<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
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
-------------
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
June 30, 2000: 117,548,879
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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 FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- -------------------------------------
MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA 2000 1999 2000 1999
------------------------------------------ ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES $ 976 $ 854 $2,112 $1,709
OPERATING COSTS AND EXPENSES:
Cost of sales 769 651 1,721 1,281
Selling, general and administrative expenses 33 66 88 123
Research and development expense 7 14 21 29
Amortization of goodwill
and other intangible assets 25 23 53 47
---------------- ---------------- ---------------- ----------------
834 754 1,883 1,480
---------------- ---------------- ---------------- ----------------
Operating income 142 100 229 229
Gain on sale of assets - - - - 544 - -
Interest expense (123) (149) (288) (295)
Interest income 20 9 28 15
Other income (expense), net (1) 14 (6) 7
---------------- ---------------- ---------------- ----------------
Income (loss) before equity investments,
income taxes and extraordinary item 38 (26) 507 (44)
---------------- ---------------- ---------------- ----------------
INCOME (LOSS) FROM EQUITY INVESTMENTS:
Equistar Chemicals, LP 72 26 105 39
LYONDELL-CITGO Refining LP (10) (20) 6 (9)
Other 4 2 5 (1)
---------------- ---------------- ---------------- ----------------
66 8 116 29
---------------- ---------------- ---------------- ----------------
Income (loss) before income
taxes and extraordinary items 104 (18) 623 (15)
Provision (benefit) for income taxes 39 (7) 241 (6)
---------------- ---------------- ---------------- ----------------
Income (loss) before extraordinary items 65 (11) 382 (9)
Extraordinary loss on extinguishment
of debt, net of income taxes (19) (31) (30) (31)
---------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) $ 46 $ (42) $ 352 $ (40)
================ ================ ================ ================
BASIC EARNINGS PER SHARE:
Income (loss) before extraordinary items $ .55 $(.11) $ 3.25 $ (.10)
================ ================ ================ ================
Net income (loss) $ .39 $(.42) $ 3.00 $ (.45)
================ ================ ================ ================
DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary items $ .55 $(.11) $ 3.25 $ (.10)
================ ================ ================ ================
Net income (loss) $ .39 $(.42) $ 2.99 $ (.45)
================ ================ ================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
MILLIONS OF DOLLARS, EXCEPT PAR VALUE DATA 2000 1999
------------------------------------------ -------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 420 $ 307
Accounts receivable, net 480 566
Inventories 379 519
Prepaid expenses and other current assets 119 114
Deferred tax assets 108 380
-------------------- --------------------
Total current assets 1,506 1,886
-------------------- --------------------
Property, plant and equipment, net 2,468 4,291
Investments and long-term receivables:
Investment in PO joint ventures 656 - -
Investment in Equistar Chemicals, LP 622 607
Receivable from LYONDELL-CITGO Refining LP 223 219
Investment in LYONDELL-CITGO Refining LP 32 52
Other investments and long-term receivables 114 137
Goodwill, net 1,167 1,545
Deferred charges and other assets 606 761
-------------------- --------------------
Total assets $7,394 $9,498
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 319 $ 350
Current maturities of long-term debt 212 225
Other accrued liabilities 601 446
-------------------- --------------------
Total current liabilities 1,132 1,021
-------------------- --------------------
Long-term debt, less current maturities 3,998 6,046
Other liabilities and deferred credits 388 331
Deferred income taxes 533 891
Commitments and contingencies
Minority interest 175 202
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 shares issued 120 120
Additional paid-in capital 854 854
Retained earnings 472 172
Accumulated other comprehensive loss (203) (64)
Treasury stock, at cost, 2,701,121 and 2,678,976 shares, (75) (75)
respectively
-------------------- --------------------
Total stockholders' equity 1,168 1,007
-------------------- --------------------
Total liabilities and stockholders' equity $7,394 $9,498
==================== ====================
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
-----------------------------------------------
MILLIONS OF DOLLARS 2000 1999
------------------- -------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 352 $ (40)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Gain on sale of assets (544) - -
Depreciation and amortization 142 164
Extraordinary items 30 31
Increase in accounts receivable (103) (89)
Decrease in inventories 16 31
(Decrease) increase in accounts payable (15) 3
Net change in other working capital accounts 15 (3)
Other, net (21) 48
-------------------- --------------------
Net cash (used in) provided by operating activities (128) 145
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets, net of cash sold 2,424 - -
Distributions from affiliates in excess of earnings 31 55
Expenditures for property, plant and equipment (31) (75)
Contributions and advances to affiliates (18) (38)
Other (32) - -
-------------------- --------------------
Net cash provided by (used in) investing activities 2,374 (58)
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (2,061) (4,111)
Issuance of long-term debt, net - - 3,293
Issuance of common stock - - 736
Dividends paid (52) (43)
Payment of debt-related costs (18) - -
Other - - 5
-------------------- --------------------
Net cash used in financing activities (2,131) (120)
-------------------- --------------------
Effect of exchange rate changes on cash (2) 4
-------------------- --------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 113 (29)
Cash and cash equivalents at beginning of period 307 233
-------------------- --------------------
Cash and cash equivalents at end of period $ 420 $ 204
==================== ====================
</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 accounting principles generally accepted in the United States
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 accounting principles generally accepted
in the United States 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
ownership interests in its domestic propylene oxide ("PO") 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 used
proceeds of the asset sale to retire a significant portion of its outstanding
debt (see Note 9). The polyols business had sales of approximately $830 million
for the year ended December 31, 1999. The accompanying consolidated statements
of income included the operating results of the polyols business through March
31, 2000. As part of the transaction, Lyondell entered into joint ventures with
Bayer for the manufacture of PO. Lyondell contributed approximately $1.2 billion
of assets to the joint ventures, and sold $522 million of ownership interests to
Bayer. Lyondell's residual interests are reported as "Investment in PO joint
ventures" in the accompanying consolidated balance sheets (see Note 8).
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 paid $21 million of the severance, relocation and
other employee benefits through June 30, 2000. Lyondell expects to settle the
remainder of the liability by the end of the current year.
