<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999.
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10145
----------------
LYONDELL CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
----------------
Delaware 95-4160558
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1221 McKinney Street, 77010
Suite 700, Houston, Texas (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (713) 652-7200
----------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Number of shares of Common Stock, $1.00 par value, outstanding as of March
31, 1999: 77,065,442
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
LYONDELL CHEMICAL COMPANY
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the
three
months
ended
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>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Lyondell has taken major strategic actions to strengthen the Company's
position in the chemicals industry. In December 1997, Equistar was formed by
combining the olefins and polymers businesses of Lyondell and Millennium. In
May 1998, Equistar was expanded with the addition of the olefins and oxygenated
chemicals businesses of Occidental Chemical. In July 1998, Lyondell acquired
ARCO Chemical, the world's largest producer of PO and a leading worldwide
producer and marketer of polyether polyols, PG, PGE, TDI, SM and MTBE.
The operations of the Acquired Business form the Company's intermediate
chemicals and derivatives business segment. Lyondell's petrochemicals, polymers
and refining segments are conducted through its interests in Equistar and LCR.
The methanol business conducted through LMC is not a reportable segment for
financial disclosure purposes. Lyondell accounts for its investments in
Equistar, LCR and LMC using the equity method of accounting.
RESULTS OF OPERATIONS
Lyondell Chemical Company
First Quarter 1999 versus Fourth Quarter 1998
For the first quarter 1999, Lyondell reported net income of $2 million
compared to a fourth quarter 1998 loss of $27 million. The fourth quarter 1998
loss included unusual after-tax charges of $6 million primarily related to a
new labor agreement at LCR and formation costs at Equistar. The new labor
agreement at LCR is expected to result in cost savings in the near term. The
first quarter 1999 net income improvement primarily reflected higher operating
income in the intermediate chemicals and derivatives segment and higher equity
income from Equistar, partly offset by lower equity income from LCR.
Operating income of the intermediate chemicals and derivatives segment was
$129 million in the first quarter 1999 compared to $97 million in the fourth
quarter 1998. The improvement was primarily due to lower administrative and
Acquisition-related transition costs. Income from equity investment in Equistar
increased to $13 million in the first quarter 1999 versus a loss of $11 million
in the fourth quarter 1998. Improved results for the petrochemicals and
polymers businesses of Equistar reflected a tighter supply/demand situation,
leading to higher prices and margins. LCR equity income decreased to $11
million in the first quarter 1999 from $22 million in the fourth quarter 1998.
LCR operating results were negatively affected by the impact of ongoing reduced
allocations of Venezuelan extra heavy crude oil, lower margins on crude oil
purchased in the spot market and lower crude oil processing rates.
First Quarter 1999 versus First Quarter 1998
Net Income--Net income of $2 million in the first quarter 1999 decreased
from $65 million in the first quarter 1998. Pretax income from equity
investments decreased $96 million, or about $61 million after tax, in the first
quarter 1999 compared to the first quarter 1998. Operating income of the
Acquired Business in the first quarter 1999 was more than offset by higher
interest expense related to the credit facility ("Credit Facility") obtained to
finance the Acquisition and assumed debt.
Revenues, Operating Costs and Expenses--The revenues and operating costs and
expenses for the first quarter 1999 primarily consist of the operating results
of the Acquired Business, which are included prospectively from August 1, 1998.
The first quarter 1998 includes only the Company's administrative expenses.
Income from the Company's interests in Equistar, LCR and LMC is reported as
income from equity investments.
13
<PAGE>
Income from Equity Investments--Income from equity investments decreased
substantially from $117 million in the first quarter 1998 to $21 million in the
first quarter 1999. Lower Equistar operating results primarily reflected weaker
market conditions in petrochemicals and polymers, leading to lower prices and
margins in the first quarter 1999 compared with first quarter 1998. LCR
operating results declined primarily due to lower margins resulting from
reduced allocations of extra heavy Venezuelan crude oil.
Interest Expense--Interest expense was $146 million in the first quarter
1999 versus $7 million in the first quarter 1998. The increase reflects higher
debt levels as a result of amounts borrowed under the Credit Facility,
primarily to finance the Acquisition, and debt assumed as part of the
Acquisition.
