<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . . . to . . . . . . . . . .
Commission file number 1-10145
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LYONDELL CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
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Delaware 95-4160558
(State or other jurisdiction of (I.R.S. EMPLOYER
incorporation or organization) IDENTIFICATION NO.)
1221 McKinney Street, 77010
Suite 700, Houston, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 652-7200
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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 June 30, 1999: 117,491,420
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<PAGE>
PART I. FINANCIAL INFORMATION
LYONDELL CHEMICAL COMPANY
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------------- --------------------------------
MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA 1999 1998 1999 1998
- ------------------------------------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES $ 854 $ -- $1,709 $ --
OPERATING COSTS AND EXPENSES:
Cost of sales 651 -- 1,281 --
Selling, general and administrative expenses 66 5 123 11
Research and development expense 14 -- 29 --
Amortization of goodwill
and other intangible assets 23 -- 47 --
Unusual charges -- -- -- 4
---------- ---------- ----------- ---------
754 5 1,480 15
---------- ---------- ----------- ---------
Operating income (loss) 100 (5) 229 (15)
Interest expense (149) (6) (295) (13)
Interest income 9 3 15 7
Other income, net 14 5 7 5
---------- ---------- ----------- --------
Loss before equity investments,
income taxes and extraordinary item (26) (3) (44) (16)
---------- ---------- ----------- --------
INCOME (LOSS) FROM EQUITY INVESTMENTS:
Equistar Chemicals, LP 26 31 39 107
LYONDELL-CITGO Refining LP (20) 19 (9) 54
Other 2 -- (1) 6
---------- ---------- ----------- --------
8 50 29 167
---------- ---------- ----------- --------
Income (loss) before income
taxes and extraordinary item (18) 47 (15) 151
Provision (benefit) for income taxes (7) 18 (6) 57
---------- ---------- ----------- --------
Income (loss) before extraordinary item (11) 29 (9) 94
Extraordinary loss on extinguishment
of debt, net of income taxes of $23 (31) -- (31) --
---------- ---------- ----------- --------
NET INCOME (LOSS) $ (42) $ 29 $ (40) $ 94
========== ========== =========== ========
BASIC AND DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary item $(.11) $ .38 $ (.10) $1.20
========== ========== =========== ========
Net income (loss) $(.42) $ .38 $ (.45) $1.20
========== ========== =========== ========
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
MILLIONS OF DOLLARS, EXCEPT PAR VALUE DATA 1999 1998
- ------------------------------------------ ------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 204 $ 233
Accounts receivable, net 547 479
Inventories 507 550
Prepaid expenses and other current assets 25 64
------ ------
Total current assets 1,283 1,326
------ ------
Property, plant and equipment, net 4,385 4,511
Investments and long-term receivables:
Investment in Equistar Chemicals, LP 649 660
Receivable from LYONDELL-CITGO Refining LP 255 231
Investment in LYONDELL-CITGO Refining LP 43 84
Other investments and long-term receivables 123 103
Goodwill, net 1,434 1,430
Deferred charges and other assets 846 880
------ ------
Total assets $9,018 $9,225
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 246 $ 253
Current maturities of long-term debt 21 1,603
Other accrued liabilities 337 481
------ ------
Total current liabilities 604 2,337
------ ------
Long-term debt, less current maturities 6,261 5,391
Other liabilities and deferred credits 384 294
Deferred income taxes 413 413
Commitments and contingencies
Minority interest 192 216
Stockholders' equity:
Preferred stock, $.01 par value, 80,000,000 shares
authorized, none outstanding -- --
Common stock, $1.00 par value, 250,000,000 shares
authorized, 120,250,000 and 80,000,000 issued, respectively 120 80
Additional paid-in capital 854 158
Retained earnings 303 387
Accumulated other comprehensive income (loss) (35) 32
Treasury stock, at cost, 2,758,580 and 2,978,203 shares,
respectively (78) (83)
------ ------
Total stockholders' equity 1,164 574
------ ------
Total liabilities and stockholders' equity $9,018 $9,225
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30
-----------------------------------------------
MILLIONS OF DOLLARS 1999 1998
- ------------------- -------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (40) $ 94
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities,
net of the effects of deconsolidation of affiliate:
Depreciation and amortization 164 --
Extraordinary item 31 --
Deferred income taxes 13 12
(Increase) decrease in accounts receivable (89) 2
Decrease in inventories 31 --
Increase (decrease) in accounts payable 3 (182)
Net change in other working capital accounts (3) (8)
Other, net 35 (18)
-------------------- --------------------
Net cash provided by (used in) operating activities 145 (100)
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (75) --
Distributions from affiliates in excess of earnings 55 185
Contributions and advances to affiliates (38) (16)
Deconsolidation of affiliate -- (11)
-------------------- --------------------
Net cash (used in) provided by investing activities (58) 158
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 3,400 --
Payment of debt issuance costs (107) --
Repayments of long-term debt (4,111) --
Issuance of common stock 736 --
Dividends paid (43) (35)
Net decrease in short-term debt -- (35)
Repurchase of common stock -- (49)
Other 5 --
-------------------- --------------------
Net cash used in financing activities (120) (119)
-------------------- --------------------
Effect of exchange rate changes on cash 4 --
-------------------- --------------------
DECREASE IN CASH AND CASH EQUIVALENTS (29) (61)
Cash and cash equivalents at beginning of period 233 86
-------------------- --------------------
Cash and cash equivalents at end of period $ 204 $ 25
==================== ====================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<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, 1998 included in the Lyondell Chemical Company ("Company" or "Lyondell")
1998 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 and six-month
periods ended June 30, 1999 include the operating results of Lyondell Chemical
Worldwide, Inc., formerly ARCO Chemical Company ("LCWI" or "ARCO Chemical"),
acquired by the Company as of July 28, 1998, and the Company's income from
equity investments in Equistar Chemicals, LP ("Equistar"), LYONDELL-CITGO
Refining LP ("LCR") and Lyondell Methanol Company, L.P. ("LMC"). The
accompanying Consolidated Statements of Income for the three and six-month
periods ended June 30, 1998 include the Company's income from equity investments
in Equistar, LCR and LMC.
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 ("PG"), propylene glycol ethers
("PGE"), toluene diisocyanate ("TDI"), styrene monomer ("SM") and methyl
tertiary butyl ether ("MTBE"). LCWI (formerly ARCO Chemical) is reported
as the intermediate chemicals and derivatives segment.
The Company's operations in the petrochemicals and polymers segments are
conducted through its joint venture ownership interest in Equistar (see Note 3).
Equistar's petrochemicals segment consists of: olefins, including ethylene,
propylene and butadiene; aromatics, including benzene and toluene; oxygenated
chemicals, including ethylene oxide, ethylene glycol, ethanol and MTBE; and
specialty chemicals, including refinery blending stocks.
Equistar's polymers segment consists of: polyolefins, including high density
polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear low density
polyethylene ("LLDPE") and polypropylene; and performance polymers products,
including wire and cable resins and compounds, adhesive resins, and fine
powders. Equistar's color concentrates and compounds business, which was part
of performance polymers products, was sold effective April 30, 1999.
Lyondell's operations in the refining segment are conducted through its joint
venture ownership interest in LCR (see Note 4). This 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, process oils and base oils; carbon black oil; sulfur; residual oil;
petroleum coke fuel; olefins feedstocks; and crude oil resales. LCR sells its
principal refined products to the Company's joint venture partner in LCR, CITGO
Petroleum Corporation ("CITGO").
