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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 September 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
September 30, 2000: 117,560,333
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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 nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
Millions of dollars, except per share data 2000 1999 2000 1999
------------------------------------------ ------------------ ----------- ---------------- ------------
<S> <C> <C> <C> <C>
Sales and other operating revenues $ 975 $ 976 $3,087 $2,685
Operating costs and expenses:
Cost of sales 793 771 2,514 2,052
Selling, general and administrative expenses 51 63 139 186
Research and development expense 6 14 27 43
Amortization of goodwill
and other intangible assets 28 28 81 75
----- ----- ------- ------
878 876 2,761 2,356
----- ----- ------- ------
Operating income 97 100 326 329
Gain on sale of assets 46 - - 590 - -
Interest expense (114) (156) (403) (451)
Interest income 10 12 39 27
Other income, net 14 2 8 9
----- ----- ------- ------
Income (loss) before equity investments,
income taxes and extraordinary item 53 (42) 560 (86)
----- ----- ------- ------
Income from equity investments:
Equistar Chemicals, LP 35 24 140 63
LYONDELL-CITGO Refining LP 42 14 48 5
Other 6 2 11 1
----- ----- ------- ------
83 40 199 69
----- ----- ------- ------
Income (loss) before income
taxes and extraordinary items 136 (2) 759 (17)
Provision for income taxes 3 11 244 5
----- ----- ------- ------
Income (loss) before extraordinary items 133 (13) 515 (22)
Extraordinary loss on extinguishment
of debt, net of income taxes - - (4) (30) (35)
----- ----- ------- ------
Net income (loss) $ 133 $ (17) $ 485 $ (57)
===== ===== ====== ======
Basic earnings per share:
Income (loss) before extraordinary items $1.13 $(.11) $ 4.38 $ (.22)
===== ===== ====== ======
Net income (loss) $1.13 $(.14) $ 4.13 $ (.57)
===== ===== ====== ======
Diluted earnings per share:
Income (loss) before extraordinary items $1.13 $(.11) $ 4.37 $ (.22)
===== ===== ====== ======
Net income (loss) $1.13 $(.14) $ 4.12 $ (.57)
===== ===== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
Millions of dollars, except par value data 2000 1999
------------------------------------------ ------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 516 $ 307
Accounts receivable, net 498 566
Inventories 420 519
Prepaid expenses and other current assets 114 114
Deferred tax assets 60 380
------ ------
Total current assets 1,608 1,886
------ ------
Property, plant and equipment, net 2,417 4,291
Investments and long-term receivables:
Investment in PO joint ventures 664 - -
Investment in Equistar Chemicals, LP 638 607
Receivable from LYONDELL-CITGO Refining LP 229 219
Investment in LYONDELL-CITGO Refining LP 58 52
Other investments and long-term receivables 117 137
Goodwill, net 1,147 1,545
Other assets 536 761
------ ------
Total assets $7,414 $9,498
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 371 $ 350
Current maturities of long-term debt 212 225
Other accrued liabilities 450 446
------ ------
Total current liabilities 1,033 1,021
------ ------
Long-term debt, less current maturities 3,995 6,046
Other liabilities 383 331
Deferred income taxes 647 891
Commitments and contingencies
Minority interest 179 202
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 578 172
Accumulated other comprehensive loss (300) (64)
Treasury stock, at cost, 2,689,667 and 2,678,976 shares,
respectively (75) (75)
------ ------
Total stockholders' equity 1,177 1,007
------ ------
Total liabilities and stockholders' equity $7,414 $9,498
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine months ended
September 30,
--------------------------------------------
<S> <C> <C>
Millions of dollars 2000 1999
------------------- --------------------- ---------------
Cash flows from operating activities:
Net income (loss) $ 485 $ (57)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Gain on sale of assets (590) - -
Depreciation and amortization 203 244
Deferred income taxes 75 3
Extraordinary items 30 35
Increase in accounts receivable (134) (143)
(Increase) decrease in inventories (28) 37
Increase in accounts payable 44 13
Net change in other working capital accounts (5) 52
Other, net (43) 46
------- -------
Net cash provided by operating activities 37 230
------- -------
Cash flows from investing activities:
Proceeds from sale of assets, net of cash sold 2,445 - -
Distributions from affiliates in excess of earnings - - 82
Expenditures for property, plant and equipment (78) (90)
Contributions and advances to affiliates (28) (45)
------- -------
Net cash provided by (used in) investing activities 2,339 (53)
------- -------
Cash flows from financing activities:
Repayment of long-term debt (2,064) (4,117)
Issuance of long-term debt, net - - 3,400
Issuance of common stock - - 736
Dividends paid (79) (70)
Payment of debt-related costs (18) (107)
Other - - 8
------- -------
Net cash used in financing activities (2,161) (150)
------- -------
Effect of exchange rate changes on cash (6) (2)
------- -------
Increase in cash and cash equivalents 209 25
Cash and cash equivalents at beginning of period 307 233
------- -------
Cash and cash equivalents at end of period $ 516 $ 258
======= =======
</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
of America 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 of America 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.
