<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): AUGUST 16, 1999
LYONDELL CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
1-10145 95-4160558
(Commission File Number) (IRS Employer Identification No.)
1221 MCKINNEY STREET
ONE HOUSTON CENTER, SUITE 700
HOUSTON, TEXAS 77010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 652-7200
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ITEM 5. OTHER EVENTS.
On August 16, 1999, Lyondell Chemical Company (the "Company") amended
its financial statements included in its Quarterly Report on Form 10-Q filed on
May 12, 1999 for the sole purpose of disclosing financial information of certain
of the Company's subsidiaries that are guarantors of debt securities of the
Company. These subsidiaries have unconditionally guaranteed Lyondell's 9 5/8%
Senior Secured Notes, Series A, due 2007, 9 7/8% Senior Secured Notes, Series B,
due 2007 and 10 7/8% Senior Subordinated Notes due 2009 registered under an
effective registration statement on Form S-4 (Registration No. 333-81831; 333-
81831-01; 333-81831-02) dated July 15, 1999. Such information was not required
to be disclosed on the date the Company's Quarterly Report on Form 10-Q was
filed. The amended financial statements are being filed as an exhibit to this
Current Report on Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
99.1 -- Amended Financial Statements of Lyondell Chemical Company.
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Lyondell Chemical Company
Dated: August 16, 1999 /s/ KELVIN R. COLLARD
-----------------------------------
Kelvin R. Collard
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
3
<PAGE>
EXHIBIT 99.1
LYONDELL CHEMICAL COMPANY
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the
three
months
ended
March 31
-----------
Millions of dollars, except per share data 1999 1998
- ------------------------------------------ ----- ----
<S> <C> <C>
Sales and other operating revenues................................. $ 855 $ --
----- ----
Operating costs and expenses:
Cost of sales.................................................... 630 --
Selling, general and administrative expenses..................... 57 6
Research and development expense................................. 15 --
Amortization of goodwill and other intangible assets............. 24 --
Unusual charges.................................................. -- 4
----- ----
726 10
----- ----
Operating income (loss).......................................... 129 (10)
Interest expense................................................... (146) (7)
Interest income.................................................... 6 4
Other income (expense), net........................................ (7) --
Income (loss) from equity investments:
Equistar Chemicals, LP........................................... 13 76
LYONDELL-CITGO Refining LP....................................... 11 35
Lyondell Methanol Company, L.P................................... (3) 6
----- ----
21 117
----- ----
Income before income taxes......................................... 3 104
Provision for income taxes......................................... 1 39
----- ----
Net income......................................................... $ 2 $ 65
===== ====
Basic and diluted earnings per share............................... $ .02 $.82
===== ====
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
Millions of dollars, except par value data 1999 1998
- ------------------------------------------ --------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 260 $ 233
Accounts receivable, net................................. 434 479
Inventories.............................................. 516 550
Prepaid expenses and other current assets................ 17 64
------ ------
Total current assets................................... 1,227 1,326
------ ------
Property, plant and equipment, net......................... 4,430 4,511
Investment in affiliates:
Equistar Chemicals, LP................................... 653 660
LYONDELL-CITGO Refining LP............................... 69 84
Lyondell Methanol Company, L.P........................... 51 50
Receivable from LYONDELL-CITGO Refining LP................. 231 231
Other investments and long-term receivables................ 62 53
Goodwill, net.............................................. 1,421 1,430
Deferred charges and other assets.......................... 874 880
------ ------
Total assets............................................... $9,018 $9,225
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 194 $ 253
Current maturities of long-term debt..................... 1,694 1,603
Other accrued liabilities................................ 391 481
------ ------
Total current liabilities.............................. 2,279 2,337
------ ------
Long-term debt, less current maturities.................... 5,223 5,391
Other liabilities and deferred credits..................... 398 294
Deferred income taxes...................................... 414 413
Commitments and contingencies
Minority interest.......................................... 190 216
Stockholders' equity:
