<PAGE>
FILED PURSUANT TO RULE 424(b)(5)
NOS. 333-60429
333-60429-01
333-60429-02
333-60429-03
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus supplement is not complete and may be +
+changed. This prospectus supplement and the accompanying prospectus do not +
+constitute an offer to sell these securities and we are not soliciting offers +
+to buy these securities in any jurisdiction where these activities are not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion Dated April 19, 1999
Prospectus Supplement
(to Prospectus dated April 5, 1999)
35,000,000 Shares
[Lyondell Chemical Company]
Lyondell Chemical Company
Common Stock
(Par value $1.00 per share)
----------
We are offering 35,000,000 shares of our common stock.
Our common stock trades on the New York Stock Exchange under the symbol "LYO."
On April 16, 1999, the last reported sale price for our common stock on the New
York Stock Exchange was $15 7/16 per share.
Investing in the common stock involves certain risks. See "Risk Factors"
beginning on page S-10 of this prospectus supplement and on page 2 of the
accompanying prospectus.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus
supplement or the accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
----------
<TABLE>
<CAPTION>
Proceeds to
Underwriting Lyondell
discounts before other
Price to and offering
public commissions expenses
------------ ------------ ------------
<S> <C> <C> <C>
Per share................................ $ $ $
Total.................................... $ $ $
</TABLE>
----------
Lyondell has granted the underwriters the right to purchase up to an additional
5,250,000 shares of common stock to cover overallotments.
----------
Joint Book-Running Managers
Donaldson, Lufkin & Jenrette____________________________________J.P.Morgan & Co.
----------
Goldman, Sachs & Co. Morgan Stanley Dean Witter
Salomon Smith Barney Schroder & Co. Inc.
Prospectus Supplement dated , 1999
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Prospectus Supplement Page
<S> <C>
Prospectus Supplement Summary....... S-1
Risk Factors........................ S-10
Use of Proceeds..................... S-12
Price Range of Lyondell Common Stock
................................... S-12
Dividend Policy..................... S-13
Capitalization...................... S-14
Unaudited Pro Forma Financial
Statements......................... S-15
Selected Historical Financial Data.. S-20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... S-23
Description of Indebtedness......... S-32
Forward-Looking Statements.......... S-37
Business............................ S-38
Management.......................... S-47
Underwriting........................ S-52
Legal Matters....................... S-54
Experts............................. S-54
Index to Financial Statements....... F-1
</TABLE>
<TABLE>
<CAPTION>
Prospectus Page
<S> <C>
The Company........................................................... 2
Forward-Looking Statements............................................ 2
Risk Factors.......................................................... 2
Use of Proceeds....................................................... 9
Ratio of Earnings to Fixed Charges.................................... 9
Description of Capital Stock.......................................... 9
Description of Debt Securities........................................ 15
Plan of Distribution.................................................. 23
Legal Matters......................................................... 24
Experts............................................................... 24
Available Information................................................. 25
Incorporation of Certain Documents by Reference....................... 25
</TABLE>
You should rely only on the information contained or incorporated by
reference in this prospectus supplement or the accompanying prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale of such securities is not permitted. You
should assume that the information appearing in this prospectus supplement or
the accompanying prospectus, as well as information we previously filed with
the Securities and Exchange Commission and incorporated by reference, is
current only as of its respective date. Our business, financial condition,
results of operations and prospects may have changed since that date.
ii
<PAGE>
Prospectus Supplement Summary
This summary highlights information found elsewhere in this prospectus
supplement. It is not complete and may not contain all of the information that
you should consider before investing in the common stock. You should read this
entire prospectus supplement and the accompanying prospectus carefully,
including "Risk Factors" beginning on page S-10 of this prospectus supplement
and page 2 of the accompanying prospectus, and the financial statements and the
notes to those statements. Pro forma disclosures assume that Lyondell Chemical
Worldwide, Inc. (formerly ARCO Chemical Company) (LCW) was acquired on January
1, 1998. Lyondell will merge LCW into itself concurrently with the completion
of the sale of the common stock. Unless otherwise specified, information in
this prospectus supplement assumes that the underwriters' overallotment option
will not be exercised.
Lyondell Chemical Company
Lyondell Chemical Company is a global chemical company with leading market
positions in all of its major products, world-scale production capacity and low
cost operations. Lyondell is vertically integrated into its key raw materials
through its equity ownerships in Equistar Chemicals, LP, LYONDELL-CITGO
Refining LP (LCR) and Lyondell Methanol Company, L.P. This enhances Lyondell's
operating leverage and, with its core business of less cyclical chemical
products, mitigates the petrochemical and refining cycles affecting its joint
ventures. Lyondell's total pro forma revenues plus its pro rata share of
revenues from its three joint ventures (including sales to affiliates) were
$6.9 billion in 1998.
Lyondell's operations are comprised of four businesses:
Intermediate Chemicals and Derivatives (Lyondell/LCW)
Lyondell is the world's largest producer of propylene oxide (PO) and a
leading worldwide producer and marketer of PO derivatives, including polyether
polyols, propylene glycol (PG), propylene glycol ethers (PGE) and butanediol
(BDO). PO is a key component in the manufacture of urethanes and non-urethanes
products. Lyondell is the world's second largest supplier of toluene
diisocyanate (TDI), another key component of urethanes. End uses for Lyondell's
PO and PO derivatives include: flexible foam for automotive seating and
furniture; antifreeze and coolants; personal care products; coatings,
adhesives, sealants and elastomers; resins; and solvents.
Lyondell is also a major producer of styrene monomer and tertiary butyl
alcohol (TBA), co-products of its proprietary PO technology. Styrene monomer is
used to produce plastics and resins including polystyrene (used in household
goods such as disposable food service items and toys) and expandable
polystyrene (used in foam cups and containers, insulation and packaging).
Lyondell currently utilizes most of its TBA to make methyl tertiary butyl ether
(MTBE), a gasoline blending component used to reduce fuel emissions and enhance
octane. The intermediate chemicals and derivatives business is the only
business conducted through wholly owned Lyondell operations. In 1998, on a pro
forma basis and excluding equity income from its joint ventures, Lyondell
generated revenues of $3.6 billion and $751 million of EBITDA before net
unusual charges. For an explanation of the calculation of EBITDA before net
unusual charges, see the notes to "Summary Historical and Pro Forma Financial
Data" on page S-9.
Petrochemicals and Polymers (Equistar)
Lyondell owns 41 percent of Equistar, which is an integrated, low-cost
producer of petrochemicals and polymers. Equistar is North America's largest
producer of ethylene, propylene and polyethylene and third largest producer of
ethylene oxide. End uses for its products include a wide range of consumer and
industrial
S-1
<PAGE>
products such as packaging film; trash bags; plastic bottles; plastic caps and
other closures; rigid packaging; and carpet facing and backing. Equistar was
formed in December 1997 by combining the olefins, aromatics and polymers
businesses of Lyondell and Millennium Chemicals Inc. Equistar was expanded in
May 1998 with the addition of the olefins, ethylene oxide and derivatives
businesses of Occidental Chemical Corporation. Dan Smith, CEO of Lyondell, also
serves as CEO of Equistar. In 1998, Equistar's total revenues were $4.4 billion
(including $453 million in sales to LCW and LCR) and EBITDA before unusual
charges was $585 million.
Refining (LCR)
Lyondell owns 58.75 percent of LCR, which owns and operates North America's
largest extra heavy crude coking refinery, processing low cost 17(degrees) API
crude oil. LCR processes large volumes of this extra heavy crude oil into
premium petroleum products such as reformulated gasoline, low sulfur diesel,
jet fuel, aromatics and lubricants. LCR has a long-term crude oil supply
agreement with Petroleos de Venezuela, S.A. (PDVSA), the national oil company
of Venezuela. This agreement helps to stabilize earnings and cash flow through
an advantageous pricing formula. LCR was formed in 1993 as a joint venture with
CITGO Petroleum Corporation, an indirect wholly owned subsidiary of PDVSA. In
1998, LCR had total revenues of $2.1 billion (including $131 million in sales
to Equistar) and EBITDA before unusual charges of $323 million.
Methanol (Lyondell Methanol)
Lyondell owns 75 percent of Lyondell Methanol, the third largest producer of
methanol in the United States. Lyondell Methanol was formed in December 1996 by
Lyondell and MCN Investment Corporation, a producer of natural gas, the primary
feedstock for methanol. In 1998, Lyondell Methanol had total revenues of $104
million (representing sales to Equistar) and EBITDA of $18 million.
S-2
<PAGE>
The following chart shows the organization of Lyondell, as well as 1998
sales revenues for each of its joint ventures, of which Lyondell owns the
specified percentage. Sales revenues include sales to affiliates.
[CHART APPEARS HERE]
S-3
<PAGE>
Strategy
Lyondell's mission is to maximize total return to its stockholders and
increase cash flow through growth, improved profitability and reduced earnings
volatility.
Lyondell has been a leader in the ongoing restructuring of the chemical
industry, taking a series of steps to reposition its business portfolio over
the past several years. The following is a list of major actions Lyondell has
taken to fulfill this strategy:
<TABLE>
<C> <C> <S>
1993 -- Formation of LCR
1995 -- Acquisition of Alathon(TM) high density polyethylene business
1996 -- Formation of Lyondell Methanol
1997 -- Completion of $1.1 billion LCR upgrade project
1997 -- Creation of Equistar
1998 -- Expansion of Equistar with the addition of the Occidental assets
1998 -- Acquisition of ARCO Chemical Company
</TABLE>
Lyondell will continue to identify and evaluate opportunities for strategic
business combinations, including partnership arrangements such as Equistar and
LCR, as a means to provide profitable growth and further enhance Lyondell's
competitive positions. Lyondell actively seeks opportunities to maximize
efficiency or value through various transactions, including purchases or sales
of assets or contractual arrangements or joint ventures. To the extent
permitted under the terms of Lyondell's credit facility and other debt, some of
these transactions may be financed by additional borrowings or by the issuance
of Lyondell equity securities.
Building on Leading Market Positions and Technologies to Achieve Profitable
Growth
Lyondell intends to build on its leading market positions and technologies
to achieve consistent profitable growth. Today, Lyondell and Equistar hold
leading market positions in the majority of their primary products, as shown
below.
<TABLE>
<CAPTION>
North American Global
Product Market Position Market Position
------- --------------- ---------------
<S> <C> <C>
Lyondell
Propylene Oxide............................ 1 1
Urethanes:
Polyols.................................. 2 2
Toluene Diisocyanate..................... 2 2
Equistar
Ethylene................................... 1 2
Propylene.................................. 1 3
Polyethylene............................... 1 4
</TABLE>
Lyondell intends to increase sales by creating new markets for its products
through focused technological innovation and the development of higher value
products that create additional uses for Lyondell's primary products. To
achieve this goal, Lyondell is undertaking the following initiatives:
. Participating in anticipated global demand growth in urethanes and
performance chemicals using Lyondell's strengths in technology,
manufacturing, marketing and access to raw materials.
. Taking advantage of additional opportunities derived from Equistar's
North American market leadership and low cost position in olefins and
polyolefins.
. Strategically expanding Equistar's polymers technology and capacity by
focusing on higher value products with large market demand potential,
such as medium and high molecular weight high density polyethylene.
S-4
<PAGE>
. Continuing to exploit LCR's $1.1 billion upgrade of its refinery by
increasing the total volume of extra heavy, low cost crude oil processed
in the coking mode and producing a higher percentage of higher value
products.
Improving Profitability and Reducing Earnings Volatility
Lyondell's current business portfolio is strategically positioned to provide
integration and synergy opportunities in order to improve profitability and
reduce earnings cyclicality. In addition, Lyondell intends to continue its
ongoing cost reduction initiatives to maximize efficiency of its operations.
Integrating Businesses:
. By capitalizing on vertical integration opportunities, such as
competitive feedstock supply advantages between Lyondell and Equistar
and Equistar and LCR, in order to capture profit margins across a
wide range of products and to improve stability of production volumes
and earnings throughout Lyondell.
. Through increasing Equistar product sales and improving its marketing
efforts using the global expertise and market presence of Lyondell.
Reducing Costs and Achieving Synergies:
. By completing the cost reduction programs in place at Lyondell,
Equistar and LCR.
. Through realizing identified synergies and revenue enhancements
across Lyondell's business portfolio by optimizing manufacturing
operations, using more efficient purchase and distribution practices
and reducing overhead and staffing.
. By maximizing value from the strategic flexibility and optimization
potential inherent in Equistar's large number of plant sites,
feedstock flexibility and broad polymers product slate.
Debt Reduction and Refinancing Initiatives
Lyondell significantly increased its borrowed funds in 1998 in order to
acquire LCW. The decision to take advantage of this acquisition opportunity did
not alter management's view of an optimal long-term capital structure which
calls for a lower debt-to-equity ratio and an investment grade rating. Lyondell
is looking to the cash flow of its businesses, potential joint ventures
involving strategic assets, new equity capital, working capital initiatives,
potential asset sales, refinancing plans and other cash generating
opportunities to achieve this goal.
Management believes that Lyondell is well positioned through its leading
market positions, world-scale production capacity and low cost operations to
continue to satisfy its ongoing cash requirements through its share of cash
distributions from both Equistar and LCR and cash flow from its intermediate
chemicals and derivatives business, despite the fact that Equistar has recently
reached a low point in its business cycle, LCR is currently receiving a reduced
crude oil supply from PDVSA and styrene monomer is currently in trough
conditions. This positioning should also generate significant additional cash
flow when prices for certain cyclical products emerge from their current
troughs.
S-5
<PAGE>
Credit Facility Amendments and New Term Loan
Lyondell is amending its $7 billion credit facility to eliminate the
requirement to issue $1.25 billion in equity securities by July 23, 1999 and to
allow for the issuance of up to an additional $2.75 billion of senior secured
debt. As a condition to effectiveness of the amendments, Lyondell must issue a
minimum of $350 million of common stock, $500 million of subordinated notes and
$500 million of senior secured notes. The amended credit facility requires
Lyondell to issue $500 million of common stock or preferred stock by June 30,
2000 (including the common stock sold in this offering) and $1.5 billion of
other junior securities by June 2002 (including the subordinated notes being
sold concurrently with this offering in the partial refinancing of the credit
facility). The $1.5 billion junior securities requirement will be reduced by $2
for every $1 of common stock issued over $500 million and will be eliminated if
Lyondell repays all outstanding amounts under Term Loan C and Term Loan D and
achieves either (1) a total debt to adjusted EBITDA ratio (as defined in the
credit facility) of 3.0 to 1.0 or (2) a rating for its senior unsecured debt of
BB by Standard & Poor's and Ba2 by Moody's. The credit facility amendments will
provide the lenders with additional collateral, reprice the existing loans to
reflect market rates and reset certain financial covenants. The sales of notes
and common stock are contingent upon the effectiveness of the credit facility
amendments.
Lyondell is also seeking to raise an additional $500 million to $1 billion
through the borrowing of a new 7-year Term Loan E under the amended credit
facility. Proceeds from this new term loan would be used to partially repay
Term Loan D of the credit facility, which matures on June 30, 2000. The
offering of common stock, as well as the credit facility amendments and partial
refinancing, are not contingent upon the borrowing of Term Loan E.
S-6
<PAGE>
Common Stock Offering
Common stock offered by
Lyondell................ 35,000,000 shares
Common stock
outstanding after the
offering................ 112,065,442 shares
The number of shares shown as offered and outstanding
excludes 5,250,000 shares subject to an overallotment
option granted by Lyondell to the underwriters. The
number of shares shown as outstanding is given as of
March 31, 1999 and also excludes shares reserved for
issuance upon exercise of outstanding stock options.
Partial refinancing..... At the same time as this offering, Lyondell is
refinancing between $2 billion and $2.5 billion of
debt under its credit facility through the borrowing
of a new Term Loan E under the credit facility and
the sale of secured and subordinated notes to a
limited number of qualified institutional investors.
Conditions to closing... The completion of our proposed sale of common stock,
the sale of secured and subordinated notes and the
effectiveness of the credit facility amendments
described under "Description of Indebtedness--Credit
Facility Amendments" are all conditioned on each
other. The closing of Term Loan E is not a condition
to the closing of this offering.
Use of proceeds......... We will use the net proceeds from our proposed sale
of common stock and the partial refinancing of the
credit facility to repay a portion of the debt
incurred under our credit facility used to finance
the acquisition of LCW.
New York Stock Exchange
symbol................. LYO
Risk factors............ "Risk Factors" beginning on page S-10 of this
prospectus supplement and on page 2 of the
accompanying prospectus contain important information
regarding the common stock and Lyondell. Please read
those sections carefully before you decide whether to
invest in the common stock.
S-7
<PAGE>
Summary Historical And Pro Forma Financial Data
The data set forth below highlight information found elsewhere in this
prospectus supplement. This information is not complete and may not contain all
of the information that you should consider. You should read this entire
prospectus supplement and the accompanying prospectus, including the financial
statements and the notes to those statements. The pro forma data for 1998
present the results of Lyondell as if the credit facility was amended and our
proposed sale of common stock and partial refinancing of the credit facility
through the borrowing of a $750 million Term Loan E under the credit facility
and the sale of secured and subordinated notes were completed as of
December 31, 1998 for balance sheet purposes, and such transactions, as well as
the LCW acquisition and the repayments of debt described under "Unaudited Pro
Forma Financial Statements," were completed as of January 1, 1998 for income
statement purposes.
<TABLE>
<CAPTION>
Pro forma
Year ended December 31, year ended
----------------------- December 31,
1996(a) 1997(b) 1998(c) 1998
------- ------- ------- ------------
(Dollars in millions, except per
share amounts)
<S> <C> <C> <C> <C>
Income statement data:
Sales and other operating revenues....... $5,052 $2,878 $1,447 $ 3,553
Income from equity investments........... -- 132 256 256
Cost of sales............................ 4,570 2,250 1,089 2,668
Selling, general and administrative, and
research and development expenses....... 234 186 152 344
Operating income......................... 278 534 339 631
Net income............................... 126 286 52 13
Earnings per share--basic and diluted.... $ 1.58 $ 3.58 $ 0.67 $ 0.11
Weighted average common shares
outstanding (in thousands):
Basic.................................... 80,000 79,796 77,669 112,669
Diluted.................................. 80,045 79,813 77,699 112,699
Other data:
Capital expenditures..................... $ 609 $ 49 $ 64 $ 201
Depreciation and amortization(d)......... 110 84 138 307
EBITDA before net unusual charges(e)(f).. 384 509 292 751
Joint venture EBITDA before unusual
charges(e)(g):
Equistar (41% owned at December 31,
1998)................................. N/A 76 585 585
LCR (58.75% owned at December 31,
1998)................................. 46 274 323 323
Lyondell Methanol (75% owned at
December 31, 1998).................... 4 67 18 18
</TABLE>
<TABLE>
<CAPTION>
December 31,
1998
----------------
Actual Pro forma
------ ---------
(Dollars in
millions)
<S> <C> <C>
Balance sheet data:
Cash and cash equivalents...................................... $ 233 $ 162
Total assets................................................... 9,225 9,200
Total debt..................................................... 6,994 6,474
Total stockholders' equity..................................... 574 1,069
</TABLE>
(footnotes on following page)
S-8
<PAGE>
(a) Financial information for 1996 includes 12 months of operating results for
LCR and one month of operating results for Lyondell Methanol, each on a
consolidated basis.
(b) Financial information for 1997 includes 12 months of operating results for
Lyondell Methanol on a consolidated basis. It also includes 12 months of
operating results for LCR and one month of operating results for Equistar,
each accounted for as an equity investment.
(c) Financial information for 1998 includes 5 months of operating results for
LCW on a consolidated basis. It also includes 12 months of operating
results for Equistar, LCR and Lyondell Methanol, each accounted for as an
equity investment.
(d) Includes amortization of debt issuance costs of $23 million for 1998
(actual) and $25 million for 1998 (pro forma).
(e) EBITDA before net unusual charges is calculated as net income before (1)
equity income from joint ventures and unusual charges associated with joint
ventures, (2) net interest expense, (3) taxes, (4) depreciation and
amortization and (5) net unusual charges. While EBITDA should not be
considered as a substitute for operating income or a better indicator of
liquidity than cash flows from operating activities, which are determined
in accordance with generally accepted accounting principles, it is included
in this prospectus supplement to provide additional information with
respect to the ability of an issuer to meet its future debt service,
capital expenditure and working capital requirements. EBITDA is also
included because management believes that certain investors find it to be a
useful tool for measuring the ability to service debt.
(f) Net unusual charges for Lyondell were $16 million in 1997, $61 million in
1998 (actual) and $41 million in 1998 (pro forma).
(g) Unusual charges were $42 million in 1997 and $35 million in 1998 for
Equistar and $10 million in 1998 for LCR.
S-9
<PAGE>
Risk Factors
There are many risks that may affect your investment in the common stock.
Some of these risks, but not all of them, are listed below. You should
carefully consider these risks and the risks described beginning on page 2 of
the accompanying prospectus before buying the common stock.
Lyondell's balance sheet is highly leveraged.
As of December 31, 1998, Lyondell had $7.0 billion of consolidated debt,
including the current portion of long-term debt. This debt amounted to
approximately 90% of Lyondell's total capitalization. After giving effect to
this offering of common stock, the credit facility amendments and the partial
refinancing of the credit facility, Lyondell would have had $6.5 billion of
debt, calculated on the same basis, and total debt would have amounted to
approximately 83% of Lyondell's total capitalization. Lyondell's consolidated
debt amounts do not include $2.9 billion in joint venture debt ($713 million of
which is Equistar debt for which Lyondell remains contingently liable).
Lyondell's ability to pay or to refinance its debt will depend on future
operating performance, which will be affected by general economic, financial,
competitive, legislative, regulatory, business and other factors, many of which
are beyond its control. Lyondell anticipates that its operating cash flow,
together with money Lyondell can borrow under its credit facility, will be
sufficient to meet anticipated future operating expenses and capital
expenditures. However, if future operating cash flows are less than currently
anticipated, Lyondell may be forced to reduce or delay acquisitions or capital
expenditures, sell assets or reduce operating expenses.
After giving effect to the proposed sale of common stock and the partial
refinancing of the credit facility through the borrowing of a $750 million Term
Loan E under the credit facility and the sale of secured and subordinated
notes, approximately $1.0 billion of Lyondell's remaining outstanding debt
(including $555 million of scheduled principal amortization on Term Loan A and
Term Loan B) will be required to be repaid by June 30, 2000. Lyondell expects
that most of this debt will be repaid using the proceeds of capital markets
issuances, with the remainder being repaid using cash from operations and
proceeds from asset sales or joint venture transactions. The amended credit
facility will specifically require Lyondell to issue additional amounts of
common stock by June 30, 2000 and other junior securities by June 30, 2002.
Lyondell may need to issue large amounts of additional equity or debt
securities to satisfy these obligations. Lyondell cannot assure you that it
will be able to sell these securities on satisfactory terms, if at all.
Lyondell's debt agreements may restrict our ability to take certain actions.
Lyondell will be subject to debt covenants relating to $1.5 billion of notes
that limit Lyondell's ability to engage in certain transactions. These
covenants limit Lyondell's ability to:
. incur additional debt or issue subsidiary preferred stock;
. increase dividends on its capital stock;
. redeem or repurchase capital stock or repurchase subordinated debt;
. engage in transactions with affiliates, except on an arms-length basis;
. create liens or engage in sale and leaseback transactions;
. make some types of investments and sell assets; and
. consolidate or merge with, or sell substantially all its assets to,
another person.
Lyondell's credit facility requires it to maintain specified financial
ratios and satisfy certain other financial condition tests. Lyondell's ability
to meet those financial ratios and tests can be affected by events beyond its
S-10
<PAGE>
control, and Lyondell cannot assure you that it will be able to satisfy those
covenants. The credit facility also contains covenants that limit Lyondell's
ability to:
. increase distributions with respect to its capital stock;
. make some types of investments; and
. allow its subsidiaries to incur some types and amounts of debt.
A breach of any of these provisions could permit the lenders to declare all
amounts outstanding under the credit facility to be immediately due and payable
and terminate all commitments to extend further credit. If Lyondell were unable
to repay those amounts, the lenders could proceed against the collateral
granted to them to secure that debt. Under the credit facility amendments and
the partial refinancing, Lyondell will pledge a substantial portion of its
assets as security for obligations under the credit facility and the secured
notes.
S-11
<PAGE>
Use of Proceeds
The net proceeds to Lyondell from this offering of 35 million shares of
common stock at an assumed offering price of $15 7/16 per share (the closing
price on April 16, 1999) and the partial refinancing of the credit facility
through the borrowing of Term Loan E and the sale of secured and subordinated
notes are estimated to be approximately $2.72 billion, after deducting
underwriting discounts and estimated offering expenses payable by Lyondell.
Lyondell will use the net proceeds to repay in full the $1.25 billion principal
amount outstanding under Term Loan C of the credit facility and to partially
repay the $2.0 billion principal amount outstanding under Term Loan D of the
credit facility. Term Loan C currently bears interest at LIBOR plus 2% and
matures on June 30, 1999. Term Loan D currently bears interest at LIBOR plus 2%
and matures on June 30, 2000. For information about Lyondell's credit facility
and the credit facility amendments, see "Description of Indebtedness."
Price Range of Lyondell Common Stock
Lyondell's common stock, par value $1.00 per share, is listed on the New
York Stock Exchange under the symbol "LYO." The reported high and low sale
prices of the Lyondell common stock on the New York Stock Exchange (New York
Stock Exchange Composite Tape) for each quarter from January 1, 1997 through
April 16, 1999 were:
Price Range of Common Stock
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
1997:
First Quarter....................................... 25 1/2 21 5/8
Second Quarter...................................... 23 5/8 18 3/8
Third Quarter....................................... 27 3/8 21 7/8
Fourth Quarter...................................... 27 1/4 23 15/16
1998:
First Quarter....................................... 36 1/8 23 1/4
Second Quarter...................................... 38 1/8 26 1/2
Third Quarter....................................... 30 15/16 19 7/16
Fourth Quarter ..................................... 22 7/16 15
1999:
First Quarter....................................... 18 1/4 12 11/16
Second Quarter (through April 16, 1999)............. 16 1/16 11 13/16
</TABLE>
On April 16, 1999, the last reported sale price of the Lyondell common stock
on the New York Stock Exchange was $15 7/16 per share. As of March 31, 1999,
there were 2,097 holders of record of common stock.
S-12
<PAGE>
Dividend Policy
In every quarter since January 1, 1994, Lyondell has declared and paid a
quarterly dividend of $0.225 per share of common stock. The declaration and
payment of dividends is at the discretion of Lyondell's Board of Directors. The
declaration and payment of future dividends and the amount of any future
dividends will be dependent upon Lyondell's results of operations, financial
condition, cash position and requirements, investment opportunities, future
prospects and other factors deemed relevant by the Board of Directors.
Lyondell's credit facility and the indentures governing the secured and
subordinated notes each permit Lyondell to pay common dividends at a quarterly
rate of up to $0.225 per share, so long as no default has occurred or would
occur upon payment of the dividend. In the case of the indentures, the
aggregate quarterly dividend may be limited to $0.225 per share multiplied by a
maximum number of shares. The maximum number for this purpose is the number
that will be outstanding upon completion of this offering plus amounts that may
be issued for specified purposes after the offering. This limitation would not
apply if a test is met based on cumulative earnings, restricted payments and
other factors.
Subject to these and other legal considerations, Lyondell currently intends
to distribute to its stockholders cash dividends on its common stock at a
quarterly rate of $0.225 per share. During 1997 and 1998, Lyondell paid $72
million and $70 million in dividends, respectively. During the first quarter of
1999, Lyondell paid $17 million in dividends to its stockholders.
The operation of certain of Lyondell's employee benefit plans may result in
the issuance of Lyondell common stock upon the exercise of options granted to
employees of Lyondell, including its officers. Although the terms of these
plans provide that additional shares may be issued to satisfy Lyondell's
obligations under the options, Lyondell generally intends to cause Lyondell
common stock to be repurchased in the market or issued from treasury shares in
order to satisfy these obligations.
S-13
<PAGE>
Capitalization
The following table sets forth the capitalization of Lyondell as of December
31, 1998 (1) on an historical basis and (2) as adjusted to reflect:
. this offering of 35 million shares of common stock at an assumed offering
price of $15 7/16 per share (the closing price on April 16, 1999), and
the application of the net proceeds to reduce amounts outstanding under
the credit facility;
. the refinancing of $2.25 billion of debt under the credit facility
through the borrowing of a $750 million Term Loan E under the credit
facility and the sale of secured and subordinated notes; and
. the amended terms of the credit facility.
<TABLE>
<CAPTION>
As of
December 31, 1998
-------------------
Actual As adjusted
------ -----------
(Dollars in
millions)
<S> <C> <C>
Cash and cash equivalents (a)............................. $ 233 $ 162
====== ======
Debt, including current maturities of long-term debt (b):
Secured debt
Credit facility (c)................................... 6,350 4,330 (d)
Senior secured notes.................................. 1,000
Debentures (e)........................................ 624 624
Senior subordinated notes............................... 500
Other debt.............................................. 20 20
------ ------
Total debt, including current maturities of long-term
debt................................................. 6,994 6,474
------ ------
Minority interest......................................... 216 216
------ ------
Stockholders' equity:
Common stock, 250,000,000 shares authorized; 80,000,000
issued (historical); 115,000,000 issued pro forma as
adjusted............................................... 80 115
Additional paid-in capital.............................. 158 643
Retained earnings....................................... 387 362 (f)
Accumulated comprehensive income........................ 32 32
Treasury stock, at cost, 2,978,203 shares............... (83) (83)
------ ------
Total stockholders' equity............................ 574 1,069
------ ------
Total capitalization...................................... $7,784 $7,759
====== ======
</TABLE>
- --------
(a) The decrease reflects credit facility amendment fees and debt issuance
costs aggregating $71 million.
(b) Does not include $2.9 billion in joint venture debt ($713 million of which
is Equistar debt for which Lyondell remains contingently liable).
(c) As of December 31, 1998, debt under the credit facility was secured by a
pledge of subsidiary stock and a pledge of Lyondell's rights to
distributions from certain existing joint ventures. Lyondell will grant
additional security in connection with the credit facility amendments.
(d) Assumes the borrowing of a $750 million Term Loan E under the credit
facility. See note (q) to the unaudited pro forma financial statements
included elsewhere in this prospectus supplement.
(e) Debentures were not secured as of December 31, 1998, but will be secured at
the time the credit facility amendments become effective.
(f) The decrease reflects write-offs of certain deferred debt issuance costs
and credit facility amendment fees, net of tax.
S-14
<PAGE>
Unaudited Pro Forma Financial Statements
The unaudited pro forma balance sheet set forth below gives effect to:
. this offering of 35 million shares of common stock at an assumed
offering price of $15 7/16 per share (the closing price on April 16,
1999) and the application of the net proceeds to reduce amounts
outstanding under the credit facility;
. the refinancing of $2.25 billion of debt under the credit facility
through the borrowing of a $750 million Term Loan E under the credit
facility and the sale of secured and subordinated notes; and
. the amended terms of the credit facility;
as if such transactions were completed as of December 31, 1998.
The unaudited pro forma income statement set forth below gives effect to the
transactions described above in addition to:
. the acquisition of LCW in a transaction accounted for as a purchase;
. the repayment of a $345 million note payable to Equistar; and
. the repayment of certain other Lyondell and LCW debt;
as if all such transactions were completed as of January 1, 1998.
The unaudited pro forma financial statements do not necessarily reflect the
results of operations or financial position of Lyondell that would have
resulted had such transactions actually been consummated as of such dates.
Also, they are not necessarily indicative of the future results of operations
or future financial position of Lyondell.
You should read the unaudited pro forma financial statements in conjunction
with the historical financial statements and notes of Lyondell and its joint
ventures which are included herein and incorporated by reference to Lyondell's
annual report on Form 10-K for the year ended December 31, 1998.
S-15
<PAGE>
Lyondell Chemical Company
Unaudited Pro Forma Balance Sheet
As of December 31, 1998
<TABLE>
<CAPTION>
Actual Pro forma
Lyondell Adjustments Lyondell
-------- ----------- ---------
(Dollars in millions)
<S> <C> <C> <C>
Cash and cash equivalents..................... $ 233 $ (71)(a) $ 162
Accounts receivable, net...................... 479 479
Inventories................................... 550 550
Prepaid expenses and other current assets..... 64 64
------ ------- ------
Total current assets........................ 1,326 (71) 1,255
Property, plant and equipment, net............ 4,511 4,511
Investments and long-term receivables......... 1,078 1,078
Deferred charges and other assets............. 880 (18)(b)
64 (a) 926
Goodwill...................................... 1,430 1,430
------ ------- ------
Total assets................................ $9,225 $ (25) $9,200
====== ======= ======
Accounts payable.............................. $ 253 $ 253
Current maturities of long-term debt.......... 1,603 $(1,250)(c)
8 (d) 361
Other accrued liabilities..................... 481 481
------ ------- ------
Total current liabilities................... 2,337 (1,242) 1,095
Long-term debt, less current maturities....... 5,391 2,242 (d)
(1,520)(c) 6,113
Other liabilities and deferred credits........ 294 294
Deferred income taxes......................... 413 413
Minority interest............................. 216 216
Stockholders' equity:
Common stock, 250,000,000 shares authorized;
80,000,000 issued (historical); 115,000,000
issued pro forma as adjusted............... 80 35 (e) 115
Additional paid-in capital.................. 158 485 (e) 643
Retained earnings........................... 387 (25)(b) 362
Accumulated comprehensive income............ 32 32
Treasury stock, at cost, 2,978,203 shares... (83) (83)
------ ------- ------
Total stockholders' equity................ 574 495 1,069
------ ------- ------
Total liabilities and stockholders' equity.. $9,225 $ (25) $9,200
====== ======= ======
</TABLE>
See notes to Unaudited Pro Forma Financial Statements.
S-16
<PAGE>
Lyondell Chemical Company
Unaudited Pro Forma Income Statement
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
LCW (formerly
ARCO Chemical Pro forma
Company) combined
Actual through Acquisition Lyondell Refinancing Pro forma
Lyondell July 31, 1998 adjustments and LCW adjustments Lyondell
-------- ------------- ----------- --------- ----------- ---------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Sales and other
operating revenues..... $1,447 $2,106 $ 3,553 $ 3,553
Income from equity
investments............ 256 -- 256 256
Operating costs and
expenses:
Cost of sales......... 1,089 1,584 $ (5)(f) 2,668 2,668
Amortization of
goodwill and other
intangibles.......... 41 16 48 (g)
(1)(h) 104 104
Selling, general and
administrative, and
research and
development
expenses............. 152 192 344 344
Net unusual charges... 82 (20) 62 62
------ ------ ----- ------- -------
Operating income........ 339 334 (42) 631 631
Interest expense........ (287) (45) 65 (i) $ (287)(m)
(326)(j) 208(n)
(31)(k) (624) 38(o)
(9)(p) (674)(q)
Interest income......... 25 8 33 33
Other income, net....... 12 20 32 32
------ ------ ----- ------- ------ -------
Income before income
taxes and extraordinary
items.................. 89 317 (334) 72 (50) 22
Provision for income
taxes.................. 37 93 (100)(l) 30 (21)(l) 9
------ ------ ----- ------- ------ -------
Income before
extraordinary items.... $ 52 $ 224 $(234) $ 42 $ (29) $ 13 (q)(r)
====== ====== ===== ======= ====== =======
Basic and diluted income
before extraordinary
items per common
share.................. $ 0.67 (s) $ 0.54 (s) $ 0.11 (q)(s)
Basic weighted average
shares outstanding (in
thousands)............. 77,669 77,669 112,669 (e)
Diluted weighted average
shares outstanding (in
thousands)............. 77,699 77,699 112,699 (e)
</TABLE>
See notes to Unaudited Pro Forma Financial Statements.
S-17
<PAGE>
Lyondell Chemical Company
Notes To Unaudited Pro Forma Financial Statements
(a) To reflect payment and capitalization of debt issuance costs and credit
facility amendment fees.
(b) To reflect write-off of deferred debt issuance costs and credit facility
amendment fees of Term Loan C and partial write-off of deferred debt
issuance costs of Term Loan D, offset by the impact of deferred taxes.
(c) To reflect payment of Term Loan C and partial payment of Term Loan D with
proceeds from the proposed sale of common stock, the sale of secured and
subordinated notes and the borrowing of a $750 million Term Loan E.
(d) To reflect the proposed sale of secured and subordinated notes and the
borrowing of a $750 million Term Loan E.
(e) To reflect issuance of 35 million shares of common stock (at an assumed
offering price of $15 7/16 per share (the closing price on April 16, 1999))
less underwriting discounts.
(f) To adjust depreciation expense for the estimated fair value of the acquired
LCW property, plant and equipment over an average useful life of 25 years.
The purchase price allocation is preliminary, as Lyondell is awaiting
additional information related to the fair value of certain assets acquired
and liabilities assumed. Management does not expect the finalization of
these matters to have a material effect on the purchase price allocation.
(g) To reflect amortization of goodwill and additional amortization expense for
the estimated increase in other intangibles over periods ranging from four
to 40 years.
(h) To eliminate LCW historical goodwill amortization.
(i) To reflect elimination of the historical Lyondell and LCW interest expense.
(j) To reflect interest expense related to the issuance of the $2 billion Term
Loan A, $1.25 billion Term Loan C and $2 billion Term Loan D, each at LIBOR
plus 2.0 percent, and $1.25 billion Term Loan B at LIBOR plus 2.5 percent,
combined with the historical interest expense on the $624 million LCW
debentures.
(k) To reflect amortization expense resulting from $129 million in debt
issuance costs from financings under the credit facility over periods
ranging from one to seven years.
(l) To reflect the tax effect of the pro forma adjustments and to adjust the
tax provision to Lyondell's estimated income tax rate of 41.5 percent for
the periods presented. State income tax is the primary difference between
the estimated tax rate and the 35 percent federal statutory rate.
(m) To reflect interest expense related to the sale of $1 billion of senior
secured notes and $500 million of senior subordinated notes, the borrowing
of a $750 million Term Loan E and a 1.5% increase in the interest rate on
Term Loan A, Term Loan B and the remaining portion of Term Loan D. The
impact of an increase in the LIBOR rate of 1/8 of 1% would be to increase
pro forma interest expense by approximately $6 million for the year ended
December 31, 1998.
(n) To reflect elimination of interest expense as a result of repayment of Term
Loan C and partial repayment of Term Loan D.
(o) To eliminate amortization expense of debt issuance costs due to repayment
of Term Loan C and partial repayment of Term Loan D.
(p) To reflect amortization expense resulting from $54 million in debt issuance
costs amortized over the life of the notes and Term Loan E and a $10
million credit facility amendment fee amortized over the life of the credit
facility, as amended.
(q) Pro forma interest expense would have been $674 million, net income
before extraordinary items would have been $13 million and basic and
diluted earnings per common share before extraordinary items would have
been $0.11, assuming Lyondell did not borrow Term Loan E and therefore
did not use the proceeds
S-18
<PAGE>
to reduce the principal amount outstanding of Term Loan D. See "Description
of Indebtedness--Credit Facility Amendments--New Term Loan E."
(r) The unaudited pro forma income statement does not reflect a $34 million
extraordinary charge, net of tax, related to repayment of Term Loan C and
partial repayment of Term Loan D. The extraordinary charge represents the
write-off of unamortized debt issuance costs and credit facility amendment
fees related to the portion of the debt being repaid.
(s) Net unusual charges include a $20 million reversal of a charge related to
the restructuring and the asset reviews by LCW, $57 million write-off of
in-process research and development costs, $19 million related to the
formation of Equistar and $6 million for Lyondell's share of the LCR
unusual charge related to a renegotiation of a labor agreement. Basic and
diluted earnings per share before the effects of the net unusual charges,
net of tax, on both a historical and pro forma basis are as follows:
<TABLE>
<S> <C>
Year ended December 31, 1998--Historical
Basic and diluted earnings per common share before net unusual
charges and extraordinary items, net of tax...................... $1.29
Year ended December 31, 1998--Pro Forma Combined
Basic and diluted earnings per common share before net unusual
charges and extraordinary items, net of tax...................... $1.01
Year ended December 31, 1998--Pro Forma for the Sale of Common
Stock and Partial Refinancing of the Credit Facility
Basic and diluted earnings per common share before net unusual
charges and extraordinary items, net of tax...................... $0.43
</TABLE>
S-19
<PAGE>
Selected Historical Financial Data
The following tables set forth selected historical financial data for
Lyondell and LCW. These data have been derived from the audited financial
statements of Lyondell and LCW. You should read these data in conjunction with
the Lyondell and LCW financial statements and the notes to those statements,
and the other financial and operating data included elsewhere in this
prospectus supplement and the accompanying prospectus, and incorporated by
reference to Lyondell's annual report on Form 10-K for the year ended December
31, 1998.
Historical Lyondell Chemical Company
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------------
1994(a) 1995(a) 1996(b) 1997(c) 1998(d)
------- ------- ------- ------- -------
(Dollars in millions,
except per share amounts and ratios)
<S> <C> <C> <C> <C> <C>
Income statement data:
Sales and other operating
revenues......................... $3,857 $4,936 $5,052 $2,878 $1,447
Income from equity investments.... -- -- -- 132 256
Gain on sale of assets............ -- -- 30 -- --
------ ------ ------ ------ ------
3,857 4,936 5,082 3,010 1,703
Cost of sales..................... 3,296 4,026 4,570 2,250 1,089
Selling, general and
administrative, and research and
development expenses............. 137 204 234 186 152
Amortization of goodwill and other
intangible assets................ -- -- -- -- 41
Unusual charges................... -- -- -- 40 82
------ ------ ------ ------ ------
Operating income.................. 424 706 278 534 339
Interest expense.................. (74) (80) (81) (75) (287)
Interest income................... 5 6 3 14 25
Other income (expense), net....... (6) (14) (4) (17) 12
------ ------ ------ ------ ------
Income before income taxes........ 349 618 196 456 89
Provision for income taxes........ 126 229 70 170 37
------ ------ ------ ------ ------
Net income........................ $ 223 $ 389 $ 126 $ 286 $ 52
====== ====== ====== ====== ======
Earnings per share--basic and
diluted.......................... $ 2.78 $ 4.86 $ 1.58 $ 3.58 $ .67
Weighted average common shares
outstanding (in thousands):
Basic............................. 80,000 80,000 80,000 79,796 77,669
Diluted........................... 80,061 80,072 80,045 79,813 77,699
Other data:
Depreciation and amortization(e).. $ 65 $ 86 $ 110 $ 84 $ 138
Capital expenditures(f)........... 252 982 609 49 64
Ratio of earnings to fixed
charges.......................... 4.8x 6.8x 2.2x 4.6x 1.2x
Balance sheet data:
Total assets...................... $1,663 $2,606 $3,276 $1,559 $9,225
Total debt(g)(h).................. 737 1,060 1,366 445 6,994
Total stockholders' equity........ 63 380 431 619 574
</TABLE>
See notes to Selected Historical Financial Data.
S-20
<PAGE>
Historical Lyondell Chemical Worldwide, Inc.
(formerly ARCO Chemical Company)
<TABLE>
<CAPTION>
For the year ended December
31,
------------------------------
1994 1995 1996 1997
------ ------ ------ ------
(Dollars in millions,
except ratios)
<S> <C> <C> <C> <C>
Income statement data:
Sales and other operating revenues............ $3,423 $4,282 $3,955 $3,995
Cost of sales................................. 2,586 3,102 3,067 3,230
Selling, general and administrative, and
research and development expenses............ 332 357 348 334
Unusual charges............................... 30 -- -- 175
------ ------ ------ ------
Operating income.............................. 475 823 540 256
Interest expense.............................. (85) (89) (86) (80)
Interest income............................... 8 16 25 10
Other income (expense), net................... 18 6 8 (18)
------ ------ ------ ------
Income before income taxes.................... 416 756 487 168
Provision for income taxes.................... 147 248 139 57
------ ------ ------ ------
Net income(i)................................. $ 269 $ 508 $ 348 $ 111
====== ====== ====== ======
Other operating data:
Depreciation and amortization................. $ 235 $ 233 $ 222 $ 229
Capital expenditures.......................... 186 195 244 263
Ratio of earnings to fixed charges............ 4.8x 7.6x 5.2x 2.4x
Balance sheet data:
Total assets.................................. $3,737 $4,135 $4,394 $4,116
Total debt(g)................................. 936 912 1,019 913
Total stockholders' equity.................... 1,659 1,969 2,014 1,793
</TABLE>
See notes to Selected Historical Financial Data.