In the first quarter, Lyondell recorded a pretax gain on the sale of $544
million. In the third quarter 2000, the final settlement of working capital
with Bayer and resolution of certain estimated liabilities resulted in the
recording of an additional pretax gain on the sale of $46 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 generally terminated
on or about April 1, 2000, with a limited number providing transition services
through mid-2001. Payments of $24 million for severance, relocation and other
employee benefits were made through September 30, 2000. During the third
quarter 2000, Lyondell reduced the accrued liability by $25 million due to a
reduction in the number of affected employees and significantly lower than
expected payments of severance and other benefits. The $25 million reduction in
accrued liability was included as part of the gain on sale recognized in the
third quarter. Lyondell expects to settle the remainder of the liability within
the next 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>
September 30, December 31,
Millions of dollars 2000 1999
------------------- ------------- ------------
<S> <C> <C>
BALANCE SHEETS
Total current assets $1,409 $1,360
Property, plant and equipment, net 3,829 3,926
Investment in PD Glycol 53 52
Goodwill, net 1,094 1,119
Other assets 282 279
------ ------
Total assets $6,667 $6,736
====== ======
Current maturities of long-term debt $ 90 $ 92
Other current liabilities 631 692
Long-term debt, less current maturities 2,157 2,169
Other liabilities 132 121
Partners' capital 3,657 3,662
------ ------
Total liabilities and partners' capital $6,667 $6,736
====== ======
</TABLE>
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
Sales and other operating revenues $1,914 $1,471 $5,580 $3,783
Cost of sales 1,738 1,322 4,979 3,294
Selling, general and administrative expenses 49 54 142 170
Research and development expense 9 11 28 31
Amortization of goodwill and other intangibles 9 8 25 25
------ ------ ------- -------
Operating income 109 76 406 163
Interest expense, net (45) (42) (134) (127)
Other income (expense), net (1) 1 (1) 47
------ ------ ------- -------
Net income $ 63 $ 35 $ 271 $ 83
====== ====== ====== ======
SELECTED CASH FLOW INFORMATION
Depreciation and amortization $ 78 $ 75 $ 230 $ 222
Expenditures for property, plant and equipment 33 36 81 112
</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>
September 30, December 31,
Millions of dollars 2000 1999
------------------- --------------- ---------------
<S> <C> <C>
BALANCE SHEETS
Total current assets $ 359 $ 219
Property, plant and equipment, net 1,324 1,350
Other assets 74 60
------ ------
Total assets $1,757 $1,629
====== ======
Short-term debt $ 450 $ - -
Current maturities of long-term debt - - 450
Other current liabilities 465 307
Long-term debt, less current maturities 264 247
Other liabilities 58 69
Partners' capital 520 556
------ ------
Total liabilities and partners' capital $1,757 $1,629
====== ======
</TABLE>
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
Sales and other operating revenues $1,177 $ 780 $2,937 $1,694
Cost of sales 1,077 735 2,781 1,619
Selling, general and administrative expenses 18 13 46 47
------ ----- ------ ------
Operating income 82 32 110 28
Interest expense, net (16) (11) (44) (31)
State income tax benefit - - - - - - 1
------ ----- ------ ------
Net income (loss) $ 66 $ 21 $ 66 $ (2)
====== ===== ====== ======
SELECTED CASH FLOW INFORMATION
Depreciation and amortization $ 28 $ 26 $ 84 $ 78
Expenditures for property, plant and equipment 11 11 46 43
</TABLE>
5. Extraordinary Items
During the first and second quarters of 2000, Lyondell retired debt in the
principal amount of $2.05 billion (see Note 9). Lyondell wrote off $38 million
of unamortized debt issuance costs and amendment fees and paid call premiums of
$8 million. The total charges of $46 million, less a tax benefit of $16
million, were reported as an extraordinary loss on extinguishment of debt.
6
<PAGE>
6. Inventories
The components of inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
Millions of dollars 2000 1999
------------------- ------------- ------------
<S> <C> <C>
Finished goods $ 327 $ 405
Work-in-process 9 31
Raw materials 53 44
Materials and supplies 31 39
----- -----
Total inventories $ 420 $ 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>
September 30, December 31,
Millions of dollars 2000 1999
------------------- ------------- ------------
<S> <C> <C>
Land $ 9 $ 35
Manufacturing facilities and equipment 2,499 4,406
Construction in progress 131 114
------ ------
Total property, plant and equipment 2,639 4,555
Less accumulated depreciation 222 264
------ ------
Property, plant and equipment, net $2,417 $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. 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.
Lyondell's investment in the PO joint ventures is reduced through recognition of
its share of the depreciation and amortization of the assets of the joint
ventures. Other changes in the investment balance are principally due to
additional capital investments by Lyondell in the joint ventures.
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.
7
<PAGE>
10. Commitments and Contingencies
Capital Commitments--Lyondell has commitments, including those related to
capital expenditures, all made in the normal course of business. At September
30, 2000, capital commitments included those related to the construction of a
world-scale PO facility, known as PO-11, in the Netherlands and a major
expansion of a TDI facility in France. The outstanding commitments on these two
projects totaled $80 million as of September 30, 2000.
Leases--During the third quarter 2000, construction began on a new BDO facility
in Europe known as BDO-2. Construction is being financed by a third party
lessor. Upon completion early in 2002, Lyondell will lease the facility under an
operating lease for a term of five years. Lyondell may, at its option, purchase
the facility at any time up to the end of the lease term for an amount equal to
the unrecovered construction costs of the lessor, as defined. If Lyondell does
not exercise the purchase option, the facility will be sold and Lyondell will
pay the lessor a termination fee to the extent the sales price is less than the
residual value of the facility, as defined. The residual value at the end of the
lease term is estimated at approximately $200 million.
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. 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 and of Petroleos de Venezuela, S.A.
("PDVSA"), the national oil company of the Republic of Venezuela, is required to
sell, and LCR is required to purchase, 230,000 barrels per day of extra heavy
crude oil. This 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. Subsequently, PDVSA Oil unilaterally increased allocations of crude
oil to LCR to 200,000 barrels per day effective July 1, 2000 and to 230,000
barrels per day effective October 1, 2000. LCR has consistently contested the
validity of PDVSA Oil and PDVSA's reduction in deliveries under the crude supply
agreement. PDVSA 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. On September 15, 2000, Lyondell and CITGO completed the
syndication of one-year credit facilities for LCR, which consist of a $450
million term loan to replace the interim financing and a $70 million revolving
credit facility to be used for working capital and general business purposes.
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
8
<PAGE>
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. On April 18, 2000, ARCO was acquired by
BP Amoco PLC (BP Amoco).
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
September 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 September 30, 2000, Lyondell's environmental liability for future
assessment and remediation costs at the above-mentioned sites totaled $35
million. The liabilities per site range from less than $1 million to $14
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.
9
<PAGE>
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 (now wholly owned by BP Amoco), which contributes
significant pretax margin. If legislation is enacted or other governmental
action taken, ARCO had in the past 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.
11. Financial Instruments
During the third quarter 2000, Lyondell entered into foreign currency forward
contracts to hedge foreign exchange exposures related to euro-denominated PO-11
project commitments. As of September 30, 2000, the notional amounts of
outstanding forward contracts totaled 134 million euros, or about $120 million.
Gains and losses on the forward contracts are deferred and will be included in
the measurement of the plant construction costs. Lyondell deferred $5 million
of hedging losses as of September 30, 2000.
10
<PAGE>
12. 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 nine-month periods ended September 30, 1999.