Intermediate Chemicals and Derivatives Segment--First Quarter 1999 Versus
Fourth Quarter 1998
The following table sets forth actual volumes for this segment, including SM
volumes processed under long-term processing arrangements, which are included
in sales and other operating revenues. Co-product tertiary butyl alcohol
("TBA") is principally used to produce the derivative MTBE.
<TABLE>
<CAPTION>
First Fourth
Quarter Quarter
In millions 1999 1998
- ----------- ------- -------
<S> <C> <C>
PO, PO derivatives, isocyanates (pounds)........................ 1,080 1,077
Co-products:
Styrene monomer (pounds)...................................... 782 819
TBA and derivatives (gallons)................................. 265 245
</TABLE>
Operating income was $129 million for the first quarter 1999 compared to $97
million for the fourth quarter 1998. The improvement was primarily attributable
to lower administrative and Acquisition-related transition costs and the
benefit of a seasonal increase in deicers sales volumes, partly offset by lower
PO merchant volumes and margins. Core product volumes, defined as PO, PO
derivatives and isocyanates, were flat as increased PO derivatives volumes,
primarily deicers, were offset by lower PO merchant volumes. PO merchant
volumes decreased due to reduced sales to PO co-producers and planned customer
downtime during the first quarter. PO margins declined as the market
anticipated industry capacity additions in Europe later in 1999. SM volumes
decreased five percent in the first quarter 1999 versus the fourth quarter 1998
due to the timing of export shipments to Asia. TBA and derivatives volumes
increased eight percent primarily due to higher MTBE volumes.
Equistar Chemicals, LP
First Quarter 1999 versus Fourth Quarter 1998
Equistar reported pretax income of $7 million in the first quarter 1999
compared to a pretax loss of $51 million for the fourth quarter 1998. The
increase was primarily attributable to higher ethylene prices and margins,
reflecting a tighter supply/demand balance in the first quarter 1999. Polymers
prices also improved but margin improvements were limited by higher ethylene
feedstock costs. The fourth quarter 1998 was also more negatively affected than
first quarter 1999 by unusual charges related to Equistar's formation.
First Quarter 1999 versus First Quarter 1998
Income from Equity Investment in Equistar--Lyondell's income from its equity
investment in Equistar was $13 million in the first quarter 1999 versus $76
million for the first quarter 1998. The decrease was attributable to
substantially lower ethylene and polymers prices and margins in the first
quarter 1999 compared with the same period for 1998, reflecting ongoing excess
industry capacity. The first quarter 1999 benefit from the addition of the
Occidental Chemical assets in May 1998 was substantially offset by costs
associated with the LaPorte, Texas plant turnaround and operating problems at
two of its plants in the 1999 first quarter.
14
<PAGE>
The following tables reflect selected actual sales volume data and
summarized financial information for Equistar's business segments. The addition
of the Occidental Contributed Business is reflected prospectively from May 15,
1998.
<TABLE>
<CAPTION>
For the three
months ended
March 31
--------------
In millions 1999 1998
- ----------- ------ ------
<S> <C> <C>
Selected petrochemicals products:
Olefins (pounds).............................................. 4,527 3,392
Aromatics (gallons)........................................... 85 47
Polymers products (pounds)...................................... 1,652 1,552
<CAPTION>
Millions of dollars
- -------------------
<S> <C> <C>
Sales and Other Operating Revenues:
Petrochemicals segment.......................................... $ 907 $ 787
Polymers segment................................................ 455 558
Intersegment eliminations....................................... (258) (324)
------ ------
Total......................................................... $1,104 $1,021
====== ======
Selling, General and Administrative Expenses:
Petrochemicals segment.......................................... $ 3 $ 2
Polymers segment................................................ 19 20
Unallocated..................................................... 53 48
------ ------
Total......................................................... $ 75 $ 70
====== ======
Operating Income:
Petrochemicals segment.......................................... $ 91 $ 129
Polymers segment................................................ 11 72
Unallocated..................................................... (56) (54)
------ ------
Total......................................................... $ 46 $ 147
====== ======
</TABLE>
Petrochemicals Segment
Revenues--Revenues for the first quarter 1999 increased versus the first
quarter 1998, primarily due to increased sales volumes as a result of the
addition of the Occidental Contributed Business in May 1998, partially offset
by lower industry sales prices for ethylene, propylene and co-products. The
decrease in industry sales prices is primarily attributable to ongoing excess
industry capacity and downward pressure from feedstock costs, which declined
throughout 1998. The sales price decreases began in the fourth quarter of 1997
and continued their downward trend through most of 1998. U.S. market sales
prices increased during the first quarter 1999, but average first quarter 1999
prices were still lower versus the first quarter 1998.