4
<PAGE>
The Company has additional operations conducted through its joint venture
ownership interest in LMC. These operations consist of methanol and other
petrochemical products produced by its methanol facility.
3. EQUITY INTEREST IN EQUISTAR CHEMICALS, LP
Equistar was formed on December 1, 1997 as a joint venture between the Company
and Millennium Chemicals Inc. ("Millennium"), to own and operate the businesses
contributed by the partners. Lyondell contributed substantially all of the
assets comprising its petrochemicals and polymers business segments, while
Millennium contributed substantially all of the assets comprising its
polyethylene and related products, performance polymers and ethyl alcohol
businesses, which had been held in Millennium Petrochemicals Inc., a wholly
owned subsidiary of Millennium. On May 15, 1998, the ethylene, propylene and
ethylene oxide and derivatives businesses of Occidental Chemical Corporation
("Occidental Contributed Business"), a subsidiary of Occidental Petroleum
Corporation ("Occidental"), were contributed to Equistar. The joint venture is
structured as a Delaware limited partnership owned by subsidiaries of the
Company, Millennium and Occidental ("Partners").
Lyondell currently has a 41% joint venture ownership interest in Equistar, while
Millennium and Occidental each have 29.5%. Prior to the addition of Occidental
as a partner on May 15, 1998, the Company had a 57% joint venture ownership
interest, while Millennium had 43%. Because the Partners jointly control
certain management decisions, Lyondell accounts for its investment in Equistar
using the equity method of accounting.
Summarized financial information for Equistar is as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------- -----------
<S> <C> <C>
BALANCE SHEETS
Total current assets $1,125 $1,127
Property, plant and equipment, net 4,030 4,075
Goodwill, net 1,135 1,151
Deferred charges and other assets 312 312
------ ------
Total assets $6,602 $6,665
====== ======
Current maturities of long-term debt $ 42 $ 150
Other current liabilities 490 485
Long-term debt, less current maturities 2,169 1,865
Capital lease obligations -- 205
Other liabilities and deferred credits 93 75
Partners' capital 3,808 3,885
------ ------
Total liabilities and partners' capital $6,602 $6,665
====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
Sales and other operating revenues $1,210 $1,093 $2,312 $2,114
Cost of sales 1,097 941 2,074 1,739
Selling, general and administrative expenses 73 69 151 139
Unusual charges -- 7 -- 13
---------------- ---------------- ---------------- ----------------
Operating income 40 76 87 223
Interest expense, net (45) (32) (84) (58)
Other income, net 46 -- 46 --
---------------- ---------------- ---------------- ----------------
Net income $ 41 $ 44 $ 49 $ 165
================ ================ ================ ================
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------ ------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
SELECTED CASH FLOW INFORMATION
Depreciation and amortization $ 74 $ 71 $ 147 $ 128
Expenditures for property, plant and equipment 30 44 76 65
</TABLE>
Lyondell's "Income from equity investments" in Equistar as presented in the
Consolidated Statements of Income consists of the Company's share of Equistar's
net income and the accretion of the difference between Lyondell's investment and
its underlying equity in Equistar's net assets.
4. EQUITY INTEREST IN LYONDELL-CITGO REFINING LP
In July 1993, LCR was formed to own and operate the Company's refining business.
LCR is structured as a Delaware limited partnership (formerly a Texas limited
liability company) owned by subsidiaries of the Company and CITGO. The
participation interests are currently 58.75% and 41.25% for the Company and
CITGO, respectively. Net income before depreciation expense for the period is
allocated to LCR's owners based upon participation interests. Depreciation
expense is allocated to the owners based upon contributed assets.
Summarized financial information for LCR is as follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------- -----------
<S> <C> <C>
BALANCE SHEETS
Total current assets $ 230 $ 197
Property, plant and equipment, net 1,357 1,370
Deferred charges and other assets 65 70
------ ------
Total assets $1,652 $1,637
====== ======
Total current liabilities $ 228 $ 203
Long-term debt 758 717
Other liabilities and deferred credits 73 68
Partners' capital 593 649
------ ------
Total liabilities and partners' capital $1,652 $1,637
====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
Sales and other operating revenues $ 482 $ 527 $ 914 $1,056
Cost of sales 495 471 884 916
Selling, general and administrative expenses 15 17 34 36
---------------- ---------------- ---------------- ----------------
Operating income (loss) (28) 39 (4) 104
Interest expense, net (10) (10) (20) (21)
State income tax benefit -- -- 1 --
---------------- ---------------- ---------------- ----------------
Net income (loss) $ (38) $ 29 $ (23) $ 83
================ ================ ================ ================
SELECTED CASH FLOW INFORMATION
Depreciation and amortization $ 27 $ 21 $ 52 $ 46
Expenditures for property, plant and equipment 16 13 32 30
</TABLE>
6
<PAGE>
5. EXTRAORDINARY ITEM
During the second quarter 1999, Lyondell retired debt in the principal amount of
$4.0 billion prior to maturity. Unamortized debt issuance costs and amendment
fees of $54 million, or $31 million after tax, were written off and reported as
an extraordinary loss on extinguishment of debt in the second quarter 1999.
Previously, these costs and fees had been deferred and were being amortized to
interest expense.
6. INVENTORIES
The components of inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------- -----------
<S> <C> <C>
Finished goods $ 428 $ 459
Work-in-process 15 18
Raw materials 25 34
Materials and supplies 39 39
----- -----
Total inventories $ 507 $ 550
===== =====
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, at cost, and the related
accumulated depreciation consisted of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
MILLIONS OF DOLLARS 1999 1998
- ------------------- -------- -----------
<S> <C> <C>
Land $ 12 $ 12
Manufacturing facilities and equipment 4,193 4,477
Construction in progress 309 98
------ ------
Total property, plant and equipment 4,514 4,587
Less accumulated depreciation 129 76
------ ------
Property, plant and equipment, net $4,385 $4,511
====== ======
</TABLE>
8. LONG-TERM DEBT
During May 1999, Lyondell amended its $7 billion Credit Facility. The Credit
Facility amendments provided the lenders with additional collateral, re-priced
the existing loans to reflect then market rates and revised certain financial
covenants. Also in May 1999, Lyondell issued 40.25 million shares of common
stock, receiving net proceeds of $736 million. Lyondell also issued $500
million of senior subordinated notes and $1.9 billion of senior secured notes.
Lyondell borrowed additional amounts under the amended Credit Facility through
the Credit Facility's new $850 million, seven-year Term Loan E and the Credit
Facility's new $150 million Term Loan F, maturing December 31, 2003. Lyondell
used the proceeds to retire the $1.25 billion principal amount of Term Loan C,
maturing June 30, 1999, and the $2 billion principal amount of Term Loan D,
maturing June 30, 2000, and to partially repay principal amounts outstanding
under Term Loans A and B under the Credit Facility.
The amended Credit Facility requires Lyondell to issue $470 million of
subordinated notes (or more junior securities) by June 2002. The requirement to
issue $470 million of subordinated notes will be reduced by $2 for each $1 of
equity securities issued by Lyondell, and will be eliminated if Lyondell
achieves either (1) a specified total debt to adjusted EBITDA ratio, as defined,
or (2) a specified credit rating for its senior unsecured debt.
