10-K405 1 FORM 10-K ================================================================================ 1994 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ----------- (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NUMBER 1-10145 LYONDELL PETROCHEMICAL 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 1600, HOUSTON,TEXAS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 652-7200 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- COMMON STOCK ($1.00 PAR VALUE) NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE 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 INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. ------ THERE WERE 80,000,000 SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING ON DECEMBER 31, 1994. THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT ON MARCH 1, 1995 BASED ON THE CLOSING PRICE ON THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE ON THAT DATE, WAS $849,396,870. DOCUMENTS INCORPORATED BY REFERENCE THE REGISTRANT'S DEFINITIVE PROXY STATEMENT, WHICH WILL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS AFTER DECEMBER 31, 1994 (INCORPORATED BY REFERENCE UNDER PART III). ================================================================================ TABLE OF CONTENTS PART I
Item Page -------- ---- 1. and 2. Business and Properties............................ 1 The Company's Business............................. 1 Development of Business............................ 1 Summary Description of Business Segments........... 2 Petrochemical Segment.............................. 2 Overview........................................... 2 Feedstocks......................................... 4 Marketing and Sales................................ 4 Competition and Industry Conditions................ 5 Properties......................................... 6 Capital Program.................................... 7 Employee Relations................................. 7 Refining Segment................................... 8 Overview........................................... 8 Upgrade Project.................................... 8 Management of LCR.................................. 9 Feedstocks......................................... 10 Marketing and Sales................................ 11 Other Agreements................................... 11 Competition and Industry Conditions................ 11 Properties......................................... 12 Capital Program.................................... 12 Employee Relations................................. 13 Related Party Transactions......................... 13 Research and Technology; Patents and Trademarks.... 14 Finance Matters.................................... 14 Long-Term Debt and Financing Arrangements.......... 15 Environmental Matters.............................. 16 3. Legal Proceedings.................................. 17 4. Submission of Matters to a Vote of Security Holders 22 Executive Officers of the Registrant............... 22 Description of Capital Stock....................... 25 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 26 6. Selected Financial Data............................ 27 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 28 8. Financial Statements and Supplementary Data........ 36 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 57 PART III 10. Directors and Executive Officers of the Registrant........................................ 57 11. Executive Compensation............................. 57 12. Security Ownership of Certain Beneficial Owners and Management....................................... 57 13. Certain Relationships and Related Transactions..... 57 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 58
i PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES THE COMPANY'S BUSINESS Lyondell Petrochemical Company operates in two business segments: petrochemicals and refining. As the context may require, all references hereafter to the "Company" or "Lyondell" include Lyondell Petrochemical Company, its wholly-owned subsidiaries and LYONDELL-CITGO Refining Company Ltd. ("LCR"). The Company manufactures a wide variety of petrochemicals, including olefins (ethylene, propylene, butadiene, butylenes and certain specialty products); polyolefins (polypropylene and low density polyethylene); methanol, methyl tertiary butyl ether ("MTBE") and aromatics and, through its interest in LCR, a Texas limited liability company, refined petroleum products, including gasoline, heating oil, jet fuel, fuel oil, aromatics and lubricants ("lube oils"). The Company generally sells its petrochemical products to customers for use primarily in the manufacture of other chemicals and products, which in turn are used in the production of a wide variety of consumer and industrial products. LCR sells its principal refined products primarily to CITGO Petroleum Corporation ("CITGO"). DEVELOPMENT OF BUSINESS Lyondell was formed in 1985 and was operated as a separate division ("Lyondell Division") of Atlantic Richfield Company (ARCO) until June 1988. Effective July 1, 1988, ARCO transferred substantially all the assets and liabilities relating to the integrated petrochemical and petroleum processing business of the Lyondell Division, along with certain pipeline assets that were not formerly a part of the Lyondell Division, to its wholly-owned subsidiary, Lyondell Petrochemical Company, a Delaware corporation. In exchange for the transfer of such assets and liabilities, Lyondell issued additional shares of its Common Stock to ARCO. On January 25, 1989, ARCO completed an initial public offering of 43,000,000 shares of the Company's Common Stock. In February 1990, the Company acquired a polypropylene plant and a low density polyethylene plant located in Pasadena, Texas ("Polymers Facility"). In July 1993, pursuant to agreements between the Company and CITGO (and its affiliates), the Company contributed its refining business including the refinery (the "Refinery"), the lube oil blending and packaging plant in Birmingport, Alabama and refining working capital to LCR and retained a participation interest in LCR through its wholly-owned subsidiary, Lyondell Refining Company. At December 31, 1994, the Company had an approximate 90 percent participation interest in LCR while CITGO held the remaining approximate 10 percent participation interest. The results of LCR currently are consolidated into the Company's financial statements. For further discussion of this transaction, see "REFINING SEGMENT - Overview". In August 1994, ARCO completed an offering ("ARCO Note Offering") of three-year debt securities ("Exchangeable Notes") exchangeable pursuant to the terms of the Exchangeable Notes upon maturity, at ARCO's option, into Lyondell Common Stock or cash with an equal value. If ARCO elects to deliver shares of Lyondell Common Stock at the maturity of the Notes, ARCO's equity interest in Lyondell will be substantially reduced or eliminated, depending on the price of Lyondell Common Stock at such time. In connection with the ARCO Note Offering, the five ARCO officers who were Directors of the Company, resigned from the Company's Board of Directors. Until the maturity of the Exchangeable Notes, ARCO has indicated that it generally intends to vote its shares in proportion to the votes of the non- ARCO stockholders, except under certain limited circumstances. See "RELATED PARTY TRANSACTIONS". As of March 1, 1995, ARCO owned 39,921,400 shares of Lyondell Common Stock, representing 49.9 percent of the issued and outstanding Common Stock of the Company. For additional information relating to certain continuing relationships and potential conflicts of interest among Lyondell, LCR, ARCO and ARCO Chemical Company ("ARCO Chemical"), an 83.3 percent owned subsidiary of 1 ARCO, see "RELATED PARTY TRANSACTIONS", included herein, and "Transactions Between the Company and ARCO" and "Principal Stockholders" which are included in the Company's 1995 Proxy Statement and incorporated herein by reference as part of Item 13 of this Annual Report on Form 10-K. See Note 21 - Segment Information of Notes to Consolidated Financial Statements. SUMMARY DESCRIPTION OF BUSINESS SEGMENTS PETROCHEMICAL SEGMENT OVERVIEW Channelview Complex -- Lyondell's Channelview petrochemical complex ("Channelview Complex"), located in Channelview, Texas, 20 miles east of Houston, includes two large olefins plants, a methanol plant, a butadiene recovery unit, a product flexibility unit (which has the capability to convert ethylene and other light hydrocarbon streams into propylene), an aromatics (benzene and toluene) recovery unit, two MTBE units, a butylene isomerization unit, an isoprene recovery unit and other petrochemical processing units. The Channelview Complex is connected by multiple pipelines to LCR's Refinery, which is approximately 16 miles away. The Channelview Complex also is connected by a comprehensive pipeline system to the Company's Mont Belvieu, Texas storage facility ("Mont Belvieu Facility"), to leased storage terminals and to customers along the Gulf Coast. Ethylene and propylene are shipped or exchanged through this pipeline system. See "Properties". The Company's olefins plants and related processing units produce ethylene, propylene, butadiene, butylenes, benzene, toluene, hydrogen and certain specialty products, such as isoprene, dicyclopentadiene, resin oils and piperylenes, along with gasoline blendstocks and heavy liquid fuels. The Company's petrochemical products are used by its customers to manufacture intermediate chemicals, which are used in a variety of consumer and industrial products. The Company also produces methanol and MTBE. Petrochemicals are fundamental to many segments of the economy, including the production of consumer products, housing components, automotive products and other durable and non-durable goods. Ethylene is the largest petrochemical in terms of worldwide production volume and is the key building block for a large number of chemicals. With the wide proliferation of end-use products derived from ethylene during the past 20 years, especially as plastics have developed into low-cost, high performance substitutes for a wide range of materials such as metals and paper, U.S. ethylene consumption has grown by an average annual rate of approximately four percent. Ethylene is used as a feedstock to manufacture polyethylene, which is used in products such as trash bags, packaging film, toys, housewares and milk containers. Ethylene also is used to produce ethylene oxide (used to produce ethylene glycol which is used to produce antifreeze and polyester fibers), ethylene dichloride (used to produce polyvinyl chloride for pipe and other vinyl products), ethylbenzene (used to produce styrene, which in turn is used to produce polystyrene for packaging and containers) and alpha olefins (used in the manufacture of detergents, as well as other intermediate chemicals). Propylene is used to manufacture polypropylene, which is used in products such as carpets, food packaging, upholstery, automobile parts and plastic bottles. Propylene is also used to manufacture acrylonitrile (used in clothing and high impact plastics), propylene oxide (used in polyurethane foams for furniture and insulation) and oxo products (used in industrial solvents, as well as other intermediate chemicals). Butadiene is used to manufacture styrene butadiene rubber and polybutadiene rubber, both of which are used in the manufacture of tires and other rubber products. Butadiene is also used in the production of nylon and acrylonitrile- butadiene-styrene plastics. Aromatics products include benzene and toluene. Benzene is used to produce styrene, phenol and nylon. Toluene is used as an octane enhancer, for benzene production and in urethane chemicals. These products are used in the production of plastics, rubber, fibers for carpet and apparel, in gasoline and in polyurethane foams used in seat cushions. 2 The Company's specialty products include various types of hydrocarbon resins and unsaturated polyester resins. These products are used in the production of inks, adhesives, paints and varnishes, rubber and fiberglass. Methanol is used to produce MTBE and a variety of chemical intermediates, including formaldehyde, acetic acid and methyl methacrylate. These intermediates are used to produce bonding adhesives for plywood as well as in polyester fibers and plastics. Other end uses include solvents and antifreeze applications. MTBE is an octane enhancer and clean fuel additive in reformulated gasoline. All MTBE produced at the Channelview Complex and not produced for LCR for gasoline blending is sold to a single customer. See "Competition and Industry Conditions", "Properties" and "RELATED PARTY TRANSACTIONS". The following table shows the current annual rated capacity for certain of the Company's principal petrochemical products: Rated Capacity (a) at December 31, 1994 ------------------ (Millions) Petrochemical Product Ethylene (pounds)............................... 3,600 (b) Propylene (pounds).............................. 2,100 (c) Butadiene (pounds).............................. 615 Methanol (gallons).............................. 248 (d) MTBE (gallons).................................. 199 (e) Aromatics (gallons)............................. 130 ______________ (a) The term "rated capacity", as used in this table and throughout this report, is calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit's optimal daily output based on the design feedstock mix. Because the rated capacity of a production unit is an estimated amount, the actual production volumes may be more or less than rated capacity. (b) The Company anticipates undertaking a debottleneck project of its olefins units that is expected to increase ethylene capacity by approximately 7% over the next two years. (c) Does not include refinery grade material or production from the product flexibility unit, which has a current rated capacity of 1 billion pounds per year of propylene. (d) Capacity as shown includes equivalent methanol that could be produced from reformed gas, an intermediate in the production of methanol. Capacity level reflects an approximate 6 percent increase over previous years as a result of a methanol unit turnaround completed during 1994. (e) Includes a 19 percent capacity expansion as of January 1995 which was completed in connection with the commercialization of the Company's ISOMPLUS technology. Bayport Polymers Facility -- The Polymers Facility converts propylene and ethylene supplied by the Channelview Complex into polypropylene and low density polyethylene that is sold into derivative markets. The Polymers Facility is connected by pipeline to the Company's Mont Belvieu Facility for feedstock supply. The following table shows the current annual rated capacity for each of the Company's principal polyolefins products. 3 Rated Capacity at December 31, 1994 -------------- (Millions) Polyolefins Product Polypropylene (pounds)............................ 300* Low density polyethylene (pounds)................. 140 _________________ *The Company is undertaking a debottleneck project that will expand polypropylene capacity by approximately 33% to 400 million pounds and is scheduled to be completed in 1996. FEEDSTOCKS The primary feedstocks used in the production of olefins are natural gas liquids feedstocks including ethane, propane and butane (collectively "NGLs") and naphtha, condensates and gas oils (collectively "Petroleum Liquids"). Olefins plants with the flexibility to consume a wide range of feedstocks are better able to maintain higher levels of profitability during periods of changing energy and petrochemical prices than olefins plants that are restricted in their feedstock processing capability. Prior to the mid 1970s, the feedstocks used at most ethylene plants in the United States consisted predominantly of NGLs. As of January 1, 1995, approximately 43 percent of domestic ethylene plant capacity was limited to NGL feedstocks, and the remaining approximately 57 percent could process to some extent both NGLs and petroleum liquids feedstocks. The Company's olefins plants can process 100 percent heavy petroleum liquids or up to 90 percent NGL feedstocks. Liquid feedstocks have had a significant historical margin advantage over ethane and propane. The industry margin differential between these feedstocks has been typically between one and four cents per pound of ethylene. The Company has the capability to capture this differential due to its feedstock flexibility. The Company's olefins plants use from 125,000 to 160,000 barrels per day of NGLs and/or heavy liquids feedstocks. The Company obtains a portion of its olefins feedstock requirements from LCR (NGLs, naphtha and gas oil) and additional olefins feedstock in the form of petroleum condensates pursuant to a contract with an affiliate of a foreign government. The remainder of its heavy liquids requirements are obtained under short-term contracts or on the spot market from a variety of foreign and domestic sources. The Company also purchases NGLs from a wide variety of domestic sources, many of which have pipeline connections to the Company's facilities. The Company's methanol plant generally processes natural gas feedstocks but also has the ability to process NGL feedstocks. The Company purchases natural gas from a variety of domestic sources for use as fuel at its facilities and as feedstock for the methanol plant and is connected to a diverse natural gas supply network. The Channelview Complex is currently the sole supplier of propylene and ethylene feedstocks to the Polymers Facility, which uses them to make polypropylene and low density polyethylene. MARKETING AND SALES Lyondell sells a majority of its olefins products to customers with whom it has long-standing relationships. Sales generally are made pursuant to written agreements which typically provide for monthly negotiation of price based upon current market prices for products sold under contract. The parties are contractually committed to use their best efforts to agree monthly on price terms. Nonetheless, if the parties fail to agree on a monthly price, in some cases deliveries may be suspended for the month. The term of these contracts is typically three to five years with automatic one year term extension provisions which cause the contract to remain in effect after the initial term unless expressly terminated by one of the parties. Some of these contracts are subject to early termination if deliveries have been suspended for several months. The contracts typically require the customer to purchase a specified minimum quantity while establishing a quantity range whereby the customer has the right to purchase additional quantities up to a specified maximum. The Company sells substantially all of its methanol output and most of its aromatics output under contracts that have initial terms ranging from two to three years and that typically contain automatic one year term extension 4 provisions which cause the contracts to remain in effect after the initial term expires unless expressly terminated by one of the parties. These contracts generally provide for monthly or quarterly price adjustments based upon current market prices. Aromatics produced at the Refinery, with the exception of benzene, are marketed by Lyondell for LCR under contracts with similar terms to its own. Benzene produced at the Refinery is sold directly to Lyondell at market-related prices. Lyondell licenses MTBE technology from ARCO Chemical and sells MTBE produced at one of its two units to ARCO Chemical at market-based prices. The production from the second unit is produced for LCR for gasoline blending. In addition, Lyondell has entered into a joint development and licensing arrangement to accelerate commercialization of two isomerization processes that produce feedstocks for MTBE and tertiary amyl methyl ether ("TAME") which are blending components for reformulated gasoline. See "RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS". Most of the Company's ethylene and propylene is shipped or exchanged via a comprehensive pipeline system which has connections to numerous Gulf Coast ethylene and propylene consumers. The pipeline system is owned by ARCO Pipe Line Company, and substantially all of it is leased by the Company under a long- term lease. See "Properties" and "RELATED PARTY TRANSACTIONS". The Company has exchange agreements with other olefins producers which allow access to customers who are not directly connected to the pipeline system. Some propylene is shipped by ocean-going vessel. Butadiene, methanol, aromatics and other petrochemicals are distributed by pipeline, railcar, truck, barge or ocean-going vessel. COMPETITION AND INDUSTRY CONDITIONS The basis for competition in all of Lyondell's petrochemical products is price, product quality and product deliverability. Lyondell competes with other large domestic producers of olefins and polyolefins, including Amoco Chemical Company, Chevron Chemical Company, Dow Chemical Company, Exxon Chemical Company, Occidental Chemical Corporation, Mobil Chemical Company, Phillips Petroleum Company and Shell Chemical Company. The combined rated capacity of the Company's olefins units at January 1, 1995 was approximately 3.6 billion pounds of ethylene per year or approximately 7.3 percent of total domestic production capacity. Based on published rated production capacities, the Company believes it is one of the six largest producers of ethylene in the United States. Of the total ethylene production capacity in the United States, approximately 94 percent is located along the Gulf Coast, and approximately 75 percent is owned by ten manufacturers. The petrochemical industry historically has experienced periods of high demand and high capacity utilization which result in increasingly high operating margins and profitability. This generally leads to new capacity investment until supply exceeds demand. The overcapacity in turn leads to periods of decreasing capacity utilization and declining operating margins until demand exceeds supply and the cycle is repeated. Over 7.7 billion pounds was added to domestic ethylene capacity from the end of 1989 to the beginning of 1994 (a 20 percent increase). The additional capacity, combined with poor overall U.S. and world economic conditions and further additions to supply in other parts of the world, generally outpaced ethylene demand growth in 1990-1992 and caused the industry to experience a decline in margins through 1993. However, during 1994 domestic ethylene demand grew at the rate of approximately 6% and the domestic olefins industry operated at close to maximum available capacity resulting in higher industry margins. One new plant came on line during the second quarter of 1994 and another plant came on line during the first quarter of 1995. Capacity additions resulting from these two new plants, along with additional plant expansions, is expected to total approximately 4.7 billion pounds, and is relatively in balance with domestic demand growth in 1994 and anticipated growth in 1995. Domestic industry ethylene rated capacity at January 1, 1995 was approximately 49 billion pounds per year. There is no assurance that recent and anticipated ethylene capacity increases, or other factors, will not adversely affect the industry's supply and demand balance. The Company's other major commodity chemical products all experience cyclical market conditions similar to (although not necessarily coincident with) those of ethylene. As a producer of olefins primarily for the merchant market, Lyondell may experience greater variations in its sales volumes and profitability when industry supply and demand relationships are at extremes in comparison to more integrated competitors, i.e. those with a higher proportion of captive demand for olefins derivatives production. In 1994 the Company sold approximately 90 percent of its ethylene and propylene production into the merchant market. 