<TABLE>
<CAPTION>
For the three months ended
September 30,
-------------------------------------------------------------
2000 1999
----------------------------- ---------------------------
Thousands of shares Shares EPS Shares EPS
------------------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Basic 117,556 $1.13 117,554 $(.11)
Dilutive effect of options 165 - - - - - -
------- ----- ------- -----
Diluted 117,721 $1.13 117,554 $(.11)
======= ===== ======= =====
For the nine months ended
September 30,
--------------------------------------------------------------
2000 1999
----------------------------- ---------------------------
Thousands of shares Shares EPS Shares EPS
------------------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Basic 117,556 $4.38 98,237 $(.22)
Dilutive effect of options 253 (.01) - - - -
------- ----- ------ -----
Diluted 117,808 $4.37 98,237 $(.22)
======= ===== ====== =====
</TABLE>
Comprehensive Income - Comprehensive income consisted of the following:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) $ 133 $ (17) $ 485 $ (57)
Foreign currency translation loss (97) (11) (236) (78)
----- ----- ----- -----
Comprehensive income (loss) $ 36 $ (28) $ 249 $(135)
===== ===== ===== =====
</TABLE>
11
<PAGE>
13. 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 ("LMC") 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
------------------- ------------ -------------- ---------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
For the three months ended September 30, 2000:
Sales and other operating revenues $ 975 $ - - $ - - $ - - - - $ 975
Operating income 97 97
Gain on sale of assets 46 46
Interest expense (114) (114)
Interest income 10 10
Other income, net 14 14
Income (loss) from equity investments 2 84 (19) 42 (26) 83
Income before income taxes and extraordinary item 136
For the three months ended September 30, 1999:
Sales and other operating revenues 976 976
Operating income 100 100
Gain on sale of assets 590 590
Interest expense (156) (156)
Interest income 12 12
Other income, net 2 2
Income (loss) from equity investments 2 40 11 14 (27) 40
Loss before income taxes and extraordinary item (2)
For the nine months ended September 30, 2000:
Sales and other operating revenues 3,087 3,087
Operating income 326 326
Interest expense (403) (403)
Interest income 39 39
Other income, net 8 8
Income (loss) from equity investments 8 264 (41) 48 (80) 199
Income before income taxes and extraordinary item 759
For the nine months ended September 30, 1999:
Sales and other operating revenues 2,685 2,685
Operating income 329 329
Interest expense (451) (451)
Interest income 27 27
Other income, net 9 9
Income (loss) from equity investments 5 112 19 5 (72) 69
Loss before income taxes and extraordinary item (17)
</TABLE>
12
<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 For the nine months
ended September 30, ended September 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 $ (30) $ (27) $ (83) $ (86)
Net gain from Equistar asset sales - - - - - - 18
Income (loss) from equity investment in LMC 4 - - 3 (4)
----- ----- ----- -----
Total--Other $ (26) $ (27) $ (80) $ (72)
===== ===== ===== =====
</TABLE>
14. 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.
In addition, during the third quarter 2000 Lyondell finalized the portion of the
accrued liability related to employee costs and reduced the liability by $10
million. The third quarter 2000 benefit of the accrual reversal was
substantially offset by other acquisition-related costs that were incurred but
had not been identified or accrued at the time of purchase. Through September
30, 2000, Lyondell had paid and charged approximately $213 million in total
against the accrued liability. The remaining $15 million of the accrued
liability relates to PO-11 commitments and final settlement is subject to
negotiations with the affected third parties.
15. 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 its credit facility as well as 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 and has been a Guarantor since the credit facility was entered into.
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 nine-month periods ended September 30, 2000 and 1999.
13
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
BALANCE SHEET
As of September 30, 2000
<TABLE>
<CAPTION>
Non- Consolidated
Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell
------------------- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total current assets $1,327 $ 262 $ 19 $ - - $1,608
Property, plant and equipment, net 1,860 557 - - - - 2,417
Other investments and
long-term receivables 3,746 61 978 (3,079) 1,706
Goodwill, net 423 724 - - - - 1,147
Deferred charges and other assets 471 63 - - 2 536
------ ------ ---- ------- ------
Total assets $7,827 $1,667 $997 $(3,077) $7,414
====== ====== ==== ======= ======
Current maturities of long-term debt $ 212 $ - - $- - $ - - $ 212
Other current liabilities 599 223 (1) - - 821
Long-term debt,
less current maturities 3,995 - - - - - - 3,995
Other liabilities and deferred credits 328 55 - - - - 383
Deferred income taxes 518 129 - - - - 647
Intercompany liabilities (assets) 819 (973) 152 2 - -
Minority interest 179 - - - - - - 179
Stockholders' equity 1,177 2,233 846 (3,079) 1,177
------ ------ ---- ------- ------
Total liabilities and
Stockholders' equity $7,827 $1,667 $997 $(3,077) $7,414
====== ====== ==== ======= ======
</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 2,925 50 936 (2,896) 1,015
Goodwill, net 765 780 - - - - 1,545
Deferred charges and other assets 573 188 - - - - 761
------ ------ ---- ------- ------
Total assets $9,480 $1,970 $944 $(2,896) $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 1,007 2,247 649 (2,896) 1,007
------ ------ ---- ------- ------
Total liabilities and
stockholders' equity $9,480 $1,970 $944 $(2,896) $9,498
====== ====== ==== ======= ======
</TABLE>
14
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued)
STATEMENTS OF INCOME
For the Three Months Ended September 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 $ 812 $232 $- - $ (69) $ 975
Cost of sales 699 163 - - (69) 793
Selling, general and
administrative expenses 49 2 - - - - 51
Research and development expense 6 - - - - - - 6
Amortization of goodwill
and other intangibles 21 7 - - - - 28
----- ---- --- ----- -----
Operating income 37 60 - - - 97
Gain on sale of assets 46 - - - - - - 46
Interest income (expense), net (108) 1 3 - - (104)
Other income (expense), net 37 (23) - - - - 14
Income from equity investments 137 - - 81 (135) 83
Intercompany income (expense) (16) 32 14 (30) - -