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>
JUNE 30, DECEMBER 31,
MILLIONS OF DOLLARS 2000 1999
------------------- ------------------- -------------------
<S> <C> <C>
BALANCE SHEETS
Total current assets $1,437 $1,360
Property, plant and equipment, net 3,856 3,926
Goodwill, net 1,103 1,119
Deferred charges and other assets 323 331
------------------- -------------------
Total assets $6,719 $6,736
=================== ===================
Current maturities of long-term debt $ 70 $ 92
Other current liabilities 698 692
Long-term debt, less current maturities 2,169 2,169
Other liabilities and deferred credits 138 121
Partners' capital 3,644 3,662
------------------- -------------------
Total liabilities and partners' capital $6,719 $6,736
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- -------------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
Sales and other operating revenues $1,859 $1,210 $3,666 $2,312
Cost of sales 1,594 1,096 3,241 2,072
Selling, general and administrative expenses 49 56 93 117
Research and development expense 10 10 19 20
Amortization of goodwill and other intangibles 8 8 16 16
---------------- ---------------- ---------------- ----------------
Operating income 198 40 297 87
Interest expense, net (44) (45) (89) (84)
Other income (expense), net (2) 46 - - 46
---------------- ---------------- ---------------- ----------------
Net income $ 152 $ 41 $ 208 $ 49
================ ================ ================ ================
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- -------------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
SELECTED CASH FLOW INFORMATION
Depreciation and amortization $ 75 $ 74 $ 152 $ 147
Expenditures for property, plant and equipment 28 30 48 76
</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>
JUNE 30, DECEMBER 31,
MILLIONS OF DOLLARS 2000 1999
------------------- ---------------- ----------------
<S> <C> <C>
BALANCE SHEETS
Total current assets $ 343 $ 219
Property, plant and equipment, net 1,335 1,350
Deferred charges and other assets 73 60
---------------- ----------------
Total assets $1,751 $1,629
================ ================
Current maturities of long-term debt $ - - $ 450
Other current liabilities 858 307
Long-term debt, less current maturities 276 247
Other liabilities and deferred credits 76 69
Partners' capital 541 556
---------------- ----------------
Total liabilities and partners' capital $1,751 $1,629
================ ================
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
STATEMENTS OF INCOME
Sales and other operating revenues $ 901 $ 482 $1,760 $ 914
Cost of sales 893 495 1,704 884
Selling, general and administrative expenses 14 15 28 34
---------------- ---------------- ---------------- ----------------
Operating income (loss) (6) (28) 28 (4)
Interest expense, net (16) (10) (28) (20)
State income tax benefit - - - - - - 1
---------------- ---------------- ---------------- ----------------
Net loss $ (22) $ (38) $ - - $ (23)
================ ================ ================ ================
SELECTED CASH FLOW INFORMATION
Depreciation and amortization $ 30 $ 27 $ 56 $ 52
Expenditures for property, plant and equipment 18 16 35 32
</TABLE>
5. EXTRAORDINARY ITEMS
During the first and second quarters of 2000, Lyondell retired debt in the
principal amount of $999 million and $1.05 billion, respectively (see Note 9).
During the second quarter 2000, Lyondell wrote off $21 million of unamortized
debt issuance costs and amendment fees and paid call premiums of $8 million.
The total of $29 million, less a tax benefit of $10 million, was reported as an
extraordinary loss on extinguishment of debt. During the first quarter 2000,
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.
6
<PAGE>
6. INVENTORIES
The components of inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
MILLIONS OF DOLLARS 2000 1999
------------------- ------------------- -------------------
<S> <C> <C>
Finished goods $ 283 $ 405
Work-in-process 33 31
Raw materials 30 44
Materials and supplies 33 39
------------------- -------------------
Total inventories $ 379 $ 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>
JUNE 30, DECEMBER 31,
MILLIONS OF DOLLARS 2000 1999
------------------- ------------------- -------------------
<S> <C> <C>
Land $ 9 $ 35
Manufacturing facilities and equipment 2,565 4,406
Construction in progress 97 114
------------------- -------------------
Total property, plant and equipment 2,671 4,555
Less accumulated depreciation 203 264
------------------- -------------------
Property, plant and equipment, net $2,468 $4,291
=================== ===================
</TABLE>
8. INVESTMENT IN PO JOINT VENTURES
As part of the sale of its polyols business and ownership interests in its
domestic PO operations to Bayer, Lyondell entered into joint ventures with Bayer
for the manufacture of PO (see Note 2). Bayer's ownership interests entitle it
to a portion of the PO production of the plants to provide feedstock on a global
basis to the polyols business sold to Bayer by Lyondell, including certain
future increases in volumes as Bayer expands the capacity of those polyols
manufacturing assets. Bayer's share of annual PO production will increase from
1.34 billion pounds currently to 1.6 billion pounds in 2004. Lyondell is
entitled to the remaining PO production and all co-product, SM and TBA,
production. Lyondell is the operator of the joint venture plants and the
partners share in the cost of production based on their product offtake.
Lyondell reports the cost of its product offtake as inventory and cost of sales
in its consolidated financial statements. Related cash flows are reported in the
operating cash flow section of the consolidated statement of cash flows.
9. LONG-TERM DEBT
Lyondell used the net proceeds of the March 31, 2000 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. During the second quarter, Lyondell
repaid the $96 million remaining principal balance of Term Loan A, the $149
million outstanding balance of Term Loan F and $810 million of the outstanding
balance of Term Loan B.
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
covenants of its credit facility as of June 30, 2000.
7
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
TDI Agreements--Lyondell is party to a tolling agreement and a resale 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 currently required to purchase a minimum of 216 million pounds of
TDI per year. During the second quarter 2000, Lyondell entered into a series of
agreements with the supplier to significantly expand the capacity at one of the
plants, which provides TDI to Lyondell under the tolling agreement at plant
cost. In addition to a $39 million advance payment made in the first quarter
2000, Lyondell is obligated to fund an additional 274 million French francs, or
approximately $40 million, of the expansion. The expansion will add
approximately 110 million pounds per annum of rated capacity and is scheduled to
be available early in 2002. Lyondell's minimum TDI purchase commitment under the
revised tolling agreement will be 203 million pounds of TDI per year and will be
extended through 2016. The resale agreement, which covered output of the second
plant, will expire December 31, 2001. Minimum annual purchases under the resale
agreement were approximately 93 million pounds of TDI.
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 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. Effective July 1, 2000,
PDVSA Oil unilaterally increased allocations of crude oil to LCR to 200,000
barrels per day. 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. The interim financing expires September 15, 2000.
Lyondell and CITGO are currently syndicating a one-year credit facility to
replace the interim debt.
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.
8
<PAGE>
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
June 30, 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 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 June 30, 2000, Lyondell's environmental liability for future assessment
and remediation costs at the above-mentioned sites totaled $37 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 state and federal 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, certain states, including California
have initiated actions, supported by recent legislation, to reduce, limit or
eliminate the use of MTBE. Such actions, to be effective, would generally
require (i) a waiver of the state's oxygenate mandate, (ii) Congressional action
in the form of an amendment to the Clean Air Act or (iii) replacement of 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. Lyondell has an MTBE
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.
9
<PAGE>
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.