Preferred stock, $.01 par value, 80,000,000 shares
authorized, none outstanding............................ -- --
Common stock, $1.00 par value, 250,000,000 shares
authorized, 80,000,000 issued........................... 80 80
Additional paid-in capital............................... 158 158
Retained earnings........................................ 372 387
Accumulated other comprehensive (loss) income............ (14) 32
Treasury stock, at cost, 2,934,558 and 2,978,203 shares,
respectively............................................ (82) (83)
------ ------
Total stockholders' equity............................. 514 574
------ ------
Total liabilities and stockholders' equity................. $9,018 $9,225
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
three
months
ended
March 31
-----------
Millions of dollars 1999 1998
- ------------------- ---- -----
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 2 $ 65
Adjustments to reconcile net income to net cash provided by (used
in) operating activities, net of the effects of deconsolidation
of affiliate:
Depreciation and amortization................................... 85 --
Deferred income taxes........................................... 9 8
Decrease in accounts receivable................................. 37 3
Decrease in inventories......................................... 25 --
Decrease in accounts payable.................................... (52) (167)
Net change in other working capital accounts.................... (31) 10
Other, net...................................................... 59 11
---- -----
Net cash provided by (used in) operating activities........... 134 (70)
---- -----
Cash flows from investing activities:
Expenditures for property, plant and equipment.................. (32) --
Distributions from affiliates in excess of earnings............. 25 175
Contributions and advances to affiliate......................... (4) (16)
Deconsolidation of affiliate.................................... -- (11)
Other........................................................... (6) --
---- -----
Net cash (used in) provided by investing activities........... (17) 148
---- -----
Cash flows from financing activities:
Repayments of long-term debt.................................... (76) --
Dividends paid.................................................. (17) (18)
Net decrease in short-term debt................................. -- (50)
Repurchase of common stock...................................... -- (13)
---- -----
Net cash used in financing activities......................... (93) (81)
---- -----
Effect of exchange rate changes on cash........................... 3 --
---- -----
Increase (decrease) in cash and cash equivalents.................. 27 (3)
Cash and cash equivalents at beginning of period.................. 233 86
---- -----
Cash and cash equivalents at end of period........................ $260 $ 83
==== =====
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Preparation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal, recurring adjustments considered
necessary for a fair presentation, have been included. For further information,
refer to the Consolidated Financial Statements and notes thereto for the year
ended December 31, 1998 included in the Lyondell Chemical Company ("Company" or
"Lyondell") 1998 Annual Report on Form 10-K pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934. The year-end condensed balance sheet data
was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. Certain
amounts from prior periods have been reclassified to conform to the current
period presentation.
The accompanying Consolidated Statement of Income for the three months ended
March 31, 1999 includes the operating results of Lyondell Chemical Worldwide,
Inc., formerly ARCO Chemical Company ("ARCO Chemical" or "Acquired Business"),
acquired by the Company as of July 28, 1998 ("Acquisition"), and the Company's
income from equity investments in Equistar Chemicals, LP ("Equistar"),
LYONDELL-CITGO Refining LP ("LCR") and Lyondell Methanol Company, L.P. ("LMC").
The accompanying Consolidated Statement of Income for the three months ended
March 31, 1998 includes the Company's income from equity investments in
Equistar, LCR and LMC.
2. Company Operations
During the third quarter 1998, Lyondell acquired ARCO Chemical, the world's
largest producer of propylene oxide ("PO") and a leading worldwide producer and
marketer of polyether polyols, propylene glycol ("PG"), propylene glycol ethers
("PGE"), toluene diisocyanate ("TDI"), styrene monomer ("SM") and methyl
tertiary butyl ether ("MTBE"). 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
3).
Equistar's petrochemicals segment 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 segment consists of: polyolefins, including high density
polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear low density
polyethylene ("LLDPE") and polypropylene; and performance polymers products,
including color concentrates and compounds, wire and cable resins and
compounds; adhesive resins; and fine powders. The color concentrates and
compounds business was sold on April 30, 1999.