Provision (benefit) for income taxes - - 12 19 (28) 3
----- ---- --- ----- -----
Income (loss) before
extraordinary item 133 58 79 (137) 133
Extraordinary item, net of taxes - - - - - - - - - -
----- ---- ---- ----- -----
Net income $ 133 $ 58 $ 79 $(137) $ 133
===== ==== ==== ===== =====
</TABLE>
For the Three Months Ended September 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 $ 850 $ 214 $- - $ (88) $ 976
Cost of sales 709 150 - - (88) 771
Selling, general and
administrative expenses 59 4 - - - - 63
Research and development expense 14 - - - - - - 14
Amortization of goodwill
and other intangibles 23 5 - - - - 28
----- ---- ---- ----- -----
Operating income 45 55 - - - - 100
Interest income (expense), net (149) 1 4 - - (144)
Other income (expense), net 29 (27) - - - - 2
Income from equity investments 122 - - 39 (121) 40
Intercompany income (expense) (46) (61) (31) 138 - -
Provision (benefit) for income taxes 14 (116) (27) 140 11
----- ---- ---- ----- -----
Income (loss) before
extraordinary item (13) 84 39 (123) (13)
Extraordinary item, net of taxes (4) - - - - - - (4)
----- ---- ---- ----- -----
Net income (loss) $ (17) $ 84 $ 39 $(123) $ (17)
----- ---- ---- ----- -----
</TABLE>
15
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued)
STATEMENTS OF INCOME--(Continued)
For the Nine Months Ended September 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 $2,645 $ 701 $- - $(259) $3,087
Cost of sales 2,252 521 - - (259) 2,514
Selling, general and
administrative expenses 134 5 - - - - 139
Research and development expense 27 - - - - - - 27
Amortization of goodwill
and other intangibles 59 22 - - - - 81
------ ----- ---- ----- ------
Operating income 173 153 - - - - 326
Gain on sale of assets 590 - - - - - - 590
Interest income (expense), net (376) 1 11 - - (364)
Other income (expense), net 119 (111) - - - - 8
Income from equity investments 387 - - 191 (379) 199
Intercompany income (expense) (136) 210 50 (124) - -
Provision for income taxes 242 62 62 (122) 244
------ ----- ---- ----- ------
Income before
extraordinary item 515 191 190 (381) 515
Extraordinary item, net of taxes (30) - - - - - - (30)
------ ----- ---- ----- ------
Net income $ 485 $ 191 $190 $(381) $ 485
====== ===== ==== ===== ======
</TABLE>
For the Nine Months Ended September 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 $2,339 $ 604 $- - $(258) $2,685
Cost of sales 1,919 391 - - (258) 2,052
Selling, general and
administrative expenses 173 13 - - - - 186
Research and development expense 43 - - - - - - 43
Amortization of goodwill
and other intangibles 62 13 - - - - 75
------ ----- ---- ----- ------
Operating income 142 187 - - - - 329
Interest income (expense), net (436) 2 10 - - (424)
Other income (expense), net 135 (126) - - - - 9
Income from equity investments 283 - - 65 (279) 69
Intercompany income (expense) (139) 91 (27) 75 - -
Provision (benefit) for income taxes 7 (61) (17) 76 5
------ ----- ---- ----- ------
Income (loss) before
extraordinary item (22) 215 65 (280) (22)
Extraordinary item, net of taxes (35) - - - - - - (35)
------ ----- ---- ----- ------
Net income (loss) $ (57) $ 215 $ 65 $(280) $ (57)
====== ===== ==== ===== ======
</TABLE>
16
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued)
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2000
<TABLE>
<CAPTION>
Non- Consolidated
Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell
----------- ---------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Net income $ 105 $ 188 $ 192 $ - - $ 485
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
(Gain) loss on sale of assets (599) 9 - - - - (590)
Depreciation and amortization 159 44 - - - - 203
Extraordinary item 30 - - - - - - 30
Net changes in working
capital and other 507 (426) (172) - - (91)
----------- --------- --------- ----------- ----------
Net cash provided by
(used in) operating
activities 202 (185) 20 - - 37
----------- --------- --------- ----------- ----------
Proceeds from sale of assets,
net of cash sold 2,281 164 - - - - 2,445
Expenditures for property,
plant and equipment (59) (19) - - - - (78)
Contributions and advances
to affiliates 3 (11) (20) - - (28)
----------- --------- --------- ----------- ----------
Net cash provided by (used in)
investing activities 2,225 134 (20) - - 2,339
----------- --------- --------- ----------- ----------
Payment of debt related costs (18) - - - - - - (18)
Repayments of long-term debt (2,064) - - - - - - (2,064)
Dividends paid (79) - - - - - - (79)
----------- --------- --------- ----------- ----------
Net cash used in
financing activities (2,161) - - - - - - (2,161)
----------- --------- --------- ----------- ----------
Effect of exchange rate
changes on cash (51) 45 - - - - (6)
----------- --------- --------- ----------- ----------
Increase (decrease) in
cash and cash equivalents $ 215 $ (6) $ - - $ - - $ 209
=========== ========= ========= =========== ==========
</TABLE>
17
<PAGE>
CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(Continued)
STATEMENT OF CASH FLOWS--(Continued)
For the Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Non- Consolidated
Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell
------------------- -------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss) $ (336) $ 214 $ 65 $ - - $ (57)
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 213 31 - - - - 244
Extraordinary item 35 - - - - - - 35
Net changes in working
capital and other 273 (149) (116) - - 8
------- ----- ----- ----- ======
Net cash provided by
(used in) operating
activities 185 96 (51) - - 230
------- ----- ----- ----- ======
Expenditures for property,
plant and equipment (81) (9) - - - - (90)
Distributions from affiliates
in excess of earnings 16 (16) 82 - - 82
Contributions and advances
to affiliates (3) (11) (31) - - (45)
------- ----- ----- ----- ======
Net cash provided by
(used in) investing
activities (68) (36) 51 - - (53)
------- ----- ----- ----- ======
Payment of debt related costs (107) (107)
Proceeds from issuance
of long-term debt 3,400 - - - - - - 3,400
Repayments of long-term debt (4,117) - - - - - - (4,117)
Dividends paid (70) - - - - - - (70)
Issuance of common stock 736 - - - - - - 736
Other 8 - - - - - - 8
------- ----- ----- ----- ======
Net cash used in
financing activities (150) - - - - - - (150)
------- ----- ----- ----- ======
Effect of exchange rate
changes on cash 2 (4) - - - - (2)
------- ----- ----- ----- ======
(Decrease) increase in
cash and cash equivalents $ (31) $ 56 $ - - $ - - $ 25
======= ===== ===== ===== ======
</TABLE>
18
<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 the first quarter of 2000.
