<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from..........to.......
Commission file number 1-10145
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LYONDELL CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
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Delaware 95-4160558
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1221 McKinney Street, 77010
Suite 700, Houston, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 652-7200
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x NO __
Number of shares of Common Stock, $1.00 par value, outstanding as of
March 31, 2000: 117,555,971
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<PAGE>
PART I. FINANCIAL INFORMATION
LYONDELL CHEMICAL COMPANY
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------------------------
<S> <C> <C>
Millions of dollars, except per share data 2000 1999
- ------------------------------------------ -------------------- -----------------
SALES AND OTHER OPERATING REVENUES $1,136 $ 855
OPERATING COSTS AND EXPENSES:
Cost of sales 952 630
Selling, general and administrative expenses 55 57
Research and development expense 14 15
Amortization of goodwill and other intangibles 28 24
------- -----
1,049 726
------- -----
Operating income 87 129
Interest expense (165) (146)
Interest income 8 6
Other expense, net (5) (7)
Gain on sale of assets 544 - -
------- -----
Income (loss) before equity investments,
income taxes and extraordinary item 469 (18)
------- -----
INCOME (LOSS) FROM EQUITY INVESTMENTS:
Equistar Chemicals, LP 33 13
LYONDELL-CITGO Refining LP 16 11
Other 1 (3)
------- -----
50 21
------- -----
Income before income
taxes and extraordinary item 519 3
Provision for income taxes 202 1
------- -----
Income before extraordinary item 317 2
Extraordinary loss on extinguishment
of debt, net of income taxes (11) - -
------- -----
NET INCOME $ 306 $ 2
======= =====
BASIC AND DILUTED EARNINGS PER SHARE:
Income before extraordinary item $2.69 $.02
Extraordinary loss (.09) - -
------- -----
Net income $2.60 $.02
======= =====
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
Millions of dollars, except par value data 2000 1999
- ------------------------------------------ ------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,630 $ 307
Accounts receivable, net 426 566
Inventories 374 519
Prepaid expenses and other current assets 117 114
Deferred tax assets 110 380
------ ------
Total current assets 2,657 1,886
Property, plant and equipment, net 2,499 4,291
Investments and long-term receivables:
Investment in PO joint ventures 667 - -
Investment in Equistar Chemicals, LP 645 607
Receivable from LYONDELL-CITGO Refining LP 223 219
Investment in LYONDELL-CITGO Refining LP 35 52
Other investments and long-term receivables 122 137
Goodwill, net 1,179 1,545
Deferred charges and other assets 629 761
------ ------
Total assets $8,656 $9,498
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 379 $ 350
Current maturities of long-term debt 220 225
Other accrued liabilities 762 446
------ ------
Total current liabilities 1,361 1,021
Long-term debt, less current maturities 5,047 6,046
Other liabilities and deferred credits 383 331
Deferred income taxes 537 891
Commitments and contingencies
Minority interest 169 202
Stockholders' equity:
Preferred stock, $.01 par value, 80,000,000 shares
authorized, none outstanding - - - -
Common stock, $1.00 par value, 250,000,000 shares
authorized, 120,250,000 issued 120 120
Additional paid-in capital 854 854
Retained earnings 452 172
Accumulated other comprehensive loss (192) (64)
Treasury stock, at cost, 2,694,029 and 2,678,976 shares, respectively (75) (75)
------ ------
Total stockholders' equity 1,159 1,007
------ ------
Total liabilities and stockholders' equity $8,656 $9,498
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
MILLIONS OF DOLLARS 2000 1999
- ------------------- ----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 306 $ 2
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of assets (544) - -
Depreciation and amortization 84 85
Extraordinary item 11 - -
Deferred income taxes 2 9
(Increase) decrease in accounts receivable (46) 37
Decrease in inventories 23 25
Increase (decrease) in accounts payable 43 (52)
Net change in other working capital accounts 164 (31)
Other, net (41) 59
------- -----
Net cash provided by operating activities 2 134
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets, net of cash sold 2,424 - -
Expenditures for property, plant and equipment (19) (32)
Contributions and advances to affiliates (4) (4)
Distributions from affiliates in excess of earnings - - 25
Other (38) (6)
------- -----
Net cash provided by (used in) investing activities 2,363 (17)
------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (1,004) (76)
Dividends paid (26) (17)
Payment of debt-related costs (10) - -
------- -----
Net cash used in financing activities (1,040) (93)
------- -----
Effect of exchange rate changes on cash (2) 3
------- -----
INCREASE IN CASH AND CASH EQUIVALENTS 1,323 27
Cash and cash equivalents at beginning of period 307 233
------- -----
Cash and cash equivalents at end of period $ 1,630 $ 260
======= =====
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
LYONDELL CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal, recurring adjustments considered necessary for a fair
presentation, have been included. For further information, refer to the
consolidated financial statements and notes thereto for the year ended December
31, 1999 included in the Lyondell Chemical Company ("Lyondell") 1999 Annual
Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. Certain amounts from prior periods have been reclassified to
conform to the current period presentation.
2. GAIN ON SALE OF ASSETS
On March 31, 2000, Lyondell completed the sale of its polyols business and an
ownership interest in its domestic propylene oxide ("PO") manufacturing
operations to Bayer AG and Bayer Corporation (collectively "Bayer") for
approximately $2.45 billion. Lyondell recorded a pretax gain on the sale of
$544 million. Lyondell is using proceeds of the asset sale to retire its
outstanding debt (see Note 8). The polyols business had sales of approximately
$830 million for the year ended December 31, 1999. The accompanying
consolidated statements of income include the operating revenues of the polyols
business as a continuing operation through March 31, 2000. As part of the
transaction, Lyondell entered into two joint ventures with Bayer, one to
manufacture PO and a second to license PO technology to the manufacturing joint
venture. Lyondell contributed approximately $1.2 billion of assets, primarily
property, plant and equipment, to the joint ventures, and sold a $522 million
ownership interest to Bayer. Lyondell's residual interest of $667 million at
March 31, 2000 is reported as "Investment in PO joint ventures" in the
accompanying consolidated balance sheets.
The major components of the net assets divested, were as follows:
MILLIONS OF DOLLARS:
- -------------------
Working capital, net of cash sold $ 241
Property, plant and equipment 492
Investment in PO joint ventures 522
Goodwill 348
Other intangibles 134
Other liabilities, net (15)
-------
Total net assets divested $ 1,722
=======
As part of the asset sale, Lyondell accrued liabilities of $53 million for
employee severance, relocation and other employee benefits, covering
approximately 850 employees. The affected employees were terminated on March 31
and April 1, 2000. Lyondell expects that severance and related benefits will be
paid during the second quarter 2000.