11. STOCKHOLDERS' EQUITY
Basic and Diluted Earnings Per Share--Basic earnings per share ("EPS") for
income before extraordinary items 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 items 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 and six-month periods ended June 30, 1999.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
-------------------------------------------------------------------
2000 1999
-------------------------------- -----------------------------
THOUSANDS OF SHARES SHARES EPS SHARES EPS
------------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic 117,549 $.39 99,648 $(.42)
Dilutive effect of options 605 - - - - - -
-------------- ------------ ------------ ------------
Diluted 118,154 $.39 99,648 $(.42)
============== ============ ============ ============
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------------------------------------------------
2000 1999
-------------------------------- ------------------------------
THOUSANDS OF SHARES SHARES EPS SHARES EPS
------------------- -------------- ------------ ------------- ------------
Basic 117,556 $3.00 88,419 $(.45)
Dilutive effect of options 244 (.01) - - - -
-------------- ------------ ------------- ------------
Diluted 117,800 $2.99 88,419 $(.45)
============== ============ ============= ============
</TABLE>
Comprehensive Income - For the three months and six months ended June 30, 2000,
Lyondell had comprehensive income of $35 million and $213 million, respectively.
For the three months and six months ended June 30, 1999, Lyondell had
comprehensive losses of $63 million and $107 million, respectively.
10
<PAGE>
12. SEGMENT AND RELATED INFORMATION
Lyondell has 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 JUNE 30, 2000:
<S> <C> <C> <C> <C> <C> <C>
Sales and other operating revenues $ 976 $ - - $ - - $ - - $- - $(976)
Operating income 142 142
Interest expense (123) (123)
Interest income 20 20
Other expense, net (1) (1)
Income (loss) from equity investments 3 109 (10) (10) (26) 66
Income before income taxes and extraordinary item 104
FOR THE THREE MONTHS ENDED JUNE 30, 1999:
Sales and other operating revenues 854 854
Operating income 100 100
Interest expense (149) (149)
Interest income 9 9
Other income, net 14 14
Income (loss) from equity investments 3 35 3 (20) (13) 8
Loss before income taxes and extraordinary item (18)
FOR THE SIX MONTHS ENDED JUNE 30, 2000:
Sales and other operating revenues 2,112 2,112
Operating income 229 229
Interest expense (288) (288)
Interest income 28 28
Other income, net 6 6
Income (loss) from equity investments 6 180 (22) 6 (54) 116
Income before income taxes and extraordinary item 623
FOR THE SIX MONTHS ENDED JUNE 30, 1999:
Sales and other operating revenues 1,709 1,709
Operating income 229 229
Interest expense (295) (295)
Interest income 15 15
Other income, net 7 7
Income (loss) from equity investments 3 72 8 (9) (45) 29
Loss before income taxes and extraordinary item (15)
</TABLE>
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 FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------- -------------------------------
MILLIONS OF DOLLARS 2000 1999 2000 1999
------------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Equistar items not allocated to petrochemicals and
polymers, principally general and administrative
expenses and interest expense, net $ (27) $ (30) $ (53) $ (59)
Net gain from Equistar asset sales - - 18 - - 18
Income (loss) from equity investment in LMC 1 (1) (1) (4)
------------ ------------ ------------- ------------
Total--Other $ (26) $ (13) $ (54) $ (45)
============ ============ ============= ============
</TABLE>
11
<PAGE>
13. 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 total accrued liability for these items was
approximately $255 million at the date of acquisition. Lyondell subsequently
revised the portion of 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 in 1999 and by $4 million in the second quarter 2000.
Through June 30, 2000, Lyondell had paid and charged approximately $216 million
against the accrued liability. Lyondell expects to settle the remaining
liability by the end of the current year.
14. 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 and six-
month periods ended June 30, 2000 and 1999.
12
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
BALANCE SHEET
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
------------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Total current assets $1,221 $ 270 $ 15 $ - - $1,506
Property, plant and equipment, net 1,878 590 - - - - 2,468
Other investments and
long-term receivables 3,330 61 930 (2,674) 1,647
Goodwill, net 420 747 - - - - 1,167
Deferred charges and other assets 525 63 - - 18 606
------------- ---------------- ---------------- ---------------- ----------------
Total assets $7,374 $1,731 $945 $(2,656) $7,394
============= ================ ================ ================ ================
Current maturities of long-term $ 212 $ - - $- - $ - - $ 212
debt
Other current liabilities 694 226 - - - - 920
Long-term debt,
less current maturities 3,998 - - - - - - 3,998
Other liabilities and deferred 336 52 - - - - 388
credits
Deferred income taxes 400 133 - - - - 533
Intercompany liabilities (assets) 702 (901) 181 18 - -
Minority interest 175 - - - - - - 175
Stockholders' equity 857 2,221 764 (2,674) 1,168
------------- ---------------- ---------------- ---------------- ----------------
Total liabilities and
Stockholders' equity $7,374 $1,731 $945 $(2,656) $7,394
============= ================ ================ ================ ================
</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 $ 225 $ - - $- - $ - - $ 225
debt
Other current liabilities 614 182 - - - - 796
Long-term debt,
less current maturities 6,046 - - - - - - 6,046
Other liabilities and deferred 330 1 - - - - 331
credits
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>
13
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued)
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
------------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues $ 837 $252 $- - $(113) $ 976
Cost of sales 699 183 - - (113) 769
Selling, general and
Administrative expenses 33 (1) 1 - - 33
Research and development expense 7 - - - - - - 7
Amortization of goodwill
and other intangibles 18 7 - - - - 25
--------- ---------------- ---------------- ---------------- ----------------
Operating income (loss) 80 63 (1) - - 142
Interest income (expense), net (107) - - 4 - - (103)
Other income (expense), net 41 (42) - - - - (1)
Income from equity investments 3 - - 63 - - 66
Intercompany income (expense) (80) 59 21 - - - -
Provision (benefit) for income taxes (9) 23 25 - - 39
--------- ---------------- ---------------- ---------------- ----------------
Income (loss) before
extraordinary item (54) 57 62 - - 65
Extraordinary item, net of taxes (19) - - - - - - (19)
--------- ---------------- ---------------- ---------------- ----------------
Net income (loss) $ (73) $ 57 $ 62 $ - - $ 46
========= ================ ================ ================ ================
</TABLE>
FOR THE THREE MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
------------------- ---------------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues $ 732 $199 $- - $(77) $ 854
Cost of sales 616 112 - - (77) 651
Selling, general and
administrative expenses 62 4 - - - - 66
Research and development expense 14 - - - - - - 14
Amortization of goodwill
and other intangibles 16 7 - - - - 23
------------ -------------- ---------------- ---------------- ----------------
Operating income 24 76 - - - - 100
Interest income (expense), net (144) 1 3 - - (140)
Other income (expense), net 62 (48) - - - - 14
Income from equity investments 3 - - 5 - - 8
Intercompany income (expense) (75) 77 (2) - - - -
Provision (benefit) for income taxes (40) 32 1 - - (7)