5 The provisions of the Clean Air Act Amendments of 1990 require the manufacture and sale of alternative fuels, including reformulated gasoline. There is strong competition between MTBE, derived from methanol, ethanol and ethyl tertiary butyl ether ("ETBE") for the oxygenate market and it is difficult to predict the outcome of this competition, which will depend, in part, on the future of tax subsidies and possible market share mandates for ethanol. The Environmental Protection Agency ("EPA") has specifically mandated that the nine metropolitan areas in the United States with the most severe ozone problems begin using reformulated gasoline year-round beginning in 1995 to prevent ozone formation. In addition, a number of states opted to utilize reformulated gasoline on a state-wide basis ("opting-in") although the EPA has subsequently allowed certain areas to opt-out of the program and uncertainties have developed with respect to the level of future use of reformulated gasolines. Because of the uncertainties in the reformulated gasoline market, it is difficult to predict the impact of this end-use on the future demands for MTBE and methanol. Historically, petrochemical industry profitability has been affected by vigorous price competition, which may intensify due to, among other things, new domestic and foreign industry capacity. In general, weak economic conditions either in the United States or in the world tend to reduce demand and put pressure on margins. Petrochemical profitability can be affected by the level of derivative exports which is affected by regional production throughout the world. It is not possible to predict accurately how changes in feedstock costs, market conditions or other factors will affect petrochemical industry margins in the future. PROPERTIES The Company owns all of the plant and equipment that comprise its two olefins plants at its Channelview Complex and owns the approximately 2,945 acre parcel on which the complex is situated. The Company also owns the methanol plant and other petrochemical processing units which are located at the Channelview Complex. These include the product flexibility unit, two MTBE units, a butylene isomerization unit, the benzene and toluene recovery unit, the butadiene recovery unit, the isoprene recovery unit and an isopropyl alcohol unit. One of the MTBE units and the isopropyl alcohol unit are used exclusively to process products for ARCO Chemical. The Company also operates a styrene maleic anhydride unit ("SMA") and a polybutadiene unit which are owned by a third party and are located on property leased from the Company within the Channelview Complex. A third party owns and operates a facility on land leased from the Company that is used to purify hydrogen from the Company's methanol plant. The Company owns the real property, plant and equipment which comprise the Polymers Facility, located on approximately 187 acres in Pasadena, Texas. Lyondell owns several pipelines connecting the Channelview Complex, the Refinery and the Mont Belvieu Facility, including six lines used to transport heavy liquid feedstocks, butylenes, benzene, hydrogen, butane, MTBE and unfinished gasolines between the Channelview Complex and the Refinery. The Company also owns a Barge Docking Facility capable of berthing eight barges and its terminal equipment for loading and unloading. It is utilized for loading methanol, pyrolysis fuel oil and pyrolysis gas oil into barges for delivery to customers and unloading petroleum condensate barges for olefins feedstocks. At the Channelview Complex, the Company recovers and sells valuable petrochemical components contained in a number of intermediate product streams. The Channelview Complex includes units for butadiene recovery and aromatics recovery. In addition, the Channelview Complex has recovered valuable components such as high purity isoprene, piperylenes and dicyclopentadiene ("DCPD") and resin oils from its gasoline products since 1986. The Company is using its proprietary butylene isomerization technology, known as ISOMPLUS, to efficiently produce isobutylene from olefins plant butylene by-product streams. The project, which started up in the first quarter of 1995, includes an MTBE unit debottleneck which increased the Companys MTBE production capacity by 19 percent. See "RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS". Lyondell also owns a storage facility, a brine pond facility and a tract of vacant land at Mont Belvieu, Texas, located approximately 15 miles east of the Channelview Complex. Storage capacity for up to 10 million barrels of NGL feedstocks, ethylene, propylene and other products is provided in salt domes at the Mont Belvieu Facility. The Company also owns an approximate 10 percent undivided joint interest in much of the real property surrounding the Mont Belvieu Facility. This property, which is owned jointly with several other companies that operate storage or processing facilities at Mont Belvieu, is maintained as a greenbelt for these facilities. The Company has a long-term lease on product pipelines from the Mont Belvieu Facility to most olefins customers. 6 Lyondell leases its executive offices and corporate headquarters in downtown Houston. In addition, the Company leases storage facilities for the handling of its products from various third parties, primarily in the Gulf Coast area. CAPITAL PROGRAM The petrochemical segment's fixed asset capital expenditures totaled $39 million in 1994 and its capital budget for 1995 is $110 million. Major scheduled capital projects include expansion of the alkylation unit at the Channelview Complex, a debottleneck of the polypropylene plant at the Polymers Facility and a debottleneck project at one of the two olefins units at the Channelview Complex. As part of its ongoing operations, the Company periodically conducts maintenance turnarounds on its facilities. When conducting a maintenance turnaround on a principal facility, capital expenditures and maintenance expenses as well as lost operating income are typically incurred. Although turnarounds on principal facilities are usually scheduled well in advance, the timing of such turnarounds can be accelerated or delayed because of numerous factors, many of which are beyond the Company's control. The methanol unit at the Channelview Complex was shut down for a turnaround in the third quarter of 1994. The Company currently has a turnaround scheduled for the second half of 1995 on one of its two olefins units. The second olefins unit currently is scheduled for a turnaround in 1996. In accordance with the Company's accounting policies, repair and maintenance expenses associated with turnarounds exceeding $5 million are capitalized when incurred and amortized on a straight-line basis until the next planned turnaround, generally four to six years. Prior to 1993, all repair and maintenance expenses associated with turnarounds were expensed as incurred. The Company believes that the current method of accounting is preferable in that it provides for a better matching of repair and maintenance expenses associated with turnarounds with future product revenues. See Note 4 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS". Lyondell continually evaluates opportunities to expand or diversify its petrochemical operations through potential acquisitions, joint ventures and other opportunities involving third parties. In the last several years, the petrochemical industry has experienced significant joint venture, merger, acquisition and divestiture activity. Although management does not believe that the Company will be required to undertake such a transaction in order to maintain its competitive position, management believes that there may be opportunities to create stockholder value by making attractive investments. This could be accomplished by applying the Company's experience in the efficient and low-cost operation of its facilities to a larger asset base. Vertical integration with an ethylene or propylene consumer could increase olefins plant operating rates during weak market periods by providing captive outlets. Horizontal integration with another olefins producer could improve operating efficiencies by spreading costs across larger volumes and enhancing operating flexibility. Consistent with the Company's overall strategy, however, management's intent is to undertake such a transaction only if it expects that the transaction would produce both near-term and long-term improved cash flow and produce returns in excess of the Company's cost of capital. Potential funding sources for long-term capital projects, whether involving transactions with third parties or otherwise, could include, without limitation, the Company's current financial resources, potential earnings growth, future borrowings and future issuance of equity securities, as well as possible contractual arrangements such as joint ventures or partnerships. Both the Company's ability to undertake and fund the particular strategies described above, and the general level of the Company's capital commitments and expenditures from period to period, will be affected by a variety of factors including, without limitation, the general business environment, as well as changes in applicable government regulations and tax laws. See "FINANCE MATTERS". EMPLOYEE RELATIONS At year-end, Lyondell, excluding LCR, employed approximately 1,100 full-time employees. The Company also uses the services of approximately 275 employees of independent contractors in the routine conduct of its business. 7 REFINING SEGMENT OVERVIEW The Refinery, located adjacent to the Houston Ship Channel in Pasadena, Texas, includes a coker, a fluid catalytic cracking unit, three reformers, four crude distillation units, two sulfur recovery plants and several hydrodesulfurization units, as well as lube oil manufacturing and packaging facilities and an aromatics recovery unit. It is connected by multiple pipelines to the Channelview Complex and provides feedstocks to and receives production from that facility. Products manufactured at the Refinery include gasoline, heating oil, jet fuel, aromatics, lubricants (industrial lubricants, motor oils, white oils, process oils and base oils) carbon black oil, sulfur, residual fuel and petroleum coke fuel and are sold to third parties. The aromatics recovery unit at the Refinery produces benzene, toluene, paraxylene and orthoxylene. Aromatics are used to manufacture a variety of intermediate chemicals, including ethylbenzene, cumene, urethane foam components and polyester intermediates for films, fibers and resins. End uses of these products include packaging and containers, furniture, apparel and flooring. LCR is undertaking a major upgrade project at the Refinery to enable the facility to process substantial additional volumes of very heavy crude oil. LCR also has entered into a long-term crude supply contract ("Crude Supply Contract") with Lagoven, S.A. ("LAGOVEN"), an affiliate of CITGO. In addition, under the terms of a long-term product sales agreement ("Products Agreement"), CITGO purchases from LCR a majority of the refined products produced at the Refinery. Both LAGOVEN and CITGO are direct or indirect wholly-owned subsidiaries of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company of Venezuela. Pursuant to agreements between the Company and CITGO (and their affiliates), the Company contributed its refining assets (including the lube oil blending and packaging plant in Birmingport, Alabama) and refining working capital to LCR in July 1993. CITGO contributed $100 million to LCR in 1993 (excluding its contribution towards the upgrade project described below) giving it an approximate ten percent participation interest in LCR. Prior to the in-service date for the upgrade project, CITGO has committed to reinvest its share of LCR's operating cash flow and thereby increase its participation interest in LCR. These contributions are used for ongoing LCR capital projects other than (i) the upgrade project and (ii) certain environmental capital projects for which liability has been retained by the Company. Any additional ongoing LCR capital requirements prior to the in-service date (for purposes other than the upgrade project) will be funded substantially by Lyondell, primarily in the form of subordinated loans to LCR. In addition to the funding related to the upgrade project described below, CITGO has one additional contribution commitment of $30 million to be made upon completion of the upgrade project and it has a one-time option to make an additional equity contribution sufficient to increase its participation interest in LCR to 50 percent. The Company believes that the principal benefit from its participation in LCR will be stabilized and increased earnings and cash flow from the refining business resulting from the upgrade project as well as the long-term Crude Supply Contract and the long-term Products Agreement, all of which are described below. The expected stabilization of earnings and cash flows resulting from the agreement with CITGO will not be fully realized until the projected completion of the Refinery upgrade project described below. The Refinery began processing Venezuelan crude oil in the third quarter of 1992. Since that time, improved operating efficiency has enabled the Refinery to increase the volume of heavy Venezuelan crude oil processed enabling LCR to realize increased benefits associated with processing heavy Venezuelan crude oil. Following the upgrade, the earnings potential of LCR is expected to be enhanced due to higher margins expected to be associated with the resulting heavier crude oil mix and LCR's increased coking capability, enhanced reformulated fuels and low sulfur diesel production capability and other yield improvements. However, as described above, the Company's participation interest following the upgrade project will decrease. UPGRADE PROJECT LCR is undertaking a major upgrade project at the Refinery to enable the facility to process substantial additional volumes of very heavy crude oil. CITGO is providing a major portion of the funds for the upgrade project. 8 Definitive cost engineering for the upgrade is substantially complete and at the present time, LCR management anticipates the cost for the project, which is scheduled to be completed in late 1996, will be approximately $955 million, including an allowance for contingency costs. The upgrade project is intended to increase the heavy crude oil processing capability of the Refinery from 130,000 barrels per day of 22 degree API gravity crude oil to 200,000 barrels per day of 17 degree API gravity crude oil. The upgrade is not intended to increase the total throughput of the Refinery, but rather its ability to process heavier, higher margin, crude oils. The project also includes expansion of the Refinery's reformulated gasoline and low sulfur diesel production capability. Major components of the upgrade include new coking, crude distillation and sulfur recovery units. Modifications to the Refinery's largest existing crude distillation unit related to the upgrade project were completed in late 1994. Funding for the upgrade project will occur in three phases. The first phase, the initial $300 million, will be funded by CITGO. The second phase will be funded by an LCR borrowing of $200 million. The third phase, which would be $455 million based on an estimated $955 million upgrade project cost, is expected to commence in late 1995 and is anticipated to be funded (i) 50 percent through an LCR borrowing, (ii) 25 percent through contributions from CITGO and (iii) 25 percent through subordinated loans from the Company. Prior to completion of the upgrade project, the financing costs for the upgrade project loans will be funded by CITGO. In exchange for CITGO's upgrade project contributions described above and an additional $30 million cash contribution at the in-service date, CITGO's participation interest in LCR is expected to increase to approximately 40 percent effective as of the in-service date. CITGO will have a one-time option to increase its participation interest in LCR up to 50 percent following the in-service date by making an additional equity contribution. The timing of the third phase and the level of contributions from the Company and CITGO will be dependent upon the total cost of the upgrade project and on LCR's ability to obtain construction financing. In the event that LCR is unable to obtain construction financing for the Refinery upgrade project, the Company and CITGO each are obligated to fund one-half of the cost of the upgrade project in excess of $300 million. In turn, CITGO's participation interest in LCR as of the in-service date will be dependent upon its actual contributions. MANAGEMENT OF LCR LCR is a limited liability company organized under the laws of the state of Texas and has pass-through tax characteristics similar to those of a partnership for federal income tax purposes. The Company owns its interest in LCR through a wholly-owned subsidiary, Lyondell Refining Company. CITGO holds its interest through CITGO Refining Investment Company, a wholly-owned subsidiary of CITGO (together with Lyondell Refining Company, the "Owners"). The operative agreement with respect to the rights of each of the Owners and their parent companies is the Amended and Restated Limited Liability Company Regulations ("Regulations") of LCR. The Regulations govern, among other things, ownership and cash distribution rights. CITGO has committed to reinvest its share of operating cash flow during the upgrade project which will increase its participation percentage, while the Company has unrestricted access to its share of operating cash flow from LCR. The initial term of the Regulations is 25 years, although they may be terminated under certain circumstances, including insolvency of LCR or either Owner and uncured material breaches by either Owner. Under the terms of a reciprocal Performance Guarantee and Control Agreement ("Performance Guarantee"), Lyondell and CITGO each unconditionally guarantee the obligations and performance of their respective subsidiary-Owner under the terms of the Regulations. The Regulations provide that LCR is managed by an Owners Committee, which has three representatives ("Representatives") from each Owner. Certain actions require unanimous consent of the Representatives, including, without limitation, amendment of the Regulations, borrowing money in excess of LCR's existing credit facility, delegation of authority to committees, certain purchase commitments and capital expenditures in excess of designated amounts and budgetary approval. All actions not requiring unanimous consent can be determined by Lyondell so long as it is a majority owner. The day-to-day operations of the Refinery are managed by the executive officers of LCR, including former Lyondell officers with responsibility for manufacturing and refining operations and refined products marketing. The results of LCR's operations are consolidated into Lyondell's financial statements. 9 FEEDSTOCKS The following table sets forth the Refinery's runs of blended crude oils (which include crude oil and other petroleum liquids, unfinished oils and other hydrocarbons) and unfinished stock.
Year Ended December 31 -------------------------- 1994 1993 1992 ------- ------- --------- (Thousand barrels per day) Refinery Runs Blended crude oils.. 209 234 236 Unfinished stock.... 64 50 50 ---- ---- ---- Total................ 273 284 286 ==== ==== ====
The Refinery can process a wide variety of domestic and foreign crude oil feedstocks, including heavy (low API gravity, high viscosity) and sour (high sulfur content) crude oils. In addition to 45,000 barrels per day of light sweet crude oil for lubricants production, the Refinery can process up to (i) approximately 220,000 barrels per day of light sour crude oil in a coking mode, or (ii) in the mode in which it currently operates, approximately 130,000 barrels per day of heavy sour crude oil (22 degree API gravity) primarily in a coking mode plus 80,000 barrels per day of light sour crude oil in a cracking mode. It currently has a capacity rating of 265,000 barrels per day of crude oil and related feedstocks which is based on running West Texas Sour ("WTS") or equivalent crude oil in a "full conversion mode". Full conversion mode means processing crude oil feedstocks into a product output mix that consists of a significant percentage of high value products, such as gasoline, heating oil, jet fuel, aromatics, lube oils and olefins feedstocks which are used by the Channelview Complex. The actual operating capability varies with the type of crude oil it processes. Prior to the completion of the upgrade project, LCR is required to purchase and LAGOVEN is required to sell a minimum of the Refinery's coking capacity, or 125,000 barrels per day of heavy Venezuelan crude oil. For amounts above the coking capacity minimum LAGOVEN is contractually obligated to supply an additional 10,000 barrels per day if LCR so requests. LAGOVEN has the right, but not the obligation, to supply any incremental amounts above 135,000 barrels per day. Following completion of the upgrade project that minimum is increased to 200,000 barrels per day (allowing for scheduled or unscheduled downtime). The contract incorporates a formula price based on the market value of a slate of refined products deemed to be produced from each particular crude oil or feedstock, less: (i) certain deemed refining costs, adjustable for inflation; (ii) certain actual costs, including crude transportation costs, import duties and taxes; and (iii) a deemed margin, which varies according to the grade of crude oil or other feedstock delivered. Deemed margins and deemed costs are adjusted periodically. These adjustments are based on, but less than, the rate of inflation. Because deemed operating costs and the slate of refined products deemed to be produced for a given barrel of crude oil or other feedstock do not necessarily reflect the actual costs and yields in any period and also because the market value of the refined products used in the pricing formula does not necessarily reflect the actual price received for the refined products, the actual refining margin earned by LCR under the Crude Supply Contract will vary depending on, among other things, the efficiency with which LCR conducts its operations during such period. The heavy (22 degree API gravity) Venezuelan crude oil currently being processed by LCR under the Crude Supply Contract contains high levels of heavy metals, naphthenic acids, sulfur and residual fuels, which make it more difficult to process than lighter, sweeter crude oils. The Refinery began processing Venezuelan crude oil in the third quarter of 1992. Since that time, the Company and LCR have identified and overcome obstacles inherent in processing high rates of heavy Venezuelan crude oil, including making operational changes to the coker and physical modifications to one of the crude distillation units. The improved unit reliability and increased unit processing capability has increased the Refinery's capability of running high volumes of heavy Venezuelan crude oil and raised the capacity to 130,000 barrels per day. The remainder of the Refinery's capacity is used to process lighter crude oils and feedstocks. There are risks associated with enforcing the provisions of contracts with an affiliate of a foreign government such as LAGOVEN, including the risks associated with enforcing judgments of United States courts against entities whose assets may be located outside of the United States and whose management does not reside in the United States. Depending on 10 then current market conditions, breach or termination of the Crude Supply Contract could adversely affect the Company. Although the parties have negotiated alternative arrangements in the event of certain force majeure conditions, including governmental or other actions restricting or otherwise limiting LAGOVEN's ability to perform its obligations, any such alternative arrangements may not be as beneficial as the Crude Supply Contract. There can be no assurance that alternative crude oils with similar margins would be available for purchase by LCR. Furthermore, the breach or termination of the Crude Supply Contract would require LCR to return to the practice of purchasing all of its crude oil feedstocks in the merchant market and would again subject LCR to significant volatility and price fluctuations. However, the Company believes that this transaction holds substantial economic and other incentives for all parties to perform their obligations. Lyondell believes that PDVSA has a strategic interest in expanding its crude oil refining operations in the United States in order to increase the markets for its heavy, sour crude oil and that the financial commitments of CITGO should provide an economic incentive for all PDVSA affiliates to perform their obligations under the various agreements. MARKETING AND SALES The Refinery produces gasoline, heating oil, jet fuel, aromatics, lube oils and certain industrial products. On a weekly basis, LCR evaluates and determines the optimal product output mix for the Refinery, based on spot market prices and conditions. LCR and CITGO have entered into a long-term (25 years) Products Agreement pursuant to which CITGO purchases the majority of gasoline, jet fuel and heating oil manufactured at the Refinery. CITGO is currently purchasing between 80-85% of the light refined products produced at the Refinery. These products are purchased by CITGO at market-based prices. For example, the price for gasoline is based on published Platts prices. Lube oils are manufactured and sold by LCR directly to industrial consumers and to distributors throughout the United States and international markets. Branded lubricants marketed by LCR include both paraffinic and naphthenic oils, rubber process oils, base oils used to blend into finished lubricant products, food- grade white oils and an extensive variety of engine oils and industrial lubricants. Lyondell is the sole marketing agent for LCR's aromatics (see "PETROCHEMICAL SEGMENT - Marketing and Sales") with the exception of benzene which is sold directly to Lyondell at market-related prices. OTHER AGREEMENTS The Company and LCR have entered into multiple agreements designed to preserve much of the synergy between the Refinery and the Channelview Complex. Economic evaluations at the Channelview Complex and the Refinery are based on sending products to the highest-value disposition, which may be local use, use at the other site, or third party sales. Certain refinery products (propane, butane, low-octane naphthas, heating oils, and gas oils) can be used as feedstocks for olefins production, and certain Channelview Complex olefins by-products (pyrolysis gasoline and pyrolysis gas oil) can be processed by the Refinery into gasoline, jet fuel or heating oil. Butylenes from the LCR Refinery are tolled through the Channelview Complex for the production of alkylate and MTBE for gasoline blending. Hydrogen from the Channelview Complex is used at the Refinery for sulfur removal and product stabilization. Also effective July 1, 1993, the majority of the employees formerly employed by Lyondell in its refining business became employees of LCR. Pursuant to the terms of a number of service agreements, Lyondell has contracted with LCR to continue to perform services in certain areas, including employee services, administrative services and marketing services. Lyondell and LCR also entered into a variety of contracts providing for the assignment or licensing of intellectual property rights associated with the refining business. COMPETITION AND INDUSTRY CONDITIONS The Company formerly competed with many other refiners for sales of gasoline, heating oil, and jet fuel in the domestic and international merchant market. With the formation of LCR, the majority of these products are sold to CITGO under the Products Agreement. LCR continues to sell lube oils directly to major industrial consumers and through distributors in domestic and international markets. The refining business tends to be volatile as well as cyclical. Crude oil prices, which are impacted by worldwide political events and the economics of exploration and production in addition to refined products demand, are the 11 largest source of this volatility. Demand for refined products is influenced by seasonal and short-term factors such as weather and driving patterns, as well as by longer term issues such as energy conservation and alternative fuels. Industry refined products supply is also dependent on industry operating capabilities and on long-term refining capacity trends. However, management believes that the combination of the Crude Supply Contract and the Products Agreement have and will continue to stabilize future earnings and cash flows and reduce the market driven aspects of such volatility. Prior to the completion of the upgrade project, the keys to operational success for LCR will be to maximize the amount of heavy