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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM . . . . . . . . . . TO . . . . . . . . . .
COMMISSION FILE NUMBER 1-10145
LYONDELL PETROCHEMICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO _____
-----
NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING AS OF MARCH 31,
1997: 80,000,000
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PART I. FINANCIAL INFORMATION
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31
---------------------------
PRO- AS
MILLIONS OF DOLLARS EXCEPT PER SHARE FORMA REPORTED
AMOUNTS 1997 1996 1996
------ ------- ----------
SALES AND OTHER OPERATING REVENUES:
Unrelated parties $ 595 $ 459 $1,101
Related parties 160 120 64
----- ----- ------
755 579 1,165
OPERATING COSTS AND EXPENSES:
Cost of sales
Unrelated parties 510 403 986
Related parties 119 101 57
Selling, general and
administrative expenses 47 45 61
----- ----- ------
676 549 1,104
----- ----- ------
Operating income 79 30 61
Interest expense (21) (20) (20)
Interest income 3 2 1
Minority interest (4) -- (4)
Income from equity investment 6 26 --
----- ----- ------
Income before income taxes 63 38 38
Provision for income taxes 23 14 14
----- ----- ------
NET INCOME $ 40 $ 24 $ 24
===== ===== ======
EARNINGS PER SHARE $ .50 $ .30 $ .30
===== ===== ======
See notes to consolidated financial statements.
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LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
PROFORMA AS REPORTED
MARCH 31 DECEMBER 31 DECEMBER 31
MILLIONS OF DOLLARS 1997 1996 1996
---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 34 $ 56 $ 68
Accounts receivable:
Trade 264 259 394
Related parties 48 96 62
Inventories 259 196 294
Prepaid expenses and other current
assets 13 12 13
---------- ------------ ------------
Total current assets 618 619 831
---------- ------------ ------------
Property, plant and equipment 2,123 2,109 4,313
Less accumulated depreciation and
amortization (1,234) (1,216) (2,043)
---------- ------------ ------------
889 893 2,270
Investment in affiliate 65 83 --
Receivable from affiliate 225 177 --
Deferred charges and other assets 126 118 175
---------- ------------ ------------
Total assets $ 1,923 $ 1,890 $ 3,276
========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade $ 164 $ 200 $ 474
Related parties 22 30 1
Notes payable 215 50 60
Current maturities of long-term
debt 7 112 112
Other accrued liabilities 80 93 124
---------- ------------ ------------
Total current liabilities 488 485 771
---------- ------------ ------------
Long-term debt 742 744 1,194
Other liabilities and deferred credits 75 70 114
Deferred income taxes 161 157 157
Commitments and contingencies
Minority interest 4 3 609
Stockholders' equity:
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 80
Additional paid-in capital 158 158 158
Retained earnings 215 193 193
---------- ------------ ------------
Total stockholders' equity 453 431 431
---------- ------------ ------------
Total liabilities and stockholders'
equity $ 1,923 $ 1,890 $ 3,276
========== ============ ============
See notes to consolidated financial statements.
2
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LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
----------------------------------------
PROFORMA AS REPORTED
MILLIONS OF DOLLARS 1997 1996 1996
--------- ---------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 40 $ 24 $ 24
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 22 17 24
Deferred income taxes 2 2 2
Minority interest 4 -- 4
Income from equity investment (6) (26) --
(Increase) decrease in
accounts receivable 43 (23) (11)
Increase in inventories (63) (13) (22)
Increase (decrease) in
accounts payable (44) 6 (7)
Net change in other working
capital accounts (11) (2) (11)
Other (6) (4) (5)
-------- --------- -----------
Net cash used in
operating activities (19) (19) (2)
-------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment (15) (20) (194)
Purchases of short-term investments -- (76) (76)
Contributions and advances to
affiliate (49) (53) --
Distributions from affiliate 24 22 --
-------- --------- -----------
Net cash used in
investing activities (40) (127) (270)
-------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Minority owner contributions
(distributions) (3) -- 42
Net change in short-term debt 165 (103) (87)
Borrowings of long-term debt -- 300 376
Repayments of long-term debt (107) -- --
Dividends paid (18) (18) (18)
-------- --------- -----------
Net cash provided by
financing activities 37 179 313
-------- --------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (22) 33 41
Cash and cash equivalents at beginning
of period 56 6 10
-------- --------- -----------
Cash and cash equivalents at end of
period $ 34 $ 39 $ 51
======== ========= ===========
See notes to consolidated financial statements.
3
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LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal, recurring adjustments considered necessary for a fair
presentation, have been included. For further information, refer to the
consolidated financial statements and notes thereto for the year ended December
31, 1996 included in the Lyondell Petrochemical Company ("Company" or
"Lyondell") 1996 Annual Report and the Annual Report on Form 10-K pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934. The year-end
condensed balance sheet data was derived from audited financial statements but
does not include all disclosures required by generally accepted accounting
principles.
Certain amounts from prior periods have been reclassified to conform to the
current period presentation.
Proforma Financial Information - The unaudited proforma financial information in
the accompanying financial statements presents the financial position, results
of operations and cash flows of the Company as of December 31, 1996 and for the
three months ended March 31, 1996 using the equity method of accounting for
Lyondell's investment in LYONDELL-CITGO Refining Company Ltd. ("LCR") as if the
change in accounting method had been effective January 1, 1996 (see Note 3).
This unaudited proforma information may not be indicative of results that will
be obtained in the future. The unaudited proforma financial information also
includes restatements to split the petrochemicals segment into the
petrochemicals and polymers segments.
COMPANY OPERATIONS
The Company operates in the petrochemicals, polymers and refining segments. In
1996 and prior years, the results of the polymers business were included in the
petrochemicals segment. The petrochemicals business, as reported in 1997,
manufactures a wide variety of petrochemicals including olefins, methanol,
methyl tertiary butyl ether ("MTBE") and aromatics produced at the Channelview
petrochemical facility. The Company's petrochemical products are used primarily
in the manufacture of other chemicals and products, including polymers. The
polymers business manufacturers polyolefins, including high-density polyethylene
("HDPE"), low-density polyethylene and polypropylene, which are used in the
production of a wide variety of consumer and industrial products. The Company
also operates in the refining segment through the Company's equity interest in
LCR, a Texas limited liability company that is owned by subsidiaries of Lyondell
and CITGO Petroleum Corporation ("CITGO"), which manufactures refined petroleum
products, including gasoline, low sulfur diesel, jet fuel, aromatics and
lubricants.
EQUITY INTEREST IN LYONDELL- CITGO REFINING COMPANY LTD.
In July 1993, LCR was formed to own and operate the Company's refining business,
including the full-conversion Houston, Texas refinery ("Refinery"). LCR
completed a major upgrade project at the Refinery ("Upgrade Project") during the
first quarter of 1997 to enable the facility to process substantial additional
volumes of very heavy crude oil. The Upgrade Project was funded by debt and
CITGO equity contributions.
CITGO has provided a major portion of the funds for the Upgrade Project and has
provided $130 million through March 31, 1997 for funding other capital projects
and operations. Major components of the Upgrade Project
4
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include new coking, crude distillation and sulfur recovery units. CITGO
reinvested its share of operating cash flow during the Upgrade Project totaling
$46 million through March 31, 1997, while the Company had unrestricted access to
its share of operating cash flow from LCR.
As a result of the completion of the Upgrade Project, effective April 1, 1997
the participation interests changed from 86 percent and 14 percent to
approximately 60 percent and 40 percent for Lyondell and CITGO, respectively, to
reflect CITGO's equity contribution in the Upgrade Project. CITGO has a one-
time option to increase its participation interest in LCR up to 50 percent by
making an additional equity contribution.