Operating Income--Operating income decreased in the first quarter 1999
versus the first quarter 1998 primarily due to lower product margins, as
industry sales prices declined more than feedstock costs, and the effects of
the LaPorte plant turnaround in the 1999 period. These were partly offset by
the benefit of increased volumes as a result of the addition of the Occidental
Contributed Business in May 1998.
Polymers Segment
Revenues--Revenues decreased in the first quarter 1999 versus the first
quarter 1998 as a result of decreases in industry sales prices, partly offset
by a six-percent increase in volumes. The sales price decreases reflect excess
industry supply, as industry capacity additions exceeded demand growth, and
downward pressure from feedstock costs, which declined throughout 1998. The
decreases in sales prices started during the fourth
15
<PAGE>
quarter 1997 and continued in a downward trend through 1998. Industry prices
increased during the first quarter 1999, however average first quarter 1999
prices were significantly lower than the first quarter 1998. The volume
increase reflects additional polyethylene capacity.
Operating Income--Operating income for the first quarter 1999 decreased
versus first quarter 1998 primarily due to decreases in polymers sales prices,
which more than offset decreases in polymers feedstock costs, reducing product
margins.
Unallocated Items
Interest expense increased from $32 million in the first quarter 1998 to $43
million in the first quarter 1999, primarily reflecting higher levels of long-
term debt due to the addition of the Occidental Contributed Business in May
1998.
LYONDELL-CITGO Refining LP
Refining Segment
First Quarter 1999 versus Fourth Quarter 1998
LCR had pretax income of $15 million in the first quarter 1999 compared to
$42 million, before unusual charges, in the fourth quarter 1998. The unusual
charge of $10 million in the fourth quarter related to a new labor agreement.
LCR operating results were negatively affected by the impact of ongoing reduced
allocations of Venezuelan extra heavy crude oil, lower margins on crude oil
purchased in the spot market and lower crude oil processing rates. Total crude
oil processing rates averaged 255,000 barrels per day in the first quarter 1999
compared to 273,000 barrels per day in the fourth quarter 1998. LCR reduced
crude oil processing rates in the first quarter 1999 due to declining margins
on crude oil purchased in the spot market.
First Quarter 1999 versus First Quarter 1998
Income from Equity Investment in LCR--Lyondell's income from its equity
investment in LCR was $11 million in the first quarter 1999 versus $35 million
for the first quarter 1998. The decline was primarily due to reduced
allocations of extra heavy Venezuelan crude oil under the Crude Supply
Agreement.
The following table sets forth sales volumes for LCR's refined products:
<TABLE>
<CAPTION>
For the
three
months
ended
March 31
---------
Thousand barrels per day 1999 1998
- ------------------------ ---- ----
<S> <C> <C>
Refined products
Gasoline............................................................ 117 124
Diesel and heating oil.............................................. 65 63
Jet fuel............................................................ 17 19
Aromatics........................................................... 9 10
Other refined products.............................................. 119 91
--- ---
Total refined products volumes.................................... 327 307
=== ===
</TABLE>
16
<PAGE>
The following table sets forth processing rates at the Refinery:
<TABLE>
<CAPTION>
For the
three
months
ended
March 31
---------
Thousand barrels per day 1999 1998
- ------------------------ ---- ----
<S> <C> <C>
Crude processing rates:
Crude Supply Agreement--coked....................................... 206 235
Other heavy crude oil--coked........................................ 8 --
Other crude oil..................................................... 41 19
--- ---
Total crude oil................................................... 255 254
=== ===
</TABLE>
Revenues--Revenues for LCR were $432 million in the first quarter 1999
compared to $529 million in the 1998 period. The decrease primarily resulted
from lower industry prices for refined products, partly offset by a seven
percent increase in refined products volumes. Sales prices declined as a result
of lower industry crude oil prices in the first quarter 1999 versus the 1998
period.