Under the covenant provisions of the amended 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
7
<PAGE>
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 indentures under which the senior secured notes and the senior subordinated
notes were issued contain covenants that restrict the ability of Lyondell and
its subsidiaries to (i) incur additional debt or issue subsidiary preferred
stock, (ii) increase dividends on Lyondell capital stock, (iii) redeem or
repurchase capital stock or repurchase subordinated debt, (iv) engage in
transactions with affiliates, except on an arms-length basis, (v) create liens
or engage in sale and leaseback transactions, (vi) make some types of
investments and sell assets, and (vii) consolidate or merge with, or sell
substantially all of its assets to, another person. Some of the covenants will
no longer apply if the notes achieve specified credit ratings. The notes
are unconditionally guaranteed by certain Lyondell subsidiaries (see Note 13).
Long-term debt at June 30, 1999 and December 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------- -----------
<S> <C> <C>
Term Loan A $1,095 $1,852
Term Loan B 1,161 1,248
Term Loan C -- 1,250
Term Loan D -- 2,000
Term Loan E 847 --
Term Loan F 150 --
Senior Secured Notes, Series A due 2007, 9.625% 900 --
Senior Secured Notes, Series B due 2007, 9.875% 1,000 --
Senior Subordinated Notes due 2009, 10.875% 500 --
Debentures due 2000, 9.9% 200 200
Debentures due 2005, 9.375% 100 100
Debentures due 2010, 10.25% 100 100
Debentures due 2020, 9.8% 224 224
Other 5 20
------ ------
Total long-term debt 6,282 6,994
Less current maturities 21 1,603
------ ------
Long-term debt, net $6,261 $5,391
====== ======
</TABLE>
The Term Loans currently bear interest at the following rates: (i) Term Loan A
- - LIBOR plus 3.25%; (ii) Term Loan B - LIBOR plus 3.75%; (iii) Term Loan E -
LIBOR plus 3.875%; and (iv) Term Loan F - LIBOR plus 3.5%.
During 1998, to mitigate interest rate exposure on its anticipated future public
debt issuance, the Company entered into treasury-rate lock transactions
("Treasury Locks") in the notional amount of $1 billion. As a result of the
refinancing, the Company settled the Treasury Locks during the second quarter
1999 in the amount of $4 million. This amount is being amortized to interest
expense over the life of the related debt.
9. COMMITMENTS AND CONTINGENCIES
Lyondell has commitments, including those related to capital expenditures, all
made in the normal course of business. During August 1998, Lyondell announced
the delay of construction of a PO plant, known as PO-11, that ARCO Chemical had
previously scheduled for startup in late 2001. As part of the delay, Lyondell is
negotiating the cancellation of the related lump-sum contract for the
engineering, procurement and construction of the PO-11 plant. Lyondell recorded
estimated liabilities for penalties and cancellation charges related to the
cancellation of the lump-sum contract and related commitments at the time of the
acquisition of ARCO Chemical.
8
<PAGE>
LCWI is party to a long-term supply arrangement for TDI. Under the arrangement,
Lyondell is 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. Lyondell 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. Lyondell is
further obligated to pay additional capacity reservation fees based upon plant
output factors.
Crude Supply Agreement--LCR has a long-term crude supply agreement ("Crude
Supply Agreement") with Lagoven, S.A., now known as PDVSA Petroleo y Gas, S.A.
("PDVSA Oil"), an affiliate of CITGO. Under the Crude Supply Agreement, LCR
is required to purchase, and PDVSA Oil is required to sell, up to 230,000
barrels per day of extra heavy Venezuelan crude oil. PDVSA Oil has the right,
but not the obligation, to supply incremental amounts above 230,000 barrels per
day. Depending upon market conditions, breach or termination of LCR's Crude
Supply Agreement could adversely affect LCR, and therefore, the Company. In the
event of certain force majeure conditions, including governmental or other
actions restricting or otherwise limiting PDVSA Oil's ability to perform its
obligations, LCR would seek alternative crude supply arrangements. Any such
alternative arrangements may not be as beneficial as the Crude Supply Agreement.
There can be no assurance that alternative crude oils with similar margins would
be available for purchase by LCR. Furthermore, the breach or termination of the
Crude Supply Agreement would require LCR to return to the practice of purchasing
all or a portion 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 reduced delivery
of crude oil related to announced OPEC production cuts. LCR began receiving the
reduced allocation of crude oil from PDVSA Oil in August 1998. Following the
March 1999 OPEC agreement to limit production, LCR was advised by PDVSA Oil in
May 1999 of a further reduction in the allocation of crude oil supplied under
the Crude Supply Agreement.
Cross Indemnity Agreement--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 upon years of
ownership during the relevant time period. The party with the more 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 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 the acquisition of ARCO Chemical, the Company succeeded,
indirectly, to a cross indemnity agreement with ARCO whereby ARCO Chemical
indemnified ARCO against certain claims or liabilities that ARCO may incur
relating to ARCO's former ownership and operation of the businesses of ARCO
Chemical ("Former ARCO 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 ARCO 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 ARCO Businesses for periods prior to
July 1, 1987.
Indemnification Arrangements Relating to Equistar--Lyondell, Millennium
Petrochemicals and certain subsidiaries of Occidental have each agreed to
provide certain indemnifications to Equistar with respect to the petrochemicals
and polymers businesses contributed by the Partners. In addition, Equistar
agreed to assume third party claims that are related to certain pre-closing
contingent liabilities asserted prior to December 1, 2004 for Lyondell and
Millennium, and May 15, 2005 for Occidental, to the extent the aggregate thereof
does not exceed $7 million to each of Lyondell, Millennium and Occidental,
subject to certain terms of the respective Asset Contribution Agreements.
From inception through June 30, 1999, Equistar expensed approximately $3 million
under the $7 million indemnification basket with respect to the business
contributed by Lyondell.
9
<PAGE>
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 June 30, 1999, the Company has accrued $8 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 the acquisition of ARCO Chemical, the Company assumed ARCO Chemical's
environmental liability, which had a remaining balance of $36 million at June
30, 1999 and reflects the Company's latest assessment of potential future
remediation costs associated with known ARCO Chemical sites. The liability is
related to five current plant sites, one former plant site and one federal
Superfund site for amounts ranging from $1 million to $18 million per site.
Further, the acquired business is involved in administrative proceedings or
lawsuits relating to a minimal number of other Superfund sites. The Company
estimates however, based upon currently available information, that potential
loss contingencies associated with these Superfund 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 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 accrued to the extent the
scope of remediation required, the final remediation method selected and/or 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 facts,
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.
MTBE--Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict the
use of MTBE. At the state level, these initiatives include the recent
affirmation by the California State Energy Commission of Governor Gray Davis'
December 2002 deadline for the removal of MTBE from California gasoline supplies
and approval of an MTBE phase out timetable. At the federal level, the blue
ribbon panel appointed by the Environmental Protection Agency issued its report
on July 27, 1999. That report recommended, among other things, reducing the use
of MTBE in
10
<PAGE>
gasoline. Based on that report, the Environmental Protection Agency has recently
indicated that it will recommend Congress amend the Clean Air Act to reduce MTBE
in reformulated gasoline. In addition, on August 9, 1999, the U.S. Senate
passed a "Sense of the Senate" resolution calling for removal of MTBE from
gasoline. These initiatives or other governmental actions could result in a
significant reduction in the Company's MTBE sales. In addition, the Company has
a take-or-pay contract with ARCO, which contributes significant pretax margin.
If legislation is enacted or other governmental action taken, ARCO has indicated
that it might attempt to invoke a force majeure provision in the contract in
order to reduce the quantities of MTBE it purchases under, or to terminate, the
contract. The Company would vigorously dispute such action.
