<PAGE>
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UNITED STATES
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 SEPTEMBER 30, 1998.
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 CHEMICAL 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
---------
(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
September 30, 1998: 76,932,949
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<PAGE>
PART I. FINANCIAL INFORMATION
LYONDELL CHEMICAL COMPANY
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------- --------------------
Millions of dollars except per share amounts 1998 1997 1998 1997
--------- -------- -------- ----------
SALES AND OTHER OPERATING REVENUES:
<S> <C> <C> <C> <C>
Unrelated parties $ 566 $ 648 $ 566 $1,874
Related parties -- 151 -- 469
------ ------ ----- ------
566 799 566 2,343
------ ------ ----- ------
INCOME FROM EQUITY INVESTMENTS:
Equistar Chemicals, LP (before unusual
charges) 26 -- 139 --
LYONDELL-CITGO Refining Company Ltd. 35 29 89 56
Lyondell Methanol Company, L.P. -- -- 6 --
------ ------ ----- ------
61 29 234 56
------ ------ ----- ------
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties 408 475 408 1,447
Related parties -- 120 -- 370
Selling, general and administrative 45 51 56 148
Research and development 10 -- 10 --
Amortization of goodwill and other
intangible assets 16 -- 16 --
Unusual charges 61 -- 71 --
------ ------ ----- ------
540 646 561 1,965
------ ------ ----- ------
Operating income 87 182 239 434
Interest expense (119) (19) (132) (60)
Interest income 7 4 14 10
Other income (expense), net 1 (5) 6 (13)
------ ------ ----- ------
Income (loss) before income taxes (24) 162 127 371
Provision for income taxes (9) 60 48 136
------ ------ ----- -------
NET INCOME (LOSS) $ (15) $ 102 $ 79 235
====== ====== ===== =======
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $(0.20) $1.27 $1.00 $ 2.94
====== ====== ===== =======
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
Millions of dollars except share amounts 1998 1997
------------ -----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 217 $ 86
Accounts receivable, net 601 5
Inventories 510 --
Prepaid expenses and other current assets 99 12
------ ------
Total current assets 1,427 103
------ ------
Property, plant and equipment 4,777 138
Less accumulated depreciation and amortization (39) (92)
------ ------
4,738 46
------ ------
Investment in affiliates:
Equistar Chemicals, LP 671 1,063
LYONDELL-CITGO Refining Company Ltd. 95 104
Lyondell Methanol Company, L.P. 50 --
Receivable from LYONDELL-CITGO Refining Company Ltd. 231 196
Other investments and long-term receivables 57 --
Goodwill, net 1,268 --
Deferred charges and other assets 1,010 47
------ ------
Total assets $9,547 $1,559
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 100
Current maturities of long-term debt 1,554 --
Accounts payable:
Trade 261 87
Related parties -- 97
Other accrued liabilities 546 24
------ ------
Total current liabilities 2,361 308
------ ------
Long-term debt 5,591 345
Other liabilities and deferred credits 286 73
Deferred income taxes 491 209
Commitments and contingencies
Minority interest 211 5
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 80 80
Additional paid-in capital 158 158
Retained earnings 432 407
Accumulated comprehensive income 22 --
Treasury stock, at cost, 3,067,051 and 1,015,512 shares,
respectively (85) (26)
------ ------
Total stockholders' equity 607 619
------ ------
Total liabilities and stockholders' equity $9,547 $1,559
====== ======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30
------------------------------
Millions of dollars 1998 1997
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 79 $ 235
Adjustments to reconcile net income to net cash provided by
operating activities, net of the effects of purchase
accounting and deconsolidation of affiliates:
Depreciation and amortization 65 66
Unusual charges 57 --
Deferred income taxes 26 12
(Increase) decrease in accounts receivable (5) 9
Increase in inventories (34) (62)
Decrease in accounts payable (196) (16)
Net change in other working capital accounts 16 26
Other 122 8
------- -----
Net cash provided by operating activities 130 278
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of ARCO Chemical Company, net of cash acquired (5,923) --
Capital expenditures (28) (39)
Distributions from affiliates in excess of earnings 404 18
Contributions and advances to affiliates (35) (54)
Deconsolidation of affiliates (11) (12)
------- -----
Net cash used in investing activities (5,593) (87)
------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt 6,337 --
Repayment of notes payable (100) --
Repayment of long-term debt (530) (112)
Repurchase of common stock (59) (14)
Dividends paid (53) (54)
Minority owner distributions -- (12)
------- -----
Net cash provided by (used in) financing activities 5,595 (192)
------- -----
Effect of exchange rate changes on cash (1) --
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 131 (1)
Cash and cash equivalents at beginning of period 86 68
------- -----
Cash and cash equivalents at end of period $ 217 $ 67
======= =====
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------------- ---------------------------------
1998 1997 1998 1997
---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
MILLIONS OF DOLLARS
- -------------------------------------------
Net income (loss) $ (15) $ 102 $ 79 $ 235
Other comprehensive income:
Foreign currency translation, net of tax 22 -- 22 --
----- ----- ----- -----
Comprehensive income $ 7 $ 102 $ 101 $ 235
===== ===== ===== =====
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal, recurring adjustments considered necessary for a fair
presentation, have been included. For further information, refer to the
consolidated financial statements and notes thereto for the year ended
December 31, 1997 included in the Lyondell Chemical Company, formerly Lyondell
Petrochemical Company, ("Company" or "Lyondell") 1997 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.
The accompanying consolidated statements of income for the three months and nine
months ended September 30, 1998 include two months of operating results of ARCO
Chemical Company ("ARCO Chemical" or "Acquired Business"), acquired by the
Company as of July 28, 1998 (see Note 3), and the Company's income from equity
investments in Equistar Chemicals L.P. ("Equistar"), LYONDELL-CITGO Refining
Company Ltd. ("LCR") and Lyondell Methanol Company ("Lyondell Methanol"). The
accompanying consolidated statements of income for the three months and nine
months ended September 30, 1997 include the operating results of the Company's
petrochemicals and polymers segments, which were contributed to Equistar on
December 1, 1997, the operating results of the Company's methanol business, and
the Company's income from equity investment in LCR.
2. COMPANY OPERATIONS
During the third quarter 1998, Lyondell acquired ARCO Chemical, the world's
largest producer of propylene oxide ("PO") and a leading worldwide producer and
marketer of polyether polyols, propylene glycol, propylene glycol ethers,
toluene diisocyanate ("TDI"), styrene monomer ("SM") and methyl tertiary butyl
ether ("MTBE"). The Acquired Business will be treated as a separate business
segment, the intermediate chemicals and derivatives segment.
The Company's operations in the petrochemicals and polymers segments are
conducted through its interest in Equistar. Equistar was formed on December 1,
1997 as a joint venture between the Company and Millennium Chemicals Inc.
("Millennium"). On May 15, 1998, the ethylene, propylene and ethylene oxide and
derivatives businesses of Occidental Chemical Corporation ("OxyChem"), a
subsidiary of Occidental Petroleum Corporation ("Occidental"), were contributed
to Equistar (the "OxyChem Contributed Business"). Equistar is operated as a
Delaware limited partnership owned by subsidiaries of the Company, Millennium
and Occidental (the "Partners").
Equistar's petrochemicals division consists of: olefins, including ethylene,
propylene and butadiene; aromatics, including benzene and toluene; oxygenated
chemicals, including ethylene oxide and derivatives, and MTBE; ethyl alcohol and
diethyl ether; and specialty chemicals, including refinery blending stocks.
Equistar's polymers division consists of: polyolefins, including high-density
polyethylene ("HDPE"), low-density polyethylene ("LDPE"), linear low-density
polyethylene ("LLDPE"), and polypropylene; and performance polymers products,
including color concentrates and compounds; wire and cable resins and compounds;
adhesive resins; and fine powders.