S-21
<PAGE>
Notes To Selected Historical Financial Data
(a) Financial information for 1994 and 1995 includes 12 months of operating
results for LCR on a consolidated basis.
(b) Financial information for 1996 includes 12 months of operating results for
LCR and one month of operating results for Lyondell Methanol, each
accounted for on a consolidated basis.
(c) Financial information for 1997 includes 12 months of operating results for
Lyondell Methanol on a consolidated basis. It also includes 12 months of
operating results for LCR and one month of operating results for Equistar,
each accounted for as an equity investment.
(d) Financial information for 1998 includes 5 months of operating results for
LCW on a consolidated basis. It also includes 12 months of operating
results for Equistar, LCR and Lyondell Methanol, each accounted for as an
equity investment.
(e) Includes amortization of debt issuance costs of $23 million for 1998.
(f) Includes $135 million, $458 million, $473 million and $45 million in 1994,
1995, 1996 and 1997, respectively, for the upgrade project at LCR,
primarily funded by CITGO and non-recourse debt. Includes $356 million in
1995 for the acquisition of the Alathon(TM) high density polyethylene
business.
(g) Total debt represents long-term debt, notes payable and current maturities
of long-term debt.
(h) Does not include $2.9 billion in joint venture debt ($713 million of which
is Equistar debt for which Lyondell remains contingently liable).
(i) Net income in 1997 includes an after-tax charge of $116 million for costs
related to a restructuring program and asset reviews.
S-22
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion is not a complete description of Lyondell's
business affairs. You should read it in conjunction with the financial
statements of Lyondell, Equistar and LCR and the notes to those statements,
which are included herein and incorporated by reference to Lyondell's annual
report on Form 10-K for the year ended December 31, 1998.
General
Lyondell operates in the intermediate chemicals and derivatives segment and,
through its interests in Equistar, LCR and Lyondell Methanol, operates in the
petrochemicals, polymers, refining and methanol segments. Lyondell accounts for
its investments in Equistar, LCR and Lyondell Methanol using the equity method
of accounting. During the third quarter of 1998, Lyondell acquired all of the
outstanding shares of ARCO Chemical Company (now LCW). LCW is treated as a
separate business segment, the intermediate chemicals and derivatives segment.
Lyondell obtained its $7.0 billion credit facility to finance the acquisition,
paying $5.6 billion for the LCW stock and assuming approximately $870 million
of LCW debt, net of cash.
The following chart shows the revenues for Lyondell and the revenues, equity
percentage owned by Lyondell and the accounting method used for each of
Lyondell's businesses for the fiscal years ended December 31, 1996, 1997 and
1998.
Structure of the Company
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1996 1997 1998
------------- ------------- -------------
(Dollars in millions, except equity
investment percentages)
<S> <C> <C> <C>
Lyondell
Revenues................... $5,052(a) $2,878(b) $1,447(c)
LCW
Revenues................... $3,955(d) $3,995(d) $3,553(e)
Percentage of equity owned
by Lyondell at period
end....................... -- -- 100%
Method of accounting....... N/A N/A Consolidation
Equistar(f)
Revenues................... N/A $ 365 $4,363
Percentage of equity owned
by Lyondell at period
end....................... N/A 57% 41%
Method of accounting....... N/A Equity Equity
LCR
Revenues................... $2,816 $2,695 $2,055
Percentage of equity owned
by Lyondell at period
end....................... 86.44% 58.49% 58.75%
Method of accounting....... Consolidation Equity Equity
Lyondell Methanol(g)
Revenues................... $ 14 $ 165 $ 104
Percentage of equity owned
by Lyondell at period
end....................... 75% 75% 75%
Method of accounting....... Consolidation Consolidation Equity
</TABLE>
- --------
(a) Revenues for 1996 are prior to the contribution of assets to Equistar and
include 12 months of operating revenues for LCR and one month of operating
revenues for Lyondell Methanol, each accounted for on a consolidated basis.
(b) Revenues for 1997 include 12 months of operating revenues for Lyondell
Methanol on a consolidated basis. The first 11 months of operating revenues
for 1997 are prior to the contribution of assets to Equistar. Revenues for
1997 include 12 months of operating revenues for LCR and one month of
operating revenues for Equistar, each accounted for as an equity
investment.
(c) Revenues for 1998 include 5 months of operating revenues for LCW on a
consolidated basis. Revenues exclude 12 months of operating revenues for
Equistar, LCR and Lyondell Methanol, each accounted for as an equity
investment.
(d) LCW was purchased by Lyondell in July 1998. Information presented for the
periods above for LCW represents the results of operations of LCW on a
historical basis.
(e) Pro forma revenues of LCW for the year ended December 31, 1998. For more
information, see the Unaudited Pro Forma Financial Statements and the
accompanying notes included in this prospectus supplement.
(f) Equistar was formed in December 1997 as a joint venture between Lyondell
and Millennium Chemicals Inc. Beginning May 15, 1998, the results of
operations of the Occidental assets are included in the information
presented above.
(g) Lyondell Methanol was formed in December 1996 by Lyondell and MCNIC to own
and operate the methanol facility at Equistar's Channelview, Texas
facility.
S-23
<PAGE>
Results of Operations
Lyondell's historical operating results reflect the cyclical and volatile
nature of both the chemical and refining industries. These industries have
historically experienced alternating periods of tight supply, causing price and
profit margins to increase, followed by periods of substantial capacity
additions, resulting in oversupply and declining prices and profit margins. The
chemical industry has experienced a downward trend since peaking in 1995.
Lyondell experienced earnings declines in 1998 compared to 1997, which
continued in the fourth quarter of 1998 compared to the third quarter of 1998,
primarily because of lower prices in both the chemicals and refining
industries. Lyondell believes that consecutive-period comparisons best
illustrate the cyclical movement of the industries in which Lyondell and its
joint ventures operate.
Lyondell and Equistar believe that prices for certain of their products,
including ethylene, have reached the low point of their cyclical troughs.
According to published data, spot prices for ethylene have recently edged
higher than contract prices, indicating that prices for this product may be
emerging from the trough. Because pricing for its products is dependent upon a
broad range of factors beyond Lyondell's control, including United States and
international economic conditions, competitor action, international events and
governmental regulation, Lyondell cannot predict when prices for its products
will emerge from their cyclical troughs or the length of such troughs.
Recent Developments
Lyondell expects to report a profit for the first quarter of 1999, an
improvement compared to the fourth quarter of 1998. Positive factors affecting
the first quarter will be increased ethylene profitability at Equistar, the
reduction of transition costs relating to the LCW acquisition and the
nonrecurrence of the fourth quarter 1998 charge associated with a new LCR labor
agreement. These factors will be partially offset by the effects of a reduction
of crude oil allocations received under LCR's crude supply agreement.
Intermediate Chemicals and Derivatives (Lyondell/LCW)
Merchant PO volumes and margins have declined in the first quarter of 1999
compared to the fourth quarter of 1998. Merchant volume declines resulted from
reduced sales to co-producers and planned customer downtime during the first
quarter of 1999. PO margins declined in the first quarter of 1999 due to market
conditions resulting from anticipated industry capacity additions. PO
derivative volumes continued strong into the first quarter of 1999. In response
to recent market condition improvements, several producers, including Lyondell,
have announced styrene monomer, TDI and polyols price increases for the second
quarter of 1999. Lyondell can give no assurance that the price increases will
be accepted by the market.
MTBE margins have been improving since December 1998 due to an increase in
worldwide gasoline prices. The governor of California recently announced an
intention to eliminate MTBE from gasoline sold in California by December 31,
2002. Other states may take similar steps. However, due to the federal and
state regulatory approval process required to effect a phase out, Lyondell does
not expect a significant impact on MTBE volumes and margins in 1999. In
addition, Lyondell does not expect a significant decrease in European and Asian
demand for MTBE for the foreseeable future. Lyondell already possesses the
technology to convert TBA (the MTBE feedstock) into another gasoline additive
at a moderate capital cost and has also been exploring alternative higher value
uses of TBA.
Management continues to make substantial progress integrating LCW to capture
expected synergies.
Petrochemicals and Polymers (Equistar)
Ethylene margins have improved as price increases for Equistar's products
have taken effect during the first quarter of 1999. Polymers prices have also
increased, although Equistar did not benefit from these
S-24
<PAGE>
increases until late in the first quarter of 1999 when the price increases took
effect. Margins for the first quarter of 1999 remained flat because higher
ethylene feedstock costs offset the impact of the polymers price increases.
Based on historical trends, increases in polymers prices and margins tend to
follow ethylene price increases after a period of time as the higher feedstock
costs are passed through.
Equistar also expects to realize the benefits of aggressive actions it took
at the end of 1998 and beginning of 1999. These include the acceleration to
November 1998 of the turnaround of its LaPorte, Texas plant, which was
originally scheduled for the third quarter 1999, the announced idling of a
substantial portion of polyethylene capacity at its Port Arthur plant,
reductions in working capital and cost reductions through the achievement of
integration synergies. Additionally, the LaPorte turnaround included changes
that enable the plant to run heavier, cheaper feedstocks, thereby reducing
ethylene production costs. Also, the scheduled turnaround and expansion of
Equistar's Victoria, Texas facility was completed during the fourth quarter of
1998 and increased the plant's annual high density polyethylene capacity by
approximately 125 million pounds.
In February 1999, Equistar completed a $900 million offering of senior
unsecured notes. The proceeds were used primarily to refinance existing debt of
Equistar.
In April 1999, Equistar shut down one of its two Channelview, Texas olefins
units to make mechanical repairs to a compressor. The unit has an annual
ethylene capacity of 1.9 billion pounds. Equistar anticipates that the unit
will resume operations by mid-May 1999.
Refining (LCR)
LCR's margins continue to be negatively impacted by the reduction in PDVSA
crude oil allocations which took effect in August 1998. The impact of these
cutbacks is a reduction of extra heavy crude oil purchased under the LCR crude
supply agreement from 230,000 barrels per day to the current level of 195,000
barrels per day. In March 1999, OPEC announced an agreement to further limit
OPEC oil production, which is likely to result in an additional decrease in the
allocation of crude oil supplied to LCR by PDVSA. As a result, LCR has been
increasing its purchases of crude oil in the spot market. While LCR has been
able to obtain alternate supplies of crude oil to date, during the first
quarter of 1999 the margins for this crude oil were much lower than for the
extra heavy Venezuelan crude oil purchased under the crude supply agreement. As
a result, LCR temporarily reduced crude oil processing rates from 273,000
barrels per day in the fourth quarter of 1998 to 255,000 in the first quarter
of 1999 due to declining margins generated by use of alternative supplies of
crude oil. LCR expects the incremental margin drop to be temporary, which would
support higher operating rates in the near future, and has begun to see some
improvement in the margins. LCR's margins were also negatively impacted in the
first quarter of 1999 by inventory effects on all purchased crude oil due to
the recent rapid increase in spot market prices for both crude oil and refined
products. Despite the reduction in volumes under the crude supply agreement,
which generally carry a higher margin than volumes purchased on the spot
market, LCR continues to generate free cash flow which will be available for
distribution to the partners.
Fourth Quarter 1998 Compared to Third Quarter 1998
Intermediate Chemicals and Derivatives (Lyondell/LCW)
LCW earned revenues of $881 million in the fourth quarter 1998, a 3 percent
increase from pro forma revenues of $856 million in third quarter 1998. LCW
recorded lower operating income in the fourth quarter compared to the third
quarter, as the benefit from an increase in sales volumes for PO and PO
derivatives was more than offset by lower MTBE margins and volumes. PO and PO
derivatives volumes were 11 percent higher due to increased demand for
urethanes products, including polyols and TDI, in the automotive and housing
markets. All three regions, the Americas, Europe and Asia, showed volume
improvement, particularly the Asian region, which showed a nearly 50 percent
increase. MTBE margins declined 15 cents per gallon for the fourth quarter
versus the third quarter primarily due to lower worldwide gasoline prices,
which pushed down MTBE prices, as well as higher raw material costs in Europe.
S-25
<PAGE>
Petrochemicals and Polymers (Equistar)
Equistar earned revenues of $1.1 billion in fourth quarter 1998, a 4 percent
decline from revenues of $1.15 billion in third quarter 1998. EBITDA for
Equistar was $58 million in the fourth quarter, a 59 percent decline from third
quarter EBITDA of $141 million. Equistar reported a pretax loss of $51 million
for the fourth quarter compared to pretax income of $29 million in the third
quarter. The decrease in earnings and EBITDA was attributable to earnings
declines in both the petrochemicals and polymers segments. However, Equistar
reduced total working capital during the fourth quarter by approximately $207
million. In addition, Equistar realized a reduction of working capital of
approximately $130 million from the sale of receivables in December 1998 under
a one-year revolving securitization agreement.
In petrochemicals, the effects of decreased ethylene and co-product sales
prices were only partially offset by lower feedstock prices. Also contributing
to the petrochemicals earnings decrease in the fourth quarter was the
turnaround of Equistar's LaPorte, Texas facility. Due to market conditions in
the fourth quarter, Equistar elected to accelerate the timing and extend the
length of the turnaround. The turnaround started in mid-November 1998 and
continued through mid-February 1999. Earnings were also negatively impacted by
the reduction of inventories that were carried in excess of current production
costs due to declines in feedstock costs.
In polymers, earnings also decreased primarily as a result of a 9 percent
decline in average sales prices of the significant polymers products, which
exceeded the 4 percent price decrease of the ethylene feedstock. In addition,
the scheduled turnaround and expansion of Equistar's Victoria, Texas facility
had a negative impact on fourth quarter polymers earnings. This project was
completed during the fourth quarter and increased the plant's annual high
density polyethylene capacity by approximately 125 million pounds.
Refining (LCR)
LCR earned revenues of $500 million in fourth quarter 1998 compared to $499
million in third quarter 1998. EBITDA for LCR was $72 million in the fourth
quarter, a 21 percent decline from third quarter EBITDA of $91 million. LCR had
pretax income of $32 million in the fourth quarter 1998 compared to $54 million
in the third quarter 1998. The decline in earnings was due to an unusual charge
related to a new agreement with LCR's labor union, a fire in a hydrotreater
unit and the full quarter impact of lower Venezuelan crude oil allocations.
In August, LCR began receiving reduced allocations of crude oil from PDVSA
due to cutbacks in crude oil production in Venezuela. While to date LCR has
been able to obtain alternate supplies of crude oil, the margin for this crude
oil has been lower than for the crude oil purchased under the crude supply
agreement. Total crude oil processing rates averaged 273,000 barrels per day in
the fourth quarter compared to 267,000 barrels per day in the third quarter.
Following additional cutbacks announced by OPEC in late March 1999, LCR
anticipates further reductions in its allocation of crude oil under the crude
supply agreement. These reductions are expected to decrease pre-tax income and,
accordingly, Lyondell's pro rata share of LCR's income. LCR is currently
assessing the potential impact of further reductions.
1998 Compared to 1997
Intermediate Chemicals and Derivatives (Lyondell/LCW)
The following discussion compares Lyondell's pro forma 1998 results to pro
forma 1997 results. The pro forma adjustments give effect to the LCW
acquisition and related debt financing (which occurred in July 1998), the
formation of Equistar (which occurred in December 1997) and the deconsolidation
of Lyondell Methanol (which occurred in January 1998) as if each occurred as of
January 1, 1997 and 1998, respectively. These adjustments are intended to
facilitate a comparison of the results of the intermediate chemicals and
derivatives business.
S-26
<PAGE>
The following table sets forth sales volumes for the intermediate chemicals
and derivatives business:
<TABLE>
<CAPTION>
For the
year ended
December
31,
-----------
1997 1998
----- -----
(Volumes in
millions)
<S> <C> <C>
PO, PO derivatives and TDI (pounds)........................... 4,135 4,159
Co-products:
Styrene monomer (pounds).................................... 2,577 2,912
TBA and derivatives (gallons)............................... 1,054 995
</TABLE>
Revenues--Pro forma revenues of $3.6 billion for 1998 decreased 11 percent
compared to $4.0 billion for 1997. The decrease of $442 million was primarily
due to lower average sales prices in 1998, reflecting a combination of downward
pressure from lower feedstock costs, ongoing competition in PO derivatives and
TDI markets, the negative effects of a stronger U.S. dollar on foreign sales
and the effects of weaker Asian markets. PO and PO derivatives volumes were
essentially flat in 1998 versus 1997 as stronger demand for certain PO
derivatives in the United States and Europe was offset by lower volumes in
Asian markets. The increase in styrene monomer volumes in 1998 was a result of
the recently completed debottleneck of the PO/SM II facility in Channelview,
Texas. The increased volumes were dedicated to long-term styrene monomer
processing arrangements. TBA and derivatives volumes decreased in 1998 by 6
percent, mainly due to lower MTBE demand.
Operating costs--Pro forma cost of sales of $2.7 billion for 1998 decreased
15 percent compared to $3.2 billion for 1997. The 15 percent decrease was
greater than the 11 percent decrease in revenues, reflecting comparatively
lower feedstock prices. Pro forma selling, general and administrative and
research and development expenses of $344 million for 1998 remained flat as
compared to 1997.
Operating income--Pro forma operating income of $631 million for 1998
decreased 5 percent compared to $663 million for 1997. Operating income for
1998 reflected unusual charges of $62 million, primarily related to the write-
off of in-process research and development projects of LCW and Equistar
formation costs. Operating income for 1997 reflected unusual charges of $215
million, primarily related to restructuring and other costs of LCW and Equistar
formation costs. Excluding these items, operating income of $693 million for
1998 decreased $185 million.
Net income--Pro forma net income of $42 million for 1998 increased 55
percent compared to $27 million for 1997. Excluding the effects of the unusual
charges in both years, pro forma net income of $78 million for 1998 decreased
$75 million in 1997 as lower equity income from the joint ventures more than
offset improved operating results and lower foreign exchange losses of LCW.
Petrochemicals and Polymers (Equistar)
The following discussion compares Equistar's actual 1998 results to combined
1997 results. The 1998 results include results attributable to the Occidental
assets from May 15, 1998, the date on which they were contributed. The 1997
results combine 11 months of the operations of the businesses contributed to
Equistar by Lyondell and Millennium Chemicals and one month of Equistar's
actual operations. These adjustments are intended to facilitate a comparison of
the results of the petrochemicals and polymers business.
Petrochemicals
Revenues--Petrochemicals revenues of $3.5 billion for 1998 decreased 10
percent compared to combined 1997 revenues of $3.9 billion, primarily due to
lower industry sales prices for ethylene, propylene and co-products, partially
offset by increased sales volumes as a result of the addition of the Occidental
assets in May 1998. The decrease in sales prices is primarily attributable to
increased industry capacity and downward pressure on sales prices as a result
of lower feedstock costs. The sales price decreases began in the fourth
S-27
<PAGE>
quarter of 1997 and continued their downward trend through most of 1998.
Olefins volumes were 16,716 million pounds in 1998, a 77 percent increase over
combined volumes of 9,429 million pounds in 1997, primarily as a result of the
addition of the Occidental assets. Aromatics volumes were 271 million gallons
in 1998, a 40 percent increase over combined volumes of 193 million gallons in
1997, primarily as a result of the addition of the Occidental assets.
Operating costs--Petrochemicals cost of sales of $3.1 billion for 1998
decreased 1 percent from $3.2 billion for combined 1997. This decrease was less
than the 10 percent decrease in revenues, reflecting the fact that feedstock
prices declined at a slower rate than petrochemicals product prices.
Petrochemicals selling expenses of $14 million for 1998 decreased 55 percent
from $31 million for 1997. This decrease reflected lower personnel costs as a
result of the consolidation of operations.
Operating income--Petrochemicals operating income of $319 million for 1998
decreased 53 percent compared to combined 1997 operating income of $684
million, primarily due to lower product margins as sales prices declined more
than feedstock costs and, to a lesser extent, slightly higher fixed costs. The
decrease in operating income as a result of the lower margins was partially
offset by the addition of the Occidental assets in May 1998.
Polymers
Revenues--Polymers revenues of $2.1 billion for 1998 decreased 18 percent
compared to combined 1997 revenues of $2.5 billion as a result of decreases in
industry sales prices. These sales price decreases were a result of excess
industry supply and lower feedstock costs. The excess industry supply started
during the fourth quarter of 1997 and continued in a downward trend through
1998. Polymers volumes were 6,488 million pounds in 1998, a 6 percent increase
over combined volumes of 6,132 million pounds in 1997. Volume increases were a
result of the turnarounds at three facilities, as well as unscheduled industry
outages, in 1997.
Operating costs--Polymers cost of sales of $1.8 billion for 1998 decreased
16 percent from $2.1 billion for combined 1997. This decrease was less than the
18 percent decrease in revenues, reflecting the fact that feedstock prices
declined at a slower rate than polymers product prices. Polymers selling
expenses of $82 million for 1998 decreased 40 percent from $137 million for
combined 1997. This decrease primarily reflected lower personnel costs as a
result of consolidation of operations.
Operating income--Polymers operating income of $177 million for 1998
decreased 24 percent compared to combined 1997 operating income of $233
million, primarily due to decreases in polymers sales prices, which more than
offset decreases in polymers feedstock costs.
Unallocated Items
Equistar's unusual charges, which are not allocated to either the
petrochemicals or polymers segments, were $42 million and $35 million in 1997
and 1998, respectively. Both years included costs associated with the formation
of Equistar and the consolidation of certain operations. These costs were paid
by Equistar and allocated to the Equistar partners in accordance with their
ownership percentages.
S-28
<PAGE>
Refining (LCR)
The following discussion compares LCR's actual 1998 results to its actual
1997 results.
Increased processing capacity resulting from the upgrade project enabled LCR
to increase its crude processing rates and produce greater refined product
volumes, as shown in the table below.
<TABLE>
<CAPTION>
Year ended
December 31,
--------------
1997 1998
------ ------
(Barrels per
day in
thousands)
<S> <C> <C>
Crude processing rates:
Crude supply agreement--coked........................... 203 223
Other heavy crude oil--coked............................ 7 19
Other crude oil......................................... 14 18
------ ------
Total................................................. 224 260
====== ======
Refined product sales volumes:
Gasoline................................................ 111 121
Diesel and heating oil.................................. 68 79
Jet fuel................................................ 17 17
Aromatics............................................... 11 10
Other refined products.................................. 93 103
------ ------
Total................................................. 300 330
====== ======
</TABLE>
Revenues--Revenues for LCR, including sales to affiliates, of $2.1 billion
for 1998, decreased 22 percent compared to $2.7 billion for 1997. The decrease
primarily resulted from lower refined products prices, which declined as a
result of lower industry crude prices. These decreases were partially offset by
higher sales volumes as production levels increased, reflecting a full year's
benefit from the upgrade project.
Operating costs--LCR's cost of sales of $1.8 billion for 1998 decreased 28
percent from $2.4 billion for 1997. The benefits of lower feedstock prices
under the PDVSA crude supply agreement were offset in part by the lower
allocations under that agreement, which began in August 1998 and required LCR
to seek additional crude supplies at higher prices in the spot market. LCR's
selling, general and administrative expenses of $78 million for 1998 increased
8 percent from $72 million for 1997. This increase reflected increased coke
handling charges and other selling costs related to increased production and
higher sales volumes.
Operating income--LCR's operating income of $213 million for 1998 increased
18 percent compared to $181 million for 1997. The increase reflected the
benefits of the upgrade project, which resulted in higher average margins as
higher volumes of extra heavy crude oil were processed in the coking mode. The
upgrade project was completed in the first quarter 1997 and, initially, higher
costs were incurred due to normal operational start-up activities, during which
the refinery did not operate at peak rates. Cost savings resulting from
improved operational efficiency in 1998 were partly offset by higher
depreciation expense attributable to the upgrade project.
Interest expense--LCR's net interest expense of $43 million for 1998
increased 23 percent compared to $35 million for 1997. Interest expense on debt
related to construction of the upgrade project was capitalized through its
completion, including the first quarter of 1997.
Methanol (Lyondell Methanol)
Lyondell's share of Lyondell Methanol's earnings for 1998 was $6 million.
Lyondell would have recorded approximately $43 million for its share of
Lyondell Methanol's earnings had Lyondell followed the equity
S-29
<PAGE>
method of accounting for its investment in Lyondell Methanol during 1997. The
decrease was due to significant declines in the sales prices of methanol
beginning in the first quarter of 1998. Increased supply due to new capacity,
as well as weaker demand from Asia, caused worldwide methanol price declines.
Liquidity and Capital Resources
Cash Flows
Operating activities--Lyondell's cash provided by operating activities
totaled $263 million for 1998, a 2 percent decrease compared to $269 million
for 1997. Cash provided by operating activities in 1998 included $160 million
of proceeds from the sale of domestic receivables in December 1998 under a
three-year revolving securitization agreement. Cash provided by operations in
1998 was negatively affected by the payment of liabilities associated with the
acquisition of LCW and the settlement of accounts payable retained by Lyondell
in the formation of Equistar in December 1997.
Investing activities--Lyondell completed the acquisition of LCW on July 28,
1998 for a total cost of approximately $5.9 billion, excluding assumed debt.
Lyondell made capital expenditures of $64 million in 1998, primarily related to
LCW. Equistar's 1998 capital expenditures totaled $200 million, of which $88
million was Lyondell's pro rata share. LCR made 1998 capital expenditures of
$61 million, of which Lyondell funded $35 million through loans to LCR.
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 1998 were $403 million by Equistar,
$20 million by LCR and $12 million by Lyondell Methanol. The $403 million
excess distribution from Equistar includes $197 million resulting from
Lyondell's repayment of a $345 million note to Equistar.
Financing activities--Cash provided by financing activities was $5.4 billion
for 1998, compared to cash used in financing activities of $176 million for
1997. During the third quarter 1998, Lyondell obtained a $7.0 billion credit
facility, of which $6.5 billion was drawn down in connection with the
acquisition of LCW. As part of the acquisition, Lyondell assumed approximately
$870 million of LCW debt. Lyondell's borrowing under the credit facility of
$6.5 billion was used for the purchase of all outstanding shares of LCW stock;
repayment of debt, including a $345 million note to Equistar and $283 million
in other debt of Lyondell and LCW; and payment of certain debt issuance costs.
Cash used in other financing activities in 1998 consisted primarily of $59
million used to repurchase Lyondell common stock. From time to time Lyondell
purchases its shares in the market to issue under Lyondell's employee
compensation and benefits plans, including stock option and restricted stock
plans. In addition, in the second quarter of 1998 Lyondell completed a stock
buyback program authorized in September 1997. A total of 2,567,051 shares were
purchased under the program for $75 million.
Lyondell paid regular quarterly dividends of $.225 per share of common stock
in 1998 and the first quarter of 1999.
Debt
As of December 31, 1998, Lyondell had outstanding consolidated debt of $7.0
billion and equity of $0.6 billion. Substantially all of the debt was incurred
in July 1998 under the credit facility for the purpose of acquiring LCW or was
assumed as part of the acquisition. See "Description of Indebtedness--Credit
Facility" for a description of the credit facility.
In addition, as of December 31, 1998, Equistar, LCR and Lyondell Methanol
had, in the aggregate, outstanding debt of approximately $2.9 billion and
equity of approximately $4.6 billion. The ability of the joint
S-30
<PAGE>
ventures to distribute cash to Lyondell is reduced by their respective debt
service obligations. Furthermore, a default under certain joint venture debt
agreements would constitute a cross-default under Lyondell's credit facility.
Lyondell also remains liable on approximately $713 million of debt for which
primary responsibility was assumed by Equistar in connection with its
formation. See "Description of Indebtedness--Joint Venture Debt" for a
description of debt of the joint ventures.
The credit facility requires Lyondell to retire $1.25 billion of the debt by
June 30, 1999 and the original terms of the credit facility required Lyondell
to issue $1.25 billion of equity or equity-linked securities by July 23, 1999.
At the time the credit facility was arranged in July 1998, Lyondell intended to
promptly issue $1.25 billion or more of equity or equity-linked securities to
satisfy both these requirements. An additional $2 billion of debt under the
credit facility matures on June 30, 2000. Lyondell anticipated that a
combination of operating cash flows and proceeds to Lyondell from the then-
planned LCR refinancing, together with a planned offering of debt securities,
would be used to repay or refinance the debt due in June 2000.
However, Lyondell postponed its plans for a fall 1998 securities offering as
a result of adverse changes in capital market conditions that began in August
1998. In addition, the cyclical downturn in commodity chemicals adversely
affected both Lyondell's operating results and the market valuation of its
common stock. In late 1998, LCR's refinancing plans were postponed for reasons
discussed in "Description of Indebtedness--Joint Venture Debt--LCR Debt." The
postponement of the $1.25 billion equity offering and related debt paydown,
combined with the decline in recent and projected operating results, could have
made it more difficult for Lyondell to remain in compliance with certain
financial ratio requirements contained in the credit facility as those ratios
became more restrictive under the original terms.
As a result of all the foregoing, Lyondell is amending its credit facility
to, among other things, substantially reduce the requirements for sale of
equity and ease the financial ratio requirements. Effectiveness of the credit
facility amendments and completion of this offering of common stock and the
issuance of secured and subordinated notes are conditioned on each other.
Additional information about the credit facility amendments is contained under
"Description of Indebtedness--Credit Facility Amendments." To reduce its debt,
Lyondell is looking to the cash flow of its businesses, potential joint
ventures involving strategic assets, new equity capital, working capital
initiatives, potential asset sales, refinancing programs and other cash
generating opportunities. Lyondell continues to believe that repositioning its
balance sheet to achieve an investment grade rating over time is an important
objective.
The ability of Lyondell to meet its debt obligations, finance its capital
expenditure needs, maintain its dividend rate and comply with the covenants and
financial requirements in the credit facility will generally depend on the
future performance of Lyondell and the availability and terms of additional
financing or alternative means to repay and refinance bank debt. These factors,
in turn, are affected by relevant prevailing economic, competitive and market
conditions and other factors beyond Lyondell's control. The breach of any of
the covenants or financial requirements in the credit facility could result in
a default, which would permit the lenders to declare the loans immediately
payable and to terminate future lending commitments, and would also result in
an acceleration of Lyondell's other debt.
Lyondell believes that cash balances, cash generated from operating
activities, and funds from financing activities and lines of credit will be
adequate to meet anticipated future cash requirements for scheduled debt
repayments, necessary capital expenditures and dividends. See "Risk Factors."
Under Internal Revenue Code Sections 338 (g) and (h)(10), Lyondell and the
former majority stockholder of LCW agreed to elect to step-up the United States
tax bases of LCW's net assets. This will result in significant increased
depreciation and amortization with attendant United States tax savings. The
total value of these savings is expected to be between $800 million and $1
billion over time.
S-31
<PAGE>
Description of Indebtedness
Credit Facility
In July 1998, Lyondell acquired all the outstanding shares of common stock
of LCW for $6.5 billion, which included $5.6 billion for the purchase of common
stock and the assumption or refinancing of approximately $870 million in debt,
net of cash. Following the acquisition, LCW became a wholly owned subsidiary of
Lyondell. Funding for the acquisition, the repayment of certain Lyondell and
LCW debt and related fees and expenses was provided through the $7 billion
credit facility. The credit facility consists of a 5-year revolving credit
facility of up to $500 million to be used for general corporate purposes and
four separate term loans. Lyondell pledged the stock of some of its
subsidiaries and its rights to distributions from certain existing joint
ventures as collateral under the credit facility. No amounts to date have been
funded under the revolving credit facility. As of December 31, 1998, the
principal amounts outstanding, then-current interest rates and maturity dates
of the term loans were as follows:
<TABLE>
<CAPTION>
Principal
Amount Current
Term Loan Outstanding Interest Rate Maturity
--------- -------------- --------------- ------------------------
<S> <C> <C> <C>
Term Loan A............. $1.852 billion LIBOR plus 2.0% June 30, 2003
(amortized over 5 years)
Term Loan B............. $1.248 billion LIBOR plus 2.5% June 30, 2005
(amortized over 7 years)
Term Loan C............. $1.250 billion LIBOR plus 2.0% June 30, 1999
Term Loan D............. $2.000 billion LIBOR plus 2.0% June 30, 2000
</TABLE>
Existing Covenants
Under the existing covenant provisions of the credit facility, Lyondell has
agreed to, among other things, maintain certain specified financial ratios and
consolidated net worth, not make certain distributions with respect to
Lyondell's capital stock, not make certain investments, not allow its
subsidiaries to incur certain types and amounts of debt, and to use its best
efforts to maintain certain ownership interests in certain of its existing
joint ventures and to ensure that certain of its existing joint ventures
maintain certain capital expenditure and debt levels and cash distribution
policies. Lyondell is in compliance with each of its financial covenants as of
December 31, 1998.
Credit Facility Amendments
Lyondell is amending its credit facility to eliminate the requirement to
issue $1.25 billion in equity or equity-linked securities by July 23, 1999 and
to allow for the issuance of up to an additional $2.75 billion of senior
secured debt. The terms and conditions of the credit facility amendments are
substantially similar to those set forth in the existing credit facility,
except as described below.
Conditions Precedent
The effectiveness of the credit facility amendments is conditioned upon,
among other things, the issuance by Lyondell of;
(1) not less than $350 million in gross proceeds (total cash proceeds before
discounts, commissions and expenses) of Lyondell common stock;
(2) not less than $500 million in gross proceeds of senior subordinated debt
securities; and
(3) senior secured debt securities in the amount of not less than $1 billion
in gross proceeds less the proceeds from the issuance of senior subordinated
debt securities referred to in clause (2) above.
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<PAGE>
This offering and the concurrent sale of secured and subordinated notes are
expected to fulfill the conditions precedent to the effectiveness of the credit
facility amendments.
Covenants
The material covenants in the credit facility remain in full force and
effect with the following primary exceptions and additions:
(1) certain financial covenants of Lyondell, including the required ratio
of debt to adjusted EBITDA and the fixed charge coverage ratio, have
been relaxed; and
(2) Lyondell is released from its obligation to issue at least $1.25
billion in gross proceeds of equity or equity-linked securities by July
23, 1999. In lieu of this obligation, Lyondell has agreed to issue in
one or more transactions (including the currently proposed offering of
common stock and partial refinancing of the credit facility) not less
than $500 million of Lyondell common stock or preferred stock by
June 30, 2000 and not less than $1.5 billion of junior securities by
June 30, 2002. This $1.5 billion junior securities requirement will be
reduced by $2 for every $1 of common stock issued over $500 million and
will be eliminated if Lyondell repays all outstanding amounts under
Term Loan C and Term Loan D and achieves either (a) a total debt to
adjusted EBITDA ratio (as defined in the credit facility amendments) of
3.0 to 1.0 or (b) a rating for its senior unsecured debt of BB by
Standard & Poor's and Ba2 by Moody's.
Interest Rate Increase
Until such time as Lyondell completes the required offerings or improves the
public ratings for its senior debt, the indicative interest rates for the term
loans under the credit facility will be as set forth below. The interest rates
for each of the term loans will be adjusted based on the pricing of the secured
notes.
<TABLE>
<CAPTION>
Term Loan Interest Rate
--------- ---------------
<S> <C>
Term Loan A LIBOR plus 3.5%
Term Loan B LIBOR plus 4.0%
Term Loan C LIBOR plus 3.5%
Term Loan D LIBOR plus 3.5%
</TABLE>
Following completion of the required offerings, the interest rate for the
revolver and Term Loan A will be reduced by 0.25%. Lyondell intends to repay
all outstanding principal under Term Loan C using the proceeds of this offering
and the refinancing of the credit facility. See "Use of Proceeds."
New Term Loan E
Lyondell is seeking commitments for an additional $500 million to $1 billion
of credit under new Term Loan E. Term Loan E will bear interest at LIBOR plus
4.25%, subject to adjustment based on the pricing of the secured notes. Term
Loan E is expected to mature on June 30, 2006 and is expected to require only
nominal principal payments prior to September 30, 2005.
Additional Security
The credit facility, as amended, will be secured by personal property of
Lyondell, a pledge of the stock of domestic subsidiaries directly owned by
Lyondell and 65% of the stock of foreign subsidiaries directly owned by
Lyondell, and the property, plant and equipment for certain of Lyondell's
facilities located in Texas and Louisiana.
S-33
<PAGE>
ARCO Chemical Debentures
In connection with the acquisition of LCW, Lyondell assumed liability for
$624 million of ARCO Chemical's outstanding debentures, including:
. $200.0 million of 9.90% debentures due 2000
. $100.0 million of 9.375% debentures due 2005
. $100.0 million of 10.25% debentures due 2010
. $224.0 million of 9.80% debentures due 2020
Concurrently with the effectiveness of the credit facility amendments, the
debentures will be secured by equal and ratable liens on some of the assets
that will secure other secured debt of Lyondell, including amounts outstanding
under the senior secured notes and the credit facility, as amended. The
indentures for these debentures contain customary covenant provisions
pertaining to, among other things, limitations on liens and sale and leaseback
transactions.
Concurrent Private Placement of Notes
Lyondell intends to privately place $1 billion of senior secured notes and
$500 million of senior subordinated notes. Closing of the sale of the common
stock is subject to, among other things, the closing of the private placement
of notes. The notes have not been registered under the Securities Act of 1933
and may not be offered or sold absent registration in the United States or an
applicable exemption from the registration requirements.
Upon the occurrence of certain events constituting a change of control of
Lyondell, holders of the notes will have the right to require Lyondell to
purchase their notes. Furthermore, under certain circumstances, Lyondell may
become obligated to offer to purchase all or a portion of the notes with the
proceeds of certain asset sales.
The indentures governing the notes contain other covenants limiting or
restricting Lyondell's ability and the ability of its subsidiaries to:
. incur additional debt or issue subsidiary preferred stock;
. increase dividends on its capital stock;
. redeem or repurchase its subsidiary stock or repurchase its subordinated
debt;
. engage in transactions with affiliates, except on an arms-length basis;
. create liens or engage in sale and leaseback transactions;
. make some types of investments and sell assets; and
. consolidate or merge with, or sell substantially all its assets to,
another person.
Some of these covenants will no longer be applicable if the notes are rated
investment grade.
Joint Venture Debt
Equistar Debt
In February 1999, Equistar completed a $900 million private placement of 5
and 10-year notes, the proceeds of which were used to refinance existing
Equistar debt. Proceeds are being used to repay in its entirety Equistar's $205
million outstanding capital lease obligation relating to its Corpus Christi,
Texas facility, to retire at maturity $150 million aggregate principal amount
of 10.00% Notes due in June 1999 (for which Lyondell is a co-obligor), to repay
approximately $152 million remaining outstanding under Equistar's credit
agreement and to refinance outstanding borrowings under its 5-year working
capital facility. As of
S-34
<PAGE>
December 31, 1998, the principal amounts outstanding, then-current interest
rates and maturity dates of the debt obligations of Equistar were as follows:
<TABLE>
<CAPTION>
Debt Principal Amount Outstanding Current Interest Rate Maturity
---- ---------------------------- --------------------- --------
<S> <C> <C> <C>
Capital lease obligations $205 million March 2000
(a).......................... 6.34%
Notes and medium-term notes (b).. $713 million Fixed rates ranging from Various dates from
6.5% to 11.3%; June 1999 to
weighted average equal February 2026
to 8.6%
5-year revolving credit facility.. $1.3 billion LIBOR plus 0.5% November 2002
</TABLE>
- --------
(a) These obligations were repaid with the proceeds of the Equistar notes
offering in February 1999.
(b) Lyondell remains liable on $713 million of debt assumed by Equistar in
connection with its formation, though Equistar has agreed to be primarily
liable for this debt. Upon repayment of $150 million of the 10.00% Notes
due in June 1999, this Equistar debt (and Lyondell's contingent obligation)
will be reduced to $563 million.
Equistar Covenants
Under the covenant provisions of its 5-year revolving credit facility,
Equistar has agreed to, among other things, maintain certain specified
financial ratios, not create certain liens on its property or assets, not enter
into certain sale and leaseback transactions, not allow its subsidiaries to
incur certain types of debt or issue certain types of preferred stock, not use
the proceeds of its credit facility for certain purposes, not change its or its
subsidiaries' line of business and not enter into agreements restricting the
ability of certain of its subsidiaries to pay distributions or dividends.
Equistar is in compliance with each of its financial covenants as of December
31, 1998. The ability of Equistar to meet its debt service obligations and to
comply with the covenants and financial requirements in its credit facility
will largely depend on the future performance of Equistar and the availability
of additional financing to repay and refinance bank debt, both of which will be
subject to prevailing economic, market and competitive conditions and to other
factors beyond Equistar's control. The breach by Equistar of any of the
covenants or financial requirements in its credit facility could result in a
default, which would permit the lenders to declare the loans immediately
payable and to terminate future lending commitments.
LCR Debt
As of December 31, 1998, the principal amounts outstanding, then-current
interest rates and maturity dates of the debt obligations of LCR were as
follows:
<TABLE>
<CAPTION>
Debt Principal Amount Outstanding Current Interest Rate Maturity
---- ---------------------------- --------------------- --------
<S> <C> <C> <C>
Construction loan
payable to bank........ $450 million LIBOR plus 0.55% May 2000
Loans payable to $231 million LIBOR plus basis points July 1, 2003
Lyondell............... consistent with a BBB+
issuer
Loans payable to CITGO.. $ 36 million LIBOR plus basis points July 1, 2003
consistent with a BBB+
issuer
$70 million revolving
credit agreement....... $ 20 million LIBOR plus 0.55% April 30, 1999
</TABLE>
LCR has requested an extension of its $70 million revolving credit agreement
to April 28, 2000 on substantially the same terms and conditions. LCR expects
the extension request to be approved by the lenders.
S-35
<PAGE>
In late 1998, LCR postponed a planned debt refinancing. The postponement was
due to unfavorable bond market conditions and political change in Venezuela
associated with the recent presidential elections. The proceeds of such
refinancing would have been used to repay third party construction loans and
subordinated loans made to LCR by Lyondell and CITGO with any remaining cash
distributed to the partners. LCR intends to pursue the refinancing as soon as
practical.
LCR Covenants
Under the covenant provisions of its credit agreements, LCR has agreed to,
among other things, maintain certain specified financial ratios, not enter into
certain transactions with affiliates, not make certain investments, not create
certain liens, not make certain distributions or repurchases on its capital
stock, not allow its subsidiaries to incur certain types and amounts of debt,
not enter into certain asset sales and not take certain specified actions with
respect to its crude supply agreement, products purchase agreement or certain
of LCR's formation documents. LCR is in compliance with each of its financial
covenants as of December 31, 1998. The ability of LCR to meet its debt service
obligations and to comply with the covenants and financial requirements in its
credit agreement will largely depend on the future performance of LCR and the
availability of additional financing to repay and refinance bank debt, both of
which will be subject to prevailing economic, market and competitive conditions
and to other factors beyond LCR's control. The breach by LCR of any of the
covenants or financial requirements in its credit agreement could result in a
default, which would permit the lenders to declare the loans immediately
payable and to terminate future lending commitments.
S-36
<PAGE>
Forward-Looking Statements
This prospectus supplement includes forward-looking statements. Although
Lyondell believes the expectations reflected in such forward-looking statements
are reasonable, they do involve certain assumptions, risks and uncertainties,
and there are no assurances that such expectations will prove to be correct.
The actual results obtained by Lyondell could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
many of which are beyond Lyondell's or its joint ventures' ability to control
or predict, including:
. the cyclical and highly competitive 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 other countries;
. substantial chemical 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, labor difficulties, unscheduled downtime, transportation
interruptions, spills and releases, and other environmental risks).
Lyondell undertakes no obligation to publicly update or revise any forward-
looking statement, whether as a result of new information, future events or
otherwise. You are cautioned against putting undue reliance on forward-looking
statements or projecting any future results based on such statements or present
or prior earnings levels.
S-37
<PAGE>
Business
Our annual report on Form 10-K for the year ended December 31, 1998 contains
a complete description of our businesses. Set forth below is a discussion of
our strategy for intermediate chemicals and derivatives, petrochemicals and
polymers, refining and methanol.
