company's Executive Long-Term
Incentive Plan (the "Stock Option Plan"), notwithstanding any provision of
the Stock Option Plan or Executive's associated stock option agreement, if
any, to the contrary, all non-vested options shall become 100% vested and
fully exercisable as of the last business day immediately preceding the
Change in Control. For purposes of this Agreement, all references herein
to stock options shall also include all associated dividend share credits
granted under the Stock Option Plan with respect to such options.
<PAGE>
In the further event that there is a "Cessation of Active Market" for
the Company's common stock coincident with or within three (3) years
following a Change in Control, then notwithstanding any provision of the
Stock Option Plan or Executive's associated stock option agreement, if any,
to the contrary, with respect to any stock options which Executive has
elected not to exercise, Company shall pay to Executive a cash lump-sum
payment equal to the "Black-Scholes Value" for all of his unexercised stock
options within forty-five (45) calendar days from the date that there is a
Cessation of Active Market; provided, however, payment of such amount shall
-------- -------
be delayed by the Company for a period of up to six (6) months to the
extent that payment at an earlier date could subject Executive to liability
for short swing profits under Section 16(b) of the Securities Exchange Act
of 1934, as amended ("Exchange Act").
For purposes of this Section, a "Cessation of Active Market" shall be
deemed to have occurred if the Company's common stock ceases to meet the
requirements for listing on the New York Stock Exchange or any other
established securities market or system on which it is listed.
For purposes of this Section, "Black-Scholes Value" shall mean the
value of the stock options, as calculated by Hewitt Associates, L.L.C., or
any other compensation consultant that is mutually agreeable to the parties
(the "Compensation Consultant") using the Black-Scholes method of
valuation, determined as if the valuation was based on the average closing
price of the Company's common stock for the period of thirty (30) trading
days ending on the day immediately preceding the date of Cessation of
Active Market. Such valuation also shall take into consideration the
remaining term of each stock option. In preparing such valuation, the
Compensation Consultant in its good faith discretion shall be responsible
for designating reasonable and customary parameters for the Black-Scholes
method. Company shall deliver to Executive the determination of the Black-
Scholes Value of his stock options with the payment therefor.
(b) Performance Units. Upon a Change in Control on or prior to March
-----------------
6, 1995 which occurs while Executive is employed by the Company (which for
this purpose also shall include LCR (as defined in Section 2(c)) and any
subsidiary of the Company or LCR), the number of performance units granted
under the Stock Option Plan, if any, and held by Executive as of the Change
in Control shall be multiplied by a fraction, the numerator of which is the
number of months in the performance cycle that have elapsed as of the
Change in Control (including any fraction of a month) and the denominator
of which is the number of months in the entire performance cycle ending
March 6, 1995 (including any fraction of a month). The product computed in
accordance with the preceding sentence shall be deemed the number of
performance units held by Executive as of the Change in Control
notwithstanding any contrary provision of the Stock Option Plan and any
grant of a larger number of performance units to Executive and, moreover,
any performance units held by Executive in excess of this product shall be
deemed to be void. For purposes of computing the value of performance
units deemed held by Executive as of the Change in Control, the ranking of
competitor companies, the level
2
<PAGE>
of payout (0, 1x or 2x) and the fair market value of the Company's common
stock shall be determined, in accordance with the terms of the performance
unit, as of the Change in Control. A cash lump-sum payment for the value
of Executive's performance units, computed in accordance with the preceding
sentence as of the Change in Control, shall be made by Company to Executive
as of the earlier of (i) the last day of the Executive's employment with
the Company or any of its subsidiaries or (ii) March 6, 1995.
(c) Any long-term incentive compensation program, including subsequent
awards of performance units, that may exist or that may be adopted in the
future, shall follow the intent of this Agreement as described under
Sections 1(a) and 1(b) hereof with respect to the complete vesting and
payout of a pro rata share of awards effective with a Change in Control.
(d) Capitalized terms not defined in this Section are defined in
Section 2(c) of this Agreement.
SECTION 2. TERMINATION FOLLOWING CHANGE IN CONTROL.
---------------------------------------
(a) Termination Upon Change in Control. The Company will provide or
----------------------------------
cause to be provided to Executive the rights and benefits described in
Section 3 of this Agreement in the event that Executive's employment by the
Company (which for this purpose also shall include LCR and any subsidiary
of the Company or LCR) is terminated at any time within three (3) years
following a Change in Control (as defined in Section 2(b)): (1) by the
Company for reasons other than (A) "Cause" (as defined in Section 7), (B)
Executive's death or permanent disability or (C) Executive's retirement
upon reaching age 65 ("Normal Retirement Date"), or (2) by Executive within
ninety (90) days following the occurrence of any of the following events
without Executive's written consent which events shall constitute
"Constructive Termination for Good Reason":
(i) the assignment of Executive to any duties or responsibilities that
are inconsistent with Executive's position, offices, duties,
responsibilities or status immediately preceding such Change in Control, or
a change in Executive's reporting responsibilities or titles in effect at
such time resulting in a reduction of Executive's responsibilities or
position at the Company;
(ii) the reduction of Executive's annual salary (including any
deferred portions thereof) or Targeted Bonus, or a material reduction in
the level of benefits or supplemental compensation provided to Executive;
or
(iii) the actual transfer, or the proposed transfer, as evidenced in
a written communication from Company to Executive, of Executive to another
location other than the location at which he was primarily employed
immediately preceding the Change in Control, unless such new location is a
major operating unit or facility of the Company
3
<PAGE>
that is located within 50 miles of Executive's primary location as of the
date immediately preceding such Change in Control; provided, however, (1)
-------- -------
Executive, within thirty (30) days from the date that he is given written
notice by the Company of such actual or proposed transfer, shall provide
the Board with written notice that such transfer shall constitute a
Constructive Termination for Good Reason hereunder, (2) Company within
twenty (20) days of receipt of such notice by the Board shall fail to
provide Executive with written notice rescinding such actual or proposed
transfer and (3) if the transfer is not rescinded by the Company, Executive
must terminate his employment due to Constructive Termination for Good
Reason within forty (40) days following expiration of the 20-day period
referred to in the preceding clause so that in any event Executive shall
have terminated his employment with the Company within 90 days after
Executive first receives written notice from the Company of such actual or
proposed transfer.