4
<PAGE>
3. EQUITY INTEREST IN EQUISTAR CHEMICALS, LP
Lyondell has a 41% partnership interest in Equistar Chemicals, LP ("Equistar"),
while Millennium Chemicals Inc. ("Millennium") and Occidental Chemical
Corporation ("Occidental") each have a 29.5% partnership interest. 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 follows:
<TABLE>
<CAPTION>
March 31, December 31,
Millions of dollars 2000 1999
- ------------------- ------------ -------------
<S> <C> <C>
BALANCE SHEETS
Total current assets $ 1,389 $ 1,360
Property, plant and equipment, net 3,889 3,926
Goodwill, net 1,111 1,119
Deferred charges and other assets 315 331
------- -------
Total assets $ 6,704 $ 6,736
======= =======
Current maturities of long-term debt $ 57 $ 92
Other current liabilities 620 692
Long-term debt, less current maturities 2,169 2,169
Other liabilities and deferred credits 136 121
Partners' capital 3,722 3,662
------- -------
Total liabilities and partners' capital $ 6,704 $ 6,736
======= =======
</TABLE>
<TABLE>
<CAPTION>
For the three months ended
March 31,
----------------------------
<S> <C> <C>
2000 1999
---------- -----------
STATEMENTS OF INCOME
Sales and other operating revenues $ 1,807 $ 1,104
Cost of sales 1,647 979
Other operating costs and expenses 61 79
------- -------
Operating income 99 46
Interest expense, net (45) (39)
Other income, net 2 - -
------- -------
Net income $ 56 $ 7
======= =======
SELECTED CASH FLOW INFORMATION
Depreciation and amortization $ 77 $ 73
Expenditures for property, plant and equipment 20 46
</TABLE>
Lyondell's "Income from equity investments" in Equistar as presented in the
consolidated statements of income consists of Lyondell's share of Equistar's net
income plus the accretion of the difference between Lyondell's investment and
its underlying equity in Equistar's net assets.
5
<PAGE>
4. EQUITY INTEREST IN LYONDELL-CITGO REFINING LP
Lyondell has a 58.75% partnership interest in LYONDELL-CITGO Refining LP
("LCR"), while CITGO Petroleum Corporation ("CITGO") has a 41.25% partnership
interest. Net income before depreciation expense for the period is allocated to
the partners based upon participation interests. Depreciation expense is
allocated to the partners based upon contributed assets. Summarized financial
information for LCR follows:
<TABLE>
<CAPTION>
March 31, December 31,
Millions of dollars 2000 1999
- ------------------ ---------- --------------
<S> <C> <C>
BALANCE SHEETS
Total current assets $ 220 $ 219
Property, plant and equipment, net 1,341 1,350
Deferred charges and other assets 65 60
------- -------
Total assets $ 1,626 $ 1,629
======= =======
Current maturities of long-term debt $ 450 $ 450
Other current liabilities 297 307
Long-term debt, less current maturities 254 247
Other liabilities and deferred credits 73 69
Partners' capital 552 556
------- -------
Total liabilities and partners' capital $ 1,626 $ 1,629
======= =======
</TABLE>
<TABLE>
<CAPTION>
For the three months ended
March 31,
---------------------------------
<S> <C> <C>
2000 1999
----------- -----------
STATEMENTS OF INCOME
Sales and other operating revenues $ 859 $ 432
Cost of sales 811 389
Selling, general and administrative expenses 14 19
----- -----
Operating income 34 24
Interest expense, net (12) (10)
State income tax benefit - - 1
----- -----
Net income $ 22 $ 15
===== =====
SELECTED CASH FLOW INFORMATION
Depreciation and amortization $ 26 $ 25
Expenditures for property, plant and equipment 17 16
</TABLE>
5. EXTRAORDINARY ITEM
During the first quarter 2000, Lyondell retired debt in the principal amount of
$999 million prior to maturity (see Note 8). Unamortized debt issuance costs
and amendment fees of $17 million, less a tax benefit of $6 million, were
written off and reported as an extraordinary loss on extinguishment of debt in
the first quarter 2000.
6
<PAGE>
6. INVENTORIES
The components of inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
MILLIONS OF DOLLARS 2000 1999
- ------------------- ---------- --------------
<S> <C> <C>
Finished goods $ 287 $ 405
Work-in-process 22 31
Raw materials 31 44
Materials and supplies 34 39
----- -----
Total inventories $ 374 $ 519
===== =====
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, at cost, and the related
accumulated depreciation consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
MILLIONS OF DOLLARS 2000 1999
- ------------------- ---------- --------------
<S> <C> <C>
Land $ 10 $ 35
Manufacturing facilities and equipment 2,576 4,406
Construction in progress 93 114
------- -------
Total property, plant and equipment 2,679 4,555
Less accumulated depreciation 180 264
------- -------
Property, plant and equipment, net $ 2,499 $ 4,291
======= =======
</TABLE>
8. LONG-TERM DEBT AND SUBSEQUENT EVENTS
Lyondell is using the net proceeds of the asset sale to significantly reduce its
variable-rate debt. On March 31, 2000, Lyondell repaid $999 million of the
principal amount of Term Loan A and on April 7, 2000, it repaid the $96 million
remaining principal balance of Term Loan A and the $149 million outstanding
balance of Term Loan F. Lyondell intends to reduce the $810 million
outstanding balance of Term Loan B by May 31, 2000.
In February 2000, Lyondell secured an amendment to certain financial covenants
in its credit facility that increased its financial and operating flexibility in
the near term. Additionally, the amendment eliminated a cross-default provision
in the credit facility that could have been triggered by a default on LCR's $450
million construction facility debt. Lyondell was in compliance with all such
covenants as of March 31, 2000.
9. COMMITMENTS AND CONTINGENCIES
TDI Agreements--Lyondell is party to a resale agreement and a tolling agreement
for toluene diisocyanate ("TDI"). Under these agreements, Lyondell is entitled
to all of the TDI output of the supplier's two plants in France, which have a
combined rated capacity of approximately 264 million pounds per year. The
aggregate purchase price is a combination of plant cost and market price.
Lyondell is required to purchase a minimum of 216 million pounds of TDI per
year, through December 31, 2000, at which time the resale agreement expires.
Minimum annual purchases under the resale agreement were approximately 93
million pounds of TDI. During the first quarter 2000, Lyondell paid $39 million
as a deposit to reserve additional capacity under the tolling agreement.
Crude Supply Agreement--Under the crude supply agreement, PDVSA Petroleo y Gas,
S.A. ("PDVSA Oil"), an affiliate of CITGO, is required to sell, and LCR is
required to purchase, 230,000 barrels per day of extra heavy crude oil, which
constitutes approximately 88% of the Refinery's refining capacity of 260,000
barrels per day of crude oil. In late April 1998, LCR received notification
from PDVSA Oil that it would reduce allocations of crude oil on the
7
<PAGE>
grounds of announced OPEC production cuts. LCR began receiving reduced
allocations of crude oil from PDVSA Oil in August 1998, amounting to 195,000
barrels per day in that month. LCR was advised by PDVSA Oil in May 1999 of a
further reduction in the allocations of crude oil supplied under the crude
supply agreement to 184,000 barrels per day, effective May 1999. On several
occasions since then, PDVSA Oil has further reduced certain crude oil
deliveries, although it has made payments in partial compensation for such
reductions. Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company of
the Republic of Venezuela, has announced that it intends to renegotiate the
crude supply agreements that it has with all third parties, including LCR.
However, they have confirmed that they expect to honor their commitments if a
mutually acceptable restructuring of the crude supply agreement is not achieved.
The breach or termination of the crude supply agreement would require LCR to
purchase all or a portion of its crude oil feedstocks in the merchant market,
would subject LCR to significant volatility and price fluctuations and could
adversely affect LCR and, therefore, Lyondell.