Business Segment Strategies
Intermediate Chemicals and Derivatives (Lyondell/LCW)
PO and its Derivatives
Lyondell intends to maintain its leading market positions in its major
products. It intends to be a major participant in the global growth of PO,
urethanes and performance chemicals, building from its strengths in technology,
manufacturing, marketing and access to raw materials.
Over the past 25 years, the annual global industry growth rate for PO and
its derivatives has averaged approximately 5 percent. Lyondell expects similar
growth to continue into the future. Based on published data, global demand for
PO was estimated at approximately 8.7 billion pounds in 1998. Approximately 90
percent of that volume was consumed in the manufacture of three families of PO
derivatives products: polyols, PG and PGE. The remainder was consumed in the
manufacture of a growing segment of performance-based products, as well as BDO
and its derivatives. Lyondell intends to increase both its overall production
of PO and its production of PO derivatives, while continuing its participation
in the PO merchant market, an important source of revenue and profit for
Lyondell.
Lyondell is a major participant in the global urethanes chemicals market
through its production of polyols and TDI. Lyondell's strategy is to grow its
urethanes business using its proprietary Impact(TM) polyols processing
technology first introduced in 1995. This technology offers significant cost
savings in the production of conventional polyols products. It is also key to
the development of new, superior quality products for markets such as footwear,
carpet backing and spandex. To date, Lyondell has been granted 66 patents and
has over 34 patents pending for this technology. Lyondell plans to retrofit
most of its polyols production facilities to utilize Impact(TM) technology over
the next five years.
Lyondell has the only PO-based processing route to BDO. This efficient
proprietary technology provides Lyondell with a competitive advantage in the
rapidly expanding markets for BDO and its derivatives. BDO and its derivatives
represent a global market growing at 7 percent per year and provide access to
markets such as pharmaceuticals, personal care products, fibers and high
performance coatings.
The co-products produced from Lyondell's two PO processes are TBA and
styrene monomer. Lyondell's strategy is to maximize earnings contribution from
these products.
Cost Savings
In late 1997 LCW initiated a restructuring program designed to simplify its
organization, streamline operations and reduce costs. Lyondell expects to
achieve these cost savings by the end of 1999. Lyondell's management believes
that it will be able to realize additional cost savings through overhead
consolidation, manufacturing and purchasing efficiencies, reduced
transportation costs and raw materials integration with Equistar.
Petrochemicals and Polymers (Equistar)
Equistar intends to maximize its vertical integration opportunities with
Lyondell, increase its production and sales of higher value products, and
continue its ongoing cost reduction activities.
S-38
<PAGE>
The formation of Equistar provided significant vertical integration for
Lyondell's ethylene production. Prior to the formation of Equistar,
approximately 35 percent of Lyondell's ethylene was utilized internally, with
the remainder sold into the merchant market. Following the addition of the
Occidental assets to Equistar in May 1998, approximately 75 percent of
Equistar's ethylene production is used internally to make higher value
polyethylene or ethylene oxide and derivatives. This vertical integration
stabilizes earnings by helping to reduce volumetric fluctuations.
The creation and subsequent expansion of Equistar were driven by the
opportunity to reduce costs significantly and realize revenue enhancements that
were not possible for the Equistar partners on a stand-alone basis. Equistar
intends to achieve synergy targets and reduce costs by: optimizing its
processing units for improved on-stream time and increased throughput
capability, maximizing the value of its feedstock flexibility and olefins co-
products production, lowering distribution costs through volume leverage, and
reducing raw materials and other procurement costs. Equistar expects to achieve
significant synergies and cost savings by the end of the year 2000.
Equistar is focused on capital projects designed to lower its operating
costs. It is currently undertaking cost efficient expansions of its value-added
product lines such as high and medium molecular weight high density
polyethylene film resins, value and specialty injection molding resins, and
wire and cable resins. These capacity expansions are intended to support
Equistar's expected increase in production and sales volumes for these
products.
Petrochemicals
Equistar's business strategy for its petrochemicals business is to derive
maximum value from its internal integration, as well as with Lyondell, and to
improve its low cost position. Management of Lyondell intends to use Equistar's
production of propylene, ethylene, benzene and methanol as key feedstocks for
Lyondell's intermediate chemicals and derivatives business. Equistar will
continue to pursue joint ventures as the preferred method to add olefins
production capacity when needed and will aggressively pursue research on
alternative olefins feedstock technology to reduce the costs of raw materials.
In addition, Equistar intends to improve its low cost position by increasing
its ability to use low cost heavy feedstocks, maximizing olefins co-product
production, and reducing raw materials and product delivery costs.
Polymers
Equistar will promote growth in polymers by targeting value-added markets
that provide attractive margins and above average growth rates. In late 1998
Equistar completed a 125 million-pound expansion at its Victoria, Texas
facility. A 480 million-pound expansion of its Matagorda, Texas facility is
expected to be completed in the third quarter of 1999. These expansions will
provide necessary capacity for the high and medium molecular weight high
density polyethylene market. These are areas in which Equistar has a leading
market position and for which demand is growing at 2 to 3 percent above average
polyethylene growth.
Equistar continues to pursue technological innovation for its polymers
segment in order to create new polymers products. With the recent addition of
the Occidental assets to Equistar in May 1998, Lyondell benefits from access to
its processing technologies. To date, Equistar has received eight fundamental
patents and has nine patents pending for its single-site catalyst technology.
This technology is expected to lead to the development of higher value polymers
products with enhanced performance characteristics, such as improved puncture
resistance, impact strength and clarity.
Refining (LCR)
LCR's business strategy focuses on improving its ability to process low
cost, extra heavy crude oil in the coking mode, thereby enabling LCR to
capitalize on the favorable economics of its crude oil supply agreement and to
increase profitability with little additional fixed cost. LCR has already
demonstrated its ability to exceed
S-39
<PAGE>
the refinery's designed throughput of 230,000 barrels per day of extra heavy
crude oil in the coking mode. Peak coking rates of approximately 270,000
barrels per day have been achieved and LCR is developing a plan to increase the
refinery's capability to process up to 300,000 barrels per day with modest
capital investment and minimal changes to the refinery's fixed cost structure.
This capability, when coupled with LCR's advantageous formula-priced long-term
crude oil supply contract with PDVSA, helps to stabilize earnings and cash
flow. In addition to increasing throughput capacity, LCR is improving its
profitability by increasing its yield of high value products produced per
barrel of crude processed.
Lyondell seeks to position the LCR refinery in the top quartile of the
industry in cost structure. LCR continues to improve its low cost position
through aggressive energy conservation programs, improving its yields to
increase operational efficiency and improving equipment reliability to maximize
throughput and minimize downtime. LCR has reduced its number of employees in
connection with its new labor agreement and will outsource non-core activities.
Methanol (Lyondell Methanol)
Lyondell Methanol's strategy is to achieve efficient, low cost operations.
Lyondell Methanol intends to reduce feedstock costs, increase contract sales,
implement cost reduction technologies and techniques, maximize the chemical
efficiency of its processes through research into alternative feedstocks and
achieve vertical integration with Lyondell's other businesses.
You are cautioned that Lyondell's ability to undertake and fund the business
strategies described above will be affected by a variety of factors, some of
which are beyond Lyondell's control. See "Forward-Looking Statements" on page
S-37.
S-40
<PAGE>
Products
The following charts show the products produced by Lyondell, Equistar and
LCR, including the location of manufacturing facilities, capacity, major
competitors and primary uses. "Capacity" represents rated capacity at January
1, 1999. Rated capacity is calculated by estimating the number of days in a
typical year a production plant is expected to operate after allowing for
downtime for regular maintenance and multiplying that number by an amount equal
to the unit's optimal daily output based on the design feedstock mix. Because
the rated capacity of a production unit is an estimated amount, actual
production values may be more or less than rated capacity. Capacity shown for
Equistar is 100 percent of the capacity of Equistar, of which Lyondell owns a
41 percent interest. Capacity shown for LCR is 100 percent of the capacity of
LCR, of which Lyondell owns a 58.75 percent interest.
LYONDELL PRODUCTS AND PRODUCTION FACILITIES
<TABLE>
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Major
Key Products Capacity Primary Uses Where Produced Competitors
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Propylene Oxide 3.85 billion PO is a key Channelview, Texas Dow Chemical
pounds per component of Bayport, Texas Shell Chemical
year polyols, PG, PGE Fos-sur-Mer, France Rotterdam, Huntsman
and BDO. The Netherlands Chiba, Japan
- ----------------------------------------------------------------------------------------------------------------
Polyols 1.47 billion Polyols are used to Institute, West Virginia Dow Chemical
pounds per produce flexible South Charleston, West Virginia Bayer AG
year foam for automotive Channelview, Texas BASF AG
seating and home Fos-sur-Mer, France Shell Chemical
furnishings, Rieme, Belgium
coatings, Anyer, Indonesia
adhesives, sealants Kaohsiung, Taiwan
and elastomers.
- ----------------------------------------------------------------------------------------------------------------
Toluene Diisocyanate 250 million TDI is combined Lake Charles, Louisiana Bayer AG
(TDI) pounds per with polyols to Pont de Claix, France BASF AG
year/1/ produce flexible Lille, France
foam for automotive
seating and home
furnishings,
coatings,
adhesives, sealants
and elastomers.
- ----------------------------------------------------------------------------------------------------------------
Propylene Glycol (PG) 960 million PG is used to Bayport, Texas Dow Chemical
pounds per produce unsaturated Fos-sur-Mer, France
year polyester resins Rotterdam, The Netherlands
for bathroom
fixtures and boat
hulls; lower
toxicity
antifreeze,
coolants and
aircraft deicers;
and cosmetics and
cleaners.
- ----------------------------------------------------------------------------------------------------------------
Propylene Glycol Ethers 300 million PGE is used as a Bayport, Texas Dow Chemical
(PGE) pounds per lower toxicity Rotterdam, The Netherlands
year solvent for paints,
coatings and
cleaners.
- ----------------------------------------------------------------------------------------------------------------
Butanediol (BDO) 120 million BDO is used in the Channelview, Texas BASF AG
pounds per manufacture of ISP
year engineering resins, SISAS
films, personal
care products,
pharmaceuticals,
coatings, solvents
and adhesives.
- ----------------------------------------------------------------------------------------------------------------
Tertiary Butyl 58,500 barrels TBA is a key Bayport, Texas Saudi Basic
Alcohol (TBA)-- fuel per day component of MTBE. Fos-sur-Mer, France Industries
oxygenates: Methyl MTBE is a gasoline Rotterdam, The Netherlands Corp. (SABIC)
tertiary butyl ether component for Huntsman
(MTBE) reducing emissions Shell Chemical
in reformulated Exxon
gasolines and
enhancing octane
value.
</TABLE>
S-41
<PAGE>
<TABLE>
<CAPTION>
Major
Key Products Capacity Primary Uses Where Produced Competitors
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Styrene Monomer 3.65 billion Styrene monomer is Channelview, Shell Chemical
pounds per used to produce Texas/2 Dow Chemical
year plastics, such as / Chiba, Japan/3/ Nova Chemicals
expandable BASF AG
polystyrene for Sterling
packaging, foam Chemical
cups and Chevron
containers,
insulation products
and durables and
engineering resins.
</TABLE>
Lyondell's research and technical facilities are located in Newtown Square,
Pennsylvania, South Charleston, West Virginia, Villers Saint Paul, France and
Singapore.
- --------
1 Does not include supply reserved under long-term supply agreements with
Rhone-Poulenc that entitle Lyondell to all of the TDI output of Rhone-
Poulenc's two plants in France.
2 Lyondell has committed 1.5 billion pounds of styrene monomer capacity
through long-term processing arrangements.
3 Owned by Nihon Oxirane Co., Ltd., Lyondell's joint venture in Japan.
S-42
<PAGE>
EQUISTAR PRODUCTS AND PRODUCTION FACILITIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Key Major
Products Capacity Primary Uses Where Produced Competitors
- ----------------------------------------------------------
Petrochemicals
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ethylene 11.5 billion Ethylene is used as Channelview, Texas Exxon
pounds per a feedstock to Chocolate Bayou, Dow Chemical
year manufacture Texas Shell Chemical
polyethylene, EO, Clinton, Iowa
ethylene dichloride Corpus Christi,
and ethylbenzene. Texas
LaPorte, Texas
Lake Charles,
Louisiana
Morris, Illinois
- --------------------------------------------------------------------------------
Propylene 5.0 billion Propylene is used Channelview, Texas Shell Chemical
pounds/1/ per to produce Chocolate Bayou, Phillips
year polypropylene, Texas Petroleum
acrylonitrile and Clinton, Iowa Exxon
propylene oxide. Corpus Christi,
Texas
LaPorte, Texas
Lake Charles,
Louisiana Morris,
Illinois
- --------------------------------------------------------------------------------
Butadiene 1.2 billion Butadiene is used Channelview, Texas Shell Chemical
pounds per to manufacture Chocolate Bayou, Huntsman
year styrene butadiene Texas Texas
rubber and Corpus Christi, Petrochemicals
polybutadiene Texas
rubber, which are
used in the
manufacture of
tires, hoses,
gaskets and other
rubber products.
Butadiene is also
used in the
production of
paints, adhesives,
nylon clothing,
carpets and
engineered
plastics.
- --------------------------------------------------------------------------------
Benzene 301 million Benzene is used to Channelview, Texas Amoco
gallons per produce styrene, Chocolate Bayou, Chemicals
year phenol and Texas Exxon
cyclohexane. These Corpus Christi, Mobil
products are used Texas Chevron
in the production
of nylon, plastics,
rubber and
polystyrene.
Polystyrene is used
in insulation,
packaging and drink
cups.
- --------------------------------------------------------------------------------
Toluene 66 million Toluene is used as Channelview, Texas Exxon
gallons per an octane enhancer Chocolate Bayou, Mobil
year in gasoline, as a Texas Chevron
chemical feedstock
for benzene
production, and a
core ingredient in
TDI, a compound in
urethane
production.
</TABLE>
S-43
<PAGE>
Petrochemicals
<TABLE>
- --------------------------------------------------------------------------------------------
<CAPTION>
Major
Key Products Capacity Primary Uses Where Produced Competitors
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ethylene Glycol 1.0 billion EG is used to Beaumont, Texas Union Carbide
pounds per produce polyester Pasadena, Texas Shell Chemical
year fibers and film, Huntsman
PET resin, heat
transfer fluids,
paint and
automobile
antifreeze.
- --------------------------------------------------------------------------------------------
Ethylene Oxide 1.1 billion EO is used to Beaumont, Texas Union Carbide
(EO) and Equivalents pounds per produce Pasadena, Texas Shell Chemical
(EOE) year EOE; 400 surfactants, Huntsman
million pounds industrial
per year as cleaners,
pure EO cosmetics,
emulsifiers, paint,
heat transfer
fluids and ethylene
glycol (polyester
fibers and film,
polyethylene
terephthalate
("PET") resin and
antifreeze).
- --------------------------------------------------------------------------------------------
Ethylene Oxide 225 million EO derivatives are Pasadena, Texas Dow Chemical
Derivatives pounds per used to produce Union Carbide
year paint and coatings,
polishes, solvents
and chemical
intermediates.
- --------------------------------------------------------------------------------------------
</TABLE>
Polymers
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High Density 3.4 billion HDPE is used to Clinton, Iowa Exxon
Polyethylene Alathon(R) pounds/2/ per manufacture grocery, Chocolate Bayou, Phillips
Petrothene(R) year merchandise and Texas Chemical
trash bags; food LaPorte, Texas Solvay
containers for items Matagorda County, Polymers
from frozen desserts Texas
to margarine; Port Arthur, Texas
plastic caps and Victoria, Texas
closures; liners for
boxes of cereal and
crackers; plastic
drink cups and toys;
dairy crates; bread
trays and pails for
items from paint to
fresh fruits and
vegetables; safety
equipment such as
hard hats; house
wrap for insulation;
bottles for
household/industrial
chemicals and motor
oil;
milk/water/juice
bottles; and large
(rotomolded) tanks
for storing liquids
like agricultural
and lawn care
chemicals.
- ------------------------------------------------------------------------------------------------
Low Density Polyethylene 1.7 billion LDPE is used to Clinton, Iowa Dow Chemical
Petrothene(R) pounds per manufacture food LaPorte, Texas Chevron
Acrythene(R) year packaging films; Morris, Illinois Westlake Group
Utrathene(R) plastic bottles for Pasadena, Texas
packaging food and Port Arthur, Texas
personal care items;
dry cleaning bags;
ice bags; pallet
shrink wrap; heavy-
duty bags for mulch
and potting soil;
boil-in-bag bags;
coatings on flexible
packaging products;
and coatings on
paper board such as
milk cartons.
Specialized forms of
LDPE are Ethyl
Methyl Acrylate
("EMA"), which
provides adhesion in
a variety of
applications, and
Ethylene Vinyl
Acetate ("EVA"),
which is used in
foamed sheets, bag-
in-box bags, vacuum
cleaner hoses,
medical tubing,
clear sheet
protectors and
flexible binders.
</TABLE>
S-44
<PAGE>
Polymers
<TABLE>
- -----------------------------------------------------------------------------------------
<CAPTION>
Major
Key Products Capacity Primary Users Where Produced Competitors
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Linear Low Density 1.1 billion LLDPE is used to LaPorte, Texas Union Carbide
Polyethylene pounds per manufacture garbage Morris, Illinois Dow Chemical
Petrothene(R) year and lawn-leaf bags; Exxon
housewares; lids Mobil Chemical
for coffee cans and
margarine tubs; and
large (rotomolded)
toys like outdoor
gym sets.
- -----------------------------------------------------------------------------------------
Polypropylene 680 million Polypropylene is Morris, Illinois Montell
KromaLon(R) pounds per used to manufacture Pasadena, Texas FINA
Petrofil(R) year fibers for carpets, Huntsman
Petrothene(R) rugs and Amoco
KromaLux(R) upholstery; Chemicals
KromaTex(R) housewares;
Flexathene(R) automotive battery
cases; automotive
fascia, running
boards and bumpers;
grid-type flooring
for sports
facilities; fishing
tackle boxes; and
bottle caps and
closures.
</TABLE>
Equistar's research facilities are located in Cincinnati, Ohio; Matagorda,
Texas and Plano, Texas.
- --------
1 Does not include refinery grade material or production from the product
flexibility unit at Equistar's Channelview, Texas facility, which can
convert ethylene and other light petrochemicals into propylene and has a
current rated capacity of 1.0 billion pounds per year of propylene.
2 Equistar increased its HDPE capacity by approximately 125 million pounds in
1998. A 480 million pound HDPE resin expansion project at the Matagorda,
Texas facility has a targeted start-up in the third quarter of 1999. The
idling of the Port Arthur, Texas facility effective March 31, 1999 will
result in a decrease in capacity of 300 million pounds of rated capacity per
year.
S-45
<PAGE>
LCR PRODUCTS AND PRODUCTION FACILITIES
<TABLE>
- --------------------------------------------------------------------------------------
<CAPTION>
Key Products Capacity Primary Uses Where Produced
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gasoline/1/ 120,000 barrels per Automotive fuel. Houston, Texas
day
- --------------------------------------------------------------------------------------
Diesel/1 75,000 barrels per Fuel for diesel cars Houston, Texas
/ (#2 Distillate) day and trucks.
- --------------------------------------------------------------------------------------
Jet Fuel/1/ 22,000 barrels per Aviation fuel. Houston, Texas
day
- --------------------------------------------------------------------------------------
Benzene/2/ 50 million gallons Nylon for clothing Houston, Texas
per year and consumer items;
polystyrene for
insulation, packaging
and drink cups.
- --------------------------------------------------------------------------------------
Toluene/3/ 37 million gallons Gasoline component Houston, Texas
per year and chemical
feedstock for
producing benzene.
- --------------------------------------------------------------------------------------
Paraxylene/3/ 400 million pounds Polyester fibers for Houston, Texas
per year clothing and fabrics,
PET soft drink
bottles and films for
audio and video tape.
- --------------------------------------------------------------------------------------
Orthoxylene/3/ 270 million pounds Plasticizer in Houston, Texas
per year products such as
rainwear, shower
curtains, toys and
auto upholstery and
an intermediate in
paints and
fiberglass.
- --------------------------------------------------------------------------------------
Lube Oils/1/ 4,000 barrels per day Automotive and Houston, Texas
industrial engine and
lube oils, railroad
engine additives and
white oils for food-
grade applications.
</TABLE>
- --------
1 Produced by LCR and sold to CITGO.
2 Produced by LCR and sold to Equistar.
3 Produced by LCR and marketed for LCR by Equistar.
S-46
<PAGE>
Management
The following table sets forth certain information with respect to the
directors, executive officers and certain other key executives of Lyondell and
its joint ventures as of February 1, 1999:
Directors of Lyondell
Name, Age and Present Position Business Experience During Past Five
with Lyondell Years and Period Served as Officer
or Director
-------------------------------------
William T. Butler, 66................ Dr. Butler has served as Chairman of
Chairman of the Board of Directors the Board of Directors of Lyondell
since June 30, 1997 and as a
Director of Lyondell since January
1989. He has been Chancellor of
Baylor College of Medicine since
January 1996. Dr. Butler was
President and Chief Executive
Officer of Baylor College of
Medicine from 1979 until January
1996. Dr. Butler is also a Director
of C. R. Bard, Inc. and Browning-
Ferris Industries Inc.
Carol Anderson, 52................... Ms. Anderson was elected to the
Director Board of Directors of Lyondell in
October 1998. She is Managing
Director of TSG International, a
subsidiary of The Springland Group.
From 1993 until 1998, Ms. Anderson
served as Managing Director of
Merrill International, Ltd. Ms.
Anderson is also a Director of The
Stroh Brewery Co., The Stroh
Companies and Merrill International,
Ltd.
Travis Engen, 54..................... Mr. Engen has served as Director of
Director Lyondell since April 1995. He has
been Chairman, President and Chief
Executive of ITT Industries, Inc. (a
diversified manufacturing company)
since December 1995. Previous to
this position, he was Executive Vice
President and a member of the
Management Policy Committee of ITT
Corporation from 1991 to December
1995. Mr. Engen is also a Director
of Alcan Aluminum Limited.
Stephen F. Hinchliffe, 65............ Mr. Hinchliffe has served as
Director Director of Lyondell since March
1991. He has been Chairman of the
Board and Chief Executive Officer of
BHH Management, Inc., the managing
partner of Leisure Group, Inc. (a
manufacturer of consumer products)
since 1988.
Dudley C. Mecum II, 63............... Mr. Mecum has been a Director of
Director Lyondell since January 1989. He has
been the Managing Director of
Capricorn Holdings LLC (a firm
specializing in leveraged buyouts)
since July 1997. Previous to this
position, he was a Partner with the
merchant banking firm of G. L.
Ohrstrom & Company from
S-47
<PAGE>
August 1989 until January 1997. Mr.
Mecum is also a Director of
Citigroup, Dyncorp, VICORP
Restaurants, Inc., Fingerhut
Companies, Inc., Travelers Property
Casualty Corporation, Metris
Companies, Inc. and Suburban Propane
LLP.
Frank Savage, 60..................... Mr. Savage was elected to the Board
Director of Directors of Lyondell in October
1998. He is the Chairman of Alliance
Capital Management International.
From 1988 until 1996, Mr. Savage was
Senior Vice President of The
Equitable Life Assurance Society of
the United States. Mr. Savage served
on the Board of Directors of ARCO
Chemical Company from 1993 until it
was acquired by Lyondell in July
1998. Mr. Savage is a Director of
Alliance Capital Management
Corporation, Alliance Capital
Management International, Lockheed
Martin Corporation and Qualcomm,
Inc.
Dan F. Smith, 52..................... Mr. Smith was named Chief Executive
Director, President and Chief Officer and President in December
Executive Officer 1996. Mr. Smith has been a Director
since 1988. Mr. Smith served as
President and Chief Operating
Officer of Lyondell from 1994 to
December 1996. Prior to 1994, Mr.
Smith held various positions
including Executive Vice President,
Chief Financial Officer of Lyondell,
Vice President, Corporate Planning
of ARCO and Senior Vice President in
the areas of management,
manufacturing, control and
administration for Lyondell and the
Lyondell Division of ARCO. Mr. Smith
is a Director of Cooper Industries
and ChemFirst, Inc.
Paul R. Staley, 69................... Mr. Staley has been a Director of
Director Lyondell since January 1989. He has
been Chairman of the National Vision
Foundation since August 1994.
Previous to this position, he was
Chairman of the Executive Committee
of the Board of Directors of P. Q.
Corporation (an industry supplier of
silicates) from January 1991 until
August 1994.
S-48
<PAGE>
Executive Officers of Lyondell
Dan F. Smith, 52..................... See above.
Director, President and Chief
Executive Officer
Van Billet, 44....................... Mr. Billet was appointed Vice
Vice President and Controller President and Controller in July
1998. Mr. Billet previously served
as Vice President and Controller of
ARCO Chemical Company since March
1997. He served as Corporate
Controller of ARCO Chemical Company
from July 1993 to January 1995, and
Manager of Planning and Analysis for
Performance Chemicals and Business
Development from January 1995 to
March 1997.
T. Kevin DeNicola, 44................ Mr. DeNicola has been Vice
Vice President, Corporate Development President, Corporate Development
since April 1998, overseeing
strategic planning and investor
relations. From 1996 until April
1998, Mr. DeNicola was Director of
Investor Relations of Lyondell. Mr.
DeNicola served as Ethylene Products
Manager of Lyondell from 1993 until
1996. Mr. DeNicola also serves as a
member of the owners committees of
both Equistar and LCR.
Edward J. Dineen, 44................. Mr. Dineen was appointed Senior Vice
Senior Vice President, Urethanes and President, Urethanes and Performance
Performance Chemicals Chemicals in July 1998. Prior to
this position, he served as Vice
President, Performance Products and
Development for ARCO Chemical
Company beginning in June 1997. He
served as Vice President, Planning
and Control for ARCO Chemical
European Operations from 1993 until
his appointment as Vice President,
Worldwide Co-Products and Raw
Materials in 1995.
Morris Gelb, 52...................... Mr. Gelb was appointed to his
Executive Vice President and Chief current position in December 1998.
Operating Officer Previous to this appointment, he
served as Senior Vice President,
Manufacturing, Process Development
and Engineering of Lyondell from
July 1998. He was named Vice
President for Research and
Engineering of ARCO Chemical Company
in 1986 and Senior Vice President of
ARCO Chemical Company in July 1997.
John Hollinshead, 49................. Mr. Hollinshead was appointed to his
Vice President, Human Resources current position in July 1998.
Previous to this appointment, he was
Director, Human Resources,
Manufacturing and Engineering for
Equistar from 1997. Mr. Hollinshead
served as Manager, Human Resources
with Lyondell from 1985 until 1997.
Allen C. Holmes, 51.................. Before appointment to his current
Vice President, Corporate Services position in July 1998, Mr. Holmes
served as Vice President, Tax and
Business Systems, with the
responsibility for tax planning and
compliance, business systems and
administrative services for
Lyondell. Prior to joining
S-49
<PAGE>
Lyondell, Mr. Holmes served as Vice
President and General Tax Officer of
ARCO from 1991 until May 1998.
Alan D. Kornfeld, 56................. Mr. Kornfeld was appointed to his
Vice President, Strategic Ventures current position in July 1998. From
and Latin America 1992 until 1994, he served as Vice
President, Styrenics of ARCO
Chemical Company, from 1995 to 1996
he was Vice President, Plastics for
ARCO Chemical Company, and from 1996
to 1997 he was Vice President,
Isocyanates. Most recently he served
as Vice President, Basic Chemicals
for ARCO Chemical Company.
Daniel A. Mariano, 55................ Mr. Mariano was appointed to his
Vice President, Supply Chain current position in July 1998. From
1991 to 1995 he served as Director,
Worldwide Business Management of
ARCO Chemical Company, and from 1996
to 1997 he was Director of Worldwide
Raw Materials for ARCO Chemical
Company. Most recently, Mr. Mariano
was Vice President, Supply Chain for
ARCO Chemical Company.
Robert J. Millstone, 55.............. Before appointment to his current
Vice President and General Counsel position in July 1998, Mr. Millstone
served as Vice President and General
Counsel of ARCO Chemical Company
since 1995. He was Associate General
Counsel of ARCO Chemical Company
from January 1989 to December 1994,
and Secretary of ARCO Chemical
Company from 1990 to 1998.
Jeffrey R. Pendergraft, 50........... Mr. Pendergraft was named Executive
Executive Vice President and Chief Vice President and Chief
Administrative Officer Administrative Officer in July 1998.
Prior to this appointment, he served
as Senior Vice President of Lyondell
since May 1993 and as Vice
President, General Counsel and
Secretary of Lyondell beginning in
1988.
Joseph M. Putz, 57................... Mr. Putz was appointed to his
Senior Vice President, Special Assignmentscurrent position in July 1998. Mr.
Putz served as Vice President,
Control and Administration of
Lyondell beginning in 1987 until
December 1997, when he was named
Senior Vice President, Finance and
Administration of Equistar.
Edward W. Rich, 48................... Mr. Rich was named Vice President,
Vice President, Finance and Treasurer Finance and Treasurer in January
1998. Previously, Mr. Rich served as
Treasurer of Dow Corning Corporation
from February 1993 to January 1998.
Prior to February 1993, Mr. Rich
held various financial and legal
positions with The Dow Chemical
Company.
Lyndon Stanton, 55...................
Vice President and President, Lyondell Prior to appointment to his current
European Operations position with Lyondell in July 1998,
Mr. Stanton served in various
managerial positions with ARCO
Chemical Europe
S-50
<PAGE>
since 1979. He was President,
European Operations from 1994 until
1997, and Vice President, Business
Management from 1991 until 1994.
Debra L. Starnes, 46................. Ms. Starnes has served in various
Senior Vice President, Intermediate engineering and managerial positions
Chemicals with Lyondell since 1975. Before her
most recent appointment in July
1998, she served as Senior Vice
President, Polymers for Equistar
since January 1997. Ms. Starnes
served as Lyondell's Vice President,
Petrochemical Business Management
and Marketing from 1992 to 1994,
Senior Vice President of Lyondell
from 1994 to 1995, and Senior Vice
President, Polymers from 1995 until
1997.
Robert E. Tolbert, 56................ Mr. Tolbert was appointed to his
Vice President, Information Services current position in July 1998. He
served as General Auditor for ARCO
from 1991 until 1995, when he was
named Vice President, Information
Services for ARCO Chemical Company.
Edward V. Zenzola, 55................ Mr. Zenzola joined ARCO Chemical
Vice President and President, Lyondell Company in 1969 and has held various
Asia Pacific financial positions in its United
States and Japan operations. He
assumed responsibility for ARCO
Chemical Company's Asian operation
upon appointment as Chairman, ARCO
Chemical Japan in 1993. Before
appointment to his current position
in July 1998, Mr. Zenzola served as
President, ARCO Chemical Asia
Pacific since 1996.
Joint Venture Officers
Equistar Officers
Dan F. Smith--Chief Executive Officer
Eugene R. Allspach--President and Chief Operating Officer
John R. Beard--Senior Vice President, Manufacturing
Kelvin R. Collard--Vice President and Controller
Clifton B. Currin, Jr.--Vice President, Supply and Optimization
J.R. Fontenot--Vice President, Research and Engineering
Brian A. Gittings--Senior Vice President, Petrochemicals
Jeffrey L. Hemmer--Vice President, Information Systems and Business Process
Improvement
Alan Houlton--Vice President, Customer Supply Chain
Gerald A. O'Brien--Vice President, General Counsel and Secretary
Myra J. Perkinson--Vice President, Human Resources
W. Norman Phillips, Jr.--Senior Vice President, Polymers
LCR Officers
Charles M. Rampacek--President and Chief Executive Officer
Anne-Marie N. Ainsworth--Vice President, Support Services
David J. McNiel--Vice President, Refining
Rose Nenni--Vice President, Human Resources
Jose L. Rodriguez--Vice President, Planning, Evaluation & Supply
S-51
<PAGE>
Underwriting
Lyondell and the underwriters named below have entered into an underwriting
agreement covering the common stock to be offered in this offering. Donaldson,
Lufkin & Jenrette Securities Corporation, J.P. Morgan Securities Inc., Goldman,
Sachs & Co., Morgan Stanley & Co. Incorporated, Salomon Smith Barney Inc. and
Schroder & Co. Inc. are acting as representatives of the underwriters. Each
underwriter has agreed to purchase the number of shares of common stock set
forth opposite its name in the following table.
<TABLE>
<CAPTION>
Number of
Underwriters shares
------------ ----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation............
J.P. Morgan Securities Inc.....................................
Goldman, Sachs & Co............................................
Morgan Stanley & Co. Incorporated..............................
Salomon Smith Barney Inc.......................................
Schroder & Co. Inc.............................................
----------
Total........................................................ 35,000,000
==========
</TABLE>
The underwriting agreement provides that if the underwriters take any of the
shares set forth in the table above, then they must take all of these shares.
No underwriter is obligated to take any shares allocated to a defaulting
underwriter except under limited circumstances.
The underwriters are offering the shares of common stock, subject to the
prior sale of such shares, and when, as and if such shares are delivered to and
accepted by them. The underwriters will initially offer to sell shares to the
public at the initial public offering price set forth on the cover page of this
prospectus supplement. The underwriters may sell shares to securities dealers
at a discount of up to $ per share from the initial public offering price.
Any such securities dealers may resell shares to certain other brokers or
dealers at a discount of up to $ per share from the initial public offering
price. After the initial public offering, the underwriters may vary the public
offering price and other selling terms.
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have the option to buy up to an additional
5,250,000 shares of common stock from Lyondell to cover such sales. They may
exercise this option during the 30-day period from the date of this prospectus
supplement. If any shares are purchased with this option, the underwriters will
purchase shares in approximately the same proportion as set forth in the table
above.
The following table shows the per share and total underwriting discounts and
commissions that Lyondell will pay to the underwriters. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Lyondell
------------------
No Full
exercise exercise
--------- --------
<S> <C> <C>
Per share.................................................... $ $
--------- --------
Total...................................................... $ $
========= ========
</TABLE>
The underwriters may purchase and sell shares of common stock in the open
market in connection with this offering. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares
S-52
<PAGE>
than they are required to purchase in the offering. Stabilizing transactions
consist of certain bids or purchases made for the purpose of preventing or
slowing a decline in the market price of the common stock while the offering
is in progress. The underwriters may also impose a penalty bid, which means
that an underwriter must repay to the other underwriters a portion of the
underwriting discount received by it. An underwriter may be subject to a
penalty bid if the representatives of the underwriters, while engaging in
stabilizing or short covering transactions, repurchase shares sold by or for
the account of that underwriter. These activities may stabilize, maintain or
otherwise affect the market price of the common stock. As a result, the price
of the common stock may be higher than the price that otherwise might exist in
the open market. If the underwriters commence these activities, they may
discontinue them at any time. The underwriters may carry out these
transactions on the New York Stock Exchange, in the over-the-counter market or
otherwise.
Lyondell estimates that the total expenses of this offering, excluding
underwriting discounts and commissions, will be $ .
Lyondell has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1993.
Lyondell and directors and senior officers of Lyondell have agreed with the
underwriters not to dispose of or hedge any of their common stock, or
securities convertible into or exchangeable for shares of common stock, for a
period of 90 days after the date of this prospectus supplement, except with
the prior written consent of Donaldson, Lufkin and Jenrette Securities
Corporation. This agreement does not apply to any of Lyondell's employee
benefit plans existing on or outstanding as of the date of this prospectus
supplement.
The common stock trades on the New York Stock Exchange under the symbol
"LYO."
It is expected that delivery of the shares will be made to investors on or
about , 1999.
Because the net proceeds of this offering are being used to repay loans
under Lyondell's credit facility, and affiliates of certain of the
underwriters are lenders under the credit facility, this offering is being
made in accordance with Rule 2710(c)(8) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
At Lyondell's request, the underwriters have reserved shares of common
stock for sale to directors, officers, employees and retirees of Lyondell who
have expressed an interest in participating in the offering. Lyondell expects
these persons to purchase no more than 5% of the common stock offered in the
offering. The number of shares available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. The
underwriters will offer unpurchased reserved shares to the general public on
the same basis as the other offered shares.
Certain of the underwriters from time to time provide investment banking
services to Lyondell, for which they receive customary compensation. In
addition, affiliates of certain of the underwriters are acting as agents
and/or lenders under Lyondell's credit facility and receive fees customary for
performing such services. J.P. Morgan Securities Inc. advised Lyondell in
connection with Lyondell's acquisition of LCW and received customary advisory
fees in connection therewith.
Mr. Dudley C. Mecum II, a director of Lyondell, also serves on the board of
directors of Citigroup Inc. and Travelers Property Casualty Corporation, each
of which is an affiliate of Salomon Smith Barney Inc. Mr. Frank Savage, a
director of Lyondell, also serves on the board of directors of Alliance
Capital Management Corporation and Alliance Capital Management International,
each of which is an affiliate of Donaldson, Lufkin and Jenrette Securities
Corporation.
S-53
<PAGE>
Legal Matters
Certain legal matters in connection with the sale of Lyondell common stock
will be passed upon for Lyondell by Baker & Botts, L.L.P., Houston, Texas.
Certain legal matters in connection with the sale of common stock will be
passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.
Experts
The consolidated financial statements of Lyondell Chemical Company as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 included in this prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The financial statements of Equistar Chemicals, LP as of December 31, 1998
and 1997 and for the year ended December 31, 1998 and the period from December
1, 1997 (inception) to December 31, 1997 included in this prospectus have been
so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of LYONDELL-CITGO Refining LP as of December 31,
1998 and for the year ended December 31, 1998 included in this prospectus and
incorporated herein by reference to Lyondell's Annual Report on Form 10-K for
the year ended December 31, 1998 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report, which is included and
incorporated by reference herein, and have been so included and incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The financial statements of LYONDELL-CITGO Refining LP as of December 31,
1997 and for each of the two years in the period ended December 31, 1997
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
S-54
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
LYONDELL CHEMICAL COMPANY
Report of Independent Accountants.......................................... F-2
Consolidated Financial Statements:
Consolidated Statements of Income........................................ F-3
Consolidated Balance Sheets.............................................. F-4
Consolidated Statements of Cash Flows.................................... F-5
Consolidated Statements of Stockholders' Equity.......................... F-6
Notes to Consolidated Financial Statements............................... F-7
EQUISTAR CHEMICALS, LP
Report of Independent Accountants.......................................... F-33
Financial Statements:
Statements of Income..................................................... F-34
Balance Sheets........................................................... F-35
Statements of Cash Flows................................................. F-36
Statements of Partners' Capital.......................................... F-37
Notes to Financial Statements............................................ F-38
LYONDELL-CITGO REFINING LP
Independent Auditors' Report............................................... F-55
Report of Independent Accountants.......................................... F-56
Financial Statements:
Statements of Income..................................................... F-57
Balance Sheets........................................................... F-58
Statements of Cash Flows................................................. F-59
Statements of Partners' Capital.......................................... F-60
Notes to Financial Statements............................................ F-61
</TABLE>
F-1
<PAGE>
LYONDELL CHEMICAL COMPANY
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Lyondell Chemical Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Lyondell
Chemical Company (formerly Lyondell Petrochemical Company) and its subsidiaries
at December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
February 26, 1999
F-2
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the year ended
December 31
----------------------
Millions of dollars, except per share data 1998 1997 1996
- ------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Sales and other operating revenues:
Unrelated parties...................................... $1,447 $2,346 $4,734
Related parties........................................ -- 532 318
------ ------ ------
1,447 2,878 5,052
------ ------ ------
Income from equity investments (before unusual charges):
Equistar Chemicals, LP................................. 134 30 --
LYONDELL-CITGO Refining LP............................. 116 102 --
Lyondell Methanol Company, L.P......................... 6 -- --
------ ------ ------
256 132 --
------ ------ ------
Gain on sale of assets................................... -- -- 30
------ ------ ------
Operating costs and expenses:
Cost of sales:
Unrelated parties.................................... 1,089 1,827 4,320
Related parties...................................... -- 423 250
Selling, general and administrative expenses........... 126 186 234
Research and development expense....................... 26 -- --
Amortization of goodwill and other intangible assets... 41 -- --
Unusual charges........................................ 82 40 --
------ ------ ------
1,364 2,476 4,804
------ ------ ------
Operating income....................................... 339 534 278
Interest expense......................................... (287) (75) (81)
Interest income.......................................... 25 14 3
Other income (expense), net.............................. 12 (17) (4)
------ ------ ------
Income before income taxes............................... 89 456 196
Provision for income taxes............................... 37 170 70
------ ------ ------
Net income............................................... $ 52 $ 286 $ 126
====== ====== ======
Basic and diluted earnings per share..................... $ .67 $ 3.58 $ 1.58
====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------
Millions of dollars 1998 1997
- ------------------- ------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 233 $ 86
Accounts receivable:
Trade, net................................................. 473 1
Related parties............................................ 6 4
Inventories.................................................. 550 --
Prepaid expenses and other current assets.................... 64 12
------ ------
Total current assets..................................... 1,326 103
------ ------
Property, plant and equipment, net............................. 4,511 46
Investment in affiliates:
Equistar Chemicals, LP....................................... 660 1,063
LYONDELL-CITGO Refining LP................................... 84 104
Lyondell Methanol Company, L.P............................... 50 --
Receivable from LYONDELL-CITGO Refining LP..................... 231 196
Other investments and long-term receivables.................... 53 --
Goodwill, net.................................................. 1,430 --
Deferred charges and other assets.............................. 880 47
------ ------
Total assets................................................... $9,225 $1,559
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade...................................................... $ 252 $ 87
Related parties............................................ 1 97
Notes payable................................................ -- 100
Current maturities of long-term debt......................... 1,603 --
Other accrued liabilities.................................... 481 24
------ ------
Total current liabilities................................ 2,337 308
------ ------
Long-term debt, less current maturities........................ 5,391 345
Other liabilities and deferred credits......................... 294 73
Deferred income taxes.......................................... 413 209
Commitments and contingencies
Minority interest.............................................. 216 5
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,
80,000,000 issued........................................... 80 80
Additional paid-in capital................................... 158 158
Retained earnings............................................ 387 407
Accumulated other comprehensive income....................... 32 --
Treasury stock, at cost, 2,978,203 and 1,015,512 shares,
respectively................................................ (83) (26)
------ ------
Total stockholders' equity............................... 574 619
------ ------
Total liabilities and stockholders' equity..................... $9,225 $1,559
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended
December 31
---------------------
Millions of dollars 1998 1997 1996
- ------------------- ------- ----- -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 52 $ 286 $ 126
Adjustments to reconcile net income to net cash
provided by operating activities, net of the effects
of purchase accounting and deconsolidation of
affiliates:
Depreciation and amortization......................... 138 84 110
Unusual charges....................................... 57 -- --
Deferred income taxes................................. 76 43 50
Minority interest..................................... 6 17 4
Gain on sale of assets................................ -- -- (30)
Decrease (increase) in accounts receivable............ 93 (64) (94)
Increase in inventories............................... (15) (37) (29)
(Decrease) increase in accounts payable............... (160) (44) 160
Net change in other working capital accounts.......... 36 (2) 6
Other................................................. (20) (14) (71)
------- ----- -----
Net cash provided by operating activities........... 263 269 232
------- ----- -----
Cash flows from investing activities:
Acquisition of ARCO Chemical Company, net of cash
acquired.............................................. (5,869) -- --
Expenditures for property, plant and equipment......... (64) (49) (609)
Proceeds from sales of assets.......................... -- -- 55
Contributions and advances to affiliates............... (35) (86) --
Distributions from affiliates in excess of earnings.... 435 72 --
Deconsolidation of affiliates.......................... (11) (12) --
------- ----- -----
Net cash used in investing activities............... (5,544) (75) (554)
------- ----- -----
Cash flows from financing activities:
Proceeds from issuance of long-term debt............... 6,500 -- 502
Payment of debt issuance costs......................... (130) -- (3)
Net (decrease) increase in short-term debt............. (100) 50 (43)
Repayments of long-term debt........................... (715) (112) (150)
Minority owners (distributions) contributions.......... -- (16) 146
Repurchase of common stock............................. (59) (26) --
Dividends paid......................................... (70) (72) (72)
------- ----- -----
Net cash provided by (used in) financing
activities......................................... 5,426 (176) 380
------- ----- -----
Effect of exchange rate changes on cash................. 2 -- --
------- ----- -----
Increase in cash and cash equivalents................... 147 18 58
Cash and cash equivalents at beginning of period........ 86 68 10
------- ----- -----
Cash and cash equivalents at end of period.............. $ 233 $ 86 $ 68
======= ===== =====
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
Millions of dollars, --------------- Paid-In Retained Comprehensive Comprehensive
except per share data Issued Treasury Capital Earnings Income Income
- --------------------- ------ -------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996
(80,000,000 shares
issued)............... $80 $ -- $158 $142 $-- $ --
Net income............ -- -- -- 126 -- 126
Cash dividends ($.90
per share)........... -- -- -- (72) -- --
Other................. -- -- -- (3) -- --
--- ---- ---- ---- --- ----
$126
====
Balance, December 31,
1996
(80,000,000 shares
issued)............... 80 -- 158 193 -- $ --
Net income............ -- -- -- 286 -- 286
Cash dividends ($.90
per share)........... -- -- -- (72) -- --
Purchase of 1,015,512
treasury shares...... -- (26) -- -- -- --
--- ---- ---- ---- --- ----
$286
====
Balance, December 31,
1997
(80,000,000 shares
issued; 1,015,512
treasury shares)....... 80 (26) 158 407 -- $ --
Net income............ -- -- -- 52 -- 52
Cash dividends ($.90
per share)........... -- -- -- (70) -- --
Purchase of 2,051,539
treasury shares...... -- (59) -- -- -- --
Reissuance of 88,848
treasury shares under
restricted stock
plan................. -- 2 -- -- -- --
Foreign currency
translation, net of
tax of $25........... -- -- -- -- 32 32
Other................. -- -- -- (2) -- --
--- ---- ---- ---- --- ----
$ 84
====
Balance, December 31,
1998
(80,000,000 shares
issued; 2,978,203
treasury shares)....... $80 $(83) $158 $387 $32
=== ==== ==== ==== ===
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Company and Operations
Lyondell Chemical Company ("Company" or "Lyondell"), formerly Lyondell
Petrochemical Company, operates in the (i) intermediate chemicals and
derivatives, (ii) petrochemicals, (iii) polymers, (iv) refining and (v)
methanol businesses through its wholly owned subsidiary, ARCO Chemical Company
("ARCO Chemical" or "Acquired Business"), acquired by the Company as of July
28, 1998 (see Note 3), and through the Company's joint venture ownership
interests in Equistar Chemicals, LP ("Equistar"), LYONDELL-CITGO Refining LP
("LCR"), formerly LYONDELL-CITGO Refining Company Ltd., and Lyondell Methanol
Company, L.P. ("Lyondell Methanol").