Operating Income--LCR's operating income was $24 million in the first
quarter 1999 compared to $65 million in the first quarter 1998. The decrease
primarily reflected the effects of reduced allocations of extra heavy
Venezuelan crude oil.
Lyondell Methanol Company, L.P.
Lyondell's share of LMC's loss for the first quarter 1999 was $3 million
compared to income of $6 million in the first quarter 1998. The decrease in
1999 versus 1998 was due to significant declines in the sales prices of
methanol, which began in the first quarter 1998. Increased industry supply due
to new capacity, as well as weaker demand from the Far East, caused worldwide
methanol price declines. LMC scheduled a turnaround in the first quarter 1999
to take advantage of weak market conditions and to implement process
enhancements designed to reduce methanol production costs.
FINANCIAL CONDITION
Operating Activities--Lyondell's cash provided by operating activities
totaled $134 million in the first quarter 1999, compared to an operating cash
outflow of $70 million in the first quarter 1998. Cash provided by operating
activities in 1999 included customer advances and tax refunds. Cash used by
operations in the first quarter 1998 reflected the payment of accounts payable
retained by Lyondell after the December 1997 formation of Equistar.
Investing Activities--Lyondell made capital expenditures of $32 million in
the first quarter 1999. Capital expenditures by the joint ventures were $46
million for Equistar, $16 million for LCR and $11 million for LMC. Lyondell's
pro rata share of the joint ventures' total capital expenditures was $37
million. Lyondell's 1999 capital budget is $273 million, including its $123
million pro rata share of the joint ventures' capital budgets.
Distributions in excess of earnings for the first quarter 1999 were $25
million, including $7 million by Equistar and $15 million by LCR. The Company's
share of LMC's loss was $3 million; LMC did not make any distributions.
Lyondell contributed $4 million in the first quarter 1999 to LMC to fund
turnaround expenditures.
Financing Activities--During the first quarter 1999, the Company repaid
long-term debt totaling $76 million. The Company paid a regular quarterly
dividend of $.225 per share of common stock.
17
<PAGE>
In February 1999, Equistar completed an offering of senior unsecured notes
in the principal amount of $900 million. The proceeds were primarily used to
refinance existing indebtedness of Equistar.
Liquidity--During the second quarter 1999, Lyondell successfully 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, Lyondell 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 stock 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.
Lyondell 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 Lyondell 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.
CURRENT BUSINESS OUTLOOK
For the intermediate chemicals and derivatives segment, management expects
continued stable volume growth for the core products in this segment in 1999,
as weakness in merchant PO is offset by stronger PO derivatives volumes.
Oversupply in the SM markets continues with some industry sources projecting
that recovery is expected to take at least two years. Industry consolidation
and the delay of new capacity additions may accelerate the recovery. Several
producers, including Lyondell, have announced TDI and polyols price increases
for the second quarter 1999, reflecting a balanced to tight supply and
sustained demand for urethane products. Higher gasoline prices and increasing
seasonal demand have contributed to rising MTBE prices in the U.S. Lyondell
does not expect the recent proposed phase out of the use of MTBE in oxygenated
gasoline by California to have a significant impact on MTBE margins and volumes
in 1999 or 2000.
The petrochemicals segment is currently benefiting from strong U.S. ethylene
demand and tighter supply. Ethylene inventories are at six days' supply,
pushing spot prices above contract levels. The demand is driven by continued
expansion of the U.S. economy, while supplies have been affected by plant
outages, including one of Equistar's two Channelview olefins units, which has
an annual ethylene capacity of 1.9 billion pounds. The unit was shut down on
April 1, 1999 to repair a compressor and was back on line May 1, 1999. The
outage is expected to be covered by business interruption and property damage
insurance, subject to deductibles of $20 million and $10 million, respectively.
Lyondell owns 41 percent of Equistar.
The polymers segment continues to experience strong demand growth. Industry
sources project that U.S. demand for polyethylene will grow by five to six
percent annually through 2003. However, to date, this growth has been met by
new capacity, which has generally put downward pressure on polymers prices. The
combination of strong demand and the current tightness in ethylene supply led
to first quarter 1999 price increases that reversed a year-long decline in U.S.
polyethylene prices.