The Company's operations in the refining segment are conducted through its
joint venture ownership interest in LCR (see Note 4). This segment consists of:
refined petroleum products, including conventional and reformulated gasoline,
low sulfur diesel and jet fuel; aromatics produced at LCR's full-conversion
Houston, Texas refinery ("Refinery"), including benzene, toluene, paraxylene
and orthoxylene; lubricants, including industrial lubricants, motor oils, white
oils, process oils and base oils; carbon black oil; sulfur; residual oil;
petroleum coke fuel; olefins feedstocks; and crude oil resales. LCR sells its
principal refined products to the Company's joint venture partner in LCR, CITGO
Petroleum Corporation ("CITGO").
4
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has additional operations conducted through its joint venture
ownership interest in LMC. These operations consist of methanol and other
petrochemical products produced by its methanol facility. Effective January 1,
1998, Lyondell began accounting for its investment in LMC using the equity
method of accounting.
3. Equity Interest in Equistar Chemicals, LP
Equistar was formed on December 1, 1997 as a joint venture between the
Company and Millennium Chemicals Inc. ("Millennium"), to own and operate the
businesses contributed by the partners. Lyondell contributed substantially all
of the assets comprising its petrochemicals and polymers business segments,
while Millennium contributed substantially all of the assets comprising its
polyethylene and related products, performance polymers and ethyl alcohol
businesses, which had been held in Millennium Petrochemicals, Inc., a wholly-
owned subsidiary of Millennium. On May 15, 1998, the ethylene, propylene and
ethylene oxide and derivatives businesses of Occidental Chemical Corporation
("Occidental Contributed Business"), a subsidiary of Occidental Petroleum
Corporation ("Occidental"), were contributed to Equistar. The joint venture is
structured as a Delaware limited partnership owned by subsidiaries of the
Company, Millennium and Occidental ("Partners").
Lyondell currently has a 41.0 percent joint venture ownership interest in
Equistar, 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>
March 31, December 31,
Millions of dollars 1999 1998
------------------- --------- ------------
<S> <C> <C>
BALANCE SHEETS
Total current assets............................... $1,161 $1,127
Property, plant and equipment, net................. 4,066 4,075
Goodwill, net...................................... 1,142 1,151
Deferred charges and other assets.................. 333 312
------ ------
Total assets....................................... $6,702 $6,665
====== ======
Current maturities of long-term debt............... $ 160 $ 150
Other current liabilities.......................... 414 485
Long-term debt, less current maturities............ 2,201 1,865
Capital lease obligations.......................... -- 205
Other liabilities and deferred credits............. 85 75
Partners' capital.................................. 3,842 3,885
------ ------
Total liabilities and partners' capital............ $6,702 $6,665
====== ======
</TABLE>
5
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
For the three
months ended
March 31
-------------
1999 1998
------ ------
<S> <C> <C>
STATEMENTS OF INCOME
Sales and other operating revenues......................... $1,104 $1,021
Cost of sales.............................................. 980 798
Selling, general and administrative expenses............... 75 70
Unusual charges............................................ 3 6
------ ------
Operating income........................................... 46 147
Interest expense, net...................................... 39 26
------ ------
Net income................................................. $ 7 $ 121
====== ======
<CAPTION>
For the three
months ended
March 31
-------------
1999 1998
------ ------
<S> <C> <C>
SELECTED CASH FLOW INFORMATION
Depreciation and amortization.............................. $ 73 $ 58
Expenditures for property, plant and equipment............. 46 21
</TABLE>
Lyondell's $13 million and $76 million of "Income from equity investments"
in Equistar as presented in the Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998, respectively, consists of the Company's
share of Equistar's net income and the accretion of the difference between
Lyondell's investment and its underlying 41.0 percent equity in Equistar's net
assets. During the first quarter 1999 and 1998, Equistar recognized $3 million
and $6 million of unusual charges, respectively, which consisted primarily of
costs associated with the consolidation of certain operations. The Company's
share of Equistar's unusual charges was approximately $1 million and $3 million
for the three months ended March 31, 1999 and 1998, respectively, and is
reflected in the Company's share of Equistar's net income.
4. Equity Interest in LYONDELL-CITGO Refining LP
In July 1993, LCR was formed to own and operate the Company's refining
business. LCR is structured as a Delaware limited partnership (formerly a Texas
limited liability company) owned by subsidiaries of the Company and CITGO. The
participation interests are currently 58.75 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.