The Acquired Business, now named Lyondell Chemical Worldwide, Inc., is the
world's largest producer of propylene oxide ("PO") and a leading worldwide
producer and marketer of polyether polyols, propylene glycol, propylene glycol
ethers, toluene diisocyanate ("TDI"), styrene monomer ("SM") and methyl
tertiary butyl ether ("MTBE"). The Acquired Business 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
4). The Company accounts for its investment in Equistar using the equity method
of accounting. Prior to the formation of Equistar on December 1, 1997, the
Company's assets and operations of the petrochemicals and polymers businesses
were fully consolidated in the consolidated financial statements of the
Company.
Equistar's petrochemicals division consists of: olefins, including ethylene,
propylene, butadiene, butylenes and specialty products; aromatics, including
benzene and toluene; oxygenated chemicals, including ethylene oxide and
derivatives, MTBE, ethyl alcohol and diethyl ether; and specialty chemicals,
including refinery blending stocks.
Equistar's polymers division consists of: polyolefins, including high
density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear-low
density polyethylene ("LLDPE") and polypropylene; and performance polymers
products, including color concentrates and compounds, wire and cable resins and
compounds, adhesive resins, and fine powders.
The Company's operations in the refining segment are conducted through its
joint venture ownership interest in LCR (see Note 5). 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 Lyondell Methanol (see Note 6). These operations consist
of methanol and other petrochemical products produced by its methanol facility.
Effective January 1, 1998, Lyondell began to account for its investment in
Lyondell Methanol using the equity method of accounting. Prior to 1998,
Lyondell Methanol's assets and operations were fully consolidated in the
consolidated financial statements.
From its formation in 1985 through June 1988, the Company operated as a
division of Atlantic Richfield Company ("ARCO"). In July 1988, ARCO transferred
the division's assets and liabilities along with additional pipeline assets, to
its wholly owned subsidiary, Lyondell Petrochemical Company, a Delaware
corporation. In January 1989, ARCO completed an initial public offering of
approximately 50.1 percent of the Company's common stock. In August 1994, ARCO
issued three-year debt securities ("Exchangeable Notes")
F-7
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
which were exchangeable upon maturity on September 15, 1997 into Lyondell
common stock or an equivalent cash value, at ARCO's option. On September 15,
1997, ARCO delivered shares of Lyondell common stock to the holders of the
Exchangeable Notes. The Company purchased the remaining 383,312 shares of
common stock held by ARCO after the conversion. As of December 31, 1998 and
1997, ARCO owned no shares of Lyondell common stock.
2. Summary of Significant Accounting Policies
Basis of Presentation--The 1998 Consolidated Financial Statements include
the accounts of the Company and its subsidiaries, including the results of
operations of the Acquired Business for the five months ended December 31,
1998. The Company's joint venture ownership interests in Equistar for 1998 and
December 1997, in LCR for 1998 and 1997, and in Lyondell Methanol for 1998, are
reported as equity investments and are not consolidated into the Company's
financial statements. Lyondell Methanol is fully consolidated into the
Company's financial statements for 1997 and 1996, and LCR is fully consolidated
only for 1996. Additionally, the Company has an investment in a 50 percent
owned affiliate that is accounted for using the equity method of accounting.
All significant transactions between the entities of the Company have been
eliminated from the Consolidated Financial Statements.
Revenue Recognition--Revenue from product sales is generally recognized upon
delivery of products to the customer.
Equity Method of Accounting--Investments in joint ventures ("JVs") where the
Company exerts a certain minimum level of management control, but lacks full
decision making ability over all major issues, are accounted for using the
equity method of accounting. Under those circumstances, this accounting
treatment is used even though the Company's ownership percentage may exceed 50
percent. Under this method, the operations of the JVs are not consolidated line
by line with those of the Company. Instead, the Company's portion of the JVs'
net income is included in the Consolidated Statements of Income as "Income from
equity investments" and the Company's portion of the JVs' net assets appears in
the Consolidated Balance Sheets as "Investment in affiliates." Cash advances
to, and distributions in excess of earnings from the JVs, are reflected as
individual line items in the Consolidated Statements of Cash Flows.
Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. The Company's
policy is to invest cash in conservative, highly rated instruments and limit
the amount of credit exposure to any one institution. The Company performs
periodic evaluations of the relative credit standing of these financial
institutions, which are considered in the Company's investment strategy.
The Company has no requirements for compensating balances in a specific
amount at a specific point in time. The Company does maintain compensating
balances for some of its banking services and products. Such balances are
maintained on an average basis and are solely at the Company's discretion. As a
result, none of the Company's cash is restricted.
Accounts Receivable--The Company sells its products primarily to other
industrial concerns in the petrochemicals and refining industries. The Company
performs ongoing credit evaluations of its customers' financial condition, and,
in certain circumstances, requires letters of credit from them. The Company's
allowance for doubtful accounts receivable, which is reflected in the
Consolidated Balance Sheets as a reduction of accounts receivable, totaled $11
million at December 31, 1998. The Company had no significant allowance for
doubtful accounts recorded at December 31, 1997.
F-8
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. Depreciation of manufacturing facilities and equipment is computed using
the straight-line method over the estimated useful lives of the related assets
ranging from 5 to 30 years.
Upon retirement or sale, the Company removes the cost of the asset and the
related accumulated depreciation from the accounts and reflects any resulting
gain or loss in the Consolidated Statements of Income. The Company's policy is
to capitalize interest cost incurred on debt during the construction of major
projects exceeding one year.
Turnaround Maintenance and Repair Expenses--Cost of repairs and maintenance
incurred in connection with turnarounds of major units at the Company's
manufacturing facilities exceeding $5 million are deferred and amortized using
the straight-line method, until the next planned turnaround, generally four to
six years.
Goodwill--Goodwill represents the excess of purchase price paid over the
value assigned to the net tangible assets of a business acquired. This
intangible asset is amortized over 40 years, the estimated useful life, using
the straight-line method. See Long-Lived Asset Impairment below.
Deferred Charges--Deferred charges are carried at cost and consist primarily
of the value assigned to patents and licensed technology, capacity reservation
fees and other long-term processing rights and costs. These assets are
amortized using the straight-line method over their estimated useful lives or
the term of the related agreement, if shorter.
Environmental Remediation Costs--Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Estimates have not
been discounted to present value. Environmental remediation costs are expensed
or capitalized in accordance with generally accepted accounting principles.
Pension and Other Postretirement Benefit Plans--During 1998, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 132,
Employers' Disclosures about Pensions and Other Retirement Benefits. The
provisions of SFAS No. 132 revise employer disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of these plans. SFAS No. 132 standardizes the disclosure requirements for these
plans, to the extent practicable.
Minority Interest--Minority interest in 1998 primarily represents the
interest of third-party investors in a partnership that owns one of the
Company's two domestic PO/SM plants. The Company retains a majority interest in
the partnership. The minority interest share of the partnership's income and
loss is reported in "Other income (expense), net" in the Consolidated
Statements of Income.
Exchanges--Crude oil and finished product exchange transactions, which
involve homogeneous commodities in the same line of business and do not involve
the payment or receipt of cash, are not accounted for as purchases and sales.
Any resulting volumetric exchange balances are accounted for as inventory in
accordance with the normal LIFO valuation policy.
Income Taxes--Deferred income taxes result from temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes
and are calculated based upon cumulative book and tax differences in the
Consolidated Balance Sheets in accordance with SFAS No. 109, Accounting for
Income Taxes. Valuation allowances are provided against deferred tax assets
which are not likely to be realized in full.
F-9
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign Currency Translation--Where the local currency is the functional
currency, the financial statements of international operations are translated
into U.S. dollars using the exchange rate at each balance sheet date for assets
and liabilities and the average exchange rate for each period for revenues,
expenses, gains and losses. Translation adjustments are recorded as a separate
component of "Accumulated other comprehensive income" in the stockholders'
equity section of the Consolidated Balance Sheets. Where the U.S. dollar is the
functional currency, remeasurement adjustments are recorded as foreign exchange
gains and losses in the Consolidated Statements of Income.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Long-Lived Asset Impairment--In accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, the Company reviews its long-lived assets, including goodwill, for
impairment on an exception basis whenever events or changes in circumstances
indicate a potential loss in utility. Impairment losses are recognized in the
Consolidated Statements of Income.
Segment and Related Information--In 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 supercedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the management
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect the results of operations or the
financial position of the Company (see Note 22).
Reclassifications--Certain previously reported amounts have been restated to
conform to classifications adopted in 1998.
3. Purchase of ARCO Chemical Company
As of July 28, 1998, the Company completed its acquisition of ARCO Chemical
("Acquisition"). The transaction was financed through a $7.0 billion Credit
Facility (see Note 16). This Acquisition was accounted for using the purchase
method of accounting and, accordingly, the results of operations of the
Acquired Business are included in the Company's Consolidated Statements of
Income prospectively from August 1, 1998. The acquisition cost of approximately
$5.9 billion has been allocated to the assets acquired and liabilities assumed
based upon the estimated fair value of such assets and liabilities at the date
of acquisition. The Company is awaiting additional information related to the
fair value of certain assets acquired and liabilities assumed. Management does
not expect the finalization of these matters to have a material effect on the
purchase price allocation. 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 the
Company's Houston headquarters. The liability totaled $255 million at the date
of acquisition. Through December 31, 1998, the Company had paid and charged
approximately $132 million against the liability.
Approximately $57 million, or less than one percent of the purchase price,
was allocated to purchased in-process research and development. This included
three projects valued at $29 million, $18 million and $10 million,
respectively, representing two new product applications and one new process
technology. The activities
F-10
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
represented by these projects will be continued by the Company and the values
assigned represent intangibles with no alternative future use. Accordingly, the
Company wrote off the in-process research and development, recording a
nonrecurring charge of $57 million in the third quarter 1998 (see Note 7). The
excess of purchase price paid over the estimated fair value of net assets
acquired was allocated to goodwill. The amount allocated to goodwill was
approximately $1.4 billion and is being amortized, using the straight-line
method, over 40 years, the estimated useful life.
The fair value of the assets acquired and liabilities assumed, net of cash
acquired, was as follows:
<TABLE>
<CAPTION>
Millions of dollars
-------------------
<S> <C>
Current assets, net of cash acquired.............................. $1,133
Property, plant and equipment..................................... 4,454
Purchased in-process research and development..................... 57
Goodwill.......................................................... 1,445
Deferred charges and other assets................................. 1,124
Current liabilities............................................... (599)
Long-term debt.................................................... (952)
Other liabilities and deferred credits............................ (793)
------
Purchase price, net of cash acquired.............................. $5,869
======
</TABLE>
The unaudited pro forma combined historical results of the Company and ARCO
Chemical, giving effect to the Acquisition, the Credit Facility drawdown, the
formation of Equistar, and the deconsolidation of Lyondell Methanol as of the
beginning of 1998 and 1997, respectively, are as follows:
<TABLE>
<CAPTION>
For the year
ended
December 31
-------------
Millions of dollars, except per share data 1998 1997
----------------------------------------------------------- ------ ------
<S> <C> <C>
Sales and other operating revenues......................... $3,553 $3,995
Income from equity investments............................. 256 526
Unusual charges............................................ 62 215
Operating income........................................... 631 663
Net income................................................. 42 27
Basic and diluted earnings per share....................... .54 .34
</TABLE>
The unaudited pro forma data presented above are not necessarily indicative
of the results of operations of the Company that would have occurred had such
transactions actually been consummated as of the beginning of 1998 and 1997,
respectively, nor are they necessarily indicative of future results.
4. 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, a
subsidiary of Occidental Petroleum Corporation ("Occidental"), were contributed
to Equistar ("Occidental Contributed Business"). Equistar is operated as a
Delaware limited partnership owned by subsidiaries of the Company, Millennium
and Occidental ("Partners").
F-11
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Lyondell currently has a 41.0 percent joint venture ownership interest,
while Millennium and Occidental each have 29.5 percent. Prior to the addition
of Occidental as a partner on May 15, 1998, the Company had a 57.0 percent
joint venture ownership interest, while Millennium had 43.0 percent. 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>
December 31
-------------------------
Millions of dollars 1998 1997
------------------- ------------ ------------
<S> <C> <C>
BALANCE SHEETS
Total current assets.......................... $1,130 $1,192
Property, plant and equipment, net............ 4,075 2,118
Goodwill, net................................. 1,151 1,139
Deferred charges and other assets............. 312 151
------ ------
Total assets.................................. $6,668 $4,600
====== ======
Current maturities of long-term debt.......... $ 150 $ 36
Other current liabilities..................... 488 300
Long-term debt, less current maturities....... 1,865 1,512
Capital lease obligations..................... 205 --
Other liabilities and deferred credits........ 75 34
Partners' capital............................. 3,885 3,063
Note receivable from Lyondell................. -- (345)
------ ------
Total liabilities and partners' capital....... $6,668 $4,600
====== ======
<CAPTION>
For the year For the one
ended month ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
STATEMENTS OF INCOME
Sales and other operating revenues............ $4,363 $ 365
Cost of sales................................. 3,773 287
Selling, general and administrative expenses.. 273 21
Unusual charges............................... 35 42
------ ------
Operating income.............................. 282 15
Interest expense, net......................... 139 8
------ ------
Net income.................................... $ 143 $ 7
====== ======
SELECTED CASH FLOW INFORMATION
Depreciation and amortization................. $ 268 $ 19
Expenditures for property, plant and
equipment.................................... 200 12
</TABLE>
The Company's $134 million and $30 million share of Equistar's income before
unusual charges for the one year and for the one month ended December 31, 1998
and 1997, respectively, are presented as "Income from equity investments" in
Equistar in the Consolidated Statements of Income. The Company's $15 million
and $24 million share of Equistar's unusual charges for the year ended December
31, 1998 and the one month
F-12
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ended December 31, 1997, respectively, are included in the "Unusual charges"
line in the Consolidated Statements of Income (see Note 7).
At the formation of Equistar and adjusted for the addition of the Occidental
Contributed Business on May 15, 1998, the difference between the Company's
investment in Equistar and its underlying equity in Equistar's net assets was
approximately $900 million. This difference is being accreted into income of
the Company over 25 years using the straight-line method. This accretion is
included in "Income from equity investments" in Equistar in the Consolidated
Statements of Income.
Included in "Sales and other operating revenues" above are $97 million in
sales to Lyondell for the five months ended December 31, 1998. Sales to LCR
included above were $236 million for the year ended December 31, 1998 and $27
million for the month of December 1997. In addition, Equistar purchased $2
million from Lyondell for the five months ended December 31, 1998, which is
included in Equistar's "Cost of sales" above. Purchases from LCR during the
year ended December 31, 1998 and for the month of December 1997, included in
Equistar's "Cost of sales" totaled $131 million and $10 million, respectively.
The Company has various service and cost sharing arrangements with Equistar.
Billings to Equistar were approximately $3 million for the year ended December
31, 1998. Billings from Equistar were approximately $1 million for the year
ended December 31, 1998.
5. 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. LCR
completed a major upgrade project at the Refinery ("Upgrade Project") during
the first quarter of 1997, which enabled the facility to process substantial
additional volumes of extra heavy crude oil. As a result of the completion of
the Upgrade Project, effective April 1, 1997, the participation interests
changed to reflect CITGO's equity contribution to the Upgrade Project. The
participation interests changed from approximately 86 percent and 14 percent
for the Company and CITGO, respectively, and are currently 58.75 percent and
41.25 percent 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.
Pursuant to contractual arrangements and concurrent with the completion of
the Upgrade Project, the authority and responsibility for certain management
decisions previously decided by majority vote, and therefore controlled by the
Company, changed to unanimous vote, resulting in joint control of LCR by
Lyondell and CITGO. Consequently, effective January 1, 1997, the Company began
to account for its investment in LCR using the equity method of accounting.
F-13
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized financial information for LCR is as follows. The results below
include a restatement for a pricing adjustment between LCR and Lyondell
recorded in 1996 and retroactive to 1993.
<TABLE>
<CAPTION>
December 31
-------------
Millions of dollars 1998 1997
------------------- ------ ------
<S> <C> <C>
BALANCE SHEETS
Total current assets....................................... $ 197 $ 243
Property, plant and equipment, net......................... 1,370 1,391
Deferred charges and other assets.......................... 70 47
------ ------
Total assets............................................... $1,637 $1,681
====== ======
Total current liabilities.................................. $ 203 $ 293
Long-term debt............................................. 717 663
Other liabilities and deferred credits..................... 68 52
Partners' capital.......................................... 649 673
------ ------
Total liabilities and partners' capital.................... $1,637 $1,681
====== ======
</TABLE>
<TABLE>
<CAPTION>
For the year ended
December 31
--------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
STATEMENTS OF INCOME
Sales and other operating revenues.................. $2,055 $2,695 $2,816
Cost of sales....................................... 1,754 2,442 2,750
Selling, general and administrative expenses........ 78 72 62
Unusual charges..................................... 10 -- --
------ ------ ------
Operating income.................................... 213 181 4
Interest expense, net............................... 43 35 --
State income taxes.................................. 1 1 --
------ ------ ------
Net income.......................................... $ 169 $ 145 $ 4
====== ====== ======
SELECTED CASH FLOW INFORMATION
Depreciation and amortization....................... $ 100 $ 91 $ 35
Expenditures for property, plant and equipment...... 61 85 529
</TABLE>
Included in sales and other operating revenues above are $181 million and
$175 million in sales to Lyondell for the eleven months ended November 30, 1997
and the year ended December 31, 1996, respectively. Sales to Equistar included
above were $131 million for the year ended December 31, 1998 and $10 million
for the month of December 1997. In addition, LCR purchased $325 million and
$234 million, primarily product purchases, from Lyondell for the eleven months
ended November 30, 1997 and the year ended December 31, 1996, respectively,
which are included in LCR's cost of sales. Purchases from Equistar during the
year ended December 31, 1998 and for the month of December 1997, included in
LCR's cost of sales, totaled $236 million and $27 million, respectively.
The Company has various service and cost sharing arrangements with LCR.
Billings to LCR were approximately $4 million, $7 million, and $11 million for
the years ended December 31, 1998, 1997 and 1996, respectively. Billings from
LCR were approximately $4 million, $5 million, and $3 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
F-14
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, during 1998 and 1997, the Company received interest payments of
approximately $9 million and $13 million respectively, for interest on loans
related to funding a portion of the Upgrade Project and certain other capital
expenditures at the Refinery.
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. The
Crude Supply Agreement incorporates formula prices to be paid by LCR for the
crude oil supplied based on the market value of a slate of refined products
deemed to be produced from each particular crude oil or feedstock, less: (i)
certain deemed refining costs, adjustable for inflation and energy costs; (ii)
certain actual costs; and (iii) a deemed margin, which varies according to the
grade of crude oil or other feedstock delivered. Deemed margins and deemed
costs are adjusted periodically. These adjustments are based upon inflation
rates and energy costs, however, deemed margin adjustments can be less than the
rate of inflation. Because deemed operating costs and the slate of refined
products deemed to be produced for a given barrel of crude oil or other
feedstock do not necessarily reflect the actual costs and yields in any period
and also because the market value of the refined products used in the pricing
formula does not necessarily reflect the actual price received for the refined
products, the actual refining margin earned by LCR under the Crude Supply
Agreement will vary depending upon, among other things, the efficiency with
which LCR conducts its operations during such period.
Despite the limitations discussed above, the Crude Supply Agreement reduces
the volatility of earnings and cash flow of the refining operations of LCR
irrespective of market fluctuations of either crude oil or refined products.
Specifically, if the market value of refined products deemed to be produced
from the Venezuelan crude oil increases, the deemed cost of crude oil to LCR
will also increase. Alternatively, if the market value of refined products
deemed to be produced from the Venezuelan crude oil decreases, the deemed cost
of crude oil to LCR will also decrease. This results in relatively stable
deemed margins, regardless of refined products market volatility. If the actual
yields, costs or volumes, differ substantially from those contemplated by the
Crude Supply Agreement, the benefits of this agreement to LCR could be
substantially different than anticipated.
In addition, under the terms of a long-term product sales agreement
("Products Agreement"), CITGO purchases substantially all of the refined
products produced at the Refinery. Both PDVSA Oil and CITGO are direct or
indirect, wholly-owned subsidiaries of Petroleos de Venezuela, S.A., the
national oil company of the Republic of Venezuela.
Under the terms of the Limited Partnership Agreement of LYONDELL-CITGO
Refining LP, CITGO has a one-time option to increase its participation interest
in LCR up to 50 percent by making an additional equity contribution after
January 1, 2000, but not later than September 30, 2000.
6. Equity Interest in Lyondell Methanol Company, L.P.
Lyondell Methanol was formed in December 1996 by the Company and MCN
Investment Corporation ("MCNIC") to own and operate the methanol facility at
the Company's Channelview, Texas facility. At formation, the Company sold an
undivided 25 percent interest in the facility to MCNIC, creating Lyondell
Methanol, a Texas limited partnership owned by subsidiaries of the Company and
MCNIC. The Company owns the remaining 75 percent interest and serves as
managing partner. Since December 1, 1997, Equistar has served as operator of
the methanol facility. Lyondell Methanol sells all of its products to Equistar.
F-15
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In accordance with the guidance in Emerging Issues Task Force Issue No. 96-
16 issued in May 1997, the Company began to account for its investment in
Lyondell Methanol using the equity method of accounting, effective January 1,
1998.
During 1998 and 1997, Lyondell Methanol revenues were $104 million and $165
million and net income was $8 million and $58 million, respectively.
7. Unusual Charges
During 1998, the Company wrote off $57 million of costs assigned to
purchased in-process research and development in connection with the Acquired
Business. The Company's pro rata share of Equistar's unusual charges for 1998
and 1997 was $15 million and $24 million, respectively, and consisted primarily
of costs associated with the consolidation of certain operations. These costs
were paid by Equistar and allocated to the Partners in accordance with their
ownership percentages. Lyondell's pro rata share of LCR's unusual charges
related to a new agreement with LCR's labor union. Additionally, related to the
formation of Equistar, Lyondell incurred unusual charges in 1998 and 1997
related to the early termination of incentive compensation plans and executive
severance.
The unusual charges consisted of the following items for the years ended
December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Purchased in-process research and development................... $57 $--
Lyondell's pro rata share of Equistar unusual charges........... 15 24
Lyondell's pro rata share of LCR unusual charges................ 6 --
Lyondell incentive compensation and executive severance......... 4 16
--- ---
Total unusual charges......................................... $82 $40
=== ===
</TABLE>
8. Income Taxes
The significant components of the provision for income taxes were as follows
for the years ended December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997 1996
------------------- ---- ---- ----
<S> <C> <C> <C>
Current
Federal............................................... $(44) $114 $ 19
Foreign............................................... 6 -- --
State................................................. (1) 13 1
---- ---- ----
Total current....................................... (39) 127 20
---- ---- ----
Deferred
Federal............................................... 69 43 48
Foreign............................................... (1) -- --
State................................................. 8 -- 2
---- ---- ----
Total deferred...................................... 76 43 50
---- ---- ----
Total provision for income taxes.................... $ 37 $170 $ 70
==== ==== ====
</TABLE>
F-16
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes, and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets were as follows as of
December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation and amortization................ $452 $ --
Investments in partnerships................................ 251 230
Other...................................................... 30 --
---- ----
Total deferred tax liabilities........................... 733 230
---- ----
Deferred tax assets:
Provisions for benefit plans and estimated expenses........ 236 25
Federal benefit attributable to foreign taxes.............. 100 --
Federal tax credit carryforwards........................... 57 --
Other...................................................... 30 2
---- ----
Total deferred tax assets................................ 423 27
Deferred tax asset valuation allowance..................... (27) --
---- ----
Net deferred tax assets.................................. 396 27
---- ----
Net deferred tax liabilities................................. 337 203
Less current portion of deferred tax liability (asset)....... -- (6)
---- ----
Long-term deferred income taxes............................ $337 $209
==== ====
</TABLE>
At December 31, 1998, net deferred tax assets of $76 million were classified
as "Deferred charges and other assets" on the Consolidated Balance Sheets.
Under Internal Revenue Code Sections 338 (g) and (h) (10), Lyondell and ARCO
agreed to elect to step up the U.S. tax basis of the Acquired Company's net
assets. This will result in significantly increased depreciation and
amortization deductions for U.S. tax purposes.
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to the Company's effective tax rate follows:
<TABLE>
<CAPTION>
Description 1998 1997 1996
----------- ---- ---- ----
<S> <C> <C> <C>
U.S. statutory income tax rate........................ 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Foreign and U.S. tax effects of foreign
operations....................................... 6.9 -- --
State income taxes, net of federal................ 4.9 1.8 1.2
Settlement of tax issues.......................... (5.1) -- --
Officer compensation.............................. -- .9 --
Other, net........................................ (.2) (.4) (.5)
---- ---- ----
Effective income tax rate............................. 41.5% 37.3% 35.7%
==== ==== ====
</TABLE>
F-17
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Related Party Transactions
Atlantic Richfield Company--Sales to ARCO, excluding sales to ARCO Chemical
Company, were $31 million in 1996. Cost of sales and selling expenses include
charges from ARCO, excluding costs to ARCO Chemical Company, of $23 million in
1996. The Company purchased 383,312 shares of its common stock held by ARCO
after the conversion of the Exchangeable Notes on September 15, 1997 at a price
of $25.66 per share. After that transaction, ARCO ceased to be a related party.
Sales by Lyondell to ARCO Chemical, an ARCO affiliate and therefore a
related party until September 1997, consisting of propylene, MTBE, benzene,
ethylene, methanol and other products and services, were $206 million and $287
million during 1997 and 1996, respectively.
In July 1996, a fire occurred at the ARCO PipeLine Company meter station
located within the Channelview Facility. The fire forced the shutdown of the
entire Channelview Facility for several days and more than two weeks for some
units. The Company recovered lost profits from ARCO PipeLine Company for this
shutdown. The recovery was included in 1996 reported results.
10. Accounts Receivable
In December 1998, the Company entered into a three-year receivables purchase
agreement with an independent issuer of receivables-backed commercial paper.
Under the terms of the agreement, the Company agreed to sell on an ongoing
basis and without recourse, designated accounts receivable. To maintain the
balance of the accounts receivable sold, the Company is obligated to sell new
receivables as existing receivables are collected. The agreement permits the
sale of up to $175 million of accounts receivable through December 2001.
At December 31, 1998, the Company's gross accounts receivable that had been
sold to the purchasers aggregated $160 million. This amount has been reported
as operating cash flows in the Consolidated Statements of Cash Flows. Costs
related to the sale are included in "Other income (expense), net" in the
Consolidated Statements of Income.
11. Inventories
Inventories are stated at the lower of cost or market. In 1998,
approximately 94 percent of inventories, excluding materials and supplies, were
determined by the last-in, first-out ("LIFO") method. Materials and supplies
and other non-LIFO inventories are valued using either the first-in, first-out
("FIFO") or the average cost methods.
Inventories at December 31, 1998 were comprised of the following:
<TABLE>
<CAPTION>
Millions of dollars
-------------------
<S> <C>
Finished goods....................................................... $459
Work-in-process...................................................... 18
Raw materials........................................................ 34
Materials and supplies............................................... 39
----
Total inventories.................................................. $550
====
</TABLE>
As of December 31, 1997, all of Lyondell's inventories had been contributed
to Equistar.
F-18
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Property, Plant and Equipment, Net
The components of property, plant and equipment, at cost, and the related
accumulated depreciation were as follows at December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ------ ----
<S> <C> <C>
Land......................................................... $ 19 $ --
Manufacturing facilities and equipment....................... 4,470 138
Construction in progress..................................... 98 --
------ ----
Total property, plant and equipment........................ 4,587 138
Less accumulated depreciation................................ 76 92
------ ----
Property, plant and equipment, net......................... $4,511 $ 46
====== ====
</TABLE>
Depreciation expense for 1998, 1997 and 1996 was $75 million, $71 million
and $89 million, respectively. Approximately $32 million of interest cost
during 1996 was capitalized as property, plant and equipment. No interest was
capitalized during 1998 and 1997. At December 31, 1997, the Company's
manufacturing facilities and equipment consisted of the assets owned by
Lyondell Methanol.
13. Deferred Charges and Other Assets
Deferred charges and other assets, net of accumulated amortization, were as
follows at December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Patents and licensed technology................................ $236 $ --
Company owned life insurance................................... 184 43
Contractual rights............................................. 138 --
Debt issue costs, net.......................................... 109 --
Other.......................................................... 213 4
---- ----
Total deferred charges and other assets...................... $880 $ 47
==== ====
</TABLE>
The increase in deferred charges and other assets in 1998 is primarily due
to the purchase of the Acquired Business.
14. Other Accrued Liabilities
Other accrued liabilities were as follows at December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Accrued payroll and benefits................................... $148 $ 6
Accrued contractual obligations................................ 139 --
Accrued interest............................................... 55 2
Accrued taxes other than income................................ 49 11
Other.......................................................... 90 5
---- ----
Total other accrued liabilities.............................. $481 $ 24
==== ====
</TABLE>
F-19
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Pension and Other Postretirement Benefits
The Company provides defined pension and postretirement benefit plans to
employees. The following table provides a reconciliation of benefit
obligations, plan assets and the funded status of the plans:
<TABLE>
<CAPTION>
Other
Pension Postretirement
Benefits Benefits
---------- ----------------
Millions of dollars 1998 1997 1998 1997
- ------------------- ---- ---- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, January 1.................. $136 $118 $ 5 $ 25
Service cost................................... 7 6 1 3
Interest cost.................................. 18 10 2 2
Plan amendments................................ -- -- -- (18)
Actuarial loss................................. 42 21 5 5
Effect of settlement........................... 10 (9) -- --
Acquisition of ARCO Chemical................... 303 -- 61 --
Transfer to Equistar........................... -- -- -- (12)
Benefits paid.................................. (29) (10) (1) --
---- ---- ------- -------
Benefit obligation, December 31................ 487 136 73 5
---- ---- ------- -------
Change in plan assets:
Fair value of plan assets, January 1........... 103 90 -- --
Actual return of plan assets................... 11 14 -- --
Company contributions.......................... 12 9 1 --
Acquisition of ARCO Chemical................... 351 -- -- --
Benefits paid.................................. (29) (10) (1) --
---- ---- ------- -------
Fair value of plan assets, December 31......... 448 103 -- --
---- ---- ------- -------
Funded status.................................. (39) (33) (73) (5)
Unrecognized actuarial loss.................... 70 21 8 4
Unrecognized prior service cost................ 6 3 (18) (20)
Unrecognized transition obligation (asset)..... 5 (2) -- --
---- ---- ------- -------
Net amount recognized.......................... $ 42 $(11) $ (83) $ (21)
==== ==== ======= =======
Amounts recognized in the Consolidated Balance
Sheets consist of:
Prepaid benefit cost........................... $ 54 $ -- $ -- $ --
Accrued benefit liability...................... (12) (11) (83) (21)
---- ---- ------- -------
Net amount recognized.......................... $ 42 $(11) $ (83) $ (21)
==== ==== ======= =======
</TABLE>
The above table for pension benefits includes foreign pension plans of ARCO
Chemical. These plans constituted approximately 20 percent of the benefit
obligation and 23 percent of the plan assets at December 31, 1998. The
assumptions used in determining the net periodic pension cost and pension
obligation for foreign pension plans were based on the economic environment of
each applicable country.
The benefit obligation and accumulated benefit obligation for pension plans
with accumulated benefit obligations in excess of plan assets were $19 million
and $11 million, respectively, as of December 31, 1998 and $11 million and $7
million, respectively, as of December 31, 1997. These plans are not funded and
consisted primarily of supplementary benefit plans for executives and
expatriates.
In connection with the formation of Equistar, pension obligations and assets
were not contributed by Lyondell to Equistar. The employees transferred to
Equistar became fully vested in the Lyondell pension plan effective December 1,
1997 and no longer accrue pension service with Lyondell. However, an accrued
F-20
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
postretirement benefit obligation of $12 million associated with Lyondell
employees transferred to Equistar was contributed to Equistar by Lyondell.
Net periodic pension and other postretirement benefit costs included the
following components:
<TABLE>
<CAPTION>
Other
Pension Postretirement
Millions of dollars Benefits Benefits
- ------------------------------------------------ ---------------- ---------------
1998 1997 1996 1998 1997 1996
Components of net periodic benefit cost: ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost................................... $ 7 $ 6 $ 10 $ 1 $ 3 $ 4
Interest cost.................................. 19 10 12 2 2 4
Expected return of plan assets................. (24) (8) (10) -- -- --
Prior service cost amortization................ -- -- -- (1) -- --
Actuarial loss amortization.................... 1 1 1 -- -- --
Transition obligation amortization............. -- -- 1 -- -- --
---- --- ---- --- --- ---
Net periodic benefit cost before settlement.... 3 9 14 2 5 8
Effect of settlement........................... 2 -- -- -- -- --
---- --- ---- --- --- ---
Net periodic benefit cost after settlement..... $ 5 $ 9 $ 14 $ 2 $ 5 $ 8
==== === ==== === === ===
</TABLE>
The above net periodic benefit costs included eleven months of 1997 and the
full-year 1996 costs of the business contributed to Equistar on December 1,
1997, as well as the 1996 net periodic benefit costs of LCR.
<TABLE>
<CAPTION>
Other
Pension Postretirement
Benefits Benefits
---------------- ----------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions as of
December 31:
Discount rate............................ 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected return on plan assets........... 9.50% 9.50% 9.50% -- -- --
Rate of compensation increase............ 4.75% 4.75% 5.00% 4.75% 4.75% 5.00%
</TABLE>
For measurement purposes, the assumed annual rate of increase in the per
capita cost of covered health care benefits as of December 31, 1998 was 7.0
percent for 1999-2001 and 5.0 percent thereafter. A one-percentage-point
increase in assumed health care cost trend rates would increase the
postretirement benefit obligation by $10 million, while a one-percentage-point
decrease would reduce the obligation by $8 million. The effect of a one-
percentage-point change would be less than $1 million on the total of the
service and interest cost components.
16. Long-Term Debt and Financing Arrangements
In connection with its purchase of the Acquired Business, the Company
executed a bank credit agreement providing for aggregate borrowings of up to
$7.0 billion ("Credit Facility"). As part of the acquisition, the Company
assumed approximately $870 million of ARCO Chemical debt. Borrowings under the
Credit Facility of $6.5 billion were used for: (i) the purchase of
approximately 97.4 million shares of ARCO Chemical common stock; (ii) repayment
of debt, including the $345 million term note payable to Equistar, short-term
borrowings of Lyondell and ARCO Chemical and other long-term borrowings of ARCO
Chemical; and (iii) payment of certain debt issuance costs.
The Credit Facility comprises: (i) a five-year revolving credit facility of
up to $500 million to be used for general corporate purposes ("Revolving Credit
Facility"); and (ii) four separate term loans ("Term Loans") in the amounts of:
(a) $2.0 billion ("Term Loan A") to be amortized over five years; (b) $1.25
billion ("Term Loan B") to be amortized over seven years; (c) $1.25 billion
with principal maturing on June 30, 1999 ("Term Loan C"); and (d) $2.0 billion
with principal maturing on June 30, 2000 ("Term Loan D"). All of the Term
F-21
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loans were funded on July 28, 1998. No amounts have been funded to date under
the Revolving Credit Facility. The Credit Facility is collateralized by cash
flow streams from the Company's three joint ventures and the Company's common
stock ownership in its subsidiaries.
The Term Loans bear interest at the following rates: (i) Term Loan A--LIBOR
plus 2.0 percent; (ii) Term Loan B--LIBOR plus 2.5 percent; (iii) Term Loan C--
LIBOR plus 2.0 percent; and (iv) Term Loan D--LIBOR plus 2.0 percent.
Mandatory prepayments from certain sources of funds are required with
respect to the Term Loans until such time as: (i) Term Loans C and D are repaid
in full, including accrued interest and fees thereon; and (ii) Lyondell has
achieved investment grade ratings of at least BBB- and Baa3 from Standard &
Poor's Ratings Services and Moody's Investors Service, Inc., respectively. The
sources of funds for mandatory prepayments include: (i) cash proceeds received
from or as a result of: (a) certain equity or debt issuances; (b) the
recapitalization of LCR; and (c) asset sales, as defined; and (ii) 50 percent
of annual excess cash flow, as defined, less the aggregate principal amount
prepaid under the Term Loans.
Under the covenant provisions of the Credit Facility, the Company 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 common 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, debt
level and cash distribution policies. The Credit Facility requires the Company,
among other things, to issue $1.25 billion of equity, as defined, by July 23,
1999. The breach of any of the covenants or financial requirements in the
Credit Facility could result in a default thereunder, which would permit the
lenders to declare the loans immediately payable and to terminate future
lending commitments. The Company intends to seek an amendment to the Credit
Facility that would, among other things, substantially reduce the requirements
for the sale of equity and ease the financial ratio requirements. The amendment
requires approval by lenders holding a majority of the commitments. Subject to
the foregoing, the Company intends to complete an amendment of the Credit
Facility and to effect debt and equity offerings in the second quarter of 1999,
using the proceeds to meet the June 1999 debt maturity. In addition, the
Company is actively exploring alternative means of retiring or refinancing
debt, including other financing sources, enhancement of operating cash flows
through cost reductions, management of working capital levels and sales of
assets. Accordingly, the Company believes that it will be able to satisfy its
obligations through the actions discussed above.
Long-term debt at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ------ ------
<S> <C> <C>
Term Loan A................................................ $1,852 $ --
Term Loan B................................................ 1,248 --
Term Loan C................................................ 1,250 --
Term Loan D................................................ 2,000 --
Debentures due 2000, 9.9%.................................. 200 --
Debentures due 2005, 9.375%................................ 100 --
Debentures due 2010, 10.25%................................ 100 --
Debentures due 2020, 9.8%.................................. 224 --
Other...................................................... 20 --
Term note to Equistar...................................... -- 345
------ ------
Total long-term debt..................................... 6,994 345
Less current maturities.................................... 1,603 --
------ ------
Long-term debt, net...................................... $5,391 $ 345
====== ======
</TABLE>
F-22
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Lyondell transferred $744 million of long-term debt to Equistar on December
1, 1997 of which $713 million was outstanding at December 31, 1998. Lyondell
remains an obligor on the debt. Under certain limited circumstances the debt
holders have the right to require repurchase of up to $313 million of the
debt.
Aggregate maturities of all long-term debt during the next five years are
$1.6 billion in 1999, $2.6 billion in 2000, $445 million in 2001, $445 million
in 2002, $446 million in 2003, and $1.4 billion thereafter.
17. Financial Instruments
The Company does not buy or sell, or hold or issue financial instruments
for speculative trading purposes.
Foreign currency swap and forward contracts are used to minimize foreign
exchange exposures. Foreign exchange exposures result from cash flows between
U.S. and international operations and transactions denominated in currencies
other than the local currency of an operating entity. Swap contracts and
forward contracts are used to hedge foreign exchange exposures The notional
amounts of foreign currency contracts outstanding, principally involving the
Netherlands guilder, were $205 million at December 31, 1998 with various
maturity dates in 1999.
Gains and losses, realized and unrealized, on foreign currency forward and
swap contracts as well as realized and unrealized gains and losses on the
underlying exposures are recognized currently in "Other income (expense), net"
in the Consolidated Statements of Income.
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. The Treasury Locks,
which are based on U.S. Treasury rates have an average interest rate of 5.52
percent with a determination date of August 5, 1999. The Company's accounting
policy is to defer any gains and losses on the Treasury Locks, and recognize
them as an adjustment to interest expense over the term of the debt issued.
The fair value of the Treasury Locks at December 31, 1998 was an obligation of
approximately $53 million, resulting from a decline in the relevant U.S.
Treasury rates. Had the Company issued the anticipated fixed-rate debt as of
December 31, 1998, it would have benefited from a lower interest rate on the
debt issued, resulting in lower interest expense over the life of the debt,
that would have been an offset to the potential settlement of the Treasury
Locks.
The carrying value and the estimated fair value of the Company's financial
instruments as of December 31, 1998 are shown as assets (liabilities) in the
table below.
<TABLE>
<CAPTION>
1998
---------------
Carrying Fair
Millions of dollars Value Value
------------------- -------- ------
<S> <C> <C>
Nonderivatives:
Investments and long-term receivables.................. $1,078 $1,078
Long-term debt (including current maturities).......... 6,994 7,027
Derivatives:
Treasury locks......................................... -- (53)
Foreign currency swaps................................. (10) (11)
Foreign currency forwards.............................. (1) (1)
</TABLE>
All derivative instruments are off-balance-sheet instruments, however net
receivable or payable positions related to derivative instruments are carried
on the balance sheet.
F-23
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of all nonderivative financial instruments included in
current assets and current liabilities, including cash and cash equivalents,
accounts receivable, accounts payable and notes payable, approximated their
carrying value due to their short maturity. Investments and long-term
receivables, which consist primarily of equity investments in affiliated
companies, were valued using current financial and other available information.
Based upon the borrowing rates currently available to the Company for debt with
terms and average maturities similar to the Company's debt portfolio, the fair
value of the Company's long-term debt, including amounts due within one year,
was $7.0 billion at December 31, 1998. The fair value of derivative financial
instruments represents the amount to be exchanged if the existing contracts
were settled at December 31, 1998 and are based on market quotes.
The Company is exposed to credit risk related to its financial instruments
in the event of nonperformance by the counterparties. The Company does not
generally require collateral or other security to support these financial
instruments. The counterparties to these transactions are major institutions
deemed creditworthy by the Company. The Company does not anticipate
nonperformance by the counterparties.
For the year ended December 31, 1998, the results of foreign exchange
transactions, including foreign currency derivative instruments, were not
significant.
