<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): June 29, 1999
LYONDELL CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
1-10145 of incorporation) 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 June 29, 1999, Lyondell Chemical Company (the "Company") amended its
financial statements included in its Annual Report on Form 10-K filed on March
26, 1999 for the sole purpose of disclosing financial information of certain of
the Company's subsidiaries that may be guarantors of debt securities of the
Company to be registered under a registration statement on Form S-4. Such
information was not required to be disclosed on the date the Annual Report on
Form 10-K 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
By: /s/ Joseph M. Putz
--------------------------------
Joseph M. Putz
Senior Vice President,
Special Assignments and
Acting Chief Financial Officer
Date: June 29, 1999
<PAGE>
Exhibit 99.1
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
LYONDELL CHEMICAL COMPANY
Report of Independent Accountants.......................................... 2
Consolidated Financial Statements:
Consolidated Statements of Income........................................ 3
Consolidated Balance Sheets.............................................. 4
Consolidated Statements of Cash Flows.................................... 5
Consolidated Statements of Stockholders' Equity.......................... 6
Notes to Consolidated Financial Statements............................... 7
</TABLE>
1
<PAGE>
LYONDELL CHEMICAL COMPANY
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Lyondell Chemical Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Lyondell
Chemical Company (formerly Lyondell Petrochemical Company) and its subsidiaries
at December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
February 26, 1999
2
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the year ended
December 31
----------------------
Millions of dollars, except per share data 1998 1997 1996
- ------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Sales and other operating revenues:
Unrelated parties...................................... $1,447 $2,346 $4,734
Related parties........................................ -- 532 318
------ ------ ------
1,447 2,878 5,052
------ ------ ------
Income from equity investments (before unusual charges):
Equistar Chemicals, LP................................. 134 30 --
LYONDELL-CITGO Refining LP............................. 116 102 --
Lyondell Methanol Company, L.P......................... 6 -- --
------ ------ ------
256 132 --
------ ------ ------
Gain on sale of assets................................... -- -- 30
------ ------ ------
Operating costs and expenses:
Cost of sales:
Unrelated parties.................................... 1,089 1,827 4,320
Related parties...................................... -- 423 250
Selling, general and administrative expenses........... 126 186 234
Research and development expense....................... 26 -- --
Amortization of goodwill and other intangible assets... 41 -- --
Unusual charges........................................ 82 40 --
------ ------ ------
1,364 2,476 4,804
------ ------ ------
Operating income....................................... 339 534 278
Interest expense......................................... (287) (75) (81)
Interest income.......................................... 25 14 3
Other income (expense), net.............................. 12 (17) (4)
------ ------ ------
Income before income taxes............................... 89 456 196
Provision for income taxes............................... 37 170 70
------ ------ ------
Net income............................................... $ 52 $ 286 $ 126
====== ====== ======
Basic and diluted earnings per share..................... $ .67 $ 3.58 $ 1.58
====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------
Millions of dollars 1998 1997
- ------------------- ------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 233 $ 86
Accounts receivable:
Trade, net................................................. 473 1
Related parties............................................ 6 4
Inventories.................................................. 550 --
Prepaid expenses and other current assets.................... 64 12
------ ------
Total current assets..................................... 1,326 103
------ ------
Property, plant and equipment, net............................. 4,511 46
Investment in affiliates:
Equistar Chemicals, LP....................................... 660 1,063
LYONDELL-CITGO Refining LP................................... 84 104
Lyondell Methanol Company, L.P............................... 50 --
Receivable from LYONDELL-CITGO Refining LP..................... 231 196
Other investments and long-term receivables.................... 53 --
Goodwill, net.................................................. 1,430 --
Deferred charges and other assets.............................. 880 47
------ ------
Total assets................................................... $9,225 $1,559
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade...................................................... $ 252 $ 87
Related parties............................................ 1 97
Notes payable................................................ -- 100
Current maturities of long-term debt......................... 1,603 --
Other accrued liabilities.................................... 481 24
------ ------
Total current liabilities................................ 2,337 308
------ ------
Long-term debt, less current maturities........................ 5,391 345
Other liabilities and deferred credits......................... 294 73
Deferred income taxes.......................................... 413 209
Commitments and contingencies
Minority interest.............................................. 216 5
Stockholders' equity:
Preferred stock, $.01 par value, 80,000,000 shares
authorized, none outstanding................................ -- --
Common stock, $1.00 par value, 250,000,000 shares authorized,
80,000,000 issued........................................... 80 80
Additional paid-in capital................................... 158 158
Retained earnings............................................ 387 407
Accumulated other comprehensive income....................... 32 --
Treasury stock, at cost, 2,978,203 and 1,015,512 shares,
respectively................................................ (83) (26)
------ ------
Total stockholders' equity............................... 574 619
------ ------
Total liabilities and stockholders' equity..................... $9,225 $1,559
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended
December 31
---------------------
Millions of dollars 1998 1997 1996
- ------------------- ------- ----- -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 52 $ 286 $ 126
Adjustments to reconcile net income to net cash
provided by operating activities, net of the effects
of purchase accounting and deconsolidation of
affiliates:
Depreciation and amortization......................... 138 84 110
Unusual charges....................................... 57 -- --
Deferred income taxes................................. 76 43 50
Minority interest..................................... 6 17 4
Gain on sale of assets................................ -- -- (30)
Decrease (increase) in accounts receivable............ 93 (64) (94)
Increase in inventories............................... (15) (37) (29)
(Decrease) increase in accounts payable............... (160) (44) 160
Net change in other working capital accounts.......... 36 (2) 6
Other................................................. (20) (14) (71)
------- ----- -----
Net cash provided by operating activities........... 263 269 232
------- ----- -----
Cash flows from investing activities:
Acquisition of ARCO Chemical Company, net of cash
acquired.............................................. (5,869) -- --
Expenditures for property, plant and equipment......... (64) (49) (609)
Proceeds from sales of assets.......................... -- -- 55
Contributions and advances to affiliates............... (35) (86) --
Distributions from affiliates in excess of earnings.... 435 72 --
Deconsolidation of affiliates.......................... (11) (12) --
------- ----- -----
Net cash used in investing activities............... (5,544) (75) (554)
------- ----- -----
Cash flows from financing activities:
Proceeds from issuance of long-term debt............... 6,500 -- 502
Payment of debt issuance costs......................... (130) -- (3)
Net (decrease) increase in short-term debt............. (100) 50 (43)
Repayments of long-term debt........................... (715) (112) (150)
Minority owners (distributions) contributions.......... -- (16) 146
Repurchase of common stock............................. (59) (26) --
Dividends paid......................................... (70) (72) (72)
------- ----- -----
Net cash provided by (used in) financing
activities......................................... 5,426 (176) 380
------- ----- -----
Effect of exchange rate changes on cash................. 2 -- --
------- ----- -----
Increase in cash and cash equivalents................... 147 18 58
Cash and cash equivalents at beginning of period........ 86 68 10
------- ----- -----
Cash and cash equivalents at end of period.............. $ 233 $ 86 $ 68
======= ===== =====
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
Millions of dollars, --------------- Paid-In Retained Comprehensive Comprehensive
except per share data Issued Treasury Capital Earnings Income Income
- --------------------- ------ -------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996
(80,000,000 shares
issued)................ $80 $ -- $158 $142 $-- $ --
Net income............ -- -- -- 126 -- 126
Cash dividends ($.90
per share)........... -- -- -- (72) -- --
Other................. -- -- -- (3) -- --
--- ---- ---- ---- --- ----
$126
====
Balance, December 31,
1996
(80,000,000 shares
issued)................ 80 -- 158 193 -- $ --
Net income............ -- -- -- 286 -- 286
Cash dividends ($.90
per share)........... -- -- -- (72) -- --
Purchase of 1,015,512
treasury shares...... -- (26) -- -- -- --
--- ---- ---- ---- --- ----
$286
====
Balance, December 31,
1997
(80,000,000 shares
issued; 1,015,512
treasury shares)....... 80 (26) 158 407 -- $ --
Net income............ -- -- -- 52 -- 52
Cash dividends ($.90
per share)........... -- -- -- (70) -- --
Purchase of 2,051,539
treasury shares...... -- (59) -- -- -- --
Reissuance of 88,848
treasury shares under
restricted stock
plan................. -- 2 -- -- -- --
Foreign currency
translation, net of
tax of $25........... -- -- -- -- 32 32
Other................. -- -- -- (2) -- --
--- ---- ---- ---- --- ----
$ 84
====
Balance, December 31,
1998
(80,000,000 shares
issued; 2,978,203
treasury shares)....... $80 $(83) $158 $387 $32
=== ==== ==== ==== ===
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Company and Operations
Lyondell Chemical Company ("Company" or "Lyondell"), formerly Lyondell
Petrochemical Company, operates in the (i) intermediate chemicals and
derivatives, (ii) petrochemicals, (iii) polymers, (iv) refining and (v)
methanol businesses through its wholly owned subsidiary, ARCO Chemical Company
("ARCO Chemical" or "Acquired Business"), acquired by the Company as of July
28, 1998 (see Note 3), and through the Company's joint venture ownership
interests in Equistar Chemicals, LP ("Equistar"), LYONDELL-CITGO Refining LP
("LCR"), formerly LYONDELL-CITGO Refining Company Ltd., and Lyondell Methanol
Company, L.P. ("Lyondell Methanol").
The Acquired Business, now named Lyondell Chemical Worldwide, Inc., is the
world's largest producer of propylene oxide ("PO") and a leading worldwide
producer and marketer of polyether polyols, propylene glycol, propylene glycol
ethers, toluene diisocyanate ("TDI"), styrene monomer ("SM") and methyl
tertiary butyl ether ("MTBE"). The Acquired Business is reported as the
intermediate chemicals and derivatives segment.
The Company's operations in the petrochemicals and polymers segments are
conducted through its joint venture ownership interest in Equistar (see Note
4). The Company accounts for its investment in Equistar using the equity method
of accounting. Prior to the formation of Equistar on December 1, 1997, the
Company's assets and operations of the petrochemicals and polymers businesses
were fully consolidated in the consolidated financial statements of the
Company.
Equistar's petrochemicals division consists of: olefins, including ethylene,
propylene, butadiene, butylenes and specialty products; aromatics, including
benzene and toluene; oxygenated chemicals, including ethylene oxide and
derivatives, MTBE, ethyl alcohol and diethyl ether; and specialty chemicals,
including refinery blending stocks.