6
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized financial information for LCR is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
Millions of dollars 1999 1998
------------------- --------- ------------
<S> <C> <C>
BALANCE SHEETS
Total current assets.............................. $ 226 $ 197
Property, plant and equipment, net................ 1,362 1,370
Deferred charges and other assets................. 70 70
------ ------
Total assets...................................... $1,658 $1,637
====== ======
Total current liabilities......................... $ 238 $ 203
Long-term debt.................................... 717 717
Other liabilities and deferred credits............ 71 68
Partners' capital................................. 632 649
------ ------
Total liabilities and partners' capital........... $1,658 $1,637
====== ======
<CAPTION>
For the three months
ended March 31
----------------------
1999 1998
--------- ------------
<S> <C> <C>
STATEMENTS OF INCOME
Sales and other operating revenues................ $ 432 $ 529
Cost of sales..................................... 389 445
Selling, general and administrative expenses...... 19 19
------ ------
Operating income.................................. 24 65
Interest expense, net............................. (10) (11)
State income taxes................................ 1 --
------ ------
Net income........................................ $ 15 $ 54
====== ======
<CAPTION>
For the three months
ended March 31
----------------------
1999 1998
--------- ------------
<S> <C> <C>
SELECTED CASH FLOW INFORMATION
Depreciation and amortization..................... $ 25 $ 25
Expenditures for property, plant and equipment.... 16 17
</TABLE>
5. Inventories
The components of inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
Millions of dollars 1999 1998
------------------- --------- ------------
<S> <C> <C>
Finished goods..................................... $429 $459
Work-in-process.................................... 16 18
Raw materials...................................... 27 34
Materials and supplies............................. 44 39
---- ----
Total inventories................................ $516 $550
==== ====
</TABLE>
7
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Property, Plant and Equipment, Net
The components of property, plant and equipment, at cost, and the related
accumulated depreciation consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
Millions of dollars 1999 1998
------------------- --------- ------------
<S> <C> <C>
Land............................................... $ 12 $ 12
Manufacturing facilities and equipment............. 4,422 4,477
Construction in progress........................... 119 98
------ ------
Total property, plant and equipment.............. 4,553 4,587
Less accumulated depreciation...................... 123 76
------ ------
Property, plant and equipment, net............... $4,430 $4,511
====== ======
</TABLE>
7. 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.
The Acquired Business is party to a long-term supply arrangement for 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.
Crude Supply Agreement--LCR has a long-term crude supply agreement ("Crude
Supply Agreement") with Lagoven, S.A., now known as PDVSA Petroleo y Gas, S.A.
("PDVSA Oil"), an affiliate of CITGO. Under the Crude Supply Agreement, LCR is
required to purchase, and PDVSA Oil is required to sell, up to 230,000 barrels
per day of extra heavy Venezuelan crude oil. PDVSA Oil has the right, but not
the obligation, to supply incremental amounts above 230,000 barrels per day.
Depending upon market conditions, breach or termination of LCR's Crude Supply
Agreement could adversely affect LCR, and therefore, the Company. In the event
of certain force majeure conditions, including governmental or other actions
restricting or otherwise limiting PDVSA Oil's ability to perform its
obligations, LCR would seek alternative crude supply arrangements. Any such
alternative arrangements may not be as beneficial as the Crude Supply
Agreement. There can be no assurance that alternative crude oils with similar
margins would be available for purchase by LCR. Furthermore, the breach or
termination of the Crude Supply Agreement would require LCR to return to the
practice of purchasing all or a portion of its crude oil feedstocks in the
merchant market and would again subject LCR to significant volatility and price
fluctuations. In late April 1998, LCR received notification from PDVSA Oil of
reduced delivery of crude oil related to announced OPEC production cuts. LCR
began receiving the reduced allocation of crude oil from PDVSA Oil in August
1998. In March 1999 OPEC announced an agreement to further limit OPEC oil
production, which could result in some additional decreases in the allocation
of crude oil supplied to LCR by PDVSA Oil.
