<PAGE>
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, 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
-------------------
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 700, HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 652-7200
-------------------
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, 1999: 117,594,086
<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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------------- -------------------------------------
MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA 1999 1998 1999 1998
- ------------------------------------------ ---------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES $ 976 $ 566 $2,685 $ 566
OPERATING COSTS AND EXPENSES:
Cost of sales 771 408 2,052 408
Selling, general and administrative expenses 63 45 186 56
Research and development expense 14 10 43 10
Amortization of goodwill and other
intangibles 28 16 75 16
Unusual charges -- 57 -- 61
------ ------ ------- -------
876 536 2,356 551
------ ------ ------- -------
Operating income 100 30 329 15
Interest expense (156) (119) (451) (132)
Interest income 12 7 27 14
Other income, net 2 1 9 6
------ ------ ------- -------
Loss before equity investments,
income taxes and extraordinary item (42) (81) (86) (97)
------ ------ ------- -------
INCOME FROM EQUITY INVESTMENTS:
Equistar Chemicals, LP 24 22 63 129
LYONDELL-CITGO Refining LP 14 35 5 89
Other 2 -- 1 6
------ ------ ------- -------
40 57 69 224
------ ------ ------- -------
Income (loss) before income
taxes and extraordinary item (2) (24) (17) 127
Provision for (benefit from) income taxes 11 (9) 5 48
------ ------ ------- -------
Income (loss) before extraordinary item (13) (15) (22) 79
Extraordinary loss on extinguishment
of debt, net of income taxes (4) -- (35) --
------ ------ ------- -------
NET INCOME (LOSS) $ (17) $ (15) $ (57) $ 79
====== ====== ======= =======
BASIC AND DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary item $(.11) $(.20) $ (.22) $1.00
Extraordinary loss (.03) -- (.35) --
------ ------ ------- -------
Net income (loss) $(.14) $(.20) $ (.57) $1.00
====== ====== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
1
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LYONDELL CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
MILLIONS OF DOLLARS, EXCEPT PAR VALUE DATA 1999 1998
- ------------------------------------------ -------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 258 $ 233
Accounts receivable, net 594 479
Inventories 501 550
Prepaid expenses and other current assets 22 64
-------- --------
Total current assets 1,375 1,326
Property, plant and equipment, net 4,376 4,511
Investments and long-term receivables:
Investment in Equistar Chemicals, LP 652 660
Receivable from LYONDELL-CITGO Refining LP 259 231
Investment in LYONDELL-CITGO Refining LP 14 84
Other investments and long-term receivables 128 103
Goodwill, net 1,479 1,430
Deferred charges and other assets 839 880
-------- --------
Total assets $9,122 $9,225
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 258 $ 253
Current maturities of long-term debt 20 1,603
Other accrued liabilities 470 481
-------- --------
Total current liabilities 748 2,337
Long-term debt, less current maturities 6,256 5,391
Other liabilities and deferred credits 332 294
Deferred income taxes 480 413
Commitments and contingencies
Minority interest 195 216
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 257 387
Accumulated other comprehensive income (loss) (46) 32
Treasury stock, at cost, 2,655,914 and 2,978,203 shares,
respectively (74) (83)
-------- --------
Total stockholders' equity 1,111 574
-------- --------
Total liabilities and stockholders' equity $9,122 $9,225
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
2
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LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------------------------
MILLIONS OF DOLLARS 1999 1998
- ------------------- -------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (57) $ 79
Adjustments to reconcile net (loss) income
to net cash provided by operating activities,
net of the effects of deconsolidation of affiliate:
Depreciation and amortization 244 65
Unusual charges -- 61
Extraordinary item 35 --
Deferred income taxes 3 26
Increase in accounts receivable (143) (5)
Decrease (increase) in inventories 37 (34)
Increase (decrease) in accounts payable 13 (196)
Net change in other working capital accounts 52 16
Other, net 46 118
---------- ----------
Net cash provided by operating activities 230 130
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of ARCO Chemical Company, net of cash acquired -- (5,923)
Expenditures for property, plant and equipment (90) (28)
Distributions from affiliates in excess of earnings 82 404
Contributions and advances to affiliates (45) (35)
Deconsolidation of affiliate -- (11)
---------- ----------
Net cash used in investing activities (53) (5,593)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 3,400 6,500
Payment of debt issuance costs (107) (130)
Repayments of long-term debt (4,117) (563)
Issuance of common stock 736 --
Dividends paid (70) (53)
Net decrease in short-term debt -- (100)
Repurchase of common stock -- (59)
Other 8 --
---------- ----------
Net cash (used in) provided by financing activities (150) 5,595
---------- ----------
Effect of exchange rate changes on cash (2) (1)
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 25 131
Cash and cash equivalents at beginning of period 233 86
---------- ----------
Cash and cash equivalents at end of period $ 258 $ 217
========== ==========
</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 ("Lyondell" or "Company")
1998 Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. 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 nine-month
periods ended September 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 nine-month
periods ended September 30, 1998 include two months of operating results for
LCWI and 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").
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.
4
<PAGE>
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 of its petrochemicals and polymers business segments, while Millennium
contributed substantially all of the assets of 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:
SEPTEMBER 30 DECEMBER 31
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------ -----------
BALANCE SHEETS
Total current assets $1,211 $1,127
Property, plant and equipment, net 4,010 4,075
Goodwill, net 1,128 1,151
Deferred charges and other assets 320 312
------- -------
Total assets $6,669 $6,665
======= =======
Current maturities of long-term debt $ 42 $ 150
Other current liabilities 578 485
Long-term debt, less current maturities 2,169 1,865
Capital lease obligations -- 205
Other liabilities and deferred credits 87 75
Partners' capital 3,793 3,885
------- -------
Total liabilities and partners' capital $6,669 $6,665
======= =======
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
Sales and other operating revenues $1,471 $1,149 $3,783 $3,263
Cost of sales 1,323 1,002 3,397 2,741
Other operating costs and expenses 72 74 223 225
Restructuring and other unusual charges -- 4 -- 5
--------- -------- --------- ----------
Operating income 76 69 163 292
Interest expense, net (42) (40) (127) (98)
Other income, net 1 -- 47 --
--------- -------- --------- ----------
Net income $ 35 $ 29 $ 83 $ 194
========= ======== ========= ==========
SELECTED CASH FLOW INFORMATION
Depreciation and amortization $ 76 $ 72 $ 222 $ 201
Expenditures for property, plant and equipment 36 46 112 111
</TABLE>
5
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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 the partners based upon participation interests. Depreciation
expense is allocated to the partners based upon contributed assets.