(b) Change in Control. For purposes of this Agreement, a "Change in
-----------------
Control" shall be deemed to have occurred as of the date that one or more
of the following occurs:
(i) Individuals who, as of the date hereof, constitute the entire
Board of Directors of the Company ("Incumbent Directors") cease for any
reason to constitute at least a majority of the Board; provided, however,
-------- -------
that any individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the then Incumbent Directors
shall be considered as though such individual was an Incumbent Director,
but excluding, for this purpose any such individual whose initial
assumption of office occurs as a result of either an actual or threatened
election contest, as such terms are used in Rule 14a-11 under the Exchange
Act or other actual or threatened solicitation of proxies or consents by or
on behalf of any Person (as defined below) other than the Board; provided,
--------
further, that in the event ARCO at any time determines to achieve minority
-------
representation on the Company's Board of Directors approximately equal to
its then ownership percentage of the Company's common stock, its
implementation of such determination through the election of ARCO employees
as directors of the Company shall not be deemed to be a Change in Control
and such ARCO employees shall constitute Incumbent Directors;
(ii) The stockholders of the Company shall approve (A) any merger,
consolidation or recapitalization of the Company (or, if the capital stock
of the Company is affected, any subsidiary of the Company), or any sale,
lease, or other transfer (in one transaction or a series of transactions
contemplated or arranged by any party as a single plan) of all or
substantially all of the assets of the Company (each of the foregoing being
an "Acquisition Transaction") where (1) the shareholders of the Company
immediately prior to such Acquisition Transaction would not immediately
after such Acquisition Transaction beneficially own, directly or
indirectly, shares or other ownership interests representing in the
aggregate eighty percent (80%) or more of (a) the then outstanding common
stock or other equity interests of the corporation or other entity
surviving or
4
<PAGE>
resulting from such merger, consolidation or recapitalization or acquiring
such assets of the Company, as the case may be (the "Surviving Entity") (or
of its ultimate parent corporation or other entity, if any), and (b) the
Combined Voting Power of the then outstanding Voting Securities of the
Surviving Entity (or of its ultimate parent corporation or other entity, if
any) or (2) the Incumbent Directors at the time of the initial approval of
such Acquisition Transaction would not immediately after such Acquisition
Transaction constitute a majority of the Board of Directors, or similar
managing group, of the Surviving Entity (or of its ultimate parent
corporation or other entity, if any), or (B) any plan or proposal for the
liquidation or dissolution of the Company;
(iii) Any Person except for ARCO shall be or become the beneficial
owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act),
directly or indirectly, of securities of the Company representing in the
aggregate more than twenty percent (20%) of either (A) the then outstanding
shares of common stock of the Company ("Common Shares") or (B) the Combined
Voting Power of all then outstanding Voting Securities of the Company;
provided, however, that notwithstanding the foregoing, a "Change of
-------- -------
Control" shall not be deemed to have occurred for purposes of this
Subsection (iii):
(1) Solely as a result of an acquisition of securities by the Company
which, by reducing the number of Common Shares or other Voting
Securities outstanding, increases (a) the proportionate number of
Common Shares beneficially owned by any Person to more than
twenty percent (20%) of the Common Shares then outstanding, or
(b) the proportionate voting power represented by the Voting
Securities beneficially owned by any Person to more than twenty
percent (20%) of the Combined Voting Power of all then
outstanding Voting Securities; or
(2) Solely as a result of an acquisition of securities directly from
the Company except for any conversion of a security that was not
acquired directly from the Company,
provided, further, that if any Person referred to in paragraph (1) or (2)
-------- -------
of this Subsection (iii) shall thereafter become the beneficial owner of
any additional Common Shares or other Voting Securities of the Company
(other than pursuant to a stock split, stock dividend or similar
transaction), then a "Change of Control" shall be deemed to have occurred
for purposes of this Subsection (iii); or
(iv) ARCO shall become the owner, directly or indirectly, of
securities of the Company representing in the aggregate more than fifty
percent (50%) of either (i) the then outstanding Common Shares or (ii) the
Combined Voting Power of all then outstanding Voting Securities of the
Company except as the result of an acquisition of securities by the Company
which, by reducing the number of Common Shares or other Voting Securities
outstanding, increases (x) the proportionate number of Common Shares
5
<PAGE>
beneficially owned by ARCO to more than fifty percent (50%) of the Common
Shares then outstanding, or (y) the proportionate voting power represented
by the Voting Securities beneficially owned by ARCO to more than fifty
percent (50%) of the Combined Voting Power of all then outstanding Voting
Securities; provided, however, that if thereafter ARCO becomes the
-------- -------
beneficial owner of any additional Common Shares or other Voting Securities
of the Company (other than pursuant to a stock split, stock dividend or
similar transaction) the exception provided above shall no longer apply;
provided, further, that for purposes of this Subsection (iv), neither
-------- -------
record ownership of common stock of the Company by the Trustee for ARCO's
401(a) qualified plans nor beneficial ownership of common stock of the
Company by any of ARCO's directors for their personal account shall be
deemed to constitute "indirect" ownership of common stock of the Company by
ARCO; provided, further, that notwithstanding any contrary provision of
-------- -------
this Agreement, no Change in Control shall be deemed to have occurred
pursuant to this Subsection (iv) if as a result of an inadvertent act ARCO
becomes the owner, directly or indirectly, of additional Common Shares or
Voting Securities and such securities are sold or otherwise disposed of by
ARCO within 30 days after ARCO discovers, or is notified by the Company as
to, the potential Change of Control resulting from such ownership, so that,
as a result of such subsequent sale or other disposition by ARCO, no Change
in Control would otherwise be deemed to have occurred pursuant to the terms
(excluding this proviso) of this Subsection (iv).
Notwithstanding any of the foregoing, no Change in Control shall be deemed
to have occurred as a result solely of (i) the registration by ARCO of the
Exchangeable Notes pursuant to the Registration Statement, (ii) the
issuance and sale by ARCO of the Exchangeable Notes to the underwriters in
accordance with the Registration Statement, or (iii) prior to the maturity
of the Exchangeable Notes, purchases and sales of the Exchangeable Notes.
(c) For purposes of this Agreement:
(i) "Affiliate" shall mean, as to a specified Person, another Person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the specified Person,
within the meaning of such terms as used in Rule 405 under the Securities
Act of 1933, as amended, or any successor rule.
(ii) "ARCO" shall mean Atlantic Richfield Company and any of its
Affiliates, excluding the Company.
(iii) "Combined Voting Power" shall mean the aggregate votes entitled to
be cast generally in the election of the Board of Directors, or similar
managing group, of a corporation or other entity by holders of then
outstanding Voting Securities of such corporation or other entity.
6
<PAGE>
(iv) "Exchangeable Notes" shall mean the debt securities exchangeable upon
maturity, at ARCO's option, into shares of the Company's common stock or
cash, as such debt securities are described in the Registration Statement.
(v) "LCR" shall mean LYONDELL-CITGO Refining Company Ltd., a Limited
Liability Company organized under the laws of the State of Texas.
(vi) "Person" shall mean any individual, entity (including, without
limitation, any corporation, partnership, trust, joint venture, association
or governmental body) or group (as defined in Sections 14(d)(3) or 15(d)(2)
of the Exchange Act and the rules and regulations thereunder); provided,
--------
however, that Person shall not include the Company or LCR, any of their
-------
subsidiaries, any employee benefit plan of the Company or LCR or any of
their majority-owned subsidiaries or any entity organized, appointed or
established by the Company, LCR or such subsidiaries for or pursuant to the
terms of any such plan.