After a temporary decrease in April 2000, crude oil prices became more volatile,
but still trended upward, peaking in September 2000 at a three-year high. Third
quarter 2000 average benchmark crude oil prices were 12% higher than the second
quarter 2000 and 74% higher than the third quarter 1999. Prices for the first
nine months of 2000 averaged 85% higher than the comparable 1999 period. These
crude oil price increases 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 market resistance and other competitive
factors. More recently, Equistar experienced downward pressure on prices due to
competition from new industry capacity. In addition, third quarter 2000 GDP
(gross domestic product) growth in the U.S. slowed significantly from growth
rates experienced in the prior four quarters.
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. Net proceeds of the sale were used to retire $2.05 billion of
variable-rate debt. Including post-closing adjustments recorded in the third
quarter 2000, Lyondell recorded a $400 million after-tax gain on the sale.
Unless otherwise indicated, the following analysis of operating results compares
the third quarter and first nine months of 2000 to the comparable 1999 periods.
An analysis comparing third quarter 2000 to second quarter 2000 is also
included.
Net Income--Net income of $133 million for the third quarter 2000 included a $40
million benefit due to a lower revised income tax rate and a favorable $31
million after-tax adjustment of the gain on the Bayer asset sale. The third
quarter 1999 net loss of $17 million included an $11 million charge and a $4
million extraordinary loss, both due to a revised income tax rate. Excluding
these items, third quarter 2000 net income was $62 million compared to a $2
million net loss in the third quarter 1999. Excluding the $400 million after-
tax gain on asset sale, net income before extraordinary items for the first nine
months of 2000 was $115 million compared to a net loss before extraordinary
items of $22 million in the first nine months of 1999.
The increases in net income in both the third quarter and nine-month comparisons
were primarily due to higher equity income from Equistar and LCR and lower
interest expense. The operating results for Lyondell's intermediate chemicals
and derivatives segment were flat. Equistar's income improved primarily due to
higher ethylene margins in Equistar's petrochemicals segment. LCR's income
improvement reflected higher margins, due to higher gasoline prices, and higher
sales volumes. The lower interest expense was due to the debt retirement and
was partly offset by higher interest rates. Margins improved in Lyondell's
intermediate chemicals and derivatives segment, particularly for MTBE, but these
were offset by the effect of the sale of the polyols business on March 31, 2000.
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--In the first quarter 2000, the sale of assets to Bayer
generated a pretax gain of $544 million. In the third quarter 2000, the final
settlement of working capital with Bayer and resolution of certain estimated
liabilities resulted in the recording of an additional pretax gain of $46
million for a total gain on the sale of $590 million, or $400 million after tax.
19
<PAGE>
Income from Equity Investment in Equistar--Lyondell's income from its equity
investment in Equistar was $35 million in the third quarter 2000 compared to $24
million in the third quarter 1999. Equity income was $140 million for the first
nine months of 2000 compared to $63 million for the comparable 1999 period. For
the 2000 periods, the benefit of higher margins in Equistar's petrochemicals
segment, particularly in the second quarter 2000, more than offset lower margins
in the polymers segment and the effect, on the nine-month comparison, of $41
million of net gains on asset sales included in the second quarter 1999. In the
petrochemicals segment, sales prices for ethylene increased more than costs for
raw materials, leading to higher margins in the 2000 periods. In the polymers
segment, 2000 margins were lower as sales price increases lagged behind raw
material cost increases.
Income from Equity Investment in LCR--Lyondell's income from its equity
investment in LCR was $42 million in the third quarter 2000 compared to $14
million in the third quarter 1999. Lyondell had equity income of $48 million in
the first nine months of 2000 compared to $5 million for the 1999 period. The
improvements in 2000, primarily in the third quarter, were due to higher
allocations and an improved mix of Venezuelan crude oil, higher spot margins,
reflecting a stronger gasoline market, and higher margins for reformulated
gasoline as well as lubes and aromatics. 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 $114 million in the third quarter 2000
compared to $156 million in the third quarter 1999 and $403 million in the first
nine months of 2000 compared to $451 million in the 1999 period. The decreases
were primarily due to the early retirement of $2.05 billion of debt during 2000,
using proceeds of the asset sale to Bayer. The benefit from the early
retirement of debt, which was realized in the second and third quarters of 2000,
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 $39 million in the first nine months of
2000 compared to $27 million in the 1999 period. The increase reflected higher
cash balances, primarily in the second quarter 2000, as a result of proceeds
from the asset sale to Bayer.
Income Tax--The estimated effective tax rate for 2000 was revised from 39% to
32% in the third quarter. The lower 32% estimated tax rate reflected the effect
of the final allocation of the Bayer transaction gain among the various state
and foreign tax jurisdictions in which Lyondell operates. The effect of
applying the 32% tax rate to pretax income for the first six months of 2000
resulted in a $40 million benefit in the third quarter 2000. In the third
quarter 1999, the estimated effective tax rate was revised from a tax benefit of
39% to a tax benefit of 27%, resulting in an $11 million charge in the period.
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 provisions for taxes
in foreign jurisdictions.
Extraordinary Items--The extraordinary items for the first nine months of 2000
consisted of the write off of unamortized debt issuance costs and amendment fees
of $38 million and the payment of call premiums of $8 million for a total of $46
million, or $30 million after tax, related to the early retirement of $2.05
billion of debt. The early debt retirement during the first and second quarters
of 2000 was made with proceeds from the March 31, 2000 asset sale to Bayer. The
1999 extraordinary item consisted of the write off of unamortized debt issuance
costs and amendment fees totaling $54 million, or $35 million after tax, related
to early retirement 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 net 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.
The following condensed income statements present the unaudited pro forma
consolidated operating results for the nine months ended September 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
20
<PAGE>
debt in accordance with the provisions of Lyondell's credit facility and
indentures. The operating results for the nine months ended September 30, 2000
exclude the after-tax gain on asset sale of $400 million, or $3.40 per share.