Summarized financial information for LCR is as follows:
SEPTEMBER 30 DECEMBER 31
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------ -----------
BALANCE SHEETS
Total current assets $ 223 $ 197
Property, plant and equipment, net 1,351 1,370
Deferred charges and other assets 64 70
------ ------
Total assets $1,638 $1,637
====== ======
Current maturities of long-term debt $ 450 $ --
Other current liabilities 273 203
Long-term debt, less current maturities 315 717
Other liabilities and deferred credits 62 68
Partners' capital 538 649
------ ------
Total liabilities and partners' capital $1,638 $1,637
====== ======
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------------- ---------------------------------
1999 1998 1999 1998
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
Sales and other operating revenues $ 780 $ 499 $1,694 $1,555
Cost of sales 735 413 1,619 1,329
Selling, general and administrative expenses 13 21 47 57
------------- ------------- ------------- -------------
Operating income 32 65 28 169
Interest expense, net (11) (11) (31) (32)
State income tax benefit -- -- 1 --
------------- ------------- ------------- -------------
Net income (loss) $ 21 $ 54 $ (2) $ 137
============= ============= ============= =============
SELECTED CASH FLOW INFORMATION
Depreciation and amortization $ 26 $ 26 $ 78 $ 72
Expenditures for property, plant and equipment 11 13 43 43
</TABLE>
5. INCOME TAXES
During the third quarter 1999 Lyondell revised its 1999 estimated effective tax
rate from 41.5% to 20%, reducing the estimated tax benefit on Lyondell's 1999
net loss. This resulted in an $11 million tax provision in the third quarter
1999 despite a pretax loss of $2 million. It also resulted in a $4 million
unfavorable adjustment of tax benefits related to the second quarter 1999
extraordinary loss on early extinguishment of debt. The downward revision of
the 1999 estimated effective tax rate primarily resulted from the impact of the
extraordinary loss and lower than forecasted domestic earnings. Excluding the
extraordinary loss and related tax benefit, a tax provision
6
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rate of approximately 29% resulted in a tax provision of $5 million on
Lyondell's pretax loss of $17 million. The tax provision rate of 29% reflects
the effect of foreign income tax provisions that were not offset by domestic
federal income tax benefits.
6. EXTRAORDINARY ITEM
During the second quarter 1999, Lyondell retired debt in the principal amount of
$4 billion prior to maturity. Unamortized debt issuance costs and amendment
fees of $54 million, less a tax benefit of $23 million, 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.
During the third quarter 1999, Lyondell reduced by $4 million the $23 million
tax benefit recognized in the second quarter 1999 related to the extraordinary
loss. The $4 million reduction of the tax benefit reflected a change in the
estimated effective tax rate for 1999.
7. INVENTORIES
The components of inventories consisted of the following:
SEPTEMBER 30 DECEMBER 31
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------ -----------
Finished goods $ 403 $ 459
Work-in-process 20 18
Raw materials 40 34
Materials and supplies 38 39
----- -----
Total inventories $ 501 $ 550
===== =====
8. PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, at cost, and the related
accumulated depreciation consisted of the following:
SEPTEMBER 30 DECEMBER 31
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------- -----------
Land $ 34 $ 19
Manufacturing facilities and equipment 4,435 4,470
Construction in progress 123 98
------ ------
Total property, plant and equipment 4,592 4,587
Less accumulated depreciation 216 76
------ ------
Property, plant and equipment, net $4,376 $4,511
====== ======
9. 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 interest 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 Term Loan E, maturing June 30, 2006 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
7
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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
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 14).
Long-term debt at September 30, 1999 and December 31, 1998 consisted of the
following:
SEPTEMBER 30 DECEMBER 31
MILLIONS OF DOLLARS 1999 1998
- ------------------- ------------ -----------
Term Loan A $1,095 $1,852
Term Loan B 1,158 1,248
Term Loan C -- 1,250
Term Loan D -- 2,000
Term Loan E 846 --
Term Loan F 149 --
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 4 20
--------- -------
Total long-term debt 6,276 6,994
Less current maturities 20 1,603
--------- -------
Long-term debt, net $6,256 $5,391
========= =======
The Term Loans currently bear interest at the following variable 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.
8
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10. 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.
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 generally 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, a breach or termination of
LCR's Crude Supply Agreement could adversely affect LCR, and therefore,
Lyondell. 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 may seek alternative crude supply
arrangements. Any such alternative arrangements may not be as beneficial as the
Crude Supply Agreement. Currently, alternative crude oils with similar margins
are not available for purchase by LCR. Furthermore, the breach or termination
of the Crude Supply Agreement would require LCR to purchase all or a portion of
its crude oil feedstocks in the merchant market and would subject LCR to
significant volatility and price fluctuations.
In late April 1998, LCR received notification from PDVSA Oil of reduced
allocations of crude oil related to announced OPEC production cuts. LCR began
receiving the reduced allocations 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 allocations of crude oil
supplied under the Crude Supply Agreement. In addition, PDVSA Oil has reduced
crude oil deliveries and has made payments in respect thereof.
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
9
<PAGE>
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 September 30, 1999, Equistar expensed approximately $3 million
under the $7 million indemnification agreement with respect to the business
contributed by Lyondell.
Environmental--Lyondell's policy is to be in compliance with all applicable
environmental laws. Lyondell 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, Lyondell
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, Lyondell 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. Lyondell has also been named, along
with several other companies, as a potentially responsible party for another
CERCLA site near Houston, Texas. Lyondell is also subject to certain assessment
and remedial actions at the Refinery under the Resource Conservation and
Recovery Act ("RCRA"). In addition, Lyondell 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 part of the acquisition of ARCO Chemical, Lyondell assumed ARCO Chemical's
environmental liability related to potential future remediation costs associated
with known ARCO Chemical sites. The liability under RCRA and various state and
foreign government regulations relates to six current plant sites, two former
plant sites and one research site. Under CERCLA, the liability relates to one
federal site. Further, as a result of the acquisition, Lyondell is involved in
administrative proceedings or lawsuits relating to a minimal number of other
CERCLA sites. Lyondell estimates, based upon currently available information,
that potential loss contingencies associated with these CERCLA sites,
individually and in the aggregate, are not significant.
As of September 30, 1999, Lyondell has accrued $42 million related to future
assessment and remediation costs associated with the above mentioned sites. The
costs per site range from less than $1 million to $13 million and 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 or foreign law investigations, could require Lyondell to
reassess its potential exposure related to environmental matters.