LCR Debt--On May 5, 2000, Lyondell and CITGO, as partners of LCR, arranged
interim financing for LCR to repay the $450 million outstanding under its
construction facility.
Cross Indemnity Agreement--In connection with the transfer of assets and
liabilities from Atlantic Richfield Company ("ARCO") to Lyondell in 1988,
Lyondell agreed to assume certain liabilities arising out of the operation of
Lyondell's integrated petrochemicals and refining business prior to July 1,
1988. In connection with the transfer of such liabilities, Lyondell and ARCO
entered into an agreement, updated in 1997 ("Revised Cross-Indemnity
Agreement"), whereby Lyondell agreed to defend and indemnify ARCO against
certain uninsured claims and liabilities which ARCO may incur relating to the
operation of Lyondell prior to July 1, 1988, including certain liabilities which
may arise out of pending and future lawsuits. For current and future cases
related to Lyondell's products and operations, ARCO and Lyondell 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. Under the Revised Cross-Indemnity Agreement, Lyondell will assume
responsibility for its proportionate share of future costs for waste site
matters not covered by ARCO insurance.
In connection with the acquisition of ARCO Chemical Company ("ARCO Chemical"),
Lyondell 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, 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 ARCO Chemical business.
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 that are 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. As of
March 31, 2000, Equistar had expensed approximately $4 million under the $7
million indemnification basket with respect to the business contributed by
Lyondell.
Environmental--Lyondell's policy is to be in compliance with all applicable
environmental laws. Lyondell is subject to extensive environmental laws and
regulations concerning emissions to the air, discharges to surface and
subsurface waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. Some of these laws and regulations
are subject to varying and conflicting interpretations. In addition, Lyondell
cannot accurately predict future developments, such as increasingly strict
environmental laws and inspection and enforcement policies, as well as higher
compliance costs arising therefrom, which might affect the handling,
manufacture, use, emission or disposal of products, other materials or hazardous
and non-hazardous waste.
Lyondell is currently contributing funds to the clean up of two waste sites
located near Houston, Texas under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") as amended and the Superfund
Amendments and Reauthorization Act of 1986. Lyondell has also been named, along
with several other companies, as a potentially responsible party for a third
CERCLA site near Houston, Texas. In addition, Lyondell is involved in
administrative proceedings or lawsuits relating to a minimal number of other
CERCLA sites. Lyondell
8
<PAGE>
estimates, based upon currently available information, that potential loss
contingencies associated with the latter CERCLA sites, individually and in the
aggregate, are not significant.
Lyondell is also subject to certain assessment and remedial actions at the LCR
refinery under the Resource Conservation and Recovery Act ("RCRA"). In
addition, Lyondell has negotiated an order with the Texas Natural Resource
Conservation Commission ("TNRCC") for assessment and remediation of groundwater
and soil contamination at the LCR refinery. Lyondell also has liabilities under
RCRA and various state and foreign government regulations related to six current
plant sites and two former plant sites.
As of March 31, 2000, Lyondell's environmental liability for future assessment
and remediation costs at the above-mentioned sites totaled $39 million. The
liabilities per site range from less than $1 million to $13 million and are
expected to be incurred over the next two to seven years. In the opinion of
management, there is currently no material range of loss in excess of the amount
recorded for these sites. However, it is possible that new information about
the sites for which the accrual has been established, new technology or future
developments such as involvement in other CERCLA, RCRA, TNRCC or other
comparable state or foreign law investigations, could require Lyondell to
reassess its potential exposure related to environmental matters.
MTBE--Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict or
ban the use of MTBE. At the state level, the State of California has initiated
action, pursuant to an Executive Order of the Governor and supported by recent
legislation, to begin the process of reducing or limiting the use of MTBE by
December 31, 2002. Such action, to be effective, would require (i) a waiver of
the oxygenate mandate for California, (ii) Congressional action in the form of
an amendment to the Clean Air Act or (iii) California refiners to replace MTBE
with another oxygenate such as ethanol, a more costly and less widely available
additive. At the federal level, a blue ribbon panel appointed by the
Environmental Protection Agency issued its report on July 27, 1999. That report
recommended, among other things, reducing the use of MTBE in gasoline. The EPA
has recently announced its intent to seek legislative changes from Congress to
give EPA authority to ban MTBE over a three-year period. Such action would only
be granted through amendments to the Clean Air Act. Additionally, the EPA is
seeking a ban of MTBE utilizing rulemaking authority contained in the Toxic
Substance Control Act. It would take at least three years for such a rule to
issue. These initiatives or other governmental actions could result in a
significant reduction in Lyondell's MTBE sales. The Company has developed
technologies to convert TBA into alternate gasoline blending components should
it be necessary to reduce MTBE production in the future. In addition, Lyondell
has a take-or-pay contract with ARCO, which contributes significant pretax
margin. If legislation is enacted or other governmental action taken, ARCO has
indicated that it might attempt to invoke a force majeure provision in the
contract in order to reduce the quantities of MTBE it purchases under, or to
terminate the contract. Lyondell would vigorously dispute such action.
General--Lyondell 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 Lyondell
consolidated financial statements.
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. 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 Lyondell'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.
9
<PAGE>
10. STOCKHOLDERS' EQUITY
Basic and Diluted Earnings Per Share--Basic earnings per share ("EPS") for
income before extraordinary item for the periods presented are computed based
upon the weighted average number of shares outstanding for the periods. Diluted
earnings per share for income before extraordinary item include the effect of
outstanding stock options issued under the Executive Long-Term Incentive Plan
and the Incentive Stock Option Plan. These stock options were antidilutive in
the three-month periods ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
For the three months ended
March 31,
-------------------------------------------------------------------
2000 1999
------------------------------- ------------------------------
Thousands of shares Shares EPS SHARES EPS
- ------------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Basic 117,562 $ 2.69 77,072 $ .02
Dilutive effect of options - - - - - - - -
------- ------ ------ -----
Diluted 117,562 $ 2.69 77,072 $ .02
======= ====== ====== =====
</TABLE>
Comprehensive Income--For the three-months ended March 31, 2000, Lyondell had
comprehensive income of $178 million. For the three-months ended March 31,
1999, Lyondell had a comprehensive loss of $44 million.
11. SEGMENT AND RELATED INFORMATION
Lyondell has identified four reportable segments in which it operates: (i)
intermediate chemicals and derivatives; (ii) petrochemicals; (iii) polymers; and
(iv) refining. Lyondell's methanol business is not a reportable segment.