Equistar's polymers division consists of: polyolefins, including high density
polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear-low density
polyethylene ("LLDPE") and polypropylene; and performance polymers products,
including color concentrates and compounds, wire and cable resins and
compounds, adhesive resins, and fine powders.
The Company's operations in the refining segment are conducted through its
joint venture ownership interest in LCR (see Note 5). This segment consists of:
refined petroleum products, including conventional and reformulated gasoline,
low sulfur diesel and jet fuel; aromatics produced at LCR's full-conversion
Houston, Texas refinery ("Refinery"), including benzene, toluene, paraxylene
and orthoxylene; lubricants, including industrial lubricants, motor oils, white
oils, process oils and base oils; carbon black oil; sulfur; residual oil;
petroleum coke fuel; olefins feedstocks; and crude oil resales. LCR sells its
principal refined products to the Company's joint venture partner in LCR, CITGO
Petroleum Corporation ("CITGO").
The Company has additional operations conducted through its joint venture
ownership interest in Lyondell Methanol (see Note 6). These operations consist
of methanol and other petrochemical products produced by its methanol facility.
Effective January 1, 1998, Lyondell began to account for its investment in
Lyondell Methanol using the equity method of accounting. Prior to 1998,
Lyondell Methanol's assets and operations were fully consolidated in the
consolidated financial statements.
From its formation in 1985 through June 1988, the Company operated as a
division of Atlantic Richfield Company ("ARCO"). In July 1988, ARCO transferred
the division's assets and liabilities along with additional pipeline assets, to
its wholly owned subsidiary, Lyondell Petrochemical Company, a Delaware
corporation. In January 1989, ARCO completed an initial public offering of
approximately 50.1 percent of the
7
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's common stock. In August 1994, ARCO issued three-year debt securities
("Exchangeable Notes") which were exchangeable upon maturity on September 15,
1997 into Lyondell common stock or an equivalent cash value, at ARCO's option.
On September 15, 1997, ARCO delivered shares of Lyondell common stock to the
holders of the Exchangeable Notes. The Company purchased the remaining 383,312
shares of common stock held by ARCO after the conversion. As of December 31,
1998 and 1997, ARCO owned no shares of Lyondell common stock.
2. Summary of Significant Accounting Policies
Basis of Presentation--The 1998 Consolidated Financial Statements include the
accounts of the Company and its subsidiaries, including the results of
operations of the Acquired Business for the five months ended December 31,
1998. The Company's joint venture ownership interests in Equistar for 1998 and
December 1997, in LCR for 1998 and 1997, and in Lyondell Methanol for 1998, are
reported as equity investments and are not consolidated into the Company's
financial statements. Lyondell Methanol is fully consolidated into the
Company's financial statements for 1997 and 1996, and LCR is fully consolidated
only for 1996. Additionally, the Company has an investment in a 50 percent
owned affiliate that is accounted for using the equity method of accounting.
All significant transactions between the entities of the Company have been
eliminated from the Consolidated Financial Statements.
Revenue Recognition--Revenue from product sales is generally recognized upon
delivery of products to the customer.
Equity Method of Accounting--Investments in joint ventures ("JVs") where the
Company exerts a certain minimum level of management control, but lacks full
decision making ability over all major issues, are accounted for using the
equity method of accounting. Under those circumstances, this accounting
treatment is used even though the Company's ownership percentage may exceed 50
percent. Under this method, the operations of the JVs are not consolidated line
by line with those of the Company. Instead, the Company's portion of the JVs'
net income is included in the Consolidated Statements of Income as "Income from
equity investments" and the Company's portion of the JVs' net assets appears in
the Consolidated Balance Sheets as "Investment in affiliates." Cash advances
to, and distributions in excess of earnings from the JVs, are reflected as
individual line items in the Consolidated Statements of Cash Flows.
Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less. Cash
equivalents are stated at cost, which approximates fair value. The Company's
policy is to invest cash in conservative, highly rated instruments and limit
the amount of credit exposure to any one institution. The Company performs
periodic evaluations of the relative credit standing of these financial
institutions, which are considered in the Company's investment strategy.
The Company has no requirements for compensating balances in a specific
amount at a specific point in time. The Company does maintain compensating
balances for some of its banking services and products. Such balances are
maintained on an average basis and are solely at the Company's discretion. As a
result, none of the Company's cash is restricted.
Accounts Receivable--The Company sells its products primarily to other
industrial concerns in the petrochemicals and refining industries. The Company
performs ongoing credit evaluations of its customers' financial condition, and,
in certain circumstances, requires letters of credit from them. The Company's
allowance for doubtful accounts receivable, which is reflected in the
Consolidated Balance Sheets as a reduction of accounts receivable, totaled $11
million at December 31, 1998. The Company had no significant allowance for
doubtful accounts recorded at December 31, 1997.
8
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property, Plant and Equipment--Property, plant and equipment are recorded at
cost. Depreciation of manufacturing facilities and equipment is computed using
the straight-line method over the estimated useful lives of the related assets
ranging from 5 to 30 years.
Upon retirement or sale, the Company removes the cost of the asset and the
related accumulated depreciation from the accounts and reflects any resulting
gain or loss in the Consolidated Statements of Income. The Company's policy is
to capitalize interest cost incurred on debt during the construction of major
projects exceeding one year.
Turnaround Maintenance and Repair Expenses--Cost of repairs and maintenance
incurred in connection with turnarounds of major units at the Company's
manufacturing facilities exceeding $5 million are deferred and amortized using
the straight-line method, until the next planned turnaround, generally four to
six years.
Goodwill--Goodwill represents the excess of purchase price paid over the
value assigned to the net tangible assets of a business acquired. This
intangible asset is amortized over 40 years, the estimated useful life, using
the straight-line method. See Long-Lived Asset Impairment below.
Deferred Charges--Deferred charges are carried at cost and consist primarily
of the value assigned to patents and licensed technology, capacity reservation
fees and other long-term processing rights and costs. These assets are
amortized using the straight-line method over their estimated useful lives or
the term of the related agreement, if shorter.
Environmental Remediation Costs--Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Estimates have not
been discounted to present value. Environmental remediation costs are expensed
or capitalized in accordance with generally accepted accounting principles.
Pension and Other Postretirement Benefit Plans--During 1998, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 132,
Employers' Disclosures about Pensions and Other Retirement Benefits. The
provisions of SFAS No. 132 revise employer disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of these plans. SFAS No. 132 standardizes the disclosure requirements for these
plans, to the extent practicable.
Minority Interest--Minority interest in 1998 primarily represents the
interest of third-party investors in a partnership that owns one of the
Company's two domestic PO/SM plants. The Company retains a majority interest in
the partnership. The minority interest share of the partnership's income and
loss is reported in "Other income (expense), net" in the Consolidated
Statements of Income.
Exchanges--Crude oil and finished product exchange transactions, which
involve homogeneous commodities in the same line of business and do not involve
the payment or receipt of cash, are not accounted for as purchases and sales.
Any resulting volumetric exchange balances are accounted for as inventory in
accordance with the normal LIFO valuation policy.
Income Taxes--Deferred income taxes result from temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes
and are calculated based upon cumulative book and tax differences in the
Consolidated Balance Sheets in accordance with SFAS No. 109, Accounting for
Income Taxes. Valuation allowances are provided against deferred tax assets
which are not likely to be realized in full.
Foreign Currency Translation--Where the local currency is the functional
currency, the financial statements of international operations are translated
into U.S. dollars using the exchange rate at each balance sheet date for assets
and liabilities and the average exchange rate for each period for revenues,
expenses, gains
9
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and losses. Translation adjustments are recorded as a separate component of
"Accumulated other comprehensive income" in the stockholders' equity section of
the Consolidated Balance Sheets. Where the U.S. dollar is the functional
currency, remeasurement adjustments are recorded as foreign exchange gains and
losses in the Consolidated Statements of Income.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Long-Lived Asset Impairment--In accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, the Company reviews its long-lived assets, including goodwill, for
impairment on an exception basis whenever events or changes in circumstances
indicate a potential loss in utility. Impairment losses are recognized in the
Consolidated Statements of Income.
Segment and Related Information--In 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 supercedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the management
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect the results of operations or the
financial position of the Company (see Note 22).
Reclassifications--Certain previously reported amounts have been restated to
conform to classifications adopted in 1998.
3. Purchase of ARCO Chemical Company
As of July 28, 1998, the Company completed its acquisition of ARCO Chemical
("Acquisition"). The transaction was financed through a $7.0 billion Credit
Facility (see Note 16). This Acquisition was accounted for using the purchase
method of accounting and, accordingly, the results of operations of the
Acquired Business are included in the Company's Consolidated Statements of
Income prospectively from August 1, 1998. The acquisition cost of approximately
$5.9 billion has been allocated to the assets acquired and liabilities assumed
based upon the estimated fair value of such assets and liabilities at the date
of acquisition. The Company is awaiting additional information related to the
fair value of certain assets acquired and liabilities assumed. Management does
not expect the finalization of these matters to have a material effect on the
purchase price allocation. In connection with the acquisition, the Company
accrued liabilities for costs associated with the delay of construction of the
PO-11 plant, vesting of certain key manager benefits pursuant to a change of
control provision, severance costs for the involuntary termination of certain
headquarters employees, and relocation costs for moving personnel to the
Company's Houston headquarters. The liability totaled $255 million at the date
of acquisition. Through December 31, 1998, the Company had paid and charged
approximately $132 million against the liability.
Approximately $57 million, or less than one percent of the purchase price,
was allocated to purchased in-process research and development. This included
three projects valued at $29 million, $18 million and $10 million,
respectively, representing two new product applications and one new process
technology. The activities represented by these projects will be continued by
the Company and the values assigned represent intangibles with no alternative
future use. Accordingly, the Company wrote off the in-process research and
development,
10
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recording a nonrecurring charge of $57 million in the third quarter 1998 (see
Note 7). The excess of purchase price paid over the estimated fair value of net
assets acquired was allocated to goodwill. The amount allocated to goodwill was
approximately $1.4 billion and is being amortized, using the straight-line
method, over 40 years, the estimated useful life.