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, the State of California has initiated action,
pursuant to an Executive Order of the Governor and supported by recent
legislation, to begin the process of reducing or limiting the use of MTBE by a
date to be determined. Such action, to be effective, would require
Congressional approval in the form of an amendment to the Clean Air Act. At the
federal level, a 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 gasoline. Based on that report, the
Environmental Protection Agency has indicated that it will recommend Congress
amend the Clean Air Act to reduce MTBE in reformulated gasoline. These
initiatives or other governmental actions could result in a significant
reduction in Lyondell's MTBE sales. In addition, Lyondell has a take-or-pay
contract with ARCO, which contributes significant pretax margin. If
10
<PAGE>
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. Lyondell 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.
11. 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 117.6 million shares at September 30, 1999.
Basic and Diluted Earnings Per Share--Basic earnings per share ("EPS") for
income (loss) before extraordinary item for the periods presented are computed
based upon the weighted average number of shares outstanding for the periods.
Diluted earnings per share for income (loss) before extraordinary item include
the effect of outstanding stock options issued under the Executive Long-Term
Incentive Plan and the Incentive Stock Option Plan. These stock options were
antidilutive in 1999.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30
--------------------------------------------------------------------
1999 1998
------------------------------- ------------------------------
THOUSANDS OF SHARES SHARES EPS SHARES EPS
- ------------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Basic 117,554 $(.11) 77,363 $(.20)
Dilutive effect of options -- -- 146 --
------------- ------------ ------------- ------------
Diluted 117,554 $(.11) 77,509 $(.20)
============= ============ ============= ============
FOR THE NINE MONTHS ENDED
SEPTEMBER 30
--------------------------------------------------------------------
1999 1998
------------------------------- ------------------------------
THOUSANDS OF SHARES SHARES EPS SHARES EPS
- ------------------- ------------- ------------ ------------- ------------
Basic 98,237 $(.22) 77,904 $1.00
Dilutive effect of options -- -- 145 --
------------- ------------ ------------- ------------
Diluted 98,237 $(.22) 78,049 $1.00
============= ============ ============= ============
</TABLE>
Comprehensive Income--For the three-month and nine-month periods ended September
30, 1999, the Company had comprehensive losses of $28 million and $135 million,
respectively. For the three-month and nine-month periods ended September 30,
1998, Lyondell had comprehensive income of $7 million and $101 million,
respectively.
11
<PAGE>
12. 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 SEPTEMBER 30, 1999:
Sales and other operating revenues $ 976 $ -- $ -- $ -- $ -- $ 976
Operating income 100 100
Interest expense (156) (156)
Interest income 12 12
Other income, net 2 2
Income from equity investments 2 40 11 14 (27) 40
Loss before income taxes and extraordinary item (2)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998:
Sales and other operating revenues 566 566
Operating income 30 30
Interest expense (119) (119)
Interest income 7 7
Other income, net 1 1
Income from equity investments 34 14 35 (26) 57
Loss before income taxes and extraordinary item (24)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999:
Sales and other operating revenues 2,685 2,685
Operating income 329 329
Interest expense (451) (451)
Interest income 27 27
Other income, net 9 9
Income from equity investments 5 112 19 5 (72) 69
Loss before income taxes and extraordinary item (17)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998:
Sales and other operating revenues 566 566
Operating income 30 (15) 15
Interest expense (132) (132)
Interest income 14 14
Other income, net 6 6
Income from equity investments 141 86 89 (92) 224
Income before income taxes and extraordinary item 127
</TABLE>
The following table presents the details of "Income from equity investments" as
presented above in the "Other" column for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------------------- ------------------------------
MILLIONS OF DOLLARS 1999 1998 1999 1998
- ------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Equistar items not allocated to petrochemicals and polymers:
Principally general and administrative expenses
and interest expense, net $ (27) $ (26) $ (86) $ (98)
Other income, net -- -- 18 --
Income (loss) from equity investment in LMC -- -- (4) 6
------------- ------------ ------------ ------------
Total--Other $ (27) $ (26) $ (72) $ (92)
============ ============ ============ ============
</TABLE>
12
<PAGE>
13. 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 September 30, 1999, Lyondell had paid and charged
approximately $188 million against the accrued liability.
14. 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 issued by Lyondell in May 1999 (see
Note 9). 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 nine-month periods ended September 30, 1999 and 1998 present supplemental
information for the Guarantors:
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
BALANCE SHEET
AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
- ------------------- -------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total current assets $ 144 $1,227 $ 4 $ -- $1,375
Property, plant and equipment, net 6 4,370 4,376
Other investments and
long-term receivables 6,244 65 982 (6,238) 1,053
Goodwill, net 1,479 1,479
Deferred charges and other assets 198 641 839
------ ------ ---- ------- ------
Total assets $6,592 $7,782 $986 $(6,238) $9,122
====== ====== ==== ======= ======
Current maturities of long-term debt $ 19 $ 1 $ -- $ -- $ 20
Other current liabilities 14 684 30 728
Long-term debt,
less current maturities 5,629 627 6,256
Other liabilities and deferred credits 63 269 332
Deferred income taxes (96) 310 266 480
Intercompany liabilities (assets) (291) 212 79 --
Minority interest 195 195
Stockholders' equity 1,254 5,484 611 (6,238) 1,111
------ ------ ---- ------- ------
Total liabilities and
stockholders' equity $6,592 $7,782 $986 $(6,238) $9,122
====== ====== ==== ======= ======
</TABLE>
13
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED)
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 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 $ -- $ 976 $-- $ -- $ 976
Cost of sales 771 771
Selling, general and
administrative expenses 15 48 63
Research and development expense 14 14
Amortization of goodwill
and other intangibles 28 28
-------- -------- --------- ----------- ------------
Operating income (loss) (15) 115 100
Interest income (expense), net (139) (9) 4 (144)
Other income, net 1 1 2
Income from equity investments 2 38 40
Intercompany income (expense) 141 (137) (4) --
Provision (benefit) for income taxes 16 (7) 2 11
-------- -------- --------- ----------- ------------