5
<PAGE>
The Company's operations in the refining segment are conducted through its
interest in 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 conventional and reformulated
gasoline, low sulfur diesel, and jet fuel; aromatics produced at LCR's full-
conversion Houston, Texas refinery ("Refinery"), including benzene, toluene,
paraxylene and orthoxylene; lubricants, including industrial lubricants, motor
oils, white oils and process oils; carbon black oil; sulfur; residual oil;
petroleum coke fuel; olefins feedstocks; and crude oil resales.
The Company's operations in the methanol segment are conducted through its
interest in Lyondell Methanol, a Texas limited partnership held by subsidiaries
of the Company and MCN Investment Corporation ("MCNIC"). The methanol segment
consists of methanol and other petrochemical products produced by the methanol
facility. Effective January 1, 1998, Lyondell began accounting for its
investment in Lyondell Methanol using the equity method of accounting. Prior to
1998, the results of the methanol business were included in the petrochemicals
segment.
3. PURCHASE OF ARCO CHEMICAL COMPANY
As of July 28, 1998, the Company completed its acquisition of ARCO Chemical. The
transaction was financed through the $7.0 billion Credit Facility (defined in
Note 9). The acquisition was accounted for as a purchase and, accordingly, ARCO
Chemical's results of operations are included in the Company's consolidated
statement of income prospectively from August 1, 1998. The acquisition cost of
approximately $5.9 billion has been allocated to the assets acquired and
liabilities assumed based on the estimated fair value of such assets and
liabilities at the date of acquisition. Goodwill of approximately $1.3 billion
has been recorded and will be amortized on a straight-line basis over 40 years,
the estimated useful life. The preliminary fair value of the assets acquired
and liabilities assumed is reflected in the September 30, 1998 consolidated
balance sheet. The final allocation of the purchase price will be determined
within a reasonable time after the acquisition date and will be based on a
complete evaluation of the assets acquired and the liabilities assumed.
The unaudited pro forma combined historical results of the Company and ARCO
Chemical, as if ARCO Chemical had been acquired and the Credit Facility obtained
as of the beginning of 1998 and 1997, respectively, are estimated as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30
-------------------------------------
1998 1997
-------------- ----------------
<S> <C> <C>
Sales and other operating revenues $2,672 $2,989
Income from equity investments 234 380
Unusual charges 51 175
Operating income 500 434
Net income (loss) 40 (25)
Basic and diluted earnings (loss) per share $0.51 $(0.32)
</TABLE>
The unaudited pro forma data presented above are not necessarily indicative of
the results of operations of the Company that would have occurred had such
transactions actually been consummated as of the beginning of 1998 and 1997,
respectively, nor are they necessarily indicative of future results of
operations.
4. EQUITY INTEREST IN EQUISTAR CHEMICALS, LP
Lyondell has a 41 percent ownership interest in Equistar, with Millennium and
Occidental each having a 29.5 percent ownership interest. Prior to the addition
of Occidental as a partner on May 15, 1998, Lyondell had a 57 percent ownership
interest in Equistar. Because the Partners jointly control certain management
decisions, Lyondell accounts for its investment in Equistar under the equity
method of accounting.
6
<PAGE>
Summarized financial information for Equistar is as follows (in millions of
dollars).
<TABLE>
<CAPTION>
BALANCE SHEETS SEPTEMBER 30 DECEMBER 31
1998 1997
----------------- -----------------
<S> <C> <C>
Total current assets $1,389 $1,209
Property, plant and equipment, net 3,795 2,118
Goodwill, net 1,115 1,139
Deferred charges and other assets 592 151
------ ------
Total assets $6,891 $4,617
====== ======
Current maturities of long-term debt $ -- $ 36
Other current liabilities 448 317
Long-term debt 2,238 1,512
Capital lease obligations 205 --
Other liabilities and deferred credits 73 34
Partners' capital 3,927 3,063
Note receivable from Lyondell -- (345)
------ ------
Total liabilities and partners' capital $6,891 $4,617
====== ======
</TABLE>
<TABLE>
<CAPTION>
INCOME STATEMENTS FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
-------------- -------------
<S> <C> <C>
Sales and other operating revenues $1,149 $3,263
Cost of sales 1,002 2,741
Selling, general and administrative expenses 68 207
Unusual charges 10 23
------ ------
Operating income 69 292
Interest expense, net (40) (98)
------ ------
Net income $ 29 $ 194
====== ======
</TABLE>
<TABLE>
<CAPTION>
SELECTED CASH FLOW INFORMATION
<S> <C> <C>
Depreciation and amortization $ 72 $201
Cash flow from operations 118 493
Additions to property, plant and equipment 46 111
</TABLE>
Lyondell's $26 million and $139 million share of Equistar's income before
unusual charges for the three and nine months ended September 30, 1998,
respectively, is presented as Lyondell's equity income from investment in
Equistar on the consolidated income statement. Lyondell's $4 million and $10
million share of Equistar's unusual charges for the three and nine months ended
September 30, 1998, respectively, is included in the unusual charges line on the
consolidated income statement (see Note 7).
5. EQUITY INTEREST IN LYONDELL-CITGO REFINING COMPANY LTD.
In July 1993, LCR was formed to own and operate the Company's refining business.
LCR completed a major upgrade project at the Refinery ("Upgrade Project") during
the first quarter of 1997, which enables the facility to process substantial
additional volumes of very heavy crude oil. As a result of the completion of
the Upgrade Project, effective April 1, 1997, the participation interests
changed from approximately 86 percent and 14 percent for Lyondell and CITGO,
respectively, to reflect CITGO's equity contribution in the Upgrade Project.
The participation interests are currently 58.75 percent and 41.25 percent for
Lyondell and CITGO, respectively. Net
7
<PAGE>
income before depreciation expense for the period is allocated to LCR's owners
based on participation interests. Depreciation expense is allocated to the
owners based on contributed assets.
Summarized financial information for LCR is as follows (in millions of dollars).
<TABLE>
<CAPTION>
BALANCE SHEETS SEPTEMBER 30 DECEMBER 31
1998 1997
------------ -----------
<S> <C> <C>
Total current assets $ 231 $ 243
Property, plant and equipment, net 1,371 1,391
Deferred charges and other assets 71 47
------ ------
Total assets $1,673 $1,681
====== ======
Total current liabilities $ 195 $ 293
Long-term debt 717 663
Other liabilities and deferred credits 58 52
Members' equity 703 673
------ ------
Total liabilities and members' equity $1,673 $1,681
====== ======
</TABLE>
<TABLE>
<CAPTION>
INCOME STATEMENTS FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------------- -------------------------
1998 1997 1998 1997
-------- ------ ------- -------
<S> <C> <C> <C> <C>
Sales and other operating revenues $ 499 $ 634 $1,555 $1,974
Cost of sales 413 561 1,329 1,825
Selling, general and administrative expenses 21 17 57 50
----- ----- ------ ------
Operating income 65 56 169 99
Interest expense, net (11) (12) (33) (26)
State income taxes - - - - 1 - -
----- ----- ------ ------
Net income $ 54 $ 44 $ 137 $ 73
===== ===== ====== ======
SELECTED CASH FLOW INFORMATION
Depreciation and amortization $ 26 $ 24 $ 72 $ 66
Cash flow from operations 39 63 77 70
Additions to property, plant and equipment 13 13 43 64
</TABLE>
6. EQUITY INTEREST IN LYONDELL METHANOL COMPANY, L.P.
Lyondell Methanol was formed in December 1996 by Lyondell and MCNIC to own and
operate the methanol facility at Equistar's Channelview, Texas facility. MCNIC
has a 25 percent interest in Lyondell Methanol. Lyondell has a 75 percent
interest in Lyondell Methanol and serves as managing partner. Equistar serves
as operator of the methanol facility. Lyondell began accounting for its
investment in Lyondell Methanol under the equity method of accounting effective
January 1, 1998.
Lyondell Methanol's revenues for the three months ended September 30, 1998 and
1997 were $24 million and $43 million, respectively. Lyondell Methanol's
revenues for the nine months ended September 30, 1998 and 1997 were $81 million
and $123 million, respectively.