Summarized financial information concerning reportable segments is shown in the
following table:
<TABLE>
<CAPTION>
Intermediate
Chemicals
and
Millions of dollars Derivatives Petrochemicals Polymers Refining Other Total
- ------------------- ------------ -------------- --------- -------- ------ --------
FOR THE THREE MONTHS ENDED MARCH 31, 2000:
<S> <C> <C> <C> <C> <C> <C>
Sales and other operating revenues $ 1,136 $ - - $ - - $ - - $ - - $ 1,136
Operating income 87 87
Interest expense (165) (165)
Interest income 8 8
Other expense, net (5) (5)
Gain on sale of assets 544 544
Income (loss) from equity investments 3 71 (12) 16 (28) 50
Income before income taxes and extraordinary item 519
FOR THE THREE MONTHS ENDED MARCH 31, 1999:
Sales and other operating revenues $ 855 $ - - $ - - $ - - $ - - $ 855
Operating income 129 129
Interest expense (146) (146)
Interest income 6 6
Other expense, net (7) (7)
Income (loss) from equity investments - - 37 5 11 (32) 21
Income before income taxes and extraordinary item 3
</TABLE>
10
<PAGE>
The following table presents the details of "Income from equity investments" as
presented above in the "Other" column for the periods indicated:
<TABLE>
<CAPTION>
For the three months
ended March 31,
---------------------------------------------
Millions of dollars 2000 1999
- ------------------- ------------------- -------------------
<S> <C> <C>
Equistar items not allocated to petrochemicals and polymers, principally
general and administrative expenses and interest expense, net $ (26) $ (29)
Loss from equity investment in LMC (2) (3)
----- -----
Total--Other $ (28) $ (32)
===== =====
</TABLE>
12. PURCHASE OF ARCO CHEMICAL COMPANY
In connection with the July 28, 1998 acquisition of ARCO Chemical, Lyondell
accrued liabilities for costs associated with the delay of construction of the
PO-11 plant, vesting of certain key manager benefits pursuant to a change of
control provision, severance costs for the involuntary termination of certain
headquarters employees and relocation costs for moving personnel to Lyondell's
Houston headquarters. The accrued liability for these items totaled
approximately $255 million at the date of acquisition. During 1999, Lyondell
revised the estimated liabilities for penalties and cancellation charges related
to the PO-11 lump-sum construction contract and related commitments. Based on
the final negotiated terms, Lyondell reduced the accrued liability by $13
million. Through March 31, 2000, Lyondell had paid and charged approximately
$214 million against the accrued liability.
13. SUPPLEMENTAL GUARANTOR INFORMATION
ARCO Chemical Technology Inc. ("ACTI"), ARCO Chemical Technology L.P. ("ACTLP")
and Lyondell Chemical Nederland, Ltd. ("LCNL") are guarantors (collectively
"Guarantors") of the $500 million senior subordinated notes and $1.9 billion
senior secured notes issued by Lyondell in May 1999. LCNL, a Delaware
corporation, is a wholly owned subsidiary of Lyondell that operates a chemical
production facility in Rotterdam, the Netherlands. In April, 2000, pursuant to
the terms of Lyondell's Credit Facility, ACTI and ACTLP became "significant
subsidiaries" as defined in the Credit Facility, and, as such, guarantors of the
above-mentioned debt securities. ACTI is a Delaware corporation, which holds
the investment in ACTLP. ACTLP is a Delaware limited partnership, which holds
and licenses technology to other Lyondell affiliates and to third parties.
Separate financial statements of the Guarantors are not considered to be
material to the holders of the senior subordinated notes and senior secured
notes. The following condensed consolidating financial information present
supplemental information for the Guarantors as of and for the three-month
periods ended March 31, 2000 and 1999.
11
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
BALANCE SHEET
AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
Non- Consolidated
Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell
- ------------------- ---------- ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Total current assets $ 2,233 $ 413 $ 11 $ - - $ 2,657
Property, plant and equipment, net 1,900 599 - - 2,499
Other investments and
long-term receivables 3,466 62 958 (2,794) 1,692
Goodwill, net 423 756 - - 1,179
Deferred charges and other assets 561 68 - - 629
------- ------- ----- -------- -------
Total assets $ 8,583 $ 1,898 $ 969 $ (2,794) $ 8,656
======= ======= ===== ======== =======
Current maturities of long-term debt $ 220 $ - - $ - - $ - - $ 220
Other current liabilities 966 175 - - - - 1,141
Long-term debt,
less current maturities 5,047 - - - - - - 5,047
Other liabilities and deferred credits 382 1 - - - - 383
Deferred income taxes 400 137 - - - - 537
Intercompany liabilities (assets) 435 (701) 266 - - - -
Minority interest 169 - - - - - - 169
Stockholders' equity 964 2,286 703 (2,794) 1,159
------- ------- ----- -------- -------
Total liabilities and
stockholders' equity $ 8,583 $ 1,898 $ 969 $ (2,794) $ 8,656
======= ======= ===== ======== =======
</TABLE>
BALANCE SHEET
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
Non- Consolidated
Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell
- ------------------- ---------- ------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
Total current assets $ 1,567 $ 311 $ 8 $ - - $ 1,886
Property, plant and equipment, net 3,650 641 - - 4,291
Other investments and
long-term receivables 2,814 50 936 (2,785) 1,015
Goodwill, net 765 780 - - 1,545
Deferred charges and other assets 573 188 - - 761
------- ------- ----- -------- -------
Total assets $ 9,369 $ 1,970 $ 944 $ (2,785) $ 9,498
======= ======= ===== ======== =======
Current maturities of long-term debt $ 225 $ - - $ - - $ - - $ 225
Other current liabilities 614 182 - - - - 796
Long-term debt,
less current maturities 6,046 - - - - - - 6,046
Other liabilities and deferred credits 330 1 - - - - 331
Deferred income taxes 746 145 - - - - 891
Intercompany liabilities (assets) 310 (605) 295 - - - -
Minority interest 202 - - - - - - 202
Stockholders' equity 896 2,247 649 (2,785) 1,007
------- ------- ----- -------- -------
Total liabilities and
stockholders' equity $ 9,369 $ 1,970 $ 944 $ (2,785) $ 9,498
======= ======= ===== ======== =======
</TABLE>
12
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED)
STATEMENTS OF INCOME
For the Three Months Ended March 31, 2000
<TABLE>
<CAPTION>
Non- Consolidated
Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell
- ------------------- ---------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues $ 996 $ 217 - - $ (77) $ 1,136
Cost of sales 854 175 (77) 952
Selling, general and
administrative expenses 51 4 55
Research and development expense 14 - - 14
Amortization of goodwill
and other intangibles 20 8 28
----- ----- ---- ----- ------
Operating income 57 30 - - 87
Interest income (expense), net (161) - - 4 (157)
Other income (expense), net 585 (46) - - 539
Income from equity investments 3 - - 47 50
Intercompany income (expense) (134) 119 15 - -
Provision (benefit) for income taxes 156 28 18 202
----- ----- ---- ----- ------
Income before
extraordinary item 194 75 48 - - 317
Extraordinary item, net of taxes (11) (11)
----- ----- ---- ----- ------
Net income $ 183 $ 75 $ 48 $ - - $ 306
===== ===== ==== ===== ======
</TABLE>
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Non- Consolidated
Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell
- ------------------- ---------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues $ 757 $ 191 $ - - $ (93) $ 855
Cost of sales 594 129 (93) 630
Selling, general and
Administrative expenses 52 5 57
Research and development expense 15 - - 15
Amortization of goodwill
and other intangibles 23 1 24
----- ----- ----- ------ -----
Operating income (loss) 73 56 - - 129
Interest income (expense), net (143) - - 3 (140)
Other income (expense), net 44 (51) (7)