Venezuelan crude oil processed in the coking mode, to optimize the efficient utilization of the remaining cracking capacity and to maintain an overall focus on low cost operations. Among LCR's refining competitors are major integrated petroleum companies that have their own raw material resources and, in many cases, downstream markets, both of which tend to decrease the impact of business cycles on these competitors' sales volumes and profitability. Many of the domestic refiners are owned by or affiliated with major integrated oil companies. Based on published industry data, as of January 1, 1995, there were 173 crude oil refineries in operation in the United States and total domestic refinery capacity was approximately 15 million barrels per day. During 1994, LCR processed an average of 209,000 barrels per day of crude oil and other petroleum liquids, or approximately one percent of domestic capacity. PROPERTIES LCR owns the real property, plant and equipment which comprise the Refinery, located on an approximately 700-acre site in Houston, Texas. Units include the fluid catalytic cracking unit, the coker, reformers, crude distillation units, sulfur recovery plants and hydrodesulfurization units, as well as lube oil manufacturing and packaging facilities and an aromatics recovery unit. LCR also owns the real property, plant and equipment which comprise a lube oil blending and packaging plant in Birmingport, Alabama. LCR owns a pipeline used to transport gasoline, kerosene and heating oil from the Refinery to the GATX Terminal to interconnect with common carrier pipelines. Lyondell owns several pipelines connecting the Channelview Complex, the Refinery and the Mont Belvieu Facility, including six lines used to transport heavy liquid feedstocks, butylenes, benzene, hydrogen, butane, MTBE and unfinished gasolines between the Channelview Complex and the Refinery. CAPITAL PROGRAM The refining segment's capital expenditures for additions to fixed assets (excluding spending on the upgrade project) totaled $75 million in 1994. The refining segment's capital budget (excluding the upgrade project) for 1995 is approximately $60 million. Of the total 1995 capital budget, approximately $32 million is expected to be spent on environmentally-related capital projects, including a wastewater management plan developed in response to state regulations regarding emissions. See "ENVIRONMENTAL MATTERS". The funds contributed by CITGO in the previous two years (see "REFINING SEGMENT - Overview") were used for capital spending by LCR and will reduce the total capital expenditures that the Company otherwise would have been required to make in connection with Refinery operations through 1995. (See "Upgrade Project" for a discussion of spending on the upgrade project.) As part of its ongoing operations, LCR periodically conducts maintenance turnarounds on its facilities. When conducting a maintenance turnaround on a principal facility, capital expenditures as well as repair and maintenance expenses and lost operating income are typically incurred. Although turnarounds on principal facilities are usually scheduled well in advance, the timing of such turnarounds can be accelerated or delayed because of numerous factors, many of which are beyond LCR's control. Scheduled turnarounds on the coker and one of the major crude distillation units were completed during the fourth quarter of 1994. During these turnarounds, which lasted approximately eight weeks, work was completed to modify the crude distillation unit for the upgrade project, thereby avoiding downtime of the unit that otherwise would be necessary for the completion of the upgrade project. In accordance with the Company's accounting policies, repair and maintenance expenses associated with turnarounds exceeding $5 million are capitalized when incurred and amortized on a straight-line basis until the next planned turnaround, generally four to six years. Prior to 1993, all repair and maintenance expenses associated with turnarounds were expensed as incurred. The Company believes that the current method of 12 accounting is preferable in that it provides for a better matching of repair and maintenance expenses associated with turnarounds with future revenues. See Note 4 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS". The Company remains obligated to fund certain Refinery environmental projects initiated prior to the creation of LCR as well as its share of a base level of Refinery capital improvements; the total of these obligations is estimated to be approximately $75 million through the completion of the upgrade project, of which approximately $35 million has been spent through 1994. The level and timing of these anticipated capital commitments and expenditures will be affected by changes in applicable governmental regulations, including environmental and tax laws. EMPLOYEE RELATIONS At year-end, LCR employed approximately 1,200 full-time employees. LCR also uses the services of approximately 200 employees of independent contractors in the routine conduct of its business. Certain hourly workers at the Refinery are covered by collective bargaining agreements between LCR and the Oil, Chemical and Atomic Workers Union (approximately 700 employees). RELATED PARTY TRANSACTIONS In connection with the transfer of assets and liabilities to Lyondell and the initial public offering of Lyondell's common stock in January 1989, the Company and ARCO entered into a number of agreements for the purpose of defining their ongoing relationships. In addition, in July 1987, Lyondell and ARCO Chemical, then a wholly-owned subsidiary of ARCO, entered into a number of agreements in connection with the organization of ARCO Chemical. None of these agreements was the result of arm's-length negotiations between independent parties. It was the intention of Lyondell, ARCO and ARCO Chemical that such agreements and the transactions provided for therein, taken as a whole, accommodate the parties' interests in a manner that was fair to the parties, while continuing certain mutually beneficial arrangements. The Audit Committee of the Board of Directors of the Company, whose members are not affiliated with the Company, ARCO or its affiliates, has determined that such agreements, taken as a whole, were fair to the Company and its stockholders. Because of the complexity of the various relationships between Lyondell, ARCO, its direct and indirect subsidiaries, including ARCO Chemical (together, "ARCO Affiliates"), there can be no assurance that each of such agreements, or the transactions provided for therein, has been effected on terms at least as favorable to the Company as could have been obtained from unaffiliated parties. The terms and provisions of many of these initial agreements have subsequently been modified or supplemented and additional or modified agreements, arrangements and transactions will be determined through negotiation among the Company and ARCO Affiliates, and it is possible that conflicts of interest will be involved. Future contractual relations between the Company and ARCO Affiliates will be subject to certain provisions of the Company's Certificate of Incorporation. In addition, the Audit Committee of the Board of Directors of the Company has adopted a set of guidelines for the review of all agreements entered into between the Company and ARCO Affiliates. These guidelines include a provision that, at least annually, the Audit Committee will review such agreements or the transactions provided for therein to assure that such agreements are fair to the Company and its stockholders. During 1994, Lyondell purchased certain of its feedstock requirements from ARCO Affiliates and paid them fees for transportation of product. For the year ended December 31, 1994, Lyondell paid ARCO Affiliates approximately $45 million. During 1994, Lyondell sold products to and provided services for ARCO Affiliates, including sales of benzene, MTBE, ethylene, propylene and methanol to ARCO Chemical and crude oil resales and sales of lube oil to other ARCO Affiliates. For the year ended December 31, 1994, Lyondell received approximately $314 million from sales to and services for ARCO Affiliates, of which $310 million represented sales to and services for ARCO Chemical. See Note 8 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS". 13 In connection with the ARCO Note Offering, the Company and ARCO entered into agreements governing their ongoing relationships, including a Registration Rights Agreement that provides ARCO with rights under certain circumstances to compel the Company to file a registration statement with the SEC with respect to all or a portion of the shares of Common Stock held by ARCO. At the same time, ARCO announced its intention to vote its shares in proportion to the votes of the non-ARCO stockholders, except under certain limited circumstances. For a summary of agreements, arrangements and transactions among the Company, ARCO Chemical and ARCO see "TRANSACTIONS BETWEEN THE COMPANY AND ARCO", which is included in the 1995 Proxy Statement and incorporated herein by reference as part of Item 13 of this Annual Report on Form 10-K. RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS The Company uses numerous patents in its operations, many of which are licensed from third parties, including ARCO. See Item 13 -- "Certain Relationships and Related Transactions" (incorporated by reference). Although the Company's licenses from ARCO and others are significant to its operations, the Company is not dependent upon any particular patent, trade secret or the like, and it believes that the loss of any individual patent, trade secret or similar proprietary right would not have a material adverse effect on the operations of the Company. The Company submitted several new patent applications during 1994 to protect new processes it developed. In 1992, the Company introduced a new technology called ISOMPLUS for producing low-cost isobutylene by isomerizing normal butylenes. Isobutylene is a key ingredient in MTBE, and management believes that ISOMPLUS will play an important role in the next increments of capacity that the industry will need to supply the demand for MTBE in reformulated gasoline. In an effort to accelerate worldwide commercialization of Lyondell's butylene isomerization process, Lyondell has commercialized the technology through a joint development and licensing relationship with CDTECH, a leading supplier of ethers technologies used in reformulated fuels production and has entered into licensing arrangements with third parties. The arrangement with CDTECH is intended to commercialize two processes, isomerization and etherification, to produce blending agents for cleaner burning gasolines. During the first quarter of 1995, the ISOMPLUS unit at the Channelview Complex became operational and commercial production of isobutylene using the new technology began. In connection with this project, the existing MTBE unit at the Channelview Complex was expanded. Research efforts are continuing on similar technology to produce isoamylene, a feedstock used to produce TAME, another oxygenate used in the production of reformulated gasoline. The Company also has product development efforts aimed at tailoring products to meet specific customer needs, especially in such areas as resins, fibers, adhesives and sealants. Lyondell's research and development efforts have resulted in the invention of KromaLon TM, an enhanced polyolefin fiber for the carpet market. This advancement in fiber technology enables the production of a recyclable fiber with advanced coloring capabilities. In addition to the inherent stain resistance of polypropylene, the new fiber is dyeable and printable, providing advantages for commercial and residential applications. The Company uses numerous trademarks in its marketing operations, a portion of which are licensed from third parties, including ARCO. The Company is not dependent upon any particular trademark, and it believes the loss of any individual trademark would not have a material adverse effect on its operations. The Company submitted several new trademark applications during 1994 to protect product line names and to foster its marketing position. FINANCE MATTERS The Company uses cash flow to enhance total return to stockholders. To achieve this, the Company's first priority for cash use is to make high return investments in its businesses. As a result of improved business conditions, the Company has currently identified more high return opportunities. The Company increased its level of capital spending during 1994 and anticipates spending levels in 1995 in excess of 1994 levels. The Company's goals include achieving and maintaining an investment-grade debt rating while maintaining sufficient liquidity and debt capacity through all phases of the industry cycle to provide for what it deems to be sufficient capability to invest in attractive capital projects and possible external business opportunities. The 14 Company continues to have an interest in pursuing external business opportunities with positive cash flow and returns in excess of its cost of capital that would allow it to increase downstream integration or leverage its operating expertise and increase operating flexibility across a larger olefins asset base. These opportunities may take the form of acquisitions or other business structures. See "PETROCHEMICAL SEGMENT - Capital Program". In the near term, the next priority for cash flow after such investments is to build liquidity and reduce debt in order to progress toward these financial goals. The Company intends that excess cash flow above the amounts needed to fund its capital projects, external business opportunities and appropriate liquidity needs, would be returned to the stockholders. The Company views its current dividend as sustainable and intends that any future dividend decisions be based on maintaining a sustainable dividend level. See "Item 5 - Market for Registrants Common Equity and Related Stockholder Matters". The Company has not established specific financial targets for such matters as capital spending, cash and debt levels, but instead anticipates that such matters will be adjusted to reflect current business conditions and opportunities. Substantial changes in business conditions or new opportunities may also change cash flow priorities. LONG-TERM DEBT AND FINANCING ARRANGEMENTS As of December 31, 1994, the Company had $717 million of long-term debt consisting of $300 million of notes due 1996 and 1999, $200 million of notes due 1997 and 2002 and $217 million of medium-term notes due from 1995 to 2005. The Notes due 1996 and 1999 and the medium-term notes contain provisions that would allow the holders to require the Company to repurchase the debt upon the occurrence of certain events combined with specified declines in public ratings on the Notes due 1996 and 1999 ("Put Rights"). Events which may trigger the Put Rights include, among other things, acquisitions by persons other than ARCO or the Company of more than 20 percent of the Company's Common Stock, any merger or transfer of substantially all of the Company's assets in connection with which the Company's Common Stock is changed into or exchanged for cash, securities or other property and payment of "special" dividends. See "Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters". The foregoing summary of the Put Rights is not intended to be complete and it is subject to, and qualified in its entirety by reference to, the terms of the Indenture for the Notes due 1996 and 1999 which has been filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1989 and is incorporated herein by reference. Company Unsecured Revolving Credit Facility- During December 1993, the Company finalized a five year, $400 million unsecured revolving credit facility ("Facility"). At the present time, the Company views the Facility as a back-up source of liquidity that is also potentially available to fund investment opportunities. The Company does not believe that the covenants or the other terms of the Facility described below are reasonably likely to materially affect or restrict the future operation of the Company's business or its ability to pay dividends on its Common Stock. At December 31, 1994, no amounts were outstanding under the Facility. Under the terms of the Facility, the interest rate for borrowings is based on Euro-Dollar, certificate of deposit ("CD") or prime rates, at the Company's option, and also is dependent upon the Facility utilization rate and the Company's debt ratings. The Facility contains restrictive covenants regarding the incurrence of additional debt, the maintenance of certain fixed charge coverage and leverage ratios and the making of contributions to LCR, as well as the payment of dividends to the extent the Company's net income after December 31, 1993 generally does not exceed, over time, dividends declared or paid after that date. The Facility's debt incurrence covenant restricts the incurrence by the Company of additional debt, including debt under the Facility, unless, immediately after giving effect to the additional borrowing, the ratio of earnings before depreciation, amortization, interest and income taxes, to interest expense exceeds the limits set forth in the Facility. However, the debt incurrence covenant does not become applicable until the debt incurred by the Company after December 31, 1993 exceeds $75 million. In addition to other customary events of default, the Facility provides that an event of default will occur (i) if the Company fails to pay when due (whether by scheduled maturity, acceleration or otherwise) an aggregate amount of indebtedness or 15 interest thereon (other than with respect to loans under the Facility) in excess of $15 million, or (ii) if the Company is determined (upon exhaustion of all appeals and expiration of all cure periods) to be in default of a material obligation under the LCR Regulations. The foregoing summary of the Facility is not intended to be complete and it is subject to, and qualified in its entirety by reference to, the terms of the Facility which has been filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. LCR Unsecured Revolving Credit Facility- Effective July 1, 1994, LCR entered into a 364 day unsecured $70 million revolving credit facility with a group of banks, including Bank of America (formerly Continental Bank, N.A.), as agent ("LCR Facility"). Under terms of the LCR Facility, LCR may borrow with interest based on prime, LIBOR or CD rates at LCR's option or have letters of credit issued on its behalf. The LCR Facility may be extended at the request of LCR upon consent of the bank group. The LCR Facility contains covenants that limit LCR's ability to modify certain significant contracts, dispose of assets or merge or consolidate with other entities. This agreement replaced a $100 million revolving credit facility with substantially the same terms which expired on June 30, 1994. At December 31, 1994, $20 million was outstanding under the LCR Facility. The foregoing summary of the LCR Facility is not intended to be complete and it is subject to, and qualified in its entirety by reference to, the terms of the LCR Facility which has been filed as an exhibit to this Annual Report on Form 10-K. For a further discussion of the Company's long-term debt and financing arrangements, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FINANCIAL CONDITION" and "Note 13 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS". ENVIRONMENTAL MATTERS Lyondell's production facilities are generally required to have permits and licenses regulating air emissions, discharges to water and generation, storage, treatment and disposal of hazardous wastes. Companies such as Lyondell that are permitted to treat, store or dispose of hazardous waste and maintain underground storage tanks pursuant to the Resource Conservation and Recovery Act ("RCRA") also are required to meet certain financial responsibility requirements. The Company believes that it has all permits and licenses generally necessary to conduct its business or, where necessary, is applying for additional, amended or modified permits and that it meets applicable financial responsibility requirements. The Company's policy is to be in compliance with all applicable environmental laws. The Company also is committed to Responsible Care(R), a chemical industry initiative to enhance the industry's responsible management of chemicals. The Company (together with the industries in which it operates) is subject to extensive federal, state and local environmental laws and regulations concerning emissions to the air, discharges onto land or waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, the Company cannot accurately predict future developments, such as increasingly strict requirements of environmental laws, inspection and enforcement policies and compliance costs therefrom, which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. In particular, the ultimate effect of the Clean Air Act on the Company's operations will depend on how the law is interpreted and implemented pursuant to regulations that are currently being developed and on additional factors such as the evolution of environmental control technologies. For example, in April 1994, new regulations relating to emission standards for a large number of petrochemicals such as methanol, butadiene and toluene, were announced by the EPA. The Company is in the process of analyzing the impact that these new regulations will have on its businesses. Some risk of environmental costs and liabilities is inherent in particular operations and products of the Company, as it is with other companies engaged in similar businesses, and there is no assurance that material costs and liabilities will not be incurred. In general, however, with respect to the capital expenditures and risks described above, the Company does not expect that it will be affected differentially from the rest of the domestic petrochemical and refining industry. In some cases, compliance with environmental, health and safety laws and regulations can only be achieved by capital expenditures. In the years ended December 31, 1994 and 1993, the Company spent approximately $48 million and $38 million, respectively, for environmentally related capital expenditures at existing facilities. For 1995 and 1996, the Company currently estimates that environmentally related capital expenditures at existing facilities will be approximately $42 million and $49 million, respectively. The timing and amount of these 16 expenditures are subject to the regulatory and other uncertainties described above as well as obtaining of the necessary permits and approvals. For periods beyond 1996, additional environmentally related capital expenditures will be required, although the Company cannot accurately predict the levels of such expenditures at this time. The Refinery contains on-site solid-waste landfills which were used in the past to dispose of waste generated at this facility. It is anticipated that corrective measures will be necessary to comply with federal and state requirements with respect to this facility. In addition, the Company negotiated an order with the Texas Natural Resource Conservation Commission ("TNRCC"), for assessment and remediation of groundwater and soil contamination at the Refinery. The Company's policy is to accrue remediation expenses when it is probable that such efforts will be required and the related expenses can be reasonably estimated. Estimated costs for future environmental compliance and remediation are necessarily imprecise due to such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of presently unknown remediation sites and the allocation of costs among the responsible parties under applicable statutes. The Company has reserved an amount (without regard to potential insurance recoveries or other third party reimbursements) it believes to be sufficient to cover current estimates of the cost for remedial measures at its manufacturing facilities based upon its interpretation of current environmental standards. In the opinion of management, there is no material range of loss in excess of the amount recorded. Based on the establishment of such reserves, and the status of discussions with regulatory agencies described in this paragraph, and although the reserves are subject to increase, the Company does not anticipate any material adverse effect upon its financial statements or competitive position as a result of compliance with the laws and regulations described in this or the preceding paragraphs. See also Item 3 -- Legal Proceedings - "Claims Relating To Waste Disposal Sites", "Other Matters" and "Management's Discussion and Analysis". ITEM 3. LEGAL PROCEEDINGS GENERAL In connection with the transfer of assets and liabilities from ARCO to Lyondell, Lyondell agreed to assume certain liabilities arising out of the operation of the Company's integrated petrochemical and petroleum processing business prior to July 1, 1988. At that time, the Company and ARCO entered into an agreement ("Cross-Indemnity Agreement") whereby the Company agreed to defend and indemnify ARCO against certain uninsured claims and liabilities which ARCO may incur relating to the operation of the business of the Company prior to July 1, 1988, including liabilities which may arise out of certain of the legal proceedings described in this Item 3. See Item 13 -- "Certain Relationships and Related Transactions". Prior to November 20, 1990, ARCO's insurance carriers had assumed the defense of most of the lawsuits described in this Item 3. Since that date, ARCO's insurance carriers have refused to advance defense costs in those lawsuits relating to certain of the waste disposal sites. See "Claims Relating To Waste Disposal Sites - ARCO Insurance Litigation". In addition to the proceedings specifically described in this Item 3, ARCO, the Company and its subsidiaries are defendants in other suits, some of which are not covered by insurance. Many of these additional suits involve smaller amounts than the matters described herein, or make no specific claim for relief. Although final determination of legal liability and the resulting financial impact with respect to the litigation described in this Item 3, as well as the other litigation affecting the Company, cannot be ascertained with any degree of certainty, the Company does not believe that any ultimate uninsured liability resulting from the legal proceedings in which it currently is involved (directly or indirectly) will individually, or in the aggregate, have a material adverse effect on the business or financial statements of the Company, however the adverse resolution in any reporting period of one or more of the matters discussed in this note could have a material impact on the Company's results of operations for that period. See Note 20 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS". Although Lyondell is involved in numerous and varied legal proceedings, a significant portion of its litigation arises in three contexts: (1) claims for personal injury or death allegedly arising out of exposure to the Company's products; (2) claims for personal injury or death, and/or property damage allegedly arising out of the generation and disposal of chemical wastes at Superfund and other waste disposal sites; and (3) claims for personal injury and/or property damage and air and noise pollution allegedly arising out of the operation of the Company's facilities. The following sections of this Item 3 describe these types of pending proceedings. Lyondell (either directly or through ARCO as its indemnitee) is the real party at interest in these proceedings. 