------------ -------------- ---------------- ---------------- ----------------
Income (loss) before
extraordinary item (90) 74 5 - - (11)
Extraordinary item, net of taxes (31) - - - - - - (31)
------------ -------------- ---------------- ---------------- ----------------
Net income (loss) $(121) $ 74 $ 5 $- - $ (42)
============ ============== ================ ================ ================
</TABLE>
14
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued)
STATEMENTS OF INCOME--(Continued)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
------------------- ------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues $1,833 $469 $ - - $(190) $2,112
Cost of sales 1,553 358 - - (190) 1,721
Selling, general and
Administrative expenses 84 3 1 - - 88
Research and development expense 21 - - - - - - 21
Amortization of goodwill
and other intangibles 38 15 - - - - 53
----------- ---------------- ---------------- ---------------- ----------------
Operating income (loss) 137 93 (1) - - 229
Gain (loss) on sale of assets 553 (9) - - - - 544
Interest income (expense), net (268) - - 8 - - (260)
Other income (expense), net 73 (79) - - - - (6)
Income from equity investments 6 - - 110 - - 116
Intercompany income (expense) (214) 178 36 - - - -
Provision for income taxes 147 51 43 - - 241
----------- ---------------- ---------------- ---------------- ----------------
Income before
extraordinary item 140 132 110 - - 382
Extraordinary item, net of taxes (30) - - - - - - (30)
----------- ---------------- ---------------- ---------------- ----------------
Net income $ 110 $132 $110 $- - $ 352
=========== ================ ================ ================ ================
</TABLE>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
------------------- ------------ ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Sales and other operating revenues $1,489 $390 $- - $(170) $1,709
Cost of sales 1,210 241 - - (170) 1,281
Selling, general and
administrative expenses 114 9 - - - - 123
Research and development expense 29 - - - - - - 29
Amortization of goodwill
and other intangibles 39 8 - - - - 47
------------ ---------------- ---------------- ---------------- ----------------
Operating income 97 132 - - - - 229
Interest income (expense), net (287) 1 6 - - (280)
Other income (expense), net 106 (99) - - - - 7
Income from equity investments 3 - - 26 - - 29
Intercompany income (expense) (156) 152 4 - - - -
Provision (benefit) for income taxes (71) 55 10 - - (6)
------------ ---------------- ---------------- ---------------- ----------------
Income (loss) before
extraordinary item (166) 131 26 - - (9)
Extraordinary item, net of taxes (31) - - - - - - (31)
------------ ---------------- ---------------- ---------------- ----------------
Net income (loss) $ (197) $131 $ 26 $- - $ (40)
============ ================ ================ ================ ================
</TABLE>
15
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
------------------- ---------------- --------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Net income $ 110 $ 132 $ 110 $ - - $ 352
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Gain (loss) on sale of assets (553) 9 - - - - (544)
Depreciation and amortization 112 30 - - - - 142
Extraordinary item 22 - - - - - - 22
Net changes in working
capital and other 373 (347) (126) - - (100)
----------- --------------- ---------------- ---------------- ----------------
Net cash provided by
(used in) operating 64 (176) (16) - - (128)
activities
----------- --------------- ---------------- ---------------- ----------------
Proceeds from sale of assets,
net of cash sold 2,260 164 - - - - 2,424
Expenditures for property,
plant and equipment (27) (4) - - - - (31)
Distributions from affiliates
in excess of earnings 4 - - 27 - - 31
Contributions and advances
to affiliates 3 (11) (10) - - (18)
Other (32) - - (32)
----------- --------------- ---------------- ---------------- ----------------
Net cash provided by
investing activities 2,208 149 17 - - 2,374
----------- --------------- ---------------- ---------------- ----------------
Proceeds from issuance
of long-term debt (18) - - - - - - (18)
Repayments of long-term debt (2,061) - - - - - - (2,061)
Dividends paid (52) - - - - - - (52)
----------- --------------- ---------------- ---------------- ----------------
Net cash used in
financing activities (2,131) - - - - - - (2,131)
----------- --------------- ---------------- ---------------- ----------------
Effect of exchange rate
changes on cash (14) 12 - - - - (2)
----------- --------------- ---------------- ---------------- ----------------
Increase (decrease) in
cash and cash equivalents $ 127 $ (15) $ 1 $ - - $ 113
=========== =============== ================ ================ ================
</TABLE>
16
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued)
STATEMENT OF CASH FLOWS--(Continued)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
NON- CONSOLIDATED
MILLIONS OF DOLLARS LYONDELL GUARANTORS GUARANTORS ELIMINATIONS LYONDELL
------------------- ---------------- --------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Net income (loss) $ (198) $ 132 $ 26 $ - - $ (40)
Adjustments to reconcile net
income (loss) to net cash
provided
by (used in) operating
activities:
Depreciation and amortization 146 18 - - - - 164
Extraordinary item 31 - - - - - - 31
----------- --------------- ---------------- ---------------- ----------------
Net changes in working
capital and other 146 (129) (27) - - (10)
----------- --------------- ---------------- ---------------- ----------------
Net cash provided by
(used in) operating 125 21 (1) - - 145
activities
----------- --------------- ---------------- ---------------- ----------------
Expenditures for property,
plant and equipment (68) (7) - - - - (75)
Distributions from affiliates
in excess of earnings 7 (7) 55 - - 55
Contributions and advances
to affiliates (3) (11) (24) - - (38)
----------- --------------- ---------------- ---------------- ----------------
Net cash provided by
(used in) investing (64) (25) 31 - - (58)
activities
----------- --------------- ---------------- ---------------- ----------------
Proceeds from issuance
of long-term debt 3,293 - - - - - - 3,293
Repayments of long-term debt (4,111) - - - - - - (4,111)
Dividends paid (43) - - - - - - (43)
Issuance of common stock 736 - - - - - - 736
Other 5 - - - - - - 5
----------- --------------- ---------------- ---------------- ----------------
Net cash used in
financing activities (120) - - - - - - (120)
----------- --------------- ---------------- ---------------- ----------------
Effect of exchange rate
changes on cash (6) 10 - - - - 4
----------- --------------- ---------------- ---------------- ----------------
(Decrease) increase in
cash and cash equivalents $ (65) $ 6 $ 30 $ - - $ (29)
=========== =============== ================ ================ ================
</TABLE>
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
GENERAL--Crude oil prices, which affect the raw material costs of Lyondell and
Equistar, increased steadily throughout 1999 and peaked in early March 2000 as
the OPEC decision to increase production resulted in a temporary decline. A
seasonal increase in demand for gasoline during the second quarter 2000,
however, triggered a resurgence of crude oil price increases. While second
quarter 2000 average benchmark crude oil prices were comparable to first quarter
2000, they were 65% higher than second quarter 1999. Prices for the first six
months of 2000 averaged over 90% higher than in the comparable 1999 period. The
resumption of crude oil price increases continued to put pressure on product
margins for Lyondell and Equistar. In response, both companies announced sales
price increases, however, in some cases, these were limited by customer
resistance and other competitive factors.