8
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cross Indemnity Agreement--In connection with the transfer of assets and
liabilities from Atlantic Richfield Company ("ARCO") to the Company in 1988,
the Company agreed to assume certain liabilities arising out of the operation
of the Company's integrated petrochemicals and refining business prior to July
1, 1988. In connection with the transfer of such liabilities, the Company and
ARCO entered into an agreement, updated in 1997 ("Revised Cross-Indemnity
Agreement"), whereby the Company agreed to defend and indemnify ARCO against
certain uninsured claims and liabilities which ARCO may incur relating to the
operation of the business of the Company prior to July 1, 1988, including
certain liabilities which may arise out of pending and future lawsuits. For
current and future cases related to Company products and Company operations,
ARCO and the Company bear a proportionate share of judgment and settlement
costs according to a formula that allocates responsibility based upon years of
ownership during the relevant time period. The party with the more significant
potential liability exposure is responsible for case management and associated
costs while allowing the non-case managing party to protect its interests.
Under the Revised Cross-Indemnity Agreement, the Company will assume
responsibility for its proportionate share of future costs for waste site
matters not covered by ARCO insurance. Subject to the uncertainty inherent in
all litigation, management believes the resolution of the matters pursuant to
the Revised Cross-Indemnity Agreement will not have a material adverse effect
upon the Consolidated Financial Statements of the Company.
In connection with the Acquisition, 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. From
inception through March 31, 1999, Equistar expensed approximately $1 million
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
9
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and remedial actions at the Refinery under the Resource Conservation and
Recovery Act ("RCRA"). In addition, the Company has negotiated an order with
the Texas Natural Resource Conservation Commission ("TNRCC") for assessment and
remediation of groundwater and soil contamination at the Refinery.
As of March 31, 1999, the Company has accrued $8 million related to future
CERCLA, RCRA and TNRCC assessment and remediation costs associated with the
above mentioned sites. The costs are expected to be incurred over the next two
to seven years. In the opinion of management, there is currently no material
range of loss in excess of the amount recorded for these sites. However, it is
possible that new information about the sites for which the reserve has been
established, new technology or future developments such as involvement in other
CERCLA, RCRA, TNRCC or other comparable state law investigations, could require
the Company to reassess its potential exposure related to environmental
matters.
As part of the Acquisition, the Company assumed ARCO Chemical's
environmental liability, which totaled $38 million at March 31, 1999 and
reflects the Company's latest assessment of potential future remediation costs
associated with known ARCO Chemical sites. The liability is related to five
current plant sites, one former plant site and one federal Superfund site for
amounts ranging from $1 million to $18 million per site. Further, the Acquired
Business is involved in administrative proceedings or lawsuits relating to a
minimal number of other Superfund sites. The Company estimates however, based
upon currently available information, that potential loss contingencies
associated with these Superfund sites, individually and in the aggregate, are
not significant. Substantially all amounts accrued are expected to be paid out
over the next five to ten years.
The Company has relied upon remedial investigation/feasibility studies
("RI/FS") at each site of the Acquired Business as a basis for estimating
remediation costs at the site. RI/FS or preliminary assessments have been
completed at most of the sites. However, selection of the remediation method
and the cleanup standard to be applied are, in most cases, subject to approval
by the appropriate government authority. Accordingly, the Company may have
possible loss contingencies in excess of the amounts accrued to the extent the
scope of remediation required, the final remediation method selected and/or the
cleanup standard applied, vary from the assumptions used in estimating the
liability. The Company estimates that the upper range of these possible loss
contingencies should not exceed the amount accrued by more than $65 million.
The extent of loss related to environmental matters ultimately depends upon
a number of factors, including technological developments, changes in
environmental laws, the number and ability to pay of other parties involved at
a particular site and the Company's potential involvement in additional
environmental assessments and cleanups. Based upon currently known facts,
management believes that any remediation costs the Company may incur in excess
of the amounts accrued or disclosed above would not have a material adverse
impact on the Company's Consolidated Financial Statements.
MTBE--Certain federal and state legislative initiatives have sought either
to rescind the oxygenate requirement for reformulated gasoline sold in
California and other states or to restrict the use of MTBE. There is ongoing
review of this issue and any ultimate negative governmental 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.