Equistar has begun to realize the benefits of actions it took at the end of
1998 and beginning of 1999 to improve its cost position. These include the
acceleration to November 1998 of the turnaround of its LaPorte plant, which was
originally scheduled for the third quarter 1999, the idling of a substantial
portion of higher-
18
<PAGE>
cost HDPE capacity at the Port Arthur plant beginning April 1, 1999, reductions
in working capital, and a continued focus on cost reduction through the
achievement of integration synergies. The LaPorte plant turnaround included
changes that enable the plant to run heavier, cheaper feedstocks, thereby
reducing ethylene production costs. Also, the scheduled turnaround and
expansion of the Victoria, Texas facility was completed during the fourth
quarter of 1998 and increased the plant's annual HDPE capacity by approximately
125 million pounds. Equistar completed the sale of its concentrates and
compounds business on April 30, 1999, recognizing a gain on the sale.
LCR's financial results continue to be 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 Crude
Supply Agreement from 230,000 barrels per day to the current level of 195,000
barrels per day. In addition, in March 1999 OPEC announced an agreement to
further limit OPEC oil production, which is likely to result in additional
reductions in the allocation of crude oil supplied to LCR by PDVSA under the
Crude Supply Agreement. Reduced allocations of crude oil supplied by PDVSA
force LCR to purchase a portion of its crude oil in the spot market, reducing
LCR's pretax income and, accordingly, Lyondell's pro rata share of LCR's
income. Even though LCR may continue to receive a reduced crude oil allocation
from PDVSA, LCR has begun to see some improvement in the spot margins. Despite
the reduction in volumes under the Crude Supply Agreement, LCR continues to
generate free cash flow, which is available for distribution to the partners.
LCR is also moving forward with a multi-year program to reduce operating costs.
On May 3, 1999, LCR shut down a fluid catalytic cracker with a capacity of
92,000 barrels per day as a result of a malfunction that damaged the main air
blower. Repairs are expected to be completed within three weeks. On May 7,
1999, LCR shut down one of two coker units following a fire. Early estimates
are that the damaged coker will be back in service at 50 percent of capacity by
mid-June and achieve full capacity by early July 1999. As a result of these
incidents, crude oil processing rates have been reduced. LCR is currently
putting Venezuelan crude oil into inventory and expects to benefit from higher
processing rates once repairs have been completed. Estimates of the total cost
of the shut downs are not currently available. To the extent the business
interruption impact and the cost of repairs exceed insurance deductibles of $10
million each, per incident, any excess cost is expected to be covered by
insurance. Lyondell owns 58.75 percent of LCR.
YEAR 2000
Lyondell, Equistar and LCR use many business information (information
technology or "IT") systems as well as non-IT systems such as manufacturing
support and other systems that could be affected by the "Year 2000 problem."
The Year 2000 problem arises from computer programs and computer and other
equipment with embedded chips or processors that use two digits rather than
four to designate the year. Date-sensitive computer operations may recognize a
date using "00" as the year 1900 rather than the year 2000, resulting in system
failures or miscalculations, which may cause operational disruptions.
Equistar and LCR have replaced many of their business information computer
systems (including systems operated by Equistar for Lyondell Methanol). The new
systems, based on enterprise software from SAP America, Inc. ("SAP"), replace
older business systems and allow employees at different locations to share
financial and operating information more effectively. LCR completed its
transition to SAP systems during the first quarter 1999. Equistar will complete
implementation of its SAP project in the second quarter 1999. The new systems
and software are Year 2000 compliant, thus addressing the majority of the
Company's Year 2000 business system requirements. Lyondell has elected to
continue with the repair and remediation for the majority of systems of the
Acquired Business for the near term.
The Company has a Year 2000 Executive Sponsor Team with representatives of
Lyondell, Equistar and LCR. The Year 2000 Executive Sponsor Team is providing
oversight to individual Year 2000 Steering Committees within each organization.
Each Steering Committee is in the process of completing an assessment
19
<PAGE>
of the state of readiness of the IT and non-IT systems of the Company and its
joint ventures. These assessments cover manufacturing systems, including
laboratory information systems and field instrumentation, and significant third
party vendor and supplier systems, including employee compensation and benefit
plan maintenance systems. The Steering Committees are also in the process of
assessing the readiness of significant customers and suppliers.