7. UNUSUAL CHARGES
During the third quarter of 1998, the Company expensed $57 million of costs
assigned to in-process research and development in connection with its
acquisition of ARCO Chemical as well as the Company's pro rata share of
Equistar's unusual charges of $4 million. The Company's pro rata share of
Equistar's unusual charges for the first nine months of 1998 was $10 million.
The unusual charges, related to the formation of Equistar, consisted
8
<PAGE>
primarily of costs associated with the consolidation of certain operations.
These costs were paid by Equistar and allocated to the Partners in accordance
with their ownership percentages.
8. INVENTORIES
Inventories at September 30, 1998, consisted of the following categories (in
millions of dollars):
Finished goods $406
Work-in-process 18
Raw materials 41
Materials and supplies 45
----
Total $510
====
9. DEBT
In connection with the acquisition of ARCO Chemical, Lyondell executed a bank
credit agreement providing for aggregate borrowings of up to $7 billion ("Credit
Facility"). As part of the acquisition, Lyondell assumed approximately $870
million of ARCO Chemical debt. Borrowings under the Credit Facility of $6.5
billion were used for the purchase of approximately 97.4 million shares of ARCO
Chemical common stock; repayment of debt, including the $345 million note
payable to Equistar, short-term borrowings of Lyondell and ARCO Chemical and
other long-term borrowings of ARCO Chemical; and payment of certain debt
issuance costs.
The Credit Facility comprises (i) a five-year revolving credit facility of up to
$500 million to be used for general corporate purposes (the "Revolving Credit
Facility") and (ii) four separate term loans ("Term Loans") in the amounts of
(a) $2.0 billion ("Term Loan A") to be amortized over five years, (b) $1.25
billion ("Term Loan B") to be amortized over seven years, (c) $1.25 billion with
principal maturing in one year ("Term Loan C"), and (d) $2.0 billion with
principal maturing in two years ("Term Loan D"). All of the Term Loans were
funded on July 28, 1998. No amounts have been funded to date under the
Revolving Credit Facility. The Credit Facility is collateralized by cash flow
streams of Lyondell's three joint ventures and Lyondell's stock in its
subsidiary companies.
The Term Loans initially bear interest at the following rates: (i) Term Loan
A - LIBOR plus 2.0 percent; (ii) Term Loan B - LIBOR plus 2.5 percent;
(iii) Term Loan C - LIBOR plus 2.0 percent; and (iv) Term Loan D - LIBOR
plus 2.0 percent.
Mandatory prepayments from certain sources of funds are required with respect to
the Term Loans until such time as (i) Term Loan C and Term Loan D are repaid in
full, including accrued interest and fees thereon, and (ii) Lyondell has
achieved investment grade ratings of at least BBB- and Baa3 from Standard &
Poor's Ratings Services and Moody's Investors Service, Inc., respectively. The
sources of funds for mandatory prepayments include (i) cash proceeds received
from or as a result of (a) certain equity or debt issuances, (b) the
recapitalization and reorganization of LCR, and (c) asset sales, as defined, and
(ii) 50% of annual excess cash flow, as defined, less the aggregate principal
amount prepaid under the Term Loans.
Under the covenant provisions of the Credit Facility, Lyondell has agreed to,
among other things, (i) maintain certain specified financial ratios and
consolidated net worth (as defined in the Credit Facility), (ii) refrain from
making certain distributions with respect to Lyondell's capital stock, (iii)
refrain from making certain investments, as defined, (iv) refrain from allowing
its subsidiaries to incur certain types and amounts of debt, and (v) use its
best efforts to maintain certain ownership interests in its joint ventures and
to ensure that the joint ventures maintain certain capital expenditure and debt
levels and cash distribution policies. The Credit Facility requires the
Company, among other things, to issue $1.25 billion of equity and use the
proceeds to retire certain debt by July 27, 1999. An additional $2 billion of
debt must be refinanced or retired by July 27, 2000.
9
<PAGE>
During the third quarter 1998, in anticipation of a future debt issuance, the
Company entered into treasury-rate lock transactions ("Treasury Locks") in the
notional amount of $1 billion at an average interest rate of 5.29 percent. The
Treasury Locks are based on U.S. Treasury rates and can either be closed by the
Company at any time prior to the determination date in November 1998 or rolled
over. The Company's accounting policy is to defer gains and losses on the
Treasury Locks, and recognize them as an adjustment to interest expense over the
term of the debt. There was an unrecognized, unrealized loss on the Treasury
Locks at September 30, 1998 of approximately $62 million, resulting from a
decline in the relevant U.S. Treasury rates. Had the Company issued the
anticipated fixed-rate debt as of September 30, 1998, it could have benefited
from a lower interest rate on the debt, resulting in lower interest expense over
the life of the debt that could have offset the deferred loss.
10. COMMITMENTS AND CONTINGENCIES
COMMITMENTS As part of its acquisition of ARCO Chemical, the Company became
party to a long-term supply arrangement for toluene diisocyanate ("TDI"). Under
the arrangement, ARCO Chemical was entitled to all of the TDI output of the
supplier's two plants in France, which have a combined rated capacity of
approximately 264 million pounds per year. The Company is required to purchase a
minimum of 216 million pounds of TDI per year for up to 15 years, beginning
January 1, 1995. The aggregate purchase price is a combination of plant cost and
market price. The Company is further obligated to pay additional capacity
reservation fees based upon plant output factors.
CRUDE SUPPLY CONTRACT At its inception, LCR entered into a long-term crude oil
supply contract ("Crude Supply Contract") with Lagoven, S.A., now known as PDVSA
Petroleo y Gas, S.A. ("PDVSA Oil"), an affiliate of CITGO. LCR is required to
purchase, and PDVSA Oil is required to sell, sufficient crude oil to satisfy
LCR's coking capacity, or a minimum of 200,000 barrels per day and up to 230,000
barrels per day of very heavy Venezuelan crude oil. PDVSA Oil has the right,
but not the obligation, to supply incremental amounts above 230,000 barrels per
day. Depending on market conditions, breach or termination of LCR's Crude
Supply Contract could adversely affect LCR, and therefore, the Company.
Although the parties have negotiated alternate arrangements in the event of a
force majeure, including governmental or other actions restricting or otherwise
limiting PDVSA Oil'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 late April 1998, LCR
received notification from PDVSA Oil of an allocation of crude oil related to
announced OPEC production cuts. LCR began receiving the new allocations of crude
oil from PDVSA Oil in August. In the opinion of LCR's management, the allocation
is anticipated to be temporary, with a possible decrease in pretax income of
approximately $6 million to $8 million per quarter. On the basis of these
estimates, Lyondell's after-tax pro rata share of the decrease in LCR's net
income would be $2 million to $3 million per quarter.
CROSS INDEMNITY AGREEMENTS In connection with the transfer of assets and
liabilities from Atlantic Richfield Company ("ARCO") to the Company in 1988, the
Company agreed to assume certain liabilities arising out of the operation of the
Company's integrated petrochemicals and refining business prior to July 1, 1988.
In connection with the transfer of such liabilities, the Company and ARCO
entered into an agreement, updated in 1997 ("Revised 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. For
current and future cases related to Company products and Company operations,
ARCO and the Company bear a proportionate share of judgment and settlement costs
according to a formula that allocates responsibility based on years of ownership
during the relevant time period. The party with the most significant potential
liability exposure is responsible for case management and associated costs while
allowing the non-case managing party to protect its interests. Under the
Revised Cross-Indemnity Agreement, 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
10
<PAGE>
believes the resolution of the matters pursuant to the Revised Cross-Indemnity
Agreement will not have a material adverse effect upon the consolidated
financial statements of the Company.