(vii) "Registration Statement" shall mean ARCO's registration statement on
Form S-3 (Registration No. 33-53481) with respect to the Exchangeable
Notes.
(viii) "Targeted Bonus" shall mean an amount equal to the difference
between (1) the sixtieth (60th) percentile of total cash compensation and
(2) the sixtieth (60th) percentile of annual base compensation for the
Executive's position as determined by the most recent annual executive
compensation survey analysis performed by the Company. If the Executive's
position is not capable of being matched to a position in the executive
compensation survey or if an annual executive compensation survey analysis
has not been performed within twelve (12) months of Executive's
Termination, the Targeted Bonus shall be a percentage of the Executive's
current annual base salary and, in such situation, the applicable
percentage shall be determined by the Compensation Consultant (as defined
in Section 1(a)), but in no event shall the Targeted Bonus be less than the
highest average of Executive's annual bonuses for any consecutive thirty-
six (36) month period during the sixty (60) months immediately preceding
Termination.
(ix) "Voting Securities" shall mean all securities of a corporation or
other entity having the right under ordinary circumstances to vote in an
election of the Board of Directors, or similar managing group, of such
corporation or other entity.
SECTION 3. RIGHTS AND BENEFITS UPON TERMINATION. In the event Executive
------------------------------------
is entitled pursuant to Section 2 to receive the rights and benefits described
in this Section as a result of the termination or Constructive Termination for
Good Reason of Executive's employment within three years following a Change in
Control (hereinafter collectively referred to as "Termination"), the Company
agrees to provide or cause to be provided to Executive the following rights and
benefits:
7
<PAGE>
(a) Salary and Other Payment at Termination. Company shall pay to
---------------------------------------
Executive not later than thirty (30) days following Termination a lump-sum
payment in cash in the amount of three (3) times Executive's "Applicable
Annual Earnings" (as defined below); provided, however, if there are fewer
-------- -------
than thirty-six (36) full months remaining from the date of Termination to
Executive's Normal Retirement Date, the payment Executive shall be entitled
to receive pursuant to this Section 3(a) will equal such amount multiplied
by a fraction, the numerator of which is the number of months (including
any fraction of a month) so remaining to Executive's Normal Retirement Date
and the denominator of which is 36.
For purposes of this Agreement, "Applicable Annual Earnings" shall
mean the sum of the Executive's current annual base salary and Targeted
Bonus (in each case determined using the highest rate in effect up to and
including the effective date of Termination, whether or not paid) for
personal services on behalf of the Company, LCR or their subsidiaries for
the calendar year in which the Termination occurs (except that if Executive
is subject to a Constructive Termination for Good Reason because his salary
or Targeted Bonus is reduced, then the current annual base salary and
Targeted Bonus used to determine Applicable Annual Earnings shall be the
annual base salary in effect or Targeted Bonus, as applicable, immediately
prior to such Constructive Termination for Good Reason). Applicable Annual
Earnings shall include Executive's current annual base salary and Targeted
Bonus whether or not paid on a deferred basis, including, without
limitation, amounts contributed by or on behalf of Executive under a
Company-sponsored plan, such as (i) a plan described in Section 125 or
401(k) of the Internal Revenue Code of 1986, as amended, or (ii) the
Company's Executive Deferral Plan or an "excess benefit plan" as defined in
the Employee Retirement Income Security Act of 1974, as amended.
Notwithstanding the preceding provisions of this paragraph, Applicable
Annual Earnings does not include any income attributable to stock options,
stock appreciation rights, performance awards, dividend credits, and
restricted stock granted under, and dividends on shares acquired pursuant
to, any stock option plan, restricted stock plan or performance unit plan.
(b) Prorated Targeted Bonus. Company shall pay to Executive, not
-----------------------
later than thirty (30) days following Termination, a cash lump-sum payment
equal to his Targeted Bonus for the year of Termination (except that, if
Executive is subject to Constructive Termination for Good Reason because
his Targeted Bonus was reduced, then Targeted Bonus for this purpose shall
be the Targeted Bonus prior to such Constructive Termination for Good
Reason) multiplied by a fraction, the numerator of which is the number of
elapsed days in the year of Termination up to and including the date of
Termination and the denominator of which is 365.
(c) Crediting of Additional Pension Benefit. In accordance with the
---------------------------------------
special supplemental retirement benefit authorized by the Compensation
Committee on September 13, 1991, Company shall credit Executive with an
additional five (5) years of (i) age (not to exceed age 65) and (ii)
service with the Company, under the
8
<PAGE>
Company's Supplementary Executive Retirement Plan (or its successor) for
purposes of determining his accrued benefits thereunder.
(d) Stock Options. Notwithstanding any provision of the Stock Option
-------------
Plan or Executive's stock option agreement, if any, to the contrary, all
stock options owned by Executive shall be freely exercisable following
Termination for the remainder of their existing terms without regard to any
earlier date that may be specified therein including, without limitation,
an earlier expiration date specified with respect to Executive's
termination of employment.
(e) Executive Deferral Plan. The provisions of this Section 3(e)
-----------------------
shall apply notwithstanding any provisions of the Company's Executive
Deferral Plan (the "Deferral Plan") or the initial paragraph of Section 3
hereof to the contrary.
In the event that (i) there is a "Termination or Adverse Amendment"
(as defined below) of the Deferral Plan within three years following a
Change in Control and (ii) a Termination within the meaning of this
Agreement has not occurred with respect to Executive, then, notwithstanding
any other provision of this Agreement, the full amount of contributions and
earnings accrued or credited to Executive's account balance under the
Deferral Plan (as of the date immediately preceding the Termination or
Adverse Amendment) shall be immediately distributed to Executive in a cash
lump-sum payment and the Company shall pay Executive in a cash lump-sum
payment an additional amount equal to the "Income Tax Gross-up" (as defined
below).
In the event that Executive as of his Termination date is not eligible
to receive an "Immediate Retirement Benefit" (as defined below), then the
full amount of contributions and earnings accrued or credited to
Executive's account balance under the Deferral Plan (as of the date
immediately preceding his Termination) shall be immediately distributed to
Executive in a cash lump-sum payment and the Company shall pay Executive in
a cash lump-sum payment an additional amount equal to the Income Tax Gross-
up, without regard to whether or not there has been a Termination or
Adverse Amendment.
In the event that (i) there is a Termination or Adverse Amendment of
the Deferral Plan following a Change in Control and (ii) Executive as of
his Termination date is either eligible to receive an Immediate Retirement
Benefit or elects (or has elected) to commence an Immediate Retirement
Benefit, then the full amount of contributions and earnings accrued or
credited to Executive's account balance under the Deferral Plan (as of the
date immediately preceding the Termination or Adverse Amendment) shall be
immediately distributed to Executive in a cash lump-sum payment and the
Company shall pay Executive in a cash lump-sum payment an additional amount
equal to the Income Tax Gross-up.