The fair value of the assets acquired and liabilities assumed, net of cash
acquired, was as follows:
<TABLE>
<CAPTION>
Millions of dollars
-------------------
<S> <C>
Current assets, net of cash acquired.............................. $1,133
Property, plant and equipment..................................... 4,454
Purchased in-process research and development..................... 57
Goodwill.......................................................... 1,445
Deferred charges and other assets................................. 1,124
Current liabilities............................................... (599)
Long-term debt.................................................... (952)
Other liabilities and deferred credits............................ (793)
------
Purchase price, net of cash acquired.............................. $5,869
======
</TABLE>
The unaudited pro forma combined historical results of the Company and ARCO
Chemical, giving effect to the Acquisition, the Credit Facility drawdown, the
formation of Equistar, and the deconsolidation of Lyondell Methanol as of the
beginning of 1998 and 1997, respectively, are as follows:
<TABLE>
<CAPTION>
For the year
ended
December 31
-------------
Millions of dollars, except per share data 1998 1997
----------------------------------------------------------- ------ ------
<S> <C> <C>
Sales and other operating revenues......................... $3,553 $3,995
Income from equity investments............................. 256 526
Unusual charges............................................ 62 215
Operating income........................................... 631 663
Net income................................................. 42 27
Basic and diluted earnings per share....................... .54 .34
</TABLE>
The unaudited pro forma data presented above are not necessarily indicative
of the results of operations of the Company that would have occurred had such
transactions actually been consummated as of the beginning of 1998 and 1997,
respectively, nor are they necessarily indicative of future results.
4. Equity Interest in Equistar Chemicals, LP
Equistar was formed on December 1, 1997 as a joint venture between the
Company and Millennium Chemicals Inc. ("Millennium"), to own and operate the
businesses contributed by the partners. Lyondell contributed substantially all
of the assets comprising its petrochemicals and polymers business segments,
while Millennium contributed substantially all of the assets comprising its
polyethylene and related products, performance polymers and ethyl alcohol
businesses, which had been held in Millennium Petrochemicals Inc., a wholly-
owned subsidiary of Millennium. On May 15, 1998, the ethylene, propylene and
ethylene oxide and derivatives businesses of Occidental Chemical Corporation, a
subsidiary of Occidental Petroleum Corporation ("Occidental"), were contributed
to Equistar ("Occidental Contributed Business"). Equistar is operated as a
Delaware limited partnership owned by subsidiaries of the Company, Millennium
and Occidental ("Partners").
11
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Lyondell currently has a 41.0 percent joint venture ownership interest, while
Millennium and Occidental each have 29.5 percent. Prior to the addition of
Occidental as a partner on May 15, 1998, the Company had a 57.0 percent joint
venture ownership interest, while Millennium had 43.0 percent. Because the
Partners jointly control certain management decisions, Lyondell accounts for
its investment in Equistar using the equity method of accounting.
Summarized financial information for Equistar is as follows:
<TABLE>
<CAPTION>
December 31
-------------------------
Millions of dollars 1998 1997
------------------- ------------ ------------
<S> <C> <C>
BALANCE SHEETS
Total current assets.......................... $1,130 $1,192
Property, plant and equipment, net............ 4,075 2,118
Goodwill, net................................. 1,151 1,139
Deferred charges and other assets............. 312 151
------ ------
Total assets.................................. $6,668 $4,600
====== ======
Current maturities of long-term debt.......... $ 150 $ 36
Other current liabilities..................... 488 300
Long-term debt, less current maturities....... 1,865 1,512
Capital lease obligations..................... 205 --
Other liabilities and deferred credits........ 75 34
Partners' capital............................. 3,885 3,063
Note receivable from Lyondell................. -- (345)
------ ------
Total liabilities and partners' capital....... $6,668 $4,600
====== ======
<CAPTION>
For the year For the one
ended month ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
STATEMENTS OF INCOME
Sales and other operating revenues............ $4,363 $ 365
Cost of sales................................. 3,773 287
Selling, general and administrative expenses.. 273 21
Unusual charges............................... 35 42
------ ------
Operating income.............................. 282 15
Interest expense, net......................... 139 8
------ ------
Net income.................................... $ 143 $ 7
====== ======
SELECTED CASH FLOW INFORMATION
Depreciation and amortization................. $ 268 $ 19
Expenditures for property, plant and
equipment.................................... 200 12
</TABLE>
The Company's $134 million and $30 million share of Equistar's income before
unusual charges for the one year and for the one month ended December 31, 1998
and 1997, respectively, are presented as "Income from equity investments" in
Equistar in the Consolidated Statements of Income. The Company's $15 million
and $24 million share of Equistar's unusual charges for the year ended December
31, 1998 and the one month
12
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ended December 31, 1997, respectively, are included in the "Unusual charges"
line in the Consolidated Statements of Income (see Note 7).
At the formation of Equistar and adjusted for the addition of the Occidental
Contributed Business on May 15, 1998, the difference between the Company's
investment in Equistar and its underlying equity in Equistar's net assets was
approximately $900 million. This difference is being accreted into income of
the Company over 25 years using the straight-line method. This accretion is
included in "Income from equity investments" in Equistar in the Consolidated
Statements of Income.
Included in "Sales and other operating revenues" above are $97 million in
sales to Lyondell for the five months ended December 31, 1998. Sales to LCR
included above were $236 million for the year ended December 31, 1998 and $27
million for the month of December 1997. In addition, Equistar purchased $2
million from Lyondell for the five months ended December 31, 1998, which is
included in Equistar's "Cost of sales" above. Purchases from LCR during the
year ended December 31, 1998 and for the month of December 1997, included in
Equistar's "Cost of sales" totaled $131 million and $10 million, respectively.
The Company has various service and cost sharing arrangements with Equistar.
Billings to Equistar were approximately $3 million for the year ended December
31, 1998. Billings from Equistar were approximately $1 million for the year
ended December 31, 1998.
5. Equity Interest in LYONDELL-CITGO Refining LP
In July 1993, LCR was formed to own and operate the Company's refining
business. LCR is structured as a Delaware limited partnership (formerly a Texas
limited liability company) owned by subsidiaries of the Company and CITGO. LCR
completed a major upgrade project at the Refinery ("Upgrade Project") during
the first quarter of 1997, which enabled the facility to process substantial
additional volumes of extra heavy crude oil. As a result of the completion of
the Upgrade Project, effective April 1, 1997, the participation interests
changed to reflect CITGO's equity contribution to the Upgrade Project. The
participation interests changed from approximately 86 percent and 14 percent
for the Company and CITGO, respectively, and are currently 58.75 percent and
41.25 percent for the Company and CITGO, respectively. Net income before
depreciation expense for the period is allocated to LCR's owners based upon
participation interests. Depreciation expense is allocated to the owners based
upon contributed assets.
Pursuant to contractual arrangements and concurrent with the completion of
the Upgrade Project, the authority and responsibility for certain management
decisions previously decided by majority vote, and therefore controlled by the
Company, changed to unanimous vote, resulting in joint control of LCR by
Lyondell and CITGO. Consequently, effective January 1, 1997, the Company began
to account for its investment in LCR using the equity method of accounting.
13
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized financial information for LCR is as follows. The results below
include a restatement for a pricing adjustment between LCR and Lyondell
recorded in 1996 and retroactive to 1993.
<TABLE>
<CAPTION>
December 31
-------------
Millions of dollars 1998 1997
------------------- ------ ------
<S> <C> <C>
BALANCE SHEETS
Total current assets....................................... $ 197 $ 243
Property, plant and equipment, net......................... 1,370 1,391
Deferred charges and other assets.......................... 70 47
------ ------
Total assets............................................... $1,637 $1,681
====== ======
Total current liabilities.................................. $ 203 $ 293
Long-term debt............................................. 717 663
Other liabilities and deferred credits..................... 68 52
Partners' capital.......................................... 649 673
------ ------
Total liabilities and partners' capital.................... $1,637 $1,681
====== ======
</TABLE>
<TABLE>
<CAPTION>
For the year ended
December 31
--------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
STATEMENTS OF INCOME
Sales and other operating revenues.................. $2,055 $2,695 $2,816
Cost of sales....................................... 1,754 2,442 2,750
Selling, general and administrative expenses........ 78 72 62
Unusual charges..................................... 10 -- --
------ ------ ------
Operating income.................................... 213 181 4
Interest expense, net............................... 43 35 --
State income taxes.................................. 1 1 --
------ ------ ------
Net income.......................................... $ 169 $ 145 $ 4
====== ====== ======
SELECTED CASH FLOW INFORMATION
Depreciation and amortization....................... $ 100 $ 91 $ 35
Expenditures for property, plant and equipment...... 61 85 529
</TABLE>
Included in sales and other operating revenues above are $181 million and
$175 million in sales to Lyondell for the eleven months ended November 30, 1997
and the year ended December 31, 1996, respectively. Sales to Equistar included
above were $131 million for the year ended December 31, 1998 and $10 million
for the month of December 1997. In addition, LCR purchased $325 million and
$234 million, primarily product purchases, from Lyondell for the eleven months
ended November 30, 1997 and the year ended December 31, 1996, respectively,
which are included in LCR's cost of sales. Purchases from Equistar during the
year ended December 31, 1998 and for the month of December 1997, included in
LCR's cost of sales, totaled $236 million and $27 million, respectively.
The Company has various service and cost sharing arrangements with LCR.
Billings to LCR were approximately $4 million, $7 million, and $11 million for
the years ended December 31, 1998, 1997 and 1996, respectively. Billings from
LCR were approximately $4 million, $5 million, and $3 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
14
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, during 1998 and 1997, the Company received interest payments of
approximately $9 million and $13 million respectively, for interest on loans
related to funding a portion of the Upgrade Project and certain other capital
expenditures at the Refinery.
LCR has a long-term crude supply agreement ("Crude Supply Agreement") with
Lagoven, S.A., now known as PDVSA Petroleo y Gas, S.A. ("PDVSA Oil"), an
affiliate of CITGO. Under the Crude Supply Agreement, LCR is required to
purchase, and PDVSA Oil is required to sell, up to 230,000 barrels per day of
extra heavy Venezuelan crude oil. PDVSA Oil has the right, but not the
obligation, to supply incremental amounts above 230,000 barrels per day. The
Crude Supply Agreement incorporates formula prices to be paid by LCR for the
crude oil supplied based on the market value of a slate of refined products
deemed to be produced from each particular crude oil or feedstock, less: (i)
certain deemed refining costs, adjustable for inflation and energy costs; (ii)
certain actual costs; and (iii) a deemed margin, which varies according to the
grade of crude oil or other feedstock delivered. Deemed margins and deemed
costs are adjusted periodically. These adjustments are based upon inflation
rates and energy costs, however, deemed margin adjustments can be less than the
rate of inflation. Because deemed operating costs and the slate of refined
products deemed to be produced for a given barrel of crude oil or other
feedstock do not necessarily reflect the actual costs and yields in any period
and also because the market value of the refined products used in the pricing
formula does not necessarily reflect the actual price received for the refined
products, the actual refining margin earned by LCR under the Crude Supply
Agreement will vary depending upon, among other things, the efficiency with
which LCR conducts its operations during such period.