Pursuant to contractual arrangements and concurrent with the completion of the
Upgrade Project, the authority and responsibility for certain management
decisions previously decided by majority vote, and therefore controlled by
Lyondell, changed to unanimous vote resulting in expanded joint control of LCR
by Lyondell and CITGO. Consequently, effective January 1, 1997, Lyondell began
accounting for its investment in LCR under the equity method of accounting,
meaning that the operations of LCR are no longer consolidated line by line with
those of Lyondell. The net earnings of LCR are included in the income of
Lyondell as income from equity investment and Lyondell's portion of LCR's net
assets appear on a single line as investment in affiliate. Cash advances to and
distributions from LCR are reflected as individual line items on the statement
of cash flows.
Summarized financial information for LCR is as follows (all amounts in
millions).
INCOME STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31
--------------------
1997 1996
---------- --------
Sales and other operating revenues $ 698 $ 688
Cost of sales 671 641
Selling, general and administrative
expenses 16 17
---------- --------
Operating income $ 11 $ 30
========== ========
Operating income after interest expense $ 7 $ 29
========== ========
BALANCE SHEETS MARCH 31 DECEMBER 31
1997 1996
---------- --------
ASSETS
Total current assets $ 257 $ 273
Property, plant and equipment, net 1,405 1,378
Deferred charges and other assets 53 56
---------- --------
Total assets $1,715 $1,707
========== ========
LIABILITIES AND MEMBERS' EQUITY
Total current liabilities $ 265 $ 373
Long-term debt 692 627
Other liabilities and deferred credits 46 44
Members' equity 712 663
---------- --------
Total liabilities and members' equity $1,715 $1,707
========== ========
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED MARCH 31
--------------------
1997 1996
---------- --------
Depreciation and amortization $ 17 $ 7
Net changes in working capital (84) (20)
Additions to property, plant and equipment (39) (174)
Included in sales and other operating revenues above are $60 million and $42
million in sales to Lyondell for the three months ended March 31, 1997 and 1996,
respectively. In addition, LCR purchased $94 million and $58 million, primarily
product purchases, from the Company, which is included in LCR's cost of sales.
5
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LCR has a long-term crude supply contract ("Crude Supply Contract")
with Lagoven, S.A. ("LAGOVEN"), an affiliate of CITGO. The Crude Supply
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 inflation rates, however,
deemed margins are 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 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.
Despite the limitations discussed above, the Crude Supply Contract reduces the
volatility of earnings and cash flow of the refining operations of LCR
irrespective of market fluctuations of either crude oil or refined products.
Specifically, if the market value of refined products "deemed" to be produced
from the Venezuelan crude oil increases, 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.
In addition, under the terms of a long-term product sales agreement ("Products
Agreement"), CITGO purchases from LCR substantially all 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. LCR is required to purchase and LAGOVEN is required to
sell sufficient crude oil to satisfy LCR's coking capacity, which upon
completion of the Upgrade Project is a minimum of 200,000 barrels per day and up
to 230,000 barrels per day of very heavy Venezuelan crude oil. LAGOVEN has the
right, but not the obligation, to supply incremental amounts above 230,000
barrels per day.
INVENTORIES
The categories of inventory and their recorded values at March 31, 1997 and
December 31, 1996 were:
PROFORMA AS REPORTED
MARCH 31 DECEMBER 31 DECEMBER 31
MILLIONS OF DOLLARS 1997 1996 1996
---------- ----------- -----------
Petrochemicals $ 170 $ 98 $ 172
Polymers 64 74 --
Crude oil and refined products -- -- 81
Materials and supplies 25 24 41
---------- ----------- -----------
Total inventories $ 259 $ 196 $ 294
========== =========== ===========
CAPITALIZED INTEREST
The Company's policy is to capitalize interest expense incurred on debt during
the construction of major projects that exceed one year. Total interest expense
incurred during the three months ended March 31, 1997 was approximately $21
million, none of which was capitalized. Total interest expense incurred during
the three months ended March 31, 1996 was approximately $26 million, of which $5
million was incurred by LCR. Approximately $6 million was capitalized during the
three months ended March 31, 1996, of which $5 million was capitalized by LCR.
6
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6. COMMITMENTS AND CONTINGENCIES
The Company has various purchase commitments for materials, supplies and
services incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market.
Depending on 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.
In connection with the transfer of assets and liabilities from Atlantic
Richfield Company ("ARCO") to the Company, the Company agreed to assume certain
liabilities arising out of the operation of the Company's integrated
petrochemicals 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 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. The Company has reached an agreement-in-principle
with ARCO to update the Cross-Indemnity Agreement ("Revised Cross-Indemnity
Agreement"). For current and future cases related to Company products and
Company operations, ARCO and the Company will bear a proportionate share of
judgment and settlement costs according to a formula which allocates
responsibility based on years of ownership during the relevant time period. The
party with the most significant potential liability exposure will be responsible
for case management and associated costs while providing some provisions to
allow the non-case managing party to protect its interests. Under the Revised
Cross-Indemnity Agreement, both ARCO and the Company waive any claim for
reimbursement under the existing Cross-Indemnity Agreement for any prior defense
and settlement costs associated with waste site matters, and the Company will
assume responsibility for its proportionate share of future costs for waste
site matters not covered by ARCO insurance. Subject to the uncertainty inherent
in all litigation, management believes the resolution of the matters pursuant to
the Revised Cross-Indemnity Agreement will not have a material adverse effect
upon the financial statements or liquidity of the Company.
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 financial
statements or liquidity of the Company.
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 thereform which
might affect the handling, manufacture, use, emission or disposal of products,
other materials or hazardous and non-hazardous waste.
7
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Subject to the terms of the Cross-Indemnity Agreement, the Company is currently
contributing funds to the cleanup of one waste site (Brio, 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") 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 received a notice of violation
from the TNRCC regarding the two streams and paid a fine of $10,200. In
addition, the Company incurred approximately $2 million in capital costs in
connection with these waste-water streams to achieve ongoing compliance with the
Benzene NESHAPS regulations. Although the Criminal Enforcement Division of the
EPA is conducting a formal investigation, the Company does not believe any
aspects of the matters described above will subject the Company to criminal
liability or have a material adverse effect on the financial statements or
liquidity of the Company.
The Company has accrued $13 million related to future CERCLA, RCRA and TNRCC
assessment and remediation costs, of which $3 million is included in current
liabilities while the remaining amounts are expected to be incurred over the
next two 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
in this Note will not have a material adverse effect on the consolidated
financial statements or liquidity of the Company. However, 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 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.
STOCKHOLDERS' EQUITY
Dividends - The Company paid regular quarterly dividends of $.225 per share of
common stock during the first quarter of 1997. Additionally, on May 9, 1997,
the Board of Directors declared a regular quarterly dividend of $.225 per share
of common stock, payable June 15, 1997 to stockholders of record on May 23,
1997.
Earnings per Share - Earnings per share for all periods presented are computed
based on the weighted average number of shares outstanding for the periods,
which was 80,000,000 shares.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock. SFAS No. 128 is
effective for interim and annual periods ending after December 15, 1997. The
Company does not believe the effect of adoption in the fourth quarter of 1997
will have a material impact on the Company's reported earnings per share.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
In 1996, Lyondell Petrochemical Company ("Company" or "Lyondell") operated in
the petrochemicals and refining segments. In 1996 the petrochemicals segment
included the results of operations of the Company's petrochemicals and polymers
business. Beginning in 1997, the petrochemicals segment was split into the
petrochemicals and polymers segments. The petrochemicals segment consists of
olefins including ethylene, propylene, butadiene, butylenes and specialty
products; aromatics produced at the Channelview, Texas petrochemicals facility
("Channelview Facility") including benzene and toluene; methanol; methyl
tertiary butyl ether ("MTBE"); and refinery blending stocks. In December 1996,
the Company sold an undivided interest in its methanol facility to MCN
Investment Corporation ("MCNIC") and created Lyondell Methanol Company L.L.P.