For purposes of this Agreement, "Termination or Adverse Amendment"
means that the Deferral Plan is either (i) terminated for whatever reason
by the Company or (ii)
9
<PAGE>
amended by the Company in any way that adversely affects Executive's
rights, privileges or benefits thereunder including, without limitation, an
amendment that results in a change to the methodology used to determine the
interest rate for earnings credited to Executive's account balance, without
the Executive's written consent to such amendment, other than an amendment
which is required by law.
For purposes of this Agreement, "Immediate Retirement Benefit" means
Executive is eligible (after giving effect to Section 3(c)) to receive an
immediate allowance or distribution (whether reduced or unreduced) from a
retirement plan maintained by the Company which is intended to be a
qualified plan under Section 401(a) of the Internal Revenue Code of 1986,
as amended.
For purposes of this Agreement, "Income Tax Gross-up" shall mean the
amount necessary so that after payment of any federal, state and local
income or employment tax by Executive on the distribution of amounts under
the Deferral Plan and the Income Tax Gross-up, the net amount retained by
Executive shall be the full amount accrued and credited to his account
balance under the Deferral Plan at the time immediately preceding
distribution. For purposes of determining the amount of the Income Tax
Gross-up, Executive shall be deemed (i) to pay federal income taxes at the
highest stated rate of federal income taxation (including surtaxes, if any)
for the calendar year in which the Income Tax Gross-up is to be made (for
1994, the highest stated rate is 39.6%); and (ii) to pay any applicable
state and local income taxes at the highest stated rate of taxation
(including surtaxes, if any) for the calendar year in which the Income Tax
Gross-up is to be made. Any Income Tax Gross-up required hereunder shall
be paid by Company to Executive at the same time that any payment made
under the Deferral Plan which is subject to income tax is paid or deemed
received by Executive.
(f) Insurance and Other Benefits. To the extent that Executive is
----------------------------
eligible thereunder, then for a period of thirty-six (36) months following
Termination, Executive (and his dependents, as applicable) shall continue
to be covered at Company's expense by the life insurance, medical and
dental plans, and accident and disability plans of the Company and its
subsidiaries, or any successor to a plan or program in effect at
Termination for employees in the same class or category as Executive
(hereafter individually and collectively referred to as "Company Welfare
Plan"), subject to the terms of the Company Welfare Plan and to Executive's
making any required contributions thereto which contributions shall not
exceed those charged to employees in the same class or category in which
Executive was employed by the Company. In the event that Executive is
ineligible to continue to be so covered under the terms of any Company
Welfare Plan, or in the event that Executive is eligible but the benefits
applicable to Executive (and his dependents, as applicable) are not
substantially equivalent to such benefits immediately prior to Termination,
then, for a period of thirty-six (36) months following Termination, the
Company shall at its expense provide to Executive (and his dependents, as
applicable) through other sources such benefits as may be necessary to make
the benefits applicable to Executive (and his dependents, as
10
<PAGE>
applicable) substantially equivalent to those in effect immediately prior
to Termination. Continuation coverage provided hereunder pursuant to any
group health plan maintained by the Company or a subsidiary shall be in
lieu of, and not in addition to, any continuation coverage required under
the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA"). Any retiree coverage provided to Executive by Company shall be
on the same terms and conditions, including bridging of coverage, as that
provided to executives in the same class or category in which Executive was
employed by Company.
(g) Financial Counseling. For a period of one year following
--------------------
Termination, Executive shall continue to be covered at Company's expense
under the financial counseling program of Company, or any successor
program, in effect at Termination for employees in the same class or
category as Executive, subject to the terms of such program. In the event
the benefits available to Executive under such financial counseling program
are not substantially equivalent to the benefits available to Executive at
Termination, Company at its expense shall provide to Executive through
other sources such benefits as may be necessary to make the benefits
available to Executive substantially equivalent to those in effect at
Termination.
(h) Outplacement. Company shall provide to Executive, at Company's
------------
expense but not to exceed fifteen percent (15%) of Executive's Applicable
Annual Earnings, outplacement assistance for Executive from a professional
outplacement assistance firm which is reasonably suitable to Executive.
(i) No Duty to Mitigate. Executive's entitlement to benefits
-------------------
hereunder shall not be governed by any duty to mitigate Executive's damages
by seeking further employment nor offset by any compensation which
Executive may receive from future employment.
SECTION 4. OTHER BENEFIT PLANS. The specific arrangements referred to in
-------------------
this Agreement are not intended (i) to exclude or limit Executive's
participation in other benefit plans or programs in which Executive currently
participates or may participate including, without limitation, retiree benefits,
or benefits which are available to executive personnel generally in the same
class or category as Executive (excluding only the Company's Special Termination
Plan and the special supplemental retirement benefit authorized by the
Compensation Committee on September 13, 1991) or (ii) to preclude or limit other
compensation or benefits as may be authorized by the Compensation Committee or
the Board from time to time. To the extent not otherwise paid or provided, the
Company shall timely pay or provide to the Executive and/or the Executive's
dependents any other amounts or benefits required to be paid or provided or
which the Executive or the Executive's dependents are eligible to receive
pursuant to this Agreement and under any plan, program, policy or practice or
contract or agreement of the Company and its Affiliates as in effect and
applicable generally to executive personnel in the same class or category of
Executive.
11
<PAGE>
SECTION 5. PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay
----------------------------
or provide or cause to be paid or provided to Executive the amounts and
benefits, and to make the arrangements, provided in this Agreement shall be
absolute and unconditional and shall not be affected by any circumstances
(including, without limitation, any setoff, claim, counterclaim, recoupment,
defense or other right, which the Company may have against Executive or anyone
else). All amounts payable by or on behalf of the Company hereunder shall be
paid without notice or demand. Each and every payment made hereunder by or on
behalf of the Company shall be final and the Company and its subsidiaries shall
not, for any reason whatsoever, seek to recover all or any part of such payment
from Executive or from whomever shall be entitled thereto. In no event shall an
asserted violation of any provision of this Agreement constitute a basis for
deferring or withholding any amount payable to, or on behalf of, Executive
under this Agreement.
SECTION 6. COMBINED GROSS-UP PAYMENT; TAX DEFENSE.