Income from equity investments 21 21
Intercompany income (expense) (81) 75 6 - -
Provision (benefit) for income taxes (31) 23 9 1
----- ----- ----- ------ -----
Net income (loss) $ (76) $ 57 $ 21 $ - - $ 2
===== ===== ===== ====== =====
</TABLE>
13
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED)
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Non- Consolidated
Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell
- ------------------- ---------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Net income $ 183 $ 75 $ 48 $ - - $ 306
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Gain on sale of assets (553) 9 - - - - (544)
Depreciation and amortization 68 16 - - - - 84
Extraordinary item 11 - - - - - - 11
Deferred income taxes 7 (5) - - - - 2
Net changes in working
Capital and other 291 (95) (53) - - 143
------- ----- ----- ----- -------
Net cash provided by
(used in) operating
activities 7 - - (5) - - 2
------- ----- ----- ----- -------
Proceeds from sale of assets, net
of cash sold 2,260 164 - - - - 2,424
Expenditures for property,
plant and equipment (19) - - - - - - (19)
Distributions from affiliates
in excess of earnings 10 (10) - - - - - -
Contributions and advances
to affiliates 3 (12) 5 - - (4)
Other (38) - - (38)
------- ----- ----- ----- -------
Net cash provided by
investing activities 2,216 142 5 - - 2,363
------- ----- ----- ----- -------
Payment of debt issuance costs (10) - - - - - - (10)
Repayments of long-term debt (1,004) - - - - - - (1,004)
Dividends paid (26) - - - - - - (26)
------- ----- ----- ----- -------
Net cash used in
financing activities (1,040) - - - - - - (1,040)
------- ----- ----- ----- -------
Effect of exchange rate
Changes on cash (25) 23 - - - - (2)
------- ----- ----- ----- -------
Increase in cash
and cash equivalents $ 1,158 $ 165 $ - - $ - - $ 1,323
======= ===== ===== ===== =======
</TABLE>
14
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED)
STATEMENT OF CASH FLOWS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Non- Consolidated
Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell
- ------------------- ---------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Net income (loss) $ (76) $ 57 $ 21 $ - - $ 2
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 78 7 - - 85
Deferred income taxes 20 (1) (10) 9
Net changes in working
capital and other 96 (41) (17) 38
---- ---- ---- ----- ----
Net cash provided by
(used in) operating
activities 118 22 (6) - - 134
---- ---- ---- ----- ----
Expenditures for property,
plant and equipment (32) - - - - (32)
Distributions from affiliates
in excess of earnings 29 (29) 25 25
Contributions and advances
to affiliates 13 (17) - - (4)
Other (6) - - - - (6)
---- ---- ---- ----- ----
Net cash provided by (used
in) investing activities 4 (46) 25 - - (17)
---- ---- ---- ----- ----
Repayments of long-term debt (76) - - - - (76)
Dividends paid (17) - - - - (17)
---- ---- ---- ----- ----
Net cash (used in)
financing activities (93) - - - - - - (93)
---- ---- ---- ----- ----
Effect of exchange rate
changes on cash (14) 17 - - 3
---- ---- ---- ----- ----
Increase (decrease) in
cash and cash equivalents $ 15 $ (7) $ 19 $ - - $ 27
==== ==== ==== ===== ====
</TABLE>
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
GENERAL--Raw material costs continued to increase during the first quarter 2000
as evidenced by crude oil prices, which peaked above $32 per barrel in early
March. The subsequent OPEC decision to increase production resulted in some
relief, however first quarter 2000 benchmark crude oil prices averaged 16%
higher than fourth quarter 1999 and 129% higher than first quarter 1999. These
increases in crude oil prices put upward pressure on raw material costs of
Lyondell and Equistar. While both companies implemented sales price increases,
these generally lagged behind the rise in raw material costs, putting pressure
on product margins.
On March 31, 2000, Lyondell completed the sale of its polyols business and an
ownership interest in its domestic PO manufacturing operations to Bayer for
$2.45 billion and used $999 million of the net proceeds to retire debt. Lyondell
recorded an after-tax gain on the sale of $332 million and an $11 million
extraordinary loss on the early extinguishment of debt. Additionally, Lyondell
used the net proceeds to retire $245 million of debt on April 7, 2000 and
expects to retire an additional $810 million of debt by May 31, 2000.
Unless otherwise indicated, the following analysis of operating results compares
the first quarter 2000 to the first quarter 1999. An analysis comparing first
quarter 2000 to fourth quarter 1999 is also included and is headed as such.
NET INCOME--Excluding the $332 million after-tax gain from the asset sale and
the $11 million extraordinary charge, the first quarter 2000 net loss of $15
million compared to net income of $2 million in the first quarter 1999. The
loss in the 2000 period was primarily due to lower product margins in the
intermediate chemicals and derivatives business segment resulting from the rise
in feedstock costs noted above. This was partly offset by higher income from
equity investments, which increased $29 million, or about $18 million after tax,
due to higher earnings at both Equistar and LCR.
RESULTS OF OPERATIONS
LYONDELL CHEMICAL COMPANY
REVENUES, OPERATING COSTS AND EXPENSES--Lyondell's operating results are
reviewed below in the discussion of the intermediate chemicals and derivatives
segment.
GAIN ON SALE OF ASSETS--The sale of Lyondell's worldwide polyols business as
well as an ownership interest in its domestic PO manufacturing operations on
March 31, 2000 generated a $544 million pretax gain.
INCOME FROM EQUITY INVESTMENT IN EQUISTAR--Lyondell's income from its equity
investment in Equistar was $33 million in the first quarter 2000 compared to $13
million in the first quarter 1999. The increase of $20 million reflected the
benefit of higher margins and volumes in Equistar's petrochemicals segment,
which was only partly offset by lower margins in the polymers segment.
INCOME FROM EQUITY INVESTMENT IN LCR--Lyondell's income from its equity
investment in LCR was $16 million in the first quarter 2000 compared to $11
million in the 1999 period. The increase was primarily due to higher margins
partly offset by lower volumes of extra heavy Venezuelan crude oil.
INTEREST EXPENSE--Interest expense was $165 million in the first quarter 2000
compared to $146 million in the first quarter 1999. The increase in interest
expense was due to comparatively higher interest rates on Lyondell's fixed-rate
debt, which resulted from the May 1999 refinancing, and higher LIBOR interest
rates, which affected the remaining variable-rate debt.
16
<PAGE>
INCOME TAX--The effective tax rate for 2000, including the gain on asset sale,
is estimated to be 39%. The full-year 1999 effective tax rate, including the
extraordinary item, was a tax benefit of 27%. The 1999 tax benefit rate of 27%
reflected a federal income tax benefit from a domestic loss incurred in 1999,
which was partly offset by tax provisions in foreign jurisdictions.
EXTRAORDINARY ITEM--The first quarter 2000 extraordinary loss on early
extinguishment of debt consisted of the write off of unamortized debt issuance
costs and amendment fees totaling $17 million, or $11 million after tax. These
related to the early extinguishment of $999 million principal amount of debt on
March 31, 2000, using proceeds from the asset sale. Lyondell expects to incur
an extraordinary charge of $19 million after tax in the second quarter 2000 as a
result of the early extinguishment of additional debt, using remaining net
proceeds of $1.05 billion from the asset sale.
PRO FORMA
On March 31, 2000, Lyondell completed the sale of its worldwide polyols
business, along with an ownership interest in its domestic PO operations, for
approximately $2.45 billion in cash.