18. Commitments and Contingencies
The Company has commitments, including those related to capital
expenditures, all made in the normal course of business. During August 1998, as
contemplated at the time of the Acquisition, 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, the Company is
negotiating the cancellation of the related lump-sum contract for the
engineering, procurement and construction of the PO-11 plant. The Company
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 (see Note 3).
The Acquired Business is party to a long-term supply arrangement for toluene
diisocyanate ("TDI"). Under the arrangement, the Company 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. The Company is
required to purchase a minimum of 216 million pounds of TDI per year for up to
15 years, beginning January 1, 1995. The aggregate purchase price is a
combination of plant cost and market price. The Company is further obligated to
pay additional capacity reservation fees based upon plant output factors.
Prior to the formation of Equistar on December 1, 1997, the Company was
party to various unconditional purchase obligation contracts as a purchaser of
product and services. The Company's total purchases under those agreements,
including LCR for 1996, were $27 million and $47 million in 1997 and 1996,
respectively.
Crude Supply Agreement--Depending upon market conditions, breach or
termination of LCR's Crude Supply Agreement could adversely affect LCR, and
therefore, the Company. Although the parties have negotiated alternate
arrangements in the event of a force majeure, which may arise from, among other
things, governmental or other actions restricting or otherwise limiting PDVSA
Oil's ability to perform its obligations, any such alternative arrangements may
not be as beneficial as the Crude Supply 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.
F-24
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cross Indemnity Agreement--In connection with the transfer of assets and
liabilities from 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, 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 and
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 Partner,
subject to certain terms of the respective Asset Contribution Agreements.
During the thirteen months ended December 31, 1998, approximately $1 million
had been expensed by Equistar under the $7 million indemnification basket with
respect to the business contributed by Lyondell.
Environmental--The Company's policy is to be in compliance with all
applicable environmental laws. The Company is subject to extensive
environmental laws and regulations concerning emissions to the air, discharges
to surface and subsurface waters and the generation, handling, storage,
transportation, treatment and disposal of waste materials. Some of these laws
and regulations are subject to varying and conflicting interpretations. In
addition, the Company cannot accurately predict future developments, such as
increasingly strict environmental laws and inspection and enforcement policies,
as well as higher compliance costs arising therefrom, which might affect the
handling, manufacture, use, emission or disposal of products, other materials
or hazardous and non-hazardous waste.
Pursuant to the terms of the Revised Cross-Indemnity Agreement, the Company
is currently contributing funds to the clean up of one waste site (Brio,
located near Houston, Texas) under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") as amended and the Superfund
Amendments and Reauthorization Act of 1986. The Company is also subject to
certain assessment and
F-25
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 December 31, 1998, the Company has accrued $9 million related to
future CERCLA, RCRA and TNRCC assessment and remediation costs associated with
the above mentioned sites. The costs are expected to be incurred over the next
two to seven years. In the opinion of management, there is currently no
material range of loss in excess of the amount recorded for these sites.
However, it is possible that new information about the sites for which the
reserve has been established, new technology or future developments such as
involvement in other CERCLA, RCRA, TNRCC or other comparable state law
investigations, could require the Company to reassess its potential exposure
related to environmental matters.
As part of the Acquisition (see Note 3), the Company assumed ARCO Chemical's
environmental liability, which totaled $39 million at December 31, 1998 and
reflects the Company's latest assessment of potential future remediation costs
associated with known ARCO Chemical sites. The liability is related to four
current plant sites, one former plant site and one federal Superfund site for
amounts ranging from $2 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 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.
During July 1994, the Company reported results of an independent
investigation conducted by the Audit Committee of the Board of Directors
regarding the compliance status of two process waste-water streams under the
applicable Benzene National Emissions Standard for Hazardous Air Pollutants
("NESHAPS") regulations and certain issues raised by an employee. The Company
has been informed that this matter is considered closed by the EPA and no
further enforcement action is anticipated.
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 legislative initiatives have sought to
either rescind the oxygenate requirement for reformulated gasoline sold in
California and other states or restrict the use of MTBE. There is ongoing
review of this issue and the ultimate resolution of the appropriateness of
using MTBE 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 such legislative initiatives were
enacted, 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.
F-26
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
19. Lease Commitments
The Company leases various facilities and equipment under noncancelable
lease arrangements for varying periods. As of December 31, 1998, future minimum
lease payments for years ending December 31, relating to all noncancelable
operating leases with lease terms in excess of one year were as follows:
<TABLE>
<CAPTION>
Millions of dollars
-------------------
<S> <C>
1999................................................................ $ 52
2000................................................................ 42
2001................................................................ 38
2002................................................................ 33
2003................................................................ 26
Thereafter.......................................................... 310
----
Total minimum lease payments...................................... $501
====
</TABLE>
Operating lease net rental expenses for 1998, 1997 and 1996, including
Lyondell Methanol for 1997 and LCR for 1996, were $39 million, $43 million and
$66 million, respectively.
20. Stockholders' Equity
Dividends--During 1998, 1997 and 1996, the Company paid regular quarterly
dividends of $.225 per share on common stock outstanding.
Basic and Diluted Earnings per Share--Basic earnings per share for all
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. The following earnings per share ("EPS")
data is presented for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ------------
Thousands of shares Shares EPS Shares EPS Shares EPS
- ------------------- ------ ---- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Basic.................................... 77,669 $.67 79,796 $3.58 80,000 $1.58
Dilutive effect of options............... 30 -- 17 -- 45 --
------ ---- ------ ----- ------ -----
Diluted.................................. 77,699 $.67 79,813 $3.58 80,045 $1.58
====== ==== ====== ===== ====== =====
</TABLE>
Treasury Stock--From time to time the Company purchases its shares in the
open market to be used for issuances under the Company's employee compensation
and benefits plans, including stock option and restricted stock plans. During
1998, the Company purchased 500,000 shares for approximately $10 million to
F-27
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
be used for such plans. The Company reissued, under the Restricted Stock Plan,
88,848 shares previously purchased. Earlier in 1998, the Company completed the
stock repurchase program authorized by the Company's Board of Directors in
September 1997. A total of 2,567,051 shares were purchased for $75 million
under this stock repurchase program.
Restricted Stock Plan--During 1998 the Company granted and issued 88,848
shares of restricted stock to employees of the Acquired Business. The shares
vest on various dates through December 15, 2000, depending upon the terms of
the individual grants. Employees are entitled to receive dividends on the
restricted shares.
Rights to Purchase Common Stock--On December 8, 1995, the Board of Directors
of Lyondell declared a dividend of one right ("Right") for each outstanding
share of the Company's common stock to stockholders of record on December 20,
1995. The Rights become exercisable upon the earlier of: (i) ten days following
a public announcement by another entity that it has acquired beneficial
ownership of 15 percent or more of the outstanding shares of common stock; or
(ii) ten business days following the commencement of a tender offer or exchange
offer to acquire beneficial ownership of 15 percent or more of the outstanding
shares of common stock, except under certain circumstances. The Rights expire
at the close of business on December 8, 2005 unless earlier redeemed at a price
of $.0005 per Right or exchanged by the Company as described in the Rights
Agreement dated as of December 8, 1995.
Preferred Stock--The Company has authorized 80,000,000 shares of preferred
stock, $.01 par value, of which none were issued or outstanding at December 31,
1998.
Stock Options--The Company's Executive Long-Term Incentive Plan ("LTI Plan")
became effective in November 1988. The last stock options granted under the LTI
Plan were granted in March 1994. No additional stock option grants will be made
under this plan. The LTI Plan provided, among other compensation awards, for
the granting to officers and other key management employees of non-qualified
stock options for the purchase of up to 1,295,000 shares of the Company's
common stock. The number of options exercisable each year is equal to 25
percent of the number granted after each year of continuous service starting
one year from the date of grant. The LTI Plan provided that the option price
per share was not less than 100 percent of the fair market value of the stock
on the effective date of the grant. As of December 31, 1998, options covering
621,835 shares were outstanding under the LTI Plan with a weighted average
remaining life of 4 years, all of which were exercisable at prices ranging from
$18.25 to $30.00 per share. The following summarizes stock option activity for
the LTI Plan:
<TABLE>
<CAPTION>
Number Average
of Option Price
Shares Per Share
-------- ------------
<S> <C> <C>
Balance, January 1, 1996................................. 948,256 $23.26
Exercised.............................................. (204,454) 22.64
--------
Balance, December 31, 1996............................... 743,802 23.43
Exercised.............................................. (11,642) 19.15
--------
Balance, December 31, 1997............................... 732,160 23.50
Exercised.............................................. (110,325) 22.84
--------
Balance, December 31, 1998............................... 621,835 23.62
========
</TABLE>
F-28
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's Incentive Stock Option Plan ("ISO Plan"), a tax qualified
plan, became effective in January 1989. The last stock options granted under
the ISO Plan were granted in March 1993. No additional grants will be made
under the ISO Plan. All employees of the Company who were not on the executive
payroll were eligible to participate in the ISO Plan, subject to certain
restrictions. Various restrictions apply as to when and to the number of stock
options that may be exercised during any year. As of December 31, 1998, options
covering 145,191 shares were outstanding at $30.00 per share. These options
were held by 641 eligible employees and expired in January 1999. At December
31, 1998, no stock options were exercisable. The following summarizes stock
option activity for the ISO Plan:
<TABLE>
<CAPTION>
Number Average
of Option Price
Shares Per Share
------- ------------
<S> <C> <C>
Balance, January 1, 1996.................................. 189,553 $29.64
Canceled/forfeited...................................... (10,303) 28.51
Exercised............................................... (3,446) 19.44
-------
Balance, December 31, 1996................................ 175,804 29.91
Canceled/forfeited...................................... (18,250) 29.68
Exercised............................................... (803) 19.44
-------
Balance, December 31, 1997................................ 156,751 29.99
Canceled/forfeited...................................... (11,408) 30.00
Exercised............................................... (152) 19.44
-------
Balance, December 31, 1998................................ 145,191 30.00
=======
</TABLE>
Employee stock options are accounted for under the intrinsic value based
method prescribed by the Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Accordingly, no compensation cost has been
recognized in connection with stock option grants under the plans. There were
no grants in any of the years ended December 31, 1998, 1997 and 1996.
21. Supplemental Cash Flow Information
Supplemental cash flow information is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997 1996
------------------- ---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest:
Paid.................................................... $230 $ 66 $103
Less amount capitalized................................. -- -- 32
---- ---- ----
Net.................................................... $230 $ 66 $ 71
==== ==== ====
Income taxes............................................. $ 63 $125 $ 42
==== ==== ====
</TABLE>
The petrochemicals and polymers businesses contributed by the Company to
Equistar on December 1, 1997 included non-cash net assets with a net book value
of $762 million, including $381 million of accounts receivable, $233 million of
inventory, $826 million of net property, plant and equipment and $745 million
of long-term debt, including the current maturities. In addition, the Company
contributed a $345 million term note payable to Equistar, which was repaid in
July 1998.
F-29
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
22. Segment and Related Information
Using the guidelines set forth in SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, the Company has identified four
reportable segments in which it operates. The reportable segments are: (i)
intermediate chemicals and derivatives; (ii) petrochemicals; (iii) polymers;
and (iv) refining. The accounting policies of the segments are the same as
those described in the Summary of Significant Accounting Policies (see Note 2).
The methanol segment is not a reportable segment. The reportable segments are
described further below:
Intermediate Chemicals and Derivatives--This segment consists of the
production and marketing of propylene oxide ("PO"), polyether polyols,
propylene glycol, propylene glycol ethers, toluene diisocyanate ("TDI"),
styrene monomer ("SM") and methyl tertiary butyl ether ("MTBE").
Petrochemicals--This segment consists of operations in: olefins, including
ethylene, propylene, butadiene, butylenes and specialty products; aromatics,
including benzene and toluene; methanol; oxygenated chemicals, including
ethylene oxide and derivatives, MTBE, ethyl alcohol and diethyl ether; and
specialty chemicals, including refinery blending stocks. The petrochemicals
business of Equistar for 1998 and December 1997 is included in this segment.
Polymers--This segment consists of operations in: polyolefins, including
high density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear
low density polyethylene ("LLDPE") and polypropylene; and performance polymers
products, including color concentrates and compounds, wire and cable resins and
compounds, adhesive resins, and fine powders. The polymers business of Equistar
for 1998 and December 1997 is included in this segment.
Refining--This segment, which is comprised of LCR operations, consists of:
refined petroleum products, including conventional and reformulated gasoline,
low sulfur diesel and jet fuel; aromatics produced at the 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.
No customer accounted for 10 percent or more of consolidated sales during
1998, 1997 or 1996, other than CITGO during 1996, which purchased substantially
all of the refined products produced at the LCR Refinery under the Products
Agreement (see Note 5). Under the terms of that agreement, CITGO continues to
purchase a substantial portion of the output of the Refining segment.
F-30
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The table includes certain
reclassifications for an intersegment pricing adjustment recorded in 1996.
Intersegment sales from the petrochemicals segment to the polymers segment in
1997 and 1996 include ethylene and propylene produced at Equistar's Channelview
facility. Intersegment sales between the petrochemicals and refining segments
in 1997 and 1996 include olefins feedstocks and benzene produced at the
Refinery, and gasoline blending stocks and hydrogen produced at Equistar's
Channelview facility. Intersegment sales were made at prices based upon current
market values.
<TABLE>
<CAPTION>
Intermediate
Chemicals
and
Millions of dollars Derivatives Petrochemicals Polymers Refining Other Total
- ------------------- ------------ -------------- -------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
1998
Sales and other
operating revenues..... $1,447 $1,447
Income from equity
investments before
unusual charges........ -- $ 159 $ 89 $ 116 $(108) 256
Unusual charges......... 57 -- -- 6 19 82
Operating income........ 108 159 89 110 (127) 339
Total assets............ 8,200 297 201 315 212 9,225
Capital expenditures.... 64 -- -- -- -- 64
Depreciation and
amortization expense... 138 -- -- -- -- 138
1997
Sales and other
operating revenues:
Customers............. $2,108 $770 $2,878
Intersegment.......... 424 -- $(424) --
Income from equity
investments before
unusual charges........ 28 13 $ 102 (11) 132
Unusual charges......... -- -- -- 40 40
Operating income........ 472 95 102 (135) 534
Total assets............ 447 349 300 463 1,559
Capital expenditures.... 27 13 -- 9 49
Depreciation and
amortization expense... 50 29 -- 5 84
1996
Sales and other
operating revenues:
Customers............. $1,628 $783 $2,641 $5,052
Intersegment.......... 665 -- 171 $(836) --
Operating income........ 240 97 1 (60) 278
Total assets............ 870 624 1,706 76 3,276
Capital expenditures.... 57 20 529 3 609
Depreciation and
amortization expense... 44 29 34 3 110
</TABLE>
F-31
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the details of "Other" operating income as
presented above for the years ended December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997 1996
------------------- ----- ----- -----
<S> <C> <C> <C>
Expenses, principally Equistar selling, general and
administrative, not allocated to petrochemicals and
polymers segments..................................... $(114) $ (95) $ (60)
Income from equity investment in Lyondell Methanol
Company, L.P.......................................... 6 -- --
Unallocated unusual charges............................ (19) (40) --
----- ----- -----
Total................................................ $(127) $(135) $ (60)
===== ===== =====
</TABLE>
The following "Sales and other operating revenues" by country data are based
upon the location of the use of the product. Long-lived assets by country data
are based upon the location of the assets. The data are for the five months
ended and as of December 31, 1998, respectively:
<TABLE>
<CAPTION>
Sales and
Other
Operating Long-Lived
Millions of dollars Revenues Assets
------------------- --------- ----------
<S> <C> <C>
United States........................................ $ 724 $3,046
Foreign.............................................. 723 1,465
------ ------
Total.............................................. $1,447 $4,511
====== ======
</TABLE>
Foreign long-lived assets primarily consist of the net property, plant and
equipment of two plants, located in Rotterdam, The Netherlands, and Fos-sur-
Mer, France, both of which are part of the intermediate chemicals and
derivatives segment. Prior to the purchase of the Acquired Business as of July
28, 1998, the Company did not have operations outside the United States and
export sales were not significant.
23. Unaudited Quarterly Results
<TABLE>
<CAPTION>
For the quarter ended
-----------------------------
March June September December
Millions of dollars, except per share data 31 30 30 31
- ------------------------------------------ ----- ---- --------- --------
<S> <C> <C> <C> <C>
1998
Sales and other operating revenues............... $ -- $ -- $566 $881
Income from equity investments................... 120 53 61 22
Operating income................................. 107 45 87 100
Income (loss) before income taxes................ 104 47 (24) (38)
Net income (loss)................................ 65 29 (15) (27)
Basic and diluted earnings (loss) per share...... .82 .38 (.20) (.35)
1997
Sales and other operating revenues............... $755 $789 $799 $535
Income from equity investments................... 6 21 29 76
Operating income................................. 85 167 182 100
Income before income taxes....................... 63 146 162 85
Net income....................................... 40 93 102 51
Basic and diluted earnings per share............. .50 1.17 1.27 .64
</TABLE>
- --------
Earnings per common share calculations for each of the quarters are based upon
the weighted average number of shares outstanding for each period (basic
earnings per share). The sum of the quarters may not necessarily be equal to
the full year earnings per share amount.
F-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Governance Committee
of Equistar Chemicals, LP
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of Equistar Chemicals, LP (the
"Partnership") at December 31, 1998 and 1997, and the results of its operations
and its cash flows for the year ended December 31, 1998 and for the period from
December 1, 1997 (inception) to December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
February 26, 1999
F-33
<PAGE>
EQUISTAR CHEMICALS, LP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the
period from
December 1,
1997
For the year (inception)
ended to
December 31, December 31,
Millions of dollars 1998 1997
- ------------------- ------------ ------------
<S> <C> <C>
Sales and other operating revenues:
Unrelated parties................................... $3,818 $338
Related parties..................................... 545 27
------ ----
4,363 365
------ ----
Operating costs and expenses:
Cost of sales:
Unrelated parties................................. 3,313 261
Related parties................................... 460 26
Selling, general and administrative expenses........ 273 21
Unusual charges..................................... 35 42
------ ----
4,081 350
------ ----
Operating income.................................... 282 15
Interest expense...................................... (156) (10)
Interest income....................................... 17 2
------ ----
Net income............................................ $ 143 $ 7
====== ====
</TABLE>
See Notes to Financial Statements.
F-34
<PAGE>
EQUISTAR CHEMICALS, LP
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------
Millions of dollars 1998 1997
- ------------------- ------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 66 $ 41
Accounts receivable:
Trade, net................................................ 376 428
Related parties........................................... 111 36
Receivables from partners................................... 3 150
Inventories................................................. 549 513
Prepaid expenses and other current assets................... 25 24
------- -------
Total current assets.................................... 1,130 1,192
------- -------
Property, plant and equipment................................. 5,847 3,690
Less accumulated depreciation and amortization................ (1,772) (1,572)
------- -------
4,075 2,118
Investment in PD Glycol....................................... 55 --
Goodwill, net................................................. 1,151 1,139
Deferred charges and other assets............................. 257 151
------- -------
Total assets.................................................. $ 6,668 $ 4,600
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade..................................................... $ 264 $ 154
Related parties........................................... 15 18
Payables to partners........................................ 9 63
Current maturities of long-term debt........................ 150 36
Other accrued liabilities................................... 200 65
------- -------
Total current liabilities............................... 638 336
------- -------
Obligations under capital leases.............................. 205 --
Long-term debt................................................ 1,865 1,512
Other liabilities and deferred credits........................ 75 34
Commitments and contingencies
Partners' capital:
Partners' capital........................................... 3,885 3,063
Note receivable from Lyondell LP............................ -- (345)
------- -------
Total partners' capital................................. 3,885 2,718
------- -------
Total liabilities and partners' capital....................... $ 6,668 $ 4,600
======= =======
</TABLE>
See Notes to Financial Statements.
F-35
<PAGE>
EQUISTAR CHEMICALS, LP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
period from
December 1,
1997
For the year (inception)
ended to
December 31, December 31,
Millions of dollars 1998 1997
- ------------------- ------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 143 $ 7
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 268 19
Loss on disposition of property, plant and
equipment........................................ 8 --
Equity in losses of investment in PD Glycol....... 3 --
Changes in assets and liabilities, net of the
effects of assets contributed:
Decrease (increase) in accounts receivable....... 105 (100)
Decrease (increase) in receivables from
partners........................................ 147 (101)
Decrease (increase) in inventories............... 133 (5)
Increase in accounts payable..................... 40 188
(Decrease) increase in payables to partners...... (63) 54
Increase in other accrued liabilities............ 122 48
Net change in other working capital accounts..... 2 (15)
Other............................................ (62) 7
------- -----
Net cash provided by operating activities........ 846 102
------- -----
Cash flows from investing activities:
Additions to property, plant and equipment......... (200) (12)
Proceeds from disposition of property, plant and
equipment......................................... 3 --
Contributions and advances to affiliates........... (15) --
------- -----
Net cash used in investing activities............ (212) (12)
------- -----
Cash flows from financing activities:
Borrowings of long-term debt....................... 757 50
Repayments of long-term debt....................... (290) --
Proceeds from payment of note receivable by
Lyondell.......................................... 345 --
Cash contributions from partners................... -- 1
Distributions to partners.......................... (1,421) (100)
------- -----
Net cash used in financing activities............ (609) (49)
------- -----
Increase in cash and cash equivalents................ 25 41
Cash and cash equivalents at beginning of period..... 41 --
------- -----
Cash and cash equivalents at end of period........... $ 66 $ 41
======= =====
</TABLE>
See Notes to Financial Statements.
F-36
<PAGE>
EQUISTAR CHEMICALS, LP
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Millions of dollars Lyondell Millennium Occidental Total
- ------------------- -------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Balance, December 1, 1997 (inception)... $ -- $ -- $ -- $ --
Capital contributions at inception:
Net assets.......................... 763 2,048 -- 2,811
Note receivable from Lyondell LP.... 345 -- -- 345
Net income............................ 4 3 -- 7
Distributions to partners............. (57) (43) -- (100)
----- ------ ------ ------
Balance, December 31, 1997.............. 1,055 2,008 -- 3,063
Capital contributions:
Net assets.......................... -- -- 2,097 2,097
Other............................... (14) 9 8 3
Net income (loss)..................... 84 64 (5) 143
Distributions to partners............. (512) (460) (449) (1,421)
----- ------ ------ ------
Balance, December 31, 1998.............. $ 613 $1,621 $1,651 $3,885
===== ====== ====== ======
</TABLE>
See Notes to Financial Statements.
F-37
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS
1. Formation of the Company and Operations
Pursuant to a partnership agreement ("Partnership Agreement") Lyondell
Chemical Company ("Lyondell") and Millennium Chemicals, Inc. ("Millennium")
formed Equistar Chemicals, LP ("Equistar" or "Partnership"), a Delaware limited
partnership, which commenced operations on December 1, 1997. From December 1,
1997 to May 15, 1998, the Partnership was owned 57 percent by Lyondell and 43
percent by Millennium. Lyondell owns its interest in the Partnership through
two wholly-owned subsidiaries, Lyondell Petrochemical G.P. Inc. ("Lyondell GP")
and Lyondell Petrochemical L.P. Inc. ("Lyondell LP"). Millennium also owns its
interest in the Partnership through two wholly-owned subsidiaries, Millennium
Petrochemicals GP LLC ("Millennium GP") and Millennium Petrochemicals LP LLC
("Millennium LP").
On May 15, 1998, the Partnership was expanded with the contribution of
certain assets from Occidental Petroleum Corporation ("Occidental") (see Note
3). These assets include the ethylene, propylene and ethylene oxide ("EO") and
EO derivatives businesses and certain pipeline assets held by Oxy
Petrochemicals Inc. ("Oxy Petrochemicals"), a 50 percent interest in a joint
venture between PDG Chemical Inc. ("PDG Chemical") and E.I. DuPont de Nemours
and Company ("PD Glycol"), and a lease to the Partnership of the Lake Charles,
Louisiana olefins plant and related pipelines held by Occidental Chemical
Corporation ("Occidental Chemical") (collectively, "Occidental Contributed
Business"). Occidental Chemical, Oxy Petrochemicals and PDG Chemical are
wholly-owned, indirect subsidiaries of Occidental. The Occidental Contributed
Business included olefins plants at Corpus Christi and Chocolate Bayou, Texas,
EO/ethylene glycol and EO derivatives businesses located at Bayport, Texas,
Occidental's 50 percent ownership of PD Glycol, which operates a polyglycol
plant at Beaumont, Texas, 1,430 miles of owned and leased ethylene/propylene
pipelines, and the lease to the Partnership of the Lake Charles, Louisiana
olefins plant and related pipelines.
In exchange for the Occidental Contributed Business, two subsidiaries of
Occidental were admitted as limited partners and a third subsidiary was
admitted as a general partner in the Partnership for an aggregate partnership
interest of 29.5 percent. In addition, the Partnership assumed approximately
$205 million of Occidental indebtedness and the Partnership issued a promissory
note to an Occidental subsidiary in the amount of $419.7 million, which was
subsequently paid in cash in June 1998. In connection with the contribution of
the Occidental Contributed Business and the reduction of Millennium's and
Lyondell's ownership interests in the Partnership, the Partnership also issued
a promissory note to Millennium LP in the amount of $75 million, which was
subsequently paid in June 1998. These payments are included in "Distributions
to partners" in the accompanying Statements of Partners' Capital and of Cash
Flows. The consideration paid for the Occidental Contributed Business was
determined based upon arms-length negotiations between Lyondell, Millennium and
Occidental. In connection with the transaction, the Partnership and Occidental
also entered into a long-term agreement for the Partnership to supply the
ethylene requirements for Occidental Chemical's U.S. manufacturing plants.
After completion of this transaction, the Partnership is owned 41 percent by
Lyondell, 29.5 percent by Millennium and 29.5 percent by Occidental, through
its wholly-owned subsidiaries Occidental Petrochem Partner GP Inc. ("Occidental
GP"), Occidental Petrochem Partner 1, Inc. ("Occidental LP1") and Occidental
Petrochem Partner 2, Inc. ("Occidental LP2").
The Partnership owns and operates the petrochemicals and polymers businesses
contributed by Lyondell, Millennium and Occidental ("Contributed Businesses")
which consist of 20 manufacturing facilities on the U.S. Gulf Coast and in the
U.S. Midwest. The petrochemicals segment manufactures and markets olefins,
oxygenated chemicals, aromatics and specialty chemicals. Olefins include
ethylene, propylene and butadiene, and oxygenated chemicals include ethylene
oxide, ethylene glycol, ethanol and methyl tertiary butyl ether ("MTBE"). The
petrochemicals segment also includes the production and sale of aromatics,
including benzene and toluene. The polymers segment manufactures and markets
polyolefins, including high-density polyethylene
F-38
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
("HDPE"), low-density polyethylene ("LDPE"), linear low-density polyethylene
("LLDPE"), polypropylene, and performance polymers, all of which are used in
the production of a wide variety of consumer and industrial products. The
performance polymers include enhanced grades of polyethylene, including wire
and cable resins, concentrates and compounds, and polymeric powders.
The Partnership Agreement provides that Equistar is governed by a
Partnership Governance Committee consisting of nine representatives, three
appointed by each partner. Most of the significant decisions of the Partnership
Governance Committee require unanimous consent, including approval of the
Partnership's Strategic Plan and annual updates thereof.
Pursuant to the Partnership Agreement, net income is allocated among the
partners on a pro rata basis based on their percentage ownership of the
Partnership. Distributions are made to the partners based on their percentage
ownership of the Partnership. Additional cash contributions required by the
Partnership will also be based on the partners' percentage ownership of the
Partnership.
2. Summary of Significant Accounting Policies
Revenue Recognition--Revenue from product sales is generally recognized upon
delivery of products to the customer.
Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. The
Partnership's policy is to invest cash in conservative, highly rated
instruments and limit the amount of credit exposure to any one institution. The
Partnership performs periodic evaluations of the relative credit standing of
these financial institutions which are considered in the Partnership's
investment strategy.
The Partnership has no requirements for compensating balances in a specific
amount at a specific point in time. The Partnership does maintain compensating
balances for some of its banking services and products. Such balances are
maintained on an average basis and are solely at the Partnership's discretion.
As a result, none of the Partnership's cash is restricted.
Accounts Receivable--The Partnership sells its products primarily to
companies in the petrochemicals and polymers industries. The Partnership
performs ongoing credit evaluations of its customers' financial condition and,
in certain circumstances, requires letters of credit from them. The
Partnership's allowance for doubtful accounts, which is reflected in the
accompanying Balance Sheet as a reduction of accounts receivable, totaled $3
million at December 31, 1998. The Partnership had no allowance for doubtful
accounts recorded at December 31, 1997.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined on the last-in, first-out ("LIFO") basis except for materials and
supplies, which are valued at average cost.
Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. Depreciation of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the related assets,
ranging from 5 to 30 years.
Upon retirement or sale, the Partnership removes the cost of the assets and
the related accumulated depreciation from the accounts and reflects any
resulting gains or losses in the Statement of Income. The Partnership's policy
is to capitalize interest cost incurred on debt during the construction of
major projects exceeding one year.
F-39
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Turnaround Maintenance and Repair Expenses--Cost of major repairs and
maintenance incurred in connection with turnarounds of units at the
Partnership's manufacturing facilities are deferred and amortized on a
straight-line basis until the next planned turnaround, generally five to seven
years.
Deferred Software Costs--Costs to purchase and develop software for internal
use are deferred and amortized on a straight-line basis over 10 years. The
Partnership amortized $6 million and less than $1 million of deferred software
costs for the year ended December 31, 1998 and during the period from December
1, 1997 (inception) to December 31, 1997, respectively.
Goodwill--Goodwill includes goodwill contributed by Millennium and goodwill
recorded in connection with the contribution of Occidental's assets. Goodwill
is being amortized using the straight-line method over forty years. Management
periodically evaluates goodwill for impairment based on the anticipated future
cash flows attributable to the related operations. Such expected cash flows, on
an undiscounted basis, are compared to the carrying value of the tangible and
intangible assets, and if impairment is indicated, the carrying value of
goodwill, and if necessary other related assets, is adjusted. Management
believes that no impairment exists at December 31, 1998. The Partnership
amortized $31 million and $3 million of goodwill for the year ended December
31, 1998 and during the period from December 1, 1997 (inception) to December
31, 1997, respectively. Accumulated amortization of goodwill was $166 million
and $135 million at December 31, 1998 and 1997, respectively.
Investment in PD Glycol--Equistar holds a 50 percent interest in a joint
venture with E.I. DuPont de Nemours and Company that owns an ethylene glycol
facility in Beaumont, Texas. This investment was contributed by Occidental in
1998. The investment in PD Glycol is accounted for using the equity method of
accounting.
Environmental Remediation Costs--Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Estimates have not
been discounted to present value. Environmental remediation costs are expensed
or capitalized in accordance with generally accepted accounting principles.
Pension and Other Postretirement Benefit Plans--During 1998, the Partnership
adopted Statement of Financial Accounting Standards ("SFAS") No. 132,
Employers' Disclosures about Pensions and Other Retirement Benefits. The
provisions of SFAS No. 132 revise employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of these plans. SFAS No. 132 standardizes the disclosure
requirements for these plans, to the extent practicable.
Exchanges--Finished product exchange transactions, which involve homogeneous
commodities in the same line of business and do not involve the payment or
receipt of cash, are not accounted for as purchases and sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance with
the normal LIFO valuation policy. Exchanges settled through payment and receipt
of cash are accounted for as purchases and sales.
Income Taxes--The Partnership is not subject to federal income taxes as
income is reportable directly by the individual partners; therefore, there is
no provision for income taxes in the accompanying financial statements.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-40
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Segment and Related Information--In 1998, the Partnership adopted SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 supercedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Partnership's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect the results of operations or the
financial position of the Partnership (see Note 18).
Reclassifications--Certain 1997 amounts have been restated to conform to
classifications adopted in 1998.
3. Addition of Occidental Contributed Business
On May 15, 1998, the Partnership was expanded with the contribution of
certain assets from Occidental. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the results of operations for
these assets are included in the accompanying Statement of Income prospectively
from May 15, 1998. The consideration paid for the Occidental Contributed
Business was approximately $2.1 billion and was allocated to the assets
contributed and liabilities assumed based on the estimated fair values of such
assets and liabilities at the date of the contribution. The fair value of the
assets contributed and liabilities assumed by the Partnership on May 15, 1998
was as follows:
<TABLE>
<CAPTION>
Millions of dollars
-------------------
<S> <C>
Total current assets......................................... $ 281
Property, plant and equipment................................ 1,964
Investment in PD Glycol...................................... 58
Goodwill..................................................... 43
Deferred charges and other assets............................ 49
------
Total assets............................................... $2,395
======
Other current liabilities.................................... $ 79
Long-term debt............................................... 205
Other liabilities and deferred credits....................... 14
Partners' capital............................................ 2,097
------
Total liabilities and partners' capital.................... $2,395
======
The unaudited pro forma combined historical results of the Partnership as if
the Occidental Contributed Business had been contributed on January 1, 1998 is
as follows:
<CAPTION>
For the year
ended
December 31,
Millions of dollars 1998
------------------- ------------
<S> <C>
Sales and other operating revenues........................... $4,869
Unusual charges.............................................. 35
Operating income............................................. 320
Net income................................................... 154
</TABLE>
The unaudited pro forma data presented above is not necessarily indicative
of the results of operations of the Partnership that would have occurred had
such transaction actually been consummated as of January 1, 1998, nor are they
necessarily indicative of future results.
F-41
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Cash paid for interest.......................................... $154 $--
==== ===
Noncash investing and financing activities:
Noncash adjustments to contributed capital.................... $ 3 $--
Inventory transfer from PD Glycol............................. 15 --
==== ===
</TABLE>
Historical cost of assets contributed and liabilities assumed by the
Partnership in December 1997 (inception):
<TABLE>
<S> <C>
Total current assets............................................ $ 948
Property, plant and equipment, net.............................. 2,121
Goodwill, net................................................... 1,142
Deferred charges and other assets............................... 158
------
Total assets.................................................. $4,369
======
Current maturities of long-term debt............................ $ 36
Other current liabilities....................................... 17
Long-term debt.................................................. 1,462
Other liabilities and deferred credits.......................... 43
Partners' capital............................................... 3,156
Note receivable from Lyondell LP................................ (345)
------
Total liabilities and partners' capital....................... $4,369
======
</TABLE>
5. Financial Instruments
The fair value of all financial instruments included in current assets and
current liabilities, including cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximated their carrying value due
to their short maturity. Based on the borrowing rates currently available to
the Partnership for debt with terms and average maturities similar to the
Partnership's debt portfolio, the fair value of the Partnership's long-term
debt, including amounts due within one year, was approximately $2.3 billion
and $1.5 billion at December 31, 1998 and 1997, respectively.
The Partnership had issued letters of credit totaling $2.6 million and $4
million at December 31, 1998 and 1997, respectively.
6. Related Party Transactions
Loans to Millennium and Occidental--In connection with Occidental's entry
into Equistar in May 1998, Equistar executed promissory notes to Millennium
and Occidental in the principal amounts of $75.0 million and $419.7 million,
respectively. Each of the notes provides for the annual accrual of interest
(based on a year of 360 days and actual days elapsed) at a rate equal to LIBOR
plus 0.6 percent. These notes were paid in full in June 1998. Interest expense
incurred on these notes during 1998 was $3 million.
Note Receivable from Lyondell LP--Upon formation of the Partnership,
Lyondell LP contributed capital to the Partnership in the form of a $345
million promissory note ("Lyondell Note"). The Lyondell Note bears interest at
LIBOR plus a market spread. The note was repaid in full by Lyondell in July
1998. Interest income accrued on the Lyondell Note totaled $12.8 million and
$1.75 million during 1998 and during the period from December 1, 1997
(inception) to December 31, 1997, respectively.
F-42
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Shared Services Agreement with Lyondell--Lyondell provides certain
corporate, general and administrative services to the Partnership, including
legal, tax, treasury, risk management and other services pursuant to a shared
services agreement. During the year ended December 31, 1998, Lyondell charged
the Partnership $3 million for these services. During the period December 1,
1997 (inception) to December 31, 1997, charges from Lyondell were less than $1
million. As part of the shared services agreement, the Partnership provides
certain general and administrative services to Lyondell, such as health, safety
and environmental services, human resource services, information services and
legal services. During the year ended December 31, 1998 and during the period
December 1, 1997 (inception) to December 31, 1997, the Partnership charged
Lyondell less than $1 million for these services.
Shared Services and Shared-Site Agreements with Millennium--The Partnership
and Millennium have entered into a variety of operating, manufacturing and
technical service agreements related to the business of Equistar and the vinyl
acetate monomers, acetic acid, synthesis gas and methanol businesses retained
by Millennium Petrochemicals. These agreements include the provision by the
Partnership to Millennium Petrochemicals of materials management, certain
utilities, administrative office space, health, safety and environmental
services and computer services. During the year ended December 31, 1998, the
Partnership charged Millennium Petrochemicals $5 million for these services.
During the period from December 1, 1997 (inception) to December 31, 1997,
charges to Millennium Petrochemicals were less than $1 million. These
agreements also include the provision by Millennium Petrochemicals to the
Partnership of certain operational services, including waste water treatment
and barge dock access. During the year ended December 31, 1998 and during the
period December 1, 1997 (inception) to December 31, 1997, Millennium
Petrochemicals charged the Partnership less than $1 million for these services.
Operating Agreement with Occidental Chemical Corporation--On May 15, 1998,
Occidental Chemical and the Partnership entered into an Operating Agreement
("Operating Agreement") whereby Occidental Chemical agreed to operate and
maintain the Occidental Contributed Business and to cause third-parties to
continue to provide equipment, products and commodities to those businesses
upon substantially the same terms and conditions as provided prior to the
transfer. Under the terms of the Operating Agreement, the Partnership agreed to
reimburse Occidental Chemical for its cost in connection with the services
provided to the Partnership, and the Partnership agreed to pay Occidental
Chemical an administrative fee. The Operating Agreement terminated in
accordance with its terms on June 1, 1998. During the term of the Operating
Agreement, the Partnership paid Occidental Chemical an administrative fee of $1
million.
Transition Services Agreement with Occidental Chemical--On June 1, 1998,
Occidental Chemical and the Partnership entered into a Transition Services
Agreement ("TSA"). Under the terms of the TSA, Occidental Chemical agreed to
provide the Partnership certain services in connection with the Occidental
Contributed Business, including services related to accounting, payroll, office
administration, marketing, transportation, purchasing and procurement,
management, human resources, customer service, technical services and others.
Between June 1, 1998 and December 31, 1998, the Partnership expensed $6 million
in connection with services provided pursuant to the TSA. The TSA expires by
its terms on June 1, 1999.
Occidental Chemical Ethylene Sales Agreement--The Partnership and Occidental
Chemical entered into a Sales Agreement, dated May 15, 1998 ("Ethylene Sales
Agreement"). Under the terms of the Ethylene Sales Agreement, Occidental
Chemical has agreed to purchase an annual minimum amount of ethylene from the
Partnership equal to 100 percent of the ethylene feedstock requirements of
Occidental Chemical's United States plants (estimated to be 2 billion pounds
per year at the time of the signing of the agreement) less any quantities up to
250 million pounds tolled in accordance with the provisions of such agreement.
The Partnership's maximum supply obligation in any calendar year under the
Ethylene Sales Agreement is 2.55 billion pounds. Upon three years notice from
either party to the other, the Partnership's maximum supply obligation in any
F-43
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
calendar year under the Ethylene Sales Agreement may be "phased down" as set
forth in the agreement, provided that no phase down may occur prior to January
1, 2009. In accordance with the phase down provisions of the agreement, the
annual minimum requirements set forth in the agreement must be phased down over
at least a five year period so that the annual required minimum cannot decline
to zero prior to December 31, 2013 unless certain specified force majeure
events occur. The Ethylene Sales Agreement provides for an ethylene sales price
that is generally reflective of market prices and will be determined pursuant
to a formula using the Partnership's sales price to third parties and several
published market price indices. During the period from May 15, 1998 to December
31, 1998, the Partnership charged Occidental Chemical $171 million under the
Ethylene Sales Agreement.
Product Sales to Millennium--The Partnership sells ethylene to Millennium at
market-related prices pursuant to an agreement entered into in connection with
the formation of Equistar. Under this agreement, Millennium is required to
purchase 100 percent of its ethylene requirements for its LaPorte, Texas
facility (estimated to be 300 million pounds per year), up to a maximum of 330
million pounds per year. Millennium has the option to increase the amount
purchased to up to 400 million pounds per year beginning January 1, 2001. The
initial term of the contract expires December 1, 2000 and thereafter, the
contract automatically renews annually. Either party may terminate on one
year's notice, except that if Millennium elects to increase its purchases under
the contract, a party must provide two year's notice of termination. The
pricing terms of this agreement are similar to the Ethylene Sales Agreement
with Occidental Chemical. The Partnership charged Millennium $41 million and $4
million for ethylene for 1998 and December 1997, respectively.
Product Sales to Lyondell--Lyondell acquired its intermediate chemicals and
derivatives business through the acquisition of ARCO Chemical Company effective
August 1, 1998. Sales to Lyondell, primarily for ethylene, propylene, MTBE,
benzene and alkylate, totaled $97 million for the period from August 1, 1998 to
December 31, 1998, and were based on price terms generally reflective of
market.
Transactions with LCR--Lyondell's rights and obligations under the terms of
its product sales and feedstock purchase agreements with LYONDELL-CITGO
Refining LP ("LCR"), a joint venture investment of Lyondell, were assigned to
the Partnership. Accordingly, certain refinery products are sold to the
Partnership as feedstocks, and certain olefins by-products are sold to LCR for
processing into gasoline. Sales to LCR were $236 million and $27 million and
purchases from LCR were $131 million and $10 million for the year ended
December 31, 1998 and for the period from December 1, 1997 (inception) to
December 31, 1997, respectively. The Partnership also assumed certain tolling
arrangements as well as terminalling and storage obligations between Lyondell
and LCR and performs certain marketing services for LCR. Aggregate charges
under these various service agreements of $15 million were made to LCR by the
Partnership with respect to 1998. No charges were made during December 1997.
All of the agreements between LCR and the Partnership are on terms generally
representative of prevailing market prices. The Partnership also has a shared
services agreement with LCR to provide LCR with information services, including
mainframe processing and maintenance. Net charges to LCR by the Partnership for
the shared services agreement were less than $1 million during 1998. No charges
were made during December 1997.
Transactions with Lyondell Methanol--The Partnership provides operating and
other services for Lyondell Methanol Company, L.P. ("Lyondell Methanol") under
the terms of existing agreements that were assumed by Equistar from Lyondell,
including the lease to Lyondell Methanol by the Partnership of the real
property on which its methanol plant is located. Pursuant to the terms of those
agreements, Lyondell Methanol pays the Partnership a management fee and will
reimburse certain expenses of the Partnership at cost. Management fees charged
by the Partnership to Lyondell Methanol totaled $6 million for the year ending
December 31, 1998 and less than $1 million during the period from December 1,
1997 (inception) to December 31, 1997. The Partnership sells natural gas to
Lyondell Methanol at prices generally representative of its cost. Purchases by
F-44
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Lyondell Methanol of natural gas feedstock from the Partnership totaled $44
million and $4 million for the year ended December 31, 1998 and during the
period from December 1, 1997 (inception) to December 31, 1997, respectively.
Lyondell Methanol sells all of its products to Equistar. For the year ending
December 31, 1998 and during the period from December 1, 1997 (inception) to
December 31, 1997, purchases from Lyondell Methanol were $103 million and $15
million, respectively.
Related Party Leases--As part of their shared services agreement with the
Partnership, Millennium subleases from the Partnership certain administrative
office space at a monthly rent of $42,000.
7. Accounts Receivable
In December 1998, the Partnership entered into a purchase agreement with an
independent issuer of receivables-backed commercial paper. Under the terms of
the agreement, the Partnership agreed to sell on an ongoing basis and without
recourse, designated accounts receivable. To maintain the balance of the
accounts receivable sold, the Partnership is obligated to sell new receivables
as existing receivables are collected. The agreement expires in December 1999.
At December 31, 1998, the Partnership's gross accounts receivable that had
been sold to the purchasers aggregated $130 million. This amount has been
reported as operating cash flows in the Statements of Cash Flows. Costs related
to the sale are included in "Selling, general and administrative expenses" in
the Statements of Income.