--------------------------------------
(a) Combined Gross-up Payment. If the Executive becomes entitled to
-------------------------
one or more payments (with a "payment" including, without limitation, an
increase in pension benefits and the vesting of an option or other non-cash
benefit or property) pursuant to the terms of any plan, arrangement or
agreement with the Company (the "Total Payments"), which are or become
subject to the tax imposed by Section 4999 of the Internal Revenue Code of
1986, as amended (the "Code") (or any similar tax that may hereafter be
imposed) (the "Excise Tax"), the Company shall pay to Executive an
additional cash amount (the "Combined Gross-up Payment") such that the net
amount retained by Executive after reduction for (i) any Excise Tax on the
Total Payments and (ii) any federal, state and local income or employment
tax and Excise Tax payable with respect to the Combined Gross-up Payment,
shall equal the Total Payments. For purposes of determining the amount of
the Combined Gross-up Payment, Executive shall be deemed (i) to pay federal
income taxes at the highest stated rate of federal income taxation
(including surtaxes, if any) for the calendar year in which the Combined
Gross-up Payment is to be made (for 1994, the highest stated rate is
39.6%); and (ii) to pay any applicable state and local income taxes at the
highest stated rate of taxation (including surtaxes, if any) for the
calendar year in which the Combined Gross-up Payment is to be made. Any
Combined Gross-up Payment required hereunder shall be made to Executive at
the same time any Total Payment subject to the Excise Tax is paid or deemed
received by Executive.
(b) Tax Defense. If in connection with the examination of Executive's
-----------
tax return the Internal Revenue Service asserts that any amount payable or
benefit provided hereunder is a "parachute payment" as defined in the Code
and such amount or benefit was not treated as a parachute payment in
determining the Combined Gross-up Payment (as defined in Section 6(a)
above), Company at its cost shall assume the defense of any controversy
involving such issue and shall indemnify and hold Executive harmless for
all liabilities, costs, taxes, interest and penalties attributable to such
issue and shall to the extent necessary (without duplication) increase the
Combined Gross-up Payment to give
12
<PAGE>
effect to any additional amount or benefit determined to be a parachute
payment. Executive shall cooperate with Company so that Company will be
able to challenge any adverse determination by the Internal Revenue Service
through administrative proceedings and, if determined by Company, through
litigation.
SECTION 7. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The Company
--------------------------------------------
shall have no obligation to provide or cause to be provided to Executive the
rights and benefits described in this Agreement if the Company shall terminate
Executive's employment for "Cause", which for purposes of this Agreement shall
be defined and limited to: (i) the continued and willful refusal by Executive to
substantially perform his duties (other than a willful refusal to perform a duty
which constitutes Constructive Termination for Good Reason or a refusal
resulting from Executive's incapacity due to physical or mental illness), after
demand for substantial performance is delivered by the Board, which demand
specifically identifies the manner in which the Board has determined that
Executive has not substantially performed his duties, and Executive's
performance is not cured to the Board's reasonable satisfaction within thirty
(30) days from such demand; (ii) the engagement by Executive in willful
misconduct or dishonesty that is materially injurious to the Company, monetarily
or otherwise; or (iii) Executive's final conviction of a felony.
Notwithstanding the foregoing, the Company shall not be deemed to have
terminated Executive for Cause without (1) reasonable written notice to
Executive setting forth the reasons for the Company's intention to terminate
Executive for Cause and (2) an opportunity for Executive, together with his
counsel, to be heard before the Board. Notwithstanding any contrary provision
of this Agreement, it is specifically agreed that Cause shall not include any
act or omission by Executive in the good faith exercise of Executive's business
judgment as an officer of the Company or as a member of the Board.
If Executive is terminated for Cause, Company, in accordance with and
subject to the provisions of the immediately preceding paragraph, shall not be
required to provide Executive with at least sixty (60) days advance written
notice of such termination for Cause. If Executive is terminated for a reason
other than for Cause, Company shall be required to provide sixty (60) days
advance written notice to Executive unless Executive agrees to a shorter notice
period. Regardless of the reason for termination, Executive shall receive, in
addition to any other payments provided to Executive hereunder or otherwise,
payment for his accrued base salary and a vacation allowance based on years of
service through his termination date.
SECTION 8. CONFIDENTIALITY; COOPERATION; CONSULTANCY.
-----------------------------------------
(a) Cooperation. Executive agrees that, at all times following
-----------
Termination, Executive will furnish such information and render such
assistance and cooperation as may reasonably be requested in connection
with any litigation or legal proceedings concerning the Company or any of
its subsidiaries (other than any legal proceedings arising out of or
concerning Executive's employment or its termination). In connection with
such cooperation, the Company will pay or reimburse Executive for
reasonable expenses.
13
<PAGE>
(b) Consultation. Executive agrees that, for a period of six (6)
------------
months following the date of Termination, Executive will use reasonable
efforts to be available to the Company and its subsidiaries for
consultation with senior officers of the Company or one of its
subsidiaries, as the case may be; provided, however, Executive shall not be
required to perform consulting services (i) for more than five (5) days in
any month or (ii) for more than thirty (30) hours in any month. It is
expressly agreed that Executive's consulting services will be required at
such time and such places as will result in the least inconvenience to
Executive, taking into consideration Executive's other business and
personal commitments during such period which may obligate Executive to
honor such other commitments prior to the rendering of consulting services
by Executive. It is further agreed that Executive's consulting services
shall be rendered by personal consultation at Executive's principal
residence or office, wherever maintained, or by correspondence through
mail, telephone or facsimile machine or other similar modes of
communication at times, including weekends and evenings, most convenient to
Executive. The Company and Executive agree that if, during such period,
Executive should enter into the full-time employ of another company or
firm, Executive shall not be required to consult at times that will
conflict with Executive's responsibilities with respect to such employment.
No additional consideration shall be provided to Executive for making such
consulting services available to Company regardless of whether Company
elects to utilize such services; provided, however, Company shall reimburse
-------- -------
Executive for all reasonable out-of-pocket expenses incurred by Employee in
the course of his performance of consulting services hereunder, including,
without limitation, supplies, mileage and travel expenses.
(c) Release of Liability. Executive hereby represents and covenants
--------------------
that prior to the time he is eligible to receive any payments provided for
in Section 3 of this Agreement, he will execute and deliver to the Company,
on a form reasonably satisfactory to the Company and the Executive, a
separate release and waiver, which, without limiting the generality of the
foregoing, shall include a release and discharge of the Company and its
subsidiaries and affiliates, and its and their directors, officers,
employees, owners, agents, successors and assigns from any and all suits,
causes of action, demands, claims, charges, complaints, liabilities, costs,
losses, damages, injuries, bonds, judgments, attorneys' fees and expenses,
in any form whatsoever, in law or in equity, whether known or unknown,
whether suspected or unsuspected, arising out of Executive's employment
with Company through his Termination, including, without limitation, claims
arising under any federal, state or local law for breach of an implied
covenant of good faith and fair dealing, breach of contract, defamation,
slander, negligent misrepresentation, fraud, intentional or negligent
interference with business relations, and employment discrimination,
including, but not limited to, claims under the Age Discrimination in
Employment Act, the Americans with Disabilities Act and the Texas
Commission on Human Rights Act.