The following condensed income statements present the unaudited pro forma
consolidated operating results for the three months ended March 31, 2000 and
1999 as if the transaction had occurred as of the beginning of 2000 and 1999,
respectively. The pro forma income statements assume that net proceeds of
$2.05 billion were used to retire debt in accordance with the provisions of
Lyondell's credit facility and indentures. The operating results for the three
months ended March 31, 2000 exclude the after-tax gain on asset sale of $332
million, or $2.82 per share.
<TABLE>
<CAPTION>
For the three months ended
March 31,
------------------------------------
In millions, except per share data 2000 1999
- ---------------------------------- ------------ -------------
<S> <C> <C>
Sales and other operating revenues $ 916 $ 655
Operating income 72 97
Interest expense 116 108
Net income from continuing operations 6 5
Basic and diluted income per share from continuing operations .06 .06
</TABLE>
The unaudited pro forma data presented above are not necessarily indicative of
the results of operations of Lyondell that would have occurred had such
transactions actually been consummated as of the indicated dates, nor are they
necessarily indicative of future results.
FIRST QUARTER 2000 VERSUS FOURTH QUARTER 1999
For the first quarter 2000, Lyondell reported net income of $306 million
compared to a fourth quarter 1999 net loss of $58 million. The first quarter
2000 included the after-tax gain on asset sale of $332 million and the $11
million extraordinary charge, while the fourth quarter 1999 loss included
unusual after-tax charges of $42 million, primarily related to Lyondell's share
of Equistar restructuring and LCR renegotiated labor agreement charges.
Excluding these items, Lyondell's first quarter 2000 net loss of $15 million was
comparable to its fourth quarter 1999 net loss of $16 million.
First quarter 2000 results were essentially level with the fourth quarter 1999
despite a sharp rise in raw material costs for both Lyondell and Equistar.
Offsetting the escalation in raw materials costs were benefits from higher
volumes for Lyondell's PO derivatives and Equistar's petrochemicals products,
generally higher product prices and lower controllable costs as a result of
implementing the shared services organization and other cost reduction
initiatives.
17
<PAGE>
INTERMEDIATE CHEMICALS AND DERIVATIVES SEGMENT
The following table sets forth actual volumes for this segment, including SM
volumes processed under long-term processing arrangements, which are included in
sales and other operating revenues. Co-product tertiary butyl alcohol ("TBA")
is principally used to produce the derivative MTBE.
<TABLE>
<CAPTION>
For the three months ended
March 31,
------------------------------------
In millions 2000 1999
- ----------- -------------- ------------
<S> <C> <C>
PO, PO derivatives, isocyanates (pounds) 1,187 1,080
Co-products:
Styrene monomer (pounds) 900 782
TBA and derivatives (gallons) 284 265
</TABLE>
REVENUES--Revenues of $1.1 billion in the first quarter 2000 increased 33%
compared to revenues of $855 million in the first quarter 1999 due to higher
sales prices and volumes. Sales prices increased for most products, primarily
co-products MTBE and SM, which increased over 75%, reflecting the effects of
higher raw material costs and increased demand. Average sales prices for PO and
derivatives declined, primarily in Europe, due to new industry PO capacity and
the foreign exchange effects of a stronger U.S. dollar. PO and derivative
volumes, which include PO, PO derivatives and isocyanates, increased 10% due to
increased demand for PO derivatives. SM volumes increased 15% on higher export
demand, primarily from Asia. TBA and derivatives volumes increased 7% due to
higher global demand for MTBE and higher contractual offtakes by ARCO.
OPERATING INCOME--Operating income was $87 million, or 8% of sales, in the first
quarter 2000 compared to $129 million, or 15% of sales, in the first quarter
1999. The decrease was primarily due to higher raw material costs, especially
propylene, which nearly doubled compared to the first quarter 1999, reducing
product margins for PO and derivatives. This was only partly offset by the
benefit from higher sales volumes and higher margins for co-products SM and
MTBE.
FIRST QUARTER 2000 VERSUS FOURTH QUARTER 1999
Operating income in the first quarter 2000 was $87 million, or essentially flat,
compared to $90 million in the fourth quarter 1999, excluding the effect of a
$15 million LIFO-related charge in the fourth quarter. Compared to the fourth
quarter 1999, the first quarter 2000 benefited from seasonally better results
from the aircraft deicers business and improved profitability for SM. This was
offset by higher costs for propylene, the primary raw material for PO and
derivatives. PO and derivatives sales volumes were flat as higher volumes for
deicers, propylene glycol ethers and butanediol were offset by lower PO merchant
volumes.
18
<PAGE>
EQUISTAR CHEMICALS, LP
SEGMENT DATA
The following tables reflect selected actual sales volume data and summarized
financial information for Equistar's business segments.
<TABLE>
<CAPTION>
For the three months ended
March 31,
IN MILLIONS -------------------------------------
- ----------- 2000 1999
--------------- ---------------
<S> <C> <C>
SELECTED PETROCHEMICALS PRODUCTS:
Olefins (pounds) 4,902 4,527
Aromatics (gallons) 102 85
POLYMERS PRODUCTS (pounds) 1,667 1,652
MILLIONS OF DOLLARS
- -------------------
SALES AND OTHER OPERATING REVENUES:
Petrochemicals segment $ 1,705 $ 907
Polymers segment 576 455
Intersegment eliminations (474) (258)
------- -------
Total $ 1,807 $ 1,104
======= =======
COST OF SALES:
Petrochemicals segment $ 1,531 $ 813
Polymers segment 590 424
Intersegment eliminations (474) (258)
------- -------
Total $ 1,647 $ 979
======= =======
OTHER OPERATING EXPENSES:
Petrochemicals segment $ 2 $ 3
Polymers segment 17 20
Unallocated 42 56
------- -------
Total $ 61 $ 79
======= =======
OPERATING INCOME:
Petrochemicals segment $ 172 $ 91
Polymers segment (31) 11
Unallocated (42) (56)
------- -------
Total $ 99 $ 46
======= =======
</TABLE>
PETROCHEMICALS SEGMENT
REVENUES--Revenues of $1.7 billion in the first quarter 2000 increased 88%
compared to the first quarter 1999, primarily due to higher sales prices and a
5% increase in volumes. The increase in sales prices is primarily in response
to the significant increases in raw material costs, which have risen steadily
since the first quarter 1999. Benchmark quoted ethylene prices averaged 28.33
cents per pound in the first quarter 2000, a 67% increase over 16.95 cents per
pound in the first quarter 1999. Raw material costs increased steadily and
peaked in early March 2000. Sales volumes increased due to demand growth, which
reflected the ongoing strength of the U.S. economy.
COST OF SALES--Cost of sales of $1.5 billion in the first quarter 2000 also
increased 88% compared to $813 million for the first quarter 1999. This
increase primarily reflected the significant increase in raw material costs and,
to a lesser extent, higher volumes.
OPERATING INCOME--Operating income of $172 million in the first quarter 2000
increased from $91 million in the first quarter 1999 due to higher product
margins, as sales prices increased more than raw material costs, and, to a
lesser extent, higher sales volumes.