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, recording an after-tax gain on the sale of $332 million.
Lyondell used net proceeds of the sale to retire $2.05 billion of variable-rate
debt.
Unless otherwise indicated, the following analysis of operating results compares
the second quarter and first six months of 2000 to the comparable 1999 periods.
An analysis comparing second quarter 2000 to first quarter 2000 is also
included.
NET INCOME--Net income before extraordinary items for the second quarter 2000
was $65 million, an improvement of $76 million compared to a net loss before
extraordinary items of $11 million in the second quarter 1999. Excluding the
$332 million after-tax gain on asset sale in the first quarter 2000, net income
before extraordinary items for the first six months of 2000 was $50 million, an
improvement of $59 million compared to a net loss before extraordinary items of
$9 million in the first six months of 1999.
The improvements in 2000 were primarily due to higher ethylene margins in
Equistar's petrochemicals segment and higher MTBE and SM margins and volumes in
Lyondell's intermediate chemicals and derivatives segment. Second quarter 2000
earnings also benefited from lower interest expense, as a result of the early
debt retirement, and cost reduction efforts. These improvements were only
partly offset by the effects of higher raw material costs on Lyondell's PO and
derivatives margins and the sale of the polyols business on March 31, 2000. On
a year-to-date basis, lower interest expense due to the early debt retirement in
2000 was partly offset by higher interest rates.
RESULTS OF OPERATIONS
LYONDELL CHEMICAL COMPANY
REVENUES, OPERATING COSTS AND EXPENSES--Lyondell's operating results are
reviewed in the discussion of the intermediate chemicals and derivatives segment
below.
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, $332 million after tax, gain in
the first quarter 2000.
INCOME FROM EQUITY INVESTMENT IN EQUISTAR--Lyondell's income from its equity
investment in Equistar was $72 million in the second quarter 2000, an increase
of $46 million compared to $26 million in the second quarter 1999. Lyondell's
equity income was $105 million for the first six months of 2000, an increase of
$66 million compared to $39 million for the comparable 1999 period. The
increases primarily reflected the benefit of higher margins in
18
<PAGE>
Equistar's petrochemicals segment, particularly in the second quarter 2000,
which were only partly offset by lower margins and volumes in the polymers
segment and the effect of $41 million of net gains on asset sales in the second
quarter 1999. In the petrochemicals segment, sales price increases for ethylene
and co-product propylene outpaced cost increases for raw materials, leading to
improved margins. In the polymers segment, sales price increases lagged behind
raw material cost increases.
INCOME FROM EQUITY INVESTMENT IN LCR--Lyondell's loss from its equity investment
in LCR was $10 million in the second quarter 2000, an improvement of $10 million
compared to a loss of $20 million in the second quarter 1999. Lyondell had
equity income of $6 million in the first six months of 2000, an improvement of
$15 million compared to a loss of $9 million for the 1999 period. The
improvements in 2000 were primarily due to higher product margins, reflecting
stronger gasoline markets. Although the second quarter 2000 included a major
planned turnaround, the effect was more than offset by the impact of unplanned
production unit outages during the second quarter 1999.
INTEREST EXPENSE--Interest expense was $123 million in the second quarter 2000
compared to $149 million in the second quarter 1999. The decrease was primarily
due to the early retirement of $999 million of debt on March 31, 2000 and an
additional $1.05 billion during the second quarter 2000, using proceeds of the
asset sale to Bayer. Interest expense was $288 million in the first six months
of 2000 compared to $295 million in the 1999 period. The benefit from the early
retirement of debt was partly offset by the effect of higher interest rates.
Lyondell's fixed-rate debt, issued as part of the May 1999 refinancing, had
higher rates compared to the variable-rate debt it replaced, while higher LIBOR
rates in 2000 adversely affected the remaining variable-rate debt.
INTEREST INCOME--Interest income was $20 million in the second quarter 2000
compared to $9 million in the second quarter 1999 and $28 million in the first
six months of 2000 compared to $15 million in the 1999 period. The increases
reflected higher cash balances, primarily in the second quarter 2000, as a
result of proceeds from the asset sale.
INCOME TAX--The effective tax rate for 2000, including the gain on asset sale,
is estimated to be 39%. While the estimated effective tax rate was 39% for the
first six months of 1999, 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 ITEMS--The second quarter 2000 extraordinary item consisted of the
write off of unamortized debt issuance costs and amendment fees of $21 million
and the payment of call premiums of $8 million for a total of $29 million, or
$19 million after tax, related to the early extinguishment of $1.05 billion of
debt. The first quarter 2000 extraordinary item consisted of the write off of
unamortized debt issuance costs and amendment fees totaling $17 million, or $11
million after tax, related to the early extinguishment of $999 million of debt.
The early extinguishment of $2.05 billion of debt during the first and second
quarters of 2000 was made with proceeds from the March 31, 2000 asset sale to
Bayer. The second quarter 1999 extraordinary loss consisted of the write off of
unamortized debt issuance costs and amendment fees totaling $54 million, or $31
million after tax, related to early extinguishment of $4.1 billion of debt.
During May 1999, Lyondell issued $2.4 billion of fixed-rate debt, $1 billion of
variable-rate debt and 40.25 million shares of common stock, using the proceeds
to reduce variable-rate debt by a net $3.1 billion.
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, to
Bayer for approximately $2.45 billion in cash.
19
<PAGE>
The following condensed income statements present the unaudited pro forma
consolidated operating results for the six months ended June 30, 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 six
months ended June 30, 2000 exclude the after-tax gain on asset sale of $332
million, or $2.82 per share.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------------------
IN MILLIONS, EXCEPT PER SHARE DATA 2000 1999
---------------------------------- --------------- ---------------
<S> <C> <C>
Sales and other operating revenues $1,892 $1,308
Operating income 214 169
Interest expense 225 199
Net income from continuing operations 75 12
Basic and diluted income per share from continuing operations .64 .14
</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.