("Lyondell Methanol"), a partnership with the minority owner, to own and operate
the methanol facility.
The polymers segment consists of polyolefins including high-density polyethylene
("HDPE"), low-density polyethylene and polypropylene produced at the production
facilities in Matagorda ("Matagorda Facility") and Victoria ("Victoria
Facility"), Texas and production facilities in Bayport ("Bayport Facility").
The Company's operations in the refining segment are conducted through its
interest in LYONDELL-CITGO Refining Company Ltd. ("LCR"), a Texas limited
liability company owned by subsidiaries of the Company and CITGO Petroleum
Corporation ("CITGO"). The refining segment consists of refined petroleum
products, including gasoline, low sulfur diesel, and jet fuel; aromatics
produced at the full-conversion Houston, Texas refinery ("Refinery"), including
benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial
lubricants, motor oils, white oils, process oils and base oils; carbon black
oil; sulfur; residual oil; petroleum coke fuel; olefins feedstocks; and crude
oil resales. LCR completed a major upgrade project at the Refinery ("Upgrade
Project") during the first quarter of 1997 to enable the facility to process
substantial additional volumes of very heavy crude oil.
The following table sets forth sales volumes for the Company's major products
for the periods indicated. Sales volumes, including intersegment sales, include
production, purchases of products for resale, propylene production from the
product flexibility unit, products received on exchange and draws from
inventory. Refined products volumes include all activity at LCR.
FOR THE THREE
MONTHS
ENDED MARCH 31
------------------
1997 1996
-------- --------
SELECTED PETROCHEMICAL PRODUCTS (MILLIONS)
Ethylene, propylene and other olefins (lbs.) 2,018 2,004
Methanol (gallons) 58 51
Aromatics (gallons) 44 50
POLYMERS PRODUCTS (MILLIONS)
Polyethylene and polypropylene (lbs.) 496 547
REFINED PRODUCTS (THOUSAND BARRELS PER DAY)
Gasoline 110 110
Diesel and heating oil 51 50
Jet fuel 17 27
Aromatics 9 9
Other refined products 80 79
-------- --------
Total refined products volumes 267 275
======== ========
9
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Summarized below is the segment data for the Company. Intersegment sales from
the petrochemicals segment to the polymers segment include ethylene and
propylene produced at the Channelview Facility. Intersegment sales between the
petrochemicals and refining segments in 1996 include olefins feedstocks and
benzene produced at the Refinery and gasoline blending stocks and hydrogen
produced at the Channelview Facility. Intersegment sales were made at prices
that were based on current market values.
Effective January 1, 1997, Lyondell began accounting for its investment in LCR
under the equity method of accounting, meaning that the operations of LCR are no
longer consolidated line by line with those of Lyondell. The net earnings of LCR
are included in the income of Lyondell as income from equity investment and
Lyondell's portion of LCR's net assets appear on a single line as investment in
affiliate. Cash advances to and distributions from LCR are reflected as
individual line items on the statement of cash flows. Therefore, the results of
operations of the refining segment, which consists primarily of the Company's
interest in LCR, do not appear line by line in the tables below for 1997.
The following unaudited proforma financial information presents the results of
operations of the Company for the year ended December 31, 1996 using the equity
method of accounting for Lyondell's investment in LCR as if the change in
accounting method had been effective January 1, 1996. The unaudited proforma
financial information also includes restatements to split the petrochemicals
segment into the petrochemicals and polymers segments. This unaudited proforma
information may not be indicative of results that will be obtained in the
future.
FOR THE THREE MONTHS
ENDED MARCH 31
------------------------
PRO- AS
FORMA REPORTED
(MILLIONS OF DOLLARS) 1997 1996 1996
- --------------------- ----- ----- ------
SALES AND OTHER OPERATING REVENUES:
Petrochemicals segment $ 659 $ 495 $ 578
Polymers segment 198 169 --
Refining segment -- -- 687
Intersegment sales (102) (85) (100)
----- ----- ------
$ 755 $ 579 $1,165
===== ===== ======
COST OF SALES:
Petrochemicals segment $ 569 $ 454 $ 502
Polymers segment 162 135 --
Refining segment -- -- 641
Intersegment purchases (102) (85) (100)
----- ----- ------
$ 629 $ 504 $1,043
===== ===== ======
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES:
Petrochemicals segment $ 7 $ 9 $ 28
Polymers segment 20 19 --
Refining segment -- -- 17
Unallocated 20 17 16
----- ----- ------
$ 47 $ 45 $ 61
===== ===== ======
OPERATING INCOME:
Petrochemicals segment $ 83 $ 32 $ 48
Polymers segment 16 15 --
Refining segment -- -- 29
Unallocated (20) (17) (16)
----- ----- ------
$ 79 $ 30 $ 61
===== ===== ======
INCOME FROM EQUITY INVESTMENT:
Refining segment $ 6 $ 26 --
===== ===== ======
10
<PAGE>
Summarized below are intersegment sales for Lyondell's segments.
FOR THE THREE MONTHS
ENDED MARCH 31
------------------------
PRO- AS
FORMA REPORTED
(MILLIONS OF DOLLARS) 1997 1996 1996
- --------------------- ----- ----- --------
Petrochemicals segment to polymers segment $ 102 $ 85 $ --
Petrochemicals segment to refining segment -- -- 58
Refining segment to petrochemicals segment -- -- 42
----- ----- --------
$ 102 $ 85 $ 100
===== ===== ========
RESULTS OF OPERATIONS
OVERVIEW
Net income for the first quarter of 1997 was $40 million or $.50 per share
compared to net income of $24 million or $.30 per share for the first quarter
of 1996. The $16 million increase was primarily due to improved margins for
olefins and methanol due to higher sales prices offset by decreased paraxylene
margins at LCR as a result of significantly lower sales prices.
Net income was $12 million lower for the first quarter of 1997 compared to the
fourth quarter of 1996. Reported earnings for the fourth quarter of 1996
included an approximate $20 million after-tax gain from the sale of an undivided
interest in the methanol facility and $19 million of after-tax proceeds from a
business interruption claim settlement. Excluding the effect of these gains, the
increase in net income was primarily caused by improved margins for olefins
primarily due to lower feedstock costs. Additionally, refined products margins
improved as the Upgrade Project was completed in February 1997 and higher
volumes of very heavy crude oil were processed. These improvements were
partially offset by decreased margins in the polymers business primarily
resulting from increased feedstock costs and decreased sales volumes due in part
to a planned turnaround at the Matagorda Facility.
PETROCHEMICALS SEGMENT
SELECTED PRICING INFORMATION The following table presents industry pricing
information for the periods shown below.
FOR THE THREE MONTHS ENDED
---------------------------------
MARCH 31 DECEMBER 31 MARCH 31
1997 1996 1996
---------- ------------ --------
ETHYLENE (CENTS PER POUND) 28.4 26.6 20.1
CMAI Monomers Market Report,
delivered - contract, monthly
contract price agreement
METHANOL (CENTS PER GALLON) 61.1 47.2 38.9
CMAI Weekly Methanol Market Report -
spot FOB/US Gulf
in barges
CRUDE OIL ($ PER BARREL) 20.98 23.50 19.37
Platts Oilgram Price Report, spot
price WTS low
OPERATING INCOME Operating income for the first quarter of 1997 increased $51
million compared to the first quarter of 1996. This increase was primarily due
to improved margins for olefins as a result of higher industry sales prices and
improved methanol performance as a result of higher sales margins generated by
higher industry sales prices and higher sales volumes.
11
<PAGE>
Operating income for the first quarter of 1997 was $83 million compared to the
fourth quarter of 1996 of $115 million. Excluding the effect of the one-time
gains mentioned in the Overview above, operating income in 1997 actually
increased by $26 million. This increase in operating income in 1997 was
primarily due to improved margins for olefins as a result of lower feedstock
costs. In addition, methanol performance improved as a result of higher sales
volumes. Olefins feedstock costs were lower in the first quarter of 1997 as a
result of lower crude oil prices. Methanol sales volumes increased in response
to higher demand generated for its downstream products by positive economic
trends in the housing and plastic packaging industries.