The Year 2000 assessment process for each organization consists of an
inventory of Year 2000 sensitive equipment, an assessment of the impact of
possible failures, determination of the required remediation actions, and
testing and implementation of solutions. The inventory, assessment and
remediation phases were substantially completed in the first quarter 1999.
Completion of testing and final implementation will take place in the remainder
of 1999. The progress of these phases as of March 31, 1999 is summarized as
follows:
[CHART OF LYONDELL ENTERPRISE YEAR 2000 READINESS APPEARS HERE]
Chart showing the percentage of completion of the inventory, assessment,
remediation, testing and implementation phases of the Year 2000 assessment
process for each of Lyondell, Equistar and LCR. The percentage of completion is
indicated in the table below:
LYONDELL ENTERPRISE YEAR 2000 READINESS
AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
Inventory Assessment Remediation Testing Implementation
--------- ---------- ----------- ------- --------------
<S> <C> <C> <C> <C> <C>
Lyondell 99% 99% 95% 70% 50%
Equistar 99% 99% 97% 66% 65%
LCR 98% 98% 95% 60% 50%
</TABLE>
As of March 31, 1999, Year 2000 spending by the Company, Equistar and LCR
for the replacement of both IT and non-IT systems is summarized as follows:
<TABLE>
<CAPTION>
Millions of dollars Lyondell Equistar LCR
------------------- -------- -------- ---
<S> <C> <C> <C>
Spending through March 31, 1999..................... $ 7 $ 3 $ 1
Estimated additional spending....................... 6 10 3
--- --- ---
Total estimated spending.......................... $13 $13 $ 4
=== === ===
Lyondell share of estimated spending................ $13 $ 5 $ 2
=== === ===
</TABLE>
The total estimated spending of $30 million for all three organizations
represents a midpoint of an estimated range between $25 million and $35
million, of which the Company's share would be $18 million to $24 million. The
estimated amount does not include costs incurred in connection with the
implementation of SAP-related software. These spending estimates are
continuously refined as phases of the assessment are completed. Spending is
funded by cash generated from operations. Preliminary estimates indicate that
approximately 10 to 15 percent of the estimated spending could qualify for
capitalization.
20
<PAGE>
Management believes that all significant systems controlled by the Company
will be Year 2000 ready in the last half of 1999. The Company's operations are
dependent on a continuous supply of key services from raw material suppliers
and utility and transportation providers. While the Steering Committees are
assessing the readiness of third party customers and suppliers, there can be no
assurance that third parties with a significant business relationship will
successfully test, reprogram, and replace all of their IT and non-IT systems on
a timely basis. The Company is developing contingency plans with the assistance
of an outside consultant. The final plans, when implemented, are intended to
avoid material interruption of core business operations through the year 2000
and beyond, while ensuring safe operations and responsible financial
performance. The contingency planning will involve an analysis of critical
business processes and an identification of the most likely threats to these
processes. Solutions and alternatives will be developed for these internal or
external threats. The enterprise expects to complete its analysis and plan
development by mid-year 1999 with implementation to be completed in the last
half of the year.
There is inherent uncertainty in the Year 2000 problem due to the
possibility of unanticipated failures by third party customers and suppliers.
Accordingly, the Company is unable, at this time, to assess the extent and
resulting materiality of the impact of possible Year 2000 failures on its
operations, liquidity or financial position. In a worst case scenario,
controlled plant shutdowns using the Company's standard shutdown procedures
might be necessitated by failures of utility providers or suppliers or by
internal conditions affecting plant operability. Such events could have a
material adverse effect on the Company's operations, liquidity or financial
position. The Year 2000 assessment process is expected to provide information
that will significantly reduce the level of uncertainty regarding the Year 2000
impact. Management believes that the completion of the assessment as scheduled
will help minimize the possibility of any significant disruptions of Company
operations.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement is effective for the
Company's calendar year 2000; however, early adoption is permitted. SFAS No.
133 requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending upon
whether a derivative is designated as part of a hedge transaction and, if it
is, the type of hedge transaction. The gains and losses on the derivative
instrument that are reported in other comprehensive income will be reclassified
as earnings in the periods in which earnings are impacted by the hedged item.