In connection with its acquisition of ARCO Chemical, the Company is successor to
a cross indemnity agreement with ARCO whereby ARCO Chemical has indemnified ARCO
against certain claims or liabilities that ARCO may incur relating to ARCO's
former ownership and operation of the oxygenates and polystyrenics businesses of
ARCO Chemical (the "Former Businesses"), including liabilities under laws
relating to the protection of the environment and the workplace and liabilities
arising out of certain litigation. As part of the agreement, ARCO indemnified
ARCO Chemical with respect to claims or liabilities and other matters of
litigation not related to the Former Businesses. ARCO also indemnified ARCO
Chemical for certain federal, foreign, state, and local taxes that might be
assessed upon audit of the operations of the Former Businesses for periods prior
to July 1, 1987.
INDEMNIFICATION ARRANGEMENTS RELATING TO EQUISTAR Lyondell, Millennium, and
Occidental have each agreed to provide certain indemnifications to Equistar in
respect of the petrochemicals and polymers businesses contributed by the
Partners. In addition, Equistar agreed with each of Lyondell, Millennium and
Occidental to assume third party claims that are related to certain pre-closing
contingent liabilities asserted prior to December 1, 2004 to the extent the
aggregate thereof does not exceed $7 million and other liabilities, subject to
certain terms of the respective Asset Contribution Agreements. During the three
and nine months ended September 30, 1998, less than $1 million and approximately
$1 million, respectively, was expensed by Equistar under the $7 million
indemnification basket with respect to the business contributed by Lyondell.
ENVIRONMENTAL 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 environmental laws and inspection and enforcement policies as well as
higher compliance costs arising therefrom, which might affect the handling,
manufacture, use, emission or disposal of products, other materials or hazardous
and non-hazardous waste.
Pursuant to the terms of the Revised Cross-Indemnity Agreement, the Company is
currently contributing funds to the clean up 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.
As of September 30, 1998, the Company has accrued $9 million related to future
CERCLA, RCRA and TNRCC assessment and remediation costs associated with the
above-mentioned sites. The costs 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 for these sites. 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.
As part of its acquisition of ARCO Chemical (see Note 3), the Company assumed
ARCO Chemical's environmental liability, which totaled $42 million at September
30, 1998 and reflected the Company's latest assessment of potential future
remediation costs associated with existing sites. A significant portion of the
liability is related to the Beaver Valley plant site, located in Monaca,
Pennsylvania. ARCO Chemical sold the Beaver Valley plant assets to NOVA
Chemicals Inc. ("NOVA") on September 30, 1996, but retained responsibility for
remediation of the land. Final approval of the remediation methods is subject
to the Pennsylvania Department of Environmental Protection's ("PADEP") approval
of risk assessment studies to be submitted by the Company in the near future.
The Company succeeded to an agreement with Beazer East, Inc. ("Beazer") whereby
Beazer has
11
<PAGE>
agreed to pay for approximately 50 percent of the Beaver Valley plant site
remediation costs. The Company has also succeeded to an agreement with Beazer
and the U.S. government whereby the government will pay 28.5 percent of the
costs incurred by the Company and Beazer for remediation of substantial portions
of the Beaver Valley site. The remainder of the liability is related to four
other plant sites and one federal Superfund site for amounts ranging from $2
million to $13 million per site. ARCO Chemical was involved in administrative
proceedings or lawsuits relating to a minimal number of other Superfund sites.
However, the Company estimates, based on currently available information, that
potential loss contingencies associated with these sites, individually and in
the aggregate, are not significant. Substantially all amounts accrued are
expected to be paid out over the next five to ten years.
The Company has relied upon remedial investigation/feasibility studies ("RI/FS")
at each former site of the Acquired Business as a basis for estimating
remediation costs at the site. RI/FS or preliminary assessments have been
completed at most of the sites. However, selection of the remediation method
and the cleanup standard to be applied are, in most cases, subject to approval
by the appropriate government authority. Accordingly, the Company may have
possible loss contingencies in excess of the amounts reserved to the extent the
scope of remediation required, the final remediation method selected and the
cleanup standard applied vary from the assumptions used in estimating the
liability. The Company estimates that the upper range of these possible loss
contingencies should not exceed the amount accrued by more than $65 million.
The extent of loss related to environmental matters ultimately depends upon a
number of factors, including technological developments, changes in
environmental laws, the number and ability to pay of other parties involved at a
particular site and the Company's potential involvement in additional
environmental assessments and cleanups. Based upon currently known information,
management believes that any remediation costs the Company may incur in excess
of the amounts accrued or disclosed above would not have a material adverse
impact on the Company's consolidated financial statements.
GENERAL The Company is involved in 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
consolidated financial statements of the Company.
In the opinion of management, any liability arising from the matters discussed
in this Note is not expected to have a material adverse effect on the
consolidated financial statements 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.
11. STOCKHOLDERS' EQUITY
BASIC AND DILUTED EARNINGS PER SHARE Basic earnings per share for all periods
presented are computed based on the weighted average number of shares
outstanding for the periods. Diluted earnings per share include the effect of
outstanding stock options issued under the Executive Long-Term Incentive Plan
and the Incentive Stock Option Plan.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------------------- --------------------------------
(THOUSANDS OF SHARES) 1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Basic 77,363 79,974 77,904 79,991
Diluted 77,509 79,997 78,049 80,014
</TABLE>
TREASURY STOCK From time to time the Company purchases its shares in the market
to be used for issuances under the Company's employee compensation and benefits
plans, including stock option and restricted stock plans. In the third quarter
of 1998, the Company purchased 500,000 shares for approximately $10 million to
be used for
12
<PAGE>
such plans. In the second quarter of 1998, the Company completed the stock
buyback program authorized by a resolution adopted by the Board of Directors in
September 1997. A total of 2,567,051 shares were purchased for $75 million in
the stock buyback program.
12. OPTION PERIOD EXTENSION
Under the terms of the Amended and Restated Limited Liability Company
Regulations of LCR, CITGO was required to give notice to Lyondell of its
intention to exercise a one-time option to increase its participation interest
in LCR up to 50 percent by making an additional equity contribution. Such notice
was not received by Lyondell within the required 60-day period prior to the
expiration of the option on September 30, 1998. Lyondell has offered to extend
the option period to September 30, 2000 and renegotiate the terms of the option.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Lyondell operates an intermediate chemicals and derivatives business segment,
described below, and also operates in the petrochemicals, polymers, refining and
methanol segments through its interests in Equistar, LCR, and Lyondell Methanol.
Lyondell accounts for its investments in Equistar, LCR and Lyondell Methanol
using the equity method of accounting.
During the third quarter 1998, Lyondell acquired all of the outstanding shares
of ARCO Chemical, the world's largest producer of PO and a leading worldwide
producer and marketer of polyether polyols, propylene glycol, propylene glycol
ethers, TDI, SM and MTBE. The Acquired Business will be treated as a separate
business segment, the intermediate chemicals and derivatives segment. Lyondell
obtained a $7.0 billion Credit Facility to finance the acquisition, paying $5.6
billion for the stock and assuming approximately $870 million of ARCO Chemical
debt.
In order to facilitate the understanding of operating results, a discussion of
the unaudited pro forma combined historical results of the Company and ARCO
Chemical (see Note 3) is presented below.
RESULTS OF OPERATIONS
LYONDELL CHEMICAL COMPANY
OVERVIEW
For the third quarter 1998, Lyondell earned $23 million, or $0.30 per share,
excluding a nonrecurring after-tax charge of $38 million, or $0.50 per share,
related to the acquisition of ARCO Chemical and the formation of Equistar,
further described below. This compares to $31 million, or $0.40 per share, in
the second quarter 1998, excluding a $2 million after-tax charge for Equistar
formation costs.
Operating income of $87 million in the third quarter 1998 compared to $45
million in the second quarter 1998. The improvement reflected benefits from the
less cyclical intermediate chemicals and derivatives segment as well as improved
operating results in the petrochemicals and refining segments. The
petrochemicals and polymers businesses of Equistar reflect market conditions and
margins that are at a low point in the business cycle. Nonetheless, the
petrochemicals segment had higher operating profit on higher volumes,
attributable to a full quarter of operations of the OxyChem Contributed
Business. LCR operating results improved due to higher on-stream time and
improved plant efficiency. Offsetting these positive contributions were lower
earnings in the polymers segment. The net improvement in operating income was
offset by higher interest charges due to the $6.5 billion borrowing under the
Credit Facility, leading to the $8 million decrease in net income before unusual
charges versus the second quarter.