Lyondell's olefins feedstocks are primarily condensates and other petroleum
liquids which tend to follow the cost trends of crude oil. During 1996 the price
of crude oil increased steadily which resulted in higher feedstock costs for the
petrochemicals business, however, crude oil prices began dropping in 1997. The
sales prices for various olefins products are primarily driven by two factors.
The first factor is the demand for ethylene, propylene and other by-products as
a result of economic conditions in end-use markets for these commodities such as
the auto industry, housing construction and consumer durable and non-durable
goods. The second factor driving sales prices is the underlying cost of the
feedstock.
Methanol is a component of products used by the housing and plastics industry,
as well as being a primary component of MTBE, a product used to blend low-
emission reformulated gasoline. Prices gradually increased throughout 1996 due
to strong demand by the end-use markets and supply constraints due to industry
operating problems. The price of natural gas, the principal methanol feedstock,
increased throughout 1996 as a result of the tight supply and demand balance in
the fuels market, but began falling in March 1997.
REVENUES Sales and other operating revenues, including intersegment sales, were
$659 million in the first quarter of 1997 compared to $495 million in the first
quarter of 1996, an increase of $164 million. This increase was primarily due
to increased olefins sales prices, which showed significant improvement from the
first quarter of 1996 as strong demand from the polyolefins markets resulted in
a tighter balance of supply and demand for olefins and also as cost increases
for olefins feedstocks over the course of 1996 were reflected in olefins product
prices. In addition, olefins sales volumes increased due to strong demand in
the downstream markets, primarily for propylene. Sales margins for methanol
improved significantly due to increased sales prices resulting from a tighter
supply and demand situation due to unscheduled industry downtime. Methanol
sales volumes increased in the first quarter of 1997 in response to higher
demand generated for its downstream products by the housing and plastic
packaging industries.
COST OF SALES Cost of sales was $569 million in the first quarter of 1997
compared to $454 million in the first quarter of 1996, an increase of $115
million. This increase was primarily due to increased sales volumes, as well as
higher olefins feedstock costs which reflects higher prices for crude oil in the
first three months of 1997 compared to 1996 due to stronger seasonal demand for
petroleum products. Natural gas feedstock costs for methanol were higher due to
seasonal winter fuel demand which was stronger in the first three months of 1997
than 1996.
SELLING EXPENSES Selling expenses were $2 million lower in the first quarter of
1997 compared to the first quarter of 1996. Selling expenses for the
petrochemicals segment consist primarily of terminal expenses related to storage
and distribution of finished goods and rail freight costs of finished product.
The decrease was primarily due to lower rail freight costs as a result of
renegotiation of sales contracts.
POLYMERS SEGMENT
OPERATING INCOME Operating income for the first quarter of 1997 was $16 million
compared to $15 million in the first quarter of 1996. The $1 million increase
was primarily due to higher polymers sales margins due to increases in polymers
sales prices as a result of strong demand and low industry inventories.
Operating income for the first quarter of 1997 compared to the fourth quarter of
1996 decreased $12 million. This decrease was primarily due to lower polymers
margins as a result of higher feedstock costs. In addition, sales
12
<PAGE>
volumes were lower due to lower production levels at the Matagorda Facility as a
result of the planned turnaround completed in March 1997. Industry sales price
increases reflecting the higher costs became effective towards the end of the
first quarter of 1997. Feedstock costs continued rising throughout the first
quarter of 1997 due to tighter supply and demand in the olefins markets.
Lyondell's polymers feedstocks are primarily ethylene and propylene. During
1996 and 1997 the industry sales price of ethylene has increased steadily which
resulted in higher feedstock costs for the polymers business. The sales prices
for various polymers products are primarily driven by two factors. One is the
supply and demand balance for the products as a result of economic conditions
in end-use markets such as the auto industry, housing construction and consumer
durable and non-durable goods. Secondarily, sales prices are driven by the
underlying cost of the feedstock.
REVENUES Sales and other operating revenues were $198 million in the first
quarter of 1997 compared to $169 million in the first quarter of 1996, an
increase of $29 million. This increase was primarily due to increased sales
prices, offset by decreases in sales volumes as a result of lower production
levels at the Matagorda facility due to the planned turnaround completed in
March 1997.
COST OF SALES Cost of sales was $162 million in the first quarter of 1997
compared to $135 million in the first quarter of 1996, an increase of $27
million. The increase was primarily due to increased feedstock costs caused by
tight supply and demand in the olefins markets.
SELLING EXPENSES Selling expenses for the first three months of 1997 were $20
million, an increase of $1 million compared to the first three months of 1996.
For the polymers business, the cost of transporting finished products to
customers by rail, including rail freight costs and rail car lease expense, is
classified as selling expense.
REFINING SEGMENT
GENERAL At inception, LCR entered into a long-term crude oil supply contract
("Crude Supply Contract") with Lagoven, S.A. ("LAGOVEN"), an affiliate of CITGO.
LCR is required to purchase and LAGOVEN is required to sell sufficient crude oil
to satisfy LCR's coking capacity, which upon completion of the Upgrade Project
is a minimum of 200,000 barrels per day and up to 230,000 barrels per day of
very heavy Venezuelan crude oil. LAGOVEN has the right, but not the obligation,
to supply incremental amounts above 230,000 barrels per day. In addition, under
terms of a long-term product sales agreement ("Products Agreement"), CITGO
purchases substantially all 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., the national oil company of Venezuela.
The Upgrade Project was completed one month ahead of schedule with a declared in
service date of February 28, 1997. The completion enabled LCR to begin to take
full benefit of the Crude Supply Contract in March 1997. There were no
significant planned downtime or other operational problems as there were during
the fourth quarter of 1996 with the scheduled outage of the fluid catalytic
cracking unit as well as other units. Margins on the volumes of crude oil coked
under the Crude Supply Contract improved as the purchases of very heavy crude
oil (which is at a lower cost) increased in anticipation of the completion of
the Upgrade Project. Because of the completion of the Upgrade Project one month
ahead of schedule, increased volumes of very heavy crude oil were processed
during March 1997.
The following table sets forth processing rates at the Refinery for the periods
indicated. Refinery runs for the 1996 periods presented are primarily heavy
crude oil, whereas the first quarter of 1997 refinery runs reflect higher
volumes of very heavy crude oil processed.
13
<PAGE>
FOR THE THREE MONTHS ENDED
---------------------------------
MARCH 31 DECEMBER 31 MARCH 31
1997 1996 1996
---------- ----------- --------
REFINERY RUNS (THOUSAND BARRELS PER DAY)
Blended crude oil:
Crude Supply Contract - coked 141 123 109
Other crude oil 53 117 81
---------- ----------- --------
Total blended crude oil 194 240 190
Unfinished stock 79 39 55
---------- ----------- --------
Total 273 279 245
========== =========== ========
INCOME FROM EQUITY INVESTMENT IN LYONDELL-CITGO REFINING COMPANY LTD. The
income from equity investment in LCR represents the Company's share of the net
income for the period based on its participation interest of approximately 86
percent and 87 percent for the three months ended March 31, 1997 and 1996,
respectively. As a result of the completion of the Upgrade Project, effective
April 1, 1997, the Company's participation interest changed to approximately 60
percent. Had the Company followed the equity method of accounting for its
investment in LCR during 1996, the Company would have earned $26 million in
income from equity investment in LCR for the three months ended March 31, 1996.
In comparing the first quarter of 1997 to the first quarter of 1996, the
decrease of $20 million in income from equity investment in LCR is due to
reduced operating income of $19 million and higher interest expense. The change
in operating income reflects improved margins on crude oil coked under the Crude
Supply Contract which did not offset lower margins on paraxylene and higher
production costs.