Income (loss) before
extraordinary item (28) (21) 36 (13)
Extraordinary item, net of taxes (4) (4)
-------- -------- --------- ----------- ------------
Net income (loss) $ (32) $ (21) $36 $ -- $ (17)
======== ======== ========= =========== ============
</TABLE>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
- ------------------- -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues $ -- $566 $-- $ -- $ 566
Cost of sales 408 408
Selling, general and
administrative expenses 7 38 45
Research and development expense 10 10
Amortization of goodwill
and other intangibles 16 16
Unusual charges 57 57
-------- -------- --------- ----------- ------------
Operating income (loss) (7) 37 30
Interest expense, net (94) (9) (9) (112)
Other income, net 1 1
Income from equity investments 57 57
Provision (benefit) for income taxes (38) 11 18 (9)
-------- -------- --------- ----------- ------------
Net income (loss) $(62) $ 17 $30 $ -- $ (15)
======== ======== ========= =========== ============
</TABLE>
14
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED)
STATEMENTS OF INCOME--(CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 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 $ -- $2,685 $ -- $ -- $2,685
Cost of sales 2,052 2,052
Selling, general and
administrative expenses 37 149 186
Research and development expense 43 43
Amortization of goodwill
and other intangibles 75 75
-------- ---------- ---------- ------------ ------------
Operating income (loss) (37) 366 329
Interest income (expense), net (395) (39) 10 (424)
Other income, net 3 6 9
Income from equity investments 5 64 69
Intercompany income (expense) 372 (362) (10) --
Provision (benefit) for income taxes (3) (5) 13 5
------- --------- ---------- ------------ -----------
Income (loss) before
extraordinary item (54) (19) 51 (22)
Extraordinary item, net of taxes (35) (35)
-------- ---------- ---------- ------------ ------------
Net income (loss) $ (89) $ (19) $ 51 $ -- $ (57)
======== ========== ========== ============ ============
</TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
- ------------------- -------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues $ -- $566 $ -- $ -- $ 566
Cost of sales 408 408
Selling, general and
administrative expenses 18 38 56
Research and development expense 10 10
Amortization of goodwill
and other intangibles 16 16
Unusual charges 4 57 61
-------- ---------- ---------- ------------ ------------
Operating income (loss) (22) 37 15
Interest expense, net (96) (9) (13) (118)
Other income, net 6 6
Income from equity investments 224 224
Provision (benefit) for income taxes (43) 11 80 48
-------- ---------- ---------- ------------ ------------
Net income (loss) $(69) $ 17 $131 $ -- $ 79
======== ========== ========== ============ ============
</TABLE>
15
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED)
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
- ------------------- -------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net income (loss) $ (89) $ (19) $ 51 $ -- $ (57)
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 24 220 244
Extraordinary item 35 35
Deferred income taxes (69) 56 16 3
Net changes in working
capital and other 236 (110) (121) 5
-------- ---------- ---------- ------------ ------------
Net cash provided by (used in)
operating activities 137 147 (54) 230
-------- ---------- ---------- ------------ ------------
Expenditures for property,
plant and equipment (6) (84) (90)
Distributions from affiliates
in excess of earnings 82 82
Contributions and advances
to affiliates (17) (28) (45)
-------- ---------- ---------- ------------ ------------
Net cash provided by (used
in) investing activities (23) (84) 54 (53)
-------- ---------- ---------- ------------ ------------
Proceeds from issuance
of long-term debt 3,400 3,400
Payment of debt issuance costs (107) (107)
Repayments of long-term debt (4,101) (16) (4,117)
Issuance of common stock 736 736
Dividends paid (70) (70)
Other 8 8
-------- ---------- ---------- ------------ ------------
Net cash used in
financing activities (134) (16) (150)
-------- ---------- ---------- ------------ ------------
Effect of exchange rate
changes on cash (2) (2)
-------- ---------- ---------- ------------ ------------
Increase (decrease) in
cash and cash equivalents $ (20) $ 45 $ -- $ -- $ 25
======== ========== ========== ============ ============
</TABLE>
16
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED)
STATEMENT OF CASH FLOWS--(CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
- ------------------- -------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net income (loss) $ (69) $ 17 $ 131 $ -- $ 79
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 10 55 65
Unusual charges 4 57 61
Deferred income taxes 11 16 (1) 26
Net changes in working
capital and other (394) 438 (145) (101)
-------- ---------- ---------- ------------ ------------
Net cash provided by (used
in) operating activities (438) 583 (15) 130
-------- ---------- ---------- ------------ ------------
Purchase of ARCO Chemical
Company, net of cash acquired (5,621) (302) (5,923)
Expenditures for property,
plant and equipment (28) (28)
Distributions from affiliates
in excess of earnings 395 9 404
Contributions and advances
to affiliates 9 (35) (9) (35)
Deconsolidation of affiliate (11) (11)
-------- ---------- ---------- ------------ ------------
Net cash provided by (used
in) investing activities (5,612) (330) 349 -- (5,593)
-------- ---------- ---------- ------------ ------------
Proceeds from issuance
of long-term debt 6,500 6,500
Payment of debt issuance costs (130) (130)
Repayments of long-term debt (218) (345) (563)
Dividends paid (53) (53)
Net decrease in short-term debt (100) (100)
Repurchase of common stock (63) 4 (59)
-------- ---------- ---------- ------------ ------------
Net cash provided by (used
in) financing activities 6,154 (214) (345) 5,595
-------- ---------- ---------- ------------ ------------
Effect of exchange rate
changes on cash (1) (1)
-------- ---------- ---------- ------------ ------------
Increase (decrease) in
cash and cash equivalents $ 104 $ 38 $ (11) $ -- $ 131
======== ========== ========== ============ ============
</TABLE>
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The acquired operations of ARCO Chemical, now known as Lyondell Chemical
Worldwide Inc. ("LCWI"), form Lyondell'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
THIRD QUARTER 1999 COMPARED TO SECOND QUARTER 1999
For the third quarter 1999, Lyondell reported a net loss of $17 million compared
to a net loss of $42 million in the second quarter 1999. Both periods included
an extraordinary charge related to early extinguishment of debt and associated
tax effects of $4 million and $31 million, respectively. The third quarter 1999
also included an $11 million unfavorable adjustment of the 1999 income tax
benefit. Excluding the extraordinary charges and the tax adjustment, Lyondell's
third quarter net loss of $2 million compared to a net loss of $11 million in
the second quarter 1999. The third quarter 1999 results primarily reflected
improved operations at LCR and Equistar that were partly offset by higher raw
materials costs.