Management expects the relatively stable earnings from LCR and the intermediate
chemicals and derivatives segment to buffer the cyclical downturns in
petrochemicals and polymers, while the Company continues to focus on cost
savings and synergies. Operating cash flow was $230 million for the third
quarter 1998, reflecting the cash flow contribution of the Acquired Business.
Management believes that the combined cash flow of the Company will be adequate
to meet debt service requirements, fund the regular quarterly dividend, and
continue with a focused capital expenditure program.
14
<PAGE>
REVENUES, OPERATING COSTS AND EXPENSES The operating results for the three
months and nine months ended September 30, 1998 include the Company's income
from equity investments in Equistar, LCR and Lyondell Methanol and two months of
operating results of the Acquired Business. The acquisition was accounted for
as a purchase and the operating results reflect the depreciation and
amortization of the estimated fair value of the assets, including the
amortization of $1.3 billion of goodwill over its estimated forty-year life.
The Company's operating results for the three months and nine months ended
September 30, 1997 include the operating results of the Company's petrochemicals
and polymers segments, which were contributed to Equistar on December 1, 1997,
the operating results of the Company's methanol business, and the Company's
income from its equity investment in LCR.
INCOME FROM EQUITY INVESTMENT IN EQUISTAR Lyondell's income from equity
investment in Equistar, before unusual charges, for the three and nine months
ended September 30, 1998, by segments, is as follows:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(MILLIONS OF DOLLARS) 1998 1998
-------------- --------------
<S> <C> <C>
Petrochemicals segment $ 34 $143
Polymers segment 14 86
Unallocated (22) (90)
---- ----
Total $ 26 $139
==== ====
</TABLE>
Lyondell's share of Equistar's earnings for the third quarter 1998, before its
pro rata share of the unusual charges related to the formation of Equistar, was
$26 million compared to $34 million for the second quarter 1998 as lower
polymers earnings more than offset higher petrochemicals earnings. The polymers
decrease was primarily due to lower margins on lower polymers prices. Higher
petrochemicals earnings reflected higher volumes and lower fixed costs.
INCOME FROM EQUITY INVESTMENT IN LCR Lyondell's share of LCR's earnings for the
third quarter 1998 was $35 million compared to $29 million for the third quarter
1997. The increase was primarily due to higher crude processing rates
attributable to increased purchases on the open market. For the first nine
months of 1998, Lyondell's share of LCR's earnings was $89 million, an increase
of $33 million over the first nine months of 1997. The increase reflected
benefits from the Upgrade Project, which resulted in higher crude processing
rates. Lyondell's share of LCR's earnings increased by $16 million during the
third quarter 1998 compared to the second quarter 1998. The second quarter was
negatively affected by both planned and unplanned downtime, resulting in lower
crude processing rates.
INCOME FROM EQUITY INVESTMENT IN LYONDELL METHANOL Lyondell's share of Lyondell
Methanol's earnings for the first nine months of 1998 was $6 million. Lyondell
Methanol was breakeven in the third quarter 1998. Had the Company followed the
equity method of accounting for its investment in Lyondell Methanol during 1997,
the Company would have recorded $13 million and $33 million in income from its
equity investment in Lyondell Methanol for the third quarter and first nine
months of 1997, respectively.
The decreases in equity income are due to significant declines in the sales
prices of methanol beginning in the first quarter 1998. Increased supply due to
global overcapacity, strong domestic production and heavy imports into the Gulf
Coast, as well as weaker demand from the MTBE sector of the market and as a
result of customer plant outages caused the methanol price declines.
INTEREST EXPENSE Interest expense of $119 million and $132 million in the third
quarter and first nine months of 1998, respectively, increased versus the 1997
periods primarily due to interest on the $6.5 billion of debt drawn under the
Credit Facility on July 28, 1998. The 1997 periods include interest on debt that
was contributed to Equistar as of December 1, 1997.
15
<PAGE>
INCOME TAX The effective tax rate for 1998 is currently estimated to be 37.75
percent, which is comparable to the final effective tax rate of 37.3 percent for
1997. State income tax was the primary difference between the effective tax
rate and the 35 percent federal statutory rate during each of the periods.
PRO FORMA
Comparing the full third quarter to the second quarter of the Acquired Business,
sales volumes for core products, defined as PO and derivatives and TDI, were
lower due to nonrecurring sales to co-producers in the second quarter. Volumes
returned to normal levels in the third quarter. Core products margins improved
in the third quarter versus the second quarter. Third quarter results also
benefited from higher MTBE volumes, resulting from higher gasoline demand during
the summer driving season, and improved MTBE margins as a result of a better
sales mix and lower feedstock costs. The third quarter also benefited from lower
plant turnaround costs compared to the second quarter.
The following is a discussion of the operating results for the nine month
periods ended September 30, 1998 and 1997 included in the unaudited pro forma
combined historical results of the Company and ARCO Chemical (see Note 3).
REVENUES Pro forma revenues of $2.7 billion for the nine months ended
September 30, 1998 decreased 11 percent compared to pro forma revenues of $3.0
billion for the 1997 period. The decrease was primarily due to lower average
sales prices in 1998, reflecting a combination of downward pressure from lower
feedstock costs, ongoing competition in PO derivatives and TDI markets, the
negative effects of a stronger U.S. dollar on foreign sales, and the effects of
weaker Asian markets. Core product volumes were essentially flat versus 1997 as
stronger demand for certain PO derivatives in the United States and Europe was
offset by lower volumes in Asian markets. Increased SM volumes in 1998 primarily
reflect additional contractual offtake of SM equity volumes. TBA and derivatives
volumes decreased in 1998 by five percent, mainly due to lower MTBE demand.
INCOME FROM EQUITY INVESTMENTS Pro forma income for the first nine months of
1998 was $234 million compared to pro forma income of $380 million for the first
nine months of 1997. The $146 million decrease was primarily due to lower
margins for petrochemicals and polymers as a result of declining prices,
partially offset by higher earnings from LCR as higher volumes of very heavy
crude oil were processed in 1998.
OPERATING INCOME Pro forma operating income of $500 million in 1998 increased
$66 million compared to $434 million in the 1997 period. The 1997 period
included a $175 million unusual charge related to restructuring and other costs,
of which $20 million was reversed in the 1998 period. The 1998 period also
included unusual charges of $71 million, primarily related to the write off of
in-process research and development projects of the Acquired Business. Excluding
these items, operating income decreased $58 million. Higher operating income of
the Acquired Business was offset by lower income from equity investments. The
improved income of the Acquired Business in the 1998 period was primarily due to
lower fixed costs and higher core product margins. The fixed cost decrease
reflected the benefits of the cost reduction program and lower maintenance
expense due to fewer scheduled plant turnarounds. Core product margins improved
as feedstock costs decreased more than sales prices.
NET INCOME Pro forma net income for the nine months ended September 30, 1998
was $40 million compared with a loss of $25 million for the 1997 period.
Excluding the effects of the unusual charges, pro forma net income decreased by
$12 million in 1998 as lower equity income more than offset improved operating
results and lower foreign exchange losses of the Acquired Business.
EQUISTAR CHEMICALS, LP
OVERVIEW
Equistar earned pretax income of $29 million for the third quarter compared to
$44 million in the second quarter. Improved petrochemicals results were more
than offset by lower polymers earnings. The petrochemicals business had
operating income of $84 million compared to second quarter 1998 operating income
of $68 million. Third
16
<PAGE>
quarter results reflect higher sales volumes resulting from the first full
quarter of operations of the OxyChem Contributed Business and lower fixed costs.
Margins declined from second quarter levels as lower prices for ethylene,
propylene and other major co-products more than offset lower feedstock costs.