SECOND QUARTER 2000 VERSUS FIRST QUARTER 2000
For the second quarter 2000, Lyondell reported net income before extraordinary
items of $65 million compared to a $15 million loss before extraordinary items,
excluding the after-tax gain on asset sale of $332 million, in the first quarter
2000. The improved second quarter 2000 results primarily reflect improved
margins for ethylene at Equistar, higher MTBE margins at Lyondell, and lower
interest expense that resulted from a substantial reduction in debt. These
benefits were only partly offset by the effects of higher raw material costs, a
scheduled maintenance turnaround at LCR and the effects of the sale of
Lyondell's polyols business.
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. Volumes of the polyols
business, sold on March 31, 2000, are included through the date of sale. Bayer's
ownership interests in Lyondell's domestic PO operations entitle it to a
portion of the PO production to provide feedstock on a global basis to the
polyols business sold to Bayer by Lyondell, including certain future increases
in volumes as Bayer expands the capacity of those polyols manufacturing assets.
Bayer's share of annual PO production will increase from 1.34 billion pounds
currently to 1.6 billion pounds in 2004. Bayer's PO volumes are excluded from
the table.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------ ------------------------------------
IN MILLIONS 2000 1999 2000 1999
----------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
PO, PO derivatives, TDI (pounds) 693 1,062 1,880 2,142
Co-products:
Styrene monomer (pounds) 888 676 1,788 1,458
TBA and derivatives (gallons) 308 268 592 533
</TABLE>
REVENUES--Revenues of $976 million in the second quarter 2000 increased 14%
compared to revenues of $854 million in the second quarter 1999 despite the sale
of the polyols business on March 31, 2000. Revenues of $2.1 billion in the first
six months of 2000 increased 24% compared to revenues of $1.7 billion in the
first six months of 1999. The effect of the sale of the polyols business was
more than offset by higher sales prices and volumes in 2000 for co-products MTBE
and SM. MTBE prices and volumes benefited from higher gasoline prices,
increased global demand, primarily due to new regulations in Europe, and tighter
supplies, due to new U.S. reformulated gasoline
20
<PAGE>
standards. SM prices and volumes also benefited from stronger demand. Sales
price increases for PO and derivatives, excluding polyols, were tempered by new
industry PO capacity and the foreign exchange effects of a stronger U.S. dollar.
PO and derivatives volumes, which include TDI, declined due to the effects of
the sale of the polyols business. Excluding polyols, volumes were flat on a
quarterly basis and up 3% on a six-month basis.
OPERATING INCOME--Operating income was $142 million in the second quarter 2000
compared to $100 million in the second quarter 1999. The increase was due to
higher margins and volumes for co-products MTBE and SM, which more than offset
the effect of the sale of the polyols business and lower margins for other PO
and derivatives products. MTBE and SM margins reflected significantly higher
prices for those products due to increased demand. PO and derivatives product
margins, excluding polyols, decreased due to higher raw material costs,
primarily propylene, the cost of which more than doubled compared to 1999.
Operating income was $229 million in the first six months of both 2000 and 1999.
On a six-month comparative basis, the benefits from higher margins and volumes
for MTBE and SM, which primarily occurred in the second quarter 2000, were
substantially offset by the year-to-date effects of higher propylene costs on PO
and derivatives margins in addition to the effects of the sale of the polyols
business. Decreases in selling, general and administrative expense, as well as
in research and development expense in 2000 reflected the effects of the sale of
the polyols business and benefits from cost reduction efforts.
SECOND QUARTER 2000 VERSUS FIRST QUARTER 2000
Operating income in the second quarter 2000 was $142 million compared to $87
million in the first quarter 2000. Compared to the first quarter 2000,
operating income increased 63% as higher profitability for co-products MTBE and
SM more than offset the effects of higher propylene costs, a seasonal decline in
aircraft deicer sales, and the first quarter 2000 contribution of the polyols
business that was sold. The profitability from MTBE increased primarily due to
higher prices and margins, reflecting increased demand and stronger gasoline
prices. The increased MTBE demand resulted from tight gasoline markets
attributable to new U.S. reformulated gasoline standards, the summer driving
season, and new gasoline regulations in Europe. Styrene profitability increased
in the second quarter compared to the first quarter due to higher margins, while
sales volumes were flat. The polyols business that was sold contributed
approximately $15 million to first quarter 2000 operating income.
Sales volumes for PO and derivatives, including TDI, decreased from 1.2 billion
pounds in the first quarter to 693 million pounds in the second quarter,
primarily due to the sale of the polyols business. Excluding the impact of the
polyols business, PO and derivative sales volumes were slightly less than the
first quarter, mainly due to seasonally lower propylene glycol (PG) sales
following the first quarter 2000 aircraft deicer season. The lower PG sales
volumes were partially offset by higher merchant PO sales volumes. The
continued rise in propylene costs both in the US and Europe resulted in some
margin pressure for many PO derivatives in the second quarter relative to the
first quarter. Contract chemical grade propylene on the U.S. Gulf Coast rose to
nearly 25 cents per pound in the second quarter compared to 19.5 cents per pound
in the first quarter. In general, price increases for PO and derivatives
products were not able to fully keep pace with rising propylene costs.
21
<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 FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- -------------------------------------
IN MILLIONS 2000 1999 2000 1999
----------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
SELECTED PETROCHEMICALS PRODUCTS:
Olefins (pounds) 4,606 4,508 9,508 9,035
Aromatics (gallons) 109 91 211 176
Polymers products (pounds) 1,474 1,611 3,141 3,263
MILLIONS OF DOLLARS
-------------------
SALES AND OTHER OPERATING REVENUES:
Petrochemicals segment $1,761 $1,045 $3,466 $1,950
Polymers segment 564 477 1,140 932
Intersegment eliminations (466) (312) (940) (570)
--------------- --------------- --------------- ---------------
Total $1,859 $1,210 $3,666 $2,312
=============== =============== =============== ===============
COST OF SALES:
Petrochemicals segment $1,492 $ 959 $3,023 $1,769
Polymers segment 568 449 1,158 873
Intersegment eliminations (466) (312) (940) (570)
--------------- --------------- --------------- ---------------
Total $1,594 $1,096 $3,241 $2,072
=============== =============== =============== ===============
OTHER OPERATING EXPENSES:
Petrochemicals segment $ 2 $ 3 $ 4 $ 6
Polymers segment 19 19 36 39
Unallocated 46 52 88 108
--------------- --------------- --------------- ---------------
Total $ 67 $ 74 $ 128 $ 153
=============== =============== =============== ===============
OPERATING INCOME (LOSS):
Petrochemicals segment $ 267 $ 83 $ 439 $ 175
Polymers segment (23) 9 (54) 20
Unallocated (46) (52) (88) (108)
--------------- --------------- --------------- ---------------
Total $ 198 $ 40 $ 297 $ 87
=============== =============== =============== ===============
</TABLE>
PETROCHEMICALS SEGMENT
Revenues--Revenues of $1.8 billion in the second quarter 2000 increased 68%
compared to second quarter 1999 revenues of $1.0 billion, primarily due to
higher sales prices. The increase in sales prices is in response to the
significant increases in raw material costs, which have risen steadily since the
first quarter 1999, and increased demand. Benchmark quoted ethylene prices
averaged 31.7 cents per pound in the second quarter 2000, a 55% increase over
the second quarter 1999. Average benchmark propylene prices increased over
130%. While sales volumes in the second quarter 2000 were affected by the
planned turnaround at the Morris plant, second quarter 1999 sales volumes were
affected by outages at the Channelview, Texas olefins production units.