<TABLE>
<CAPTION>
For the nine months ended
September 30,
---------------------------------
<S> <C> <C>
In millions, except per share data 2000 1999
---------------------------------- -------------- --------------
Sales and other operating revenues $2,867 $2,077
Operating income 311 246
Interest expense 340 310
Income from equity investments 199 69
Net income from continuing operations 140 24
Basic and diluted income per share from continuing operations 1.19 .24
</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.
Third Quarter 2000 versus Second Quarter 2000
For the third quarter 2000, Lyondell's net income, excluding the post-closing
adjustment of the gain on asset sale and the six-month effect of the tax rate
revision, was $62 million and was comparable to net income before extraordinary
item of $65 million in the second quarter 2000. Lyondell's third quarter 2000
net income benefited from a combination of higher refining volumes and margins
at LCR, higher PO and derivatives margins and volumes in the intermediate
chemicals and derivatives segment and a lower 32% tax rate compared to the 39%
tax rate in the second quarter. However, these benefits were more than offset
by the effects of lower MTBE and SM margins in the intermediate chemicals and
derivatives segment and lower margins at Equistar.
Intermediate Chemicals and Derivatives Segment
The following table sets forth volumes, including processing volumes, included
in sales and other operating revenues for this segment. Co-product tertiary
butyl alcohol ("TBA") is principally used to produce the derivative MTBE.
Volumes for 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. The volume of
PO to which Bayer is entitled is subject to future increases 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 not included in sales and are excluded
from the table.
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
In millions 2000 1999 2000 1999
----------- -------------- ------------ -------------- --------------
PO, PO derivatives, TDI (pounds) 720 1,126 2,600 3,268
Co-products:
Styrene monomer (pounds) 882 898 2,670 2,356
TBA and derivatives (gallons) 299 278 891 811
</TABLE>
Revenues--Revenues of $975 million in the third quarter 2000 were comparable to
revenues of $976 million in the third quarter 1999. The effect of the sale of
the polyols business was offset by higher sales prices in the 2000 period for
co-products MTBE and SM.
21
<PAGE>
Revenues of $3.1 billion in the first nine months of 2000 increased 15% compared
to revenues of $2.7 billion in the first nine months of 1999. Higher MTBE and
SM sales prices and volumes, particularly in the second quarter 2000, more than
offset the effect of the sale of the polyols business. The higher MTBE prices
and volumes reflected higher gasoline prices, increased global demand, and
tighter supplies. New regulations in Europe contributed to higher global
demand, while new U.S. reformulated gasoline standards affected supplies. SM
prices and volumes also benefited from stronger demand. For the 2000 periods,
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. Excluding polyols, PO and derivatives volumes decreased 5% on a
quarterly basis and 1% on a nine-month basis. These decreases were primarily due
to the effect of new industry capacity in Europe, which were only partly offset
by higher U.S. volumes.
Operating Income--Operating income was $97 million in the third quarter 2000
compared to $100 million in the third quarter 1999. Higher MTBE margins were
offset by the effect of the sale of the polyols business and lower margins and
volumes for PO and other derivatives products. The improvement in MTBE margins
reflected significantly higher prices primarily due to a stronger gasoline
market. PO and derivatives product margins, excluding polyols, decreased due to
higher raw material costs, primarily propylene. Benchmark propylene costs
increased 74% compared to third quarter 1999.
Operating income was $326 million in the first nine months of 2000 and $329
million in the first nine months of 1999. Higher margins and volumes for MTBE
and SM, which primarily occurred in the second quarter 2000, were substantially
offset by the 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 the 2000 period primarily reflected the effects of the
sale of the polyols business and benefits from cost reduction efforts.
Third Quarter 2000 versus Second Quarter 2000
Operating income in the third quarter 2000 of $97 million decreased 32% from
$142 million in the second quarter 2000. While PO and derivatives volumes and
margins increased, margins for co-products MTBE and SM decreased from the high
levels experienced in the second quarter 2000.
The core PO and derivatives business remained strong in the third quarter 2000.
Volumes increased 4% over second quarter levels. Margins increased primarily
due to higher selling prices for PO derivatives, including propylene glycol
ethers, propylene glycol and butanediol. Margins also benefited from somewhat
lower propylene raw material costs. The average U.S. published contract
chemical grade propylene price declined from 24.7 cents per pound in the second
quarter to 24.0 cents per pound in the third quarter.
MTBE margins were lower in the third quarter due mainly to a sharp rise in the
cost of butane and methanol, the raw materials for MTBE. Based on published
data, spot raw material margins in the third quarter were about 50% lower
compared to the second quarter. The increase in MTBE raw material costs was
driven by the increase in energy prices. Published data shows that spot SM
margins declined from about 12 cents per pound in the second quarter to about 5
cents per pound in the third quarter. The margin reduction was due to a sharp
increase in the cost of benzene, a key raw material, as well as some erosion in
pricing as a result of weaker demand for SM.
22
<PAGE>
Equistar Chemicals, LP
Segment Data
The following tables reflect selected sales volume data and summarized financial
information for Equistar's business segments.
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
In millions 2000 1999 2000 1999
----------- -------------- -------------- -------------- --------------
Selected petrochemicals products:
Olefins (pounds) 4,512 4,760 14,020 13,795
Aromatics (gallons) 101 94 312 270
Polymers products (pounds) 1,622 1,541 4,763 4,804
Millions of dollars
-------------------
Sales and other operating revenues:
Petrochemicals segment $1,836 $1,300 $ 5,302 $ 3,250
Polymers segment 573 533 1,713 1,465
Intersegment eliminations (495) (362) (1,435) (932)
------ ------ ------- -------
Total $1,914 $1,471 $ 5,580 $ 3,783
====== ====== ======= =======
Cost of sales:
Petrochemicals segment $1,630 $1,198 $ 4,653 $ 2,967
Polymers segment 603 486 1,761 1,359
Intersegment eliminations (495) (362) (1,435) (932)
------ ------ ------- -------
Total $1,738 $1,322 $ 4,979 $ 3,394
====== ====== ======= =======
Other operating expenses:
Petrochemicals segment $ 2 $ 3 $ 6 $ 9
Polymers segment 16 21 52 60
Unallocated 49 49 137 157
------ ------ ------- -------
Total $ 67 $ 73 $ 195 $ 226
====== ====== ======= =======
Operating income (loss):
Petrochemicals segment $ 204 $ 99 $ 643 $ 274
Polymers segment (46) 26 (100) 46
Unallocated (49) (49) (137) (157)
------ ------ ------- -------
Total $ 109 $ 76 $ 406 $ 163
====== ====== ======= =======
</TABLE>
Petrochemicals Segment
Revenues--Revenues of $1.8 billion in the third quarter 2000 increased 41%
compared to third quarter 1999 revenues of $1.3 billion as a result of higher
sales prices, which were partly offset by lower volumes. The higher sales prices
reflect significantly higher raw material costs, while the decrease in volumes
reflects a slowdown in demand in the third quarter 2000.