Income from equity investment in LCR was $14 million in the third quarter 1999
compared to a loss of $20 million in the second quarter. LCR results improved
over the second quarter, which was negatively affected by production unit
outages. Income from equity investment in Equistar of $24 million in the third
quarter 1999 compared to income of $26 million in the second quarter 1999. The
second quarter Equistar results benefited from net gains on asset sales, of
which Lyondell's pretax share was $16 million. Equistar's third quarter
reflected improved margins and operations when compared to the second quarter,
which was negatively affected by production unit outages. Operating income of
the intermediate chemicals and derivatives segment was $100 million in both the
third quarter and second quarter 1999. The benefit from higher sales volumes
for most products in this segment, along with lower fixed costs, was offset by
higher raw materials costs.
1999 COMPARED TO 1998
NET INCOME (LOSS)--Lyondell reported a third quarter 1999 net loss of $17
million compared to a third quarter 1998 net loss of $15 million. The third
quarter 1999 included a tax-related extraordinary charge of $4 million and an
unfavorable adjustment of the 1999 income tax benefit of $11 million, while the
third quarter 1998 included a $35 million after-tax unusual charge related to
the acquisition of ARCO Chemical. Excluding these items, the net loss before
extraordinary item of $2 million in the third quarter 1999 compared to net
income of $20 million in the third quarter 1998. The 1999 decrease primarily
reflected higher interest expense due to a full three months of interest on debt
related to the acquisition of ARCO Chemical and lower equity earnings from LCR,
partly offset by a full three months of operating income of LCWI.
The net loss of $57 million for the first nine months of 1999 compares to net
income of $79 million for the comparable 1998 period. Excluding the 1999
extraordinary item and the effect of the 1998 unusual charge, the net loss of
$22 million in the first nine months of 1999 decreased from net income of $114
million in the first nine months of 1998. Income from equity investments
decreased about $84 million after tax. The remainder of the decrease was due to
higher interest expense, due primarily to a full nine months of interest on debt
related to the
18
<PAGE>
acquisition of ARCO Chemical, partly offset by higher operating income, due to a
full nine months of LCWI results in the 1999 period.
REVENUES, OPERATING COSTS AND EXPENSES, OPERATING INCOME--The revenues,
operating costs and expenses and operating income for the third quarter and
first nine months of 1999 primarily consisted of the operating results of LCWI.
The third quarter and first nine months of 1998 included two months of the
operating results of LCWI, which are included prospectively from August 1, 1998.
Income from Lyondell's interests in Equistar, LCR and LMC was reported as income
from equity investments in both 1999 and 1998.
Third quarter 1999 operating income of $100 million was 10% of sales. Excluding
the $57 million unusual charge related to the acquisition of ARCO Chemical,
third quarter 1998 operating income of $87 million was 15% of sales. The
decrease in the 1999 operating margin as a percent of sales was primarily due to
higher raw materials costs, which increased more than sales prices.
INCOME FROM EQUITY INVESTMENT IN EQUISTAR--Lyondell's income from its equity
investment in Equistar was $24 million in the third quarter 1999 versus $22
million for the third quarter 1998. The slight improvement was primarily due to
higher ethylene margins in the third quarter 1999 compared to the third quarter
1998. Lyondell's income from its equity investment in Equistar was $63 million
for the first nine months of 1999 versus $129 million for the 1998 period. The
decrease was primarily attributable to lower petrochemicals and polymers margins
in 1999 compared with 1998, reflecting higher raw material costs, as well as the
net effects of olefins unit outages in the second quarter 1999 and the scheduled
LaPorte, Texas plant turnaround in the first quarter 1999 and higher interest
expense. These decreases were partly offset by volume benefits from the
addition of the Occidental Contributed Business in mid-May 1998 and the net
gains on asset sales in the second quarter 1999.
INCOME FROM EQUITY INVESTMENT IN LCR--Lyondell's income from its equity
investment in LCR was $14 million in the third quarter 1999 versus income of $35
million in the third quarter 1998. Lyondell's equity income was $5 million in
the first nine months of 1999 versus income of $89 million for the 1998 period.
The decreases were primarily due to reduced allocations and deliveries of extra
heavy Venezuelan crude oil under the Crude Supply Agreement in 1999 and lower
1999 margins on the sale of products refined from crude oil purchased in the
spot market. The first nine months of 1999 results were also negatively
affected by the lower operating rates related to the second quarter 1999
production unit outages.
INTEREST EXPENSE--Interest expense was $156 million in the third quarter 1999
versus $119 million in the third quarter 1998 and $451 million in the first nine
months of 1999 versus $132 million in the 1998 period. The increases reflect
higher debt levels as a result of amounts borrowed in late July 1998 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 refinanced a portion of its debt with new debt and equity. While
the new debt carries higher interest rates, their effect is partially offset by
reduced amortization expense and lower debt levels.
INCOME TAX EXPENSE--During the third quarter 1999 Lyondell revised its 1999
estimated effective tax rate from 41.5% to 20%, reducing the estimated tax
benefit on Lyondell's 1999 net loss. This resulted in an $11 million tax
provision in the third quarter 1999 despite a pretax loss of $2 million. It
also resulted in a $4 million unfavorable adjustment of tax benefits related to
the second quarter 1999 extraordinary loss on early extinguishment of debt. The
downward revision of the 1999 estimated effective tax rate primarily resulted
from the impact of the extraordinary loss and lower than forecasted domestic
earnings. Excluding the extraordinary loss and related tax benefit, a tax
provision rate of approximately 29% resulted in a tax provision of $5 million on
Lyondell's pretax loss of $17 million. The tax provision rate of 29% reflects
the effect of foreign income tax provisions that were not offset by domestic
federal income tax benefits.
EXTRAORDINARY ITEM--The third quarter 1999 included a $4 million adjustment of
tax benefits related to the second quarter 1999 extraordinary loss on early
extinguishment of debt. The second quarter 1999 loss on early extinguishment of
debt consisted of the write off of $54 million, or $31 million after taxes, of
unamortized debt issuance costs and amendment fees.
19
<PAGE>
INTERMEDIATE CHEMICALS AND DERIVATIVES SEGMENT--THIRD QUARTER 1999 COMPARED TO
SECOND QUARTER 1999
The following table sets forth sales 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.