17 CLAIMS RELATED TO COMPANY PRODUCTS ARCO and the Company are involved in numerous suits arising in whole or in part from the operation of the Company's petrochemical and petroleum processing businesses and the assets related thereto in which the plaintiffs allege damages arising from exposure to allegedly toxic chemical products, such as benzene and butadiene. Plaintiffs in these cases usually worked at a manufacturing facility as employees of one of Lyondell's customers, were employees of the Company's contractors, or were employees of companies involved in the transportation of the Company's products to its customers. These suits allege toxic effects of exposure to chemicals sold in the ordinary course of business to third parties by various industrial concerns, including ARCO or the Company, or allege toxic chemical exposures at the Company's manufacturing facilities. Issues common to these cases include: (1) whether the plaintiff can identify a specific product to which he was allegedly exposed; (2) whether the Company supplied the identified product to which plaintiff claims he was exposed; (3) whether the plaintiff has a medical condition which, based upon competent scientific and medical evidence, is causally related to the identified product; (4) whether, and under what conditions, the plaintiff was exposed to the identified product; and (5) if the plaintiff was exposed, whether the Company has any legal defenses to the plaintiff's claims and whether there are other parties or defendants to whom the Company can turn for contribution or indemnification. The Company believes that it has always followed a policy of not only complying with all mandated standards related to product warnings and exposure levels but also of complying with Company specific standards that were more strict than those imposed by the law. As a result, the Company believes that it has a basis to avail itself of legal defenses against claims regarding its products due to exposures by employees and by claims of exposures from third parties to whom the Company sold its products. The vast majority of chemical exposure cases name a large number of industrial concerns, in addition to the Company, as defendants and are at various stages of discovery. Although the Company does not believe that the pending chemical exposure cases will have a material adverse effect on its business or financial statements, it is difficult to determine the potential outcome of this type of case. The majority of the plaintiffs in chemical exposure legal proceedings request relief in the form of unspecified monetary damages. Furthermore, when specific amounts are requested they often bear no objective relation to the merits of the case. It is possible that if one or more of the presently pending chemical exposure cases were resolved against ARCO or the Company, the resulting damage award could be material to the Company 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. CLAIMS RELATING TO WASTE DISPOSAL SITES Wastes generated from products produced by facilities transferred from ARCO and now owned by the Company have, from time to time, been disposed of at third- party landfills. Two of these facilities, known as the "French Ltd." and the "Brio" sites, both of which are located near Houston, Texas, have been classified as "Superfund" sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). The EPA has named many potentially responsible parties ("PRPs") at each site from whom wastes were allegedly received. Based on the current law, the Company does not believe that its obligation to ARCO related to ARCO's share of clean-up costs at either of these sites will result in a liability that will have, individually or in the aggregate, a material adverse effect on the business or financial statements of the Company. It is possible, however, that the Company may be involved in future CERCLA and comparable state law investigations and clean-ups. The Superfund law is scheduled for reauthorization during 1995. The proposal has generated strong reactions from business, insurance companies, lenders, municipalities and environmentalists. The Company is not able to determine with specificity what the impact of a revised Superfund law would be on the Company. French Ltd. Site Remediation -- At the French Ltd. site, ARCO and the other PRPs have entered into a settlement agreement relating to the allocation of clean-up costs. The EPA approved the clean-up plan and a Consent Decree was entered in the Federal District Court for the Southern District of Texas in the first quarter of 1990. An amendment to the Consent Decree relating to natural resource damages has been negotiated and submitted to the court for approval. The total costs associated with the Consent Decree are currently expected to be approximately $90 million and the remediation work is expected to be completed in 1996. The Company believes that its share of 18 clean-up costs (as allocated pursuant to the Cross-Indemnity Agreement) will be no more than five percent of total costs recovered without giving effect to any insurance coverage which may be available to offset these costs. French Ltd. Site Litigation -- Approximately 2,500 plaintiffs have made claims related to wastes in the French Ltd. site. In each of these cases, ARCO is one of many defendants. These suits generally allege that unspecified chemical waste sent to the site by the defendants caused a decrease in property value, a decrease in plaintiffs' ability to enjoy their property, and unspecified adverse effects on plaintiffs' health. Although some of the lawsuits request relief in the form of unspecified monetary damages, the aggregate amount of actual damages sought in those cases where damages are specified exceeds $5 billion. The aggregate amount of punitive damages sought in those cases where damages are specified exceeds $20 billion. In December 1992, after mediation, ARCO, along with several other defendants, entered into a preliminary agreement to settle claims of approximately 2,200 plaintiffs. The remaining claims are in pretrial discovery. The Company's obligation, if any, under the Cross-Indemnity Agreement, to reimburse ARCO for a portion of its defense costs and settlements related to the French Ltd. site has not been determined. Brio Site Remediation -- At the Brio site, a definitive agreement allocating these remedial costs among ARCO and the other PRPs was reached. The EPA approved the plan and a Consent Decree between the Department of Justice and a group of PRPs (including ARCO on behalf of its former divisions and subsidiaries) was entered in Federal District Court for the Southern District of Texas, in April 1991. The total clean-up cost under the original consent decree is currently estimated to be approximately $60 million. Various objections have been raised with respect to the provisions of the original remediation plan, and the EPA and the PRPs have agreed to fund a new feasibility study to evaluate alternatives for remediation. The Company believes that its share of the clean- up costs (as allocated pursuant to the Cross-Indemnity Agreement) will be no more than one percent of total costs without giving effect to any insurance coverage which may be available to offset these costs. Brio Site Litigation -- There currently are eight separate pending legal proceedings filed against ARCO or its affiliates and numerous others in connection with the Brio Superfund site. In these proceedings, there are approximately 600 plaintiffs, many of whom are suing in their capacity as next friend of minor children. In each of these cases, ARCO is one of many defendants. Plaintiffs allege personal injury as a result of exposure to various substances that were disposed of or stored at the Brio site. These suits generally allege that defendants were negligent in sending chemical substances to the site and also contain allegations of nuisance and strict liability. The suits involve: a school district alleging damages as a result of the closing of Weber Elementary; employees of the various entities who operated the refining and reprocessing facilities at the Brio site; and other plaintiffs. All of the lawsuits request relief in the form of unspecified compensatory and exemplary damages. These suits are in pretrial discovery. ARCO (or its affiliate) is the named defendant in the above proceedings. Under the provisions of the Cross-Indemnity Agreement, Lyondell is not obligated to indemnify ARCO for costs arising out of this litigation for which ARCO is insured. Although ARCO is currently litigating the nature and extent of its coverage with its insurance carriers (see "ARCO Insurance Litigation"), Lyondell believes that the ultimate resolution of the above described lawsuits, ARCO's insurance litigation and related issues will not result in any material obligation on the part of Lyondell to ARCO with respect to the Brio and the French Ltd. sites. Other Waste Disposal Site Litigation -- The Company and ARCO are named defendants in three of four presently pending lawsuits filed on behalf of 73 plaintiffs in the state district court in Galveston County, Texas involving the alleged release of toxic and hazardous substances from the Hall's Bayou Ranch. LCR sends and, prior to July 1, 1993, Lyondell and its predecessor, ARCO, sent surface water runoff and process waste water from the Refinery to Gulf Coast Waste Disposal Authority ("GCWDA") and a portion of the solids output from GCWDA is sent for storage to the Halls Bayou Ranch site. Plaintiffs claim personal injury, diminution of property value and loss of use and enjoyment of the property. They are seeking $7 billion in actual damages and $28 billion in punitive damages. In March 1994, the Company and ARCO entered a settlement agreement to resolve these proceedings with all but seven of the plaintiffs. While the Company's portion of the settlement and the availability of insurance coverage to offset these costs has not been determined, the settlement and remaining plaintiffs' actions are not expected to have a material adverse effect on the Company's business or financial statements. 19 ARCO Insurance Litigation -- On November 21, 1990, ARCO filed suit against certain of its insurers with respect to insurance policies in effect at times during past years. This litigation involves claims for reimbursement of defense costs and environmental expenses incurred by ARCO in connection with ARCO's activities at sites and locations throughout the United States. ARCO's insurers had been participating in the defense of the Company and ARCO for the Mont Belvieu proceedings (see "Claims Related To Company Operations -- Mont Belvieu Litigation") as well as the litigation involving the French Ltd. and the Brio sites; however, subsequent to the filing of ARCO's lawsuit, the insurers have refused to advance defense costs for these proceedings (and certain other proceedings relating to the Company's products) until the coverage dispute has been resolved. ARCO is currently paying the defense costs in the Mont Belvieu proceedings, as well as the French Ltd. and Brio Site litigation, pending the resolution of the coverage dispute. CLAIMS RELATED TO COMPANY OPERATIONS Mont Belvieu Litigation -- Several organizations and groups of citizens who own property in the vicinity of Mont Belvieu, Texas, have instituted suits for monetary damages and injunctive relief against ARCO and others who own underground storage and transportation facilities in the city of Mont Belvieu. In September 1980, Warren Petroleum Company ("Warren") experienced a leak in one of its underground hydrocarbon storage wells in Mont Belvieu. On March 18, 1983, suit was brought by 34 plaintiffs, naming Warren, ARCO and other companies with operations in Mont Belvieu as defendants. These plaintiffs claimed property damage, and, in some instances, personal injuries allegedly resulting from storage operations in Mont Belvieu. Later, 83 additional plaintiffs joined the suit. Because of the number of plaintiffs, the court divided this lawsuit into three separate lawsuits. In February 1986, ARCO was granted a directed verdict as to all of the claims of the plaintiffs in the first of the three lawsuits to be tried which had the effect of dismissing all the pending claims without the ability to refile. Thereafter, the plaintiffs in the two remaining cases dropped their claims against ARCO. ARCO remains in these two cases as a result of cross claims for contribution filed by other defendants. These suits have not been set for trial. In 1986, a number of companies that operated facilities in Mont Belvieu, including ARCO, instituted a program to make offers to purchase certain properties in Mont Belvieu. The purpose of the purchase program was to give persons within a certain area the opportunity to move, if they so desired. A number of residents and litigants participated in the program. The implementation of the purchase program described above led to the filing of a new set of lawsuits. There are two separate legal proceedings which have resulted from eight lawsuits filed against ARCO, the Company, and a number of other companies that operate facilities in Mont Belvieu. These claims are made by persons outside of the area designated by the purchase program and are pending in state and federal court. The lawsuits name ARCO and the Company as well as every other company that participated in the purchase program as defendants. In six of the cases, which involve a total of 94 plaintiffs, the city of Mont Belvieu also is named as a defendant. These plaintiffs claim that industry operations, together with incidents that occurred at certain facilities, and the publicity surrounding those incidents, destroyed the value of their property. The plaintiffs also assert that they were discriminated against by the purchase program and that their civil rights were violated since they did not receive an offer to buy their property. The plaintiffs further claim that the purchase violated antitrust provisions of state law, and that the defendants were negligent in their operations and trespassed onto plaintiffs' properties. In December 1991, the District Court in Chambers County entered a take nothing summary judgment in favor of ARCO, the Company and other companies who were named as defendants in that lawsuit. The plaintiff sought injunctive relief, recovery of more than $9 million in actual damages and more than $28 million in punitive damages in this case. The plaintiff appealed the adverse ruling. In July 1992, the State Court of Appeals reversed and remanded the case for retrial in Harris County based on its interpretation of proper venue. In September 1993, a summary judgment in the state district court in the 270th District Court in Harris County was granted in favor of all defendants in this matter. In December 1994 the Texas First District Court of Appeals affirmed the summary judgment. All other Mont Belvieu cases were consolidated in the Federal District Court in the Southern District of Texas. In addition to unspecified damages, the aggregate amount of actual damages sought from all defendants in all of these 20 Mont Belvieu cases exceeds $241 million. The aggregate amount of punitive damages sought exceeds $675 million. These lawsuits went to trial on December 1, 1992. On January 11, 1993, after the plaintiffs concluded their offer of evidence, the trial court granted the defendants' motion for directed verdict which dismissed plaintiffs' claims without the ability to refile. An appeal is pending. ARCO is paying all defense costs in all of the Mont Belvieu litigation and the Company does not expect that a claim for reimbursement will be made under the Cross-Indemnity Agreement. Channelview Nuisance Litigation -- In 1992 and 1993, the Company, together with Arco Chemical and one other defendant, was named as a defendant in two separate lawsuits that were filed in two state district courts in Harris County, Texas. The consolidated lawsuits generally allege that operations of the defendants' facilities caused diminution in property value, interference with the use and enjoyment of their property and personal injuries and sought unspecified actual damages in excess of $5 million and punitive damages in excess of $20 million. A settlement agreement has been reached with each of the individuals in the consolidated lawsuits. The Company's share of the aggregate settlement amounts will not result in any material adverse effect on the business or financial statements of the Company. OTHER MATTERS In July 1994 the Company reported results of an independent investigation conducted by the Audit Committee of the Board of Directors regarding the compliance status of two process waste water streams under the applicable Benzene National Emissions Standard for Hazardous Air Pollutants ("NESHAPS") regulations and certain issues raised by an employee. Noncompliance with the Benzene NESHAPS regulations and the related reporting requirements can result in civil penalties and, under certain circumstances, substantial civil and, potentially, criminal penalties. The Company received a notice of violation from the TNRCC regarding the two streams and consented to pay a fine of $10,200. In addition, the Company incurred approximately $1 million in capital costs in connection with these waste water streams to achieve on-going compliance with the benzene NESHAPS regulations. Although the EPA has not yet made a final determination as to whether it will initiate separate enforcement proceedings, the Company does not believe that any aspects of the matters described above will subject the Company to criminal liability or have a material adverse effect on the Company's business or financial statements. In the fourth quarter of 1992, the Refinery underwent an EPA multi-media inspection. At this time, the EPA has not formally notified the Company of the enforcement action to be taken, if any. In March 1995, the Occupational Safety and Health Administration ("OSHA") cited LCR for alleged violations at the Refinery. The citations resulted from an investigation conducted in the second half of 1994 and carry proposed fines in the aggregate of $208,500. The alleged violations primarily involve record-keeping, reporting, incident investigation and monitoring procedures. A portion of the citations were settled for $13,000 and LCR intends to contest the remaining $90,500 of citations. In addition to the matters reported in this Item 3, from time to time the Company receives notices from federal, state or local governmental entities of alleged violations of environmental laws and regulations pertaining to, among other things, the disposal, emission and storage of chemical and petroleum substances, including hazardous wastes. Although the Company has not been the subject of significant penalties to date, such alleged violations may become the subject of enforcement actions or other legal proceedings and may (individually or in the aggregate) involve monetary sanctions of $100,000 or more (exclusive of interest and costs). In the opinion of management, there is no material range of loss in excess of the amount recorded. 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1994. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the executive officers of Registrant as of March 1, 1995.
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S) --------------------------- --------------------------------------------------- John R. Beard, 42.......... Mr. Beard became Vice President Quality, Supply Vice President, and Planning on July 1, 1993. Mr. Beard was Quality, Supply and appointed Vice President, Planning and Evaluations Planning in May 1992. He served as the Site Manager of Lyondell's Houston Refinery from 1988 until April 1992. From 1985 until 1988, he served in management assignments in evaluations, marketing and manufacturing. Prior to 1985, he served in various management positions for ARCO Products Company and the ARCO Chemical Division. Clifton B. Currin, Jr., 40. Mr. Currin was elected Vice President, Olefins, on Vice President, Olefins October 21, 1994 with primary responsibility for olefins marketing. Mr. Currin was previously commercial manager for light olefins. From 1985 until 1990 he served in assignments in evaluations and marketing. Prior to 1985 he served in various engineering, health, safety and environmental, manufacturing and evaluations positions for ARCO Products Company. Bob G. Gower, 57 ........ Mr. Gower was elected Chairman of the Board of President, Directors of the Company on August 31, 1994. Mr. Chairman of the Board and Gower has served as Chief Executive Officer of the Chief Executive Officer Company since October 24, 1988 and has been a Director of the Company since June 27, 1988. He was President of Lyondell and its predecessor, the Lyondell Division, since formation of the Lyondell Division in April 1985. Prior thereto, Mr. Gower served in various positions with ARCO, including Senior Vice President of ARCO.
22
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S) --------------------------- --------------------------------------------------- Richard W. Park, 55........ Mr. Park was elected Vice President, Human Vice President, Resources on June 27, 1988. He previously served Human Resources as Vice President of Employee Relations of the Lyondell Division from February 1987. From 1985 to 1987 he served as Manager of Personnel for the Specialty Chemicals and International Units of the ARCO Chemical Division. Prior to 1985 he held other employee relations positions with divisions of ARCO. Jeffrey R. Pendergraft, 46. Mr. Pendergraft was named Senior Vice President on Senior Vice President, May 6, 1993. Mr. Pendergraft was elected Vice General Counsel and President and General Counsel on June 27, 1988 and Secretary Secretary on October 24, 1988. From September 1985 to June 1988, he served as General Attorney of the Lyondell Division. Prior thereto, he served as an attorney for various operating divisions and corporate units of ARCO at increasing levels of responsibility. W. Norman Phillips, Jr., 40 Mr. Phillips was elected Vice President, Vice President, Channelview Operations on May 6, 1993. From May Channelview Operations 1992 until May 1993, he served as Site Manager of Channelview Operations. He previously served as Manager, Planning from August 1991 until May 1992. Prior to August 1991, he served in various positions in manufacturing and marketing for ARCO and Lyondell, including Sales Manager in the Petroleum Products Marketing Department from September 1987 until August 1991. Joseph M. Putz, 54 ....... Mr. Putz was elected Vice President and Controller Vice President on October 24, 1988. Previously he was Vice and Controller President, Control and Administration of Lyondell, and its predecessor, the Lyondell Division, from June 1987 to October 1988. From 1986 to 1987 he served as Director, Internal Control of ARCO. From 1985 to 1986 he served as Manager of Special Projects for ARCO. Prior to 1985, he held various financial positions with divisions of ARCO.
23
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S) --------------------------- --------------------------------------------------- Dan F. Smith, 48........... Mr. Smith was elected President of the Company on President, August 31, 1994. Mr. Smith was Executive Vice Chief Operating Officer President from May 1993 to August 1994 and has and Director been Chief Operating Officer since May 1993. Mr. Smith was elected a Director of the Company on October 24, 1988. He served as Vice President Corporate Planning of ARCO from October 1991 until May 1993. He previously served as Executive Vice President and Chief Financial Officer of the Company from October 1988 to October 1991 and as Senior Vice President of Manufacturing of Lyondell, and its predecessor, the Lyondell Division, from June 1986 to October 1988. From August 1985 to June 1986, Mr. Smith served as Vice President of Manufacturing for the Lyondell Division. He joined the Lyondell division in April 1985 as Vice President, Control and Administration. Prior to 1985, he served in various financial, planning and manufacturing management positions with ARCO. Debra L. Starnes, 42....... Ms. Starnes was named Senior Vice President on Senior Vice President, October 21, 1994. Ms. Starnes previously served Petrochemicals Business as Vice President, Petrochemicals Business Management Management and Marketing from July 1, 1993. She and Marketing also served as Vice President, Petrochemicals Business Management from May 22, 1992 to July 1993. She served as Vice President, Corporate Planning from September 1991 until May 1992. From January 1989 to September 1991, she served as Director, Planning. Prior to 1989, she held various manufacturing, marketing and planning positions with ARCO and Lyondell. Russell S. Young, 46....... Mr. Young was elected Senior Vice President, Chief Senior Vice President, Financial Officer and Treasurer on May 7, 1992. Chief Financial Officer He previously served as Vice President and and Treasurer Treasurer from November 1988 until May 1992. Mr. Young served as Controller of the ARCO Products Division from September 1986 to January 1989. Prior to September 1986 he served in various finance positions for ARCO including Assistant Treasurer.