Revenues of $5.3 billion for the first nine months of 2000 increased 63%
compared to $3.25 billion for the first nine months of 1999, primarily due to
higher sales prices as well as higher volumes. 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. Benchmark quoted ethylene prices
averaged 31 cents per pound for the first nine months of 2000, a 49% increase
over the first nine months of 1999. Sales volumes increased about 3% due to
higher demand in the first six months of 2000 compared to the 1999 period.
23
<PAGE>
Cost of Sales--Cost of sales of $1.6 billion in the third quarter 2000
increased 36% compared to $1.2 billion for the third quarter 1999. Cost of
sales of $4.7 billion in the first nine months of 2000 increased 57% compared to
$3.0 billion for the first nine months of 1999. The increases primarily
reflected the significant increase in raw material costs.
Operating Income--Operating income of $204 million in the third quarter 2000
more than doubled from $99 million in the third quarter 1999 as higher product
margins were only partly offset by the effect of lower volumes. Product margins
improved as sales prices increased more than raw material costs. Operating
income of $643 million for the first nine months of 2000 increased 135% from
$274 million in the first nine months of 1999 due primarily to higher product
margins and, to a lesser extent, higher sales volumes.
Polymers Segment
Revenues--Revenues of $573 million in the third quarter 2000 increased 7.5%
compared to $533 million in the third quarter 1999 primarily due to a 5%
increase in sales volumes. Volumes were lower in the third quarter 1999 due to
the shut down, during that quarter, of less efficient HDPE and other polymer
product capacity and plant maintenance. Equistar started up new HDPE capacity
in the fourth quarter 1999.
Revenues of $1.7 billion for the first nine months of 2000 increased 17%
compared to $1.5 billion in the first nine months of 1999 as a result of higher
sales prices, which were partly offset by a 1% decrease in volumes. The sales
price increases reflect pressure from higher raw material costs. The decrease
in volumes reflects the effect of the turnaround at the Morris, Illinois
facility during the second quarter 2000.
Cost of Sales--Cost of sales of $603 million in the third quarter 2000 increased
24% compared to $486 million for the third quarter 1999, while cost of sales of
$1.8 billion in the first nine months of 2000 increased 30% compared to $1.4
billion for the first nine months of 1999. The increases primarily reflected
the significant increases in raw material costs, primarily ethylene and
propylene.
Operating Income--For the third quarter 2000, the polymers segment had an
operating loss of $46 million compared to operating income of $26 million in the
third quarter 1999. For the first nine months of 2000, the operating loss was
$100 million compared to an operating profit of $46 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. For the first nine
months of 2000, unallocated expenses were $137 million compared to $157 million
in the comparable 1999 period. The decrease was primarily due to nonrecurring
transition service costs related to the business contributed by Occidental in
May 1998 and system implementation costs included in the first quarter 1999.
Other Income (Expense), Net--Other income of $47 million in the first nine
months 1999 primarily consisted of net gains on asset sales, including the sale
of Equistar's concentrates and compounds business.
Third Quarter 2000 versus Second Quarter 2000
Equistar's net income of $63 million in the third quarter 2000 decreased
compared to net income of $152 million in the second quarter 2000. The $89
million decrease primarily reflected higher raw material costs and lower product
sales prices. Sales prices declined due to increased competitive activity as a
result of new industry capacity and weaker demand, particularly in the early
part of the third quarter.
24
<PAGE>
Operating income for the petrochemicals segment decreased to $204 million in the
third quarter from $267 million in the second quarter. The decrease was driven
by higher raw material costs and somewhat lower olefins selling prices, leading
to a reduction in margins. Average benchmark contract ethylene prices were down
one cent per pound from the second quarter. Industry cash margins decreased
from 16 cents per pound in the second quarter to 12 cents per pound in the third
quarter.
The operating loss for the polymers segment increased from $23 million in the
second quarter to $46 million in the third quarter primarily due to lower
margins. Margins decreased as sales price erosion for polymers was greater than
the decline in raw materials costs. Average benchmark prices for high molecular
weight film went from 48 cents per pound in the second quarter to 45 cents per
pound in the third quarter. Although polymers segment sales volumes increased
10% compared to the second quarter, the increase was due to increased export
sales, as domestic demand was weak, particularly in the early part of the third
quarter.
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 nine months ended
September 30, September 30,
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Thousand barrels per day 2000 1999 2000 1999
------------------------ -------------- -------------- -------------- --------------
Refined products:
Gasoline 122 114 117 112
Diesel and heating oil 81 71 69 64
Jet fuel 24 20 17 17
Aromatics 13 10 11 10
Other refined products 109 107 103 104
------- ----- ----- -----
Total refined products volumes 349 322 317 307
======= ===== ===== =====
Crude processing rates:
Crude Supply Agreement 244 192 188 182
Other heavy crude oil - - 12 14 12
Other crude oil 26 37 34 39
------- ----- ----- -----
Total crude oil 270 241 236 233
======= ===== ===== =====
</TABLE>
Revenues--Revenues, including intersegment sales, were $1.2 billion in the third
quarter 2000, a 51% increase over third quarter 1999 revenues of $780 million,
and $2.9 billion for the first nine months of 2000, a 73% increase over revenues
of $1.7 billion 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. Third quarter 2000 sales volumes increased 8% compared
to the 1999 third quarter. The increase reflects increased allocations of extra
heavy Venezuelan crude oil under the Crude Supply Agreement (CSA). These
allocations were initially reduced to 195,000 barrels per day in August 1998 and
to 184,000 barrels per day in May 1999. In July 2000 the allocations were
increased to 200,000 barrels per day. Volumes increased 3% on a year-to-date
comparative basis.