SECTION 9. TERM OF AGREEMENT. This Agreement shall terminate at midnight
-----------------
on August 31, 1995 (the "Expiration Date"). Notwithstanding the foregoing, in
no event shall this
14
<PAGE>
Agreement terminate, within three (3) years after a Change in Control without
the written consent of Executive. It is the Company's intention to provide to
Executive the benefits set forth herein if the Company is subject to any Change
in Control and the other applicable conditions are satisfied. However, the
Compensation Committee has determined that the term of this Agreement shall not
be automatically renewed, but shall be renewed only with the express approval of
the Compensation Committee. For so long as the Agreement is in effect, the
Company agrees that at least ninety (90) days prior to the Expiration Date it
shall request the Compensation Committee to decide whether the term of the
Agreement should be extended. The Company shall notify Executive in writing of
the Compensation Committee's determination of whether the Company will extend
the term of the Agreement beyond the Expiration Date. If no notice is received
by Executive indicating that the term of the Agreement is extended, then subject
to the second sentence of this Section 9, the Agreement will terminate on the
Expiration Date.
SECTION 10. ARBITRATION.
-----------
(a) Arbitrable Matters. Any dispute under this Agreement arising
------------------
between the parties shall be settled by binding arbitration. In the event
of any dispute between Executive and Company hereunder, either party shall
be entitled to submit the dispute to arbitration. The arbitration
proceeding shall be held in Houston, Texas (unless otherwise mutually
agreed by the parties), and shall be conducted in accordance with the
Center for Public Resources ("CPR") Rules for Non-Administered Arbitration
of Business Disputes. The arbitration shall be conducted by a sole
arbitrator appointed in accordance with rules established by CPR (the
"Arbitrator").
Any arbitration between Executive and Company pursuant to this
Agreement shall be governed by the United States Arbitration Act, 9 U.S.C.
(S)(S) 1-16 (or its successor). If the United States Arbitration Act is
determined by the Arbitrator not to apply to this type of employer/employee
agreement based on precedential legal authority, the parties agree to
arbitrate any dispute under the Texas General Arbitration Act, V.A.T.S.
Art. 238-6 et. seq. (or its successor).
(b) Submission to Arbitration. The party submitting any matter
-------------------------
arising out of this Agreement to arbitration (the "demanding party") shall
do so by delivering written notice thereof (the "arbitration notice") to
the other party (the "noticed party"). In addition to indicating the
demanding party's intention to commence arbitration proceedings, the
arbitration notice shall state the nature, with reasonable detail, of the
dispute and the demanding party's claim or claims, the question or
questions to be submitted for decision or award by arbitration and the
relief or remedy sought. A copy of the arbitration notice shall be
concurrently provided to CPR, along with a copy of this Agreement and a
request to appoint an Arbitrator. Either party may bring an action in any
court of competent jurisdiction to compel arbitration under this Agreement.
15
<PAGE>
(c) Arbitration Procedures. The Arbitrator shall apply the
----------------------
substantive law (and the law of remedies, if applicable) of the State of
Texas as applicable to the claim asserted. The Federal Rules of Evidence
shall apply. The Arbitrator shall have no authority to change this
Agreement unless otherwise agreed by both parties. The Arbitrator, and not
any federal, state, or local court or agency, shall have exclusive
authority to resolve any dispute relating to the interpretation,
applicability, enforceability or formation of this Agreement, including but
not limited to any claim that all or any part of this Agreement is void or
voidable. Any party may be represented by an attorney or other
representative selected by the party.
The Arbitrator shall have jurisdiction to hear and rule on pre-hearing
disputes and is authorized to hold pre-hearing conferences by telephone or
in person as the Arbitrator deems necessary. The Arbitrator shall have the
authority to entertain a motion to dismiss and/or a motion for summary
judgment by any party and shall apply the standards governing such motions
under the Federal Rules of Civil Procedure.
At any time after the date of receipt of the arbitration notice, each
party can make discovery requests of the other in any form permitted under
the Federal Rules of Civil Procedure. The recipient of a discovery request
shall have 20 days after the receipt of such request to object to any or
all portions of such request, and shall respond to any portions of such
request not so objected to within 30 days of the receipt of such request.
All objections shall be in writing and shall indicate the reasons for such
objections. The objecting party shall insure that all objections and
responses are received by other parties within the above time periods. Any
party seeking to compel discovery following receipt of an objection shall
file with the other party and the Arbitrator a motion to compel, including
a copy of the initial request and the objection. The Arbitrator shall
allow 10 days for responses to the motion to compel before ruling. Claims
of privilege and other objections shall be determined as they would in
federal court in a case applying Texas law.
At least 30 days before the arbitration, the parties must exchange
lists of witnesses, including any expert witnesses, and copies of all
exhibits intended to be used at the arbitration. Each party shall have the
right to subpoena witnesses and documents for the arbitration. Either
party may arrange for a court reporter to provide a stenographic record of
proceedings. The cost of the court reporter will be paid by the Company.
(d) Compliance with Decisions. To the extent permissible under
-------------------------
applicable law, the parties agree that the award of the Arbitrator shall be
final and binding and shall be subject only to the judicial review
permitted by the United States Arbitration Act or other applicable
arbitration law pursuant to Section 10(a) hereof. Judgment on the
arbitration award may be entered and enforced in any court having
jurisdiction over the parties or their assets. It is the intent of the
parties that the arbitration provisions hereof be enforced to the fullest
extent permitted by applicable law.
16
<PAGE>
(e) Costs and Expenses. The Company shall promptly pay or reimburse
------------------
Executive for all costs and expenses, including, without limitation,
attorneys' fees and witnesses' fees, incurred by Executive as result of any
arbitration (regardless of the outcome thereof) arising out of this
Agreement. All expenses of such arbitration, including the reasonable fees
and expenses of legal counsel for Executive and the costs and expenses
incurred by the Arbitrator, shall be borne by the Company.
SECTION 11. NOTICES. All notices, requests, demands and other
-------
communications required or permitted to be given hereunder (hereinafter referred
to as "notices") shall be in writing and shall be deemed to have been duly given
if delivered by-hand, given by prepaid telecopy, telex or telegram, or mailed
via certified or registered U.S. mail, to the party to receive such notice at
such party's address set forth below; provided that either party may change its
address for notice by giving to the other party written notice of such change.
If to Company:
Lyondell Petrochemical Company
1221 McKinney, Suite 1600
Houston, TX 77002
Attn: Chairman of the Board of Directors
If to Executive:
--------------------------------------
--------------------------------------
--------------------------------------
Any notice given pursuant to this Agreement shall be deemed received (i) if
delivered by-hand, when delivered; (ii) if sent by telecopy, telex or telegram,
24 hours after sending; and (iii) if mailed, when delivered.