19
<PAGE>
POLYMERS SEGMENT
REVENUES--Revenues of $576 million in the first quarter 2000 increased 27%
compared to $455 million in the first quarter 1999 primarily as a result of
higher sales prices as volumes were relatively flat. The sales price increases
reflect pressure from escalating raw material costs. The flat volumes reflect
the effect of the previously announced shutdown of HDPE and LDPE capacity during
the first quarter 2000, partly offset by new capacity at the Matagorda, Texas
facility, which started up in the fourth quarter 1999.
COST OF SALES--Cost of sales of $590 million in the first quarter 2000 increased
39% compared to $424 million for the first quarter 1999. This increase
primarily reflected the significant increase in raw material costs, primarily
ethylene and propylene.
OPERATING INCOME--For the first quarter 2000, the polymers segment had an
operating loss of $31 million compared to income of $11 million in the first
quarter 1999. The decrease was primarily due to decreases in polymers margins
as sales price increases lagged behind increases in polymers raw material costs.
UNALLOCATED ITEMS
The following discusses expenses that were not allocated to the petrochemicals
or polymers segments.
OTHER OPERATING EXPENSES--This caption includes general and administrative
expenses, research and development expense, and amortization of goodwill and
other intangibles. Unallocated expenses were $42 million in the first quarter
2000 and $56 million in the first quarter 1999. The decrease was primarily due
to previously announced cost reduction measures taken in the fourth quarter
1999. The first quarter 1999 also included nonrecurring transition service
costs related to the business contributed by Occidental in May 1998 and system
implementation costs.
INTEREST EXPENSE, NET--Net interest expense of $45 million in the first quarter
2000 increased from $39 million in the first quarter 1999. Interest expense
increased due to higher interest rates as a result of Equistar's debt
refinancing in the first quarter 1999.
FIRST QUARTER 2000 VERSUS FOURTH QUARTER 1999
Equistar reported net income of $56 million in the first quarter 2000 compared
to a net loss of $51 million in the fourth quarter 1999. Excluding $96 million
of restructuring and other unusual charges, Equistar had net income of $45
million in the fourth quarter 1999. The $11 million improvement in the first
quarter 2000 primarily reflects lower unallocated general and administrative
costs partly offset by a decrease in polymers segment operating results. First
quarter 2000 unallocated costs benefited from cost reductions announced in the
fourth quarter. For the polymers segment, margins decreased as increases in
polymer prices lagged cost increases in polymer raw materials, primarily
ethylene and propylene. The margin decreases were partly offset by a 5%
increase in volumes. Compared to the fourth quarter 1999, the petrochemicals
segment operating results were flat as higher raw material costs were offset by
higher ethylene and co-product prices and the benefit from higher sales volumes.
20
<PAGE>
LYONDELL-CITGO REFINING LP
REFINING SEGMENT
FIRST QUARTER 2000 VERSUS FIRST QUARTER 1999
The following table sets forth, in thousands of barrels per day, sales volumes
for LCR's refined products and processing rates for the periods indicated:
<TABLE>
<CAPTION>
For the three months ended
March 31,
------------------------------------
<S> <C> <C>
2000 1999
--------------- ---------------
Refined products
Gasoline 106 117
Diesel and heating oil 66 65
Jet fuel 15 17
Aromatics 10 9
Other refined products 118 119
---- ---
Total refined products volumes 315 327
==== ===
Crude processing rates:
Crude supply agreement--coked 180 206
Other heavy crude oil--coked 41 8
Other crude oil 21 41
--- ---
Total crude oil 242 255
=== ===
</TABLE>
REVENUES--Revenues for LCR, including intersegment sales, were $859 million in
the first quarter 2000, a 99% increase over first quarter 1999 revenues of $432
million. The increase resulted from higher industry prices for refined
products, partly offset by a 4% decrease in refined products volumes. Sales
prices increased as a result of significantly higher industry crude oil prices
in the first quarter 2000 versus the 1999 period. The volume decrease was due
to lower allocations of extra heavy Venezuelan crude oil as a result of the May
1999 OPEC production cutbacks. LCR has not yet benefited from the OPEC
production increases announced in March 2000.
NET INCOME--LCR's net income was $22 million in the first quarter 2000 compared
to $15 million in the first quarter 1999. The increase was primarily due to
higher margins partly offset by the lower volumes of Venezuelan crude oil in the
first quarter 2000.
FIRST QUARTER 2000 VERSUS FOURTH QUARTER 1999
LCR's net income in the first quarter 2000 was $22 million compared to $26
million in the fourth quarter 1999. The fourth quarter 1999 included an
insurance recovery of $12 million related to an unplanned production unit outage
that occurred earlier in 1999. Excluding the insurance recovery, first quarter
2000 net income increased compared to the fourth quarter, as improved refining
margins were only partly offset by turnaround and other operating costs. Crude
processing rates averaged 242,000 barrels per day in the first quarter 2000
compared to 259,000 barrels per day in the fourth quarter 1999. Processing
rates under the crude supply agreement were unchanged at 180,000 barrels per
day.
21
<PAGE>
FINANCIAL CONDITION
OPERATING ACTIVITIES--Lyondell's cash provided by operating activities totaled
$2 million in the first quarter 2000 compared to operating cash flow of $134
million in the first quarter 1999. Cash provided by operating activities in
1999 included customer advances and tax refunds.
INVESTING ACTIVITIES--On March 31, 2000, Lyondell completed the sale of its
polyols business and an ownership interest in its domestic PO manufacturing
operations for approximately $2.45 billion.
Lyondell made capital expenditures of $19 million in the first quarter 2000.
Capital expenditures by the joint ventures were $20 million by Equistar and $17
million by LCR. Lyondell's pro rata share of the joint ventures' total capital
expenditures was $18 million. Lyondell's 2000 capital budget is $207 million,
including its $101 million pro rata share of the joint ventures' capital
budgets. In addition, Lyondell made a $39 million deposit to reserve additional
capacity under a TDI tolling agreement.
Distributions from affiliates of $41 million, including $33 million by LCR and
$8 million by Nihon Oxirane, in the first quarter 2000 were less than net
affiliate earnings of $50 million. Equistar did not make any distributions.
Equistar transferred a $4 million liability related to the shared services
organization to Lyondell in the first quarter 2000.
FINANCING ACTIVITIES--Lyondell is using the net proceeds of the asset sale to
significantly reduce its variable-rate debt. On March 31, 2000, Lyondell repaid
$999 million of the principal amount of Term Loan A and on April 7, 2000,
Lyondell repaid the $96 million remaining principal balance of Term Loan A and
the $149 million outstanding balance of Term Loan F. Lyondell intends to reduce
the outstanding balance of Term Loan B by $810 million by May 31, 2000.
Lyondell also repaid an additional $5 million of debt from operating cash flow
during the first quarter 2000 and paid $10 million in debt amendment fees.
Lyondell paid a regular quarterly dividend of $.225 per share of common stock,
or $26 million, in the first quarter 2000.
LIQUIDITY AND CAPITAL RESOURCES--At March 31, 2000, Lyondell had cash on hand of
$1.6 billion, of which Lyondell intends to use $1.3 billion for debt reduction,
taxes and other expenses of the sale, leaving available cash of approximately
$300 million. Lyondell also had $500 million available under its revolving
credit facility that extends until July 2003. Current maturities of long-term
debt were $220 million.