With the completion of the Upgrade Project ahead of schedule, increased volumes
of very heavy crude oil, which carry a higher margin, were processed during the
last part of the first quarter of 1997. Paraxylene margins were lower primarily
due to lower sales prices which began a downward trend in the second quarter of
1996 from the high prices seen in early 1996. However, prices for paraxylene
began to show some improvement in the first quarter of 1997 with strong demand.
Production costs were higher in the first quarter of 1997 versus 1996 due to a
significant increase in natural gas prices resulting in higher fuel costs,
higher depreciation expense associated with the Upgrade Project, higher
personnel compensation primarily related to overtime and incentive compensation,
and certain non-recurring legal costs in connection with a settlement. Due to
the completion of the Upgrade Project, LCR incurred $4 million of interest
expense in the first quarter of 1997 which previously would have been
capitalized as part of the Upgrade Project.
Income from equity investment in LCR for the first quarter of 1997 compared to
the fourth quarter of 1996 increased $29 million due to increased operating
income of $35 million offset by higher interest expense as described above. The
increase in operating income was caused primarily by higher volumes of crude oil
coked due to the completion of the Upgrade Project. In addition, margins on the
volumes of crude oil coked under the Crude Supply Contract improved as the
purchases of very heavy crude oil (which is at a lower cost) increased. There
were also fewer operating constraints versus the fourth quarter of 1996 when
LCR performed maintenance of the fluid catalytic cracking unit as well as
experienced some operating problems.
UNALLOCATED
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses were $3 million higher for the first three months of
1997 compared to the same period for 1996 due to higher non-recurring executive
compensation.
INTEREST EXPENSE AND INTEREST INCOME Net interest expense was flat comparing
the first quarter of 1997 to the first quarter of 1996.
14
<PAGE>
MINORITY INTEREST Minority interest was $4 million for the first three months
of 1997. This represented the allocated share of Lyondell Methanol net income
to MCNIC, the minority owner of Lyondell Methanol. Minority interest of $4
million as reported for the first three months of 1996 represents the allocated
share of LCR net income to CITGO.
INCOME TAXES The effective income tax rates during the first quarter of 1997
and 1996 were 36.2 percent and 37.2 percent, respectively. State income tax was
the primary difference between the effective tax rates and the 35 percent
federal statutory rate.
FINANCIAL CONDITION
Operating Activities - Lyondell's cash used in operating activities was $19
million in the first three months of 1997 and 1996. The $16 million increase in
net income in 1997 compared to 1996 was offset by changes in working capital,
resulting in no change in cash flow used by operating activities for the two
periods.
Investing Activities - Cash used in investing activities during the first three
months of 1997 consisted of capital expenditures of $15 million for projects at
the various petrochemical facilities. In 1997 the Company advanced LCR $48
million for the Upgrade Project and working capital needs and made other
contributions to LCR totaling $1 million. In 1996 the Company advanced LCR $48
million for the Upgrade Project and environmental and other capital expenditures
and made other contributions to LCR totaling $5 million for capital
expenditures. LCR distributed cash of $24 million to the Company during the
first quarter of 1997.
Financing Activities - Cash provided by financing activities consisted primarily
of $165 million in short-term borrowings used to retire $107 million of long-
term debt and for working capital purposes.
The Company paid regular quarterly dividends of $.225 per share of common stock
during the first quarter of 1997. Additionally, on May 9, 1997, the Board of
Directors declared a regular quarterly dividend of $.225 per share of common
stock, payable June 15, 1997 to stockholders of record on May 23, 1997.
CURRENT BUSINESS OUTLOOK
The Upgrade Project was completed one month ahead of schedule enabling LCR to
begin to take full benefit of the Crude Supply Contract in March 1997. The
petrochemicals business appears strong entering the second quarter of 1997 with
lower feedstock costs and balanced supply and demand for olefins. The polymers
business also appears strong entering the second quarter of 1997 with relatively
balanced supply and demand for polymers.
The Company benefits from LCR's Crude Supply Contract which diminishes the
impact of market volatility and stabilizes cash flows at attractive levels
relative to historic performance. With the completion of the Upgrade Project,
more than 90 percent of the crude oil purchases are under the Crude Supply
Contract which significantly reduces the crude oil volume which is sensitive to
market conditions. The benefits of the Crude Supply Contract have begun to be
seen following completion of the Upgrade Project through increased profitability
and cash flow. Assuming continued good operating performance, for 1997,
Lyondell's income from equity investment in LCR could be up to $100 million. LCR
is still working to achieve maximum operating efficiencies from the Upgrade
Project in order to realize the full benefits of the Crude Supply Contract.
During the remainder of 1997, management expects that olefins supply and demand
fundamentals will be more balanced than in 1996. Several turnarounds are
scheduled in the industry in the second and third quarter of 1997 which should
tighten the supply of olefins and help support pricing for olefins over the next
several months. However, additional industry capacity is anticipated to start up
late in the year which will add supply and may negatively impact pricing of
olefins near year-end and into 1998. Feedstock costs appear stable at lower
levels than experienced in the first quarter of 1997, however, olefins
profitability may be negatively impacted if feedstock costs rise.
15
<PAGE>
Domestic polymers demand was strong in the first quarter of 1997, while export
polymers demand was significantly below levels experienced in the first part of
1996. The second and third quarter are generally strong quarters for the
polymers business due to seasonal demand and management expects prices and
margins to remain steady during those periods. However, additional industry
polypropylene capacity is expected to start up later in the year, which may
negatively impact prices and margins for this product in the third and fourth
quarters.
Methanol demand should remain strong, but new industry capacity expected to be
added in the second half of 1997 is expected to lead to price pressures that
could continue in the market into 1998. Management expects margins to be
reduced during this period.
In August 1994, Atlantic Richfield Company ("ARCO") completed an offering of
three-year debt securities ("Exchangeable Notes") which are exchangeable upon
maturity on September 15, 1997 into Lyondell common stock or an equivalent cash
value, at ARCO's option. In March 1997, ARCO announced that it currently plans
to deliver shares of Lyondell common stock at the maturity of the Exchangeable
Notes. If this conversion takes place as expected, ARCO's equity interest in
the Company will be substantially reduced or eliminated. Management is unable
to predict the impact the exchange of ARCO's shares may have on Lyondell's stock
price. Arco's 39,921,400 shares are currently outstanding and therefore the
conversion will not have a dilution effect on earnings per share.
Profitability and cash flows for the petrochemicals 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 maintenance
turnarounds. Turnarounds on major units can have significant financial impacts
due to the associated loss of production, resulting in lower profitability. The
Company completed a turnaround of its Matagorda Facility during the first
quarter of 1997 and will commence a debottleneck project at the Victoria
Facility late in 1997. In addition, the Matagorda Facility was selected as the
site for the construction of a 440 million pound HDPE resin plant expected to
begin construction in January 1998 with a targeted start up of mid-1999.
Management believes 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. Management anticipates increased cash
flow from its businesses and currently intends to accelerate cash flow from its
investment in LCR by replacing construction financing with a larger, longer-term
financing and distributing excess funds to the owners of LCR. Management intends
that cash flow in excess of the amounts needed to fund capital projects, growth
opportunities and maintain an appropriate capital structure, would be returned
to the stockholders through stock repurchases, increased dividends or some
combinations thereof.
The Company's business strategies are to maintain and improve its low-cost
position, reduce cyclicality and volatility and grow the business profitably.