SECTION 12. MISCELLANEOUS.
-------------
(a) Assignment. No right, benefit or interest hereunder shall be
----------
subject to assignment, anticipation, alienation, sale, encumbrance, charge,
pledge, hypothecation or set-off in respect of any claim, debt or
obligation, or to execution; attachment, levy or similar process; provided,
--------
however, that Executive may assign any right, benefit or interest hereunder
-------
if such assignment is permitted under the terms of any plan or policy of
insurance, or annuity contract governing such right, benefit or interest.
(b) Construction of Agreement. Nothing in this Agreement shall be
-------------------------
construed to amend any provision of any plan or policy of the Company
except as otherwise expressly noted herein. This Agreement is not, and
nothing herein shall be deemed to
17
<PAGE>
create, a commitment of continued employment of Executive by the Company or
any of its subsidiaries. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. Whenever the
context of this Agreement so requires, the masculine gender includes the
feminine gender, and words used in the singular or plural will include the
other. The words "herein", "hereunder," and other similar compounds of the
word "here" refer to the entire Agreement and not to any particular,
section or provision.
(c) Amendment. This Agreement may not be amended, modified or
---------
canceled except by written agreement of the parties or their respective
successors and legal representatives.
(d) Waiver. No provision of this Agreement may be waived except by a
------
writing signed by the party to be bound thereby.
(e) Severability. In the event that any provision or portion of this
------------
Agreement shall be determined to be invalid or unenforceable for any
reason, the remaining provisions of this Agreement shall remain in full
force and effect to the fullest extent permitted by law.
(f) Successors. This Agreement is personal to Executive and without
----------
the prior written consent of the Company shall not be assignable by
Executive otherwise than by will or the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal representatives. The Company will require any successor
(whether direct or indirect) by purchase, merger, consolidation or
otherwise of all or substantially all of the business and/or assets of the
Company or of any division or subsidiary thereof, to expressly assume and
agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform this Agreement if no such
succession had taken place. Failure of the Company to obtain such
assumption and agreement, prior to the effective date for any such
succession, shall constitute a breach of this Agreement and shall entitle
Executive to compensation from the Company in the same amount and on the
same terms as he would be entitled hereunder with respect to Constructive
Termination for Good Reason.
This Agreement shall be binding upon and inure to the benefit of the
Company and any successor organization or organizations which shall succeed
to substantially all of the business and/or assets of the Company (whether
direct or indirect by means of merger, consolidation, acquisition of
substantially all the assets of the Company, or otherwise, including by
operation of law).
(g) Taxes. Any payment or delivery required under this Agreement
-----
shall be subject to all requirements of the law with regard to withholding
of taxes, filing, making of reports and the like.
18
<PAGE>
(h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO
ITS CONFLICTS OF LAW PRINCIPLES.
(i) Entire Agreement. Except as otherwise provided in Section 4 or
----------------
Section 12(b) hereof, this Agreement sets forth the entire agreement and
understanding of the parties hereto with respect to the matters covered
hereby.
[signature page follows]
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
_____ day of ____________________, 1994.
LYONDELL PETROCHEMICAL COMPANY
By: ____________________________________________
[Name and Title]
EXECUTIVE
_________________________________________________
[Signature of Executive]
20
<PAGE>
EXHIBIT 10.15
October 21, 1994
[Outside Directors]
Board of Directors
Lyondell Petrochemical Company
Dear ______________:
The Executive Committee has granted to you _____________ Restricted Shares
effective as of November 1, 1994. The grant is intended to acknowledge your
valuable contributions and the expenditure of significant amounts of your time
in connection with the evaluation of the 1994 Atlantic Richfield Company debt
offering, the subsequent transition of the Board and establishment of various
corporate governance principles, as well as to create an additional incentive
for you to continue making your valuable contributions of time and service to
the Company and to increase the alignment of personal economic interest between
you and stockholders generally.
"Restricted Shares" means shares of the Company's common stock which may
not be assigned or transferred for a stated period of time (the "Restriction
Period") and which are forfeited if the holder resigns or otherwise terminates
his or her directorship of the Company during the Restriction Period, upon the
terms set forth below. The Restriction Period applicable to these Restricted
Shares is one (1) year from November 1, 1994.
The following are additional terms, conditions and provisions applicable to
this award:
1. Your rights in regard to these Restricted Shares are not vested, and
you understand and agree, by your signature to this Agreement, that your
entire interest in these Restricted Shares may be forfeited if you fail to
remain as a Director of the
<PAGE>
[Name of Outside Director]
October 21, 1994
Page 2
Company for the full term of the Restriction Period or in the event of any
failure of any of the terms or conditions attached to this award and set
out in this Agreement.
2. Specifically, the Restricted Shares shall not vest in you until the
expiration of the Restriction Period and shall be wholly forfeited in the
event of your resignation or discharge prior to such time; provided,
however, in the event of any termination of your directorship on account of
death, disability which in the determination of the Committee prevents you
from carrying out your duties or termination for reasons other than cause
or voluntary resignation, and provided you are not otherwise in default
hereunder, the Restricted Shares shall not be forfeited but shall
immediately vest in you or your estate, as the case may be, free of any
restrictions (except as provided in Section 6).
3. During the Restriction Period, the Restricted Shares will be evidenced
by a certificate issued in your name but such certificate will not be
delivered to you and shall be held by the Company until the expiration of
the Restriction Period or until earlier forfeiture. During the Restriction
Period (and prior to any forfeiture), your rights in respect of the
Restricted Shares shall be as follows:
(i) You will be entitled to receive cash dividends when paid on
the Restricted Shares and you will be entitled to vote the Restricted
Shares;
(ii) During the Restriction Period you shall not be entitled to
delivery of any stock certificate evidencing the Restricted Shares;
(iii) The certificates for the Restricted Shares may have
imprinted thereon such restrictive legends, and such stop-transfer
orders, dividend payment orders and such other orders as may be given
in respect thereof by the Executive Committee
<PAGE>
[Name of Outside Director]
October 21, 1994
Page 3
as the Executive Committee may determine in its sole discretion;
(iv) During the Restriction Period you may not sell, transfer,
pledge, exchange, hypothecate or otherwise dispose of any of the
Restricted Shares; and
(v) Stock dividends paid on the Restricted Shares shall not be
paid to you, but shall be held by the Company on the same terms as the
Restricted Shares on which they were paid; provided, however, the
Executive Committee in its discretion may direct the payment of any
such stock dividends directly to you, free of the restriction imposed
by this Agreement.
4. At the end of the Restriction Period, the Restricted Shares which have
not been forfeited, together with any cash held on account of dividends on
such Restricted Shares, shall be delivered to you, except that the Company
may withhold sufficient Restricted Shares and cash to enable it to satisfy
its federal, state and local tax withholding obligations, if any.
5. Shares of common stock delivered pursuant to the terms hereof will be
Treasury shares of the Company.