Polymers operating income was $35 million for the third quarter compared to $63
million for the second quarter. A decline in the average selling price for HDPE
and LDPE was only partially offset by lower raw material costs and lower fixed
costs.
The unaudited pro forma sales and product volume information below present the
combined historical data of the businesses contributed to Equistar by Lyondell,
Millennium and OxyChem as if such combination had occurred as of the beginning
of 1997.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------------- -----------------------
PRO FORMA PRO FORMA PRO FORMA
1998 1997 1998 1997
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES $1,149 $1,711 $ 3,769 $ 5,072
(MILLIONS)
VOLUMES (MILLIONS):
Selected petrochemicals products
Olefins (pounds) 4,692 4,886 13,636 13,672
Aromatics (gallons) 78 59 189 155
Polymers products (pounds) 1,654 1,473 4,858 4,359
</TABLE>
Summarized financial information for Equistar's business segments for the three
months and nine months ended September 30, 1998 is as follows (in millions).
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
SALES AND OTHER OPERATING REVENUES
Petrochemicals segment $ 919 $2,565
Polymers segment 489 1,601
Intersegment eliminations (259) (903)
------ ------
Total $1,149 $3,263
====== ======
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Petrochemicals segment $ 4 $ 9
Polymers segment 24 62
Unallocated 40 136
------ ------
Total $ 68 $ 207
====== ======
OPERATING INCOME
Petrochemicals segment $ 84 $ 281
Polymers segment 35 170
Unallocated (50) (159)
------ ------
Total $ 69 $ 292
====== ======
EBITDA
Petrochemicals segment $ 133 $ 394
Polymers segment 48 222
Unallocated (40) (123)
------ ------
Total $ 141 $ 493
====== ======
</TABLE>
17
<PAGE>
PETROCHEMICALS SEGMENT
REVENUES Sales and other operating revenues, including intersegment sales, were
$919 million in the third quarter 1998 compared to $859 million in the second
quarter 1998, an increase of seven percent. The increase was primarily due to
increased sales volumes, resulting from the first full quarter of business
results from the addition of the OxyChem Contributed Business, partially offset
by declining sales prices for ethylene and propylene and lower co-product
revenues.
OPERATING INCOME Operating income of $84 million for the third quarter 1998
increased $16 million compared to operating income of $68 million for the second
quarter 1998. The increase primarily reflected higher volumes, lower feedstock
costs and lower fixed costs, which more than offset declines in sales prices.
POLYMERS SEGMENT
REVENUES Sales and other operating revenues were $489 million in the third
quarter 1998 compared to $554 million in the second quarter 1998, a decrease of
12 percent. The decreases in revenues were the result of decreases in industry
sales prices. These sales price decreases, reflecting lower feedstock costs and
excess industry supply, started during the fourth quarter of 1997 and continued
in a downward trend through the first nine months of 1998.
OPERATING INCOME Operating income for the third quarter 1998 was $35 million
compared to $63 million in the second quarter 1998. The $28 million decrease
was primarily due to decreases in polymers sales prices, which more than offset
decreases in polymers feedstock costs and fixed costs.
UNALLOCATED
UNUSUAL CHARGES Equistar's unusual charges for the three and nine months ended
September 30, 1998 were $10 million and $23 million, respectively, and primarily
consisted of costs associated with the formation of Equistar and the
consolidation of certain operations. These costs were paid by Equistar and
allocated to the Partners in accordance with their ownership percentages.
SYNERGIES The formation of Equistar in December 1997, together with the
addition of the OxyChem Contributed Business as of May 15, 1998, is expected to
result in substantial annual cost savings from synergies by the end of the year
2000. For 1998, the cost savings from synergies are expected to exceed $130
million. In the first nine months of 1998, Equistar achieved cost savings of
$105 million. Of the $105 million, approximately $84 million was in
manufacturing and supply chain areas and $21 million was in administrative
services and staffing. Synergies included in the $105 million that were not
reflected in Equistar's income statement totaled $8 million. The savings were
partly offset by the above-noted $23 million of nonrecurring costs related to
Equistar's formation.
LYONDELL-CITGO REFINING COMPANY LTD.
OVERVIEW
LCR earned pretax income of $54 million in the third quarter 1998 compared to
$29 million in the second quarter. The earnings improvement was due to higher
on-stream time, better aromatics profitability and lower fixed costs. Second
quarter profitability was adversely affected by downtime due to a fire in one of
two coker units. Total crude oil processing rates averaged 267,000 barrels per
day in the third quarter compared to 245,000 barrels per day in the second
quarter. Beginning in August, LCR began receiving reduced allocations of crude
oil from PDVSA due to announced cutbacks in crude oil production in Venezuela.
18
<PAGE>
REFINING SEGMENT
The following table sets forth sales volumes for LCR's major products for the
three-month and nine-month periods.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
--------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REFINED PRODUCTS
(THOUSAND BARRELS PER DAY)
Gasoline 118 101 120 105
Diesel and heating oil 85 58 78 63
Jet fuel 17 16 16 15
Aromatics 10 12 10 11
Other refined products 101 94 100 88
--- --- --- ---
Total refined products volumes 331 281 324 282
=== === === ===
</TABLE>
The Upgrade Project was completed in the first quarter 1997. Beginning in March
1997, higher volumes of very heavy crude oil were processed. The following
table sets forth processing rates at the Refinery for the periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
---------------------------- --------------------------
1998 1997 1998 1997
------------ ----------- ----------- ----------
CRUDE PROCESSING RATES
(THOUSAND BARRELS PER DAY)
<S> <C> <C> <C> <C>
Crude Supply Contract - coked 213 213 217 183
Other crude oil - coked 39 -- 19 16
Other crude oil 15 4 19 15
--- --- --- ---
Total 267 217 255 214
=== === === ===
</TABLE>
REVENUES Sales and other operating revenues for LCR, including intersegment
sales, were $499 million in the third quarter 1998, a decrease of 21 percent
compared to $634 million in the third quarter 1997. Sales and other operating
revenues also decreased 21 percent for the first nine months 1998 compared to
the first nine months of 1997. The decreases primarily resulted from lower
refined products prices, which declined as a result of lower industry crude
prices. These decreases were partially offset by higher sales volumes as
production levels increased after completion of the Upgrade Project.
OPERATING INCOME LCR's operating income was $65 million in the third quarter
1998 compared to $56 million in the third quarter 1997. The increase was
primarily due to higher crude operating rates as a result of crude oil purchases
on the open market. LCR's operating income was $169 million for the first nine
months of 1998 compared to $99 million for the first nine months of 1997. The
improvement reflected the completion of the Upgrade Project, which resulted in
higher margins as higher volumes of very heavy crude oil were processed in the
coking mode. The Upgrade Project was completed in the first quarter 1997 and,
initially, higher costs were incurred due to normal operational start-up
activities, during which the refinery did not operate at peak rates. Cost
savings resulting from improved operational efficiency in 1998 were partly
offset by higher depreciation expense attributable to the Upgrade Project.
INTEREST EXPENSE Interest expense for the first nine months of 1998 was $33
million compared to $26 million for the first nine months of 1997. Interest
expense on debt related to construction of the Upgrade Project was capitalized
through its completion, including the first two months of 1997.
19
<PAGE>
FINANCIAL CONDITION
OPERATING ACTIVITIES Lyondell's cash provided by operating activities totaled
$130 million during the first nine months of 1998 compared to $278 million in
the first nine months of 1997. The decrease in cash provided by operating
activities is primarily attributable to the payment of accounts payable retained
by Lyondell in the formation of Equistar on December 1, 1997, which partly
offset the cash generated from operations of the Acquired Business. Operating
cash flow was $230 million in the third quarter of 1998.