* The By-Laws of the Company provide that each officer shall hold office until the officer's successor is elected or appointed and qualified or until the officer's death, resignation or removal by the Board of Directors. 24 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company currently consists of 250,000,000 shares of Common Stock, par value $1 per share and 80,000,000 shares of preferred stock, par value $.01 per share. The following summary description of the capital stock of the Company is qualified in its entirety by reference to the Certificate of Incorporation, as amended and the Amended and Restated By- Laws of the Company, copies of which are filed as exhibits to this Annual Report on Form 10-K. COMMON STOCK The Company is currently authorized to issue 250,000,000 shares of Common Stock, of which 80,000,000 shares of Common Stock are outstanding at the date hereof. Holders of Common Stock ("Stockholders") are entitled (i) to receive such dividends as may from time to time be declared by the Board of Directors of the Company; (ii) to one vote per share on all matters on which the Stockholders are entitled to vote; (iii) to act by written consent in lieu of voting at a meeting of Stockholders; and (iv) to share ratably in all assets of the Company available for distribution to the Stockholders, in the event of liquidation, dissolution or winding up of the Company. For additional information regarding the Company's dividend policy, see Item 5 of this Annual Report on Form 10-K. The holders of a majority of the shares of Common Stock represented at a meeting can elect all of the directors. See Item 12 -- "Security Ownership of Certain Beneficial Owners and Management" which is incorporated herein by reference. Shares of Common Stock are not liable to further calls or assessments by the Company for any liabilities of the Company that may be imposed on its Stockholders under the laws of the State of Delaware, the state of incorporation of the Company. There are no preemptive rights for the Common Stock in the Certificate of Incorporation. The Transfer Agent, Registrar and Dividend Disbursing Agent for the Common Stock is The Bank of New York. PREFERRED STOCK In July 1994, the Stockholders approved an amendment to the Certificate of Incorporation of the Company authorizing the issuance of up to 80,000,000 shares of Preferred Stock, $0.01 par value per share. Pursuant to the terms of the amendment, the Board will be able to specify the precise characteristics of the Preferred Stock to be issued, in light of current market conditions and the nature of specific transactions, and will not be required to solicit further authorization from Stockholders for any specific issue of Preferred Stock. The Board of Directors has no present intention to issue any series of Preferred Stock. The Board of Directors has adopted a policy providing that no future issuance of Preferred Stock will be effected without Stockholder approval unless the Board of Directors (whose decision shall be conclusive) determines in good faith (i) that such issuance is primarily for the purpose of facilitating a financing, an acquisition or another proper corporate objective or transaction, and (ii) that any anti-takeover effects of such issuance are not the Company's primary purpose for effecting such issuance. The Board of Directors will not amend or revoke this policy without giving written notice to the holders of all outstanding shares of the Company's stock; however, no such amendment or revocation will be effective, without Stockholder approval, to permit a subsequent issuance of Preferred Stock for the primary purpose of obstructing a takeover of the Company by any person who has, prior to such written notice to stockholders, notified the Board of Directors of such persons desire to pursue a takeover of the Company. 25 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is listed on the New York Stock Exchange. ARCO has advised the Company that, as of March 1, 1995, ARCO owned 39,921,400 shares of the Common Stock, which represented 49.9 percent of the outstanding shares. The reported high and low sale prices of the Common Stock on the New York Stock Exchange (New York Stock Exchange Composite Tape) for each quarter from January 1, 1993 through December 31, 1994, inclusive, were:
Period High Low ---------- ------ ------ 1993 First Quarter 29-1/2 23-3/4 Second Quarter 26-5/8 19 Third Quarter 21-5/8 16-3/4 Fourth Quarter 21-1/2 18-3/8 1994 First Quarter 23-7/8 20-5/8 Second Quarter 27 21-1/4 Third Quarter 32-7/8 23-5/8 Fourth Quarter 31-1/8 23
On March 1, 1995, the closing price of the Common Stock was $23.375, and there were approximately 3,000 holders of record of the Common Stock. During the last two years, Lyondell has declared per share quarterly cash dividends (which were paid in the subsequent quarter) as follows: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- 1993............. $0.45 $0.225* $0.225 $0.225 1994............. $0.225 $0.225 $0.225 $0.225 * On July 23, 1993, the Board of Directors decreased the amount of the regular quarterly dividend from $0.45 to $0.225 per share. The declaration and payment of dividends is at the discretion of the Board of Directors. The future declaration and payment of dividends and the amount thereof will be dependent upon the Company's results of operations, financial condition, cash position and requirements, investment opportunities, future prospects and other factors deemed relevant by the Board of Directors. Subject to these considerations and to the legal considerations discussed in the following paragraph, the Company currently intends to distribute to its Stockholders cash dividends on its Common Stock at a quarterly rate of $0.225 per share. In order to declare and pay dividends in the future, the Board of Directors will have to make the determination that for purposes of the General Corporation Law of the State of Delaware ("Delaware Law") there is a sufficient amount of surplus (the amount by which its assets exceed its liabilities and capital) at that time or sufficient net profits. In determining the amount of surplus of the Company for purposes of Delaware Law, the Company's assets, including the stock of any of its subsidiaries, may be valued by the Board of Directors at their current market value. In connection with each dividend declaration, the Board of Directors makes a determination that, 26 based upon its familiarity with the Company's business, prospects and financial condition, the Company's recent earnings history and forecast, an appraisal of the Company's assets and discussions with the Company's executive officers, attorneys and accountants, the dividend is a permitted dividend under Delaware Law. As detailed on page 15 herein, certain of the Company's debt instruments contain provisions that generally provide that the holders of such debt may, under certain limited circumstances, require the Company to repurchase the debt ("Put Rights"). In addition to the occurrences described on page 15 herein, the Put Rights may be triggered by the making of certain unearned distributions to Stockholders, other than regular dividends, that are followed by a specified decline in public ratings on such debt. Regular dividends are those quarterly cash dividends determined in good faith by the Board of Directors (whose determination is conclusive) to be appropriate in light of the Company's results of operations and capable of being sustained. The determinations described in the paragraphs above were made prior to the declaration of $0.225 per share dividend to be made on March 15, 1995. The Companys $400 million Facility also could limit the Company's ability to pay dividends under certain circumstances. See "Items 1 and 2 -- FINANCE MATTERS". During 1994, the Company paid $72 million in dividends. All regular dividend payments in 1994 represent taxable income and not a return of capital as has occurred in prior years. The operation of certain of the Company's employee benefit plans may result in the issuance of Common Stock upon the exercise of options granted to employees of the Company, including its officers. Although the terms of these plans provide that additional shares may be issued to satisfy the Company's obligations under the options, the Company from time to time may cause Common Stock to be repurchased in the market in order to satisfy these obligations. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information for the Company:
FOR THE YEAR ENDED DECEMBER 31 MILLIONS OF DOLLARS, EXCEPT PER SHARE ------------------------------------- AMOUNTS 1994 1993 1992 1991 1990 ---------------------------------------- ------ ------ ------ ------ ------ Sales and other operating revenues...... $3,857 $3,850 $4,809 $5,735 $6,499 Income before cumulative effect of accounting changes..................... 223 4 26 222 356 Net income (*).......................... 223 26 16 222 356 Earnings per share before cumulative effect of accounting changes........... 2.78 .06 .32 2.78 4.45 Earnings per share...................... 2.78 .33 .20 2.78 4.45 Dividends per share..................... .90 1.35 1.80 1.75 4.10 Total assets............................ 1,663 1,231 1,215 1,479 1,372 Capitalized lease obligations, less current portion........................ --- --- --- 156 187 Long-term debt, less current portion.... 707 717 725 554 471
(*) The 1993 amount includes an increase in net income from the cumulative effect of the accounting change for turnarounds of $22 million, or $0.27 per share. The 1992 amount includes a net decrease in net income of $10 million, or $.12 per share related to the cumulative effect of accounting changes for postretirement benefits other than pensions and income taxes. See Note 4 of Notes to Consolidated Financial Statements. 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL As discussed in Note 3 of Notes to Consolidated Financial Statements, on July 1, 1993, Lyondell Petrochemical Company (the "Company" or "Lyondell") and CITGO Petroleum Corporation ("CITGO") announced the commencement of operations of LYONDELL-CITGO Refining Company Ltd. ("LCR"), a new entity owned by subsidiaries of the Company and CITGO. LCR owns and operates the refining business formerly owned by the Company, including the full-conversion refinery ("Refinery"). LCR is undertaking a major upgrade project at the Refinery to enable the facility to process substantial additional volumes of very heavy crude oil. CITGO is providing a major portion of the funds for the upgrade project and has provided in excess of $100 million for funding other capital projects. Definitive cost engineering for the upgrade is substantially complete and at the present time, LCR management anticipates the cost for the project, which is scheduled to be completed in late 1996, will be approximately $955 million, including an allowance for contingency costs. On July 1, 1993, LCR entered into a long-term crude oil supply contract ("Crude Supply Contract") with LAGOVEN, S.A., an affiliate of CITGO. In addition, under terms of a long-term product sales agreement ("Products Agreement"), CITGO is purchasing approximately 80 to 85 percent of the refined products produced at the Refinery. Both LAGOVEN and CITGO are subsidiaries of Petroleos de Venezuela, S.A., the national oil company of Venezuela. Prior to completion of the upgrade project, the Crude Supply Contract requires LCR to purchase and LAGOVEN to supply a minimum of the Refinery's coking capacity, 125,000 barrels per day of heavy Venezuelan crude oil. The contract incorporates a formula price based on the market value of a slate of refined products deemed to be produced from each particular crude oil or feedstock, less: (i) certain deemed refining costs, adjustable for inflation; (ii) certain actual costs, including crude transportation costs, import duties and taxes; and (iii) a deemed margin, which varies according to the grade of crude oil or other feedstock delivered. Deemed costs are adjusted periodically based on inflation rates for specific deemed cost components. Adjustments to margins track, but are less than, inflation rates. Because deemed operating costs and the slate of refined products deemed to be produced for a given barrel of crude oil or other feedstock do not necessarily reflect the actual costs and yields in any period and also because the market value of the refined products used in the pricing formula does not necessarily reflect the actual price received for the refined products, the actual refining margin earned by LCR under the Crude Supply Contract will vary depending on, among other things, the efficiency with which LCR conducts its operations during such period. Notwithstanding the limitations discussed above, however, the Crude Supply Contract is designed to reduce the inherent earnings and cash flow volatility of the refining operations of LCR irrespective of market fluctuations of either crude oil or refined products. Specifically, should the market value of refined products "deemed" to be produced from the Venezuelan crude oil increase, the "deemed" cost of crude oil to LCR will also increase. Alternatively, if the market value of refined products "deemed" to be produced from the Venezuelan crude oil decreases, the deemed cost of crude oil to LCR will also decrease. This results in relatively stable "deemed" margins regardless of refined products market volatility. If the actual yields, costs or volumes differ substantially from those contemplated by the Crude Supply Contract, the benefits of this agreement to LCR could be substantially different than anticipated. Prior to commencement of LCR operations on July 1, 1993, the petrochemical and refining operations of the Company were considered to be a single segment due to the integrated nature of their operations. However, these operations are now considered to be separate segments due to the formation of LCR and the related separate management and operations of that entity. See Note 21 - Segment Information, of Notes to Consolidated Financial Statements. The petrochemical segment consists of olefins including ethylene, propylene, butadiene, butylenes and specialty products; polyolefins including polypropylene and low density polyethylene; aromatics produced at the Channelview petrochemical complex ("Channelview Complex") including benzene and toluene; methanol and refinery blending stocks. 28 The refining segment consists of refined petroleum products, including gasoline, heating oil and jet fuel; aromatics produced at the Refinery, including benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial and motor oils; olefins feedstocks and crude oil resales. The following table sets forth sales volumes for the Company's major products for the periods indicated. Sales volumes include production, purchases of products for resale, propylene production from the product flexibility unit and draws from inventory.
FOR THE YEAR ENDED DECEMBER 31 ------------------------------ 1994 1993 1992 -------- ------- ----- Selected petrochemical products (millions) (excluding intersegment sales): Ethylene, propylene and polymers (pounds)............................ 6,090 5,366 5,785 Other olefins (pounds) *............. 1,048 1,150 1,158 Methanol (gallons) *................. 169 225 212 Aromatics (gallons).................. 160 125 112 Refined products (thousand barrels per day) (excluding intersegment sales): Gasoline............................. 109 120 125 Heating oil (no. 2 distillate)....... 44 62 60 Jet fuel............................. 24 30 38 Aromatics............................ 8 10 11 Other refined products............... 46 41 43 ----- ----- ----- Total refined products volumes.... 231 263 277 ===== ===== =====
-------------------------- * Due to a change in a sales contract with a customer effective January 1, 1994, these products are now consumed in the manufacture of methyl tertiary butyl ether ("MTBE"). The 1993 sales volumes, if restated in a manner consistent with 1994, would be 797 million pounds and 195 million gallons for Other Olefins and Methanol, respectively and the 1992 sales volumes would be 802 million pounds and 178 million gallons for Other Olefins and Methanol, respectively. The following table sets forth the Company's sales and other revenues for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31 ------------------------------ MILLIONS OF DOLLARS 1994 1993 1992 ------------------- ------- ------- ------- Petrochemical products (excluding intersegment sales): Ethylene, propylene and polymers..... $1,113 $ 808 $ 939 Other olefins (a).................... 173 169 177 Methanol (a)......................... 133 89 77 Aromatics............................ 171 120 121 Other petrochemical products and other revenues...................... 193 140 95 ------ ------ ------ Total petrochemical products sales.......................... 1,783 1,326 1,409 ------ ------ ------ Refined products (excluding intersegment sales): Gasoline............................. 813 950 1,123 Heating oil (no. 2 distillate)....... 311 481 510 Jet fuel............................. 178 245 342 Aromatics............................ 152 167 193 Other refined products and other revenues............................ 324 280 339 ------ ------ ------ Total refined products sales.... 1,778 2,123 2,507 ------ ------ ------ Crude oil resales (b)................... 296 401 893 ------ ------ ------ Total............................. $3,857 $3,850 $4,809
====== ====== ====== 29 __________________________ (a) Due to a change in a sales contract with a customer effective January 1, 1994, these products are now consumed in the manufacture of MTBE. The 1993 sales values, if restated in a manner consistent with 1994, would be $126 million and $77 million for Other Olefins and Methanol, respectively and the 1992 sales value would be $128 million and $64 million for Other Olefins and Methanol, respectively. (b) Crude oil resales consist of revenues from the resale of previously purchased crude oil and from locational exchanges of crude oil that are settled on a cash basis. Crude oil exchanges and resales facilitate the operation of the refining segment by allowing the Company to optimize the crude oil feedstock mix in response to market conditions and refinery maintenance turnarounds and also to reduce transportation costs. RESULTS OF OPERATIONS OVERVIEW Net income for 1994 was $223 million or $2.78 per share compared with $26 million or $.33 per share in 1993 and $16 million or $.20 per share in 1992. Earnings for 1993 included a $22 million after-tax benefit for the cumulative effect related to prior periods associated with a change in accounting for major maintenance turnarounds. Earnings for 1992 reflect a net after-tax charge of $10 million for the cumulative effect related to prior periods of adopting Financial Accounting Standards Board mandated accounting standards for postretirement benefits and income taxes. Excluding the effect of these accounting changes, the $219 million earnings increase in 1994 versus 1993 was due primarily to higher petrochemical margins and higher olefins sales volumes, partially offset by lower refining margins. The $22 million earnings decline in 1993 versus 1992 was due primarily to lower ethylene sales volumes and polyolefins margins, partially offset by higher refined products margins. The Company implemented a cost reduction program in 1993 at the trough of the petrochemical cycle with the goal of reducing period costs by approximately $30 million to $50 million annually from 1992 levels, assuming continued depressed petrochemical industry conditions. After the program was implemented, a change in industry conditions and therefore in the Company's operating and maintenance plans and other factors reduced the realized savings of the cost reduction program. For example, during the latter half of 1993 and first half of 1994, the Company chose to extend the run lengths of several of its major production units by performing incremental preventive maintenance work. The cost of this unscheduled maintenance totaled approximately $13 million. Also, during 1994, the petrochemical industry experienced a significant upturn which caused the Company's net income to significantly exceed the budgeted amount. This improved profit performance triggered the accrual of various employee incentive and profit sharing plan expenses and salary and wage increases all of which were based, in part, on the Company's profit performance and totaled approximately $23 million. In addition to the above, other unbudgeted expenses were incurred during 1994 which were required to capture the opportunities presented by the economic upturn in the petrochemical industry. PETROCHEMICAL SEGMENT REVENUES Sales and other operating revenues, including intersegment sales, were $2.0 billion in 1994 compared to $1.5 billion in 1993 and $1.7 billion in 1992. The 1994 increase of $467 million compared to 1993 was primarily caused by higher petrochemical sales prices and volumes. Higher demand for olefins and polyolefins was caused by an improved worldwide economy, particularly in the U.S. automotive and construction sectors, which has created better market conditions for petrochemicals generally. Methanol sales prices were higher due to higher demand caused by the improvement in the worldwide economy and increased use of MTBE, of which methanol is a significant component, as well as industry supply disruptions. The 1993 decrease in sales and other operating revenues of $169 million compared to 1992 was primarily due to lower olefins and polyolefins sales volumes and prices caused by continued poor worldwide industry conditions and higher industry production due to reduced maintenance downtime during 1993. 30 COST OF SALES Cost of sales was $1.5 billion in 1994 compared to $1.4 billion in 1993 and $1.5 billion in 1992. The 1994 increase of $108 million compared to 1993 was principally due to higher olefins feedstock costs resulting from higher production rates, partially offset by lower feedstock prices. The 1993 decrease in cost of goods sold of $124 million compared to 1992 was due principally to lower olefins feedstock costs caused by the curtailment of production resulting from the poor economic conditions and to a lesser extent to lower feedstock prices. Cost of sales was reduced in 1993 and 1992 by $5 million and $2 million, respectively associated with a reduction in inventories accounted for under the LIFO method of accounting. SELLING EXPENSES Selling expenses amounted to $40 million in 1994 compared to $37 million in 1993 and $37 million in 1992. The $3 million increase in selling expenses in 1994 compared to 1993 was primarily due to higher terminal and freight expenses caused by higher petrochemical sales volumes. OPERATING INCOME Operating income amounted to $413 million in 1994 compared to $57 million in 1993 and $102 million in 1992. The $356 million operating income increase in 1994 compared to 1993 was primarily due to higher petrochemical sales margins and higher olefins sales volumes. Improved olefins sales margins resulted primarily from higher sales prices and to a lesser extent lower feedstock prices. Olefins sales prices and volumes were higher due to higher industry-wide demand caused by the improved worldwide economies. Contributing to the improved operating income during 1994 compared to 1993 were higher methanol sales margins, partially offset by lower methanol sales volumes. Methanol sales margins were higher primarily due to higher sales prices caused in part by the improved worldwide economy. Methanol sales volumes were lower due to scheduled and unscheduled downtime of the methanol unit. The $45 million operating income decrease in 1993 compared to 1992 was primarily due to lower ethylene sales volumes and polyolefins margins. Ethylene sales volumes and polyolefins margins were lower primarily due to poor industry and economic conditions. REFINING SEGMENT REVENUES Sales and other operating revenues, including intersegment sales, were $2.3 billion in 1994 compared to $2.8 billion in 1993 and $3.7 billion in 1992. The 1994 decrease of $489 million compared to 1993 was due primarily to lower resale volumes of purchased light products, lower sales prices for refined products and lower crude oil resale volumes. The purchase and resale activity for light refined products conducted for logistic and other reasons was curtailed because, effective with the beginning of LCR operations on July 1, 1993, a majority of the refined products produced at the refinery are now sold to CITGO under the Products Agreement. Refined products sales prices were lower due primarily to lower industry crude oil prices. Lower crude oil resale volumes resulted from reduced logistical purchases required to meet refinery feedstock requirements which was caused by a change in crude oil market supply factors. The 1993 decrease in sales and other operating revenues of $973 million versus 1992 was due to lower crude oil resale volumes, lower sales prices for refined products and lower resale volumes of purchased light products. Crude oil resale volumes were lower due to reduced logistical purchases required to meet refinery feedstock requirements resulting from higher Venezuelan crude oil volumes purchased under the Crude Supply Contract. Refined products sales prices were negatively affected by additions to industry supply which exceeded demand growth. The increase in industry supply resulted from additions of larger volumes of oxygenates, primarily MTBE, to gasoline to meet stricter environmental standards, as well as new industry conversion capacity. The purchase and resale activity for light refined products conducted for logistic and other reasons was curtailed during the current period because, effective with the beginning of LCR operations on July 1, 1993, a majority of the refined products produced at the Refinery are now sold to CITGO under the Products Agreement. COST OF SALES Cost of sales was $2.2 billion in 1994 compared to $2.6 billion in 1993 and $3.6 billion in 1992. The 1994 decrease compared to 1993 of $468 million was principally due to lower purchases for resale of light 31 refined products, lower feedstock costs primarily due to lower crude oil prices and lower logistical purchases of crude oil that were resold. Cost of sales was increased by $1 million in 1994 associated with a reduction in LIFO inventories. The 1993 decrease compared to 1992 of $1 billion was principally due to lower quantities of purchased crude oil and light refined products and lower crude oil prices. Crude oil purchases were lower due to the reduced logistical purchases. Purchases of light refined products were lower due primarily to lower purchases for resale activity. Lower crude oil prices were due to generally lower industry-wide crude oil prices and to the processing of higher volumes of lower priced, heavy Venezuelan crude oil purchased under the Crude Supply Contract. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $54 million in 1994 compared to $48 million in 1993 and $43 million in 1992. The $6 million increase in 1994 compared to 1993 and the $5 million increase in 1993 compared to 1992 resulted primarily from higher general and administrative expenses for personnel and realignment expenses associated with ongoing operations of LCR starting on July 1, 1993. OPERATING INCOME Operating income amounted to $54 million in 1994 compared to $81 million in 1993 and $49 million in 1992. The $27 million decrease in 1994 compared to 1993 was due primarily to lower refined products margins and sales volumes and higher general and administrative expenses, partially offset by improved profitability for aromatics. Refined products earnings were negatively affected in 1994 by poor industry conditions as well as lower volumes of heavy Venezuelan crude oil processed in the coking mode which was caused by downtime for turnarounds on the coker and largest crude distillation unit and operating problems prior to the turnarounds. Aromatics earnings were higher in 1994 compared to 1993 due primarily to higher sales prices. The $32 million increase in 1993 compared to 1992 was due primarily to improved refined products margins, partially offset by higher selling, general and administrative expenses. Refined products margins were higher due to processing higher volumes of heavy, low cost Venezuelan crude oil purchased under the Crude Supply Contract. UNALLOCATED INTEREST EXPENSE AND INTEREST INCOME Interest expense was $74 million in 1994 compared to $74 million in 1993 and $79 million in 1992. The $5 million reduction in interest expense in 1993 compared to 1992 was caused primarily by a reduction of outstanding debt due to the prepayment of amounts due under capitalized leases during April 1992. Interest income was $5 million in 1994 compared to $2 million in 1993 and $10 million in 1992. The $3 million increase in 1994 compared with 1993 was due principally to higher amounts of cash associated with LCR minority owner cash contributions available for investment. The $8 million decrease in 1993 versus 1992 was due primarily to lower amounts of cash available for investment. MINORITY INTEREST IN LYONDELL-CITGO REFINING COMPANY LTD. Minority interest was $6 million in 1994 and $5 million in 1993 representing CITGO's allocated share of LCR's income. INCOME TAX The effective income tax rate during 1994 from continuing operations was 36.2 percent compared to 73.1 percent for 1993 and 27.3 percent for 1992. State income tax was the primary difference between the effective tax rate and the 35 percent federal statutory rate during 1994. The difference for 1993 between the effective tax rate and the federal statutory rate was due primarily to a charge to state deferred taxes related to Texas franchise taxes and the unfavorable impact on federal deferred taxes of the increase in the federal tax rate. The difference for 1992 was due primarily to a state income tax adjustment, tax exempt income related to company owned life insurance and tax exempt interest. 32 FINANCIAL CONDITION CASH FLOW FROM OPERATIONS Lyondell's cash flow from operations totaled $155 million during 1994, a strong improvement over the $84 million generated in 1993. This increase was directly attributable to the more than eight-fold increase in net income over 1993. The increase in net income was partially offset by a significant increase in accounts receivable associated with increased sales levels in the fourth quarter of 1994 versus the same period for 1993 and to a lesser extent from an increase in inventory levels over 1993 balances. INVESTING ACTIVITIES Excluding refinery upgrade expenditures totaling $135 million, the Company made capital expenditures totaling $117 million during 1994, of which $48 million related to environmental projects at the Refinery and Channelview Complex that were required to satisfy applicable environmental laws. Refinery upgrade expenditures during 1994 were funded by the $136 million of contributions from CITGO, the minority owner of LCR. The 1995 capital expenditures budget, excluding the Refinery upgrade project, has been set at $170 million. The budget provides $60 million for Refinery projects of which $10 million is to be funded by Lyondell and $50 million is to be funded from CITGO's reinvested earnings and the restricted cash balance which was created by CITGO's contributions to LCR. The remaining $110 million is for petrochemical projects. In addition to the capital expenditures budget, $579 million of spending is planned for the Refinery upgrade project designed to increase the Refinery's ability to process larger volumes of very heavy Venezuelan crude oil, of which $211 million is to be funded by CITGO, $56 million is to be funded by Lyondell in the form of subordinated loans to LCR and the remainder is expected to be funded through an LCR external borrowing. As of December 31, 1994, $42 million of cash was restricted for use in LCR capital projects, including the Refinery upgrade project and other expenditures as determined by the LCR owners. FINANCING ACTIVITIES Cash flows associated with financing activities during 1994 included $72 million for dividend payments, $8 million and $4 million for scheduled repayments of Medium-Term notes and other borrowings, respectively, and $20 million of proceeds from borrowings under the LCR $70 million working capital facility, discussed below. The Company has a five-year, $400 million revolving credit facility ("Facility") with a group of banks. Borrowings under the Facility bear interest based on Euro-Dollar, certificate of deposit ("CD") or prime rates, at the Company's option. The Facility is available for working capital and general corporate purposes as needed and contains covenants relating to dividend payments, debt incurrence, liens, disposition of assets, mergers and consolidations, fixed charge and leverage ratios and certain payments to LCR. At December 31, 1994, no amounts were outstanding under this Facility. Effective July 1, 1994, LCR elected to replace its unsecured $100 million revolving credit facility with an unsecured $70 million revolving credit facility ("LCR Facility") on substantially similar terms. Under terms of the LCR Facility, LCR may borrow with interest based on prime, Euro-Dollar or CD rates at LCR's option or have letters of credit issued on its behalf. The LCR Facility is available for working capital and general corporate purposes as needed. At December 31, 1994, $20 million was outstanding under the LCR Facility. On January 20, 1995, the Board of Directors declared a regular quarterly dividend in the amount of $.225 per share of common stock, payable March 15, 1995 to stockholders of record on February 24, 1995. ENVIRONMENTAL MATTERS Various environmental laws and regulations impose substantial requirements upon the operations of the Company. The Company's policy is to be in compliance with such laws and regulations, which include, among others, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended, the Resource Conservation and Recovery Act ("RCRA") and the Clean Air Act and Clean Air Act Amendments of 1990. ARCO, along with many other companies, has been named a potentially responsible party ("PRP") under CERCLA in connection with the past disposal of waste at third party waste sites. The Company has an obligation 33 to reimburse ARCO for a portion of its uninsured remediation costs for two of those sites pursuant to the Cross-Indemnity Agreement. The Company reserves for contingencies, including those based upon unasserted claims, that are probable and reasonably estimable. In connection with environmental matters, the Company established reserves based upon known facts and circumstances. Based on current environmental laws and regulations, the Company believes that it has adequately reserved for the matters described above and, based upon such reserves, does not anticipate any material adverse effect upon its earnings, operations or competitive position, although the resolution in any reporting period of one or more of these matters could have a material impact on the Company's results of operations for that period. The environmental reserve on December 31, 1994 was $17 million. The environmental reserve includes $0.8 million of estimated future payments to ARCO for remediation costs associated with CERCLA waste disposal sites and $16.2 million of estimated remediation costs related to waste disposal sites located within the Company's facilities associated with RCRA. The Company spent $488,000, $627,000 and $593,000 in 1994, 1993 and 1992, respectively, relating to CERCLA matters. The Company also spent $6 million, $2 million and $158,000 in 1994, 1993 and 1992, respectively, in conjunction with RCRA matters. The Company estimates it will pay approximately $1 million in conjunction with CERCLA and RCRA matters in 1995 which is included in the December 31, 1994 environmental reserve. CURRENT BUSINESS OUTLOOK Lyondell's 1994 results reflect an improved business environment for petrochemicals. These results were partially offset by lower refining profitability which reflected depressed industry margins and also scheduled and unscheduled downtime at the Refinery for turnarounds and repair and maintenance of two major processing units. The effect of the depressed industry margins on LCR was partially offset by the benefits of the Crude Supply Contract. Profitability and cash flows for the petrochemical and refining businesses are affected by industry supply and demand, feedstock cost volatility, capital expenditures required to meet more stringent environmental standards, repair and maintenance costs and downtime of production units due to turnarounds. Turnarounds on major units can have significant financial impacts due to the repair and maintenance costs incurred as well as the associated loss of production, resulting in lower profitability during the period of the turnaround. The Company currently intends to perform a turnaround on one of its two olefins units during the second half of 1995. During this turnaround, work will be completed to debottleneck the unit which will increase its capacity by approximately 120 million pounds per year. Management believes that the low cost, operating flexibility and large production capacity of the Company's petrochemical business position it to capitalize on the current favorable petrochemical business environment. During most of 1994, the domestic olefins industry operated at close to maximum available capacity. However, additional olefins capacity scheduled to come on stream in early 1995 may negatively affect operating rates and margins. This expected increase in supply may be partially offset by higher demand if the worldwide economies continue to expand or by the replenishment of inventories that as of year-end 1994 were close to historical lows. In 1994, the methanol market benefited from increased product demand, including rapid growth in its use for MTBE, and also from production disruptions which limited supply. This led to unprecedented prices and margins in the methanol business. In early 1995, increased uncertainty about MTBE demand for reformulated gasoline and improving methanol supply began to exert downward pressure on methanol prices. The outlook for methanol in 1995 and future years is uncertain but is less positive than late in 1994. 34 Management believes the Company has improved its refining business by forming LCR which has entered into the Crude Supply Contract and Products Agreement. These arrangements are designed to diminish the impact of market volatility and stabilize cash flows at attractive levels relative to historic performance, although the remaining portion of LCR's crude oil volume not purchased under the Crude Supply Contract continues to be sensitive to market conditions. The Company believes that business conditions will be such that cash balances, cash generated from operating activities and existing lines of credit will be adequate to meet future cash requirements for scheduled debt repayments, necessary capital expenditures and to sustain for the reasonably foreseeable future the regular quarterly dividend. However, the Company continually evaluates its cash requirements and allocates cash in order to maximize stockholder returns. _________________ Management cautions against projecting any future results based on present or prior earnings levels because of the cyclical nature of the refining and petrochemical industries and uncertainties associated with the United States and worldwide economies and current and potential United States governmental regulatory actions. 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants............................ 37 Financial Statements Consolidated Statement of Income and Accumulated Deficit.. 38 Consolidated Balance Sheet................................ 39 Consolidated Statement of Cash Flows...................... 40 Notes to Consolidated Financial Statements................ 41
Financial statement schedules have been omitted because they are either not applicable or the required information is shown in the financial statements or related notes. 36 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Lyondell Petrochemical Company We have audited the accompanying consolidated balance sheet of Lyondell Petrochemical Company as of December 31, 1994 and 1993, and the related consolidated statements of income and accumulated deficit and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lyondell Petrochemical Company as of December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in Note 4 to the consolidated financial statements, during 1993 the Company changed its method of accounting for the cost of repairs and maintenance incurred in connection with turnarounds of major units at its manufacturing facilities. COOPERS & LYBRAND L.L.P. Houston, Texas February 10, 1995 37 LYONDELL PETROCHEMICAL COMPANY CONSOLIDATED STATEMENT OF INCOME AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED DECEMBER 31 ------------------------------- MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS 1994 1993 1992 -------------------------------------------- ------- ------- ------- SALES AND OTHER OPERATING REVENUES: Unrelated parties $ 3,543 $ 3,572 $ 4,480 Related parties 314 278 329 ------- ------- ------- 3,857 3,850 4,809 OPERATING COSTS AND EXPENSES: Cost of sales: Unrelated parties 3,066 3,359 4,283 Related parties 230 268 295 Selling, general and administrative expenses 137 130 127 ------- ------- ------- 3,433 3,757 4,705 ------- ------- ------- Operating income 424 93 104 Interest expense (74) (74) (79) Interest income 5 2 10 Minority interest in LYONDELL-CITGO Refining Company Ltd. (6) (5) -- ------- ------- ------- Income before income taxes and cumulative effect of accounting changes 349 16 35 Provision for income taxes 126 12 9 ------- ------- ------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 223 4 26 Cumulative effect on prior years of accounting changes, net of tax -- 22 (10) ------- ------- ------- NET INCOME $ 223 $ 26 $ 16 ======= ======= ======= EARNINGS (LOSS) PER SHARE: Income before cumulative effect of accounting changes $ 2.78 $ .06 $ .32 Cumulative effect on prior years of accounting changes -- .27 (.12) ------- ------- ------- Net income $ 2.78 $ .33 $ .20 ======= ======= ======= PRO FORMA AMOUNTS, ASSUMING RETROACTIVE APPLICATION OF NEW ACCOUNTING METHOD FOR TURNAROUNDS: Income before cumulative effect of accounting changes $ 31 ======= Income per share before cumulative effect accounting changes $ .39 ======= Net income $ 223 $ 4 $ 22 ======= ======= ======= Net income per share $ 2.78 $ .06 $ .27 ======= ======= ======= ACCUMULATED DEFICIT AT BEGINNING OF YEAR $ (326) $ (244) $ (116) Net income 223 26 16 Cash dividends (72) (108) (144) ------- ------- ------- ACCUMULATED DEFICIT AT END OF YEAR $ (175) $ (326) $ (244) ======= ======= =======
See notes to consolidated financial statements. 38 LYONDELL PETROCHEMICAL COMPANY CONSOLIDATED BALANCE SHEET
DECEMBER 31 ----------------- MILLIONS OF DOLLARS 1994 1993 ------------------- ------ ------ ASSETS Current assets: Cash and cash equivalents $ 52 $ 40 Restricted cash and cash equivalents (Note 6) 42 73 Short-term investments (Note 6) -- 6 Accounts receivable: Trade 331 179 Related parties 29 25 Inventories 229 191 Prepaid expenses and other current assets 14 9 ------ ------ Total current assets 697 523 ------ ------ Fixes assets: Property, plant and equipment 2,810 2,545 Less accumulated depreciation and amortization 1,930 1,890 ------ ------ 880 655 Deferred charges and other assets 86 53 ------ ------ Total assets $1,663 $1,231 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable: Trade $ 287 $ 203 Related parties 1 4 Notes payable 20 4 Current maturities of long-term debt 10 8 Other accrued liabilities 115 80 ------ ------ Total current liabilities 433 299 ------ ------ Long-term debt 707 717 Other liabilities and deferred credits 83 78 Deferred income taxes 109 101 Commitments and contingencies (Note 20) Minority interest 268 124 Stockholders' equity (deficit): Preferred stock, $.01 par value, 80,000,000 shares authorized, none outstanding Common stock, $1 par value, 250,000,000 shares authorized, 80,000,000 issued and outstanding 80 80 Additional paid-in capital 158 158 Accumulated deficit (175) (326) ------ ------ Total stockholders' equity (deficit) 63 (88) ------ ------ Total liabilities and stockholders' equity $1,663 $1,231 ====== ======
See notes to consolidated financial statements. 39 LYONDELL PETROCHEMICAL COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31 ------------------------------ MILLIONS OF DOLLARS 1994 1993 1992 ------------------- ------ ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 223 $ 26 $ 16 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting changes, net of tax -- (22) 10 Depreciation and amortization 65 58 39 Deferred taxes 10 7 2 (Increase) decrease in accounts receivable (156) 50 117 (Increase) decrease in inventory (38) (11) 17 Increase (decrease) in accounts payable 59 (50) (80) Net change in other working capital accounts 28 16 (20) Minority interest 6 5 -- Other (42) 5 7 ------ ------ ------ Net cash provided by operating activities 155 84 108 ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to fixed assets (252) (69) (97) Purchases of short-term investments (20) (9) -- Proceeds from sales of short-term investments 26 16 88 ------ ------ ------ Net cash used in investing activities (246) (62) (9) ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Minority owner contribution 136 116 -- Net proceeds from short-term debt 16 4 -- Proceeds from long-term debt -- -- 200 Repayments of long-term debt (8) (29) (67) Repayments of capitalized lease obligations -- -- (186) Dividends paid (72) (108) (144) ------ ------ ------ Net cash provided by (used in) financing activities 72 (17) (197) ------ ------ ------ INCREASE (DECREASE) IN CASH, RESTRICTED CASH AND CASH EQUIVALENTS (19) 5 (98) Cash, restricted cash and cash equivalents at beginning of period 113 108 206 ------ ------ ------ Cash, restricted cash and cash equivalents at end of period $ 94 $ 113 $ 108 ====== ====== ======
See notes to consolidated financial statements. 40 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. FORMATION OF THE COMPANY AND OPERATIONS Lyondell was formed in 1985 and was operated as a separate division ("Lyondell Division") of Atlantic Richfield Company ("ARCO") until June 1988. Effective July 1, 1988, ARCO transferred substantially all the assets and liabilities relating to the integrated petrochemical and petroleum processing business of the Lyondell Division, along with certain pipeline assets that were not formerly a part of the Lyondell Division, to its wholly- owned subsidiary, Lyondell Petrochemical Company, a Delaware corporation. For financial reporting purposes, the transfer of these assets and liabilities was recorded at the historical net book value of $127 million as of July 1, 1988. As the context may require, all references hereafter to the "Company" or "Lyondell" include Lyondell Petrochemical Company, its wholly-owned subsidiaries and LYONDELL-CITGO Refining Company Ltd. ("LCR"). On January 25, 1989, ARCO completed an initial public offering of 43,000,000 shares of the Company's 80,000,000 shares of common stock owned by ARCO. The Company received none of the proceeds from the sale. On August 8, 1994, ARCO completed an offering of three-year debt securities ("Exchangeable Notes") exchangeable upon maturity, at ARCO's option, into Lyondell common stock or cash with an equal value ("ARCO Note Offering"). If ARCO elects to deliver shares of Lyondell common stock at the maturity of the Exchangeable Notes, ARCO's equity interest in Lyondell will be substantially reduced or eliminated, depending on the price of Lyondell common stock at such time. In connection with the ARCO Note Offering, the five ARCO officers who were Directors of the Company resigned from the Company's Board of Directors; however, ARCO did not limit its right to nominate and vote for candidates for Lyondell's Board of Directors. Until the maturity of the Exchangeable Notes, ARCO generally intends to vote its shares in proportion to the votes of the non-ARCO stockholders, except under certain limited circumstances. As of December 31, 1994, ARCO owned 39,921,400 shares of Lyondell common stock, representing 49.9 percent of the issued and outstanding common stock of the Company. The Company operates in two business segments: petrochemicals and refining. The Company generally sells its petrochemical products to customers for use primarily in the manufacture of other chemicals and products, which in turn are used in the production of a wide variety of consumer and end-use products. LCR sells its principal refined products primarily to CITGO Petroleum Corporation ("CITGO") and to a lesser extent, other marketers of petroleum products. See Note 3. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant transactions between the entities of the Company have been eliminated from the consolidated financial statements. Certain amounts from prior years have been reclassified to conform to current year presentation. Cash Equivalents and Short-Term Investments - Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts purchased with an original maturity date of three months or less. Short-term investments consist of similar investments maturing in more than three months from purchase. The Company's policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of these financial institutions which are considered in the Companys investment strategy. The Company has no requirements for compensating balances in a specific amount at a specific point in time. The Company does maintain compensating balances for some of its banking services and products. Such balances are maintained on an average basis and are solely at the Company's discretion, so that effectively on any given date, none of the Company's cash is restricted with the exception of cash held for use in connection with LCR capital projects and other expenditures as determined by the LCR owners (see Note 6). 41 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) All investments in debt and equity securities are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" which the Company adopted as of January 1, 1994. Management determines the appropriate classification of investments in debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Accounts Receivable - The Company sells its products primarily to companies in the petrochemical and refining industries. The Company performs ongoing credit evaluations of its customer's financial condition and in certain circumstances requires letters of credit from them. The Company's allowance for doubtful accounts receivable, which is reflected in the consolidated balance sheet as a reduction in accounts receivable, totaled $3 million and $2 million at December 31, 1994 and 1993, respectively. Inventories - Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out ("LIFO") basis except for materials and supplies, which are valued at average cost. Fixed Assets - Fixed assets are recorded at cost. Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives of the related assets as follows: Manufacturing facilities and equipment - 5 to 30 years Leased assets and improvements - 5 to 20 years Upon retirement or sale, the Company removes the cost of the assets and the related accumulated depreciation from the accounts and reflects any resulting gains or losses in income. Environmental Remediation Costs - Expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable that a liability has been incurred and the amount of that liability can reasonably be estimated. Environmental remediation costs are expensed or capitalized in accordance with generally accepted accounting principles. Exchanges - Crude oil and finished product exchange transactions, which are of a homogeneous nature of commodities in the same line of business, that do not involve the payment or receipt of cash, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the normal LIFO valuation policy. Exchanges that are settled through payment and receipt of cash are accounted for as purchases and sales. Income Taxes - Deferred income taxes result from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes and are calculated, in accordance with SFAS No. 109, "Accounting for Income Taxes", based upon cumulative book/tax differences in the balance sheet. 