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.
10. STOCKHOLDERS' EQUITY
Common Stock--In May 1999, Lyondell issued 40.25 million shares of common stock
at $19 per share. The net proceeds of $736 million were credited to "Common
stock" and "Additional paid in capital" in the Consolidated Balance Sheet.
Common stock outstanding increased from 77.0 million shares at December 31, 1998
to 117.5 million shares at June 30, 1999.
Basic and Diluted Earnings per Share--Basic earnings per share ("EPS") for the
periods presented are computed based upon 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 ENDED
JUNE 30
-------------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
THOUSANDS OF SHARES SHARES EPS SHARES EPS
- ------------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Basic 99,648 $(.42) 77,650 $.38
Dilutive effect of options -- -- 165 --
------------ ------------ ------------- ------------
Diluted 99,648 $(.42) 77,815 $.38
============ ============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30
-------------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
THOUSANDS OF SHARES SHARES EPS SHARES EPS
- ------------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Basic 88,419 $(.45) 78,179 $1.20
Dilutive effect of options -- -- 165 --
------------ ------------ ------------- ------------
Diluted 88,419 $(.45) 78,344 $1.20
============ ============ ============= ============
</TABLE>
For the three and six-month periods ended June 30, 1999, Lyondell reported an
extraordinary loss on extinguishment of debt of $31 million. The basic and
diluted EPS impact of this extraordinary loss on the three and six-month periods
ended June 30, 1999 was $(.31) and $(.35), respectively. Basic and diluted EPS
for the three and six-month periods ended June 30, 1999 before the extraordinary
item were losses of $(.11) and $(.10), respectively.
Comprehensive Income--For the three months and six months ended June 30, 1999,
the Company had comprehensive losses of $63 million and $107 million,
respectively. For the three months and six months ended June 30, 1998, the
Company had comprehensive income of $29 million and $94 million, respectively.
11
<PAGE>
11. SEGMENT AND RELATED INFORMATION
The Company has identified four reportable segments in which it operates: (i)
intermediate chemicals and derivatives; (ii) petrochemicals; (iii) polymers; and
(iv) refining. The Company's methanol business is not a reportable segment.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
<TABLE>
<CAPTION>
INTERMEDIATE
CHEMICALS
AND
MILLIONS OF DOLLARS DERIVATIVES PETROCHEMICALS POLYMERS REFINING OTHER TOTAL
- ------------------- ------------ -------------- -------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED JUNE 30, 1999:
Sales and other operating revenues $ 854 $ -- $ -- $ -- $ -- $ 854
Operating income 100 100
Interest expense (149) (149)
Interest income 9 9
Other income, net 14 14
Income (loss) from equity investments 3 35 3 (20) (13) 8
Loss before income taxes and extraordinary item (18)
FOR THE THREE MONTHS ENDED JUNE 30, 1998:
Sales and other operating revenues --
Operating loss (5) (5)
Interest expense (6) (6)
Interest income 3 3
Other income, net 5 5
Income from equity investments 33 31 19 (33) 50
Income before income taxes and extraordinary item 47
FOR THE SIX MONTHS ENDED JUNE 30, 1999:
Sales and other operating revenues 1,709 1,709
Operating income 229 229
Interest expense (295) (295)
Interest income 15 15
Other income, net 7 7
Income (loss) from equity investments 3 72 8 (9) (45) 29
Loss before income taxes and extraordinary item (15)
FOR THE SIX MONTHS ENDED JUNE 30, 1998:
Sales and other operating revenues --
Operating loss (15) (15)
Interest expense (13) (13)
Interest income 7 7
Other income, net 5 5
Income from equity investments 107 72 54 (66) 167
Income before income taxes and extraordinary item 151
</TABLE>
The following table presents the details of "Income (loss) from equity
investments" as presented above in the "Other" column for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------------- -------------------------------
MILLIONS OF DOLLARS 1999 1998 1999 1998
- ------------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Expenses, principally Equistar general and administrative,
not allocated to petrochemicals and polymers segments $ (30) $ (33) $ (59) $ (72)
Net gain from Equistar asset sales 18 -- 18 --
Income (loss) from equity investment in LMC (1) -- (4) 6
------------ ------------ ------------- ----------
Total--Other $ (13) $ (33) $ (45) $ (66)
============ ============ ============= ============
</TABLE>
12
<PAGE>
12. PURCHASE OF ARCO CHEMICAL COMPANY
As of July 28, 1998, Lyondell completed its acquisition of ARCO Chemical. In
connection with the acquisition, the Company accrued liabilities for costs
associated with the delay of construction of the PO-11 plant, vesting of certain
key manager benefits pursuant to a change of control provision, severance costs
for the involuntary termination of certain headquarters employees and relocation
costs for moving personnel to Lyondell's Houston headquarters. The accrued
liability for these items totaled approximately $255 million at the date of
acquisition. Through June 30, 1999, Lyondell had paid and charged approximately
$140 million against the accrued liability.
13. SUPPLEMENTAL GUARANTOR INFORMATION
LCWI and Lyondell Chemical Nederland, Ltd. ("LCNL") (collectively, the
"Guarantors") are each Delaware corporations. LCWI is a wholly owned subsidiary
of Lyondell that operates Lyondell's intermediate chemicals and derivatives
business. LCNL is a wholly owned subsidiary of LCWI that operates a chemical
production facility in Rotterdam, The Netherlands. LCWI and LCNL have
unconditionally guaranteed the $500 million of senior subordinated notes and
$1.9 billion of senior secured notes (see Note 8). Separate financial
statements of the Guarantors are not considered to be material to the holders of
the senior subordinated notes and senior secured notes. The following condensed
consolidating financial information for the three and six-month periods ended
June 30, 1999 presents supplemental information for the Guarantors:
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
BALANCE SHEET
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
- ------------------- -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total current assets $ 115 $1,135 $ 33 $ -- $1,283
Property, plant and equipment, net 4 4,381 4,385
Other investments and
long-term receivables 6,242 63 1,001 (6,236) 1,070
Goodwill, net 1,434 1,434
Deferred charges and other assets 228 618 846
-------- ---------- ---------- ------------ ------------
Total assets $6,589 $7,631 $1,034 $(6,236) $9,018
======== ========== ========== ============ ============
Current maturities of long-term debt $ 19 $ 2 $ -- $ -- $ 21
Other current liabilities (67) 620 30 583
Long-term debt,
less current maturities 5,634 627 6,261
Other liabilities and deferred credits 63 321 384
Deferred income taxes (32) 184 261 413
Intercompany liabilities (assets) (338) 171 167 --
Minority interest 192 192
Stockholders' equity 1,310 5,514 576 (6,236) 1,164
-------- ---------- ---------- ------------ ------------
Total liabilities and
stockholders' equity $6,589 $7,631 $1,034 $(6,236) $9,018
======== ========== ========== ============ ============
</TABLE>
13
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued)
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
- ------------------- ------------- ------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues $ -- $ 854 $ -- $ -- $ 854
Cost of sales 651 651
Selling, general and
administrative expenses 15 51 66
Research and development expense 14 14
Amortization of goodwill and
other intangible assets 23 23
------------- ------------- ------------ -------------- ------------
Operating income (loss) (15) 115 -- -- 100
Income from equity investments 3 5 8
Interest income (expense), net (128) (15) 3 (140)
Intercompany income (expense) 113 (110) (3) --
Other income, net 14 14
Provision (benefit) for income taxes (12) 3 2 (7)
------------- ------------- ------------ -------------- ------------
Income (loss) before
extraordinary item (18) 4 3 -- (11)
Extraordinary item, net of tax (31) (31)