The ineffective portion of all hedges will be recognized in current-period
earnings. The Company does not intend to adopt this pronouncement prior to
2000.
Item 3. Disclosure of Market Risk.
The Company's exposure to market risks (as such risks are described in Item
7a of its Annual Report on Form 10-K for the year ended December 31, 1998) has
not changed materially in the quarter ended March 31, 1999. See Item 7a of the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report are "forward-looking
statements" within the meaning of the federal securities laws. Although
Lyondell believes the expectations reflected in such forward-looking statements
are reasonable, they do involve certain assumptions, risks and uncertainties,
and Lyondell can give no assurance that such expectations will prove to have
been correct. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the cyclical nature of the chemical and refining industries,
uncertainties associated with the United States and worldwide economies,
current and potential governmental regulatory actions in the United States and
in other
21
<PAGE>
countries, substantial chemical and refinery capacity additions resulting in
oversupply and declining prices and margins, raw material costs or supply
arrangements, the Company's ability to implement cost reductions, and operating
interruptions (including leaks, explosions, fires, mechanical failure,
unscheduled downtime, labor difficulties, transportation interruptions, spills
and releases and other environmental risks). Many of such factors are beyond
Lyondell's or its joint ventures' ability to control or predict. Management
cautions against putting undue reliance on forward-looking statements or
projecting any future results based on such statements or present or prior
earnings levels.
All forward-looking statements in this Form 10-Q are qualified in their
entirety by the cautionary statements contained in this section and elsewhere
in this report.
22
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments with respect to the Company's legal
proceedings previously reported in the 1998 Annual Report on Form 10-K.
Item 4. Submission of Matters to a Vote of Security-Holders
The Company's annual meeting of stockholders was held May 6, 1999. The
stockholders elected all of the Company's eight nominees for director, ratified
the appointment of PricewaterhouseCoopers LLP as the Company's independent
auditors for 1999 and approved the adoption of the Lyondell Chemical Company
1999 Long-Term Incentive Plan. The votes were as follows:
1. Election of Directors:
<TABLE>
<CAPTION>
Nominee For Withheld
------- ---------- --------
<S> <C> <C>
William T. Butler........................................ 71,738,804 594,468
Carol A. Anderson........................................ 71,750,303 582,969
Travis Engen............................................. 71,750,186 583,086
Stephen F. Hinchliffe, Jr................................ 71,743,111 590,161
Dudley C. Mecum II....................................... 71,708,378 624,894
Frank Savage............................................. 71,538,063 795,209
Dan F. Smith............................................. 71,752,501 580,771
Paul R. Staley........................................... 71,737,755 595,517
</TABLE>
2. Appointment of PricewaterhouseCoopers LLP:
<TABLE>
<S> <C>
For: 71,957,323
Against: 248,151
Abstain: 127,798
</TABLE>
3. Adoption of the Lyondell Chemical Company 1999 Long-Term Incentive Plan:
<TABLE>
<S> <C>
For: 52,085,010
Against: 13,499,461
Abstain: 247,450
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed during the quarter
ended March 31, 1999 and through the date hereof:
<TABLE>
<CAPTION>
Financial
Date of Report Item No. Statements
-------------- -------- ----------
<S> <C> <C>
April 19, 1999 5, 7 No
April 1, 1999 5, 7 No
February 5, 1999 5 No
</TABLE>
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lyondell Chemical Company
Dated: May 12, 1999 /s/ JOSEPH M. PUTZ
-------------------------------------
Joseph M. Putz
Senior Vice President
(Duly Authorized Officer and
Principal Accounting Officer)
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 260
<SECURITIES> 0
<RECEIVABLES> 445
<ALLOWANCES> 11
<INVENTORY> 516
<CURRENT-ASSETS> 1,227
<PP&E> 4,553
<DEPRECIATION> 123
<TOTAL-ASSETS> 9,018
<CURRENT-LIABILITIES> 2,279
<BONDS> 5,223
0
0
<COMMON> 80
<OTHER-SE> 434
<TOTAL-LIABILITY-AND-EQUITY> 9,018
<SALES> 855
<TOTAL-REVENUES> 855
<CGS> 630
<TOTAL-COSTS> 726
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 146
<INCOME-PRETAX> 3
<INCOME-TAX> 1
<INCOME-CONTINUING> 2
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