Despite the limitations discussed above, the Crude Supply Agreement reduces
the volatility of earnings and cash flow of the refining operations of LCR
irrespective of market fluctuations of either crude oil or refined products.
Specifically, if the market value of refined products deemed to be produced
from the Venezuelan crude oil increases, the deemed cost of crude oil to LCR
will also increase. Alternatively, if the market value of refined products
deemed to be produced from the Venezuelan crude oil decreases, the deemed cost
of crude oil to LCR will also decrease. This results in relatively stable
deemed margins, regardless of refined products market volatility. If the actual
yields, costs or volumes, differ substantially from those contemplated by the
Crude Supply Agreement, the benefits of this agreement to LCR could be
substantially different than anticipated.
In addition, under the terms of a long-term product sales agreement
("Products Agreement"), CITGO purchases substantially all of the refined
products produced at the Refinery. Both PDVSA Oil and CITGO are direct or
indirect, wholly-owned subsidiaries of Petroleos de Venezuela, S.A., the
national oil company of the Republic of Venezuela.
Under the terms of the Limited Partnership Agreement of LYONDELL-CITGO
Refining LP, CITGO has a one-time option to increase its participation interest
in LCR up to 50 percent by making an additional equity contribution after
January 1, 2000, but not later than September 30, 2000.
6. Equity Interest in Lyondell Methanol Company, L.P.
Lyondell Methanol was formed in December 1996 by the Company and MCN
Investment Corporation ("MCNIC") to own and operate the methanol facility at
the Company's Channelview, Texas facility. At formation, the Company sold an
undivided 25 percent interest in the facility to MCNIC, creating Lyondell
Methanol, a Texas limited partnership owned by subsidiaries of the Company and
MCNIC. The Company owns the remaining 75 percent interest and serves as
managing partner. Since December 1, 1997, Equistar has served as operator of
the methanol facility. Lyondell Methanol sells all of its products to Equistar.
15
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In accordance with the guidance in Emerging Issues Task Force Issue No. 96-16
issued in May 1997, the Company began to account for its investment in Lyondell
Methanol using the equity method of accounting, effective January 1, 1998.
During 1998 and 1997, Lyondell Methanol revenues were $104 million and $165
million and net income was $8 million and $58 million, respectively.
7. Unusual Charges
During 1998, the Company wrote off $57 million of costs assigned to purchased
in-process research and development in connection with the Acquired Business.
The Company's pro rata share of Equistar's unusual charges for 1998 and 1997
was $15 million and $24 million, respectively, and consisted primarily of costs
associated with the consolidation of certain operations. These costs were paid
by Equistar and allocated to the Partners in accordance with their ownership
percentages. Lyondell's pro rata share of LCR's unusual charges related to a
new agreement with LCR's labor union. Additionally, related to the formation of
Equistar, Lyondell incurred unusual charges in 1998 and 1997 related to the
early termination of incentive compensation plans and executive severance.
The unusual charges consisted of the following items for the years ended
December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Purchased in-process research and development................... $57 $--
Lyondell's pro rata share of Equistar unusual charges........... 15 24
Lyondell's pro rata share of LCR unusual charges................ 6 --
Lyondell incentive compensation and executive severance......... 4 16
--- ---
Total unusual charges......................................... $82 $40
=== ===
</TABLE>
8. Income Taxes
The significant components of the provision for income taxes were as follows
for the years ended December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997 1996
------------------- ---- ---- ----
<S> <C> <C> <C>
Current
Federal............................................... $(44) $114 $ 19
Foreign............................................... 6 -- --
State................................................. (1) 13 1
---- ---- ----
Total current....................................... (39) 127 20
---- ---- ----
Deferred
Federal............................................... 69 43 48
Foreign............................................... (1) -- --
State................................................. 8 -- 2
---- ---- ----
Total deferred...................................... 76 43 50
---- ---- ----
Total provision for income taxes.................... $ 37 $170 $ 70
==== ==== ====
</TABLE>
16
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes, and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets were as follows as of
December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation and amortization................ $452 $ --
Investments in partnerships................................ 251 230
Other...................................................... 30 --
---- ----
Total deferred tax liabilities........................... 733 230
---- ----
Deferred tax assets:
Provisions for benefit plans and estimated expenses........ 236 25
Federal benefit attributable to foreign taxes.............. 100 --
Federal tax credit carryforwards........................... 57 --
Other...................................................... 30 2
---- ----
Total deferred tax assets................................ 423 27
Deferred tax asset valuation allowance..................... (27) --
---- ----
Net deferred tax assets.................................. 396 27
---- ----
Net deferred tax liabilities................................. 337 203
Less current portion of deferred tax liability (asset)....... -- (6)
---- ----
Long-term deferred income taxes............................ $337 $209
==== ====
</TABLE>
At December 31, 1998, net deferred tax assets of $76 million were classified
as "Deferred charges and other assets" on the Consolidated Balance Sheets.
Under Internal Revenue Code Sections 338 (g) and (h) (10), Lyondell and ARCO
agreed to elect to step up the U.S. tax basis of the Acquired Company's net
assets. This will result in significantly increased depreciation and
amortization deductions for U.S. tax purposes.
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to the Company's effective tax rate follows:
<TABLE>
<CAPTION>
Description 1998 1997 1996
----------- ---- ---- ----
<S> <C> <C> <C>
U.S. statutory income tax rate........................ 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Foreign and U.S. tax effects of foreign
operations....................................... 6.9 -- --
State income taxes, net of federal................ 4.9 1.8 1.2
Settlement of tax issues.......................... (5.1) -- --
Officer compensation.............................. -- .9 --
Other, net........................................ (.2) (.4) (.5)
---- ---- ----
Effective income tax rate............................. 41.5% 37.3% 35.7%
==== ==== ====
</TABLE>
17
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Related Party Transactions
Atlantic Richfield Company--Sales to ARCO, excluding sales to ARCO Chemical
Company, were $31 million in 1996. Cost of sales and selling expenses include
charges from ARCO, excluding costs to ARCO Chemical Company, of $23 million in
1996. The Company purchased 383,312 shares of its common stock held by ARCO
after the conversion of the Exchangeable Notes on September 15, 1997 at a price
of $25.66 per share. After that transaction, ARCO ceased to be a related party.
Sales by Lyondell to ARCO Chemical, an ARCO affiliate and therefore a related
party until September 1997, consisting of propylene, MTBE, benzene, ethylene,
methanol and other products and services, were $206 million and $287 million
during 1997 and 1996, respectively.
In July 1996, a fire occurred at the ARCO PipeLine Company meter station
located within the Channelview Facility. The fire forced the shutdown of the
entire Channelview Facility for several days and more than two weeks for some
units. The Company recovered lost profits from ARCO PipeLine Company for this
shutdown. The recovery was included in 1996 reported results.
10. Accounts Receivable
In December 1998, the Company entered into a three-year receivables purchase
agreement with an independent issuer of receivables-backed commercial paper.
Under the terms of the agreement, the Company agreed to sell on an ongoing
basis and without recourse, designated accounts receivable. To maintain the
balance of the accounts receivable sold, the Company is obligated to sell new
receivables as existing receivables are collected. The agreement permits the
sale of up to $175 million of accounts receivable through December 2001.
At December 31, 1998, the Company's gross accounts receivable that had been
sold to the purchasers aggregated $160 million. This amount has been reported
as operating cash flows in the Consolidated Statements of Cash Flows. Costs
related to the sale are included in "Other income (expense), net" in the
Consolidated Statements of Income.
11. Inventories
Inventories are stated at the lower of cost or market. In 1998, approximately
94 percent of inventories, excluding materials and supplies, were determined by
the last-in, first-out ("LIFO") method. Materials and supplies and other non-
LIFO inventories are valued using either the first-in, first-out ("FIFO") or
the average cost methods.
Inventories at December 31, 1998 were comprised of the following:
<TABLE>
<CAPTION>
Millions of dollars
-------------------
<S> <C>
Finished goods....................................................... $459
Work-in-process...................................................... 18
Raw materials........................................................ 34
Materials and supplies............................................... 39
----
Total inventories.................................................. $550
====
</TABLE>
As of December 31, 1997, all of Lyondell's inventories had been contributed
to Equistar.
18
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Property, Plant and Equipment, Net
The components of property, plant and equipment, at cost, and the related
accumulated depreciation were as follows at December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ------ ----
<S> <C> <C>
Land......................................................... $ 19 $ --
Manufacturing facilities and equipment....................... 4,470 138
Construction in progress..................................... 98 --
------ ----
Total property, plant and equipment........................ 4,587 138
Less accumulated depreciation................................ 76 92
------ ----
Property, plant and equipment, net......................... $4,511 $ 46
====== ====
</TABLE>
Depreciation expense for 1998, 1997 and 1996 was $75 million, $71 million and
$89 million, respectively. Approximately $32 million of interest cost during
1996 was capitalized as property, plant and equipment. No interest was
capitalized during 1998 and 1997. At December 31, 1997, the Company's
manufacturing facilities and equipment consisted of the assets owned by
Lyondell Methanol.
13. Deferred Charges and Other Assets
Deferred charges and other assets, net of accumulated amortization, were as
follows at December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Patents and licensed technology................................ $236 $ --
Company owned life insurance................................... 184 43
Contractual rights............................................. 138 --
Debt issue costs, net.......................................... 109 --
Other.......................................................... 213 4
---- ----
Total deferred charges and other assets...................... $880 $ 47
==== ====
</TABLE>
The increase in deferred charges and other assets in 1998 is primarily due to
the purchase of the Acquired Business.