Net Income--LCR had net income of $66 million in the third quarter 2000 compared
to $21 million in the third quarter 1999. LCR also had net income of $66
million for the first nine months of 2000 compared to a $2 million net loss in
the 1999 period. The improvement in the 2000 periods compared to the 1999
periods was due to increased allocations and an improved mix of CSA crude oil,
higher spot margins, reflecting a stronger gasoline market in 2000, and higher
margins for reformulated gasoline as well as lubes and aromatics. These
improvements were partly offset by higher fuels and utility costs and interest
expense. While the second quarter 2000 was
25
<PAGE>
negatively impacted by a major planned turnaround, this was more than offset by
the effect of unplanned production unit outages in the second quarter 1999.
Interest expense increased due to fees and higher rates associated with the
refinancing of LCR's debt in May and September 2000.
Third Quarter 2000 versus Second Quarter 2000
LCR had net income of $66 million in the third quarter 2000 compared to a net
loss of $22 million in the second quarter 2000. The second quarter results were
affected by lower volumes due to the planned turnaround. In the third quarter,
LCR benefited from excellent operational reliability and higher processing rates
of extra heavy Venezuelan crude oil due to increased CSA allocations as well as
volumes inventoried during the second quarter turnaround. LCR also benefited
from an increase in the refining margins for spot crude processed in the
quarter. Including the inventoried volumes, processing of extra heavy
Venezuelan crude oil obtained under the CSA averaged 244,000 barrels per day
during the third quarter compared to 138,000 barrels per day in the second
quarter. Total crude oil processing rates in the third quarter averaged 270,000
barrels per day compared to 193,000 barrels per day in the second quarter.
FINANCIAL CONDITION
Operating Activities--Cash provided by operations was $37 million in the first
nine months of 2000 compared to $230 million in the comparable 1999 period. The
2000 period reflects the effects of the Bayer asset sale and payments of related
expenses and estimated income taxes, offset by a deferred tax benefit, as well
as higher working capital. The working capital increase was primarily due to
higher receivable levels, which reflected higher product prices and sales mix,
as well as a decrease in the amount of receivables sold under a 1998 receivables
sales agreement. Cash provided by operating activities in the 1999 period also
reflected higher working capital, however this was offset by customer advances
and tax refunds totaling approximately $150 million.
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. During
the third quarter 2000, construction began on a new 275 million pound per year
BDO facility in Europe known as BDO-2. The construction is being financed by a
third party lessor, who will retain ownership of the facility and, upon
completion early in 2002, lease it to Lyondell by means of an operating lease.
Lyondell made capital expenditures of $78 million in the first nine months of
2000, including initial spending on the PO-11 facility and expansion of a TDI
plant in France. Equistar made capital expenditures of $81 million in the first
nine months of 2000, while LCR made expenditures of $46 million. Contributions
and advances to affiliates of $28 million for the first nine months of 2000
included loans of $25 million to LCR for capital projects.
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. 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 made $10
million of scheduled debt repayments and 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 three quarters of 2000 for a total of $79 million.
Liquidity and Capital Resources--At September 30, 2000, Lyondell had cash on
hand of $516 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.
26
<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.
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. On September 15, 2000, Lyondell and CITGO completed the syndication
of one-year credit facilities, including a $450 million term loan to replace the
interim financing and a $70 million revolving credit facility to be used for
working capital and other general business purposes.
Equistar had outstanding debt of $2.2 billion at September 30, 2000. Lyondell
remains liable on approximately $521 million of Equistar debt for which Equistar
assumed primary responsibility in connection with its formation. At September
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 fourth quarter 2000 operating results to be significantly below
those for the third quarter 2000. In the intermediate chemicals and derivatives
segment, MTBE margins will decline seasonally from third quarter levels. Demand
for PO and derivatives continues to be strong but the market appears to be
affected by increased supply from new industry PO capacity. PO and derivatives
margins are not expected to improve unless propylene costs stabilize. Equistar
is anticipating lower profitability due to the continuing high level and
volatility of raw material costs and downward pressure on product prices from
new capacity. While LCR operating results are expected to continue to benefit
from the increased level of deliveries under the CSA contract, they will be
lower than third quarter results, which benefited from the reduction of CSA
crude oil inventory levels.
Industry forecasts project a continuing difficult business environment due to
industry capacity additions in late 2000 and 2001, primarily in the
petrochemicals and polymers segments. This new capacity will put pressure on
product margins until demand growth absorbs the new capacity. Management's
priority in the current business environment is to enhance Lyondell's financial
performance by actively managing its current portfolio of assets and maximizing
earnings and cash flow. This includes debt reduction, managing working capital,
achieving cost reductions and disciplined capital spending. The capital program
includes addition of PO and BDO capacity to meet forecasted demand growth.
27
<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 third quarter 2000, Lyondell entered into foreign currency forward
contracts to hedge foreign exchange exposures related to euro-denominated PO-11
project commitments. As of September 30, 2000, the notional amounts of
outstanding forward contracts totaled 134 million euros, or about $120 million.
Assuming a hypothetical 20% unfavorable change in the euro exchange rate from
the rate in effect at September 30, 2000, the loss in earnings for the forward
contracts would be approximately $20 million. Sensitivity analysis was used for
this purpose. The euro exchange rate varied by as much as 20% during the year
2000. The quantitative information about market risk is necessarily limited
because it does not take into account the effects of the underlying operating
transactions.
During the current year, Equistar continued to enter 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 September 30, 2000, the outstanding
over-the-counter "derivative" contracts totaled 4.6 million barrels of crude
oil. The contracts mature from October 2000 through March 2001, and cover from
25% to 10% 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 September 30, 2000 the loss in earnings
for the derivatives contracts would be approximately $42 million. Sensitivity
analysis was used for this purpose. Lyondell's share of such loss would be
approximately $12 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
28
<PAGE>
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.
29
<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
10.31 $450,000,000 Credit Agreement dated as of September 13,
2000 among LCR, the lenders from time to time parties
hereto, and Credit Suisse First Boston, as Agent.
10.32 $70,000,000 revolving Credit Agreement dated as of
September 13, 2000 among LCR, the Lenders from time to
time parties hereto, Credit Suisse First Boston, as
Issuer and Agent.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None
30
<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: November 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)
31