Revenues of $3.5 billion for the first six months of 2000 increased 78% compared
to the first six months of 1999 revenues of $1.95 billion, primarily due to
higher sales prices. Sales volumes increased about 7% due to higher demand,
reflecting the ongoing strength of the U.S. economy.
22
<PAGE>
COST OF SALES--Cost of sales of $1.5 billion in the second quarter 2000
increased 56% compared to $959 million for the second quarter 1999. Cost of
sales of $3.0 billion in the first six months of 2000 increased 71% compared to
$1.8 billion for the first six months of 1999. The increases primarily
reflected the significant increase in raw material costs and, to a lesser
extent, higher volumes.
OPERATING INCOME--Operating income of $267 million in the second quarter 2000
more than tripled from $83 million in the second quarter 1999 due to higher
product margins, as sales prices increased more than raw material costs.
Industry data indicates that ethylene cash margins were 16.2 cents per pound in
the second quarter 2000 compared to 7.5 cents per pound in the second quarter
1999. Operating income of $439 million for the first six months of 2000
increased 150% from $175 million in the first six months of 1999 due primarily
to higher product margins and, to a lesser extent, higher sales volumes.
POLYMERS SEGMENT
REVENUES--Revenues of $564 million in the second quarter 2000 increased 18%
compared to $477 million in the second quarter 1999 as higher sales prices were
partly offset by an 8% decrease in volumes. The average benchmark price for
polyethylene in the second quarter 2000 increased about 30% from the comparable
prior year period. Revenues of $1.1 billion for the first six months of 2000
increased 22% compared to $932 million in the first six months of 1999 as higher
sales prices were partly offset by a 4% decrease in volumes. The sales price
increases reflect pressure from escalating raw material costs. The decreases in
volumes reflect the effect of the turnaround at the Morris, Illinois facility in
the second quarter 2000 and a slow down in demand late in the second quarter
2000.
COST OF SALES--Cost of sales of $568 million in the second quarter 2000
increased 26% compared to $449 million for the second quarter 1999, while cost
of sales of $1.2 billion in the first six months of 2000 increased 32% compared
to $873 million for the first six months of 1999. The increases primarily
reflected the significant increases in raw material costs, primarily ethylene
and propylene, partly offset by the decrease in volumes.
OPERATING INCOME--For the second quarter 2000, the polymers segment had an
operating loss of $23 million compared to operating income of $9 million in the
second quarter 1999. For the first six months of 2000, the operating loss was
$54 million compared to an operating profit of $20 million in the comparable
1999 period. The decreases were primarily due to lower 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, UNALLOCATED--These include general and administrative
expenses and amortization of goodwill and other intangibles. Unallocated
expenses were $46 million in the second quarter 2000 and $52 million in the
second quarter 1999. For the first six months of 2000, unallocated expenses
were $88 million compared to $108 million in the comparable 1999 period. The
decreases were 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.
OTHER INCOME (EXPENSE), NET--Other income of $46 million in the second quarter
1999 primarily consisted of net gains on asset sales, including the sale of
Equistar's concentrates and compounds business.
23
<PAGE>
SECOND QUARTER 2000 VERSUS FIRST QUARTER 2000
Equistar reported net income of $152 million in the second quarter 2000 compared
to net income of $56 million in the first quarter 2000. The $96 million
increase primarily reflected improved petrochemicals and polymers margins, which
more than offset lower sales volumes for petrochemicals and polymers resulting
from a planned turnaround at Morris, Illinois, a major petrochemical and
polymers facility, and weaker demand late in the second quarter. The increase
in petrochemicals margins primarily resulted from higher product prices,
especially ethylene and co-product propylene. The contribution from co-products
was very significant in the second quarter. Average benchmark ethylene prices
increased 3 cents per pound, or 10%, while propylene prices increased 5 cents
per pound or 28%. Raw material costs were generally flat quarter to quarter.
Polymers operating results also improved as polymer prices increased more than
the cost of raw materials, primarily ethylene and propylene.
LYONDELL-CITGO REFINING LP
REFINING SEGMENT
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 FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------ ------------------------------------
THOUSAND BARRELS PER DAY 2000 1999 2000 1999
------------------------ --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REFINED PRODUCTS:
Gasoline 122 104 114 110
Diesel and heating oil 60 57 63 61
Jet fuel 12 15 14 16
Aromatics 11 10 10 9
Other refined products 81 85 99 103
--------------- --------------- --------------- ---------------
Total refined products volumes 286 271 300 299
=============== =============== =============== ===============
CRUDE PROCESSING RATES:
Crude Supply Agreement--coked 138 149 159 177
Other heavy crude oil--coked 0 14 20 11
Other crude oil 55 39 38 40
--------------- --------------- --------------- ---------------
Total crude oil 193 202 217 228
=============== =============== =============== ===============
</TABLE>
REVENUES--Revenues, including intersegment sales, were $901 million in the
second quarter 2000, an 87% increase over second quarter 1999 revenues of $482
million, and $1.8 billion for the first six months of 2000, a 93% increase over
revenues of $914 million for the 1999 period. The increases primarily resulted
from higher prices for refined products as a result of a stronger market for
gasoline and other fuels in 2000. LCR maintained sales volumes despite a major
planned turnaround in the second quarter 2000 through market purchases of raw
material feeds for downstream processing units.
NET INCOME--LCR had a net loss of $22 million in the second quarter 2000
compared to a $38 million net loss in the second quarter 1999 and broke even for
the first six months of 2000 versus a $23 million net loss in the 1999 period.
The improvement in the 2000 periods compared to 1999 was primarily due to higher
margins, reflecting a stronger gasoline market in 2000. While the second
quarter 2000 was negatively impacted by a major planned turnaround, this was
more than offset by the second quarter 1999 effect of unplanned production unit
outages. This is reflected in the lower crude processing rates shown above in
the second quarters of both 2000 and 1999.