Lyondell expects to be a major player in the ongoing petrochemical industry
restructuring. Lyondell continues to actively pursue opportunities to expand or
further diversify its operations through potential acquisitions, joint ventures
and other opportunities involving third parties. Consistent with the Company's
overall strategy, however, management's intent is to undertake such transactions
only if it expects the transactions would produce both near-term and long-term
improved cash flow and would produce returns in excess of the Company's cost of
capital.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report, including those regarding
the Current Business Outlook, are "forward-looking statements" within the
meaning of the federal securities laws. Although Lyondell believes the
expectations reflected in such forward-looking statements are reasonable, they
do involve certain assumptions, risks and uncertainties, and Lyondell can give
no assurance that such expectations will prove to have been correct. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the
cyclical nature of the refining and petrochemical industries, uncertainties
16
<PAGE>
associated with the United States and worldwide economies, current and potential
United States governmental regulatory actions, substantial petrochemical
capacity additions resulting in oversupply and declining prices and margins, and
operating interruptions (including leaks, explosions, fires, mechanical failure,
unscheduled downtime, transportation interruptions, and spills and releases and
other environmental risks). Many of such factors are beyond Lyondell's ability
to control or predict. Management cautions against putting undue reliance on
forward-looking statements or projecting any future results based on such
statements or present or prior earnings levels.
All subsequent written and oral forward-looking statements attributable to the
Company and persons acting on its behalf are qualified in their entirety by the
cautionary statements contained in this section and elsewhere in this report.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. There have been no material developments with respect to the Company's
legal proceedings previously reported in the 1996 Annual Report on Form
10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company's annual meeting of stockholders was held May 9, 1997. The
stockholders elected all of the Company's eight nominees for director,
and approved the appointment of Coopers & Lybrand L.L.P. as the
Company's independent auditors for 1997. The votes were as follows:
1. Election of Directors:
Nominee For Withheld
------- --- --------
William T. Butler 77,444,524 263,931
Curtis J. Crawford 77,447,193 261,262
Travis Engen 77,450,449 258,006
Bob G. Gower 77,438,468 269,987
Stephen F. Hinchliffe, Jr. 77,446,403 262,052
Dudley C. Mecum II 77,441,049 267,406
Dan F. Smith 77,445,563 262,892
Paul R. Staley 77,442,149 266,306
2. Appointment of Coopers & Lybrand L.L.P.
For: 77,521,106
Against: 126,048
Abstain: 61,301
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.11(a) Voluntary Separation Agreement and Release between the
Company and Bob G. Gower.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed during the
quarter ended March 31, 1997 and through the date hereof.
Date of Report Item No. Financial Statements
-------------- -------- --------------------
January 31, 1997 5 None
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lyondell Petrochemical
Company
(Registrant)
Dated: May 12, 1997 JOSEPH M. PUTZ
-----------------------------
(Signature)
Joseph M. Putz
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
19
<PAGE>
Exhibit 10.11(a)
VOLUNTARY SEPARATION AGREEMENT AND RELEASE
This Voluntary Separation Agreement and Release (the "Agreement") is entered
into by and between Lyondell Petrochemical Company (the "Company") and Bob G.
Gower ("Executive"). As used in this Agreement, the Company shall include and
encompass all of the past, present or future owners, affiliated, related and/or
subsidiary entities of the Company, any successor or predecessor in interest to
the operations or business of the Company, and all past, present or future
directors, officers, employees, agents, attorneys and representatives of the
Company and its owners. This Agreement replaces and supersedes any prior
separation or severance agreement between Company and Executive.
PREAMBLE
Executive has elected to resign from the position of Chief Executive Officer of
the Company effective December 6, 1996 and to retire from his employment with
the Company effective February 1, 1997. In recognition of Executive's service
to the Company and in response to his decision to retire, the parties have
entered into negotiations which have culminated in the following Agreement.
AGREEMENT
In consideration of the mutual promises and undertakings of the parties, the
sufficiency of which is recognized and accepted by each of the parties, it is
agreed as follows:
1. VOLUNTARY RESIGNATION. Executive shall and does hereby voluntarily
resign as Chief Executive Officer of the Company on December 6, 1996.
Executive also shall and does hereby voluntarily resign as an employee of
the Company on January 31, 1997. For
<PAGE>
the duration of Executive's employment, he shall receive his present rate
of salary and comprehensive benefits package, including any increases in
same which are awarded to him by the Compensation Committee.
If Executive continues to serve as a member of the Company's Board of
Directors following his resignation from Company employment, Company and
Executive agree that he shall participate solely as a Non-Employee
Director. Executive acknowledges that his prior employment with the
Company may restrict his participation on certain committees of the Board,
specifically the Compensation Committee, as a matter of law.
2. SEVERANCE PAYMENT. In addition to any other amounts payable under
this Agreement, Company shall pay Executive a lump-sum payment in cash in
the amount of two (2) times the Executive's current annual base salary,
including any salary paid on a deferred basis, such as amounts contributed
by or on behalf of Executive under (i) the Company's 401(k) and Savings
Plan, (ii) the Company's Health Care Account Plan or any similar plan
described in Section 125 of the Internal Revenue Code of 1986, as amended,
or (iii) the Company's Executive Deferral Plan or other "excess benefit
plan" as defined in the Employee Retirement Income Security Act of 1974, as
amended. Base pay shall 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.
If a Change in Control occurs in 1997, Executive shall be entitled to an
additional one (1) year's annual base salary. For purposes of this
Agreement, Change in Control shall mean a Change in Control as defined in
the prior Executive Severance Agreement between Executive and Company dated
August 28, 1996.
3. SUPPLEMENTARY BENEFITS. Pursuant to Section 2.6 of the Lyondell
Petrochemical Company Supplementary Executive Retirement Plan (the
"Lyondell SERP"), Executive
2
<PAGE>
shall receive a special supplementary benefit payment. This payment shall
be determined by calculating the amount generally payable under Article II
of the Lyondell SERP as if that calculation included (x) an additional five
(5) years of age and of service with the Company as of January 31, 1997 and
(y) Executive's current annual base pay plus bonus. "Bonus," for purposes
of this calculation, shall mean one third (1/3) of the cash amount of the
Value Share Plan award paid to Executive in 1996 for his 1995 performance.
This special supplemental benefit payment shall be paid in addition to the
general benefit to which Executive is already entitled under the Lyondell
SERP. The special supplemental benefit shall be paid to Executive in the
same payment form Executive elects for payment of his general benefit
payment from the Lyondell SERP. Following payment of these special and
general supplementary benefits, no further payment will be due to Executive
from the Lyondell SERP.
4. AWARDS. Company agrees that, as a retiree, Executive's shares of
restricted stock awarded under the Company's Restricted Stock Plan shall
vest on his retirement on February 1, 1997. Any unvested stock options
granted to Executive under Company's Long-Term Incentive Plan shall vest
effective with Executive's retirement on February 1, 1997. Executive also
shall be eligible for the full amount of any Value Share Plan award payable
in 1997.
In addition to payments under the Company's Value Share Plan, Executive
shall be paid the following amounts for his prior service with the Company.
In 1998, Executive shall be paid an amount equal to the total amount he
would have received in 1998 under the Value Share Plan had Executive
continued as an officer of the Company throughout 1997. In 1999 through
2002, Executive shall be paid an amount equal to a pro-rated hypothetical
Value Share Plan award calculated as follows:
Executive's pro-rated award shall be determined by first multiplying a
hypothetical award pool by 35% to determine a total amount. This
hypothetical award pool shall be based solely on the MVA and EVA used to
calculate Value Share Plan awards payable by the
3
<PAGE>
Company in 1999 through 2002. Pro-rated award payments in 1999 through 2002
shall be a percentage of this total amount, as follows:
1999 80% of total amount
2000 60% of total amount
2001 40% of total amount
2002 20% of total amount
If the Company's Value Share Plan terminates for any reason before all
payments under this paragraph have been made, the Company shall use an
average of Executive's last three full Value Share Plan payments to
determine the total amount for purposes of calculating remaining payments.
These bonus payments shall be paid entirely in cash. The Value Share Plan
award payable in 1997 shall be paid as soon as practical after it is
awarded. These cash payments are in lieu of any restricted stock or any
deferred cash payment which the Compensation Committee could have otherwise
awarded.