14. Other Accrued Liabilities
Other accrued liabilities were as follows at December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ---- ----
<S> <C> <C>
Accrued payroll and benefits................................... $148 $ 6
Accrued contractual obligations................................ 139 --
Accrued interest............................................... 55 2
Accrued taxes other than income................................ 49 11
Other.......................................................... 90 5
---- ----
Total other accrued liabilities.............................. $481 $ 24
==== ====
</TABLE>
19
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Pension and Other Postretirement Benefits
The Company provides defined pension and postretirement benefit plans to
employees. The following table provides a reconciliation of benefit
obligations, plan assets and the funded status of the plans:
<TABLE>
<CAPTION>
Other
Pension Postretirement
Benefits Benefits
---------- ----------------
Millions of dollars 1998 1997 1998 1997
- ------------------- ---- ---- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, January 1.................. $136 $118 $ 5 $ 25
Service cost................................... 7 6 1 3
Interest cost.................................. 18 10 2 2
Plan amendments................................ -- -- -- (18)
Actuarial loss................................. 42 21 5 5
Effect of settlement........................... 10 (9) -- --
Acquisition of ARCO Chemical................... 303 -- 61 --
Transfer to Equistar........................... -- -- -- (12)
Benefits paid.................................. (29) (10) (1) --
---- ---- ------- -------
Benefit obligation, December 31................ 487 136 73 5
---- ---- ------- -------
Change in plan assets:
Fair value of plan assets, January 1........... 103 90 -- --
Actual return of plan assets................... 11 14 -- --
Company contributions.......................... 12 9 1 --
Acquisition of ARCO Chemical................... 351 -- -- --
Benefits paid.................................. (29) (10) (1) --
---- ---- ------- -------
Fair value of plan assets, December 31......... 448 103 -- --
---- ---- ------- -------
Funded status.................................. (39) (33) (73) (5)
Unrecognized actuarial loss.................... 70 21 8 4
Unrecognized prior service cost................ 6 3 (18) (20)
Unrecognized transition obligation (asset)..... 5 (2) -- --
---- ---- ------- -------
Net amount recognized.......................... $ 42 $(11) $ (83) $ (21)
==== ==== ======= =======
Amounts recognized in the Consolidated Balance
Sheets consist of:
Prepaid benefit cost........................... $ 54 $ -- $ -- $ --
Accrued benefit liability...................... (12) (11) (83) (21)
---- ---- ------- -------
Net amount recognized.......................... $ 42 $(11) $ (83) $ (21)
==== ==== ======= =======
</TABLE>
The above table for pension benefits includes foreign pension plans of ARCO
Chemical. These plans constituted approximately 20 percent of the benefit
obligation and 23 percent of the plan assets at December 31, 1998. The
assumptions used in determining the net periodic pension cost and pension
obligation for foreign pension plans were based on the economic environment of
each applicable country.
The benefit obligation and accumulated benefit obligation for pension plans
with accumulated benefit obligations in excess of plan assets were $19 million
and $11 million, respectively, as of December 31, 1998 and $11 million and $7
million, respectively, as of December 31, 1997. These plans are not funded and
consisted primarily of supplementary benefit plans for executives and
expatriates.
In connection with the formation of Equistar, pension obligations and assets
were not contributed by Lyondell to Equistar. The employees transferred to
Equistar became fully vested in the Lyondell pension plan effective December 1,
1997 and no longer accrue pension service with Lyondell. However, an accrued
20
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
postretirement benefit obligation of $12 million associated with Lyondell
employees transferred to Equistar was contributed to Equistar by Lyondell.
Net periodic pension and other postretirement benefit costs included the
following components:
<TABLE>
<CAPTION>
Other
Pension Postretirement
Millions of dollars Benefits Benefits
- ------------------------------------------------ ---------------- ---------------
1998 1997 1996 1998 1997 1996
Components of net periodic benefit cost: ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost................................... $ 7 $ 6 $ 10 $ 1 $ 3 $ 4
Interest cost.................................. 19 10 12 2 2 4
Expected return of plan assets................. (24) (8) (10) -- -- --
Prior service cost amortization................ -- -- -- (1) -- --
Actuarial loss amortization.................... 1 1 1 -- -- --
Transition obligation amortization............. -- -- 1 -- -- --
---- --- ---- --- --- ---
Net periodic benefit cost before settlement.... 3 9 14 2 5 8
Effect of settlement........................... 2 -- -- -- -- --
---- --- ---- --- --- ---
Net periodic benefit cost after settlement..... $ 5 $ 9 $ 14 $ 2 $ 5 $ 8
==== === ==== === === ===
</TABLE>
The above net periodic benefit costs included eleven months of 1997 and the
full-year 1996 costs of the business contributed to Equistar on December 1,
1997, as well as the 1996 net periodic benefit costs of LCR.
<TABLE>
<CAPTION>
Other
Pension Postretirement
Benefits Benefits
---------------- ----------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions as of
December 31:
Discount rate............................ 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected return on plan assets........... 9.50% 9.50% 9.50% -- -- --
Rate of compensation increase............ 4.75% 4.75% 5.00% 4.75% 4.75% 5.00%
</TABLE>
For measurement purposes, the assumed annual rate of increase in the per
capita cost of covered health care benefits as of December 31, 1998 was 7.0
percent for 1999-2001 and 5.0 percent thereafter. A one-percentage-point
increase in assumed health care cost trend rates would increase the
postretirement benefit obligation by $10 million, while a one-percentage-point
decrease would reduce the obligation by $8 million. The effect of a one-
percentage-point change would be less than $1 million on the total of the
service and interest cost components.
16. Long-Term Debt and Financing Arrangements
In connection with its purchase of the Acquired Business, the Company
executed a bank credit agreement providing for aggregate borrowings of up to
$7.0 billion ("Credit Facility"). As part of the acquisition, the Company
assumed approximately $870 million of ARCO Chemical debt. Borrowings under the
Credit Facility of $6.5 billion were used for: (i) the purchase of
approximately 97.4 million shares of ARCO Chemical common stock; (ii) repayment
of debt, including the $345 million term note payable to Equistar, short-term
borrowings of Lyondell and ARCO Chemical and other long-term borrowings of ARCO
Chemical; and (iii) payment of certain debt issuance costs.
The Credit Facility comprises: (i) a five-year revolving credit facility of
up to $500 million to be used for general corporate purposes ("Revolving Credit
Facility"); and (ii) four separate term loans ("Term Loans") in the amounts of:
(a) $2.0 billion ("Term Loan A") to be amortized over five years; (b) $1.25
billion ("Term Loan B") to be amortized over seven years; (c) $1.25 billion
with principal maturing on June 30, 1999 ("Term Loan C"); and (d) $2.0 billion
with principal maturing on June 30, 2000 ("Term Loan D"). All of the Term Loans
were funded on July 28, 1998. No amounts have been funded to date under the
Revolving Credit
21
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Facility. The Credit Facility is collateralized by cash flow streams from the
Company's three joint ventures and the Company's common stock ownership in its
subsidiaries.
The Term Loans bear interest at the following rates: (i) Term Loan A--LIBOR
plus 2.0 percent; (ii) Term Loan B--LIBOR plus 2.5 percent; (iii) Term Loan C--
LIBOR plus 2.0 percent; and (iv) Term Loan D--LIBOR plus 2.0 percent.
Mandatory prepayments from certain sources of funds are required with respect
to the Term Loans until such time as: (i) Term Loans C and D are repaid in
full, including accrued interest and fees thereon; and (ii) Lyondell has
achieved investment grade ratings of at least BBB- and Baa3 from Standard &
Poor's Ratings Services and Moody's Investors Service, Inc., respectively. The
sources of funds for mandatory prepayments include: (i) cash proceeds received
from or as a result of: (a) certain equity or debt issuances; (b) the
recapitalization of LCR; and (c) asset sales, as defined; and (ii) 50 percent
of annual excess cash flow, as defined, less the aggregate principal amount
prepaid under the Term Loans.
Under the covenant provisions of the Credit Facility, the Company has agreed
to, among other things: (i) maintain certain specified financial ratios and
consolidated net worth (as defined in the Credit Facility); (ii) refrain from
making certain distributions with respect to Lyondell's common stock; (iii)
refrain from making certain investments, as defined; (iv) refrain from allowing
its subsidiaries to incur certain types and amounts of debt; and (v) use its
best efforts to maintain certain ownership interests in its joint ventures and
to ensure that the joint ventures maintain certain capital expenditure, debt
level and cash distribution policies. The Credit Facility requires the Company,
among other things, to issue $1.25 billion of equity, as defined, by July 23,
1999. The breach of any of the covenants or financial requirements in the
Credit Facility could result in a default thereunder, which would permit the
lenders to declare the loans immediately payable and to terminate future
lending commitments. The Company intends to seek an amendment to the Credit
Facility that would, among other things, substantially reduce the requirements
for the sale of equity and ease the financial ratio requirements. The amendment
requires approval by lenders holding a majority of the commitments. Subject to
the foregoing, the Company intends to complete an amendment of the Credit
Facility and to effect debt and equity offerings in the second quarter of 1999,
using the proceeds to meet the June 1999 debt maturity. In addition, the
Company is actively exploring alternative means of retiring or refinancing
debt, including other financing sources, enhancement of operating cash flows
through cost reductions, management of working capital levels and sales of
assets. Accordingly, the Company believes that it will be able to satisfy its
obligations through the actions discussed above.
Long-term debt at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997
------------------- ------ ------
<S> <C> <C>
Term Loan A................................................ $1,852 $ --
Term Loan B................................................ 1,248 --
Term Loan C................................................ 1,250 --
Term Loan D................................................ 2,000 --
Debentures due 2000, 9.9%.................................. 200 --
Debentures due 2005, 9.375%................................ 100 --
Debentures due 2010, 10.25%................................ 100 --
Debentures due 2020, 9.8%.................................. 224 --
Other...................................................... 20 --
Term note to Equistar...................................... -- 345
------ ------
Total long-term debt..................................... 6,994 345
Less current maturities.................................... 1,603 --
------ ------
Long-term debt, net...................................... $5,391 $ 345
====== ======
</TABLE>
Lyondell transferred $744 million of long-term debt to Equistar on December
1, 1997 of which $713 million was outstanding at December 31, 1998. Lyondell
remains an obligor on the debt. Under certain limited circumstances the debt
holders have the right to require repurchase of up to $313 million of the debt.
22
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Aggregate maturities of all long-term debt during the next five years are
$1.6 billion in 1999, $2.6 billion in 2000, $445 million in 2001, $445 million
in 2002, $446 million in 2003, and $1.4 billion thereafter.
17. Financial Instruments
The Company does not buy or sell, or hold or issue financial instruments for
speculative trading purposes.