THIRD SECOND
QUARTER QUARTER
IN MILLIONS 1999 1999
- ----------- ------------ -------------
PO, PO derivatives, isocyanates (pounds) 1,126 1,062
Co-products:
Styrene monomer (pounds) 899 676
TBA and derivatives (gallons) 279 268
Operating income was $100 million for both the third quarter and the second
quarter 1999. The benefit from higher sales volumes in the third quarter was
offset by lower third quarter margins. Sales volumes for PO, PO derivatives and
isocyanates as a group increased 6% due to stronger worldwide demand for PO,
polyols and propylene glycol. SM volumes increased 33% primarily due to higher
exports, reflecting stronger worldwide demand, especially in Asia. TBA and
derivatives volumes also increased 4%. The benefit from these higher volumes
was offset by lower margins primarily due to higher raw materials costs. Raw
materials costs increased significantly versus the second quarter primarily due
to escalating crude oil prices during the first nine months of 1999. MTBE
margins were particularly affected versus the second quarter, reflecting both
higher raw materials (butane) costs as well as a less favorable sales mix.
EQUISTAR CHEMICALS, LP
THIRD QUARTER 1999 COMPARED TO SECOND QUARTER 1999
Equistar reported net income of $35 million in the third quarter 1999 compared
to $41 million in the second quarter 1999. Operating results improved versus
the second quarter, which included net gains on asset sales of $40 million
partly offset by the effect of production unit outages. The third quarter
operating improvement included higher margins for polymers as higher prices more
than offset higher raw materials costs. Petrochemicals margins were relatively
flat as higher petrochemicals prices were offset by higher raw materials costs.
The second quarter asset sales included the sale of Equistar's concentrates and
compounds business on April 30, 1999. The production unit outages involved
Equistar's Channelview olefins production units during parts of April and May
1999.
20
<PAGE>
1999 COMPARED TO 1998
The following tables reflect selected actual sales volume data, including
intersegment sales volumes, 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------------------- --------------------------------------
IN MILLIONS 1999 1998 1999 1998
- ----------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
SELECTED PETROCHEMICALS PRODUCTS:
Olefins (pounds) 4,760 4,692 13,795 12,061
Aromatics (gallons) 94 78 270 179
POLYMERS PRODUCTS (pounds) 1,541 1,654 4,804 4,858
MILLIONS OF DOLLARS
- -------------------
SALES AND OTHER OPERATING REVENUES:
Petrochemicals segment $1,300 $ 919 $ 3,250 $ 2,565
Polymers segment 533 489 1,465 1,601
Intersegment eliminations (362) (259) (932) (903)
---------------- ---------------- ---------------- ----------------
Total $1,471 $1,149 $ 3,783 $ 3,263
================ ================ ================ ================
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Petrochemicals segment $ 3 $ 4 $ 9 $ 9
Polymers segment 20 24 57 62
Unallocated 49 46 157 154
---------------- ---------------- ---------------- ----------------
Total $ 72 $ 74 $ 223 $ 225
================ ================ ================ ================
OPERATING INCOME:
Petrochemicals segment $ 99 $ 84 $ 274 $ 281
Polymers segment 26 35 46 170
Unallocated (49) (50) (157) (159)
---------------- ---------------- ---------------- ----------------
Total $ 76 $ 69 $ 163 $ 292
================ ================ ================ ================
</TABLE>
PETROCHEMICALS SEGMENT
REVENUES--Revenues for the third quarter 1999 of $1.3 billion increased 41% over
revenues of $919 million in the comparable 1998 period. The increase was
primarily due to higher average sales prices as volumes were relatively flat.
The increase in average sales prices reflects an upward trend in 1999 compared
to a downward trend in the 1998 period. U.S. market sales prices began
decreasing in the fourth quarter of 1997 and continued their downward trend
through most of 1998, reaching a low in the fourth quarter 1998. Sales prices
increased throughout the first nine months of 1999, due to tighter supplies and
rising raw materials costs.
Revenues for the first nine months of 1999 of $3.3 billion increased 27% versus
revenues of $2.6 billion in the comparable 1998 period. The increase was due to
both higher sales volumes and higher average sales prices during the period.
Sales volumes increased about 17% during the period primarily as a result of the
addition of the Occidental Contributed Business in mid-May 1998. As a result of
rising prices during 1999 and declining prices during 1998, as noted above,
average sales prices for the first nine months of 1999 exceeded average sales
prices for the first nine months of 1998.
OPERATING INCOME--Operating income of $99 million in the third quarter 1999
increased versus $84 million in the third quarter 1998 primarily due to higher
product margins. Margins improved in the third quarter 1999 compared to the
third quarter 1998 as average sales prices increased more than raw materials
costs. Operating income of $274 million in the first nine months of 1999
decreased slightly versus $281 million in the comparable 1998 period. The
effects of lower product margins and plant outages in 1999 were substantially
offset by the benefit of increased volumes in 1999. On a nine-month basis, 1999
margins were lower than 1998 margins, as average raw materials costs increased
more than average sales prices. The 1999 plant outages included the olefins
production unit outages
21
<PAGE>
in the second quarter 1999 and the scheduled LaPorte plant turnaround completed
in the first quarter 1999. The increase in sales volumes was primarily a result
of the addition of the Occidental Contributed Business in mid-May 1998.
POLYMERS SEGMENT
REVENUES--Revenues of $533 million in the third quarter 1999 increased 9% versus
$489 million in the comparable 1998 period. The increase reflects higher
average industry sales prices in the third quarter 1999 compared to the third
quarter 1998, partly offset by lower sales volumes. Polymers sales prices
increased throughout 1999 due to higher raw materials costs compared to a
downward trend in prices and raw materials costs in 1998. Volumes declined due
to the shut down of less efficient HDPE and other polymer product capacity,
plant maintenance and the sale of the concentrates and compounds business.
Equistar started up new HDPE capacity in the fourth quarter 1999.
Revenues of $1.5 billion in the first nine months of 1999 decreased versus $1.6
billion in the comparable 1998 period. The decrease was primarily due to lower
average industry sales prices, which began decreasing during the fourth quarter
1997 and continued in a downward trend throughout 1998. Although industry sales
prices increased throughout the first nine months of 1999, average sales prices
for the first nine months of 1999 were lower than the comparable 1998 period.
OPERATING INCOME--Operating income of $26 million for the third quarter 1999
decreased versus $35 million in the comparable 1998 period. The decrease was
due equally to lower margins and lower sales volumes. Margins were slightly
lower in third quarter 1999 than third quarter 1998, as average sales price
increases substantially offset raw materials cost increases. Operating income
of $46 million for the first nine months of 1999 decreased versus $170 million
in the comparable 1998 period. The decrease was primarily due to substantially
lower margins for the first nine months of 1999 compared to the nine months half
of 1998 as raw materials cost increases outpaced sales price increases.