Executive waives any claim of eligibility or right to payment under any
other bonus or incentive program of Lyondell Petrochemical Company other
than Executive's participation in any Lyondell Petrochemical Company stock
option program or the Executive Long-Term Incentive Plan.
5. DEFERRAL BENEFITS. Executive and the Company acknowledge that
Executive has previously elected to defer compensation pursuant to one or
more Participation Agreements under the Deferral Plan.
Consistent with these elections and Executive's timely execution of this
Agreement under paragraph 21, and to the extent permitted by the Deferral
Plan, on January 31, 1997, the Company shall credit Executive's account
under the Deferral Plan with an amount up to,
4
<PAGE>
but not to exceed, the total of his unfulfilled deferral commitments under
those Participation Agreements. For purposes of this paragraph, unfulfilled
deferral commitments of Executive's Value Share Plan award for 1996 shall
be equivalent to the amount of the 1995 deferral commitment for the Value
Share Plan.
The amount to be deferred shall include payments under paragraphs 2 and 6
and an amount up to the total lump sum value of Executive's special
supplementary benefit under the Lyondell SERP, as determined in accordance
with paragraph 3. The amount of any special supplementary benefit in
excess of the amount credited to Executive's account under the Deferral
Plan, if any, shall be paid to Executive in the same form of payment
Executive has elected for payment of his general benefit payment from the
Lyondell SERP. Executive understands that if this Agreement is not
executed in a timely basis, in accordance with paragraph 21, the Company
may be unable to credit these sums to Executive's account under the
Deferral Plan and they will be paid to him directly after the Effective
Date.
Executive's outstanding deferrals shall be subject to the Designation of
Distribution Options which he has made for those deferrals regarding the
time and form of payment of his deferred compensation.
6. VACATION. Executive and Company agree that he shall be entitled to
vacation pay for 1996 and 1997, in accordance with the Company's vacation
policy.
7. MEDICAL BENEFITS. Executive and his dependents shall participate in the
Lyondell Petrochemical Company Executive Medical Insurance Plan (Lyondell
Medical Plan) as a retired executive. If the Plan is amended, terminated
or otherwise modified in the future, Executive and his dependents shall
continue to participate in a successor medical plan, provided however, that
in any event Executive and his dependents shall be provided with such
medical benefits that are equal to those provided (i) to active Lyondell
Petrochemical Company executives and their dependents or (ii) if for any
reason there are
5
<PAGE>
no active Lyondell Petrochemical Company executives, to retired Lyondell
Petrochemical Company executives and their dependents assuming that
Executive is not the only retired Lyondell Petrochemical Company executive
or (iii) if for any reason there are no retired Lyondell Petrochemical
Company executives other than Executive, to any former Lyondell
Petrochemical Company executives and their dependents employed by the
successor, if any, to the business of Lyondell Petrochemical Company and
provided further, nothing in this paragraph shall be construed to limit any
usual or customary offset to Executive's benefits with respect to any
government sponsored program that provides medical benefits to retired
persons.
All benefits, rights and obligations of the parties contained in the
Executive Medical Plan continue unaffected by this Agreement and the
Executive Medical Plan shall be governed by its terms.
8. FINANCIAL COUNSELING. In accordance with and subject to the terms of
the Lyondell Petrochemical Company Policy on Financial Counseling and
Individual Income Tax Service for Executives, the Company agrees that
Executive shall be eligible for full benefits under the Policy in 1997 and
shall be reimbursed for services with respect to Executive's 1997
individual income tax return.
9. EXECUTIVE LIFE INSURANCE AND LONG TERM DISABILITY BENEFITS. Executive
shall continue coverage as a Retiree under the Company's Executive Life
Insurance Plan. With respect to the Company's Long Term Disability Plan,
Executive shall be eligible to convert to an individual policy following
his termination of employment due to retirement, as provided under the
terms of that plan.
10. TOTAL BENEFITS. Executive agrees that the benefits described in this
Agreement are in lieu of any other separation allowance or payment of any
kind, including any special termination payment or allowance under the
Lyondell Special Termination Plan. Executive agrees that he is not entitled
to an allowance under the Special Termination Plan and further
6
<PAGE>
agrees that, if, for any reason he is determined to be eligible for an
allowance under the Special Termination Plan, or for any other special
Company benefits or allowances, other than as provided under the benefit
plans described in the following sentence, he hereby waives any claim of
eligibility for any such allowance or other special pay or benefits. If it
is determined, whether by an arbitrator pursuant to the arbitration
provisions of this Agreement or by the final decision of a court of
competent jurisdiction, that Executive cannot waive any claim to these
benefits, allowances or special pay for any reason, Executive expressly
agrees that the entire amount paid under this Agreement shall be offset
from any amount to which he is found to be entitled. Except as otherwise
specifically provided in this Agreement, including the mutual release
contained in paragraph 15, does not alter or modify any rights Executive
has as a participant under the Lyondell Petrochemical Company Retirement
Plan, the Lyondell SERP, the Lyondell Petrochemical Company Executive
Deferral Plan, the Lyondell Petrochemical Company Executive Supplementary
Savings Plan, the Lyondell Petrochemical Company Executive Life Insurance
Plan, the Lyondell Petrochemical Company Executive Disability Plan, the
Lyondell Petrochemical Company Medical Plan, or the Lyondell Petrochemical
Company Dental Plan.
11. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The balance of payments of
any nature under this Agreement shall be forfeited if the Board of
Directors of the Company, based on advice of independent counsel,
determines that Executive has engaged in gross misconduct harmful to the
Company, has committed a criminal violation harmful to the Company, or had
concealed actions described above which otherwise would have brought about
Executive's termination without this Agreement. Notwithstanding these
conditions, no action or omission made in Executive's good faith exercise
of business judgment while an officer of the Company or member of the
Company's Board of Directors shall result in any forfeiture under this
paragraph.
12. CONFIDENTIALITY AND NON-DISCLOSURE. Executive acknowledges signing and
agreeing to a specific confidentiality agreement during the term of his
employment. The
7
<PAGE>
terms of that confidentiality agreement are made a part of this Agreement
as though restated here in full, and they are not modified or amended
except as provided in this paragraph. The parties agree that all business
plans, strategies, product development information, trade secrets, records,
papers, information and documents related to the current and future
operations of the Company to which Executive may have had access in the
course of his employment, other than matters available to the public or
which have otherwise been previously disclosed to persons other than
Executives and agents of the Company, are considered "confidential
information" by the Company and will remain the property of the Company.
Executive agrees that he will return any and all such materials to the
Company. Executive will not be permitted, either directly or indirectly,
under any circumstances or at any time, to use in any way or to disclose to
any person, firm, association or corporation, except with the express
written authorization of the Company, any confidential information acquired
in the course of his employment with the Company. Any and all information
relating to ideas, concepts, discoveries, improvements, devices, processes,
products, computer programs, customer lists, prospect lists, finances
and/or any other information gained by Executive during his employment are
included in the scope of this restriction.
Notwithstanding the restrictions above, Executive shall not be prohibited
from responding to any question presented to him in connection with any
judicial or administrative proceeding or under authority of any court or
administrative agency with subpoena powers, and any such response shall not
be a violation of any provision of this agreement.
Executive agrees that he will keep the provisions of this Agreement
completely confidential and that, except as may be required by law, he will
not hereafter disclose any information concerning this Agreement to anyone
except his immediate family, tax advisor, financial advisor and/or legal
counsel, or as may be required by law.
13. TAXES. Executive acknowledges that the Company may withhold any taxes
it is required by law to withhold on any payment made to Executive pursuant
to this Agreement.