24
<PAGE>
SECOND QUARTER 2000 VERSUS FIRST QUARTER 2000
LCR had a net loss of $22 million in the second quarter 2000 compared to net
income of $22 million in the first quarter 2000. LCR's results in the second
quarter were impacted by the planned turnaround noted above. As a result, crude
oil processing rates averaged 193,000 barrels per day, a 20% decline compared to
the first quarter rate of 242,000 barrels per day.
FINANCIAL CONDITION
OPERATING ACTIVITIES--Operations used cash of $128 million in the first six
months of 2000 compared to $145 million provided in the comparable 1999 period.
The 2000 period reflects the effects of payments of expenses and estimated
income taxes related to the sale of the polyols business, as well as higher
working capital. The working capital increase was primarily due to higher
receivable levels, which reflected higher product prices as well as a decrease
in the amount of receivables sold under a 1998 receivables sales agreement.
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 to Bayer.
As part of their strategic alliance, Lyondell and Bayer are in negotiations to
form a joint venture for the construction of the previously announced world-
scale PO facility, known as PO-11, to be located in The Netherlands. The plant
is expected to start up in early 2003. Lyondell has initiated activity on the
project under an engineering, procurement and construction contract signed in
June 2000.
Lyondell made capital expenditures of $31 million in the first six months of
2000 and expects capital expenditures to total $113 million in 2000, including
initial spending on the PO-11 facility. Equistar expects capital expenditures of
$160 million in 2000, while LCR expects to spend $60 million. During the second
quarter 2000, Lyondell entered into a series of agreements to significantly
expand the capacity at one of the plants in France providing TDI under a cost-
based tolling agreement, utilizing a new, more efficient technology. Lyondell
made a $39 million advance payment in the first quarter 2000, and is obligated
to pay an additional 274 million French francs, or approximately $40 million,
for the expansion in 2001.
Contributions and advances to affiliates of $18 million for the first six months
of 2000 included $11 million to LCR and $7 million to the PO joint venture. The
contribution to the PO joint venture included $5 million of net capital
expenditures. Distributions from affiliates in excess of earnings for the first
six months of 2000 were $31 million, primarily from LCR and LMC.
FINANCING ACTIVITIES--Lyondell used 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. On May 18, 2000, Lyondell
reduced the outstanding balance of Term Loan B by $810 million. Lyondell also
paid $10 million in debt amendment fees and $8 million of call premiums related
to Term Loan B.
Lyondell paid regular quarterly dividends of $.225 per share of common stock in
the first two quarters of 2000 for a total of $52 million.
LIQUIDITY AND CAPITAL RESOURCES--At June 30, 2000, Lyondell had cash on hand of
$420 million. Lyondell also had $500 million available under its revolving
credit facility that extends until July 2003. Current maturities of long-term
debt were $212 million.
25
<PAGE>
Lyondell's credit facility and the indentures under which Lyondell's senior
secured notes and 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. 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 June 30, 2000.
The February 2000 amendment to the credit facility 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. The interim financing expires September 15, 2000. Lyondell and CITGO
are currently syndicating a one-year credit facility to replace the interim
debt.
Equistar had outstanding debt of $2.2 billion at June 30, 2000. Lyondell
remains liable on approximately $553 million of Equistar debt for which Equistar
assumed primary responsibility in connection with its formation. At June 30,
2000, Equistar and LCR had combined outstanding debt of $2.7 billion and
combined equity of approximately $4.2 billion. The ability of Equistar and LCR
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.
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 expects the contribution from PO co-products, MTBE and SM, to be
tempered in the second half of 2000 by a softening of demand due to seasonality
and new industry capacity. MTBE margins should, however, remain above historical
levels. Demand for PO continues to be good despite new industry capacity
additions. Lyondell expects PO and derivatives margins to benefit from a
decrease in propylene costs. The significant reduction in variable-rate debt has
reduced interest expense while reducing the impact of any future interest rate
increases.
Equistar experienced a slowdown in demand for products in both the
petrochemicals and polymers segments late in the second quarter, however it
believes that the slowdown was primarily driven by a combination of seasonal
effects and industry inventory reduction in anticipation of lower prices.
Lyondell expects that any potential weakness at Equistar will be offset by
improvement at LCR. LCR's third quarter operating results will benefit from
increased processing rates as a result of extra heavy Venezuelan crude oil
inventoried during the turnaround and increased allocations under the CSA, which
began July 1, 2000. LCR should also continue to benefit from strong refining
margins.
Over the longer term, 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.
Management's current priorities are to improve Lyondell's financial flexibility,
actively manage its current portfolio of assets and maximize earnings and cash
flow. This includes paying down additional acquisition-related debt, effectively
managing working capital, achieving cost reductions and employing a disciplined
capital spending program.
26
<PAGE>
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. In June 2000, the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities,
amending certain provisions of SFAS No. 133. The statements are effective for
Lyondell's calendar year 2001 with early adoption permitted. SFAS No. 133, as
amended by SFAS No. 138, 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.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB") No. 101, Revenue Recognition in
Financial Statements. SAB No. 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in the
financial statements. The statement is effective for Lyondell's fourth quarter
of 2000 with early adoption encouraged. Lyondell, Equistar and LCR are
currently evaluating the effect SAB No. 101 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. During the second quarter
2000, Equistar entered into over-the-counter "derivative" contracts for crude
oil to help manage its exposure to commodity price risk with respect to crude-
oil related raw material purchases. These hedging arrangements have the effect
of locking in, at predetermined prices and for a specified period of time, the
prices that Equistar will pay for the volumes to which the hedge relates.
As of June 30, 2000, the outstanding over-the-counter "derivative" contracts
totaled 2.2 million barrels of crude oil. The contracts mature from July
through December 2000, and cover approximately 30% of Equistar's raw material
requirements that are exposed to crude oil price fluctuations during this
period. Assuming a hypothetical 30% decrease in crude oil prices from those in
effect at June 30, 2000 the loss in earnings for the derivatives contracts would
be approximately $20 million. Sensitivity analysis was used for this purpose.
Lyondell's share of such loss would be approximately $5 million after taxes.
The quantitative information about market risk is necessarily limited because it
does not take into account the effects of the underlying operating transactions.
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.
27
<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 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 June 30, 2000 and through the date hereof:
Date of Report Item No. Financial Statements
-------------- -------- --------------------
May 5, 2000 5, 7 No
28
<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: August 14, 2000 /s/ ROBERT T. BLAKELY
--------------------------------
Robert T. Blakely
Executive Vice President and
Chief Financial Officer
/s/ KELVIN R. COLLARD
--------------------------------
Kelvin R. Collard
Vice President and Controller
(Principal Accounting Officer)
29