INVESTING ACTIVITIES As of July 28, 1998, Lyondell completed its acquisition of
ARCO Chemical for a total cost of approximately $5.9 billion. The Company made
capital expenditures of $28 million during the first nine months of 1998,
primarily related to the Acquired Business. During August 1998, Lyondell
announced the delay of construction of a previously announced propylene oxide
plant (known as PO-11). The previous plan called for the plant to start-up in
late 2000. Lyondell is also reevaluating a proposed butanediol plant originally
slated for start-up in late 2001. Equistar's capital expenditures totaled
$111 million for the first nine months of 1998, of which $52 million was
Lyondell's share. LCR made capital expenditures of $43 million for the first
nine months of 1998 of which Lyondell funded $35 million through loans to LCR.
Distributions in excess of earnings for the first nine months of 1998 were
$383 million by Equistar, $12 million by Lyondell Methanol and $9 million by
LCR. The $383 million distribution from Equistar includes $197 million resulting
from the repayment by the Company of the $345 million note payable to Equistar.
FINANCING ACTIVITIES During the third quarter 1998, the Company obtained a
$7.0 billion Credit Facility of which $6.5 billion was drawn down in connection
with the financing of the ARCO Chemical purchase. As part of the acquisition,
Lyondell assumed approximately $870 million of ARCO Chemical debt. Borrowing
under the Credit Facility of $6.5 billion was used for the purchase of
approximately 97.4 million shares of ARCO Chemical; repayment of debt, including
the $345 million note payable to Equistar, repayment of short-term borrowing of
Lyondell and ARCO Chemical, and repayment of other long-term borrowing of ARCO
Chemical; and payment of certain debt issuance costs.
Cash used in other financing activities in 1998 consisted primarily of
$59 million used to repurchase common stock. From time to time the Company
purchases its shares in the market to be used for issuances under the Company's
employee compensation and benefits plans, including stock option and restricted
stock plans. In the third quarter of 1998, the Company purchased 500,000 shares
for approximately $10 million to be used for such plans. The Company completed
the stock buyback program authorized in September 1997 by the Board of Directors
in the second quarter of 1998. A total of 2,567,051 shares were purchased for
$75 million.
The Company paid regular quarterly dividends of $.225 per share of common stock
in the first three quarters of 1998.
LCR is examining opportunities to refinance its indebtedness. If such
refinancing is effected, the Company anticipates that LCR would repay the
construction loan from third parties and subordinated loans made to LCR by
Lyondell and CITGO, including those made in connection with the Upgrade Project.
Additional cash received in the refinancing would be distributed to Lyondell and
CITGO. Lyondell currently anticipates that its net proceeds will be in the
$300 million to $500 million range.
CREDIT FACILITY The Credit Facility requires the Company, among other things,
to issue $1.25 billion of equity and use the proceeds to retire certain parts of
the debt by July 27, 1999. An additional $2 billion of debt must be refinanced
by July 27, 2000. The Company has not, as of the date of this filing, initiated
or committed to any public or private offering, although discussions are
continuing.
20
<PAGE>
YEAR 2000
Lyondell, Equistar and LCR use many business information systems as well as
manufacturing support systems that could be impacted by the "Year 2000 problem".
The Year 2000 problem arises from computer programs that have been written using
two digits rather than four to designate the year. Date-sensitive computer
software may recognize a date using "00" as the year 1900 rather than the
year 2000, resulting in system failures or miscalculations, which may cause
operational disruptions.
Lyondell and Equistar have replaced many of their business information computer
systems (including systems operated by Equistar for Lyondell Methanol).
Equistar is in the process of replacing the business information systems for the
operations contributed by Millennium and Occidental. LCR is also in the process
of replacing many of its business information systems. The new systems, based
on enterprise software from SAP America, Inc., will replace older business
systems and allow employees at different locations to share financial and
operating information more effectively. The first major use of the software
commenced May 1, 1997 for the majority of the operations contributed to Equistar
by Lyondell. Remaining phases are targeted for completion late in 1998 and into
the first half of 1999. The new systems and software are Year 2000 compliant,
thus handling the majority of the Company's Year 2000 business system
requirements. Lyondell has elected to continue with the repair and remediation
for the majority of systems of the Acquired Business.
The Company has a Year 2000 Executive Sponsor Team with representatives of
Lyondell, Equistar and LCR. The Year 2000 Executive Sponsor Team is providing
oversight to individual Year 2000 Steering Committees within each organization.
Each Steering Committee is in the process of completing an assessment of the
state of readiness of the information technology ("IT") and non-IT systems of
the Company and its joint ventures. These assessments cover manufacturing
systems, including laboratory information systems and field instrumentation, and
significant third party vendor and supplier systems, including employee
compensation and benefit plan maintenance systems. The steering committees are
also in the process of assessing the readiness of significant customers and
suppliers.
The Year 2000 assessment process for each organization consists of an inventory
of Year 2000 sensitive equipment, an assessment of the impact of possible
failures, determination of the required remediation actions, and testing and
implementation of solutions. The inventory, assessment and remediation phases
should be completed in 1998 and the first quarter of 1999, with the majority of
the testing and final implementation taking place in 1999. The progress of
these phases as of September 30, 1998 is summarized as follows:
Bar graph showing the percentage of completion of the inventory, assessment,
remediation, testing and implementation phases of the Year 2000 assessment
process for each of Lyondell, Equistar and LCR. The percentage of completion is
indicated in the table below:
Lyondell Enterprise Year 2000 Readiness
As of September 30, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Inventory Assessment Remediation Testing Implementation
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lyondell 85% 65% 40% 25% 5%
- ------------------------------------------------------------------------------------------------------------
Equistar 90% 85% 10% 0% 0%
- ------------------------------------------------------------------------------------------------------------
LCR 80% 95% 24% 0% 0%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
As of September 30, 1998, Year 2000 spending by the Company, Equistar and LCR is
summarized as follows (in millions of dollars):
<TABLE>
<CAPTION>
LYONDELL EQUISTAR LCR
<S> <C> <C> <C>
Spending through September 30, 1998 $ 3 $- $-
Estimated additional spending 8 7 4
--- -- --
Total estimated spending through December 31, 1999 $11 $7 $4
=== == ==
Replacement of IT systems $ 1 $2 $-
Replacement of non-IT systems 1 - 1
All other costs 9 5 3
--- -- --
Total estimated spending $11 $7 $4
=== == ==
Lyondell share of estimated spending $11 $3 $2
=== == ==
</TABLE>
The total estimated spending of $22 million for all three organizations
represents a midpoint of an estimated range between $14 million and $30 million,
of which the Company's share would be $11 million to $21 million. These spending
estimates will be refined as phases of the assessment are completed. Spending
is funded by cash generated from operations. Preliminary estimates indicate
that from 10 to 20 percent of the estimated costs could qualify for
capitalization.
Management believes that all significant systems controlled by the Company will
be Year 2000 ready in the last half of 1999. While the Steering Committees are
assessing the readiness of third party customers and suppliers, there can be no
assurance that third parties with a significant business relationship will
successfully test, reprogram, and replace all of their IT and non-IT systems on
a timely basis. As part of overall readiness, the Company is in the process of
developing contingency plans in the event of Year 2000 non-compliance of certain
systems or third parties. Details of such contingency plans will be determined
after the Steering Committees have completed their assessments of both internal
and third party systems and the potential for possible failures.
There is inherent uncertainty in the Year 2000 problem due to the possibility of
unanticipated failures by third party customers and suppliers. Accordingly, the
Company is unable, at this time, to assess the extent and resulting materiality
of the impact of possible Year 2000 failures on its operations, liquidity or
financial position. The Year 2000 assessment process is expected to provide
information that will significantly reduce the level of uncertainty regarding
the Year 2000 impact. Management believes that the completion of the assessment
as scheduled will help minimize the possibility of any significant disruptions
of Company operations.
EUROPEAN MONETARY UNION
On January 1, 1999, the euro will become the official currency for the eleven
member countries of the European Union (Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain) that
are participating in monetary union. On that date, the national currencies of
the participating countries will cease to exist as independent currencies and
will exist only as denominations of the euro. The euro conversion rates for
each of the former national currencies will be irrevocably fixed on January 1,
1999. Euro banknotes and coins will be introduced on January 1, 2002 and the
former national currency banknotes and coins will be withdrawn by July 1, 2002
at the latest.