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.
10
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED 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
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.
8. Earnings Per Share
Basic earnings per share ("EPS") for the periods presented are computed
based upon the weighted average number of shares outstanding for the periods.
Diluted earnings per share include the effect of outstanding stock options
issued under the Executive Long-Term Incentive Plan and the Incentive Stock
Option Plan.
<TABLE>
<CAPTION>
For the three months
ended March 31
-----------------------
1999 1998
----------- -----------
Thousands of shares Shares EPS Shares EPS
------------------- ------ ---- ------ ----
<S> <C> <C> <C> <C>
Basic............................................ 77,072 $.02 78,713 $.82
Dilutive effect of options....................... -- -- 76 --
------ ---- ------ ----
Diluted.......................................... 77,072 $.02 78,789 $.82
====== ==== ====== ====
</TABLE>
9. Segment and Related Information
The Company has identified four reportable segments in which it operates:
(i) intermediate chemicals and derivatives; (ii) petrochemicals; (iii)
polymers; and (iv) refining. The Company's methanol business is not a
reportable segment. Summarized financial information concerning the Company's
reportable segments is shown in the following table:
<TABLE>
<CAPTION>
Intermediate
Chemicals
and
Millions of dollars Derivatives Petrochemicals Polymers Refining Other Total
- ------------------- ------------ -------------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
For the three months
ended March 31, 1999:
Sales and other
operating revenues..... $855 $ 855
Operating income........ 129 129
Interest expense........ $(146) (146)
Interest income......... 6 6
Other income (expense),
net.................... (7) (7)
Income from equity
investments............ $37 $ 5 $11 (32) 21
Income before income
taxes.................. 3
For the three months
ended March 31, 1998:
Sales and other
operating revenues..... $ --
Operating loss.......... $ (10) (10)
Interest expense........ (7) (7)
Interest income......... 4 4
Income from equity
investments............ $74 $41 $35 (33) 117
Income before income
taxes.................. 104
</TABLE>
11
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the details of "Income from equity
investments--Other" as presented above for the three months ended March 31:
<TABLE>
<CAPTION>
Millions of dollars 1999 1998
------------------- ---- ----
<S> <C> <C>
Expenses, principally Equistar selling, general and
administrative, not allocated to petrochemicals and
polymers segments.......................................... $(39) $(46)
Accretion of difference between Lyondell's investment and
its underlying equity in Equistar's net assets............. 10 7
Income (loss) from equity investment in LMC................. (3) 6
---- ----
Total--Other.............................................. $(32) $(33)
==== ====
</TABLE>
10. Purchase of ARCO Chemical Company
As of July 28, 1998, the Company completed its acquisition of ARCO Chemical.
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 approximately $255 million at the date of
acquisition. Through March 31, 1999, the Company had paid and charged
approximately $142 million against the liability.
11. Subsequent Event
During the second quarter 1999, Lyondell amended its $7 billion credit
facility, eliminating the requirement to issue $1.25 billion in equity or
equity-linked securities by July 23, 1999. As a condition to effectiveness of
the amendments, the Company must issue a minimum of $350 million of common
stock, $500 million of senior subordinated notes and $500 million of senior
secured notes. Including the aforementioned amounts, the amended credit
facility requires Lyondell to issue $500 million of common or preferred stock
by June 30, 2000 and $1.5 billion of subordinated notes by June 2002. The
requirement to issue $1.5 billion of subordinated notes will be reduced on a 2
for 1 basis for each $1 of equity securities 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 specified total debt to adjusted EBITDA
ratio, as defined; or (2) a specified credit rating for its senior unsecured
debt. The credit facility amendments will provide the lenders with additional
collateral, re-price 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.
The Company intends to issue approximately 35 million shares of common
stock, $500 million of senior subordinated notes and $1.9 billion of senior
secured notes during the second quarter 1999. In addition, the Company is
seeking to raise additional amounts through the borrowing of a new $850
million, seven-year Term Loan E and a new $150 million Term Loan F, maturing
December 31, 2003, under the amended credit facility. This will enable the
Company to retire the $1.25 billion principal of Term Loan C, maturing June 30,
1999, the $2 billion principal of Term Loan D, maturing June 30, 2000, and
partially repay principal under Term Loans A and B.