Foreign currency swap and forward contracts are used to minimize foreign
exchange exposures. Foreign exchange exposures result from cash flows between
U.S. and international operations and transactions denominated in currencies
other than the local currency of an operating entity. Swap contracts and
forward contracts are used to hedge foreign exchange exposures The notional
amounts of foreign currency contracts outstanding, principally involving the
Netherlands guilder, were $205 million at December 31, 1998 with various
maturity dates in 1999.
Gains and losses, realized and unrealized, on foreign currency forward and
swap contracts as well as realized and unrealized gains and losses on the
underlying exposures are recognized currently in "Other income (expense), net"
in the Consolidated Statements of Income.
During 1998, to mitigate interest rate exposure on its anticipated future
public debt issuance, the Company entered into treasury-rate lock transactions
("Treasury Locks") in the notional amount of $1 billion. The Treasury Locks,
which are based on U.S. Treasury rates have an average interest rate of 5.52
percent with a determination date of August 5, 1999. The Company's accounting
policy is to defer any gains and losses on the Treasury Locks, and recognize
them as an adjustment to interest expense over the term of the debt issued.
The fair value of the Treasury Locks at December 31, 1998 was an obligation of
approximately $53 million, resulting from a decline in the relevant U.S.
Treasury rates. Had the Company issued the anticipated fixed-rate debt as of
December 31, 1998, it would have benefited from a lower interest rate on the
debt issued, resulting in lower interest expense over the life of the debt,
that would have been an offset to the potential settlement of the Treasury
Locks.
The carrying value and the estimated fair value of the Company's financial
instruments as of December 31, 1998 are shown as assets (liabilities) in the
table below.
<TABLE>
<CAPTION>
1998
---------------
Carrying Fair
Millions of dollars Value Value
------------------- -------- ------
<S> <C> <C>
Nonderivatives:
Investments and long-term receivables.................. $1,078 $1,078
Long-term debt (including current maturities).......... 6,994 7,027
Derivatives:
Treasury locks......................................... -- (53)
Foreign currency swaps................................. (10) (11)
Foreign currency forwards.............................. (1) (1)
</TABLE>
All derivative instruments are off-balance-sheet instruments, however net
receivable or payable positions related to derivative instruments are carried
on the balance sheet.
The fair value of all nonderivative financial instruments included in
current assets and current liabilities, including cash and cash equivalents,
accounts receivable, accounts payable and notes payable, approximated their
carrying value due to their short maturity. Investments and long-term
receivables, which consist primarily of equity investments in affiliated
companies, were valued using current financial and other available
information. Based upon the borrowing rates currently available to the Company
for debt with terms and average maturities similar to the Company's debt
portfolio, the fair value of the Company's long-term debt, including amounts
due within one year, was $7.0 billion at December 31, 1998. The fair value of
derivative financial instruments represents the amount to be exchanged if the
existing contracts were settled at December 31, 1998 and are based on market
quotes.
23
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is exposed to credit risk related to its financial instruments in
the event of nonperformance by the counterparties. The Company does not
generally require collateral or other security to support these financial
instruments. The counterparties to these transactions are major institutions
deemed creditworthy by the Company. The Company does not anticipate
nonperformance by the counterparties.
For the year ended December 31, 1998, the results of foreign exchange
transactions, including foreign currency derivative instruments, were not
significant.
18. Commitments and Contingencies
The Company has commitments, including those related to capital expenditures,
all made in the normal course of business. During August 1998, as contemplated
at the time of the Acquisition, Lyondell announced the delay of construction of
a PO plant, known as PO-11, that ARCO Chemical had previously scheduled for
startup in late 2001. As part of the delay, the Company is negotiating the
cancellation of the related lump-sum contract for the engineering, procurement
and construction of the PO-11 plant. The Company recorded estimated liabilities
for penalties and cancellation charges related to the cancellation of the lump-
sum contract and related commitments at the time of the acquisition of ARCO
Chemical (see Note 3).
The Acquired Business is party to a long-term supply arrangement for toluene
diisocyanate ("TDI"). Under the arrangement, the Company is entitled to all of
the TDI output of the supplier's two plants in France, which have a combined
rated capacity of approximately 264 million pounds per year. The Company is
required to purchase a minimum of 216 million pounds of TDI per year for up to
15 years, beginning January 1, 1995. The aggregate purchase price is a
combination of plant cost and market price. The Company is further obligated to
pay additional capacity reservation fees based upon plant output factors.
Prior to the formation of Equistar on December 1, 1997, the Company was party
to various unconditional purchase obligation contracts as a purchaser of
product and services. The Company's total purchases under those agreements,
including LCR for 1996, were $27 million and $47 million in 1997 and 1996,
respectively.
Crude Supply Agreement--Depending upon market conditions, breach or
termination of LCR's Crude Supply Agreement could adversely affect LCR, and
therefore, the Company. Although the parties have negotiated alternate
arrangements in the event of a force majeure, which may arise from, among other
things, governmental or other actions restricting or otherwise limiting PDVSA
Oil's ability to perform its obligations, any such alternative arrangements may
not be as beneficial as the Crude Supply Agreement. There can be no assurance
that alternative crude oils with similar margins would be available for
purchase by LCR. Furthermore, the breach or termination of the Crude Supply
Agreement would require LCR to return to the practice of purchasing all or a
portion of its crude oil feedstocks in the merchant market and would again
subject LCR to significant volatility and price fluctuations. In late April
1998, LCR received notification from PDVSA Oil of reduced delivery of crude oil
related to announced OPEC production cuts. LCR began receiving the reduced
allocation of crude oil from PDVSA Oil in August 1998.
Cross Indemnity Agreement--In connection with the transfer of assets and
liabilities from ARCO to the Company in 1988, the Company agreed to assume
certain liabilities arising out of the operation of the Company's integrated
petrochemicals and refining business prior to July 1, 1988. In connection with
the transfer of such liabilities, the Company and ARCO entered into an
agreement, updated in 1997 ("Revised Cross-Indemnity Agreement"), whereby the
Company agreed to defend and indemnify ARCO against certain uninsured claims
and liabilities which ARCO may incur relating to the operation of the business
of the Company prior to July 1, 1988, including certain liabilities which may
arise out of pending and future lawsuits. For current and future cases related
to Company products and Company operations, ARCO and the Company bear a
proportionate share of judgment and settlement costs according to a formula
that allocates responsibility based upon years of ownership during the relevant
time period. The party with the more significant potential
24
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
liability exposure is responsible for case management and associated costs
while allowing the non-case managing party to protect its interests. Under the
Revised Cross-Indemnity Agreement, the Company will assume responsibility for
its proportionate share of future costs for waste site matters not covered by
ARCO insurance. Subject to the uncertainty inherent in all litigation,
management believes the resolution of the matters pursuant to the Revised
Cross-Indemnity Agreement will not have a material adverse effect upon the
Consolidated Financial Statements of the Company.
In connection with the Acquisition, the Company succeeded, indirectly, to a
cross indemnity agreement with ARCO whereby ARCO Chemical indemnified ARCO
against certain claims or liabilities that ARCO may incur relating to ARCO's
former ownership and operation of the businesses of ARCO Chemical ("Former ARCO
Businesses"), including liabilities under laws relating to the protection of
the environment and the workplace, and liabilities arising out of certain
litigation. As part of the agreement, ARCO indemnified ARCO Chemical with
respect to claims or liabilities and other matters of litigation not related to
the Former ARCO Businesses. ARCO also indemnified ARCO Chemical for certain
federal, foreign, state, and local taxes that might be assessed upon audit of
the operations of the Former ARCO Businesses for periods prior to July 1, 1987.
Indemnification Arrangements Relating to Equistar--Lyondell, Millennium and
Occidental have each agreed to provide certain indemnifications to Equistar
with respect to the petrochemicals and polymers businesses contributed by the
Partners. In addition, Equistar agreed to assume third party claims that are
related to certain pre-closing contingent liabilities asserted prior to
December 1, 2004 for Lyondell and Millennium, and May 15, 2005 for Occidental,
to the extent the aggregate thereof does not exceed $7 million to each Partner,
subject to certain terms of the respective Asset Contribution Agreements.
During the thirteen months ended December 31, 1998, approximately $1 million
had been expensed by Equistar under the $7 million indemnification basket with
respect to the business contributed by Lyondell.
Environmental--The Company's policy is to be in compliance with all
applicable environmental laws. The Company is subject to extensive
environmental laws and regulations concerning emissions to the air, discharges
to surface and subsurface waters and the generation, handling, storage,
transportation, treatment and disposal of waste materials. Some of these laws
and regulations are subject to varying and conflicting interpretations. In
addition, the Company cannot accurately predict future developments, such as
increasingly strict environmental laws and inspection and enforcement policies,
as well as higher compliance costs arising therefrom, which might affect the
handling, manufacture, use, emission or disposal of products, other materials
or hazardous and non-hazardous waste.
Pursuant to the terms of the Revised Cross-Indemnity Agreement, the Company
is currently contributing funds to the clean up of one waste site (Brio,
located near Houston, Texas) under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") as amended and the Superfund
Amendments and Reauthorization Act of 1986. The Company is also subject to
certain assessment and remedial actions at the Refinery under the Resource
Conservation and Recovery Act ("RCRA"). In addition, the Company has negotiated
an order with the Texas Natural Resource Conservation Commission ("TNRCC") for
assessment and remediation of groundwater and soil contamination at the
Refinery.
As of December 31, 1998, the Company has accrued $9 million related to future
CERCLA, RCRA and TNRCC assessment and remediation costs associated with the
above mentioned sites. The costs are expected to be incurred over the next two
to seven years. In the opinion of management, there is currently no material
range of loss in excess of the amount recorded for these sites. However, it is
possible that new information about the sites for which the reserve has been
established, new technology or future developments such as involvement in other
CERCLA, RCRA, TNRCC or other comparable state law investigations, could require
the Company to reassess its potential exposure related to environmental
matters.
25
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As part of the Acquisition (see Note 3), the Company assumed ARCO Chemical's
environmental liability, which totaled $39 million at December 31, 1998 and
reflects the Company's latest assessment of potential future remediation costs
associated with known ARCO Chemical sites. The liability is related to four
current plant sites, one former plant site and one federal Superfund site for
amounts ranging from $2 million to $18 million per site. Further, the Acquired
Business is involved in administrative proceedings or lawsuits relating to a
minimal number of other Superfund sites. The Company estimates however, based
upon currently available information, that potential loss contingencies
associated with these sites, individually and in the aggregate, are not
significant. Substantially all amounts accrued are expected to be paid out over
the next five to ten years.