------------- ------------- ------------ -------------- ------------
Net income (loss) $ (49) $ 4 $ 3 $ -- $ (42)
============= ============= ============ ============== ============
</TABLE>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
- ------------------- ------------- ------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues $ -- $1,709 $-- $ -- $1,709
Cost of sales 1,281 1,281
Selling, general and
administrative expenses 22 101 123
Research and development expense 29 29
Amortization of goodwill and
other intangible assets 47 47
------------- ------------- ------------ -------------- ------------
Operating income (loss) (22) 251 -- -- 229
Income from equity investments 3 26 29
Interest income (expense), net (256) (30) 6 (280)
Intercompany income (expense) 231 (225) (6) --
Other income, net 2 5 7
Provision (benefit) for income taxes (19) 2 11 (6)
------------- ------------- ------------ -------------- ------------
Income (loss) before
extraordinary item (26) 2 15 -- (9)
Extraordinary item, net of tax (31) (31)
------------- ------------- ------------ -------------- ------------
Net income (loss) $ (57) $ 2 $15 $ -- $ (40)
============= ============= ============ ============== ============
</TABLE>
14
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
- ------------------- ------------- ------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss) $ (57) $ 2 $ 15 $ -- $ (40)
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 22 142 164
Extraordinary item 31 31
Deferred income taxes (5) 7 11 13
Net changes in
working capital and other 70 (66) (27) (23)
------------- ------------- ------------ -------------- ------------
Net cash provided by
(used in) operating
activities 61 85 (1) -- 145
------------- ------------- ------------ -------------- ------------
Expenditures for
property, plant and equipment (4) (71) (75)
Distributions from
affiliates in excess of earnings 55 55
Contributions and
advances to affiliates (14) (24) (38)
------------- ------------- ------------ -------------- ------------
Net cash provided by
(used in) investing
activities (18) (71) 31 -- (58)
------------- ------------- ------------ -------------- ------------
Proceeds from issuance of
long-term debt 3,400 3,400
Payment of debt issuance costs (107) (107)
Repayments of long-term debt (4,096) (15) (4,111)
Issuance of common stock 736 736
Dividends paid (43) (43)
Other 5 5
------------- ------------- ------------ -------------- ------------
Net cash used in
financing activities (105) (15) -- -- (120)
------------- ------------- ------------ -------------- ------------
Effect of exchange
rate changes on cash 4 4
------------- ------------- ------------ -------------- ------------
Increase (decrease) in
cash and cash equivalents $ (62) $ 3 $ 30 $ -- $ (29)
============= ============= ============ ============== ============
</TABLE>
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
During the second quarter 1999, Lyondell amended its Credit Facility and issued
debt and equity securities to refinance a substantial portion of the Credit
Facility debt. Net proceeds were used to reduce indebtedness maturing through
the year 2000 by $3.25 billion and reduce total debt outstanding by $630
million.
Lyondell has taken major strategic actions to strengthen the Company's position
in the chemicals industry. In December 1997, Equistar was formed by combining
the olefins and polymers businesses of Lyondell and Millennium. In May 1998,
Equistar was expanded with the addition of the olefins and oxygenated chemicals
businesses of Occidental Chemical. In July 1998, Lyondell acquired ARCO
Chemical, the world's largest producer of PO and a leading worldwide producer
and marketer of polyether polyols, PG, PGE, TDI, SM and MTBE.
The operations of LCWI form the Company's intermediate chemicals and derivatives
business segment. Lyondell's operations in the petrochemicals, polymers and
refining segments are conducted through its interests in Equistar and LCR. The
methanol business conducted through LMC is not a reportable segment for
financial disclosure purposes. Lyondell accounts for its investments in
Equistar, LCR and LMC using the equity method of accounting.
RESULTS OF OPERATIONS
LYONDELL CHEMICAL COMPANY
SECOND QUARTER 1999 VERSUS FIRST QUARTER 1999
For the second quarter 1999, Lyondell reported a net loss of $42 million, which
included an extraordinary after-tax loss of $31 million on early extinguishment
of debt as a result of the refinancing. The net loss before extraordinary item
of $11 million compared to net income of $2 million in the first quarter 1999.
The second quarter 1999 loss primarily reflected a loss from Lyondell's equity
interest in LCR and lower operating income in the intermediate chemicals and
derivatives segment, partly offset by higher equity income from Equistar.
Lyondell's share of LCR's loss was $20 million in the second quarter 1999
compared to equity income of $11 million in the first quarter 1999. LCR
operating results were negatively affected by production unit outages and
further reductions in allocations of Venezuelan extra heavy crude oil under
LCR's Crude Supply Agreement. Operating income of the intermediate chemicals
and derivatives segment was $100 million in the second quarter 1999 compared to
$129 million in the first quarter 1999. The decline was primarily due to lower
margins attributable to higher raw material costs. Income from equity
investment in Equistar increased to $26 million in the second quarter 1999
versus income of $13 million in the first quarter 1999 primarily due to gains on
asset sales.
1999 VERSUS 1998
REVENUES, OPERATING COSTS AND EXPENSES--The revenues and operating costs and
expenses for the first six months of 1999 primarily consist of the operating
results of LCWI, which are included prospectively from August 1, 1998. The
first six months of 1998 include only Lyondell's administrative expenses.
Income from Lyondell's interests in Equistar, LCR and LMC is reported as income
from equity investments.
NET INCOME (LOSS)--The net loss before extraordinary item of $11 million in the
second quarter 1999 decreased from net income of $29 million in the second
quarter 1998. Pretax income from equity investments decreased $42 million, or
approximately $26 million after tax, in the second quarter 1999 compared to the
second quarter 1998. The net loss before extraordinary item of $9 million in the
first six months of 1999 decreased from net income of $94 million in the first
six months of 1998. Pretax income from equity investments decreased $138
million, or about $87 million after tax, in the first six months of 1999
compared to the first six months of 1998. Lyondell's operating income from the
intermediate chemicals and derivatives business in the 1999 periods was more
than offset by higher interest expense associated with debt related to the
acquisition of ARCO Chemical.
16
<PAGE>
INCOME FROM EQUITY INVESTMENT IN EQUISTAR--Lyondell's income from its equity
investment in Equistar was $26 million in the second quarter 1999 versus $31
million for the second quarter 1998 and $39 million for the first six months of
1999 versus $107 million for the 1998 period. The decreases were generally
attributable to lower petrochemicals and polymers margins in 1999 compared with
1998, reflecting ongoing excess industry capacity, as well as the effects of the
olefins unit outages in the second quarter 1999 and the scheduled LaPorte, Texas
plant turnaround and operating problems at two other plants in the first quarter
1999. These decreases were partly offset by the gains on asset sales in the
second quarter 1999 and volume benefits from the addition of the Occidental
Contributed Business in mid-May 1998.
INCOME FROM EQUITY INVESTMENT IN LCR--Lyondell's loss from its equity investment
in LCR was $20 million in the second quarter 1999 versus income of $19 million
in the second quarter 1998. Lyondell's equity loss was $9 million in the first
six months of 1999 versus income of $54 million for the 1998 period. The
decline was primarily due to the effects of lower operating rates related to the
operating unit outages, reduced allocations of extra heavy Venezuelan crude oil
under the Crude Supply Agreement in 1999, and lower margins on crude oil
purchased in the spot market.