3. LYONDELL-CITGO REFINING COMPANY LTD. The Company and CITGO announced, on July 1, 1993, the commencement of operations of LCR, a new entity formed and owned by subsidiaries of the Company and CITGO in order to own and operate the Company's refining business, including the full- conversion Houston refinery ("Refinery"). LCR is a limited liability company organized under the laws of the state of Texas. At December 31, 1994, CITGO had an approximate 10 percent participation interest in LCR. 42 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. LYONDELL-CITGO REFINING COMPANY LTD. - (CONTINUED) LCR is undertaking a major upgrade project at the Refinery to enable the facility to process substantial additional volumes of very heavy crude oil. LCR also has entered into a long-term crude supply contract ("Crude Supply Contract") with Lagoven, S.A. ("LAGOVEN"), an affiliate of CITGO. In addition, under the terms of a long-term product sales agreement ("Products Agreement"), CITGO purchases from LCR a majority of the refined products produced at the Refinery. Both LAGOVEN and CITGO are direct or indirect wholly-owned subsidiaries of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company of Venezuela. Under the terms of the transaction, CITGO is providing a major portion of the funds for the upgrade project and has provided in excess of $100 million for funding other capital projects. Definitive cost engineering for the upgrade is substantially complete and at the present time, LCR management anticipates the cost for the project, which is scheduled to be completed in late 1996, will be approximately $955 million, including an allowance for contingency costs. CITGO has committed to reinvest its share of operating cash flow during the upgrade project, while the Company has unrestricted access to its share of operating cash flow from LCR. 4. ACCOUNTING CHANGES In May 1993 the Financial Accounting Standards Board issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company adopted the provisions of SFAS No. 115 for investments held as of or acquired after January 1, 1994. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. The effect of adopting SFAS No. 115 had no impact on income. In the first quarter of 1993, effective January 1, 1993, the Company changed its method of accounting for the cost of repairs and maintenance incurred in connection with turnarounds of major units at its manufacturing facilities. Under the new method, turnaround costs exceeding $5 million are deferred and amortized on a straight-line basis until the next planned turnaround, generally four to six years. In prior years, all turnaround costs were expensed as incurred. The Company believes that the new method of accounting is preferable in that it provides for a better matching of turnaround costs with future product revenues. The cumulative effect of this accounting change for years prior to 1993 resulted in a benefit of $33 million ($22 million or $.27 per share after income taxes), and was included in first quarter income. In the fourth quarter of 1992, the Company adopted, effective January 1, 1992, the provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("OPEB"), requiring the accrual of postretirement benefits. The applicable postretirement benefits include medical and life benefit plans. In prior years, expenses for these plans were recognized on a pay-as-you-go basis. The unfavorable effect of this accounting change through December 31, 1991 amounted to $28 million before taxes or $18 million (or $.22 per share) net of tax and was charged against 1992 income. In the fourth quarter of 1992, the Company adopted, effective January 1, 1992, the provisions of SFAS No. 109, "Accounting for Income Taxes". The Statement requires, among other things, a change from the deferred to the liability method of computing deferred income taxes. The favorable cumulative effect of this accounting change on years prior to 1992 was an $8 million (or $.10 per share) reduction in the Company's deferred tax liability and was included in 1992 income. Effective January 1, 1992, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits". The standard requires companies to accrue the cost of postemployment (prior to retirement) benefits either during the years that the employee renders the necessary service or at the date of the event giving rise to the benefit, depending upon whether certain conditions are met. The effect of adoption did not have a material impact on 1992 net income. 43 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information is summarized as follows:
MILLIONS OF DOLLARS 1994 1993 1992 ------------------- ----- ----- ----- Cash paid during the year for: Interest $ 72 $ 76 $ 77 Income taxes $ 90 $ 7 $ 22
At December 31, 1994, fixed assets included $36 million of non-cash additions which related to accounts payable accruals. As of December 31, 1993, fixed assets included $16 million of non-cash additions of which $14 million related to accounts payable accruals. 6. RESTRICTED FUNDS At December 31, 1994 and 1993, cash in the amount of $42 million and $73 million, respectively, was restricted for use in connection with LCR capital projects, including the Refinery upgrade project, and other expenditures as determined by the LCR owners. At December 31, 1993, in addition to restricted cash, short-term investments in the amount of $6 million were restricted for use in connection with LCR capital projects, including the Refinery upgrade project, and other expenditures as determined by the LCR owners. Presented below is a reconciliation of changes in restricted funds, including amounts classified as short-term investments, for the year ended December 31, 1994:
MILLIONS OF DOLLARS --------------------- Restricted - cash, cash equivalents and short-term investments at December 31, 1993 $ 79 Minority owner investments: Contributions 136 Distributable cash reinvested 10 Interest on restricted funds 3 Additions to fixed assets: Refinery upgrade project (135) Refining segment - other (51) ----- Restricted - cash and cash equivalents $ 42 at December 31, 1994 =====
7. FINANCIAL INSTRUMENTS At December 31, 1994, the Company held approximately $65 million of investments in debt securities composed primarily of commercial paper and classified as cash equivalents. As of January 1, 1994, the Company held approximately $70 million of investments in debt securities composed primarily of commercial paper, including $64 million classified as cash equivalents. The cost of securities held at December 31, 1994 and January 1, 1994 approximated their estimated fair value due to their short maturity and were classified as available-for-sale. The Company realized no gains or losses on sales of securities during the year ended December 31, 1994. All securities held by the Company as of December 31, 1994 have remaining maturities of less than one year. 44 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. FINANCIAL INSTRUMENTS - (CONTINUED) The fair value of all other financial instruments included in current assets and current liabilities, including accounts receivable, accounts payable and notes payable, approximated their carrying value due to their short maturity. Based on the borrowing rates currently available to the Company for debt with terms and average maturities similar to the Company's debt portfolio, the fair value of the Companys long-term debt, including amounts due within one year, was $689 million at December 31, 1994. At December 31, 1994, the Company had issued letters of credit totaling $26 million. The Company is party to various take-or-pay contracts as a purchaser for product and pipeline usage. At December 31, 1994, future minimum payments under these take-or-pay contracts with noncancelable contract terms in excess of one year were as follows:
MILLIONS OF DOLLARS AMOUNT ------------------- ------ 1995 $ 1 1996 3 1997 10 1998 10 1999 10 Thereafter 102 ---- Total minimum contract payments $136 ====
8. RELATED PARTY TRANSACTIONS Related party transactions with ARCO are summarized as follows:
MILLIONS OF DOLLARS 1994 1993 1992 ---------------------------------- ----- ----- ----- Costs Crude oil purchases $ 16 $ 53 $ 140 Product purchases 2 3 9 Transportation fees 28 27 24 Other, net 3 2 2 ----- ----- ----- Total $ 49 $ 85 $ 175 ===== ===== ===== Sales of crude oil and products $ 4 $ 15 $ 33 ===== ===== =====
In addition, sales to an affiliate, ARCO Chemical Company, consisting of benzene, MTBE, ethylene, propylene, methanol and other products and services, were $310 million, $263 million and $296 million for the years ended December 31, 1994, 1993 and 1992, respectively. 9. INVENTORIES The categories of inventory and their book values at December 31, 1994 and 1993 were as follows:
MILLIONS OF DOLLARS 1994 1993 ------------------- ----- ----- Crude oil $ 62 $ 68 Refined products 30 29 Petrochemicals 102 57 Materials and supplies 35 37 ----- ----- $ 229 $ 191 ===== =====
45 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. INVENTORIES - (CONTINUED) For the year ended December 31, 1994, the Company increased cost of sales by approximately $1 million associated with the reduction in LIFO inventories. For the years ended December 31, 1993 and 1992, the Company reduced cost of sales by approximately $6 million and $1 million, respectively, associated with the reduction in LIFO inventories. The excess of the current cost of inventories over book value was approximately $105 million and $56 million at December 31, 1994 and 1993, respectively. 10. FIXED ASSETS The components of fixed assets at December 31, 1994 and 1993 were as follows: MILLIONS OF DOLLARS 1994 1993 ------------------- ---- ----- Manufacturing facilities and equipment $2,781 $2,516 Land 26 26 Leased assets and improvements 3 3 ------ ------ $2,810 $2,545 ====== ====== Repair and maintenance expenses for 1994, 1993 and 1992 were $109 million, $101 million and $109 million, respectively. The 1994 and 1993 amounts include amortization of deferred turnaround costs of $12 million and $15 million, respectively. 11. DEFERRED CHARGES AND OTHER ASSETS Deferred charges and other assets at December 31, 1994 and 1993 was comprised of the following:
MILLIONS OF DOLLARS 1994 1993 ---------------------------------------------- ----- ----- Deferred turnaround costs (Note 4) $ 36 $ 18 Company owned life insurance 25 17 Other 25 18 ----- ----- $ 86 $ 53 ===== =====
12. OTHER ACCRUED LIABILITIES Other accrued liabilities at December 31, 1994 and 1993 were as follows:
MILLIONS OF DOLLARS 1994 1993 ------------------------------------------- ----- ----- Income taxes $ 28 $ --- Accrued taxes other than income 32 29 Accrued interest 11 11 Accrued payroll 28 20 Other 16 20 ----- ----- $ 115 $ 80 ===== =====
46 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. LONG-TERM DEBT AND FINANCING ARRANGEMENTS Long-term debt at December 31, 1994 and 1993 was comprised of the following:
MILLIONS OF DOLLARS 1994 1993 ------------------- ----- ----- 9.95% Notes due in 1996 $ 150 $ 150 10.00% Notes due in 1999 150 150 8.25% Notes due in 1997 100 100 9.125% Notes due in 2002 100 100 Medium-Term Notes 217 225 ----- ----- 717 725 Less current portion 10 8 ----- ----- Total long-term debt $ 707 $ 717 ===== =====
Aggregate maturities of long-term debt during the five years subsequent to December 31, 1994 are as follows: 1995-$10 million; 1996-$150 million; 1997-$112 million; 1998-$32 million; 1999-$150 million. Effective July 1, 1994, LCR elected to replace its $100 million revolving credit facility with a $70 million 364 day unsecured revolving credit facility ("LCR Facility") with substantially similar terms. Under terms of the $70 million LCR Facility, LCR may borrow a maximum of $70 million in the form of cash or letters of credit with interest based on prime, Euro-Dollar or certificate of deposit ("CD") rates at LCR's option. The LCR Facility may be extended at the request of LCR upon consent of the bank group. The LCR Facility contains covenants that limit LCR's ability to modify certain significant contracts, dispose of assets or merge or consolidate with other entities. At December 31, 1994, $20 million was outstanding under the LCR Facility while no amounts were outstanding under the former credit facility at December 31, 1993. The weighted average interest rate of borrowings under the LCR Facility was 5.1 percent and 3.6 percent during the years ended December 31, 1994 and 1993, respectively. During December 1993, the Company entered into a five year, $400 million unsecured revolving credit facility ("Facility") which replaced its existing $300 million credit facility that was due to expire in July 1994. In connection with the Facility, the Company paid administrative, arrangement and commitment fees totaling $3 million during 1993 and administrative and commitment fees totaling $2 million during 1994. At December 31, 1994 and 1993, no amounts were outstanding under the Facility. Under the terms of the Facility, the interest rate is based on Euro-Dollar, prime or CD rates, at the Company's option, and also is dependent upon the Facility utilization rate and the Company's debt ratings. The Facility contains restrictive covenants regarding the incurrence of additional debt, the maintenance of certain fixed charge coverage and leverage ratios and the making of contributions to LCR, as well as the payment of dividends to the extent that the Company's net income after January 1, 1994 generally does not exceed, over time, dividends declared or paid after that date. The Facility's debt incurrence covenant restricts the incurrence by the Company of additional debt, including debt under the Facility, unless, immediately after giving effect to the additional borrowing, the ratio of earnings before depreciation, amortization, interest and income taxes, to interest expense exceeds the limits set forth in the Facility. However, the debt incurrence covenant does not become applicable until the debt incurred by the Company after December 31, 1993 exceeds $75 million. During March 1992, the Company completed the placement of $200 million of notes ("Notes") consisting of $100 million of 8.25 percent Notes due 1997 and $100 million of 9.125 percent Notes due 2002. A majority of the proceeds was used in April 1992 to prepay amounts due under capitalized leases relating to the olefins plants, which allowed the Company to terminate the leases and acquire ownership of the plants. The Company retired $8 million of the Medium-Term Notes during 1994 while the remaining Medium-Term Notes mature at various dates from 1995 to 2005 and have a weighted average interest rate at December 31, 1994 and 1993 of 9.85 percent. 47 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. LONG-TERM DEBT AND FINANCING ARRANGEMENTS - (CONTINUED) The Notes due 1996 and 1999, and the Medium-Term Notes contain provisions that would allow the holders to require the Company to repurchase the debt upon the occurrence of certain events together with specified declines in public ratings on the Notes due 1996 and 1999. Certain events include acquisitions by persons other than ARCO or the Company of more than 20 percent of the Company's common stock, any merger or transfer of substantially all of the Company's assets, in connection with which the Company's common stock is changed into or exchanged for cash, securities or other property and payment of certain "special" dividends. 14. EARNINGS PER SHARE Earnings per share were computed based on the weighted average number of shares outstanding of 80,000,000 for the years ended December 31, 1994, 1993 and 1992. 15. STOCKHOLDERS' EQUITY Dividends - During 1994, the Company paid regular quarterly dividends of $.225 per share. During 1993, the Company paid a regular dividend to stockholders in the amount of $.45 per share during the first and second quarters and a regular dividend to stockholders in the amount of $.225 per share during each of the remaining two quarters. During 1992, the Company paid regular quarterly dividends of $.45 per share. Preferred Stock - The Company has authorized 80,000,000 shares of preferred stock, $.01 par, of which none were issued or outstanding at December 31, 1994. Stock Options - The Company's Executive Long-Term Incentive Plan ("LTI Plan") became effective November 7, 1988. The LTI Plan provides, among other things, for the granting to officers and other key management employees of non-qualified stock options for the purchase of up to 1,295,000 shares of the Company's common stock. The number of options exercisable each year is equal to 25 percent of the number granted after each year of continuous service starting one year from the date of grant. The LTI Plan provides that the option price per share will not be less than 100 percent of the fair market value of the stock on the effective date of the grant. As of December 31, 1994, options covering 985,496 shares were outstanding under the LTI Plan of which 430,775 were exercisable at a weighted average price of $22.60 per share. The following summarizes stock option activity for the LTI Plan:
Option Price Number of Average Shares Per Share Total ---------- ------------ ------------ Balance, December 31, 1992 576,302 $22.07 $12,718,893 Granted 259,490 26.00 6,746,740 Exercised (1,808) 21.01 (37,984) Canceled (72,252) 22.29 (1,610,782) ------- ----------- Balance, December 31, 1993 761,732 23.39 $17,816,867 Granted 230,800 23.13 5,337,250 Exercised (7,036) 22.04 (155,091) ------- ----------- Balance, December 31, 1994 985,496 23.34 $22,999,026 ======= ===========
48 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 15. STOCKHOLDERS' EQUITY - (CONTINUED) The Company's Incentive Stock Option Plan ("ISO Plan") became effective January 12, 1989. The last stock options granted under the ISO Plan were granted on March 5, 1993. No additional grants will be made under the ISO Plan. The ISO Plan is a tax qualified plan which provided for the granting of stock options for the purchase of up to 550,000 shares of the Company's common stock. All employees of the Company who were not on the executive payroll were eligible to participate in the ISO Plan, subject to certain restrictions. Various restrictions apply as to when and to the number of stock options that may be exercised during any year. As of December 31, 1994, options covering 204,715 shares were outstanding at an average exercise price of $29.31 per share. These options were held by 901 eligible employees. At December 31, 1994, 5,511 stock options were exercisable at an exercise price of $19.44. During 1995, effective July 1, 1993, the stock options held by those participants in the ISO Plan who became employees of LCR on or after July 1, 1993 were canceled. Consequently, the stock option activity for the year 1993 shown in the table below reflects the revised amounts.
Option Price Number Average of Shares Per Share Total ---------- ------------ ------------ Balance, December 31, 1992 504,019 $29.31 $14,772,840 Canceled (289,500) 29.36 (8,499,419) -------- ----------- Balance, December 31, 1993 214,519 29.24 $ 6,273,421 -------- ----------- Canceled (9,804) 27.83 (272,799) -------- ----------- Balance, December 31, 1994 204,715 29.31 $ 6,000,622 ======== ===========
16. LEASES At December 31, 1994, future minimum rental payments for operating leases with noncancelable lease terms in excess of one year were as follows:
MILLIONS OF DOLLARS AMOUNT ------------------- ------ 1995 $ 36 1996 34 1997 31 1998 27 1999 17 Thereafter 253 ---- Total minimum lease payments $398 ====
Operating lease net rental expenses for 1994, 1993 and 1992 were $50 million, $43 million and $35 million, respectively. 17. RETIREMENT PLANS All Lyondell and LCR employees are covered by defined benefit pension plans. Retirement benefits are based on years of service and the employee's highest three years of compensation during the last ten years of service. The funding policy for these plans is to make periodic contributions as required by applicable law. Lyondell and LCR accrue pension costs based on an actuarial valuation and fund the plans through contributions to pension trust funds separate from Lyondell or LCR's funds. Lyondell and LCR also have unfunded supplemental nonqualified retirement plans which provide pension benefits for certain employees in excess of the tax qualified plans' limits. 49 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 17. RETIREMENT PLANS - (CONTINUED) The following table sets forth the funded status of Lyondell and LCR's retirement plans and the amounts recognized in the Company's consolidated balance sheet at December 31, 1994 and 1993:
1994 1993 ------------------------ ------------------------ Plans with Plans with Plans with Plans with assets in ABO in assets in ABO in excess of excess of excess of excess of ABO assets ABO assets ----------- ----------- ----------- ----------- MILLIONS OF DOLLARS ------------------- Actuarial present value of benefit obligations: Vested benefit obligation $46 $ 21 $ 53 $ 21 === ===== ===== ==== Accumulated benefit obligation ("ABO") $49 $ 22 $ 54 $ 25 === ===== ===== ==== Projected benefit obligation $77 $ 37 $ 84 $ 42 Plan assets at fair value, primarily stocks and bonds 68 18 62 18 --- ----- ----- ---- Projected benefit obligation in excess of plan assets (9) (19) (22) (24) Unrecognized net loss 15 6 22 14 Prior service cost not yet recognized in pension cost (3) 3 (2) 3 Remaining unrecognized net asset (4) --- (4) --- --- ----- ----- ---- Net pension liability $(1) $ (10) $ (6) $ (7) === ===== ===== ====
The Company's net pension cost for 1994, 1993 and 1992 included the following components:
MILLIONS OF DOLLARS 1994 1993 1992 ------------------- ------ ------ ------ Service cost - benefits earned during the period $ 8 $ 5 $ 4 Interest cost on projected benefit obligations 9 8 6 Actual (gain) loss on plan assets 3 (14) (4) Net amortization and deferral (10) 7 (2) ----- ----- ----- Net periodic pension cost $ 10 $ 6 $ 4 ===== ===== =====
The assumptions used as of December 31, 1994, 1993 and 1992, in determining the pension costs and pension liability shown above were as follows:
PERCENT 1994 1993 1992 ------- ---- ---- ---- Discount rate 8.25 7.25 8.75 Rate of salary progression 5.00 5.00 5.00 Long-term rate of return on assets 9.50 9.50 9.50
Lyondell and LCR also maintain voluntary defined contribution Capital Accumulation and Savings plans for eligible employees. Under provisions of the plans, Lyondell and LCR contribute an amount equal to 150 percent of employee contributions up to a maximum Lyondell or LCR contribution of 6 percent of the employee's base salary for the Capital Accumulation plans and 200 percent of employee contributions up to a maximum Lyondell or LCR contribution of 2 percent of the employees base salary for the Savings plans. Lyondell and LCR contributions to these plans totaled $8 million, $8 million and $7 million during the years ended December 31, 1994, 1993 and 1992, respectively. 50 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 18. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Lyondell and LCR sponsor unfunded postretirement plans other than pensions for both salaried and non-salaried employees which provide medical and life insurance benefits. The postretirement health care plans are contributory while the life insurance plans are non-contributory. Currently, Lyondell and LCR pay approximately 80 percent of the cost of the health care plans, but reserve the right to modify the cost-sharing provisions at any time. The following table sets forth the plans' separate postretirement benefit liabilities as of December 31, 1994 and 1993:
1994 1993 ---------------- ---------------- MILLIONS OF DOLLARS MEDICAL LIFE MEDICAL LIFE ------------------- -------- ------ -------- ------ Accumulated postretirement benefit obligation: Retirees $ (3) $ (1) $ (2) $ (1) Fully eligible active plan participants (5) (1) (5) (1) Other active plan participants (26) (5) (37) (6) ---- ----- ---- ----- (34) (7) (44) (8) Unrecognized prior service cost (5) --- --- --- Unrecognized net loss 2 --- 12 2 ---- ----- ---- ----- Accrued postretirement benefit liability $(37) $ (7) $(32) $ (6) ==== ===== ==== =====
Net periodic postretirement benefit costs for 1994 and 1993 included the following components:
1994 1993 ------------- ------------- MILLIONS OF DOLLARS MEDICAL LIFE MEDICAL LIFE ------------------- ------- ---- ------- ---- Service cost - benefits attributed to service during the period $2 $2 Interest cost on accumulated postretirement benefit obligation 3 $1 3 $1 -- -- ----- -- Net periodic postretirement benefit cost $5 $1 $ 5 $1 == == ===== ==
For measurement purposes, the assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 1994 was 10 percent for 1995-1996, 8 percent for 1997-2001, and 6 percent thereafter. The assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 1993 was 13 percent for 1994-1996, 9 percent for 1997-2001, and 6 percent thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit liability as of December 31, 1994 by $8 million and the net periodic postretirement benefit cost for the year then ended by $1 million. The accumulated postretirement benefit obligation was calculated utilizing a weighted-average discount rate of 8.25 percent and 7.25 percent at December 31, 1994 and 1993, respectively, and an average rate of salary progression of 5 percent in each year. Lyondell and LCR's current policy is to fund the postretirement health care and life insurance plans on a pay-as-you-go basis. 51 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 19. INCOME TAXES Significant components of the Company's provision for income taxes attributable to continuing operations follow.