The Company has substantially completed a review of its principal European
markets and does not expect European monetary union to have a material effect on
the conduct of its business. Specifically, there are no major competitive
implications for product pricing, and most significant contracts are expected to
remain in force with no renegotiation expected. The European-based revenues of
the Acquired Business were approximately $1.1 billion in 1997.
22
<PAGE>
While the Company is preparing to start invoicing its customers in euros
beginning January 1, 1999, other business system conversion is still in the
planning stages. Due to Year 2000 priorities, it is anticipated that the
conversion of most business systems to the euro will not begin until the fourth
quarter of 1999 with a target completion date of January 1, 2001. The deadline
for conversion of systems is January 1, 2002. Based upon the assessments
completed to date, the Company does not expect the onset of European monetary
union to have a material impact on the Company's consolidated financial
statements.
MARKET RISK
The Company is exposed to market risk with respect to certain financial
instruments and derivative instruments. These include variable-rate Term Loans
outstanding of $6.5 billion and Treasury Lock transactions, based on U.S.
Treasury rates, in the notional amount of $1 billion at September 30, 1998.
Assuming a hypothetical 10 percent increase in interest rates, the increase in
annual interest expense on the variable-rate Term Loans would be offset by the
Treasury Lock transactions for a net increase of $46 million in annual interest
expense. Sensitivity analysis was used for this purpose.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The statement is effective for the
Company's calendar year 2000; however, early adoption is permitted. SFAS No.
133 requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The gains and losses on the derivative instrument that
are reported in other comprehensive income will be reclassified as earnings in
the periods in which earnings are impacted by the hedged item. The ineffective
portion of all hedges will be recognized in current-period earnings. The
Company is currently evaluating SFAS No. 133 and whether it will adopt this
pronouncement prior to the effective date.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The statement will be effective for the
Company's 1998 annual financial statements. SFAS No. 131 established standards
for reporting information about operating segments and related disclosures about
products and services, geographic areas and major customers. SFAS No. 131
supercedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." The Company does not expect the adoption of SFAS No. 131 to result
in any changes in its reported segments. SFAS No. 131 affects disclosure only
and will not affect reported earnings, cash flow or financial position.
CURRENT BUSINESS OUTLOOK
Lyondell's operating results include the Acquired Business beginning August 1,
1998. Management expects demand and margins for PO and derivatives to remain
relatively stable. While there has been a general demand decline in Asia, this
has been offset by relatively strong markets in the U.S. and Europe. Continuing
softness in petrochemical prices should benefit the acquired operations, which
use propylene, ethylene and butanes as feedstocks. For the fourth quarter,
management expects higher PO and derivatives volumes, resulting from higher
seasonal demand for coolants and deicers, which use propylene glycol ("PG");
higher polyols and TDI volumes, following the seasonal slowdown and the General
Motors strike in the third quarter; and higher merchant PO sales in line with
the seasonal upturns in polyols and PG. Margins for co-products, including SM
and MTBE, are expected to remain weak.
Lyondell expects the acquisition of ARCO Chemical to result in significant
annual cost savings. This is in addition to the $150 million cost reduction
program previously announced by ARCO Chemical. Lyondell also
23
<PAGE>
expects significant increased cash tax benefits from depreciation and
amortization as a result of certain tax elections made at the time of the
acquisition.
Market conditions in the petrochemicals and polymers businesses are at a low
point in the business cycle. Current spot prices of ethylene are at about the
same level as the cost of ethane, which is the feedstock for approximately one-
half of the industry. A number of plant outages have been announced for the
fourth quarter of 1998 and the first quarter of 1999; Equistar's LaPorte plant
will be down for approximately 90 days for a turnaround beginning in mid-
November. Industry inventories are at manageable levels and this, combined with
the plant outages, should help bring supply and demand into balance.
Demand for polymers continues to grow overall, however a significant increase in
new capacity is putting downward pressure on polymers prices. Competitors plan
to add 3.5 billion pounds of annual capacity over the next 12 to 18 months. The
result is that polyethylene prices are approaching historical trough levels.
The industry view is that the decline in prices seems to have stabilized, and
margins are at or near cash cost levels for non-integrated producers.
Equistar continues to focus on cost reduction and synergies. Many of the cost
reduction programs have required time and capital to be achieved and the
benefits are just now beginning to be realized. For example, in November,
Equistar began implementation of the SAP information system on a company-wide
basis. This is expected to eliminate the extra expense and inefficiency of
running and coordinating three different systems. Additionally, the LaPorte
plant turnaround will include changes to enable the plant to run heavier,
cheaper feedstocks, reducing ethylene production costs.
LCR operations will be impacted by the full quarter effect of the reduction in
PDVSA crude oil allocations. In the opinion of LCR's management, the allocation
is anticipated to be temporary, with an estimated decrease in pretax income of
approximately $6 million to $8 million per quarter. On the basis of those
estimates, Lyondell's pro rata share of the decrease in LCR's income would be $2
million to $3 million, after tax, per quarter. LCR operating results improved in
the third quarter 1998 despite the cutback, which started in August.
The methanol market continues to be weak due to considerable excess capacity.
Methanol margins are expected to continue at current low levels, as prices
remain flat. Improvement is not anticipated in the near term.
Profitability and cash flows for the intermediate chemicals and derivatives,
petrochemicals, polymers, refining and methanol 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.
Management believes business conditions will be such that cash balances, cash
generated by the Acquired Business, cash distributions from Equistar, LCR and
Lyondell Methanol and existing lines of credit will be adequate to meet future
cash requirements for scheduled debt repayments and to sustain, for the
reasonably foreseeable future, the regular quarterly dividend.
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 chemical and refining industries, uncertainties
associated with the United States and worldwide economies, current and potential
governmental regulatory actions, substantial chemical and refinery capacity
additions resulting in oversupply and declining prices and margins, raw
24
<PAGE>
material costs or supply arrangements, the Company's ability to implement cost
reductions, 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 or its joint ventures' 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.
25
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. Regarding the McMullin lawsuit reported in the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1998, the plaintiff filed an
amendment complaint on August 25, 1998. On October 2, 1998, all defendants
filed motions to dismiss the amended complaint and on October 9, 1998,
plaintiff voluntarily dismissed ARCO Chemical Company from this action.
2. There have been no other material developments with respect to the
Company's legal proceedings previously reported in the 1997 Annual Report
on Form 10-K as updated by subsequent Quarterly Reports on Form 10-Q.
ITEM 5. OTHER
In October 1998, the size of the Board of Directors of the Company was
increased to eight and two additional directors were named to the Board:
Carol A. Anderson and Frank Savage. Ms. Anderson is Managing Director of
TSG International. Mr. Savage is Chairman of Alliance Capital Management
International.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The following Current Reports on Form 8-K and 8-K/A were filed
during the quarter ended September 30, 1998 and through the date
hereof.
Date of Report Item No. Financial Statements
-------------- -------- --------------------
July 23, 1998 2, 7 Yes
September 25, 1998 7 Yes
October 2, 1998 7 Yes
26
<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 Chemical Company
Dated: November 4, 1998
/s/ VAN BILLET
-----------------------------
Van Billet
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 217
<SECURITIES> 0
<RECEIVABLES> 601
<ALLOWANCES> 0
<INVENTORY> 510
<CURRENT-ASSETS> 1,427
<PP&E> 4,777
<DEPRECIATION> 39
<TOTAL-ASSETS> 9,547
<CURRENT-LIABILITIES> 2,361
<BONDS> 5,591
0
0
<COMMON> 80
<OTHER-SE> 527
<TOTAL-LIABILITY-AND-EQUITY> 9,547
<SALES> 566
<TOTAL-REVENUES> 800
<CGS> 408
<TOTAL-COSTS> 561
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132
<INCOME-PRETAX> 127
<INCOME-TAX> 48
<INCOME-CONTINUING> 79
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
</TABLE>