INTEREST EXPENSE--Interest expense was $149 million in the second quarter 1999
versus $6 million in the second quarter 1998 and $295 million in the first six
months of 1999 versus $13 million in the 1998 period. The increases reflect
higher debt levels as a result of amounts borrowed under the Credit Facility,
primarily to finance the acquisition of ARCO Chemical, and debt assumed as part
of the acquisition of ARCO Chemical. During the second quarter 1999, Lyondell
completed the refinancing. Higher interest rates on the new debt will be
partially offset by reduced amortization of debt issuance costs. Based on
current interest rates, the refinancing will result in an approximate $10
million net increase in interest expense per quarter.
OTHER INCOME, NET--Other income, net was $14 million in the second quarter 1999
versus $5 million in the second quarter 1998 and $7 million in the first six
months of 1999 versus $5 million in the 1998 period. The second quarter 1999
included a benefit from a favorable settlement of a contractual dispute and
foreign exchange gains, while the first quarter 1999 included foreign exchange
losses. The second quarter 1998 included the favorable settlement of a
contractual liability and an insurance dividend.
INTERMEDIATE CHEMICALS AND DERIVATIVES SEGMENT--SECOND QUARTER 1999 VERSUS FIRST
QUARTER 1999
The following table sets forth actual volumes for this segment, including SM
volumes processed under long-term processing arrangements, which are included in
sales and other operating revenues. The co-product tertiary butyl alcohol
("TBA") is principally used to produce the derivative MTBE.
<TABLE>
<CAPTION>
SECOND FIRST
QUARTER QUARTER
IN MILLIONS 1999 1999
- ----------- ------------ ------------
<S> <C> <C>
PO, PO derivatives, isocyanates (pounds) 1,062 1,080
Co-products:
Styrene monomer (pounds) 676 782
TBA and derivatives (gallons) 268 265
</TABLE>
Operating income was $100 million for the second quarter 1999 compared to $129
million for the first quarter 1999. The decrease was primarily attributable to
higher raw material costs, seasonally lower deicer volumes, and higher
administrative expenses. Volumes for PO, PO derivatives and isocyanates
decreased slightly overall as higher PO merchant and polyols volumes partly
offset the seasonal decrease in deicer volumes. SM volumes decreased 14% in the
second quarter 1999 versus the first quarter 1999 due to lower export shipments
to Asia. These factors were partially offset by seasonally higher margins for
MTBE as a result of higher gasoline prices and the summer driving season.
17
<PAGE>
EQUISTAR CHEMICALS, LP
SECOND QUARTER 1999 VERSUS FIRST QUARTER 1999
Equistar reported pretax income of $41 million in the second quarter 1999
compared to pretax income of $7 million in the first quarter 1999. The increase
was primarily attributable to gains on asset sales in the second quarter 1999,
including the sale of its concentrates and compounds business on April 30, 1999.
The second quarter was negatively impacted by the effects of outages at its
Channelview olefins production units during parts of April and May 1999.
However, when compared to the first quarter 1999, the net effect of the second
quarter olefins unit outages was comparable to the effects of the scheduled
LaPorte plant turnaround, which was completed in the first quarter 1999, and
other plant outages in the first quarter 1999. Overall, margins remained
relatively constant quarter to quarter as higher ethylene and polymers prices,
reflecting ongoing tight supply/demand balances, were largely offset by higher
raw materials costs.
1999 VERSUS 1998
The following tables reflect selected actual sales volume data and summarized
financial information for Equistar's business segments. The addition of the
Occidental Contributed Business is reflected prospectively from May 15, 1998.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------------------- --------------------------------------
IN MILLIONS 1999 1998 1999 1998
- ---------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Selected petrochemicals products:
Olefins (pounds) 4,508 3,977 9,035 7,369
Aromatics (gallons) 91 54 176 101
Polymers products (pounds) 1,611 1,652 3,263 3,204
MILLIONS OF DOLLARS
- -------------------
SALES AND OTHER OPERATING REVENUES:
Petrochemicals segment $1,045 $ 859 $1,950 $1,646
Polymers segment 477 554 932 1,112
Intersegment eliminations (312) (320) (570) (644)
---------------- ---------------- ---------------- ----------------
Total $1,210 $1,093 $2,312 $2,114
================ ================ ================ ================
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Petrochemicals segment $ 3 $ 3 $ 6 $ 5
Polymers segment 18 18 37 38
Unallocated 52 48 108 96
---------------- ---------------- ---------------- ----------------
Total $ 73 $ 69 $ 151 $ 139
================ ================ ================ ================
OPERATING INCOME:
Petrochemicals segment $ 83 $ 68 $ 175 $ 197
Polymers segment 9 63 20 135
Unallocated (52) (55) (108) (109)
---------------- ---------------- ---------------- ----------------
Total $ 40 $ 76 $ 87 $ 223
================ ================ ================ ================
</TABLE>
18
<PAGE>
PETROCHEMICALS SEGMENT
REVENUES--Revenues for the second quarter 1999 increased 22% over the comparable
1998 period. The increase was due to a 13% increase in sales volumes and higher
average sales prices. The volume increase in the 1999 period reflected a full
quarter of the Occidental Contributed Business, which was added in mid-May 1998.
The increase in average sales prices was due to higher sales prices for ethylene
in the second quarter 1999 versus the second quarter 1998. Sales prices began
decreasing in the fourth quarter of 1997 and continued their downward trend
through most of 1998. U.S. market sales prices increased during the first six
months of 1999, due to tighter supplies and rising feedstock costs. As a result,
average sales prices for the second quarter 1999 were higher than the second
quarter 1998. However, average sales prices for the first six months of 1999
were slightly below average sales prices for the first six months of 1998.
Revenues for the first six months of 1999 increased 19% versus the comparable
1998 period. This increase was due to increased sales volumes, which increased
23% during the period primarily as a result of the addition of the Occidental
Contributed Business in mid-May 1998. As noted above, average sales prices for
the first six months of 1999 were slightly below average sales prices for the
first six months of 1998.
OPERATING INCOME--Operating income increased in the second quarter 1999 versus
second quarter 1998 primarily due to increased sales volumes. The 1999 period
reflected a full quarter of the Occidental Contributed Business, which was added
in mid-May 1998. This volume benefit was partly offset by lower product margins
as raw materials costs increased more than sales prices. The net effect of the
olefins production unit outages in the second quarter 1999 was substantially
offset by the effect, in the second quarter 1998, of scheduled maintenance
turnarounds at three plants.
Operating income decreased in the first six months of 1999 versus the comparable
1998 periods. The decrease was primarily due to lower product margins as
industry sales prices declined more than feedstock costs, the net effect of the
olefins production unit outages in the second quarter 1999, and the scheduled
LaPorte plant turnaround, which was completed in the first quarter 1999. These
factors were partly offset by the benefit of increased volumes as a result of
the addition of the Occidental Contributed Business in mid-May 1998. Planned
maintenance turnarounds also negatively affected the first six months of 1998.
POLYMERS SEGMENT
REVENUES--Revenues decreased in the second quarter and first six months of 1999
versus the comparable 1998 periods as a result of decreases in industry sales
prices. The sales price decreases reflect excess industry supply, as industry
capacity additions exceeded demand growth, and downward pressure from feedstock
costs, which declined throughout 1998. The decreases in sales prices started
during the fourth quarter 1997 and continued in a downward trend through 1998.
Industry prices increased throughout the first six months of 1999, however
average second quarter and first half 1999 sales prices were lower than the
comparable 1998 periods.