8
<PAGE>
14. COMBINED GROSS-UP PAYMENT ON CHANGE IN CONTROL. In the event that any
payment under this Agreement is determined to be a "parachute payment" as
defined in the Internal Revenue Code, due to a Change in Control within the
twelve month period following this Agreement, and the payment is or becomes
subject to the tax imposed by Section 4999 of the Internal Revenue Code or
such similar tax that may be hereafter imposed ("Excise Tax") Company
shall pay to Executive an additional cash amount ("Combined Gross-up
Payment") such that the net amount retained by Executive after reduction
for (i) any Excise Tax on the payment 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 payments under this Agreement
determined to be parachute payments. For purposes of determining the
amount of the Combined Gross-up Payment, Executive shall be deemed (i) to
pay federal income tax 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 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.
15. MUTUAL RELEASE. The signatories to this Agreement, and their
respective heirs, assigns, and executors, including those individuals and
entities which the signatories represent, mutually remise, release and
forever discharge each and the other, their heirs, executors,
administrators, successors and assigns from any and all manner of action
and actions, cause and causes of action, suits, debts, dues, sums of money,
accounts, reckonings, bills, specialties, covenants, contracts,
controversies, agreements, promises, variances, trespasses, damages,
judgments, executions, claims and demands whatsoever, in law or in equity,
which against the other they may have ever had, now have or might have had,
by reason of any manner, cause or thing whatsoever, including, but not
limited to, 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, and intentional or
negligent interference with business relations, to the date of this general
mutual release, termination, or 7 days after the execution of this release,
whichever is the
9
<PAGE>
later. Notwithstanding the preceding provisions of this paragraph, this
release does not apply to any claim of the Company arising under paragraph
11 of this Agreement or other claims arising out of any obligations or
terms and conditions set forth in this Agreement or any claim for benefits
that become payable to Executive after the execution of this Agreement.
16. STATUTORY RELEASE. In addition to the foregoing mutual release, and
in consideration for the special supplementary benefit and other benefits
provided to Executive by the Company, Executive releases and discharges the
Company, its owners, its predecessors, successors, subsidiaries,
Executives, officers and directors from any and all claims arising under
federal, state or local laws prohibiting discrimination or claims growing
out of any legal restriction on the Company's right to terminate its
Executives including, but not limited to, claims under the Age
Discrimination in Employment Act, 29 U.S.C. 626, et. sec., Title VII of the
Civil Rights Act of 1964, the Civil Rights Act of 1866 and 1871, the
Americans with Disabilities Act, each of the foregoing as amended by the
Civil Rights Act of 1991, or the Texas Commission on Human Rights Act.
17. SURVIVAL OF BENEFITS. This Agreement and all payments hereunder,
including severance payments and payments of any benefits under either the
plans identified herein or any other plans in which Executive is a
participant, shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
heirs, distributees, devisees and legatees.
18. INDEMNIFICATION. Following his retirement, Executive shall continue to
be entitled to those indemnification rights which apply under the Company's
indemnification obligation to Executives as contained in the Company's
Articles of Incorporation or By-Laws and in the Indemnification Agreement
between Executive and Company dated October 24, 1988.
10
<PAGE>
19. COOPERATION IN LEGAL PROCEEDINGS. Executive agrees that he will
cooperate with the Company in providing information, including testimony at
trial, or in deposition, if needed, regarding any claims filed against the
Company which are based on factual allegations about which Executive has
knowledge.
20. PRESENTATION ADVISORY. Executive was presented this Agreement on
November 7, 1996. Executive expressly acknowledges that he has been
offered and given at least 21 calendar days in which to consider and review
this Agreement prior to signing it, that such time has been sufficient to
permit him to review its terms, and that he has been (and is hereby)
advised to consult with legal counsel of his choice concerning the terms of
this Agreement prior to signing it. Executive specifically acknowledges
that he fully and completely understands the terms of this Agreement and
their significance, that he accepts its terms and enters into the Agreement
freely and voluntarily.
21. EFFECTIVE DATE. Subject to the last sentence of this paragraph, this
Agreement shall become effective: seven (7) calendar days after the date
this Agreement (i) is signed by Executive, as evidenced by the date
adjacent to the signature of Executive at the end of this Agreement, and
(ii) is delivered into the possession of the Company, subject to the
following sentence. This Agreement shall not be effective and shall be
deemed null and void as if never made if prior to the Effective Date
determined under the preceding sentence, Executive revokes his earlier
acceptance of this Agreement, which revocation must be in writing and
delivered into the possession of the Company on or prior to such Effective
Date.
The Company shall have a reasonable time following the later of the
Effective Date of this Agreement or February 1, 1997 to pay Executive any
net amount due under the terms of this Agreement other than benefits
becoming payable under the Company's benefit plans as a result of
Executive's retirement, except as provided under paragraph 4 and as
provided below.
11
<PAGE>
The Company shall credit Executive's account under the Deferral Plan, per
paragraph 5, prior to Executive's termination of employment but only if
Executive executes this Agreement in sufficient time so that the Effective
Date is on or before January 31, 1997.
22. AGREEMENT CONSTRUCTION. It is agreed and understood that this
Agreement contains the entire understanding of the parties and that with
the exception of the various plan documents pertaining to the various
benefit plans referenced throughout this Agreement, there are no additional
or other promises, representations, terms or provisions applicable to the
parties other than those expressly contained herein, and that all prior
negotiations and agreements are merged and integrated into this Agreement.
This Agreement shall be construed as though jointly drafted by the parties
and it shall not be construed presumptively in favor of or against either
party. Nothing in this Agreement shall be deemed to create a commitment of
continued employment of Executive by the Company or any of its
subsidiaries. Except to the extent preempted by federal law, Texas law
shall be applicable to this Agreement. This Agreement shall not be
modified except in writing by each of the parties, which writing shall
specifically reference this Agreement. If any part of this Agreement is
found invalid or unenforceable, the remainder of the Agreement shall not be
affected.
23. ARBITRATION. Subject only to the final sentence of this paragraph,
any dispute concerning the terms or enforcement of this Agreement shall be
submitted to binding arbitration. The arbitration shall be held in Harris
County, Texas, unless otherwise mutually agreed by the parties. The
arbitrator shall be appointed and the arbitration held in accordance with
the rules of the Center for Public Resources ("CPR") Rules for Non-
Administered Arbitration of Business Disputes.
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
12
<PAGE>
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).
Each party shall bear its own costs and attorneys fees. However, if the
Company initiates the arbitration and is determined by the arbitrator, as
a matter of final and binding arbitration under this Section, to be the
non-prevailing party, then the Company will be responsible for all costs
and expenses of the arbitration and CPR, and all filing or other associated
fees and shall reimburse the prevailing party for his costs and expenses,
including attorneys fees previously paid. The arbitrator must specify
which of the parties is the non-prevailing party. Demand for arbitration
must be made within ninety (90) days of the date the party demanding
arbitration reasonably should have known of any alleged breach.
Notice of the alleged breach, including a complete description of the facts
giving rise to the alleged breach, the question or questions to be
submitted for decision or award by arbitration and the relief or remedy
sought must be given to the allegedly breaching party at least ten (10)
days before the demand for arbitration is made. 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.
The decision 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 this
section. Judgment on the arbitration award may be enforced and entered as
a judgment with a court of competent jurisdiction, and, except as provided
in the following sentence, shall be the parties' exclusive remedy.
Notwithstanding the foregoing, if either party claims that the actions of
the other, including any which may be deemed in
13
<PAGE>
harm or should otherwise should be enjoined, the claiming party may seek
immediate, preliminary and permanent injunctive relief in and through any
court of competent jurisdiction.
IN WITNESS OF WHICH, the parties have executed this Agreement on the date set
forth below.
December 2, 1996 /s/ BOB G. GOWER
Date: ________________________ ____________________________________
BOB G. GOWER
LYONDELL PETROCHEMICAL COMPANY
December 2, 1996 /S/ RICHARD W. PARK
Date: ________________________ ____________________________________
BY: RICHARD W. PARK
14
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