INTEREST EXPENSE, NET AND OTHER INCOME
Interest expense, net of $42 million in the third quarter 1999 was comparable to
$40 million in the third quarter 1998. Interest expense, net increased to $127
million in the first nine months of 1999 from $98 million in the first nine
months of 1998. The increase reflected both higher interest expense and lower
interest income. The higher interest expense was due to the refinancing of $900
million of debt through the issuance of Equistar's senior unsecured notes in
February 1999, which carry a higher fixed rate of interest, and higher levels of
debt due to the addition of the Occidental Contributed Business in mid-May 1998.
The decrease in interest income reflects payment in July 1998 of a note
receivable from Lyondell. Other income of $47 million in the first nine months
of 1999 primarily consists of net gains on asset sales, including the sale of
the concentrates and compounds business on April 30, 1999.
LYONDELL-CITGO REFINING LP
REFINING SEGMENT
THIRD QUARTER 1999 COMPARED TO SECOND QUARTER 1999
LCR had net income of $21 million in the third quarter 1999 compared to a loss
of $38 million in the second quarter 1999. The significant improvement in the
third quarter 1999 was due to higher crude throughput resulting from a
combination of better operating performance and higher available volumes from
inventory accumulated during the second quarter. These volumes were partially
offset by lower deliveries from PDVSA Oil during the third quarter. The second
quarter 1999 was negatively impacted by costs and lower processing rates related
to operating unit
22
<PAGE>
outages and, to a lesser extent, by reduced allocations and deliveries of
Venezuelan extra heavy crude oil. The shutdown of a 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. This crude oil was
put into inventory in the second quarter 1999 and processed during the third
quarter 1999, benefiting that quarter and reducing inventory levels. Total crude
oil processing rates averaged 241,000 barrels per day in the third quarter 1999
compared to 202,000 barrels per day in the second quarter 1999. LCR is pursuing
recoveries under its insurance policies and claims against third parties with
respect to the production unit outages.
1999 COMPARED TO 1998
The following table sets forth average daily sales volumes for LCR's refined
products:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------------------- ---------------------------------------
THOUSAND BARRELS PER DAY 1999 1998 1999 1998
- ------------------------ ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Refined products:
Gasoline 114 118 112 120
Diesel and heating oil 71 85 64 78
Jet fuel 20 17 17 16
Aromatics 10 10 10 10
Other refined products 107 101 104 100
---------------- ---------------- ---------------- -----------------
Total refined products volumes 322 331 307 324
================ ================ ================ =================
</TABLE>
The following table sets forth average daily processing rates at the Refinery:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------------------- ---------------------------------------
THOUSAND BARRELS PER DAY 1999 1998 1999 1998
- ------------------------ ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Crude processing rates:
Crude Supply Agreement--coked 192 221 182 226
Other heavy crude oil--coked 12 31 12 11
Other crude oil 37 16 39 19
---------------- ---------------- ---------------- -----------------
Total crude oil 241 268 233 256
================ ================ ================ =================
</TABLE>
REVENUES--Revenues of $780 million in the third quarter 1999 increased 56%
compared to $499 million in the third quarter 1998. The increase was due to
higher prices, partly offset by a 3% decrease in volumes. The increase in
prices reflects significantly higher crude oil and gasoline prices in the third
quarter 1999 versus the third quarter 1998. Volumes declined compared to 1998
primarily due to reduced allocations and deliveries from PDVSA Oil.
Revenues of $1.7 billion in the first nine months of 1999 increased 9% compared
to $1.6 billion in the 1998 period. The 1999 increase over the 1998 period was
due to higher average prices, partly offset by a 5% decrease in sales volumes.
Average crude oil and gasoline prices declined throughout 1998 and began
increasing steadily throughout 1999. As a result, average prices for the first
nine months of 1999 are higher than average prices for the comparable 1998
period. In addition to reduced allocations and deliveries from PDVSA Oil, the
sales volume decrease for the first nine months of 1999 versus the comparable
1998 period also reflected lower processing rates as a result of the outages in
the second quarter 1999.
OPERATING INCOME--LCR had pretax income of $21 million in the third quarter 1999
compared to pretax income of $54 million in the third quarter 1998. LCR had a
pretax loss of $2 million in the first nine months of 1999 compared to pretax
income of $137 million in the first nine months of 1998. The decreases
primarily reflected lower throughput and a less favorable mix of raw materials
due to reduced allocations and deliveries of extra heavy Venezuelan crude oil
and more processing of lower-margin spot crude. Margins on the crude oil
purchased in the spot market were also lower compared to 1998. The first nine
months 1999 results were also negatively affected by the lower operating rates
related to the second quarter 1999 production unit outages.
23
<PAGE>
FINANCIAL CONDITION
OPERATING ACTIVITIES--Lyondell's cash provided by operating activities totaled
$230 million for the first nine months of 1999, compared to $130 million for the
first nine months of 1998. Working capital increased in 1999 primarily due to
higher receivables. This was due to a second quarter 1999 repurchase of $65
million of accounts receivable previously sold under a three-year receivables
purchase agreement and the impact of higher 1999 sales. The increase in working
capital was partly offset by cash from customer advances and tax refunds. Cash
from 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 $90 million in the
first nine months of 1999. Joint venture capital expenditures were $112 million
by Equistar, $43 million by LCR and $16 million by LMC. Lyondell's pro rata
share of the joint ventures' total capital expenditures was $83 million.
Distributions from affiliates in excess of their earnings for the first nine
months of 1999 were $82 million, including $8 million from Equistar and $70
million from LCR. Lyondell loaned $28 million to LCR for capital, maintenance
and environmental projects in the first nine months of 1999 and contributed $17
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 10.875% senior subordinated notes due 2009,
$1.0 billion of 9.875% senior secured notes due 2007, and $900 million of 9.625%
senior secured notes due 2007. 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. Term Loan E bears interest at LIBOR plus 3.875%;
Term Loan F bears interest at LIBOR plus 3.5%. 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 maturing June 30, 2003 and June 30, 2005,
respectively. Unamortized debt issuance costs and amendment fees of $35 million
after tax were written off and reported as an extraordinary loss on
extinguishment of debt in 1999.
The Company paid regular quarterly dividends of $.225 per share of common stock
in the first three quarters of 1999 for a total of $70 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.
LCR has $450 million outstanding under a five-year credit facility, which
expires in May 2000. Lyondell and CITGO expect that LCR will be able to extend
or refinance the indebtedness. However, since there is presently no definitive
agreement in place, LCR has classified the debt as a current liability.