The Company has relied upon remedial investigation/feasibility studies
("RI/FS") at each site of the Acquired Business as a basis for estimating
remediation costs at the site. RI/FS or preliminary assessments have been
completed at most of the sites. However, selection of the remediation method
and the cleanup standard to be applied are, in most cases, subject to approval
by the appropriate government authority. Accordingly, the Company may have
possible loss contingencies in excess of the amounts accrued to the extent the
scope of remediation required, the final remediation method selected and/or the
cleanup standard applied, vary from the assumptions used in estimating the
liability. The Company estimates that the upper range of these possible loss
contingencies should not exceed the amount accrued by more than $65 million.
During July 1994, the Company reported results of an independent
investigation conducted by the Audit Committee of the Board of Directors
regarding the compliance status of two process waste-water streams under the
applicable Benzene National Emissions Standard for Hazardous Air Pollutants
("NESHAPS") regulations and certain issues raised by an employee. The Company
has been informed that this matter is considered closed by the EPA and no
further enforcement action is anticipated.
The extent of loss related to environmental matters ultimately depends upon a
number of factors, including technological developments, changes in
environmental laws, the number and ability to pay of other parties involved at
a particular site and the Company's potential involvement in additional
environmental assessments and cleanups. Based upon currently known facts,
management believes that any remediation costs the Company may incur in excess
of the amounts accrued or disclosed above would not have a material adverse
impact on the Company's Consolidated Financial Statements.
MTBE--Certain federal and state legislative initiatives have sought to either
rescind the oxygenate requirement for reformulated gasoline sold in California
and other states or restrict the use of MTBE. There is ongoing review of this
issue and the ultimate resolution of the appropriateness of using MTBE could
result in a significant reduction in the Company's MTBE sales. In addition, the
Company has a take-or-pay contract with ARCO, which contributes significant
pretax margin. If such legislative initiatives were enacted, ARCO has indicated
that it might attempt to invoke a force majeure provision in the contract in
order to reduce the quantities of MTBE it purchases under, or to terminate, the
contract. The Company would vigorously dispute such action.
General--The Company is involved in various lawsuits and proceedings. Subject
to the uncertainty inherent in all litigation, management believes the
resolution of these proceedings will not have a material adverse effect upon
the Consolidated Financial Statements of the Company.
In the opinion of management, any liability arising from the matters
discussed in this Note is not expected to have a material adverse effect on the
Consolidated Financial Statements of the Company. However, the adverse
resolution in any reporting period of one or more of these matters discussed in
this Note could have a material impact on the Company's results of operations
for that period without giving effect to contribution or indemnification
obligations of co-defendants or others, or to the effect of any insurance
coverage that may be available to offset the effects of any such award.
26
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. Lease Commitments
The Company leases various facilities and equipment under noncancelable lease
arrangements for varying periods. As of December 31, 1998, future minimum lease
payments for years ending December 31, relating to all noncancelable operating
leases with lease terms in excess of one year were as follows:
<TABLE>
<CAPTION>
Millions of dollars
-------------------
<S> <C>
1999................................................................ $ 52
2000................................................................ 42
2001................................................................ 38
2002................................................................ 33
2003................................................................ 26
Thereafter.......................................................... 310
----
Total minimum lease payments...................................... $501
====
</TABLE>
Operating lease net rental expenses for 1998, 1997 and 1996, including
Lyondell Methanol for 1997 and LCR for 1996, were $39 million, $43 million and
$66 million, respectively.
20. Stockholders' Equity
Dividends--During 1998, 1997 and 1996, the Company paid regular quarterly
dividends of $.225 per share on common stock outstanding.
Basic and Diluted Earnings per Share--Basic earnings per share for all
periods presented are computed based upon the weighted average number of shares
outstanding for the periods. Diluted earnings per share include the effect of
outstanding stock options issued under the Executive Long-Term Incentive Plan
and the Incentive Stock Option Plan. The following earnings per share ("EPS")
data is presented for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ------------
Thousands of shares Shares EPS Shares EPS Shares EPS
- ------------------- ------ ---- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Basic.................................... 77,669 $.67 79,796 $3.58 80,000 $1.58
Dilutive effect of options............... 30 -- 17 -- 45 --
------ ---- ------ ----- ------ -----
Diluted.................................. 77,699 $.67 79,813 $3.58 80,045 $1.58
====== ==== ====== ===== ====== =====
</TABLE>
Treasury Stock--From time to time the Company purchases its shares in the
open market to be used for issuances under the Company's employee compensation
and benefits plans, including stock option and restricted stock plans. During
1998, the Company purchased 500,000 shares for approximately $10 million to be
used for such plans. The Company reissued, under the Restricted Stock Plan,
88,848 shares previously purchased. Earlier in 1998, the Company completed the
stock repurchase program authorized by the Company's Board of Directors in
September 1997. A total of 2,567,051 shares were purchased for $75 million
under this stock repurchase program.
Restricted Stock Plan--During 1998 the Company granted and issued 88,848
shares of restricted stock to employees of the Acquired Business. The shares
vest on various dates through December 15, 2000, depending upon the terms of
the individual grants. Employees are entitled to receive dividends on the
restricted shares.
Rights to Purchase Common Stock--On December 8, 1995, the Board of Directors
of Lyondell declared a dividend of one right ("Right") for each outstanding
share of the Company's common stock to stockholders of record on December 20,
1995. The Rights become exercisable upon the earlier of: (i) ten days following
a
27
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
public announcement by another entity that it has acquired beneficial ownership
of 15 percent or more of the outstanding shares of common stock; or (ii) ten
business days following the commencement of a tender offer or exchange offer to
acquire beneficial ownership of 15 percent or more of the outstanding shares of
common stock, except under certain circumstances. The Rights expire at the
close of business on December 8, 2005 unless earlier redeemed at a price of
$.0005 per Right or exchanged by the Company as described in the Rights
Agreement dated as of December 8, 1995.
Preferred Stock--The Company has authorized 80,000,000 shares of preferred
stock, $.01 par value, of which none were issued or outstanding at December 31,
1998.
Stock Options--The Company's Executive Long-Term Incentive Plan ("LTI Plan")
became effective in November 1988. The last stock options granted under the LTI
Plan were granted in March 1994. No additional stock option grants will be made
under this plan. The LTI Plan provided, among other compensation awards, for
the granting to officers and other key management employees of non-qualified
stock options for the purchase of up to 1,295,000 shares of the Company's
common stock. The number of options exercisable each year is equal to 25
percent of the number granted after each year of continuous service starting
one year from the date of grant. The LTI Plan provided that the option price
per share was not less than 100 percent of the fair market value of the stock
on the effective date of the grant. As of December 31, 1998, options covering
621,835 shares were outstanding under the LTI Plan with a weighted average
remaining life of 4 years, all of which were exercisable at prices ranging from
$18.25 to $30.00 per share. The following summarizes stock option activity for
the LTI Plan:
<TABLE>
<CAPTION>
Number Average
of Option Price
Shares Per Share
-------- ------------
<S> <C> <C>
Balance, January 1, 1996................................. 948,256 $23.26
Exercised.............................................. (204,454) 22.64
--------
Balance, December 31, 1996............................... 743,802 23.43
Exercised.............................................. (11,642) 19.15
--------
Balance, December 31, 1997............................... 732,160 23.50
Exercised.............................................. (110,325) 22.84
--------
Balance, December 31, 1998............................... 621,835 23.62
========
</TABLE>
28
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's Incentive Stock Option Plan ("ISO Plan"), a tax qualified plan,
became effective in January 1989. The last stock options granted under the ISO
Plan were granted in March 1993. No additional grants will be made under the
ISO Plan. All employees of the Company who were not on the executive payroll
were eligible to participate in the ISO Plan, subject to certain restrictions.
Various restrictions apply as to when and to the number of stock options that
may be exercised during any year. As of December 31, 1998, options covering
145,191 shares were outstanding at $30.00 per share. These options were held by
641 eligible employees and expired in January 1999. At December 31, 1998, no
stock options were exercisable. The following summarizes stock option activity
for the ISO Plan:
<TABLE>
<CAPTION>
Number Average
of Option Price
Shares Per Share
------- ------------
<S> <C> <C>
Balance, January 1, 1996.................................. 189,553 $29.64
Canceled/forfeited...................................... (10,303) 28.51
Exercised............................................... (3,446) 19.44
-------
Balance, December 31, 1996................................ 175,804 29.91
Canceled/forfeited...................................... (18,250) 29.68
Exercised............................................... (803) 19.44
-------
Balance, December 31, 1997................................ 156,751 29.99
Canceled/forfeited...................................... (11,408) 30.00
Exercised............................................... (152) 19.44
-------
Balance, December 31, 1998................................ 145,191 30.00
=======
</TABLE>
Employee stock options are accounted for under the intrinsic value based
method prescribed by the Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Accordingly, no compensation cost has been
recognized in connection with stock option grants under the plans. There were
no grants in any of the years ended December 31, 1998, 1997 and 1996.
21. Supplemental Cash Flow Information
Supplemental cash flow information is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997 1996
------------------- ---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest:
Paid.................................................... $230 $ 66 $103
Less amount capitalized................................. -- -- 32
---- ---- ----
Net.................................................... $230 $ 66 $ 71
==== ==== ====
Income taxes............................................. $ 63 $125 $ 42
==== ==== ====
</TABLE>
The petrochemicals and polymers businesses contributed by the Company to
Equistar on December 1, 1997 included non-cash net assets with a net book value
of $762 million, including $381 million of accounts receivable, $233 million of
inventory, $826 million of net property, plant and equipment and $745 million
of long-term debt, including the current maturities. In addition, the Company
contributed a $345 million term note payable to Equistar, which was repaid in
July 1998.
29
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
22. Segment and Related Information
Using the guidelines set forth in SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, the Company has identified four
reportable segments in which it operates. The reportable segments are: (i)
intermediate chemicals and derivatives; (ii) petrochemicals; (iii) polymers;
and (iv) refining. The accounting policies of the segments are the same as
those described in the Summary of Significant Accounting Policies (see Note 2).
The methanol segment is not a reportable segment. The reportable segments are
described further below:
Intermediate Chemicals and Derivatives--This segment consists of the
production and marketing of propylene oxide ("PO"), polyether polyols,
propylene glycol, propylene glycol ethers, toluene diisocyanate ("TDI"),
styrene monomer ("SM") and methyl tertiary butyl ether ("MTBE").