12
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Supplemental Guarantor Information
Lyondell Chemical Worldwide, Inc. ("LCWI") and Lyondell Chemical Nederland, Ltd.
("LCNL") (collectively, the "Guarantors") are each Delaware corporations. LCWI
is a wholly owned subsidiary of Lyondell that operates Lyondell's intermediate
chemicals and derivatives business. LCNL is a wholly owned subsidiary of LCWI
that operates a chemical production facility in Rotterdam, The Netherlands.
These subsidiaries may be guarantors of debt securities anticipated to be
registered by Lyondell during 1999 (see Note 11). Separate financial statements
of the Guarantors are not considered to be material to the holders of the debt
securities. The following condensed consolidating financial information for the
three-month period ended March 31, 1999 presents supplemental information for
the Guarantors:
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
Non- Consolidated
Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell
- ------------------- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total current assets $ 169 $1,038 $ 20 $ -- $1,227
Property, plant and equipment, net 4,430 4,430
Other investments and
long-term receivables 6,236 62 997 (6,229) 1,066
Goodwill, net 1,421 1,421
Deferred charges and other assets 191 683 874
------ ------ ------ ------- ------
Total assets $6,596 $7,634 $1,017 $(6,229) $9,018
====== ====== ====== ======= ======
Current maturities of long-term debt $1,692 $ 2 $ -- $ -- $1,694
Other current liabilities (82) 637 30 585
Long-term debt, less current maturities 4,596 627 5,223
Other liabilities and deferred credits 60 338 398
Deferred income taxes (33) 188 259 414
Intercompany liabilities (assets) (282) 116 166 --
Minority interest 190 190
Stockholders' equity 645 5,536 562 (6,229) 514
------ ------ ------ ------- ------
Total liabilities and
stockholders' equity $6,596 $7,634 $1,017 $(6,229) $9,018
====== ====== ====== ======= ======
</TABLE>
13
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued)
STATEMENT OF INCOME
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Non- Consolidated
Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell
- ------------------- -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues $ -- $ 855 $ -- $ -- $ 855
Cost of sales 630 630
Selling, general and
administrative expenses 7 50 57
Research and development expense 15 15
Amortization of goodwill and
other intangible assets 24 24
----- ----- ------- ----- -----
Operating income (loss) (7) 136 -- -- 129
Income from equity investments 21 21
Interest income (expense), net (128) (15) 3 (140)
Intercompany income (expense) 118 (115) (3) --
Other income (expense), net 2 (9) (7)
Provision (benefit) for income taxes (7) (1) 9 1
----- ----- ------- ----- -----
Net income (loss) $ (8) $ (2) $ 12 $ -- $ 2
===== ===== ======= ===== =====
</TABLE>
STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Non- Consolidated
Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell
- ------------------- -------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net income (loss) $ (8) $ (2) $ 12 $ -- $ 2
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 14 71 85
Deferred income taxes (6) 6 9 9
Net changes in working
capital and other 82 (16) (27) (1) 38
---- ---- ---- ---- ----
Net cash provided by
(used in) operating activities 82 59 (6) (1) 134
---- ---- ---- ---- ----
Expenditures for
property, plant and equipment (32) (32)
Distributions from
affiliate in excess of earnings 25 25
Contributions and advances to affiliate (6) 1 1 (4)
Other (6) (6)
---- ---- ---- ---- ----
Net cash provided by
(used in) investing activities (6) (38) 26 1 (17)
---- ---- ---- ---- ----
Repayments of long-term debt (61) (15) (76)
Dividends paid (17) (17)
---- ---- ---- ---- ----
Net cash used
in financing activities (78) (15) -- -- (93)
---- ---- ---- ---- ----
Effect of exchange
rate changes on cash 3 3
---- ---- ---- ---- ----
Increase (decrease) in
cash and cash equivalents $ (2) $ 9 $ 20 $ -- $ 27
==== ==== ==== ==== ====
</TABLE>
14