OPERATING INCOME--Operating income for the second quarter and first six months
of 1999 decreased versus the comparable 1998 periods due to lower product
margins primarily as a result of lower polymers sales prices.
UNALLOCATED ITEMS
Interest expense, net increased from $32 million in the second quarter 1998 to
$45 million in the second quarter 1999 and from $58 million in the first six
months of 1998 to $84 million in the first six months of 1999. These increases
primarily reflected higher levels of debt due to the addition of the Occidental
Contributed Business in mid-May 1998 and the issuance of Equistar's senior
unsecured notes in February 1999, which carry a higher fixed interest rate.
Other income of $46 million in the second quarter and first six months of 1999
primarily consists of net gains on asset sales, including the sale of the
compounds and concentrates business on April 30, 1999.
19
<PAGE>
LYONDELL-CITGO REFINING LP
REFINING SEGMENT
SECOND QUARTER 1999 VERSUS FIRST QUARTER 1999
LCR had a pretax loss of $38 million in the second quarter 1999 compared to
pretax income of $15 million in the first quarter 1999. LCR operating results
in the second quarter 1999 were primarily impacted by costs and lower processing
rates related to operating unit outages and, to a lesser extent, by reduced
allocations of Venezuelan extra heavy crude oil. The outages involved one of
two coker units and a fluid catalytic cracker unit. The shutdown of the coker
unit from May 7 until the end of June substantially limited LCR's ability to
process the extra heavy crude oil under the Crude Supply Agreement with PDVSA
Oil. Total crude oil processing rates averaged 202,000 barrels per day in the
second quarter 1999 compared to 255,000 barrels per day in the first quarter
1999. Insurance recoveries related to the production unit outages are not
expected to be received until at least the fourth quarter 1999. In addition, LCR
is pursuing claims against responsible third parties.
1999 VERSUS 1998
The following table sets forth average daily sales volumes for LCR's refined
products:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------------------- ---------------------------------------
THOUSAND BARRELS PER DAY 1999 1998 1999 1998
- ------------------------ ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Refined products:
Gasoline 104 118 110 121
Diesel and heating oil 57 85 61 74
Jet fuel 15 12 16 15
Aromatics 10 10 9 10
Other refined products 85 107 103 100
---------------- ---------------- ---------------- -----------------
Total refined products volumes 271 332 299 320
================ ================ ================ =================
</TABLE>
The following table sets forth average daily processing rates at the Refinery:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------------------- ---------------------------------------
THOUSAND BARRELS PER DAY 1999 1998 1999 1998
- ------------------------ ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Crude processing rates:
Crude Supply Agreement--coked 149 223 177 229
Other heavy crude oil--coked 14 -- 11 --
Other crude oil 39 22 40 20
---------------- ---------------- ---------------- -----------------
Total crude oil 202 245 228 249
================ ================ ================ =================
</TABLE>
REVENUES--Revenues for LCR were $482 million in the second quarter 1999 compared
to $527 million in the second quarter 1998 and $914 million in the first six
months 1999 compared to $1.1 billion in the 1998 period. The decreases in the
1999 periods primarily resulted from lower processing rates as a result of the
outages in the second quarter 1999 and lower industry prices for refined
products. Sales prices declined in response to lower industry raw material
(crude oil) prices in the first six months 1999 versus the 1998 period.
OPERATING INCOME--LCR had a pretax operating loss of $28 million in the second
quarter 1999 compared to pretax income of $39 million in the second quarter 1998
and a pretax operating loss of $4 million in the first six months of 1999
compared to pretax income of $104 million in the first six months of 1998. The
decreases primarily reflected the effects of the operating unit outages, reduced
allocations of extra heavy Venezuelan crude oil, and lower margins on crude oil
purchased in the spot market.
20
<PAGE>
FINANCIAL CONDITION
OPERATING ACTIVITIES--Lyondell's cash provided by operating activities totaled
$145 million in the first six months of 1999, compared to an operating cash
outflow of $100 million in the first six months of 1998. Cash provided by
operating activities in 1999 included customer advances and tax refunds. During
the second quarter 1999, working capital increased due to the repurchase of $65
million of accounts receivable previously sold under a three-year receivables
purchase agreement. Cash used by operations in the 1998 period reflected the
payment of accounts payable retained by Lyondell after the December 1997
formation of Equistar.
INVESTING ACTIVITIES--Lyondell made capital expenditures of $75 million in the
first six months of 1999. Joint venture capital expenditures were $76 million
by Equistar, $32 million by LCR and $15 million by LMC. Lyondell's pro rata
share of the joint ventures' total capital expenditures was $62 million.
Lyondell's 1999 capital budget is $273 million, including its $123 million pro
rata share of the joint ventures' capital budgets.
Distributions in excess of earnings for the first six months of 1999 were $55
million, including $11 million by Equistar and $41 million by LCR. Lyondell
loaned $24 million to LCR for capital, maintenance and environmental projects in
the first six months of 1999 and contributed $14 million to LMC to fund first
quarter 1999 turnaround expenditures and working capital requirements.
FINANCING ACTIVITIES--During May 1999, Lyondell amended its $7 billion Credit
Facility. The Credit Facility amendments provided the lenders with additional
collateral, re-priced the existing loans to reflect then market rates and
revised certain financial covenants. Also in May 1999, Lyondell issued 40.25
million shares of common stock, receiving net proceeds of $736 million.
Lyondell also issued $500 million of senior subordinated notes and $1.9 billion
of senior secured notes. Lyondell borrowed additional amounts under the amended
Credit Facility through the Credit Facility's new $850 million, seven-year
Term Loan E and the Credit Facility's new $150 million Term Loan F, maturing
December 31, 2003. Lyondell used the proceeds to retire the $1.25 billion
principal amount of Term Loan C, maturing June 30, 1999, and the $2 billion
principal amount of Term Loan D, maturing June 30, 2000, and to partially repay
principal amounts outstanding under Term Loans A and B under the Credit
Facility. Unamortized debt issuance costs and amendment fees of $31 million
after tax were written off and reported as an extraordinary loss on
extinguishment of debt in the second quarter 1999.
The amended Credit Facility requires Lyondell to issue $470 million of
subordinated notes (or more junior securities) by June 2002. The requirement to
issue $470 million of subordinated notes will be reduced by $2 for each $1 of
equity securities issued by Lyondell, and will be eliminated if Lyondell
achieves either (1) a specified total debt to adjusted EBITDA ratio, as defined,
or (2) a specified credit rating for its senior unsecured debt.
The Company paid regular quarterly dividends of $.225 per share of common stock
in the first two quarters of 1999 for a total of $43 million.
In February 1999, Equistar completed an offering of senior unsecured notes in
the principal amount of $900 million. The proceeds were primarily used to
refinance existing indebtedness of Equistar.
CURRENT BUSINESS OUTLOOK
For the intermediate chemicals and derivatives segment, management expects
continued stable overall volumes for core products, PO, PO derivatives and TDI,
in 1999. Lyondell has announced plans to add 275 million pounds per year of BDO
capacity in The Netherlands and expand polyols capacity by over 50% to 500
million pounds per year at Channelview, Texas. Lyondell will pursue price
increases to offset recent increases in raw materials costs. Oversupply in the
SM markets continues with some industry sources projecting that recovery may
take at least two years. Industry consolidation and the delay of new capacity
additions may accelerate the recovery. MTBE margins may be affected in the
short term by rising costs of butane, a raw material. Lyondell does not expect
that recent proposals to phase out or reduce the use of MTBE in oxygenated
gasoline will have a significant impact on MTBE margins and volumes in 1999 or
2000.