Petrochemicals--This segment consists of operations in: olefins, including
ethylene, propylene, butadiene, butylenes and specialty products; aromatics,
including benzene and toluene; methanol; oxygenated chemicals, including
ethylene oxide and derivatives, MTBE, ethyl alcohol and diethyl ether; and
specialty chemicals, including refinery blending stocks. The petrochemicals
business of Equistar for 1998 and December 1997 is included in this segment.
Polymers--This segment consists of operations in: polyolefins, including high
density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear low
density polyethylene ("LLDPE") and polypropylene; and performance polymers
products, including color concentrates and compounds, wire and cable resins and
compounds, adhesive resins, and fine powders. The polymers business of Equistar
for 1998 and December 1997 is included in this segment.
Refining--This segment, which is comprised of LCR operations, consists of:
refined petroleum products, including conventional and reformulated gasoline,
low sulfur diesel and jet fuel; aromatics produced at the Refinery, including
benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial
lubricants, motor oils, white oils, process oils and base oils; carbon black
oil; sulfur; residual oil; petroleum coke fuel; olefins feedstocks; and crude
oil resales.
No customer accounted for 10 percent or more of consolidated sales during
1998, 1997 or 1996, other than CITGO during 1996, which purchased substantially
all of the refined products produced at the LCR Refinery under the Products
Agreement (see Note 5). Under the terms of that agreement, CITGO continues to
purchase a substantial portion of the output of the Refining segment.
30
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized financial information concerning the Company's reportable segments
is shown in the following table. The table includes certain reclassifications
for an intersegment pricing adjustment recorded in 1996. Intersegment sales
from the petrochemicals segment to the polymers segment in 1997 and 1996
include ethylene and propylene produced at Equistar's Channelview facility.
Intersegment sales between the petrochemicals and refining segments in 1997 and
1996 include olefins feedstocks and benzene produced at the Refinery, and
gasoline blending stocks and hydrogen produced at Equistar's Channelview
facility. Intersegment sales were made at prices based upon current market
values.
<TABLE>
<CAPTION>
Intermediate
Chemicals
and
Millions of dollars Derivatives Petrochemicals Polymers Refining Other Total
- ------------------- ------------ -------------- -------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
1998
Sales and other
operating revenues..... $1,447 $1,447
Income from equity
investments before
unusual charges........ -- $ 159 $ 89 $ 116 $(108) 256
Unusual charges......... 57 -- -- 6 19 82
Operating income........ 108 159 89 110 (127) 339
Total assets............ 8,200 297 201 315 212 9,225
Capital expenditures.... 64 -- -- -- -- 64
Depreciation and
amortization expense... 138 -- -- -- -- 138
1997
Sales and other
operating revenues:
Customers............. $2,108 $770 $2,878
Intersegment.......... 424 -- $(424) --
Income from equity
investments before
unusual charges........ 28 13 $ 102 (11) 132
Unusual charges......... -- -- -- 40 40
Operating income........ 472 95 102 (135) 534
Total assets............ 447 349 300 463 1,559
Capital expenditures.... 27 13 -- 9 49
Depreciation and
amortization expense... 50 29 -- 5 84
1996
Sales and other
operating revenues:
Customers............. $1,628 $783 $2,641 $5,052
Intersegment.......... 665 -- 171 $(836) --
Operating income........ 240 97 1 (60) 278
Total assets............ 870 624 1,706 76 3,276
Capital expenditures.... 57 20 529 3 609
Depreciation and
amortization expense... 44 29 34 3 110
</TABLE>
31
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the details of "Other" operating income as
presented above for the years ended December 31:
<TABLE>
<CAPTION>
Millions of dollars 1998 1997 1996
------------------- ----- ----- -----
<S> <C> <C> <C>
Expenses, principally Equistar selling, general and
administrative, not allocated to petrochemicals and
polymers segments..................................... $(114) $ (95) $ (60)
Income from equity investment in Lyondell Methanol
Company, L.P.......................................... 6 -- --
Unallocated unusual charges............................ (19) (40) --
----- ----- -----
Total................................................ $(127) $(135) $ (60)
===== ===== =====
</TABLE>
The following "Sales and other operating revenues" by country data are based
upon the location of the use of the product. Long-lived assets by country data
are based upon the location of the assets. The data are for the five months
ended and as of December 31, 1998, respectively:
<TABLE>
<CAPTION>
Sales and
Other
Operating Long-Lived
Millions of dollars Revenues Assets
------------------- --------- ----------
<S> <C> <C>
United States........................................ $ 724 $3,046
Foreign.............................................. 723 1,465
------ ------
Total.............................................. $1,447 $4,511
====== ======
</TABLE>
Foreign long-lived assets primarily consist of the net property, plant and
equipment of two plants, located in Rotterdam, The Netherlands, and Fos-sur-
Mer, France, both of which are part of the intermediate chemicals and
derivatives segment. Prior to the purchase of the Acquired Business as of July
28, 1998, the Company did not have operations outside the United States and
export sales were not significant.
23. Unaudited Quarterly Results
<TABLE>
<CAPTION>
For the quarter ended
-----------------------------
March June September December
Millions of dollars, except per share data 31 30 30 31
- ------------------------------------------ ----- ---- --------- --------
<S> <C> <C> <C> <C>
1998
Sales and other operating revenues............... $ -- $ -- $566 $881
Income from equity investments................... 120 53 61 22
Operating income................................. 107 45 87 100
Income (loss) before income taxes................ 104 47 (24) (38)
Net income (loss)................................ 65 29 (15) (27)
Basic and diluted earnings (loss) per share...... .82 .38 (.20) (.35)
1997
Sales and other operating revenues............... $755 $789 $799 $535
Income from equity investments................... 6 21 29 76
Operating income................................. 85 167 182 100
Income before income taxes....................... 63 146 162 85
Net income....................................... 40 93 102 51
Basic and diluted earnings per share............. .50 1.17 1.27 .64
</TABLE>
- --------
Earnings per common share calculations for each of the quarters are based upon
the weighted average number of shares outstanding for each period (basic
earnings per share). The sum of the quarters may not necessarily be equal to
the full year earnings per share amount.
32
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
24. Supplemental Guarantor Information
Lyondell Chemical Worldwide, Inc. ("LCWI") and Lyondell Chemical Nederland,
Ltd. ("LCNL") (collectively, the "Guarantors") are each Delaware corporations
and direct or indirect subsidiaries of Lyondell. 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 Nederlands. These subsidiaries
may be guarantors of debt securities anticipated to be registered by Lyondell
during 1999. LCWI and LCNL are also guarantors under Lyondell's Credit Facility.
Separate financial statements of the Guarantors are not considered to be
material to the holders of the proposed debt securities. The following condensed
consolidating financial information as of and for the year ended December 31,
1998 presents supplemental information for the Guarantors.
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
(Millions of Dollars)
<TABLE>
<CAPTION>
Non- Consolidated
Lyondell Guarantors Guarantors Eliminations Lyondell
-------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
Total current assets $ 281 $ 1,035 $ 10 $ -- $1,326
Property, plant and equipment, net 4,511 4,511
Other Investments and long-term receivables 6,231 53 1,018 (6,224) 1,078
Goodwill, net 1,430 1,430
Deferred charges and other assets 204 676 880
-------- ------------- ---------- ------------ ------------
Total assets $6,716 $7,705 $1,028 $(6,224) $9,225
======== ============= ========== ============ ============
Current maturities of long-term debt $1,586 $ 17 $ -- $ -- $1,603
Other current liabilities 49 685 734
Long-term debt 4,763 628 5,391
Other liabilities and deferred credits 60 234 294
Deferred income taxes (27) 190 250 413
Intercompany liabilities (assets) (382) 150 232 --
Minority interest 216 216
Stockholders' equity 667 5,585 546 (6,224) 574
-------- ------------- ---------- ------------ ------------
Total liabilities and stockholders' equity $6,716 $7,705 $1,028 $(6,224) $9,225
======== ============= ========== ============ ============
INCOME STATEMENT
Sales and other operating revenues $ -- $1,447 $ -- $ -- $1,447
Cost of sales 1,089 1,089
Selling, general and administrative expenses 22 104 126
Research and development 26 26
Amortization of goodwill and other intangible assets 41 41
Unusual charges 3 57 22 82
-------- ------------- ---------- ------------ ------------
Operating income (25) 130 (22) 83
Income from equity investments -- -- 256 256
Interest expense, net (241) (21) (262)
Intercompany income (expense) 228 (215) (13) --
Other income (expense), net 209 (2) (195) 12
Provision for income taxes 9 31 (77) (37)
-------- ------------- ---------- ------------ ------------
Net income $ 180 $ (77) $ 144 $ (195) $ 52
======== ============= ========== ============ ============
</TABLE>
33
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
Non- Consolidated
Lyondell Guarantors Guarantors Eliminations Lyondell
-------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOWS
Net income $ 180 $ (77) $ 144 $ (195) $ 52
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 23 115 138
Unusual charges 57 57
Deferred income taxes 2 61 13 76
Changes in working capital and other (359) 202 97 (60)
-------- ------------- ---------- ------------ ------------
Net cash provided by (used in) operating activities (154) 358 254 (195) 263
Acquisition of ARCO Chemical Company, net of
cash required (5,869) (5,869)
Expenditures for property, plant and equipment (64) (64)
Contributions and advances of affiliate 9 (44) (35)
Distributions from affiliate in excess of earnings 105 435 (105) 435
Deconsolidation of affiliate (11) (11)
-------- ------------- ---------- ------------ ------------
Net cash provided by (used in) investing
activities (5,755) (64) 380 (105) (5,544)
Proceeds from issuance of long-term debt 6,500 6,500
Payment of debt issuance costs (130) (130)
Net decrease in short-term debt (100) (100)
Repayments of long-term debt (151) (219) (345) (715)
Repurchase of common stock (59) (59)
Dividends paid (70) (300) 300 (70)
-------- ------------- ---------- ------------ ------------
Net cash provided by (used in) financing activities 5,990 (219) (645) 300 5,426
Effect of exchange rate changes on cash 2 2
-------- ------------- ---------- ------------ ------------
Increase (decrease) in cash and cash equivalents 81 77 (11) -- 147
Cash and cash equivalents, beginning of year 75 -- 11 86
-------- ------------- ---------- ------------ ------------
Cash and cash equivalents, end of year $ 156 $ 77 $ -- $ -- $ 233
======== ============= ========== ============ ============
</TABLE>
34