8. Inventories
Inventories at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Raw materials................................................... $149 $160
Work-in-process................................................. 11 5
Finished goods.................................................. 301 282
Materials and supplies.......................................... 88 66
---- ----
Total inventories............................................. $549 $513
==== ====
</TABLE>
For the year ending December 31, 1998, cost of sales increased by less than
$1 million associated with the reduction of LIFO inventories. For the period
from December 1, 1997 (inception) to December 31, 1997, cost of sales increased
by approximately $1 million associated with the reduction in LIFO inventories.
The excess of the current cost of inventories over book value was approximately
$103 million at December 31, 1997.
9. Property, Plant and Equipment, Net
The components of property, plant and equipment, at cost, and the related
accumulated depreciation at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ------ ------
<S> <C> <C>
Manufacturing facilities and equipment..................... $5,344 $3,489
Manufacturing equipment acquired under capital leases...... 236 --
Construction projects in progress.......................... 189 127
Land....................................................... 78 74
------ ------
Total property, plant and equipment...................... 5,847 3,690
Less accumulated depreciation.............................. 1,772 1,572
------ ------
Property, plant and equipment, net....................... $4,075 $2,118
====== ======
</TABLE>
F-45
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Depreciation expense for the year ending December 31, 1998 and for the
period from December 1, 1997 (inception) to December 31, 1997 was $200 million
and $15 million, respectively. At December 31, 1998, $10 million of the
accumulated depreciation reported in the accompanying Balance Sheet related to
the manufacturing equipment acquired under capital leases that was contributed
by Occidental in 1998.
In July 1998, the depreciable lives of certain assets were increased from a
range of 5 to 25 years to a range of 5 to 30 years. This change was accounted
for as a change in accounting estimate and resulted in a $33 million decrease
in depreciation expense for 1998.
10. Deferred Charges and Other Assets
Deferred charges and other assets at December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Deferred turnaround costs, net................................. $ 84 $ 66
Deferred software costs, net................................... 70 44
Deferred pension asset......................................... 30 23
Other.......................................................... 73 18
---- ----
Total deferred charges and other assets...................... $257 $151
==== ====
</TABLE>
11. Other Accrued Liabilities
Other accrued liabilities at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Accrued property taxes.......................................... $ 76 $ 4
Accrued freight................................................. 22 8
Accrued payroll costs........................................... 44 19
Accrued interest................................................ 18 --
Accrued severance and other costs related to formation of
the Partnership................................................ 3 27
Other........................................................... 37 7
---- ----
Total other accrued liabilities............................... $200 $ 65
==== ====
</TABLE>
F-46
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. Long-Term Debt and Financing Arrangements
Long-term debt at December 31, 1998 and 1997 was comprised of the following:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ------ ------
<S> <C> <C>
Bank credit facilities:
5-year term credit facility.............................. $1,150 $ 800
$500 million credit agreement............................ 152 --
Other debt obligations:
Medium-term notes (2000-2005)............................ 163 194
10.00% Notes due in 1999................................. 150 150
9.125% Notes due in 2002................................. 100 100
6.50% Notes due in 2006.................................. 150 150
7.55% Debentures due in 2026............................. 150 150
Other.................................................... -- 4
------ ------
Total long-term debt................................... 2,015 1,548
Less current maturities.................................... 150 36
------ ------
Long-term debt, net.................................... 1,865 1,512
Capital lease obligations (5.89% due in 2000).............. 205 --
------ ------
Total long-term debt and lease obligations............. $2,070 $1,512
====== ======
</TABLE>
Aggregate maturities of long-term debt during the five years subsequent to
December 31, 1998 are as follows: 1999-$302 million; 2000-$247 million; 2001-
$90 million; 2002-$1.251 billion; 2003-$29 million. All of the above debt is
guaranteed by the partners.
The medium-term notes mature at various dates from 2000 to 2005 and have a
weighted average interest rate of 9.87 percent and 9.83 percent at December 31,
1998 and 1997, respectively.
The Partnership has a five-year, $1.25 billion credit facility ("Facility")
with a group of banks expiring November 2002. Borrowings under the Facility
bear interest at either the Federal Funds rate plus 1/2 of 1 percent, LIBOR
plus 1/2 of 1 percent, a fixed rate offered by one of the sponsoring banks or
interest rates that are based on a competitive auction feature wherein the
interest rate can be established by competitive bids submitted by the
sponsoring banks, depending on the type of borrowing made under the Facility.
Borrowings under the Facility had a weighted average interest rate of 5.8
percent and 5.7 percent at December 31, 1998 and 1997, respectively.
On June 12, 1998, the Partnership entered into a $500 million credit
agreement consisting of a $250 million revolving credit facility and a $250
million one-year term facility. Borrowings under the $500 million credit
agreement bear interest at either the Federal Funds rate plus 1/2 of 1 percent,
LIBOR plus 0.625 percent, a fixed rate offered by one of the sponsoring banks
or interest rates that are based on a competitive auction feature wherein the
interest rate can be established by competitive bids submitted by the
sponsoring banks. At December 31, 1998, the weighted average interest rate for
borrowings under the $500 million credit agreement was 6.1 percent.
The Facility and the $500 million credit agreement ("Bank Credit
Facilities") are available for working capital and general purposes as needed
and contain covenants relating to liens, sale and leaseback transactions, debt
incurrence, leverage and interest coverage ratios, sales of assets and mergers
and consolidations.
F-47
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
In February 1999, the Partnership issued $900 million of debt securities.
The debt securities include $300 million of 8.50 percent notes, which will
mature on February 15, 2004, and $600 million of 8.75 percent notes, which will
mature on February 15, 2009. The Partnership intends to use the net proceeds
from this offering (i) to repay the $205 million outstanding under a
capitalized lease obligation relating to the Partnership's Corpus Christi
facility, (ii) to repay the outstanding balance under the $500 million credit
agreement, after which the $500 million credit agreement will be terminated,
(iii) to repay the outstanding $150 million, 10.00 percent Notes due in June
1999, upon maturity and (iv) to the extent of the remaining net proceeds,
reduce outstanding borrowings under the Facility and for Partnership working
capital. Outstanding borrowings under the Partnership's $500 million credit
agreement that are payable in 1999 are included as long-term obligations of the
Partnership in the accompanying Balance Sheet at December 31, 1998 based on the
expectation that these borrowings will be refinanced as described above.
13. Unusual Charges
In December 1997, the Partnership recorded $42 million of unusual charges
related to the formation of the Partnership. These charges included severance
and other costs related to a workforce reduction (approximately 430 employees)
that resulted from the consolidation of the businesses contributed to the
Partnership ($30 million), various closing costs ($6 million), and various
other charges ($6 million). Approximately $15 million of these charges were
paid in 1997 and $27 million were included in other accrued liabilities at
December 31, 1997. During the year ended December 31, 1998, approximately $24
million of these charges were paid and $3 million were included in other
accrued liabilities at December 31, 1998.
During 1998, the Partnership recorded and paid $35 million of unusual
charges related to its initial formation and the addition of Occidental to the
Partnership. These charges included transition personnel costs ($14 million),
costs associated with the consolidation of certain operations and facilities
($11 million), operating and transition services provided by Occidental
Chemical ($7 million), various closing costs ($2 million), and other
miscellaneous charges ($1 million).
14. Leases
At December 31, 1998, future minimum lease payments for capital and
operating leases with noncancelable lease terms in excess of one year were as
follows:
<TABLE>
<CAPTION>
Millions of dollars Capital Operating
------------------- ------- ---------
<S> <C> <C>
1999.................................................... $ 13 $101
2000.................................................... 208 74
2001.................................................... -- 58
2002.................................................... -- 44
2003.................................................... -- 38
Thereafter.............................................. -- 336
---- ----
Total minimum lease payments.......................... 221 $651
====
Imputed interest........................................ (16)
----
Present value of minimum lease payments............... $205
====
</TABLE>
Operating lease net rental expense was $110 million for the year ending
December 31, 1998 and $11 million for the period from December 1, 1997
(inception) to December 31, 1997.
F-48
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Partnership is party to various unconditional purchase obligation
contracts as a purchaser for product and services. At December 31, 1998, future
minimum payments under these contracts with noncancelable contract terms in
excess of one year were as follows:
<TABLE>
<CAPTION>
Millions of dollars
-------------------
<S> <C>
1999................................................................ $ 29
2000................................................................ 28
2001................................................................ 24
2002................................................................ 23
2003................................................................ 23
Thereafter.......................................................... 142
----
Total minimum contract payments................................... $269
====
</TABLE>
The Partnership's total purchases under these agreements were $33 million
for the year ending December 31, 1998 and $3 million during the period from
December 1, 1997 (inception) to December 31, 1997.
15. Retirement Plans
All full-time regular employees of the Partnership are covered by defined
benefit pension plans sponsored by the Partnership. The plans became effective
on January 1, 1998, except for union represented employees formerly employed by
Millennium, whose plans were contributed to the Partnership on December 1,
1997, and union represented employees formerly employed by Occidental, whose
plans were contributed to the Partnership on May 15, 1998. In connection with
the formation of the Partnership, there were no pension assets or obligations
contributed to the Partnership, except for the union represented plans
described above. Retirement benefits are based on years of service and the
employee's highest three consecutive years of compensation during the last ten
years of service. The funding policy for these plans is to make periodic
contributions as required by applicable law. The Partnership accrues pension
costs based on an actuarial valuation and funds the plans through contributions
to pension trust funds. The Partnership also has unfunded supplemental
nonqualified retirement plans which provide pension benefits for certain
employees in excess of the tax qualified plans' limits.
F-49
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the retirement plans at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
- ------------------- ---- ----
<S> <C> <C>
Change in benefit obligation:
Benefit obligation, January 1.................................... $ 21 $ --
Benefit obligation contributed at inception of Partnership....... -- 21
Benefit obligation contributed by Occidental..................... 46 --
Service cost..................................................... 16 --
Interest cost.................................................... 5 --
Actuarial loss................................................... 5 --
Benefits paid.................................................... (5) --
---- ----
Benefit obligation, December 31.................................. $ 88 $ 21
==== ====
Change in plan assets:
Fair value of plan assets, January 1............................. $ 40 $ --
Fair value of plan assets contributed at inception of
Partnership..................................................... -- 40
Fair value of plan assets contributed by Occidental.............. 51 --
Actual return of plan assets..................................... 1 --
Partnership contributions........................................ 1 --
Benefits paid.................................................... (5) --
---- ----
Fair value of plan assets, December 31........................... $ 88 $ 40
==== ====
Funded status...................................................... $ -- $ 19
Unrecognized actuarial loss........................................ 13 4
---- ----
Net amount recognized.............................................. $ 13 $ 23
==== ====
Amounts recognized in the Balance Sheets consist of:
Prepaid benefit cost............................................. $ 30 $ 23
Accrued benefit liability........................................ (17) --
---- ----
Net amount recognized............................................ $ 13 $ 23
==== ====
Weighted-average assumptions as of December 31:
Discount rate.................................................... 6.75% 7.25%
Expected return on plan assets................................... 9.50% 9.00%
Rate of compensation increase.................................... 4.75% 4.75%
</TABLE>
As of December 31, 1998, Equistar had defined benefit pension plans where
the accumulated benefit obligation exceeded the fair value of plan assets. The
accumulated benefit obligation exceeded the fair value of plan assets by $19
million for these plans as of December 31, 1998. As of December 31, 1998 and
1997, Equistar had defined benefit pension plans where the fair value of plan
assets exceeded the accumulated benefit obligation. The fair value of plan
assets exceeded the accumulated benefit obligation by $19 million for these
plans as of December 31, 1998 and 1997.
The Partnership's net periodic pension cost for 1998 included the following
components:
<TABLE>
<CAPTION>
Millions of dollars
-------------------
<S> <C>
Components of net periodic benefit cost:
Service cost....................................................... $16
Interest cost...................................................... 5
Expected return on plan assets..................................... (6)
---
Net periodic benefit cost.......................................... $15
===
</TABLE>
F-50
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
As the non-union plans became effective on January 1, 1998, the Partnership
did not recognize any net periodic pension cost during the period from December
1, 1997 (inception) to December 31, 1997.
Effective January 1, 1998, the Partnership also maintains voluntary defined
contribution savings plans for eligible employees. Under provisions of the
plans, the Partnership contributes an amount equal to 160 percent of employee
contributions up to a maximum matching contribution of eight percent of the
employee's base salary. Contributions to the plans by the Partnership were $7
million and less than $1 million for the year ended December 31, 1998 and
during the period from December 1, 1997 (inception) to December 31, 1997,
respectively.
16. Postretirement Benefits Other Than Pensions
The Partnership sponsors unfunded postretirement benefit plans other than
pensions ("OPEB") for both salaried and non-salaried employees, which provide
medical and life insurance benefits. The postretirement health care plans are
contributory while the life insurance plans are non-contributory. Currently,
the Partnership pays approximately 80 percent of the cost of the health care
plans, but reserves the right to modify the cost-sharing provisions at any
time. In connection with the formation of the Partnership on December 1, 1997,
Lyondell and Millennium contributed $31 million of accrued postretirement
benefit liabilities for employees that transferred to the Partnership. Upon
joining the Partnership in May 1998, Occidental contributed $14 million of
accrued postretirement benefit liabilities for employees that transferred to
the Partnership.
The following table provides a reconciliation of benefit obligations and
funded status of the OPEB plans at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
- ------------------- ---- ----
<S> <C> <C>
Change in benefit obligation:
Benefit obligation, January 1.................................... $ 50 $ --
Benefit obligation contributed at inception of Partnership....... -- 50
Benefit obligation contributed by Occidental..................... 14 --
Service cost..................................................... 3 --
Interest cost.................................................... 4 --
Actuarial gain................................................... (2) --
---- ----
Benefit obligation, December 31.................................. $ 69 $ 50
==== ====
Funded status...................................................... $(69) $(50)
Unrecognized actuarial loss........................................ 16 19
---- ----
Net amount recognized.............................................. $(53) $(31)
==== ====
Amounts recognized in the Balance Sheets consist of:
Prepaid benefit cost............................................. $ -- $ --
Accrued benefit liability........................................ (53) (31)
---- ----
Net amount recognized............................................ $(53) $(31)
==== ====
Weighted-average assumptions as of December 31:
Discount rate.................................................... 6.75% 7.25%
Rate of compensation increase.................................... 4.75% 4.75%
</TABLE>
Because the OPEB plans are unfunded, there was no change in the plan assets
during the year ended December 31, 1998 and for the period from December 1,
1997 (inception) to December 31, 1997.
F-51
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Partnership's postretirement benefit costs for 1998 included the
following components:
<TABLE>
<CAPTION>
Millions of dollars
-------------------
<S> <C>
Components of net periodic benefit cost:
Service cost........................................................ $ 3
Interest cost....................................................... 4
---
Net periodic benefit cost........................................... $ 7
===
</TABLE>
The accrued postretirement benefit liabilities at December 31, 1997 were
calculated and contributed as of December 31, 1997; therefore, there was no net
periodic postretirement benefit costs for the period from December 1, 1997
(inception) to December 31, 1997.
For measurement purposes, the assumed annual rate of increase in the per
capita cost of covered health care benefits as of December 31, 1998 was 7.0
percent for 1999-2001 and 5.0 percent thereafter. The health care cost trend
rate assumption does not have a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit liability as of December 31, 1998 by less than $1 million and would not
have a material effect on the aggregate service and interest cost components of
the net periodic postretirement benefit cost for the year then ended.
Decreasing the assumed health care cost trend rates by one percentage point in
each year would decrease the accumulated postretirement benefit liability as of
December 31, 1998 by $1 million and would not have a material effect on the
aggregate service and interest cost components of the net periodic
postretirement benefit cost for the year then ended.
17. Commitments and Contingencies
The Partnership has various purchase commitments for materials, supplies and
services incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market.
The Partnership is also subject to various lawsuits and proceedings. Subject
to the uncertainty inherent in all litigation, management believes the
resolution of these proceedings will not have a material adverse effect upon
the financial statements or liquidity of the Partnership.
Equistar has agreed to indemnify and defend Lyondell and Millennium,
individually, against certain uninsured claims and liabilities which Equistar
may incur relating to the operation of the Contributed Business prior to
December 1, 1997 up to $7 million each within the first seven years of the
Partnership, subject to certain terms of the Asset Contribution Agreements.
Equistar has also agreed to indemnify Occidental up to $7 million on a similar
basis relating to the operation of the Occidental Contributed Business prior to
May 15, 1998. During the year ended December 31, 1998, the Partnership incurred
$5 million in expenses for these uninsured claims and liabilities. No expenses
were incurred for these uninsured claims and liabilities during the period
December 1, 1997 (inception) to December 31, 1997.
The Partnership's policy is to be in compliance with all applicable
environmental laws. The Partnership 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
Partnership cannot accurately predict future developments, such as increasingly
strict requirements of environmental laws, inspection and enforcement policies
and compliance costs therefrom which might affect the handling, manufacture,
use, emission or disposal of products, other materials or hazardous and non-
hazardous waste.
F-52
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
financial statements or liquidity of the Partnership. 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 Partnership'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.
18. Segment Information
Using the guidelines set forth in SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, the Partnership has identified two
segments in which it operates. The reportable segments are petrochemicals and
polymers. The petrochemicals segment includes olefins, oxygenated chemicals,
aromatics and specialty chemicals. Olefins include ethylene, propylene and
butadiene, and the oxygenated chemicals include ethylene oxide, ethylene
glycol, ethanol and MTBE. The petrochemicals segment also includes the
production and sale of aromatics including benzene and toluene. The polymers
segment consists of polyolefins including high-density polyethylene, low-
density polyethylene, linear low-density polyethylene, polypropylene, and
performance polymers. The performance polymers include enhanced grades of
polyethylene, including wire and cable resins, concentrates and compounds, and
polymeric powders.
No customer accounted for 10 percent or more of sales.
The accounting policies of the segments are the same as those described in
Summary of Significant Accounting Policies (see Note 2).
F-53
<PAGE>
EQUISTAR CHEMICALS, LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Summarized financial information concerning the Partnership's reportable
segments is shown in the following table. Intersegment sales between the
petrochemicals and polymers segments were made at prices based on current
market values.
<TABLE>
<CAPTION>
Millions of dollars Petrochemicals Polymers Unallocated Eliminations Consolidated
- ------------------- -------------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1998:
Sales and other
operating revenues:
Customers............. $2,351 $2,012 $ -- $ -- $4,363
Intersegment.......... 1,112 46 -- (1,158) --
------ ------ ------ ------- ------
$3,463 $2,058 $ -- $(1,158) $4,363
====== ====== ====== ======= ======
Unusual charges......... $ -- $ -- $ 35 $ -- $ 35
====== ====== ====== ======= ======
Operating income........ $ 319 $ 177 $ (214) $ -- $ 282
====== ====== ====== ======= ======
Depreciation and
amortization expense... $ 152 $ 65 $ 51 $ -- $ 268
====== ====== ====== ======= ======
Capital expenditures.... $ 71 $ 116 $ 13 $ -- $ 200
====== ====== ====== ======= ======
Total assets............ $2,997 $2,035 $1,636 $ -- $6,668
====== ====== ====== ======= ======
For the period from
December 1, 1997
(inception) to December
31, 1997:
Sales and other
operating revenues:
Customers............. $ 179 $ 186 $ -- $ -- $ 365
Intersegment.......... 105 -- -- (105) --
------ ------ ------ ------- ------
$ 284 $ 186 $ -- $ (105) $ 365
====== ====== ====== ======= ======
Unusual charges......... $ -- $ -- $ 42 $ -- $ 42
====== ====== ====== ======= ======
Operating income........ $ 47 $ 22 $ (54) $ -- $ 15
====== ====== ====== ======= ======
Depreciation and
amortization expense... $ 7 $ 7 $ 5 $ -- $ 19
====== ====== ====== ======= ======
Capital expenditures.... $ 7 $ 4 $ 1 $ -- $ 12
====== ====== ====== ======= ======
Total assets............ $1,668 $1,504 $1,428 $ -- $4,600
====== ====== ====== ======= ======
</TABLE>
19. Subsequent Event
In January 1999, the Partnership announced that it was going to shut down
and "mothball" its gas phase HDPE reactor at Port Arthur, Texas, on March 31,
1999, as part of its long-term strategy to maximize value. The shutdown will
reduce the Partnership's HDPE capacity by 300 million pounds per year and
reduce employment at the unit from 200 to approximately 125. Customers for
products from the mothballed unit will be supplied with comparable products
produced at the Partnership's Matagorda, Victoria, and LaPorte, Texas,
facilities.
F-54
<PAGE>
LYONDELL-CITGO REFINING LP
INDEPENDENT AUDITORS' REPORT
To the Partnership Governance Committee
of LYONDELL-CITGO Refining LP
We have audited the accompanying balance sheet of LYONDELL-CITGO Refining LP
(a Limited Partnership) as of December 31, 1998 and the related statements of
income, partners' capital, and cash flows for the year then ended. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of LYONDELL-CITGO Refining LP as of December
31, 1998 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 11, 1999
F-55
<PAGE>
LYONDELL-CITGO REFINING LP
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Governance Committee
of LYONDELL-CITGO Refining LP
We have audited the accompanying balance sheet of LYONDELL-CITGO Refining LP
(formerly LYONDELL-CITGO Refining Company Ltd.) as of December 31, 1997 and the
related statements of income, partners' capital, and cash flows for each of the
two years in the period ended December 31, 1997. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LYONDELL-CITGO Refining LP
as of December 31, 1997 and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Houston, Texas
February 6, 1998
F-56
<PAGE>
LYONDELL-CITGO REFINING LP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the year ended
December 31
----------------------
Millions of dollars 1998 1997 1996
- ------------------- ------ ------ ------
<S> <C> <C> <C>
Sales and other operating revenues...................... $2,055 $2,697 $2,823
Operating costs and expenses:
Cost of sales:
Crude oil and feedstock............................. 1,264 1,960 2,367
Operating and other expenses........................ 490 482 386
Selling, general and administrative expenses.......... 78 72 59
Unusual charges....................................... 10 -- --
------ ------ ------
1,842 2,514 2,812
------ ------ ------
Operating income...................................... 213 183 11
Interest expense........................................ (44) (37) (2)
Interest income......................................... 1 2 2
------ ------ ------
Income before state income taxes........................ 170 148 11
Provision for state income taxes........................ 1 1 --
------ ------ ------
Net income.............................................. $ 169 $ 147 $ 11
====== ====== ======
</TABLE>
See Notes to Financial Statements.
F-57
<PAGE>
LYONDELL-CITGO REFINING LP
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------
Millions of dollars 1998 1997
- ------------------- ------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 24 $ 65
Accounts receivable:
Trade, net.................................................. 39 37
Related parties and affiliates.............................. 26 42
Inventories................................................... 106 98
Prepaid expenses and other current assets..................... 2 1
------ ------
Total current assets...................................... 197 243
------ ------
Property, plant and equipment................................... 2,234 2,228
Construction projects in progress............................... 80 52
Accumulated depreciation and amortization....................... (944) (889)
------ ------
1,370 1,391
Deferred charges and other assets............................... 70 47
------ ------
Total assets.................................................... $1,637 $1,681
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade....................................................... $ 71 $ 72
Related parties and affiliates.............................. 42 125
Distribution payable to Lyondell Partners..................... 19 36
Distribution payable to CITGO Partners........................ 13 25
Loan payable to bank.......................................... 20 --
Taxes, payroll and other liabilities.......................... 38 35
------ ------
Total current liabilities................................. 203 293
------ ------
Commitments and contingencies
Loan payable to bank............................................ 450 450
Loans payable to Lyondell Partners.............................. 231 196
Loans payable to CITGO Partners................................. 36 17
Pension, postretirement benefit and other liabilities........... 68 52
------ ------
Total long-term liabilities............................... 785 715
------ ------
Partners' capital............................................... 649 673
------ ------
Total liabilities and partners' capital......................... $1,637 $1,681
====== ======
</TABLE>
See Notes to Financial Statements.
F-58
<PAGE>
LYONDELL-CITGO REFINING LP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year
ended December
31
----------------
Millions of dollars 1998 1997 1996
- ------------------- ---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $169 $147 $ 11
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation............................................... 75 75 25
Amortization............................................... 25 16 10
(Increase) decrease in accounts receivable--trade.......... (2) 72 (1)
(Increase) decrease in accounts receivable--related
parties................................................... 16 9 (20)
(Increase) decrease in inventories......................... (9) -- 9
(Increase) decrease in prepaid expenses and other current
assets.................................................... (1) (1) 6
Increase (decrease) in accounts payable--trade............. 4 (89) 51
Increase (decrease) in accounts payable--related parties... (83) (27) 43
Increase (decrease) in taxes, payroll and other
liabilities............................................... 3 5 (4)
(Increase) in deferred charges and other assets and change
in pension, postretirement benefit and other liabilities.. (28) 5 (28)
---- ---- ----
Net cash provided by operating activities................. 169 212 102
---- ---- ----
Cash flows from investing activities:
Additions to property, plant and equipment:
Maintenance capital expenditures........................... (19) (12) (10)
Environmental capital expenditures......................... (12) (11) (28)
Capital enhancement expenditures........................... (27) (17) (18)
Refinery upgrade expenditures.............................. (3) (45) (473)
---- ---- ----
Total capital expenditures................................ (61) (85) (529)
Other....................................................... (1) (1) (1)
---- ---- ----
Net cash used in investing activities..................... (62) (86) (530)
---- ---- ----
Cash flows from financing activities:
Proceeds from (repayments of) bank loan..................... 20 (10) 10
Proceeds from bank loan for costs incurred on refinery
upgrade.................................................... -- -- 199
Proceeds from Lyondell GP loans for costs incurred on
refinery upgrade........................................... -- 18 123
Contributions from Lyondell GP for working capital facility
paydown.................................................... -- 65 --
Proceeds from Lyondell GP loans for costs to be incurred on
capital projects........................................... -- 2 29
Contributions from Lyondell GP for costs to be incurred on
capital projects........................................... -- 1 8
Proceeds from Lyondell GP loans for environmental projects.. 8 -- --
Proceeds from Lyondell GP loans for capital enhancement
projects................................................... 16 -- --
Proceeds from Lyondell GP loans for maintenance projects.... 11 -- --
Distributions to Lyondell Partners.......................... (130) (147) (84)
Distributions to CITGO Partners............................. (92) (91) (13)
Reimbursements from Lyondell for capital expenditures....... -- -- 4
Reimbursements from CITGO LP for costs incurred on refinery
upgrade.................................................... -- 2 123
Reimbursements from CITGO LP for loan costs incurred on
refinery upgrade........................................... -- 8 21
Contributions from CITGO LP for working capital facility
paydown.................................................... -- 28 --
Proceeds from CITGO LP loans for costs incurred on refinery
upgrade.................................................... -- 16 --
Contributions from CITGO LP for costs to be incurred on
capital projects........................................... -- 35 13
Proceeds from CITGO LP loans for environmental projects..... 4 -- --
Proceeds from CITGO LP loans for capital enhancement
projects................................................... 9 -- --
Proceeds from CITGO LP loans for maintenance projects....... 6 -- --
---- ---- ----
Net cash provided by (used in) financing activities....... (148) (73) 433
---- ---- ----
Increase (decrease) in cash and cash equivalents............. (41) 53 5
Cash and cash equivalents at beginning of period............. 65 12 7
---- ---- ----
Cash and cash equivalents at end of period................... $ 24 $ 65 $ 12
==== ==== ====
</TABLE>
See Notes to Financial Statements.
F-59
<PAGE>
LYONDELL-CITGO REFINING LP
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Lyondell CITGO
Millions of dollars Partners Partners Total
- ------------------- -------- -------- -----
<S> <C> <C> <C>
Balance, January 1, 1996............................... $ 130 $ 459 $ 589
Cash contributions................................... 8 157 165
Other contributions.................................. -- 1 1
Distributions........................................ (91) (12) (103)
Net income........................................... 10 1 11
----- ----- -----
Balance, December 31, 1996............................. 57 606 663
Cash distributions................................... 66 73 139
Distributions........................................ (158) (118) (276)
Net income........................................... 103 44 147
----- ----- -----
Balance, December 31, 1997............................. 68 605 673
Distributions........................................ (113) (80) (193)
Net income........................................... 110 59 169
----- ----- -----
Balance, December 31, 1998............................. $ 65 $ 584 $ 649
===== ===== =====
</TABLE>
See Notes to Financial Statements.
F-60
<PAGE>
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS
1. The Partnership
On July 1, 1993, Lyondell Chemical Company (formerly Lyondell Petrochemical
Company) ("Lyondell") and CITGO Petroleum Corporation ("CITGO") announced the
commencement of operations of LYONDELL-CITGO Refining LP ("LCR" or
"Partnership") (formerly LYONDELL-CITGO Refining Company Ltd.), a new entity
formed and owned by subsidiaries of Lyondell and CITGO in order to own and
operate a refinery ("Refinery") located adjacent to the Houston Ship Channel in
Houston, Texas and a lube oil blending and packaging plant in Birmingport,
Alabama.
Lyondell owns its interest in the Partnership through wholly-owned
subsidiaries, Lyondell Refining LP, LLC ("Lyondell LP") and Lyondell Refining
Company ("Lyondell GP") (formerly LOwner). These two subsidiaries are known as
Lyondell Partners. CITGO holds its interest through CITGO Refining Investment
Company ("CITGO LP") (formerly COwner) and CITGO Gulf Coast Refining, Inc.
("CITGO GP"), both wholly-owned subsidiaries of CITGO. These two subsidiaries
are known as CITGO Partners. Lyondell Partners and CITGO Partners together are
known as the Partners.
During 1998 LCR converted from a Texas limited liability company to a
Delaware limited partnership. Accordingly, the name was changed from LYONDELL-
CITGO Refining Company Ltd. to LYONDELL-CITGO Refining LP. LCR will continue in
existence until it is dissolved under the terms of the Limited Partnership
Agreement ("Agreement").
The Partners have agreed to allocate net income and cash provided by
operating activities based on certain contributions and other factors instead
of allocating such amounts based on their capital account balances. Based upon
these contributions and other factors, Lyondell Partners and CITGO Partners had
ownership interests of approximately 59 percent and 41 percent, respectively,
as of December 31, 1998. CITGO Partners have a one-time option, that will
expire in the year 2000, to make an additional capital contribution sufficient
to increase its participation interest in LCR to 50 percent.
At December 31, 1998, the Partnership employed approximately 1,200 full-time
employees. Of these, approximately 800 were covered by collective bargaining
agreements between LCR and the Oil, Chemical and Atomic Workers Union. LCR also
uses the services of independent contractors in the routine conduct of its
business.
2. Summary of Significant Accounting Policies
Revenue Recognition--Revenue from product sales is generally recognized upon
delivery of products to the customer.
Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. The
Partnership's policy is to invest cash in conservative, highly rated
instruments and limit the amount of credit exposure to any one institution. The
Partnership performs periodic evaluations of the relative credit standing of
these financial institutions which are considered in the Partnership's
investment strategy.
Accounts Receivable--The Partnership sells its products primarily to
companies in the petrochemical and refining industries. The Partnership
performs ongoing credit evaluations of its customers' financial condition and
in certain circumstances, requires letters of credit from them. The
Partnership's allowance for doubtful accounts receivable, which is reflected in
the Balance Sheets as a reduction in accounts receivable, was approximately
$179,000 at December 31, 1998 and 1997.
F-61
<PAGE>
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined on the last-in, first-out ("LIFO") basis except for materials and
supplies, which are valued at average cost.
Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. The primary components of property, plant and equipment were
manufacturing facilities and equipment. Depreciation of fixed assets is
computed using the straight-line method over the estimated useful lives of the
related assets, which range from five to thirty years.
Upon retirement or sale, the Partnership removes the cost of the assets and
the related accumulated depreciation from the accounts and reflects any
resulting gains or losses in income. Interest costs incurred on debt during the
construction of major projects are capitalized.
During 1998, the depreciable life of assets related to an upgrade project
completed in February 1997 was increased from twenty to twenty-four years.
These changes were accounted for as a change in accounting estimate. The gross
value of these assets when the depreciable life changed was approximately $1
billion, with accumulated depreciation of approximately $52 million. The
increase in the depreciable life of these assets decreased depreciation expense
by approximately $9 million for the year ended December 31, 1998.
Refinery Maintenance--Turnaround costs are repair and maintenance costs
incurred while performing an overhaul of a manufacturing unit. Significant
turnaround costs are deferred and amortized on a straight-line basis over the
estimated period until the next planned turnaround, generally four to six
years. Amortization of deferred turnaround costs for 1998, 1997 and 1996 was
approximately $12 million, $10 million and $5 million, respectively. Other
turnaround costs and ordinary repair and maintenance costs are expensed as
incurred.
Environmental Remediation Costs--Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Estimates have not
been discounted to present value. Environmental remediation costs are expensed
or capitalized in accordance with generally accepted accounting principles.
Exchanges--Crude oil and finished product exchange transactions, which are
of a homogeneous nature of commodities in the same line of business and do not
involve the payment or receipt of cash, are not accounted for as purchases and
sales. Any resulting volumetric exchange balances are accounted for as
inventory in accordance with the normal LIFO valuation policy. Exchanges
settled through payment and receipt of cash are accounted for as purchases and
sales.
Income Taxes--Deferred taxes result from temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes
and are calculated based upon cumulative book and tax differences in the
balance sheet in accordance with the Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income Taxes.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications--Certain prior period amounts have been reclassified to
conform to the current year presentation.
F-62
<PAGE>
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Long-Lived Assets Impairment--In accordance with SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, LCR periodically evaluates the carrying value of long-lived assets
to be held and used when events and circumstances warrant such a review. The
carrying value of long-lived assets is considered impaired when the separately
identifiable anticipated undiscounted cash flow from such asset is less than
its carrying value. In that event, a loss is recognized based on the amount by
which the carrying value exceeds the fair value of the long-lived asset. Fair
value is determined primarily using the anticipated cash flows, discounted at a
rate commensurate with the risk involved. Losses on long-lived assets to be
disposed of are determined in a similar manner, except that fair values are
reduced for disposal costs.
Comprehensive Income--Effective January 1, 1998, LCR adopted SFAS No. 130,
Reporting Comprehensive Income. LCR had no items of other comprehensive income
during the three years ended December 31, 1998.
Pensions and Other Postretirement Benefits--During 1998, LCR adopted SFAS
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits. The provisions of SFAS No. 132 revise employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of these plans. SFAS No. 132 standardizes the
disclosure requirements for these plans, to the extent practicable (see Note
9).
Derivatives--In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize
all derivatives, at fair value, as either assets or liabilities in the
statement of financial position with an offset either to partners' capital and
comprehensive income or income, depending upon the classification of the
derivative. LCR has not determined the impact on its financial statements that
may result from adoption of SFAS No. 133, which is required no later than
January 1, 2000.
3. Related Party Transactions
On July 1, 1993, LCR entered into a long-term crude oil supply agreement
("Crude Supply Agreement") with Lagoven, S.A., now known as PDVSA Petroleo y
Gas, S.A. ("PDVSA Oil"), an affiliate of CITGO. Pursuant to this agreement, the
Partnership will purchase a substantial majority of its crude oil supply at
market-based prices, adjusted for certain indexed items (see Note 11). In
addition, under the terms of a long-term product sales agreement, CITGO
purchases all of the gasoline, low sulfur diesel and jet fuel produced at the
Refinery at market-based prices. Both PDVSA Oil and CITGO are subsidiaries of
Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company of the
Republic of Venezuela.
Also effective July 1, 1993, LCR and Lyondell entered into a number of
feedstock and product sales agreements; a tolling agreement, pursuant to which
alkylate and methyl tertiary butyl ether will be produced at Lyondell's
Channelview, Texas petrochemical complex for the Partnership; and various
administrative services agreements.
On December 1, 1997, Lyondell contributed its Channelview, Texas
petrochemical complex, including its rights and obligations under the related
party agreements with LCR, to a joint venture named Equistar Chemicals, LP
("Equistar"). At December 31, 1998, Lyondell had a 41 percent interest in
Equistar.
F-63
<PAGE>
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Related party transactions are summarized as follows:
<TABLE>
<CAPTION>
For the year ended
December 31
--------------------
Millions of dollars 1998 1997 1996
------------------- ------ ------ ------
<S> <C> <C> <C>
Costs:
Crude oil purchases................................... $ 555 $ 977 $1,046
Product purchases..................................... 262 435 246
Transportation fees................................... 10 13 27
------ ------ ------
$ 827 $1,425 $1,319
====== ====== ======
Sales of products....................................... $1,555 $1,987 $1,835
====== ====== ======
</TABLE>
LCR billed Lyondell and Equistar approximately $4 million, $5 million and $3
million and Lyondell and Equistar billed LCR approximately $4 million, $7
million and $11 million pursuant to various service and cost sharing
arrangements during the years ended December 31, 1998, 1997 and 1996,
respectively. In addition, LCR paid Lyondell and Equistar approximately $34
million, $40 million and $6 million during 1998, 1997 and 1996, respectively,
pursuant to hydrogen supply agreements.
In September 1997, Atlantic Richfield Company ("ARCO") eliminated its
ownership interest in Lyondell by delivering its shares of Lyondell common
stock to the holders of certain ARCO notes and by Lyondell repurchasing the
remaining shares owned by ARCO. For the nine months ended September 30, 1997,
the Partnership paid ARCO PipeLine Company, an affiliate of ARCO, approximately
$4 million pursuant to throughput agreements. During 1996, LCR paid ARCO
PipeLine Company approximately $5 million pursuant to throughput agreements.
LCR recognized revenue from Lyondell of approximately $11 million in 1996
for a pricing adjustment retroactive to 1993.
During 1998, 1997 and 1996, LCR paid Lyondell GP approximately $9 million,
$13 million and $4 million, respectively, for interest on loans related to
funding a portion of the upgrade project at the Refinery and other capital
expenditures.
During 1998 and 1997, LCR paid CITGO LP approximately $2 million and $1
million, respectively, for interest on loans related to funding a portion of
the upgrade project at the Refinery and other capital expenditures. During 1997
and 1996, LCR billed CITGO LP approximately $7 million and $22 million,
respectively, and CITGO LP paid LCR approximately $8 million and $21 million,
respectively, for financing costs incurred in connection with the bank loan
being used to partially fund the upgrade project at the Refinery.
4. Supplemental Cash Flow Information
At December 31, 1998, 1997 and 1996, property, plant and equipment included
approximately $9 million, $13 million and $9 million, respectively, of non-cash
additions which related to accounts payable accruals.
During 1998, 1997 and 1996, LCR paid approximately $43 million, $42 million
and $27 million, respectively, for interest and approximately $1 million, $1
million and $4 million, respectively, for state income and franchise taxes. Of
the interest paid during 1997 and 1996, approximately $9 million and $25
million, respectively, was capitalized. No interest costs were capitalized
during 1998.
F-64
<PAGE>
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Financial Instruments
The fair value of all financial instruments included in current assets and
current liabilities, including cash and cash equivalents, accounts receivable,
accounts payable and notes payable, approximated their carrying value due to
their short maturity. The fair value of long-term loans payable approximated
their carrying value because they are variable interest rate loans.
At December 31, 1998, LCR had issued letters of credit totaling
approximately $9 million.
The Partnership is party to take-or-pay contracts for hydrogen and
electricity. At December 31, 1998, future minimum payments under these
contracts with noncancelable contract terms in excess of one year were as
follows:
<TABLE>
<CAPTION>
Millions of dollars
-------------------
<S> <C>
1999................................................................ $ 39
2000................................................................ 39
2001................................................................ 39
2002................................................................ 29
2003................................................................ 29
Thereafter.......................................................... 379
----
Total minimum payments............................................ $554
====
</TABLE>
Total LCR purchases under these agreements were approximately $81 million,
$90 million and $35 million during 1998, 1997 and 1996, respectively.
6. Inventories
Inventories were as follows at December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Crude oil....................................................... $ 47 $ 47
Refined products................................................ 45 35
Materials and supplies.......................................... 14 16
---- ----
Total inventories............................................. $106 $ 98
==== ====
</TABLE>
The excess of the current cost of inventories over book value was
approximately $40 million and $73 million at December 31, 1998 and 1997,
respectively.
7. Financing Arrangements
In May 1995, LCR entered into two credit facilities totaling $520 million
with a group of banks. The first facility, a $70 million, 364-day revolving
working capital facility, was most recently renewed in May 1998, and is being
utilized for general business purposes and for letters of credit. At December
31, 1998, $20 million was outstanding under this credit facility with a
weighted average interest rate of 5.3 percent. At December 31, 1997, no amounts
were outstanding under this credit facility. Interest for this credit facility
is based on either prime, eurodollar rates or based on a competitive auction
feature wherein the interest rate can be established by competitive bids
submitted by the participating banks, all at LCR's option. The second facility
is a $450 million, five-year term credit facility that was used to partially
fund an upgrade project at the Refinery which was completed in February 1997.
At both December 31, 1998 and 1997, $450 million was outstanding under
F-65
<PAGE>
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
this credit facility with a weighted average interest rate of 6.2 percent and
6.5 percent, respectively. Interest for this facility is based on prime or
eurodollar rates at the Partnership's option. This second facility is due in
May, 2000. Both facilities contain covenants that required LCR to maintain a
minimum net worth which increased each year until 1998 and maintenance of
certain financial ratios defined in the agreements. The facilities also contain
other customary covenants which limit the Partnership's ability to modify
certain significant contracts, incur additional debt or liens, dispose of
assets, make restricted payments as defined in the agreements or merge or
consolidate with other entities.
In October 1995, LCR began borrowing funds from Lyondell GP in connection
with the upgrade project at the Refinery and other capital expenditures. These
loans are due on July 1, 2003 and are subordinate to the two bank credit
facilities. At December 31, 1998 and 1997, these subordinated loans totaled
approximately $231 million and $196 million, respectively, and had a weighted
average interest rate of 5.8 percent and 6.2 percent, respectively. Interest on
these loans is based on eurodollar rates and is payable at the end of each
calendar quarter.
In January 1997, LCR began borrowing funds from CITGO LP in connection with
the upgrade project at the Refinery and other capital expenditures. These loans
are due on July 1, 2003 and are subordinate to the two bank facilities. At
December 31, 1998 and 1997, these subordinated loans totaled approximately $36
million and $17 million, respectively, and had a weighted average interest rate
of 5.8 percent and 6.2 percent, respectively. Interest on these loans is based
on eurodollar rates and is payable at the end of each calendar quarter.
During 1998, 1997 and 1996, LCR incurred approximately $44 million, $45
million and $30 million of interest cost, respectively. Of the interest cost
incurred in 1997 and 1996, the Partnership capitalized approximately $9 million
and $27 million, respectively. No interest costs were capitalized in 1998.
8. Leases
LCR leases crude oil storage facilities, a fleet of railroad tank cars,
computers, office equipment and other items. At December 31, 1998, future
minimum rental payments for operating leases with noncancelable lease terms in
excess of one year were as follows:
<TABLE>
<CAPTION>
Millions of dollars
-------------------
<S> <C>
1999................................................................. $22
2000................................................................. 22
2001................................................................. 6
2002................................................................. 9
2003................................................................. 1
Thereafter........................................................... 7
---
Total minimum lease payments....................................... $67
===
</TABLE>
Operating lease net rental expenses for the years ended December 31, 1998,
1997 and 1996 were approximately $26 million, $22 million and $22 million,
respectively.
9. Employee Benefit Plans
Employee Savings--LCR sponsors qualified defined contribution retirement and
savings plans covering substantially all eligible salaried and hourly
employees. Participants make voluntary contributions to the plans and the
Partnership makes contributions, including matching employee contributions,
based on plan provisions. LCR expensed $5 million, $5 million and $4 million
related to its contributions to this plan for the years 1998, 1997 and 1996,
respectively.
F-66
<PAGE>
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pension Benefits--LCR sponsors one qualified noncontributory defined benefit
pension plan covering eligible hourly employees and one covering eligible
salaried employees. The Partnership also sponsors one nonqualified defined
benefit plan for certain eligible employees. The qualified plans' assets
include primarily stocks and bonds. The nonqualified plan is not funded.
LCR's policy is to fund the qualified pension plans in accordance with
applicable laws and regulations and not to exceed the tax deductible limits.