6. Shares of common stock delivered hereunder after the release of any
conditions thereto may nonetheless be restricted stock under the Securities
Act of 1933, as amended (the "1933 Act"), and the certificates for such
shares may have a legend imprinted thereon restricting the sale,
hypothecation or further transfer of said shares except pursuant to an
offer registered under the 1933 Act or pursuant to an exemption from
registration which, in the opinion of the Company, is applicable to such
transaction.
7. In the event of a Change in Control (as defined in the Company's Key
Management Severance Plan (effective as of May 27, 1994)), the Restriction
<PAGE>
[Name of Outside Director]
October 21, 1994
Page 4
Period will terminate forthwith and the Restricted Shares shall not be
subject to forfeiture.
8. This Agreement shall be executed and delivered by you in the City of
Houston, County of Harris, Texas and shall be governed by Texas Law.
Counsel for the Company has advised that in the opinion of such counsel:
1. Any cash dividends which are paid to you on the Restricted Shares will
constitute taxable income to you when received. Generally, at such time as
the restrictions on the Restricted Shares are released or satisfied and
your right to the Restricted Shares becomes non-forfeitable you will have
taxable income in an amount equal to the then fair market value of the
Restricted Shares. You may accelerate the time at which you have taxable
income by making a special election; however, this election must be filed
within 30 days of the grant date. YOU ARE URGED TO CONTACT YOUR OWN
PERSONAL TAX ADVISOR IMMEDIATELY CONCERNING THE TAX CONSEQUENCES ASSOCIATED
WITH HOLDING THE RESTRICTED SHARES.
2. You are subject to the requirement of filing reports under section
16(a) of the Securities Exchange Act of 1934 upon changes in your
beneficial ownership of shares of the Company's common stock, and therefore
you must report the award of Restricted Shares on Form 4, Statement of
Changes in Beneficial Ownership, for the month in which the award was
received.
This Agreement, dated as of October 21, 1994, has been executed and
delivered by the parties hereto in Houston, Texas.
Very truly yours,
LYONDELL PETROCHEMICAL COMPANY
By __________________________________
Bob G. Gower
Chairman, Executive Committee
<PAGE>
[Name of Outside Director]
October 21, 1994
Page 5
Acknowledgment
--------------
The undersigned, ____________________, grantee of the award of Restricted
Shares pursuant to this Agreement, hereby accepts said award on the terms,
conditions and provisions contained in this Agreement. The undersigned
acknowledges receipt of a copy of the Agreement and understands that his rights
in respect of the Restricted Shares may be forfeited as provided in this
Agreement.
Dated ____________________, 1994.
------------------------------
[Awardee's Name]
<PAGE>
EXHIBIT 22
SUBSIDIARIES
Lyondell Refining Company
Lyondell Mont Belvieu Corporation
Lyondell Petrochemical de Mexico, Inc.
<PAGE>
EXHIBIT 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following registration
statements of Lyondell Petrochemical Company, Post-Effective Amendment No. 3 to
Registration Statement on Form S-8 (No. 33-26866), Post Effective Amendment No.
3 to Registration Statement on Form S-8 (No. 33-26867), Registration Statement
on Form S-8 (No. 33-31564), Registration Statement on Form S-8 (No. 33-32683),
of our report dated February 10, 1995 on our audits of the consolidated
financial statements of Lyondell Petrochemical Company as of December 31, 1994
and 1993, and for each of the three years in the period ended December 31, 1994,
which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 29, 1995
<PAGE>
EXHIBIT 25
LYONDELL PETROCHEMICAL COMPANY
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Bob G. Gower, Joseph M. Putz and Russell S. Young, and each of them, his or her
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, in connection with any outstanding securities of
Lyondell Petrochemical Company (the "Company"), or any public offering or other
issuance of any securities of the Company authorized by the Board of Directors
of the Company, or by the Executive Committee thereof pursuant to due
authorization by such Board, (1) to execute and file, or cause to be filed, with
the United States Securities and Exchange Commission (the "Commission"), (A)
Registration Statements and any and all amendments (including post-effective
amendments) thereto and to file, or cause to be filed, all exhibits thereto and
other documents in connection therewith as required by the Commission in
connection with such registration under the Securities Act of 1933,
1 of 4
<PAGE>
as amended, and (B) any report or other document required to be filed by the
Company with the Commission pursuant to the Securities Exchange Act of 1934, as
amended, (2) to execute and file, or cause to be filed, any application for
registration or exemption therefrom, any report or any other document required
to be filed by the Company under the Blue Sky or securities law of any of the
United States and to furnish any other information required in connection
therewith, (3) to execute and file, or cause to be filed, any application for
registration or exemption therefrom under the securities laws of any
jurisdiction outside the United States, including any reports or other documents
required to be filed subsequent to the issuance of such securities, and (4) to
execute and file, or cause to be filed, any application for listing such
securities on the New York Stock Exchange, or any other securities exchange in
any other jurisdiction where any such securities are proposed to be sold,
granting to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act required to be done as he or she
might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, and each of them, may lawfully do or cause to be
done by virtue of this power of attorney. Each person whose signature appears
below may at any time revoke this power of attorney as to himself or herself
only by an instrument in writing specifying that this power of attorney is
2 of 4
<PAGE>
revoked as to him or her as of the date of execution of such instrument or at a
subsequent specified date. This power of attorney shall be revoked
automatically with respect to any person whose signature appears below effective
on the date he or she ceases to be a member of the Board of Directors or an
officer of the Company. Any revocation hereof shall not void or otherwise
affect any acts performed by any attorney-in-fact and agent named herein
pursuant to this power of attorney prior to the effective date of such
revocation.
Dated: March 24, 1995
Signature Title
--------- -----
/s/ Bob G. Gower
______________________________ Chairman, Chief Executive
Bob G. Gower Officer and Director
(Principal Executive Officer)
/s/ Russell S. Young
______________________________ Senior Vice President,
Russell S. Young Chief Financial Officer and
(Principal Financial Officer) Treasurer
/s/ Joseph M. Putz
______________________________ Vice President and
Joseph M. Putz Controller
(Principal Accounting Officer)
3 of 4
<PAGE>
Signature Title
--------- -----
/s/ Dr. William T. Butler
______________________________ Director
Dr. William T. Butler
/s/ D. Travis Engen
______________________________ Director
D. Travis Engen*
/s/ Stephen F. Hinchliffe, Jr.
______________________________ Director
Stephen F. Hinchliffe, Jr.
/s/ Dudley C. Mecum II
______________________________ Director
Dudley C. Mecum II
/s/ Dan F. Smith
______________________________ Director
Dan F. Smith
/s/ Paul R. Staley
______________________________ Director
Paul R. Staley
* Effective as of April 1, 1995
4 of 4
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
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0
0
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<SALES> 3,857
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