21
<PAGE>
The petrochemicals segment is currently benefiting from strong U.S. ethylene
demand and tight supply. The demand is driven by continued expansion of the
U.S. economy, rebuilding of industry inventory levels, and improving Asia
Pacific demand. Supply has been affected by plant outages, including those at
Equistar. Management expects that third quarter price increases will be offset
by higher costs of raw materials. Fourth quarter margins will depend on the
rates of economic growth and industry capacity utilization.
The polymers segment continues to experience strong demand growth. Industry
sources project that U.S. demand for polyethylene will grow by five to six
percent annually through 2003. Management expects third quarter polymers
margins to improve as sales prices increase faster than raw materials costs.
Equistar will complete construction of a new 480 million pounds per year high-
density polyethylene line at its Matagorda, Texas plant in the third quarter and
begin production early in the fourth quarter.
LCR's coker production units and fluid catalytic cracker, which were down for
part of the second quarter of 1999, are back in service. Management expects
slightly higher third quarter 1999 operating rates compared to the second
quarter, as inventories of crude oil are reduced. Very low industry refining
margins will likely continue to affect LCR's business and results of operations
during the remainder of 1999. Third and fourth quarter operating results will
also continue to reflect the effects of reductions in crude oil allocations by
PDVSA Oil as a result of an OPEC agreement to limit oil production. See Note 9
of Notes to Consolidated Financial Statements. Reduced PDVSA Oil allocations of
crude oil as a result of OPEC actions or short deliveries for other reasons
(which have occurred from time to time), force LCR either to purchase a
portion of its crude oil in the spot market or reduce operating rates, both of
which negatively affect pretax income and cash flow.
YEAR 2000
Lyondell, Equistar and LCR use many business information (information technology
or "IT") systems as well as non-IT systems such as manufacturing support and
other systems that could be affected by the "Year 2000 problem." The Year
2000 problem arises from computer programs and computer and other equipment with
embedded chips or processors that use two digits rather than four to designate
the year. Date-sensitive computer operations 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.
Equistar and LCR have replaced many of their business information computer
systems (including systems operated by Equistar for LMC). The new systems,
based on enterprise software from SAP America, Inc. ("SAP"), replace older
business systems and allow employees at different locations to share financial
and operating information more effectively. LCR completed its transition to SAP
systems during the first quarter 1999. Equistar completed implementation of its
SAP project in the second quarter 1999. The new systems and software are Year
2000 compliant, thus addressing 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 LCWI for the near term.
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 has substantially completed an assessment of the state
of readiness of the IT and non-IT systems of the Company and its joint ventures
within the scope of the project. 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
were substantially completed in the first quarter 1999. Completion of testing
and final implementation will take place in the remainder of 1999. The progress
of these phases as of June 30, 1999 is summarized as follows:
22
<PAGE>
Chart 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 June 30, 1999
Inventory Assessment Remediation Testing Implementation
Lyondell 99% 99% 98% 86% 93%
Equistar 99% 99% 99% 95% 87%
LCR 99% 99% 99% 91% 87%
As of June 30, 1999, Year 2000 spending by the Company, Equistar and LCR for the
replacement of both IT and non-IT systems is summarized as follows:
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS Lyondell Equistar LCR
------------------- -------- -------- ---
<S> <C> <C> <C>
Spending through June 30, 1999......... $10 $ 5 $1
Estimated additional spending.......... 3 8 3
--- --- --
Total estimated spending........... $13 $13 $4
=== === ==
Lyondell share of estimated spending... $13 $ 5 $2
=== === ==
</TABLE>
The total spending of $30 million for all three organizations represents an
estimate within a range between $24 million and $32 million, of which the
Company's proportionate share would be $17 million to $22 million. The
estimated amount does not include costs incurred in connection with the
implementation of SAP-related software. These spending estimates are
continuously refined as phases of the assessment process are completed.
Spending is funded by cash generated from operations. Preliminary estimates
indicate that approximately 10% to 12% of the estimated spending 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. The Company's operations are
dependent on a continuous supply of key services from raw material suppliers and
utility and transportation providers. 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. The Company has substantially completed contingency plan
preparation with the assistance of an outside consultant. These plans are
intended to avoid material interruption of core business operations through the
year 2000 and beyond, while ensuring safe operations and responsible financial
performance. The contingency planning involved an analysis of critical business
processes and an identification of the most likely threats to these processes.
Solutions and alternatives have been developed for these internal or external
threats. Final testing of these plans will be completed in the last half of the
year.
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. In a worst case scenario, controlled plant shutdowns using
the Company's standard shutdown procedures might be necessitated
23
<PAGE>
by failures of utility providers or suppliers affecting plant operability. Such
events could have a material adverse effect on the Company's operations,
liquidity or financial position. Management believes that the completion of the
assessment and remediation phases of the Year 2000 assessment process has
significantly reduced the probability of any major disruptions of Company
operations.
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. Subsequently, the FASB delayed the
effective date by one year. The statement is effective for the Company's
calendar year 2001 with early adoption 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 upon 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 the effect of SFAS No. 133.
ITEM 3. DISCLOSURE OF MARKET RISK.
In the period ended June 30, 1999, the Company's exposure to market risks (as
such risks are described in Item 7a of its Annual Report on Form 10-K for the
year ended December 31, 1998) has not changed materially, except for the
settlement of the Treasury Locks in the second quarter of 1999. See Item 7a of
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report 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 in the United States and in other
countries, substantial chemical and refinery capacity additions resulting in
oversupply and declining prices and margins, raw material costs or supply
arrangements, the Company's ability to implement cost reductions, and operating
interruptions (including leaks, explosions, fires, mechanical failure,
unscheduled downtime, labor difficulties, transportation interruptions, 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 forward-looking statements in this Form 10-Q are qualified in their entirety
by the cautionary statements contained in this section and elsewhere in this
report.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments with respect to the Company's
legal proceedings previously reported in the 1998 Annual Report on
Form 10-K.
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 were filed during the quarter
ended June 30, 1999 and through the date hereof:
Date of Report Item No. Financial Statements
-------------- -------- --------------------
August 16, 1999 5, 7 Yes
June 29, 1999 5, 7 Yes
May 11, 1999 5, 7 No
April 19, 1999 5, 7 No
April 1, 1999 5, 7 No
25
<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: August 16, 1999 /s/ KELVIN R. COLLARD
---------------------------
Kelvin R. Collard
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 204
<SECURITIES> 0
<RECEIVABLES> 555
<ALLOWANCES> 8
<INVENTORY> 507
<CURRENT-ASSETS> 1,283
<PP&E> 4,514
<DEPRECIATION> 129
<TOTAL-ASSETS> 9,018
<CURRENT-LIABILITIES> 604
<BONDS> 6,261
0
0
<COMMON> 120
<OTHER-SE> 1,044
<TOTAL-LIABILITY-AND-EQUITY> 9,018
<SALES> 1,709
<TOTAL-REVENUES> 1,709
<CGS> 1,281
<TOTAL-COSTS> 1,281
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 295
<INCOME-PRETAX> (15)
<INCOME-TAX> (6)
<INCOME-CONTINUING> (9)
<DISCONTINUED> 0
<EXTRAORDINARY> (31)
<CHANGES> 0
<NET-INCOME> (40)
<EPS-BASIC> (.45)
<EPS-DILUTED> (.45)
</TABLE>