The nonqualified plans are funded as necessary to pay retiree benefits. The
plan benefits for each of the qualified pension plans are primarily based on an
employee's years of plan service and compensation as defined by each plan.
Postretirement Benefits Other Than Pensions--In addition to pension
benefits, the Partnership also provides certain health care and life insurance
benefits for eligible salaried and hourly employees at retirement. These
benefits are subject to deductibles, copayment provisions and other limitations
and are primarily funded on a pay as you go basis. The Partnership reserves the
right to change or to terminate the benefits at any time.
The following table sets forth the changes in benefit obligations and plan
assets for the pension and postretirement plans for the years ended December
31, 1998 and 1997 and the funded status of such plans reconciled with amounts
reported in the Partnership's Balance Sheets.
<TABLE>
<CAPTION>
Other
Pension Postretirement
Benefits Benefits
---------- ----------------
Millions of dollars 1998 1997 1998 1997
- ------------------- ---- ---- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, January 1.................. $ 64 $ 48 $ 42 $ 31
Service cost................................... 5 4 2 2
Interest cost.................................. 5 4 2 3
Actuarial loss (gain).......................... 9 8 (2) 6
Liability transfer............................. -- 1 2 --
Special termination benefits................... 7 -- -- --
Benefits paid.................................. (2) (1) -- --
---- ---- ------- -------
Benefit obligation, December 31................ 88 64 46 42
---- ---- ------- -------
Change in plan assets:
Fair value of plan assets, January 1........... 37 30 -- --
Actual return on plan assets................... 3 5 -- --
Partnership contributions...................... 5 3 -- --
Benefits paid.................................. (2) (1) -- --
---- ---- ------- -------
Fair value of plan assets, December 31......... 43 37 -- --
---- ---- ------- -------
Funded status.................................. (45) (27) (46) (42)
Unrecognized actuarial loss.................... 18 9 6 9
Unrecognized prior service cost................ 2 2 (2) (3)
Unrecognized transition asset.................. (1) (1) -- --
---- ---- ======= -------
Accrued benefit cost........................... $(26) $(17) $ (42) $ (36)
==== ==== ======= =======
Accumulated benefit obligation................. $ 53 $ 31 -- --
==== ====
</TABLE>
F-67
<PAGE>
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Other
Pension Postretirement
Benefits Benefits
---------------- ----------------
Millions of dollars 1998 1997 1996 1998 1997 1996
- ------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost............................. $ 5 $ 4 $ 4 $ 2 $ 2 $ 2
Interest cost............................ 5 5 3 2 3 2
Expected return on plan assets........... (3) (3) (2) -- -- --
---- ---- ---- ---- ---- ----
Net periodic benefit cost before FAS 88
cost.................................... 7 6 5 4 5 4
Effect of curtailment.................... -- -- -- 2 -- --
---- ---- ---- ---- ---- ----
Net periodic benefit cost................ $ 7 $ 6 $ 5 $ 6 $ 5 $ 4
==== ==== ==== ==== ==== ====
Special termination benefit charge....... $ 7 $ -- $ -- $ -- $ -- $ --
==== ==== ==== ==== ==== ====
Weighted-average assumptions as of December
31:
Discount rate............................ 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected return on plan assets........... 9.50% 9.50% 9.50% -- -- --
Rate of compensation increase............ 4.75% 4.75% 5.00% 4.75% 4.75% 5.00%
</TABLE>
For measurement purposes, the assumed annual rate of increase in the per
capita cost of covered health care benefits as of December 31, 1998 was 7.0
percent for 1999-2001 and 5.0 percent thereafter.
The benefit obligation, accumulated benefit obligation and the fair value of
plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $73 million, $53 million and $33 million,
respectively, as of December 31, 1998 and $53 million, $31 million and $29
million, respectively, as of December 31, 1997.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Millions of dollars Point Increase Point Decrease
------------------- -------------- --------------
<S> <C> <C>
Effect on total of service and interest
cost components.......................... $ 1 $(1)
Effect on postretirement benefit
obligation............................... 8 (6)
</TABLE>
During 1998, the management of LCR implemented a Reduction In Force ("RIF")
program, which will result in certain personnel reductions. LCR expensed
approximately $10 million in 1998 relating to the first phase of the RIF, which
is reflected as "Unusual charges" on the Statement of Income. In this phase,
approximately 80 employees in 1998 made an irrevocable voluntary election to
terminate employment and retire. As a result, they will receive certain special
termination benefits in the form of enhanced retirement benefits. LCR expects
additional amounts for phase two of the RIF to be expensed in 1999.
10. Income Taxes
LCR is treated as a partnership for federal income tax purposes;
consequently, no provision for federal income taxes is required. LCR was
however, subject to state income taxes, and therefore a provision for state
income taxes has been recorded.
Pretax income was taxed by domestic jurisdictions only. The current
provision for state income tax was $1 million in both 1998 and 1997. There was
no current provision for state income tax in 1996. In addition, there was no
deferred provision for state income tax in 1998, 1997 and 1996.
F-68
<PAGE>
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Commitments and Contingencies
LCR is subject to various lawsuits and proceedings.
With respect to liabilities associated with LCR, Lyondell generally has
retained liability for events that occurred prior to July 1, 1993 and certain
on-going environmental projects at the Refinery. LCR generally is responsible
for liabilities associated with events occurring after June 30, 1993 and on-
going environmental compliance inherent to the operation of the Refinery.
LCR's policy is to be in compliance with all applicable environmental laws.
LCR 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 Partnership cannot accurately
predict future developments, such as increasingly strict requirements of
environmental laws, inspection and enforcement policies and compliance costs
therefrom, which might affect the handling, manufacture, use, emission or
disposal of products, other materials or hazardous and non-hazardous waste.
LCR estimates that it has a liability of approximately $8 million at
December 31, 1998 related to future Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), Resource Conservation and
Recovery Act ("RCRA"), and the Texas Natural Resource Conservation Commission
("TNRCC") assessment and remediation costs. Lyondell has a contractual
obligation to reimburse LCR for a portion of this liability which is currently
estimated to be approximately $7 million. LCR has accrued a current liability
of approximately $1 million related to this liability for which Lyondell does
not have any obligation to reimburse LCR. In the opinion of management, there
is currently no material range of loss in excess of the amount recorded.
However, it is possible that new information about the sites associated with
this liability, new technology or future developments such as involvement in
other CERCLA, RCRA, TNRCC or other comparable state law investigations, could
require LCR to reassess its potential exposure related to environmental
matters.
Depending on then current market conditions, reduced deliveries under the
Crude Supply Agreement could adversely affect LCR. 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.
In April 1998, LCR received notification from PDVSA Oil of intentions to
exercise a force majeure clause related to the announced OPEC production cuts.
As a result of this force majeure clause being exercised, LCR began receiving
reduced allocations of crude oil in August 1998. This condition required LCR to
make alternative arrangements for its additional crude oil requirements and
such action resulted in lower operating margins.
LCR has various purchase commitments for materials, supplies and services
incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market.
In the opinion of management, any liability arising from the matters
discussed in this Note will not have a material adverse effect on the financial
position of LCR. However, the adverse resolution in any reporting period of one
or more of the matters discussed in this Note could have a material impact on
LCR's results of operations for that period.
F-69
<PAGE>
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. Subsequent Event
Effective January 1, 1999, the Partnership entered into a lubricant facility
operating agreement and lubricant sales agreements with CITGO. The lubricant
facility operating agreement is for the lubricant facility in Birmingport,
Alabama that will allow CITGO to operate the facility while the Partnership
retains ownership. The lubricant sales agreements state the provisions for the
Partnership to sell and CITGO to buy paraffinic lubricants base oil, naphthenic
lubricants, white mineral oils and specialty oils.
F-70
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED APRIL 5, 1999
PROSPECTUS $4,000,000,000
[LOGO OF LYONDELL APPEARS HERE]
Lyondell Chemical Company
Common Stock
Preferred Stock
Debt Securities
Lyondell Chemical Company (the "Company" or "Lyondell") may from time to time
offer, together or separately, (i) shares of its common stock, par value $1.00
per share (the "Common Stock"), (ii) shares of its preferred stock, par value
$.01 per share (the "Preferred Stock"), (iii) unsecured senior debt securities
(the "Senior Debt Securities") and (iv) unsecured subordinated debt securities
(the "Subordinated Debt Securities"), in each case in one or more series and in
amounts, at prices and on terms to be determined at or prior to the time of
sale. The Senior Debt Securities and Subordinated Debt Securities are
collectively referred to herein as the "Debt Securities." The Debt Securities,
Common Stock and Preferred Stock are collectively referred to herein as the
"Securities."
See "Risk Factors" beginning on page 2 for a discussion of certain factors
that should be considered by prospective investors.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The Common Stock and Preferred Stock offered pursuant to this Prospectus may
be issued in one or more series or issuances in U.S. dollars or in one or more
foreign currencies, currency units or composite securities to be determined at
or prior to the time of any offering. The Debt Securities offered pursuant to
this Prospectus may consist of debentures, notes or other evidences of
indebtedness in one or more series and in amounts, at prices and on terms to be
determined at or prior to the time of any such offering. As used herein, the
Debt Securities shall include securities denominated in United States dollars
or, at the option of the Company if so specified in an applicable Prospectus
Supplement, in any other currency, currency unit or composite currency, or in
amounts determined by reference to an index or formula. In addition, all or a
portion of the Debt Securities of a series may be issuable in temporary or
permanent global form. The Company's obligations under the Senior Debt
Securities will rank pari passu with all unsecured and unsubordinated debt (as
defined herein) of the Company. The Company's obligations under the
Subordinated Debt Securities will be subordinated in right of payment to the
prior payment in full of all Senior Debt (as defined herein). See "Description
of Debt Securities."
By separate prospectus, the form of which is included in the Registration
Statement of which this Prospectus forms a part, three Delaware statutory
business trusts (the "Lyondell Trusts"), each of which is a wholly owned
subsidiary of the Company, may from time to time severally offer preferred
securities guaranteed by the Company to the extent set forth therein, and the
Company may offer from time to time debt securities either directly or to a
Lyondell Trust. The aggregate public offering price of the securities to be
offered pursuant to this Prospectus and such other prospectus shall not exceed
$4,000,000,000 (or its equivalent in one or more foreign currencies, currency
units or composite currencies).
Specific terms of the Securities in respect of which this Prospectus is being
delivered (the "Offered Securities") will be set forth in a Prospectus
Supplement with respect to such Offered Securities, which Prospectus Supplement
will describe, without limitation and where applicable, the following: (i) in
the case of Common Stock, the specific designation, number of shares, purchase
price and the rights and privileges thereof, together with any qualifications
or restrictions thereon and any listing on a securities exchange; (ii) in the
case of Preferred Stock, the specific designation, number of shares, voting and
other powers, designations, preferences and relative participating, optional or
other special rights, and qualifications, limitations or restrictions
(including dividends, liquidation value, voting rights, terms for the
redemption, conversion or exchange thereof and any other specific terms of the
Preferred Stock) and any listing on a securities exchange; and (iii) in the
case of Debt Securities, the specific designation, aggregate principal amount,
ranking as senior debt or subordinated debt, authorized denomination, maturity,
rate (or method of determining the same) and times of payment of any interest,
any terms for optional or mandatory redemption, which may include redemption at
the option of holders upon the occurrence of certain events or payment of
additional amounts or any sinking fund provisions, any provisions with respect
to conversion or exchangeability, the initial public offering price, the net
proceeds to the Company, any listing on a securities exchange and any other
specific terms in connection with the offering. Unless otherwise indicated in
the Prospectus Supplement, the Company does not intend to list any of the
Securities other than the Common Stock on a national securities exchange.
The Offered Securities may be offered directly, through agents designated
from time to time, through dealers or through underwriters. Such agents or
underwriters may act alone or with other agents or underwriters. See "Plan of
Distribution." Any such agents, dealers or underwriters will be set forth in a
Prospectus Supplement. If an agent of the Company, or a dealer or underwriter
is involved in the offering of the Offered Securities, the agent's commission,
dealer's purchase price, underwriter's discount and net proceeds to the
Company, as the case may be, will be set forth in, or may be calculated from,
the Prospectus Supplement. Any underwriters, dealers or agents participating in
the offering may be deemed "underwriters" within the meaning of the Securities
Act of 1933.
The Common Stock is traded on the New York Stock Exchange under the symbol
"LYO." Any Common Stock offered will be traded, subject to notice of issuance,
on the New York Stock Exchange.
This Prospectus may not be used to consummate sales of Offered Securities
unless accompanied by a Prospectus Supplement.
The date of this Prospectus is , 1999.
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THE COMPANY
Lyondell Chemical Company ("Lyondell" or the "Company") is a vertically
integrated, global chemical company with leading market positions in all of
its major products and low cost operations. The Company's principal executive
offices are located at 1221 McKinney Street, Houston, Texas 77010 (telephone:
(713) 652-7200).
FORWARD-LOOKING STATEMENTS
Certain of the statements contained or incorporated by reference in this
Prospectus and the accompanying Prospectus Supplement 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 inherent 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 the risk factors set forth below and other factors set forth in or
incorporated by reference in this Prospectus and the accompanying Prospectus
Supplement. These factors include the cyclical and highly competitive 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 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, labor difficulties, unscheduled
downtime, 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 subsequent written and oral forward-looking statements attributable to
the Company and persons acting on its behalf are qualified in their entirety
by the cautionary statements contained in this section and elsewhere in this
Prospectus.
RISK FACTORS
The following risk factors should be considered carefully with the
information provided elsewhere in this Prospectus and the accompanying
Prospectus Supplement and the documents incorporated by reference herein in
reaching a decision regarding an investment in the Securities offered hereby.
High Leverage and Related Matters
As of December 31, 1998, the Company had outstanding consolidated debt of
approximately $7.0 billion. In addition, the Company remains liable on $713
million of debt for which primary responsibility was assumed by Equistar
Chemicals, LP ("Equistar") in connection with the formation of Equistar. The
Company's consolidated ratio of earnings to fixed charges would have been 1.1
to 1 for 1998 on a pro forma basis if the acquisition of LCW and the related
debt incurrence had occurred on January 1, 1998.
The current amount of debt of the Company significantly exceeds the
Company's historical leverage and significantly increases its debt service
obligations. The Company's historical results and financial condition do not,
accordingly, reflect the potential constraints the increase in leverage may
impose on the Company. The
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Company's significant increase in leverage could have adverse effects on the
Company, including: (i) the leverage may make the Company more vulnerable to
industry cyclicality and may limit its ability to withstand competitive
pressures and adverse changes in environmental and other government
regulation, (ii) a substantial portion of cash flow from operations (as well
as cash generated from asset sales, if any, and financings) must be dedicated
to the payment of principal of and interest on debt and will not be available
for other uses such as capital expenditures or acquisitions, (iii) additional
financing is not available to the Company upon terms as favorable as those
previously available to the Company, which may limit the Company's business
growth, including its ability to effect potential acquisitions and (iv) the
Company may not be able to maintain its current dividend rate.
The Company's credit facilities and other indebtedness contain numerous
financial and other covenants that affect and restrict the Company's business.
The ability of the Company to meet its debt service obligations and capital
expenditure needs, maintain its dividend rate and comply with the covenants
and financial requirements in the credit facilities and other indebtedness
will largely depend on the future performance of the Company and availability
of additional financing to repay and refinance bank debt, both of which will
be subject to prevailing economic, market and competitive conditions and to
other factors beyond the Company's control. The breach of any of the covenants
or financial requirements in the credit facilities or other indebtedness could
result in a default thereunder, which would permit the lenders to declare the
loans immediately payable and to terminate future lending commitments.
As of December 31, 1998, Equistar, LYONDELL-CITGO Refining LP ("LCR") and
Lyondell Methanol Company, L.P. ("Lyondell Methanol") (collectively, the
"Joint Ventures") had, in the aggregate, outstanding debt of approximately
$2.9 billion and owners' equity of $4.6 billion. The ability of the Joint
Ventures to distribute cash to the Company is limited by their respective debt
service obligations. In addition, a default under certain Joint Venture debt
agreements would constitute a cross-default under the Company's credit
facilities. Certain debt instruments that were assumed by Equistar, but as to
which Lyondell remains an obligor as well, contain provisions that generally
provide that holders of such debt may, under certain limited circumstances,
require an obligor to repurchase the debt ("Put Rights"). The Put Rights would
be triggered by a specified decline in public ratings on such debt following
(i) certain events affecting control of Lyondell or Equistar or (ii) the
making by Lyondell or Equistar of certain dividends, distributions or
repurchases in excess of specified amounts. The debt subject to the Put Rights
consists of $150 million aggregate principal amount of notes maturing in June
1999, bearing interest at 10 percent, and $163 million aggregate principal
amount of medium-term notes maturing at various dates through 2005, with a
weighted average interest rate at December 31, 1998 of 9.87 percent. To date,
these Put Rights have not been triggered.
Industry Cyclicality and Overcapacity
The Company's historical operating results reflect the cyclical and volatile
nature of both the chemical and refining industries. The Company experienced
earnings declines in the fourth quarter of 1998 compared to the third quarter
of 1998 primarily because of lower prices in both the chemicals and refining
industries. Both industries are mature and capital intensive, and industry
margins are sensitive to supply and demand balances, which have historically
been cyclical. The chemical industry historically has experienced alternating
periods of tight supply, causing prices and profit margins to increase,
followed by periods of substantial capacity additions, resulting in oversupply
and declining prices and profit margins. Due to the commodity nature of most
of the Company's products, the Company is not necessarily able to protect its
market position by product differentiation or to pass on cost increases to its
customers. Accordingly, increases in raw material and other costs do not
necessarily correlate with changes in product prices, either in the direction
of the price change or in absolute magnitude. Moreover, a number of
participants in various segments of the chemical industry have announced plans
for expansion of plant capacity. There can be no assurance that future growth
in product demand will be sufficient to utilize this additional, or even
current, capacity. Excess industry capacity, to the extent it occurs,
depresses the Company's volumes and margins. As a result, the Company's
earnings are subject to significant fluctuation.
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External factors beyond the Company's control, such as general economic
conditions, competitor action, international events and circumstances and
governmental regulation in the United States and abroad, can cause volatility
in feedstock prices, as well as fluctuations in demand for the Company's
products, product prices, volumes and margins, and can magnify the impact of
economic cycles on the Company's business. A number of the Company's products
are highly dependent on durable goods markets, such as housing and automotive,
that are particularly cyclical.
Intense Competition
The chemical industry is highly competitive. Many of the Company's
competitors are larger and have greater financial resources than the Company.
Among Lyondell's chemical competitors are some of the world's largest chemical
companies, including The Dow Chemical Company, Shell Chemical, BASF AG, Bayer
AG and Union Carbide Corporation. In the past several years, there have been a
number of mergers, acquisitions and spin-offs in the chemical industry. This
restructuring activity may result in fewer but more competitive producers with
greater financial resources than the Company.
Competition within the chemical industry is affected by a variety of
factors, including product price, reliability of product supply, technical
support, customer service, product quality and availability to the market of
potential substitute materials. Changes in the competitive environment,
including (i) the emergence of new competitors, (ii) the rate of capacity
additions by competitors, (iii) the intensification of price competition in
the Company's markets, (iv) the introduction of new or substitute products by
competitors, (v) technological innovations by competitors and (vi) new
environmental laws and regulatory requirements, could have a material adverse
effect on the business and operations of the Company.
Potential Difficulties in Integrating Recently Acquired and Combined
Operations
The Company acquired Lyondell Chemical Worldwide, Inc. (formerly ARCO
Chemical Company) ("LCW") in July 1998. The Company combined its
petrochemicals and polymers business with that of Millennium Chemicals Inc. to
form Equistar Chemicals, LP in December 1997. Equistar was expanded by the
addition of certain businesses previously held by Occidental Petroleum
Corporation in May 1998. The process of integrating the operations of LCW with
the Company has only recently begun, and the process of integrating the
operations of Equistar is not complete.
As is the case with any integration of major businesses that previously
operated independently, the integration processes for LCW and for Equistar
will require the dedication of significant management and operational
resources. The difficulties of combining operations may be exacerbated by the
necessity of coordinating geographically separate organizations, integrating
personnel with disparate business backgrounds and combining different
transaction processing and financial reporting systems and processes and
corporate cultures. The process of integrating operations could cause an
interruption of, or loss of momentum in, the activities of the combined
enterprise's business. In addition, the Company may suffer a loss of key
employees, customers or suppliers, loss of revenues, increases in costs or
other difficulties, some of which may not have been foreseen. There can be no
assurance that the Company will be able to realize the operating efficiencies,
cost savings and other benefits that are sought from such transactions.
Difficulties encountered in the integration processes could have a material
adverse effect on the business and operations of the Company.
Acquisitions, Dispositions and Joint Ventures
Each of Lyondell and Equistar actively seeks opportunities to maximize
efficiency or value through various transactions. These transactions may
include purchases or sales of assets or contractual arrangements or joint
ventures that are intended to result in the realization of synergies, the
creation of efficiencies or the generation of cash to reduce indebtedness. To
the extent permitted under Lyondell's and Equistar's credit facilities and
other indebtedness, some of these transactions may be financed by additional
borrowings by Lyondell or Equistar or by the issuance of equity securities.
These transactions may often affect the results of operations of Lyondell or
Equistar in the short term because of the costs associated with such
transactions, but they are expected to yield longer-term benefits if the
expected efficiencies and synergies of the transactions are realized. Factors
such as those described in "--Potential Difficulties in Integrating Recently
Acquired and Combined Operations" may make it difficult or impossible to
realize such expected efficiencies and synergies.
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Shared Control of Joint Ventures
The Company conducts a substantial amount of its operations through its
Joint Ventures. The Company shares control of these Joint Ventures with
unaffiliated third parties.
The Company's forecasts and plans with respect to these Joint Ventures
assume that its joint venture partners will observe their obligations with
respect to the Joint Ventures. In the event that any of the Company's joint
venture partners do not observe their commitments, it is possible that the
affected Joint Venture would not be able to operate in accordance with its
business plans or that the Company would be required to increase its level of
commitment in order to give effect to such plans.
As with any such joint venture arrangements, differences in views among the
joint venture participants may result in delayed decisions or in failures to
agree on major matters, potentially adversely affecting the business and
operations of the Joint Ventures and in turn the business and operations of
the Company.
Joint Venture Structure
The Company conducts a substantial amount of its operations through its
Joint Ventures. The Company's ability to meet its debt service obligations is
dependent, in part, upon the receipt of distributions from its Joint Ventures.
Subject to the provisions of the applicable debt agreements, future borrowings
by the Company's Joint Ventures may contain restrictions or prohibitions on
the payment of distributions by such Joint Ventures to the Company. Under
applicable state law, the Company's Joint Ventures may be limited in amounts
that they are permitted to pay as distributions on their equity interests.
Importance of Crude Oil Supply Agreement and Related Risks
Substantially all of the crude oil used by LCR as a feedstock for its
refinery is purchased under the Crude Supply Agreement with PDVSA Petroleo y
Gas S.A. ("PDVSA Oil"), which, like CITGO Petroleum Corporation ("CITGO"), is
a subsidiary of Petroleos de Venezuela, S.A., the Venezuelan national oil
company. The Crude Supply Agreement was entered into in 1993 and the Company
experienced the full effects of the Crude Supply Agreement beginning in 1997.
The Crude Supply Agreement incorporates formula prices to be paid by LCR for
the crude oil supplied based on the market value of a slate of refined
products deemed to be produced from each particular crude oil or feedstock,
less (i) certain deemed refining costs adjustable for inflation and energy
costs, (ii) certain actual costs, including crude oil transportation costs,
import duties and taxes and (iii) a deemed margin, which varies according to
the grade of crude oil or other feedstock delivered. Deemed margins and deemed
costs are adjusted periodically based on inflation rates for specific deemed
cost components. Adjustments to margins track, but are less than, inflation
rates. Because deemed operating costs and the slate of refined products deemed
to be produced from a given barrel of crude oil or other feedstock do not
necessarily reflect the actual costs and yields in any period and also because
the market value of the refined products used in the pricing formula does not
necessarily reflect the actual price received for the refined products, the
actual refining margin earned by LCR varies depending on, among other things,
the efficiency with which LCR conducts its operations from time to time.
Although LCR believes that the Crude Supply Agreement reduces the volatility
of its earnings and cash flows, the Crude Supply Agreement also limits LCR's
ability to enjoy higher margins during periods when the market price of crude
oil is low relative to the then current market prices for refined products. In
addition, if the actual yields, costs or volumes of the LCR refinery differ
substantially from those contemplated by the Crude Supply Agreement, the
benefits of this agreement to LCR could be substantially diminished, and could
result in lower earnings and cash flow for LCR. Furthermore, there may be
periods during which LCR's costs for crude oil under the Crude Supply
Agreement may be higher than might otherwise be available to LCR from other
sources.
There are risks associated with enforcing the provisions of contracts with
companies such as PDVSA Oil that are non-United States affiliates of a
sovereign nation. It is impossible to predict how governmental policies may
change under the current or any subsequent Venezuelan government. In addition,
there are risks associated with enforcing judgments of United States courts
against entities whose assets are located outside of the United
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States and whose management does not reside in the United States. In addition,
all of the crude oil supplied by PDVSA Oil under the Crude Supply Agreement is
produced in Venezuela, a country that has experienced economic difficulties
and attendant social and political unrest in recent years. If the Crude Supply
Agreement is modified or terminated or this source of crude oil is otherwise
interrupted due to production difficulties, OPEC-mandated supply cuts,
political or economic events in Venezuela or other factors, LCR could
experience significantly greater volatility in its earnings and cash flows.
The parties each have the right to transfer their interests in LCR to
unaffiliated third parties in certain circumstances, subject to reciprocal
rights of first refusal. In the event that CITGO were to transfer its interest
in LCR to an unaffiliated third party, PDVSA Oil would have an option to
terminate the Crude Supply Agreement. Depending on then current market
conditions, any breach or termination of the Crude Supply Agreement could
adversely affect LCR, since LCR would have to purchase all of its crude oil
feedstocks in the merchant market, which could subject LCR to significant
price fluctuations. There can be no assurance that alternative crude oil
supplies providing similar margins would be available for purchase by LCR.
In late April 1998, LCR received notification from PDVSA of reduced delivery
of crude oil related to announced OPEC production cuts. In August 1998, LCR
began receiving reduced allocations of crude oil from PDVSA. Following
additional cutbacks announced by OPEC in late March 1999, LCR anticipates
further reductions in its allocation of crude oil under the Crude Supply
Agreement. Historically Venezuela has complied with OPEC-mandated supply cuts
by reducing crude supply. Decreased allocations of PDVSA crude oil tend to
reduce LCR's pretax income and, accordingly, Lyondell's pro rata share of
LCR's income. OPEC-mandated supply cuts are a force majeure event under the
Crude Supply Agreement for which the Company has no contractual remedy. While
to date LCR has been able to obtain alternate supplies of crude oil, the
margin for these crude oils has been less than for the extra heavy Venezuelan
crude oil purchased under the Crude Supply Agreement. There can be no
assurance that PDVSA will not announce further cutbacks in crude oil
production thereby reducing LCR's allocation of extra heavy crude oil or that
LCR will be able to continue to obtain adequate alternative supplies of crude
oil or at what cost Lyondell will be able to obtain such substitute crude oil.
Operating Hazards
The occurrence of material operating problems, including, but not limited
to, the events described below, may have a material adverse effect on the
productivity and profitability of a particular manufacturing facility, or on
the Company as a whole, during and after the period of such operational
difficulties. The Company's revenues are dependent on the continued operation
of its various production facilities (including the ability to complete
construction projects on schedule). The Company's operations are subject to
the usual hazards associated with chemical manufacturing and refining and the
related storage and transportation of feedstocks, products and wastes,
including pipeline leaks and ruptures, explosions, fires, inclement weather
and natural disasters, mechanical failure, unscheduled downtime, labor
difficulties, transportation interruptions, remediation complications,
chemical spills, discharges or releases of toxic or hazardous substances or
gases, storage tank leaks and other environmental risks. These hazards can
cause personal injury and loss of life, severe damage to or destruction of
property and equipment and environmental damage, and may result in suspension
of operations and the imposition of civil or criminal penalties. Furthermore,
the Company is also subject to present and future claims with respect to
workplace exposure, workers' compensation and other matters. The Company
maintains property, business interruption and casualty insurance which it
believes is in accordance with customary industry practices, but it is not
fully insured against all potential hazards incident to its business.
Environmental Considerations
The Company's operations and ownership and use of real property are subject
to extensive environmental, health and safety laws and regulations promulgated
by domestic and foreign governments at both the national and local level. Many
of these laws and regulations impose requirements relating to the clean-up of
contamination, impose liability in the event of damage of natural resources
and provide for substantial fines and
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potential criminal sanctions for violations. The nature of the chemical and
refining industries exposes the Company to risks of liability under such laws
and regulations due to the production, refining, storage, transportation and
sale of materials that can cause contamination or personal injury if released
into the environment. In addition, individuals could seek damages for alleged
personal injury or property damage due to exposure to chemicals at the
Company's facilities or to chemicals otherwise owned or controlled by the
Company. Environmental laws may have a significant effect on the nature and
scope of cleanup of contamination at current and former operating facilities,
the costs of transportation and storage of feedstocks and finished products
and the costs of the storage and disposal of wastes. Also, "Superfund"
statutes may impose joint and several liability for the costs of remedial
investigations and actions on the entities that generated waste, arranged for
disposal of the wastes, transported to or selected the disposal sites and the
past and present owners and operators of such sites. All such responsible
parties (or any one of them, including the Company) may be required to bear
all of such costs regardless of fault, legality of the original disposal or
ownership of the disposal site.
The Company expects that the nature of its businesses will continue to
subject the Company to increasingly stringent environmental and health and
safety laws and regulations. It is difficult to predict the future
interpretation and development of such laws and regulations or their impact on
future earnings and operations, but the Company anticipates that these
standards will continue to require increased capital expenditures and
operating costs. In particular, the ultimate effect of the Clean Air Act on
the Company's operations will depend on how the law is interpreted and
implemented pursuant to regulations that are currently being developed and on
additional factors such as the evolution of environmental control
technologies.
The Company's policy is to accrue costs relating to environmental matters
when it is probable that such costs will be required and the related costs can
be reasonably estimated. Estimated costs for future environmental compliance
and remediation or other costs are necessarily imprecise due to such factors
as the continuing evolution of environmental laws and regulatory requirements,
the availability and application of technology, the identification of
presently unknown remediation sites and the allocation of costs among the
responsible parties under applicable statutes. On a quarterly basis, the
Company evaluates the status of all significant existing or potential
environmental issues, develops or revises estimates of costs to satisfy known
remediation requirements (including those relating to "Superfund"
requirements) and adjusts its accruals accordingly; as of December 31, 1998,
the reserve was $48 million. Based upon information presently available, the
Company does not expect that such future costs will have a material adverse
effect on its competitive or financial position or its ongoing results of
operations. However, it is not possible to predict accurately the amount or
timing of costs of any future environmental remediation requirements. Such
costs could be material to future quarterly or annual results of operations.
MTBE
Pending or future legislative initiatives or litigation may materially
adversely affect the Company's MTBE sales or subject the Company to products
liability. The presence of MTBE in some water supplies in California and other
states due to gasoline leaking from underground storage tanks and in surface
water from recreational water craft has led to public concern that MTBE may
contaminate drinking water supplies, and thereby result in a possible health
risk. The Governor of California has announced an intention to eliminate MTBE
from gasoline sold in California by December 31, 2002. There have been claims
that MTBE travels more rapidly through soil, and is more soluble in water,
than most other gasoline components, and is more difficult and more costly to
remediate. Heightened public awareness about MTBE has resulted in certain
state and federal legislative initiatives that have sought either to rescind
the oxygenate requirement for reformulated gasoline sold in California and
other states or restrict the use of MTBE. There is ongoing review of this
issue and the ultimate resolution of the appropriateness of using MTBE could
result in a significant reduction in the Company's MTBE sales.
In addition, the Company has a take-or-pay MTBE sales contract with Atlantic
Richfield Company ("ARCO"), which contributes significant pre-tax margin. If
such legislative initiatives were enacted, ARCO has
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indicated that it might attempt to invoke a force majeure provision in the
ARCO contract in order to reduce the quantities of MTBE it purchases under, or
to terminate, the contract. The Company would vigorously dispute such action.
The contract has an initial term expiring December 31, 2002 and provides for
formula-based prices that are currently significantly above spot market prices
for MTBE. A significant reduction in the Company's sales under the ARCO
contract could have a negative impact on the Company's results of operations.
Foreign Operations, Country Risks and Exchange Rate Fluctuations
International operations and exports to foreign markets are subject to a
number of risks, including currency exchange rate fluctuations, trade
barriers, exchange controls, national and regional labor strikes, political
risks and risks of increases in duties and taxes, as well as changes in laws
and policies governing operations of foreign-based companies. Although the
Company uses various types of foreign currency forward, option and swap
contracts to reduce foreign exchange exposures with respect to revenues,
capital commitments and other expenses denominated in foreign currencies,
there can be no assurance that such hedging techniques will protect the
Company's reported results against such risks or that the Company will not
incur material losses on such contracts. In addition, earnings of foreign
subsidiaries and intercompany payments may be subject to foreign income tax
rules that may reduce cash flow available to meet required debt service and
other obligations of the Company.
A number of Asian and Latin American economies have experienced economic
difficulties in recent periods. Prolonged economic difficulties in the Asian
and Latin American markets could significantly impact worldwide demand and
thereby place downward pressure on margins, which, if material, could in turn
have an adverse effect on the business and operations of the Company.
Significant Fluctuations in Quarterly Results
The Company's quarterly results will vary significantly depending on various
factors, most of which are beyond the Company's control, including changes in
product prices, product demand, raw material costs or supply arrangements;
regional business activities, including a lower level of economic activity in
Europe during the summer; adverse developments in foreign markets;
fluctuations in shipments to customers; foreign exchange fluctuations;
unanticipated expenses; changes in interest rates; and the scheduling of plant
turnarounds.
Change of Control Related Provisions
Under the Company's credit facilities, a change in control of the Company is
an event of default, which would permit the lenders to declare the loans
thereunder immediately payable and to terminate future lending commitments.
Under the credit facilities, with certain exceptions, a change in control is
deemed to occur if any person or group acquires 20% or more of the Company's
Common Stock or there has generally been a change in a majority of the
Company's Board of Directors. The Company has adopted a stockholders' rights
plan. In addition, the Delaware General Corporation Law contains provisions
that impose restrictions on business combinations with interested parties and
the Company's By-Laws contain certain advance notice provisions. The
provisions of the credit facilities, the Delaware General Corporation Law, the
Company's stockholders' rights plan and the Company's By-Laws (as well as the
Put Rights described under "--High Leverage and Related Matters" above) may
have the effect of delaying, deferring or preventing a change in control of
the Company, which could prevent the Company's stockholders from receiving a
takeover premium for their Common Stock.
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USE OF PROCEEDS
Except as otherwise described in any Prospectus Supplement, the net proceeds
from the sale of the Offered Securities will be used for general corporate
purposes, which may include, but are not limited to, repayment or refinancing
of indebtedness, working capital, capital expenditures, acquisitions and
repurchases or redemptions of debt or equity securities of Lyondell, and may
initially be invested in short-term securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges(a)................. 1.2x 4.6x 2.2x 6.8x 4.8x
Supplemental pro forma ratio of earnings to fixed
charges(b)........................................... 1.1x
</TABLE>
- --------
(a) The ratio of earnings to fixed charges has been calculated including
amounts for Lyondell and its proportionate share of amounts for Equistar
(57 percent through May 15, 1998 and 41 percent thereafter), LCR (58.75
percent for the year ended December 31, 1998, 86 percent for the first
quarter of 1997 and 58.49 percent for the remainder of 1997) and Lyondell
Methanol (75 percent for the year ended December 31, 1998), for the
periods in which Lyondell accounted for its respective investment in each
such Joint Venture using the equity method of accounting. Lyondell remains
liable on approximately $713 million of debt for which primary
responsibility was assumed by Equistar in connection with its formation.
Fixed charges include interest expense plus capitalized interest and the
portion of rental expense that represents an interest factor.
(b) The supplemental pro forma ratio of earnings to fixed charges gives effect
to the acquisition of LCW and the debt issued by the Company pursuant to
the related credit facilities as if such transactions had occurred as of
January 1, 1998.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of
250,000,000 shares of Common Stock, par value $1.00 per share, and 80,000,000
shares of preferred stock, par value $.01 per share. The following summary
description of the capital stock of the Company is qualified in its entirety
by reference to the Certificate of Incorporation, as amended (the "Certificate
of Incorporation"), and the Amended and Restated By-Laws of the Company, as
amended (the "By-Laws"), copies of which are filed as exhibits to the
Company's Annual Report on Form 10-K.
Common Stock
The Company is currently authorized to issue 250,000,000 shares of Common
Stock, of which 77,021,797 shares of Common Stock were outstanding at December
31, 1998.
Holders of Common Stock ("Stockholders") are entitled (i) to receive such
dividends as may from time to time be declared by the Board of Directors of
the Company; (ii) to one vote per share on all matters on which the
Stockholders are entitled to vote; (iii) to act by written consent in lieu of
voting at a meeting of Stockholders; and (iv) to share ratably in all assets
of the Company available for distribution to the Stockholders, in the event of
liquidation, dissolution or winding up of the Company. The holders of a
majority of the shares of Common Stock represented at a meeting can elect all
of the directors.
Shares of Common Stock are not liable to further calls or assessments by the
Company for any liabilities of the Company that may be imposed on its
Stockholders under the laws of the State of Delaware, the state of
incorporation of the Company. There are no preemptive rights for the Common
Stock in the Certificate of Incorporation.
9
<PAGE>
The Transfer Agent, Registrar and Dividend Disbursing Agent for the Common
Stock is The Bank of New York.
Preferred Stock
The Company is currently authorized to issue up to 80,000,000 shares of
Preferred Stock, $.01 par value per share. The Board of Directors is able to
specify the precise characteristics of the Preferred Stock to be issued, in
light of current market conditions and the nature of specific transactions,
and is not required to solicit further authorization from Stockholders for any
specific issue of Preferred Stock. The Board of Directors has no present
intention to issue any series of Preferred Stock.
The Board of Directors has adopted a policy providing that no future
issuance of Preferred Stock will be effected without Stockholder approval
unless the Board of Directors (whose decision shall be conclusive) determines
in good faith (i) that such issuance is primarily for the purpose of
facilitating a financing, an acquisition or another proper corporate objective
or transaction, and (ii) that any anti-takeover effects of such issuance are
not the Company's primary purpose for effecting such issuance. The Board of
Directors will not amend or revoke this policy without giving written notice
to the holders of all outstanding shares of the Company's stock; however, no
such amendment or revocation will be effective, without Stockholder approval,
to permit a subsequent issuance of Preferred Stock for the primary purpose of
obstructing a takeover of the Company by any person who has, prior to such
written notice to stockholders, notified the Board of Directors of such
person's desire to pursue a takeover of the Company.
Rights to Purchase Common Stock
On December 8, 1995, the Board of Directors of Lyondell declared a dividend
of one right ("Right") for each outstanding share of the Company's Common
Stock, par value $1.00 per share, to Stockholders of record at the close of
business on December 20, 1995. Each Right entitles the registered holder to
purchase from the Company one share of Common Stock at a purchase price of $80
per share of Common Stock, subject to adjustment (the "Purchase Price"). The
description and terms of the Rights are set forth in a Rights Agreement dated
as of December 8, 1995 as it may from time to time be supplemented or amended
(the "Rights Agreement") between the Company and The Bank of New York, as
Rights Agent.
Initially, the Rights will be attached to all certificates representing
outstanding shares of Common Stock, and no separate certificates for the
Rights ("Rights Certificates") will be distributed. The Rights will separate
from the Common Stock and a "Distribution Date" will occur, with certain
exceptions, upon the earlier of (i) ten days following a public announcement
of the existence of an "Acquiring Person" (the date of the announcement being
the "Stock Acquisition Date"), or (ii) ten business days following the
commencement of a tender offer or exchange offer that would result in a person
becoming an Acquiring Person.
An "Acquiring Person" is any person or group of affiliated or associated
persons that has acquired or obtained the right to acquire beneficial
ownership of 15 percent or more of the outstanding shares of Common Stock,
except that ARCO will not be or become an Acquiring Person unless and until
such time as ARCO or any person affiliated or associated with ARCO acquires or
becomes the beneficial owner of (or ARCO becomes affiliated or associated with
any person who, collectively with ARCO, is the beneficial owner of) more than
the lesser of (i) 1,000,000 shares of Common Stock in addition to those ARCO
beneficially owned as of December 8, 1995 (or in addition to any lesser number
of shares ARCO beneficially owns from time to time thereafter) or (ii) one
share less than 50 percent of the shares of Common Stock outstanding at any
time.
In certain circumstances prior to the time a person has become an Acquiring
Person, the Distribution Date may be deferred by the Board of Directors.
Certain inadvertent acquisitions will not result in a person's becoming an
Acquiring Person if the person promptly divests itself of sufficient Common
Stock. Until the Distribution Date, (a) the Rights will be evidenced by the
Common Stock certificates (together with this Summary of Rights or bearing the
notation referred to below) and will be transferred with and only with such
Common Stock
10
<PAGE>
certificates, (b) new Common Stock certificates issued after December 20, 1995
will contain a notation incorporating the Rights Agreement by reference and
(c) the surrender for transfer of any certificate for Common Stock (with or
without a copy of this Summary of Rights) will also constitute the transfer of
the Rights associated with the Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire at
the close of business on December 8, 2005, unless earlier redeemed or
exchanged by the Company as described below.
In the event (a "Flip-In Event") that a person becomes an Acquiring Person
(except pursuant to a tender or exchange offer for all outstanding shares of
Common Stock at a price and on terms that a majority of the independent
directors of the Company determines to be fair to and otherwise in the best
interests of the Company and its stockholders (a "Permitted Offer")), each
holder of a Right will thereafter have the right to receive, upon exercise of
such Right, a number of shares of Common Stock (or, in certain circumstances,
cash, property or other securities of the Company) having a Current Market
Price (as defined in the Rights Agreement) equal to two times the exercise
price of the Right. Notwithstanding the foregoing, following the occurrence of
any Flip-In Event, all Rights that are, or (under certain circumstances
specified in the Rights Agreement) were, beneficially owned by or transferred
to such Acquiring Person (or by certain related parties) will be null and void
in the circumstances set forth in the Rights Agreement.
In the event (a "Flip-Over Event") that, at any time from and after the time
an Acquiring Person becomes such, (i) the Company is acquired in a merger or
other business combination transaction (other than certain mergers that follow
a Permitted Offer), or (ii) 50 percent or more of the Company's assets or
earning power is sold or transferred, each holder of a Right (except Rights
owned by such Acquiring Person or certain related parties) shall thereafter
have the right to receive, upon exercise, a number of shares of common stock
of the acquiring company having a Current Market Price equal to two times the
exercise price of the Right.
At any time until the time a person becomes an Acquiring Person, the Company
may redeem the Rights in whole, but not in part, at a price of $.0005 per
Right, payable, at the option of the Company, in cash, shares of Common Stock
or such other consideration as the Board of Directors may determine. At any
time after the occurrence of a Flip-In Event and prior to the occurrence of a
Flip-Over Event or a person becoming the beneficial owner of 50 percent or
more of the shares of Common Stock then outstanding, the Company may exchange
the Rights (other than Rights owned by an Acquiring Person or an affiliate or
an associate of an Acquiring Person, which will have become void), in whole or
in part, at an exchange ratio of one share of Common Stock, and/or other
equity securities deemed to have the same value as one share of Common Stock,
per Right, subject to adjustment.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends. While the distribution of the Rights should not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights
become exercisable for Common Stock (or other consideration) of the Company or
for the common stock of the acquiring company as set forth above or are
exchanged as provided in the preceding paragraph.
The Purchase Price payable, and the number of shares of Common Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a
stock dividend on, or a subdivision, combination or reclassification of, the
Common Stock, (ii) if holders of the Common Stock are granted certain rights
or warrants to subscribe for Common Stock or securities convertible into
Common Stock at less than the current market price of the Common Stock or
(iii) upon the distribution to holders of the Common Stock of evidences of
indebtedness or assets (excluding regular quarterly cash dividends) or of
subscription rights or warrants (other than those referred to above).
Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board of Directors of the Company as long as
the Rights are redeemable. Thereafter, the provisions of the Rights Agreement
(other than the Redemption Price) may be amended by the Board of Directors in
order to cure any
11
<PAGE>
ambiguity, defect or inconsistency, to make changes that do not materially
adversely affect the interests of holders of Rights (excluding the interests
of any Acquiring Person), or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment to lengthen the time
period governing redemption or amendment shall be made at such time as the
Rights are not redeemable.
The Rights have certain antitakeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by its Board of Directors, except pursuant to an offer
conditioned on a substantial number of Rights being acquired. The Rights
should not interfere with any merger or other business combination approved by
the Board of Directors at a time when the Rights are redeemable.
A copy of the Rights Agreement is filed as an exhibit to the Company's
Annual Report on Form 10-K. This summary description of the Rights is
qualified in its entirety by reference thereto.
Voting Rights
Each holder of shares of Common Stock, except where otherwise provided by
law or the Certificate of Incorporation, is entitled to one vote, in person or
by proxy, for each share of Common Stock standing in his, her or its name on
the books of the Company. The Common Stock does not have cumulative voting
rights. Holders of the Preferred Stock, if any, will only be entitled to vote
upon the election of directors or upon any questions affecting the Company if
and to the extent that the holders of any series of Preferred Stock are
granted voting rights fixed for such series by the Board of Directors in the
resolution creating such series.
Delaware Section 203
The Company is a Delaware corporation and is subject to Section 203 of the
General Corporation Law of Delaware ("Delaware Law"). In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of the Company's outstanding voting stock) from engaging in a
"business combination" (as defined in Section 203) with the Company for three
years following the date that person becomes an interested stockholder unless
(a) before that person became an interested stockholder, the Company's Board
of Directors approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination, (b)
upon completion of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested stockholder
owns at least 85% of the Company's voting stock outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the Company and by employee stock plans that do not provide employees with
the right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer) or (c) following the
transaction in which that person became an interested stockholder, the
business combination is approved by the Company's Board of Directors and
authorized at a meeting of stockholders by the affirmative vote of the holders
of at least two-thirds of the outstanding Company voting stock not owned by
the interested stockholder.
Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement
or notification of one of certain extraordinary transactions involving the
Company and a person who was not an interested stockholder during the previous
three years or who became an interested stockholder with the approval of a
majority of the Company's directors, if that extraordinary transaction is
approved or not opposed by a majority of the directors who were directors
before any person became an interested stockholder in the previous three years
or who were recommended for election or elected to succeed such directors by a
majority of such directors then in office.
Limitation on Directors' Liability
Delaware Law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The Certificate of
Incorporation limits the liability of directors of the Company to the Company
or its stockholders to the fullest
12
<PAGE>
extent permitted by Delaware Law. Specifically, directors of the Company will
not be personally liable for monetary damages for breach of a director's
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
Law or (iv) for any transaction from which the director derived an improper
personal benefit.
The inclusion of this provision in the Certificate of Incorporation may have
the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited the Company and its
stockholders.
Provisions of the Company's By-Laws
Certain provisions of the By-Laws establish time periods during which
appropriate stockholder proposals must be delivered to the Company for
consideration at special and annual meetings called by the Company. The By-
Laws provide, among other things, that stockholders making nominations for the
Board of Directors at, or bringing other business before, an annual or special
meeting of stockholders must provide timely written notice to the Company
thereof (timely notice being required to be no later than 90 days in advance
of such meeting; provided, however, that in the event that the date of the
meeting was not publicly announced by a mailing to stockholders, in a press
release reported by the Dow Jones News Services, Associated Press or
comparable national news service or in a filing with the Securities and
Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities
Exchange Act of 1934 more than 90 days prior to the meeting, such notice, to
be timely, must be delivered to the Board of Directors not later than the
close of business on the tenth day following the day on which the date of the
meeting was first so publicly announced).
Limitation on Changes in Control
The Rights and Rights Agreement, certain provisions of the Company's By-Laws
and the provisions of Section 203 of Delaware Law could have the effect of
delaying, deferring or preventing a change in control of the Company. This
could be the case, notwithstanding that a majority of the stockholders might
benefit from such a change in control or offer.
MARKET FOR COMMON STOCK AND COMMON STOCK DIVIDENDS
The Common Stock is listed on the New York Stock Exchange under the symbol
"LYO." The reported high and low sale prices of the Common Stock on the New
York Stock Exchange (New York Stock Exchange Composite Tape) for each quarter
from January 1, 1997 through March 31, 1999, inclusive, were as set forth
below.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
1997:
First Quarter....................................... 25 1/2 21 5/8
Second Quarter...................................... 23 5/8 18 3/8
Third Quarter....................................... 27 3/8 21 7/8
Fourth Quarter...................................... 27 1/4 23 15/16
1998:
First Quarter....................................... 36 1/8 23 1/4
Second Quarter...................................... 38 1/8 26 1/2
Third Quarter....................................... 30 15/16 19 7/16
Fourth Quarter...................................... 22 7/16 15
1999:
First Quarter (through March 31, 1999).............. 18 1/4 12 11/16
</TABLE>
13
<PAGE>
During the last thirteen quarters, Lyondell has declared $.225 per share
quarterly cash dividends (which were paid in the subsequent quarter). The
declaration and payment of dividends is at the discretion of the Board of
Directors. The future declaration and payment of dividends and the amount
thereof will be dependent upon the Company's results of operations, financial
condition, cash position and requirements, investment opportunities, future
prospects and other factors deemed relevant by the Board of Directors. Subject
to these considerations and to the legal considerations discussed in the
following paragraph, the Company currently intends to distribute to its
Stockholders cash dividends on its Common Stock at a quarterly rate of $.225
per share. During 1998, the Company paid $70 million in dividends. During the
first quarter of 1999, the Company paid $17 million in dividends.
Certain debt instruments which were assumed by Equistar, but as to which
Lyondell remains an obligor as well, contain the Put Rights provisions. Among
other things, the Put Rights may be triggered by the making by either of
Lyondell or Equistar of certain unearned distributions to stockholders or
partners, respectively, other than regular dividends, that are followed by a
specified decline in public ratings on such debt. Regular dividends are those
quarterly cash dividends determined in good faith by the Board of Directors
(whose determination is conclusive) to be appropriate in light of the
Company's results of operations and capable of being sustained. Lyondell's
credit facilities also could limit the Company's ability to pay dividends
under certain circumstances.
The operation of certain of the Company's employee benefit plans may result
in the issuance of Common Stock upon the exercise of options granted to
employees of the Company, including its officers. Although the terms of these
plans provide that additional shares may be issued to satisfy the Company's
obligations under the options, the Company generally intends to cause Common
Stock to be repurchased in the market in order to satisfy these obligations.
14
<PAGE>
DESCRIPTION OF DEBT SECURITIES
The following description of the Debt Securities sets forth certain general
terms and provisions of the Debt Securities to which any Prospectus Supplement
may relate (the "Offered Debt Securities"). The particular terms of the
Offered Debt Securities and the extent to which such general provisions may
apply will be described in a Prospectus Supplement relating to such Offered
Debt Securities.
The Debt Securities will be general unsecured obligations of the Company and
will constitute either senior debt securities or subordinated debt securities.
In the case of Debt Securities that will be senior debt securities ("Senior
Debt Securities"), such Debt Securities will be issued under an Indenture (the
"Senior Indenture") between the Company and a trustee under the Senior
Indenture (the "Senior Trustee"), and will rank pari passu with all other
unsecured and unsubordinated debt of the Company. In the case of Debt
Securities that will be subordinated debt securities ("Subordinated Debt
Securities"), such Debt Securities will be issued under an Indenture (the
"Subordinated Indenture") between the Company and a trustee under the
Subordinated Indenture (the "Subordinated Trustee"), and will rank junior to
all Senior Indebtedness (as defined below) of the Company (including any
Senior Debt Securities) that may be outstanding from time to time. The Senior
Indenture and the Subordinated Indenture are sometimes hereinafter referred to
individually as an "Indenture" and collectively as the "Indentures," and the
Senior Trustee and the Subordinated Trustee are sometimes hereinafter referred
to individually as a "Trustee" and collectively as the "Trustees."
The following description does not purport to be complete. It is qualified
in its entirety by reference to the text of the Form of Senior Indenture and
the Form of Subordinated Indenture, copies of which are filed as exhibits to
this Registration Statement and may be inspected in the same manner as set
forth under "Available Information." Certain defined terms in the Indentures
are capitalized herein.
Provisions Applicable to Both Senior and Subordinated Debt Securities
General
The Indentures do not limit the aggregate principal amount of Debt
Securities that can be issued thereunder and provide that Debt Securities may
be issued from time to time thereunder in one or more series, each in an
aggregate principal amount authorized by the Company prior to issuance. The
Indentures do not limit the amount of other unsecured indebtedness or
securities that may be issued by the Company.
Unless otherwise indicated in a Prospectus Supplement, the Debt Securities
will not benefit from any covenant or other provision that would afford
Holders of such Debt Securities special protection in the event of a highly
leveraged transaction involving the Company or that would give holders of the
Debt Securities the right to require the Company to repurchase their
securities in the event of a decline in the credit rating of the Company's
debt securities resulting from a takeover, recapitalization or similar
restructuring or otherwise.
Reference is made to the Prospectus Supplement for the following terms of
the Offered Debt Securities: (i) the title and aggregate principal amount of
the Offered Debt Securities; (ii) whether such Offered Debt Securities will be
issued in the form of one or more global securities and whether such global
securities are to be issuable in temporary global form or permanent global
form, and if so, whether beneficial owners of interests in any such global
security may exchange such interests for physical securities, and the initial
depositary for any global security; (iii) the date or dates on which the
principal of and premium, if any, on the Offered Debt Securities are payable
or the method of determination thereof; (iv) the rate or rates, or the method
of determination thereof, at which the Offered Debt Securities will bear
interest, if any; (v) whether and under what circumstances Additional Amounts
with respect to the Offered Debt Securities will be payable; (vi) the date or
dates from which such interest will accrue; (vii) the interest Payment Dates
on which such interest will be payable and the record date for the interest
payable on any Offered Debt Securities on any Interest Payment Date; (viii)
the Person to whom any interest on the Offered Securities will be payable;
(ix) the place or places where the principal of, premium
15
<PAGE>
(if any) and interest and any Additional Amounts with respect to the Offered
Debt Securities will be payable; (x) the period or periods within which, the
price or prices at which and the terms and conditions upon which Offered Debt
Securities may be redeemed, in whole or in part, at the option of the Company,
if the Company is to have that option; (xi) the obligation, if any, of the
Company to redeem, purchase or repay Offered Debt Securities pursuant to any
sinking fund or analogous provisions or at the option of a holder thereof and
the period or periods within which, the price or prices (whether denominated
in cash, securities or otherwise) at which and the terms and conditions upon
which Offered Debt Securities will be redeemed, purchased or repaid in whole
or in part pursuant to such obligation; (xii) if other than denominations of
$1,000 and any integral multiple thereof, the denomination in which the
Offered Debt Securities will be issuable; (xiii) the currency or currencies
(including composite currencies), if other than U.S. dollars, in which payment
of principal, premium (if any) and interest on and any Additional Amounts with
respect to the Offered Debt Securities will be payable; (xiv) if such payments
are to be payable, at the election of the Company or a holder thereof, in a
currency or currencies (including composite currencies) other than that in
which the Offered Debt Securities are stated to be payable, the currency or
currencies (including composite currencies) in which such payments as to which
such election is made will be payable, and the periods within which and the
terms and conditions upon which such election is to be made; (xv) if the
amount of such payments may be determined with reference to any commodities,
currencies or indices, values, rates or prices or any other index or formula,
the manner in which such amounts will be determined; (xvi) if other than the
entire principal amount thereof, the portion of the principal amount of
Offered Debt Securities that will be payable upon declaration of acceleration
of the maturity thereof; (xvii) any additional means of satisfaction and
discharge of the applicable Indenture and any additional conditions or
limitations to discharge with respect to the Offered Debt Securities pursuant
to the applicable Indenture or any modifications of or deletions from such
conditions or limitations; (xviii) any deletions or modifications of or
additions to the Events of Default or covenants of the Company pertaining to
the Offered Debt Securities; (xix) any restrictions or other provisions with
respect to the transfer or exchange of Offered Debt Securities; (xx) if the
Offered Debt Securities are to be convertible into or exchangeable for Capital
Stock, other debt securities (including Debt Securities), warrants, other
equity securities or any other securities or property of the Company or any
other Person, at the option of the Company or the holder or upon the
occurrence of any condition or event, the terms and conditions for such
conversion or exchange; and (xxi) any other terms of the Offered Debt
Securities.
The Debt Securities will be issued in registered form. No service charge
will be made for any registration of transfer or exchange of the Debt
Securities, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
Substantially all of the Company's operating income and cash flow is
generated by its subsidiaries and joint ventures. As a result, funds necessary
to meet the Company's debt service obligations are provided in part by
distributions or advances from its subsidiaries and joint ventures. Under
certain circumstances, contractual and legal restrictions, as well as the
financial condition and operating requirements of the Company's subsidiaries
and joint ventures, could limit the Company's ability to obtain cash from its
subsidiaries and joint ventures for the purpose of meeting its debt service
obligations, including the payment of principal and interest on Debt
Securities. The claims of creditors of the subsidiaries and joint ventures
will effectively have priority with respect to the assets and earnings of such
companies over the claims of creditors of the Company, including the holders
of Debt Securities.
Offered Debt Securities may be sold at a discount (which may be substantial)
below their stated principal amount bearing no interest or interest at a rate
that at the time of issuance is below market rates. Any material United States
federal income tax consequences and other special considerations applicable
thereto will be described in the Prospectus Supplement relating to any such
Offered Debt Securities.
If any of the Offered Debt Securities are sold for any foreign currency or
currency unit (including a composite currency) or if the principal, premium
(if any) or interest on or any Additional Amounts with respect to any of the
Offered Debt Securities is payable in any foreign currency or currency unit,
the restrictions,
16
<PAGE>
elections, tax consequences, specific terms and other information with respect
to such Offered Debt Securities and such foreign currency or currency unit
will be set forth in the Prospectus Supplement relating thereto.
Consolidation, Merger and Sale of Assets
The Indentures provide that the Company will not, in any transaction or
series of transactions, consolidate with or merge into any Person, or sell,
lease, convey, transfer or otherwise dispose of all or substantially all of
its assets to any Person, unless: (i) either (a) the Company shall be the
continuing corporation or (b) the Person (if other than the Company) formed by
such consolidation or into which the Company is merged, or to which such sale,
lease, conveyance, transfer or other disposition shall be made, is organized
and validly existing under the laws of the United States of America, any
political subdivision thereof or any state thereof or the District of
Columbia, and shall expressly assume, by a supplemental indenture, the due and
punctual payment of the principal of (and premium, if any) and interest on and
Additional Amounts with respect to all the Debt Securities and the performance
of the Company's covenants and obligations under such Indenture and the Debt
Securities; (ii) immediately after giving effect to such transaction or series
of transactions, no default or Event of Default shall have occurred and be
continuing or would result therefrom; (iii) the Company delivers to the
Trustee an officer's certificate and an Opinion of Counsel, each stating that
the transaction and such supplemental indenture comply with the applicable
Indenture and (iv) the Company complies with any provisions provided for with
respect to any series of Debt Securities.
Events of Default
Unless otherwise provided with respect to any series of Debt Securities, the
following are Events of Default under each Indenture with respect to the Debt
Securities of such series issued under such Indenture: (i) default by the
Company for 30 days in payment of any interest or any Additional Amounts with
respect to any Debt Securities of such series; (ii) default by the Company in
the payment of (a) any principal of any Debt Securities of such series at its
maturity or (b) premium (if any) on any Debt Securities of such series when
the same becomes due and payable; (iii) default by the Company for 30 days in
the deposit of any sinking fund payment, when and as due by the terms of a
Debt Security of such series; (iv) default by the Company in compliance with
any of its other covenants or agreements in, or provisions of, the Debt
Securities of such series or the applicable Indenture (other than an
agreement, covenant or provision that has expressly been included in such
Indenture solely for the benefit of one or more series of Debt Securities
other than that series) which shall not have been remedied within 90 days
after written notice by the Trustee or by the holders of at least 25% in
principal amount of the then outstanding Debt Securities affected by such
default; (v) certain events involving bankruptcy, insolvency or reorganization
of the Company; and (vi) any other Event of Default provided with respect to
Debt Securities of that series. The Indentures provide that the Trustee may
withhold notice to the holders of the Debt Securities of any default or Event
of Default (except in payment of principal of, premium (if any) and interest
on any Additional Amounts or any sinking fund installment with respect to Debt
Securities of such series) if the Trustee considers it in the interest of the
holders of such Debt Securities to do so.
Each Indenture provides that if an Event of Default with respect to any Debt
Securities of any series at the time outstanding occurs and is continuing
(other than the event of default pursuant to (v) above), the applicable
Trustee or the holders of at least 25% in principal amount of the then
outstanding Debt Securities of the series affected by such default (or in the
event of a default pursuant to (iv) above, 25% in principal amount of the
securities affected) may declare the principal of and accrued and unpaid
interest on all then outstanding Debt Securities of such series or of all
series affected, as the case may be, to be due and payable. Upon such a
declaration, the amounts due and payable on such Debt Securities will be due
and payable immediately. If an event of default pursuant to (v) above occurs,
then the principal of and accrued and unpaid interest on all then outstanding
Debt Securities shall ipso facto become immediately due and payable without
any declaration, notice or other act on the part of the Trustee or any holder.
Under certain circumstances, the holders of a majority in principal amount of
the outstanding Debt Securities of the series affected by such default or all
series, as the case may be, may rescind any such acceleration and its
consequences.
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Each Indenture provides that no holder of a Debt Security of any series may
pursue any remedy under such Indenture unless (i) the holder gives the
applicable Trustee written notice of a continuing Event of Default with
respect to such series, (ii) the holders of at least 25% in principal amount
of the then outstanding Debt Securities of such series make a written request
to the applicable Trustee to pursue such remedy, (iii) such holder or holders
offer to the applicable Trustee indemnity reasonably satisfactory to such
Trustee, (iv) the Trustee shall have failed to act for a period of 60 days
after receipt of such notice and offer of indemnity and (v) during such 60-day
period, the holders of a majority in principal amount of the Debt Securities
of that series do not give such Trustee a direction inconsistent with the
request; however, such provision does not affect the right of a holder of a
Debt Security to sue for enforcement of any overdue payment thereon.
Each Indenture provides that the holders of a majority in principal amount
of the then outstanding Debt Securities of a series or of all series affected,
as the case may be, may direct the time, method and place of conducting any
proceeding for any remedy available to the applicable Trustee or exercising
any trust or power conferred on it not relating to or arising under an Event
of Default, subject to certain limitations specified in such Indenture. Each
Indenture requires the annual filing by the Company with the applicable
Trustee of a written statement as to compliance with the covenants contained
in such Indenture.
Modification and Waiver
Modifications and amendments of each Indenture or the Debt Securities may be
made by the Company and the applicable Trustee with the consent of the Holders
of a majority in principal amount of the outstanding Debt Securities of all
series affected by such amendment (acting as one class) under the applicable
Indenture; provided, however, that no such modification, amendment, supplement
or waiver may, without the consent of each Holder of any outstanding Debt
Security so affected, (i) reduce the amount of Debt Securities whose holders
must consent to an amendment, supplement or waiver; (ii) reduce the rate of or
change the time for payment of interest, including default interest, on any
Debt Security; (iii) reduce the principal of or premium on, or change the
stated maturity of any Debt Security; (iv) reduce the premium, if any, payable
upon the redemption of any Debt Security or change the time at which any Debt
Security may or shall be redeemed; (v) change any obligation of the Company to
pay Additional Amounts with respect to any Debt Security; (vi) make any Debt
Security payable in money other than that stated in the Debt Security; (vii)
impair the right to institute suit for the enforcement of any payment of
principal of, premium (if any) or interest on or any Additional Amounts with
respect to any Debt Security; (vii) make any change in the percentage of
principal amount of Debt Securities necessary to waive compliance with certain
provisions of the applicable Indenture; or (viii) waive a continuing Default
or Event of Default in the payment of principal of, premium (if any) or
interest on or Additional Amounts with respect to the Debt Securities. In
addition, in the case of the Subordinated Debt Securities, no modification or
amendment may be made to the Subordinated Indenture with respect to the
subordination of any Subordinated Debt Security in a manner adverse to the
Holder thereof without the consent of the Holder of each Subordinated Debt
Security then outstanding affected thereby. The Indentures provide that
amendments and supplements to, or waivers of any provision of, such Indenture
may be made by the Company and the Trustee without the consent of any holders
of Debt Securities in certain circumstances, including, among other things,
(a) to cure any ambiguity, omission, defect or inconsistency, (b) to provide
for the assumption of the obligations of the Company under such Indenture upon
the merger, consolidation or sale or other disposition of all or substantially
all of the assets of the Company, (c) to provide for uncertificated Debt
Securities in addition to or in place of certificated Debt Securities, or to
provide for the issuance of bearer Debt Securities (with or without coupons),
(d) to secure any series of Debt Securities or to add guarantees of any series
of Debt Securities, (e) to comply with any requirement in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act of
1939 or (f) to make any change that does not adversely affect any outstanding
Debt Securities of any series in any material respect.
The Indentures provide that the Holders of a majority in principal amount of
the then outstanding Debt Securities of any series or of all series (acting as
one class) may waive any existing or past default or Event of Default with
respect to such series or all series, as the case may be, except (a) in the
payment of the principal of,
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or premium (if any) or interest on or any Additional Amounts with respect to
any Debt Securities or (b) in respect of a provision that under the proviso to
the prior paragraph cannot be amended or supplemented without the consent of
each Holder affected.
Defeasance
The Indentures provide that the Company may, at its option, elect (a) to
have all of the obligations of the Company discharged with respect to the Debt
Securities (except for certain obligations to register the transfer or
exchange of Debt Securities, replace stolen, lost or mutilated Debt Securities
or maintain paying agencies and hold moneys for payment in trust) ("legal
defeasance") or (b) to have its obligations terminated with respect to certain
restrictive covenants of the Indenture ("covenant defeasance"), in which event
certain Events of Default will no longer constitute Events of Default with
respect to any Debt Securities, upon the deposit with the Trustee, in trust,
of money or U.S. Government Obligations, or a combination thereof, which
through the payment of interest thereon and principal thereof in accordance
with their terms will provide money in an amount sufficient to pay all the
principal of (and premium, if any, on) and interest on such Debt Securities on
the dates such payments are due in accordance with the terms of the Debt
Securities on their stated maturity or any redemption date. The Company is
required to deliver to the Trustee an Opinion of Counsel to the effect that
the deposit and related defeasance would not cause the Holders of the Debt
Securities to recognize income, gain or loss for federal income tax purposes
and, in the case of a legal defeasance pursuant to clause (a), such opinion
must be based upon a ruling from the United States Internal Revenue Service or
a change in law to that effect.
Governing Law
Each Indenture and the Debt Securities will be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
applicable principles of conflicts of laws to the extent the laws of another
jurisdiction would be required thereby.
Trustees
Each Indenture contains certain limitations on the right of the applicable
Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim, as security or otherwise. Each Trustee is permitted to
engage in other transactions; however, if it acquires any conflicting interest
(as defined), it must eliminate such conflict or resign.
Form, Exchange, Registration and Transfer
Debt Securities of any series will be exchangeable for other Debt Securities
of the same series and of a like aggregate principal amount and tenor of
different authorized denominations in accordance with the applicable
Indenture. Debt Securities may be presented for registration of transfer (with
the form of transfer endorsed thereon duly executed), at the office of the
Security Registrar or at the office of any transfer agent designated by the
Company for such purpose with respect to any series of Debt Securities and
referred to in an applicable Prospectus Supplement, without service charge and
upon payment of any taxes and other governmental charges as described in the
applicable Indenture. Such transfer or exchange will be effected upon the
Security Registrar or such transfer agent, as the case may be, being satisfied
with the documents of title and identity of the Person making the request. The
Company has appointed the Trustee under each Indenture as Security Registrar
for Debt Securities issued thereunder. If a Prospectus Supplement refers to
any transfer agents (in addition to the Security Registrar) initially
designated by the Company with respect to any series of Debt Securities, the
Company may at any time rescind the designation of any such transfer agent or
approve a change in the location through which any such transfer agent acts.
The Company is required to maintain an office or agency (which may be the
office of the Trustee, the Security Registrar or the Paying Agent) in each
Place of Payment for such series. The Company may at any time designate
additional transfer agents with respect to any series of Debt Securities.
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In the event of any redemption in part, the Company shall not be required to
(i) register the transfer or exchange of any Debt Security of any series
during a period beginning 15 Business Days prior to the mailing of the
relevant notice of redemption and ending on the close of business on the day
of mailing of such notice or (ii) register the transfer of or exchange any
Debt Security called for redemption in whole or in part, except the unredeemed
portion of any Debt Security being redeemed in part.
Payment and Paying Agents
Unless otherwise indicated in an applicable Prospectus Supplement, payment
of principal, premium (if any) and interest on and any Additional Amounts with
respect to Debt Securities will be made in dollars at the office of the
applicable Trustee, except that, at the option of the Company, payment of such
amounts may be made by check mailed to the holder's registered address or,
with respect to Global Debt Securities, by wire transfer. Unless otherwise
indicated in an applicable Prospectus Supplement, payment of any installment
of interest (except defaulted interest) on Debt Securities will be made to the
Person in whose name such Debt Security is registered at the close of business
on the record date next preceding the Interest Payment Date for such interest.
Unless otherwise indicated in an applicable Prospectus Supplement, the
Trustee will be designated as a Paying Agent for the Company for payments with
respect to Debt Securities issued under the applicable Indenture. The Company
may at any time designate additional Paying Agents or rescind the designation
of any Paying Agent or approve a change in the office through which any Paying
Agent acts.
Subject to the requirements of any applicable abandoned property laws, each
Trustee and Paying Agent shall pay to the Company upon written request any
money held by them for the payment of principal, premium (if any), interest or
any Additional Amounts that remain unclaimed for two years after the date upon
which such payment shall have become due. After payment to the Company,
Holders entitled to the money must look to the Company for payment as general
creditors unless an applicable abandoned property law designates another
Person, and all liability of such Trustee or Paying Agent with respect to such
money shall cease.
Book-Entry Debt Securities
The Debt Securities of a series may be issued, in whole or in part, in the
form of one or more global Debt Securities that would be deposited with a
depositary or its nominee identified in the applicable Prospectus Supplement.
Global Debt Securities may be issued in either temporary or permanent form.
The specific terms of any depositary arrangement with respect to any portion
of a series of Debt Securities and the rights of, and limitations on, owners
of beneficial interests in any such global Debt Security representing all or a
portion of a series of Debt Securities will be described in the applicable
Prospectus Supplement.
Provisions Applicable Solely to Subordinated Debt Securities
The payment of the principal of, premium, if any, and interest on and any
Additional Amounts with respect to the Subordinated Debt Securities is
expressly subordinated, to the extent and in the manner set forth in the
Subordinated Indenture and described in a Prospectus Supplement relating to
any series of Subordinated Debt Securities, to the prior payment in full of
all Senior Indebtedness of the Company. Unless otherwise indicated in an
applicable Prospectus Supplement relating to any series of Subordinated Debt
Securities, the following is a description of the Subordinated Debt Securities
and the Subordinated Indenture.
Unless otherwise provided with respect to Subordinated Debt Securities of a
series and described in a Prospectus Supplement, the Subordinated Indenture
provides that no payment may be made by or on behalf of the Company on account
of the principal of, premium, if any, or interest on or any Additional Amounts
with respect to the Subordinated Debt Securities, or to acquire any of the
Subordinated Debt Securities (including repurchases of Subordinated Debt
Securities at the option of the Holder thereof) for cash or property (other
than certain junior securities of the Company), or on account of the
redemption provisions of the Subordinated Debt Securities, in the event of (i)
default in the payment of any principal of, premium, if any, or interest on
any Senior Indebtedness of the Company when it becomes due and payable,
whether at maturity or at a date fixed for prepayment or by declaration or
otherwise (a "Payment Default"), unless and until such Payment Default has
been cured or waived or otherwise has ceased to exist, or (ii) any other event
of default with respect to any
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Designated Senior Indebtedness permitting the holders of such Designated
Senior Indebtedness (or a trustee or other representative on behalf of the
holders thereof) to declare such Designated Senior Indebtedness due and
payable prior to the date on which it would otherwise have become due and
payable, upon written notice thereof to the Company and the Subordinated
Trustee by any holders of such Designated Senior Indebtedness (or a trustee or
other representative on behalf of the holders thereof) (the "Payment Blockage
Notice"), unless and until such event of default shall have been cured or
waived or otherwise has ceased to exist, provided that such payments may not
be prevented under clause (ii) above for more than 179 days after an
applicable Payment Blockage Notice has been received by the Subordinated
Trustee unless the Designated Senior Indebtedness in respect of which such
event of default exists has been declared due and payable in its entirety, in
which case no such payment may be made until such acceleration has been
rescinded or annulled or such Designated Senior Indebtedness has been paid in
full. In the case of (ii) above, no event of default that existed or was
continuing on the date of any Payment Blockage Notice (whether or not such
event of default is on the same issue of Designated Senior Indebtedness) may
be made the basis for the giving of a second Payment Blockage Notice, and only
one such Payment Blockage Notice may be given in any 360-day period.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company (other than certain junior securities of
the Company or from the trust described under "Defeasance") is received by the
Subordinated Trustee or the Holders of Subordinated Debt Securities at a time
when such payment or distribution is prohibited by the foregoing provisions,
then, unless such payment or distribution is no longer prohibited by the
foregoing provisions, such payment or distribution shall be received and held
in trust by the Subordinated Trustee or such Holders or the Paying Agent for
the benefit of the holders of Senior Indebtedness of the Company, and shall be
paid or delivered by the Subordinated Trustee or such Holders or the Paying
Agent, as the case may be, to the holders of the Senior Indebtedness of the
Company remaining unpaid or unprovided for or their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing such Senior Indebtedness of the Company may
have been issued, ratably according to the aggregate amounts remaining unpaid
on account of the Senior Indebtedness of the Company held or represented by
each, for application to the payment of all Senior Indebtedness in full after
giving effect to any concurrent payment or distributions to or for the holders
of such Senior Indebtedness.
Upon any distribution of assets of the Company or upon any dissolution,
winding up, total or partial liquidation or reorganization of the Company,
whether voluntary or involuntary, in bankruptcy, insolvency, receivership or a
similar proceeding or upon assignment for the benefit of creditors, (i) the
holders of all Senior Indebtedness of the Company will first be entitled to
receive payment in full before the Holders of Subordinated Debt Securities are
entitled to receive any payment on account of the principal of, premium, if
any, and interest on or any Additional Amounts with respect to the
Subordinated Debt Securities (other than certain junior securities of the
Company or from the trust described under "Defeasance") and (ii) any payment
or distribution of assets of the Company of any kind or character, whether in
cash, property or securities (other than certain junior securities of the
Company or from the trust described under "Defeasance") to which the Holders
of Subordinated Debt Securities or the Subordinated Trustee on behalf of such
Holders would be entitled, except for the subordination provisions contained
in the Subordinated Indenture, will be paid by the liquidating trustee or
agent or other person making such a payment or distribution directly to the
holders of Senior Indebtedness of the Company or their representative, ratably
according to the respective amounts of Senior Indebtedness held or represented
by each, to the extent necessary to make payment in full of all such Senior
Indebtedness remaining unpaid, after giving effect to any concurrent payment
or distributions to the holders of such Senior Indebtedness.
No provision contained in the Subordinated Indenture or the Subordinated
Debt Securities affects the obligation of the Company, which is absolute and
unconditional, to pay, when due, principal of, premium, if any, and interest
on and any Additional Amounts with respect to the Subordinated Debt
Securities. The subordination provisions of the Subordinated Indenture and the
Subordinated Debt Securities do not prevent the occurrence of any default or
Event of Default under the Subordinated Indenture or limit the rights of the
Subordinated Trustee or any Holder of Subordinated Debt Securities, subject to
the two preceding paragraphs, to pursue any other rights or remedies with
respect to the Subordinated Debt Securities.
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As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of the Company or
any of its subsidiaries or joint ventures or a marshaling of assets or
liabilities of the Company and its subsidiaries and joint ventures, Holders of
Subordinated Debt Securities may receive ratably less than other creditors.
The term "Senior Indebtedness" of the Company, unless otherwise provided
with respect to the Subordinated Debt Securities of a series and described in
the Prospectus Supplement relating thereto, is defined in the Subordinated
Indenture as (i) all Indebtedness and other monetary obligations (including
expenses and fees) under the Credit Agreement dated as of July 23, 1998 (the
"Existing Credit Facility") among the Company, the lenders and agents party
thereto, DLJ Capital Funding, Inc., as Syndication Agent, and Morgan Guaranty
Trust Company of New York, as Administrative Agent, as such agreement may be
amended, restated, supplemented or otherwise modified from time to time, and
(ii) all other Indebtedness, unless, by the terms of the instrument creating
or evidencing such Indebtedness, it is provided that such Indebtedness is not
superior in right of payment to the Subordinated Debt Securities or to other
Indebtedness which is pari passu with or subordinated to the Subordinated Debt
Securities, and (iii) all interest on any Indebtedness referred to in clause
(i) and (ii) accruing during the pendency of any bankruptcy or insolvency
proceeding whether or not allowed or allowable thereunder; provided that in no
event shall "Senior Indebtedness" include (a) Indebtedness of the Company owed
or owing to any subsidiary or joint venture of the Company or any officer,
director or employee of the Company or any subsidiary or joint venture of the
Company, (b) Indebtedness to trade creditors, (c) any debt securities and
guarantees issued to any trust, partnership or other entity affiliated with
the Company which is a financing vehicle of the Company in connection with the
issuance of preferred securities by such financing entity, (d) any
Indebtedness which, when incurred and without respect to any election under
Section 1111(b) of the Bankruptcy Code, is without recourse to the Company,
(e) any Indebtedness of the Company, to the extent not permitted to be
incurred by the Indenture or (f) any liability for taxes owed or owing by the
Company.
The term "Designated Senior Indebtedness," unless otherwise provided with
respect to the Subordinated Debt Securities of a series and described in the
Prospectus Supplement relating thereto, is defined in the Subordinated
Indenture to mean (A) Indebtedness and other monetary obligations (including
expenses and fees) under the Existing Credit Facility and (B) any other Senior
Indebtedness of the Company that (i) in the instrument evidencing the same or
the assumption or guarantee thereof (or related documents to which the Company
is a party) is expressly designated as "Designated Senior Indebtedness" for
purposes of the Subordinated Indenture and (ii) satisfies such other
conditions as may be provided with respect to the Subordinated Debt Securities
of such series (provided that such instruments or documents may place
limitations and conditions on the rights of the holders of such Senior
Indebtedness to exercise the rights of Designated Senior Indebtedness).
The term "Indebtedness," unless otherwise provided with respect to the
Subordinated Debt Securities of a series and described in the Prospectus
Supplement relating thereto, is defined in the Subordinated Indenture to mean,
without duplication, (i) all indebtedness of such Person for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of
such Person or only to a portion thereof), (ii) all obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments, (iii) all
obligations of such Person in respect of letters of credit or other similar
instruments (or reimbursement obligations with respect thereto), other than
standby letters of credit, performance bonds and other obligations issued by
or for the account of such Person in the ordinary course of business, to the
extent not drawn or, to the extent drawn, if such drawing is reimbursed not
later than the third Business Day following demand for reimbursement, (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, except trade payables and accrued expenses incurred in
the ordinary course of business, (v) all Capitalized Lease Obligations of such
Person, (vi) all Indebtedness of others secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person (provided
that if the obligations so secured have not been assumed in full by such
Person or are not otherwise such Person's legal liability in full, then such
obligations shall be
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deemed to be in an amount equal to the greater of (a) the lesser of (1) the
full amount of such obligations and (2) the fair market value of such assets,
as determined in good faith by the Board of Directors of such Person, which
determination shall be evidenced by a Board Resolution, and (b) the amount of
obligations as have been assumed by such Person or which are otherwise such
Person's legal liability), and (vii) all Indebtedness of others (other than
endorsements in the ordinary course of business) guaranteed by such Person to
the extent of such guarantee.
If Subordinated Debt Securities are issued under the Subordinated Indenture,
the aggregate principal amount of Senior Indebtedness outstanding as of a
recent date will be set forth in the Prospectus Supplement. The Subordinated
Indenture does not restrict the amount of Senior Indebtedness that the Company
may incur.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities in any of three ways (or in any
combination thereof): (i) through underwriters or dealers; (ii) directly to a
limited number of purchasers or to a single purchaser; or (iii) through
agents. The Prospectus Supplement with respect to any Offered Securities will
set forth the terms of the offering of such Offered Securities, including the
name or names of any underwriters, dealers or agents and the respective
amounts of such Offered Securities underwritten or purchased by each of them,
the initial public offering price of such Offered Securities and the proceeds
to the Company from such sale, any discounts, commissions or other items
constituting compensation from the Company and any discounts, commissions or
concessions allowed or reallowed or paid to dealers and any securities
exchanges on which such Offered Securities may be listed. Any initial public
offering price and any discounts or concessions allowed or reallowed or paid
to dealers may be changed from time to time.
If underwriters are used in the sale of any Offered Securities, such Offered
Securities will be acquired by the underwriters for their own account and may
be resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. Such Offered Securities may be either offered to the
public through underwriting syndicates represented by managing underwriters,
or directly by underwriters. Unless otherwise set forth in the Prospectus
Supplement, the obligations of the underwriters to purchase such Offered
Securities will be subject to certain conditions precedent and the
underwriters will be obligated to purchase all of such Offered Securities if
any are purchased.
Offered Securities may be sold directly by the Company or through agents
designated by the Company from time to time. Any agent involved in the offer
or sale of Offered Securities in respect of which this Prospectus is delivered
will be named, and any commissions payable by the Company to such agent will
be set forth, in the Prospectus Supplement. Unless otherwise indicated in the
Prospectus Supplement, any such agent will be acting on a best efforts basis
for the period of its appointment.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters, dealers or agents to solicit offers by certain purchasers to
purchase Offered Securities from the Company at the public offering price set
forth in the Prospectus Supplement pursuant to delayed delivery contracts
providing for payment and delivery on a specified date in the future. Such
contracts will be subject only to those conditions set forth in the Prospectus
Supplement, and the Prospectus Supplement will set forth the commission
payable for solicitation of such contracts.
Agents and underwriters may be entitled under agreements entered into with
the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments which the agents or underwriters may be
required to make in respect thereof. Agents and underwriters may be customers
of, engage in transactions with, or perform services for the Company and/or
any of its affiliates in the ordinary course of business.
In connection with the offering, the underwriters or agents, as the case may
be, may purchase and sell the Offered Securities in the open market. These
transactions may include overallotment and stabilizing transactions and
purchases to cover syndicate short positions created in connection with the
offering. Stabilizing transactions
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consist of certain bids or purchases for the purpose of preventing or
retarding a decline in the market price of the Offered Securities; and
syndicate short positions involve the sale by the underwriters or agents, as
the case may be, of a greater number of Offered Securities than they are
required to purchase from the Company in the offering. The underwriters may
also impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers for the Offered Securities sold for their
account may be reclaimed by the syndicate if such Offered Securities are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Offered Securities, which may be higher than the price that might otherwise
prevail in the open market, and, if commenced, may be discontinued at any
time. These transactions may be effected on the New York Stock Exchange, in
the over-the-counter market or otherwise.
The Securities may or may not be listed on a national securities exchange.
No assurances can be given that there will be a market for the Securities.
Certain persons participating in any offering of Securities may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Securities offered, including, among others, overallotment, stabilizing and
short-covering transactions in such Securities, and the imposition of a
penalty bid, in connection with any offering of Securities. For a description
of these activities, see "Plan of Distribution" or "Underwriting" in the
relevant Prospectus Supplement.
LEGAL MATTERS
Certain legal matters in connection with the Securities offered hereby will
be passed upon for the Company by Baker & Botts, L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of Lyondell Chemical Company as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 incorporated in this prospectus by reference to Lyondell
Chemical Company's Annual Report on Form 10-K for the year ended December 31,
1998 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Equistar Chemicals, LP as of December 31, 1998
and 1997 and for the year ended December 31, 1998 and the period from December
1, 1997 (inception) to December 31, 1997 incorporated in this prospectus by
reference to Lyondell Chemical Company's Annual Report on Form 10-K for the
year ended December 31, 1998 have been so incorporated in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of LYONDELL-CITGO Refining LP as of December 31,
1998 and for the year then ended incorporated in this prospectus by reference
from the Annual Report on Form 10-K of Lyondell Chemical Company for the year
ended December 31, 1998 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report, which is incorporated herein
by reference, and have been so incorporated in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The financial statements of LYONDELL-CITGO Refining LP as of December 31,
1997 and for each of the two years in the period ended December 31, 1997
incorporated in this prospectus by reference to Lyondell Chemical Company's
Annual Report on Form 10-K for the year ended December 31, 1998 have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
24
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"), which can be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549;
and at the regional offices of the Commission at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center, New York,
New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549 at prescribed rates. Information concerning the
operation of the public reference facilities may be obtained by calling 1-800-
SEC-0330. The Commission maintains an Internet web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission (http://www.sec.gov). The Common
Stock is listed on the New York Stock Exchange, and such material also can be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
This Prospectus, which constitutes part of a registration statement on Form
S-3 (the "Registration Statement") filed by the Company with the Commission
under the Securities Act of 1933, as amended (the "Securities Act"), omits
certain of the information contained in the Registration Statement. Reference
is hereby made to the Registration Statement and the exhibits thereto, which
may be obtained at the public reference facilities maintained by the
Commission as described in the preceding paragraph, for further information
with respect to the Company and the securities offered hereby. Statements
contained herein concerning the provisions of such documents are necessarily
summaries of such documents, and each such statement is qualified in its
entirety by reference to the copy of the applicable document filed with the
Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which the Company has filed with the Commission
pursuant to the Exchange Act (File No. 1-10145), are incorporated in this
Prospectus by reference and shall be deemed to be a part hereof:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998;
(b) The description of the common stock, par value $1.00 per share, of
the Company contained in the Company's Registration Statement on Form 8-A
dated December 16, 1988, as such Registration Statement may be amended from
time to time for the purpose of updating, changing or modifying such
description; and
(c) The description of the Rights to Purchase Common Stock contained in
the Company's Registration Statement on Form 8-A dated December 12, 1995,
as such Registration Statement may be amended from time to time for the
purpose of updating, changing or modifying such description.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering made hereby shall be
deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date of filing of such document. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus is
delivered, upon the written or oral request of such person, a copy of any or
all documents that have been incorporated herein by reference (not including
exhibits to the documents that have been incorporated herein by reference
unless such exhibits are specifically incorporated by reference in the
documents this Prospectus incorporates). Requests should be directed to
Corporate Secretary, Lyondell Chemical Company, 1221 McKinney, Houston, Texas
77010 (telephone: (713) 652-7200).
25
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April , 1999 Lyondell Chemical Company
[Logo of Lyondell 35,000,000 Shares of Common Stock
Chemical Company
Appears Here] ---------------------------
PROSPECTUS SUPPLEMENT
---------------------------
Joint Book-Running Managers
Donaldson, Lufkin & Jenrette___________________________________J.P.Morgan & Co.
----------------
Goldman, Sachs & Co.__________________________________Morgan Stanley Dean Witter
Salomon Smith Barney_________________________________________Schroder & Co. Inc.
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We have not authorized any dealer, salesperson or other person to give you
written information other than the prospectus and this supplement or to make
representations as to matters not stated in the prospectus and this supplement.
You must not rely on unauthorized information. The prospectus and this
supplement are not an offer to sell these securities or our solicitation of
your offer to buy the securities in any jurisdiction where that would not be
permitted or legal. Neither the delivery of the prospectus and this supplement
nor any sales made hereunder after the date of the prospectus and this
supplement shall create an implication that the information contained herein or
the affairs of the Company have not changed since the date hereof.
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