CURRENT BUSINESS OUTLOOK
Lyondell expects continued pressure on product margins due to the recent rise in
raw materials costs, chemical industry consolidations and upcoming capacity
additions. In addition, reduced allocations and deliveries of PDVSA crude oil to
LCR as a result of OPEC limitations are ongoing and expected to continue to
negatively impact LCR's operating results. Industry forecasts project a
continuing difficult business environment due to industry capacity additions.
Lyondell has participated in the consolidation trend in the industry with the
formation of Equistar and the subsequent acquisition of ARCO Chemical.
Management's current priority is to pay down the acquisition-related debt, and
thus improve Lyondell's financial flexibility. To accomplish this, it will focus
on actively managing its current portfolio of assets and maximizing earnings and
cash flow. While Lyondell does not control raw material costs or general market
conditions, management plans to maximize earnings and cash flow by focusing on
the things that it can directly influence such as continuing to reduce working
capital, achieve cost reductions and employ a disciplined capital program.
YEAR 2000
Lyondell, Equistar and LCR use many 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
24
<PAGE>
"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"), replaced 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 Lyondell'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.
Lyondell, along with representatives of Equistar and LCR, have established a
Year 2000 Executive Sponsor Team. The Executive Sponsor Team provides oversight
to individual Year 2000 Steering Committees within each organization.
Each steering committee has completed an assessment of the state of readiness of
the IT and non-IT systems of Lyondell and its joint ventures within the scope of
the project. These assessments covered both 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 Year 2000 assessment process for each
organization consisted 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 have been completed. Testing and
final implementation for critical systems are substantially complete. Year 2000
simulation drills were successfully conducted at various sites, and the results
and recommendations thereof communicated to and implemented at those and other
sites of each organization. Testing and implementation of non-critical systems
will be complete by year-end 1999. The progress of these phases as of September
30, 1999 is summarized as follows:
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 September 30, 1999
<TABLE>
<CAPTION>
Inventory Assessment Remediation Testing Implementation
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lyondell 99% 99% 99% 98% 96%
- --------------------------------------------------------------------------------------
Equistar 99% 99% 99% 95% 94%
- --------------------------------------------------------------------------------------
LCR 99% 99% 99% 92% 88%
- --------------------------------------------------------------------------------------
</TABLE>
As of September 30, 1999, Year 2000 spending by Lyondell, Equistar and LCR for
the replacement of both IT and non-IT systems is summarized as follows:
MILLIONS OF DOLLARS LYONDELL EQUISTAR LCR
- ------------------- -------- -------- ---
Spending through September 30, 1999.... $11 $ 7 $2
Estimated additional spending.......... 2 3 1
--- --- --
Total estimated spending........... $13 $10 $3
=== === ==
Lyondell share of estimated spending... $13 $ 4 $2
=== === ==
The total spending of $26 million for all three organizations represents an
estimate within a range between $23 million and $27 million, of which Lyondell's
proportionate share would be $17 million to $20 million. The estimated amount
does not include costs incurred in connection with the implementation of SAP-
related software. Spending is funded by cash generated from operations.
Approximately 15% of the estimated spending could qualify for capitalization.
Management believes that all significant systems controlled by Lyondell will be
Year 2000 ready by year-end 1999.
25
<PAGE>
The steering committees have also substantially completed an assessment of the
readiness of significant customers and suppliers, primarily through formal
written representations as to Year 2000 readiness. Lyondell's operations are
dependent upon a continuous supply of key services from raw material suppliers
and utility and transportation providers. Lyondell has identified and contacted
a substantial portion of its critical third party suppliers and customers and,
at this point, has no reason to believe that they will not be Year 2000
compliant or that any significant Year 2000 problems will result from third
party sources. However, 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. A Year 2000 failure by
one of Lyondell's key suppliers could interfere with its ability to make or
deliver products, utilities or transportation services, and this, in turn, could
cause disruptions in Lyondell's operations. These potential disruptions could
make it necessary to seek alternative sources of supply, which may be more
expensive or difficult to obtain.
Lyondell 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 is nearing completion.
Because of the inherent uncertainty due to possible unanticipated failures by
third-party customers and suppliers, Lyondell is unable to accurately assess the
extent and resulting materiality of the impact of possible Year 2000 failures.
In the most reasonably likely worst case scenario, controlled plant shutdowns
using Lyondell's standard shutdown procedures might be necessitated by failures
of utility providers or suppliers affecting plant operability. In such event,
Lyondell would evaluate the need to reroute or reschedule the production at
another Lyondell facility or find alternative suppliers for its customers.
These events could have a material adverse effect on Lyondell's operations,
liquidity or financial position. However, management believes that the
completion of Lyondell's Year 2000 assessment process has significantly reduced
the probability of any significant disruptions of operations from internal
sources and that its contingency plans should mitigate the potential impact of
unanticipated failures by third party customers and suppliers.
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. Lyondell
is currently evaluating the effect of SFAS No. 133.
ITEM 3. DISCLOSURE OF MARKET RISK.
Lyondell's exposure to market risks is described in Item 7a of its Annual Report
on Form 10-K for the year ended December 31, 1998. Except for the settlement of
the Treasury Locks in the second quarter of 1999, Lyondell's exposure to market
risks has not changed materially in the period ended September 30, 1999.
26
<PAGE>
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. Lyondell'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, Lyondell'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.
27
<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 September 30, 1999 and through the date hereof:
Date of Report Item No. Financial Statements
-------------- -------- --------------------
August 16, 1999 5, 7 Yes
28
<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 15, 1999 /s/ KELVIN R. COLLARD
-----------------------------------
Kelvin R. Collard
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 258
<SECURITIES> 0
<RECEIVABLES> 602
<ALLOWANCES> 8
<INVENTORY> 501
<CURRENT-ASSETS> 1,375
<PP&E> 4,592
<DEPRECIATION> 216
<TOTAL-ASSETS> 9,122
<CURRENT-LIABILITIES> 748
<BONDS> 6,256
0
0
<COMMON> 120
<OTHER-SE> 991
<TOTAL-LIABILITY-AND-EQUITY> 9,122
<SALES> 2,685
<TOTAL-REVENUES> 2,685
<CGS> 2,052
<TOTAL-COSTS> 2,052
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 451
<INCOME-PRETAX> (17)
<INCOME-TAX> 5
<INCOME-CONTINUING> (22)
<DISCONTINUED> 0
<EXTRAORDINARY> (35)
<CHANGES> 0
<NET-INCOME> (57)
<EPS-BASIC> (.57)
<EPS-DILUTED> (.57)
</TABLE>