The amended credit facility and the indentures under which the senior secured
notes and the senior subordinated notes were issued contain covenants relating
to liens, sale and leaseback transactions, debt incurrence, leverage and
interest coverage ratios, dividends and investments, sales of assets and mergers
and consolidations. Given the poor current business environment in the
petrochemicals industry, Lyondell secured an amendment to certain financial
covenants in February 2000 that increased its financial and operating
flexibility in the near term. Lyondell was in compliance with all such
covenants as of March 31, 2000.
The February 2000 amendment eliminated a cross-default provision in the credit
facility that could have been triggered by a default on LCR's $450 million
construction facility, which was outstanding on March 31, 2000. On May 5, 2000,
Lyondell and CITGO, as partners of LCR, arranged interim financing for LCR to
repay the $450 million outstanding under the construction facility.
Equistar had outstanding debt of $2.2 billion at March 31, 2000. Lyondell
remains liable on approximately $553 million of Equistar debt for which Equistar
assumed primary responsibility in connection with its formation. At March 31,
2000, Equistar and LCR had combined outstanding debt of $2.7 billion and
combined equity of approximately $4.3 billion. The ability of the joint
ventures to distribute cash to Lyondell is reduced by their respective debt
service obligations. Furthermore, a default under Equistar's debt instruments
involving more than $50 million of indebtedness would constitute a cross-default
under Lyondell's Credit Facility.
22
<PAGE>
Lyondell believes that conditions will be such that cash balances, cash
generated from operating activities, and funds from lines of credit will be
adequate to meet anticipated future cash requirements for scheduled debt
repayments, necessary capital expenditures, operations and dividends for the
foreseeable future.
CURRENT BUSINESS OUTLOOK
Lyondell's future profitability will be driven by its ability to grow or
maintain product margins in an environment of uncertain and volatile feedstock
costs. For Lyondell, margins will remain under pressure despite price increases
for PO and derivatives, due to significant increases in propylene costs in the
U.S. and Europe. Lyondell expects continued stable volume growth for the
intermediate chemicals and derivatives segment, as demand growth, aided by a
strong recovery in Asia, absorbs new industry PO capacity. However, the new
capacity will also continue to put pressure on prices and margins. Strong demand
for products in the petrochemicals and polymers segments continues to benefit
Equistar's operations. This will be tempered by the effects of a scheduled
turnaround at the Morris, Illinois facility during the second quarter 2000. If
crude oil prices stabilize in the targeted price range announced by OPEC,
Equistar's results should benefit significantly. Meanwhile, both Lyondell and
Equistar are taking aggressive actions to further reduce costs and increase cash
flow. These include the implementation of the shared services organization and
other cost reduction initiatives, which have helped reduce controllable costs.
Ongoing progress with debt reduction will have a continued positive impact on
future earnings and cash flow. LCR's second quarter operating results will be
depressed by a major turnaround scheduled for that quarter. The increase in OPEC
production quotas is expected to benefit ongoing operating results.
Over the longer term, Lyondell expects continued consolidation in the chemical
industry, creating fewer but stronger competitors. Industry forecasts project a
continuing difficult business environment due to industry capacity additions,
primarily in the petrochemicals and polymers segments. This new capacity is
expected to put pressure on product margins beginning in late 2000 until demand
growth absorbs the new capacity.
Lyondell has participated in the consolidation trend in the industry with the
formation of Equistar and the subsequent acquisition of ARCO Chemical.
Management's current priority is to continue to pay down the acquisition-related
debt, and thus improve Lyondell's financial flexibility. To accomplish this, it
will focus on actively managing its current portfolio of assets and maximizing
earnings and cash flow. While Lyondell does not control raw material costs or
general market conditions, management plans to maximize earnings and cash flow
by focusing on the things that it can directly influence such as continuing to
reduce working capital, achieving cost reductions and employing a disciplined
capital program.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. Subsequently, the FASB delayed the
effective date by one year. The statement is effective for Lyondell's calendar
year 2001 with early adoption permitted. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending upon whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The gains and losses on the derivative instrument that are
reported in other comprehensive income will be reclassified as earnings in the
periods in which earnings are impacted by the hedged item. The ineffective
portion of all hedges will be recognized in current-period earnings. Lyondell,
Equistar and LCR are currently evaluating the effect SFAS No. 133 implementation
will have on their financial statements
ITEM 3. DISCLOSURE OF MARKET RISK.
Lyondell's exposure to market risks is described in Item 7a of its Annual Report
on Form 10-K for the year ended December 31, 1999. Lyondell's exposure to
market risks has not changed materially in the quarter ended March 31, 2000.
23
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report are "forward-looking
statements" within the meaning of the federal securities laws. Although
Lyondell believes the expectations reflected in such forward-looking statements
are reasonable, they do involve certain assumptions, risks and uncertainties,
and Lyondell can give no assurance that such expectations will prove to have
been correct. Lyondell's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the cyclical nature of the chemical and refining industries,
uncertainties associated with the United States and worldwide economies, current
and potential governmental regulatory actions in the United States and in other
countries, substantial chemical and refinery capacity additions resulting in
oversupply and declining prices and margins, raw material costs or supply
arrangements, Lyondell's ability to implement cost reductions, and operating
interruptions (including leaks, explosions, fires, mechanical failure,
unscheduled downtime, labor difficulties, transportation interruptions, spills
and releases and other environmental risks). Many of such factors are beyond
Lyondell's or its joint ventures' ability to control or predict. Management
cautions against putting undue reliance on forward-looking statements or
projecting any future results based on such statements or present or prior
earnings levels.
All forward-looking statements in this Form 10-Q are qualified in their entirety
by the cautionary statements contained in this section and elsewhere in this
report.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments with respect to Lyondell's legal
proceedings previously reported in the 1999 Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company's annual meeting of stockholders was held May 4, 2000. The
stockholders elected all of the Company's seven nominees for director and
ratified the appointment of PricewaterhouseCoopers LLP as the Company's
independent auditors for 2000. A shareholder proposal regarding a By-Law
amendment with respect to the treatment of abstentions in the tabulation of
votes did not pass. The votes were as follows:
1. Election of Directors:
Nominee For Withheld
- ------- --- ---------
William T. Butler 103,544,063 1,215,135
Carol A. Anderson 103,598,771 1,160,427
Travis Engen 103,593,129 1,166,069
Stephen F. Hinchliffe, Jr. 103,585,291 1,173,907
Dudley C. Mecum II 103,575,536 1,183,662
Dan F. Smith 103,319,066 1,440,132
Paul R. Staley 103,585,361 1,173,837
2. Appointment of PricewaterhouseCoopers LLP:
For: 104,084,090
Against: 502,284
Abstain: 172,824
2. Shareholder Proposal regarding treatment of abstentions in the
tabulation of votes:
For: 8,916,401
Against: 64,532,897
Abstain: 15,591,212
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed during the quarter
ended March 31, 2000 and through the date hereof:
Date of Report Item No. Financial Statements
-------------- --------- --------------------
March 31, 2000 2,7 No
May 5, 2000 5,7 No
25
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lyondell Chemical Company
Dated: May 12, 2000 /s/ KELVIN R. COLLARD
------------------------------
Kelvin R. Collard
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
26
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