MILLIONS OF DOLLARS 1994 1993 1992 --------------------- ------ ----- ------ Current Federal $ 106 $ 5 $ 6 State 11 - 1 ----- ----- ----- Total current 117 5 7 ----- ----- ----- Deferred Federal 13 2 4 State (4) 5 (2) ----- ----- ----- Total deferred 9 7 2 ----- ----- ----- $ 126 $ 12 $ 9 ===== ===== =====
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1994 and 1993 were as follows:
MILLIONS OF DOLLARS 1994 1993 ------------------- ----- ----- Deferred tax liabilities: Tax over book depreciation $ 127 $ 126 Deferred turnaround costs 10 6 LIFO inventory 7 8 ----- ----- Total deferred tax liabilities 144 140 ----- ----- Deferred tax assets: OPEB obligation 14 13 Environmental and other long-term liabilities 9 12 Alternative minimum tax credit receivable --- 7 Pension and other compensation related 11 6 Other 3 5 ----- ----- Total deferred tax assets 37 43 ----- ----- Net deferred tax liabilities $ 107 $ 97 ===== =====
Pretax income from continuing operations for the years ended December 31, 1994, 1993 and 1992 was taxed by domestic jurisdictions only. The reconciliation of income tax attributable to continuing operations computed at the U.S. federal statutory tax rates to the Company's effective tax rates follows. During 1993, the Company increased its provision for deferred income taxes by $3 million due to an increase in the federal corporate income tax rate from 34 percent to 35 percent effective January 1, 1993.
DESCRIPTION 1994 1993 1992 ----------- ------ ------ ------ U.S. statutory income tax rates 35.0 % 35.0 % 34.0 % State income taxes, net of federal 1.2 19.3 (1.5) Company owned life insurance (0.3) 3.8 (2.1) Deferred tax liability rate change --- 15.6 --- Other, net 0.3 (0.6) (3.1) ----- ----- ----- Effective income tax rate 36.2 % 73.1 % 27.3 % ===== ===== =====
52 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 20. COMMITMENTS AND CONTINGENCIES The Company has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business. In the aggregate, such commitments are not at prices in excess of current market. In connection with the transfer of assets and liabilities from ARCO to the Company, the Company agreed to assume certain liabilities arising out of the operation of the Company's integrated petrochemical and petroleum processing business prior to July 1, 1988. In connection with the transfer of such liabilities, the Company and ARCO entered into an agreement ("Cross-Indemnity Agreement") whereby the Company has agreed to defend and indemnify ARCO against certain uninsured claims and liabilities which ARCO may incur relating to the operation of the business of the Company prior to July 1, 1988, including certain liabilities which may arise out of pending and future lawsuits. ARCO indemnified the Company under the Cross-Indemnity Agreement with respect to other claims or liabilities and other matters of litigation not related to the assets or business included in the consolidated financial statements. ARCO has also indemnified the Company for all federal taxes which might be assessed upon audit of the operations of the Company included in the consolidated financial statements prior to January 12, 1989, and for all state and local taxes for the period prior to July 1, 1988. In addition to lawsuits for which the Company has indemnified ARCO, the Company is also subject to 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 Company's financial statements. The Company's policy is to be in compliance with all applicable environmental laws. The Company is subject to extensive environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, the Company cannot accurately predict future developments, such as increasingly strict requirements of environmental laws, inspection and enforcement policies and compliance costs therefrom which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. Subject to the terms of the Cross-Indemnity Agreement, the Company is currently contributing funds to the cleanup of two waste sites (French Ltd. and Brio, both of which are located near Houston, Texas) under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as amended and the Superfund Amendments and Reauthorization Act of 1986. The Company is also subject to certain assessment and remedial actions at the Refinery under the Resource Conservation and Recovery Act ("RCRA"). In addition, the Company has negotiated an order with the Texas Natural Resource Conservation Commission ("TNRCC"), formerly the Texas Water Commission, for assessment and remediation of groundwater and soil contamination at the Refinery. In July 1994 the Company reported results of an independent investigation conducted by the Audit Committee of the Board of Directors regarding the compliance status of two process waste-water streams under the applicable Benzene National Emissions Standard for Hazardous Air Pollutants ("NESHAPS") regulations and certain issues raised by an employee. Noncompliance with the Benzene NESHAPS regulations and the related reporting requirements can result in civil penalties and, under certain circumstances, substantial civil and, potentially, criminal penalties. The Company has received a notice of violation from the TNRCC regarding the two streams and consented to pay a fine of $10,200. The Company incurred approximately $1 million in capital costs in connection with these waste water streams to achieve on-going compliance with the benzene NESHAPS regulations. The EPA has not yet made a final determination as to whether it will initiate separate enforcement proceedings. However, the Company does not believe that any aspects of the matters described above will subject the Company to criminal liability or have a material adverse effect on the Company's business or financial statements. 53 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 20. COMMITMENTS AND CONTINGENCIES - (CONTINUED) The Company has accrued $17 million related to future CERCLA, RCRA and TNRCC assessment and remediation costs, of which $1 million is included in current liabilities while the remaining amounts are expected to be incurred over the next three to seven years. In the opinion of management, there is currently no material range of loss in excess of the amount recorded. However, it is possible that new information about the sites for which the reserve has been established, new technology or future developments such as involvement in other CERCLA, RCRA, TNRCC or other comparable state law investigations, could require the Company to reassess its potential exposure related to environmental matters. In the opinion of management, any liability arising from the matters discussed above will not have a material adverse effect on the consolidated financial statements or liquidity of the Company, although the adverse resolution in any reporting period of one or more of these matters discussed in this note could have a material impact on the Company's results of operations for that period. 21. SEGMENT INFORMATION As discussed in Note 3, the refining operations of the Company were contributed to LCR effective July 1, 1993. Prior to July 1, 1993, the petrochemical and refining operations of the Company were considered to be a single segment due to the integrated nature of their operations. However, these operations are now considered to be separate segments due to the formation of LCR and the related separate management and operations of that entity. The petrochemical segment consists of olefins, including ethylene, propylene, butadiene, butylenes and specialty products; polyolefins, including polypropylene and low density polyethylene; aromatics produced at the Channelview Complex, including benzene and toluene; methanol and refinery blending stocks. The refining segment, which is primarily composed of LCR operations, consists of refined petroleum products including gasoline, heating oil and jet fuel; aromatics produced at the Refinery, including benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial and motor oils; olefins feedstocks and crude oil resales. Crude oil resales consist of revenues from the resale of previously purchased crude oil and from locational exchanges of crude oil that are settled on a cash basis. Crude oil exchanges and resales facilitate the operation of the Company's petroleum processing business by allowing the Company to optimize the crude oil feedstock mix in response to market conditions and refinery maintenance turnarounds and also to reduce transportation costs. Crude oil resales amounted to $296 million, $401 million and $893 million for years ended December 31, 1994, 1993 and 1992, respectively. Consolidated sales to CITGO totaled $1.1 billion in 1994, $864 million in 1993 and $282 million in 1992. No other customer accounted for 10 percent or more of consolidated sales. Summarized below is the segment data for the Company which includes certain pro forma adjustments necessary to present the petrochemical and refining operations as individual segments for periods prior to the commencement of LCR operations on July 1, 1993. These adjustments relate principally to allocations of costs and expenses between the two segments and are based on current operating agreements between the Company and LCR. Intersegment sales between the petrochemical and refining segments include olefins feedstocks produced at the Refinery and gasoline blending stocks produced at the Channelview Complex and were made at prices based on current market values. 54 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 21. SEGMENT INFORMATION - (CONTINUED)
Petrochemical Refining MILLIONS OF DOLLARS Segment Segment Unallocated Eliminations Consolidated ------------------------ ------------- -------- ------------ ------------- ------------ 1994 ---- Sales and other operating revenues: Customers $1,783 $2,074 $3,857 Intersegment 190 198 $(388) --- ------ ------ ----- ------ 1,973 2,272 (388) 3,857 ------ ------ ----- ------ Cost of sales 1,520 2,164 (388) 3,296 Selling, general and administrative expenses 40 54 $ 43 --- 137 ------ ------ ---- ----- ------ Operating income $ 413 $ 54 $(43) $ --- $ 424 ====== ====== ==== ===== ====== Depreciation and amortization expense $ 44 $ 20 $ 1 $ 65 ====== ====== ==== ====== Capital expenditures $ 39 $ 210 $ 3 $ 252 ====== ====== ==== ====== Identifiable assets $ 925 $ 739 $ 49 $ (50) $1,663 ====== ====== ==== ===== ====== 1993 ---- Sales and other operating revenues: Customers $1,326 $2,524 $3,850 Intersegment 180 237 $(417) --- ------ ------ ----- ------ 1,506 2,761 (417) 3,850 ------ ------ ----- ------ Cost of sales 1,412 2,632 (417) 3,627 Selling, general and administrative expenses 37 48 $ 45 --- 130 ------ ------ ---- ----- ------ Operating income $ 57 $ 81 $(45) $ --- $ 93 ====== ====== ==== ===== ====== Depreciation and amortization expense $ 44 $ 13 $ 1 $ 58 ====== ====== ==== ====== Capital expenditures $ 14 $ 54 $ 1 $ 69 ====== ====== ==== ====== Identifiable assets $ 719 $ 514 $ 37 $ (39) $1,231 ====== ====== ==== ===== ====== 1992 ---- Sales and other operating revenues: Customers $1,409 $3,400 $4,809 Intersegment 266 334 $(600) --- ------ ------ ----- ------ 1,675 3,734 (600) 4,809 ------ ------ ----- ------ Cost of sales 1,536 3,642 (600) 4,578 Selling, general and administrative expenses 37 43 $ 47 --- 127 ------ ------ ---- ----- ------ Operating income $ 102 $ 49 $(47) $ --- $ 104 ====== ====== ==== ===== ====== Depreciation and amortization expense $ 33 $ 5 $ 1 $ 39 ====== ====== ==== ====== Capital expenditures $ 43 $ 53 $ 1 $ 97 ====== ====== ==== ====== Identifiable assets $ 797 $ 385 $ 33 $1,215 ====== ====== ==== ======
55 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 22. UNAUDITED QUARTERLY RESULTS
QUARTER ENDED ---------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 --------- -------- ------------ ----------- MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS -------------------------------------------- 1994 ---- Sales and other operating revenues $ 824 $ 900 $1,037 $1,096 Operating income 54 71 124 175 Income before income taxes 34 51 105 159 Net income 22 32 66 103 Earnings per share .27 .40 .83 1.28 1993(*) ------- Sales and other operating revenues $1,065 $1,080 $ 885 $ 820 Operating income 7 5 38 43 Income (loss) before income taxes and cumulative effect of accounting changes (10) (14) 18 22 Income (loss) before cumulative effect of accounting changes (8) (11) 9 14 Cumulative effect of accounting changes, net of tax 22 --- --- --- Net income (loss) 14 (11) 9 14 Earnings (loss) per share before cumulative effect of accounting changes (.09) (.14) .12 .17 Earnings (loss) per share .18 (.14) .12 .17
(*) The first two quarters of 1993 include certain pro forma adjustments necessary to present the petrochemical and refining operations as individual segments for periods prior to the commencement of LCR operations on July 1, 1993. 56 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding executive officers of the Company is included in Part I. For the other information called for by Items 10, 11, 12 and 13, reference is made to the Registrants definitive proxy statement for its Annual Meeting of Stockholders, to be held on June 2, 1995, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1994, and which is incorporated herein by reference. 57 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: 1 and 2 -- Consolidated Financial Statements and Financial Statement Schedules: these documents are listed in the Index to Consolidated Financial Statements and Financial Statement Schedules.
EXHIBITS: ------------------------------- 3.1 - Restated Certificate of Incorporation of the Registrant, and Amendment No. 1.* 3.2 - Amendment No. 1 to the Restated Certificate of Incorporation of the Registrant.+ 3.3 - Amended and Restated By-Laws of the Registrant. 4.1 - Indenture, as supplemented by a First Supplemental Indenture, between the Registrant and Texas Commerce Bank National Association, as Trustee.** 4.2 - Indenture, as supplemented by a First Supplemental Indenture, between the Registrant and Continental Bank, National Association, as Trustee.+++ 4.3 - Specimen certificate.* 4.4 - LYONDELL-CITGO Refining Company Ltd. $70,000,000 Credit Agreement.++++++ 4.5 - Lyondell Petrochemical Company $400,000,000 Credit Agreement.++++++ EXECUTIVE COMPENSATION: 10.1 - Lyondell Petrochemical Company Executive Supplementary Savings Plan.** 10.2 - Lyondell Petrochemical Company Amended and Restated Executive Long-Term Incentive Plan.*** 10.3 - Lyondell Petrochemical Company Supplementary Executive Retirement Plan.*** 10.4 - Lyondell Petrochemical Company Executive Medical Insurance Plan - Summary Plan Description.*** 10.5 - Lyondell Petrochemical Company Executive Deferral Plan.**** 10.6 - Lyondell Petrochemical Company Executive Long-Term Disability Plan.+++ 10.7 - Lyondell Petrochemical Company Executive Life Insurance Plan.+++ 10.8 - Lyondell Petrochemical Company Supplemental Executive Benefit Plans Trust Agreement.**** 10.9 - Lyondell Petrochemical Company Restricted Stock Plan. 10.10 - Lyondell Petrochemical Value Share Plan. 10.11 - Form of Executive Severance Agreement with Executive Officers. 10.12 - Form of Registrant's Indemnity Agreement with Officers and Directors.* 10.13 - Lyondell Petrochemical Company Elective Deferral Plan for Outside Directors.**** 10.14 - Lyondell Petrochemical Company Amended and Restated Retirement Plan for Outside Directors.**** 10.15 - Form of Restricted Stock Agreement with Outside Directors. MATERIAL CONTRACTS WITH ARCO AFFILIATES: 10.16 - Joint Pipeline Use Agreement between ARCO Chemical Company and the Registrant.* 10.17 - MTBE Purchase, Transportation & Storage Agreement between ARCO Chemical Company and the Registrant.* 10.18 - Agreements Implementing Transfer of Pipeline Rights from ARCO Pipe Line Company to Registrant.* 10.19 - Conveyance (conformed without exhibits) between the Registrant and ARCO.* 10.20(a) - Cross-Indemnification Agreement between the Registrant and ARCO and Amendment No. 1 to the Cross-Indemnification Agreement.* 10.20(b) - Dispute Resolution Agreement between the Registrant, ARCO and ARCO Chemical Company.++++++ 10.20(c) - Employee Services Agreement between the Registrant and ARCO.+
58 10.20(d) - Investment Management Agreement between the Registrant and ARCO.++++++ 10.20(e) - Form of Registration Rights Agreement between the Registrant and ARCO.+ 10.21(a) - Immunity From Suit Agreement between ARCO and the Registrant.* 10.21(b) - Amendment to Immunity From Suit Agreement between ARCO and the Registrant.*** 10.22(a) - License Agreement between ARCO and the Registrant.* 10.22(b) - License Agreement Amendment between ARCO and the Registrant.*** 10.23(a) - Technology Agreement between ARCO and the Registrant.** 10.23(b) - Technology Agreement Amendment between ARCO and the Registrant.*** 10.24 - Assignment of Patents and Patent Applications between ARCO and the Registrant.** 10.25 - Assignment of Technology Agreement, as amended, between ARCO and the Registrant.** OTHER MATERIAL CONTRACTS: 10.26 - Asset Purchase Agreement (conformed without exhibits) between the Registrant and Rexene Products Company.** 10.27 - Crystalline Polymers License and Block Copolymer License between Phillips Petroleum Co. and the Registrant.** 10.28(a) - Amended and Restated Limited Liability Company Regulations of LYONDELL-CITGO Refining Company Ltd.++++ 10.28(b) - Contribution Agreement between Lyondell Petrochemical Company and LYONDELL-CITGO Refining Company Ltd.++++ 10.28(c) - Crude Oil Supply Agreement between LYONDELL-CITGO Refining Company Ltd. and Lagoven, S.A.++++ 22 - Subsidiaries of the Registrant. 24 - Consent of Coopers & Lybrand L.L.P. 25 - Powers of Attorney. 27 - Financial Data Schedule. ------------
* Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No. 33-25407) and incorporated herein by reference. ** Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for the year ended December 31, 1989 and incorporated herein by reference. *** Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for the year ended December 31, 1990 and incorporated herein by reference. **** Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for the year ended December 31, 1991 and incorporated herein by reference. +++ Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for the year ended December 31, 1992 and incorporated herein by reference. ++++ Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of July 1, 1993 and incorporated herein by reference. ++++++ Filed as an exhibit to Registrants Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. + Filed as an exhibit to Registrants Registration Statement on Form S-3 dated as of May 5, 1994 and incorporated herein by reference. ++ Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference. 59 (b) Consolidated Financial Statements and Financial Statement Schedules (1) Consolidated Financial Statements Consolidated Financial Statements filed as part of this Annual Report on Form 10-K are listed in the Index to Consolidated Financial Statements on page 36. (2) Financial Statement Schedules All financial statement schedules are omitted because they are not applicable or the required information is contained in the Financial Statements or notes thereto. Copies of exhibits will be furnished upon prepayment of 25 cents per page. Requests should be addressed to the Secretary. (c) Reports on Form 8-K: No Current Reports on Form 8-K were filed during the quarter ended December 31, 1994 or thereafter through March 29, 1995. 60 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 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 PETROCHEMICAL COMPANY By: BOB G. GOWER ------------------------------------------------- Bob G. Gower Chairman of the Board and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- BOB G. GOWER Chairman of the Board and Chief March 29, 1995 ------------ Executive Officer (Bob G. Gower, Principal Executive Officer) WILLIAM T. BUTLER* Director March 29, 1995 ------------------ (William T. Butler) STEPHEN F. HINCHLIFFE, JR.* Director March 29, 1995 ---------------------------- (Stephen F. Hinchliffe, Jr.) DUDLEY C. MECUM II* Director March 29, 1995 ------------------- (Dudley C. Mecum II) DAN F. SMITH President, Chief Operating Officer March 29, 1995 ------------- and Director (Dan F. Smith) PAUL R. STALEY* Director March 29, 1995 ---------------- (Paul R. Staley) RUSSELL S. YOUNG Senior Vice President, Chief March 29, 1995 ---------------- Financial Officer and Treasurer (Russell S. Young, Principal Financial Officer) JOSEPH M. PUTZ Vice President and Controller March 29, 1995 -------------- (Joseph M. Putz, Principal Accounting Officer) *By: BOB G. GOWER March 29, 1995 ------------ (Bob G. Gower, as Attorney-in-fact)
61 EX-3.3 2 BY-LAWS EXHIBIT 3.3 BY-LAWS OF LYONDELL PETROCHEMICAL COMPANY (amended and restated as of January 20, 1995) ARTICLE I --------- STOCKHOLDERS ------------ Section 1.1. Annual Meeting. The Board of Directors by resolution ----------- -------------- shall designate the time, place and date (which shall be not more than 13 months after the date of the last annual meeting of stockholders) of the annual meeting of stockholders for the election of directors and transactions of such other business as may come before it. Section 1.2. Notice. Written notice stating the place, day and hour ----------- ------ of each meeting of stockholders and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be mailed either by the Secretary, or, in the case of a special meeting called by the stockholders in accordance with Article V of the Certificate of Incorporation, by the applicable stockholders, at least ten days and not more than sixty days before the meeting to each stockholder of record entitled to vote at the meeting to his address appearing on the books of the Company. Section 1.3. Special Meetings: Purpose; Notification of Stockholder ----------- ------------------------------------------------------ Business. At any special meeting of stockholders only such business shall be -------- conducted as shall have been set forth in the notice of special meeting. For business to be properly brought before a special meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely, a stockholder's notice must be either delivered to or mailed and received at the principal office of the Company not later than 90 days in advance of such meeting. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the special meeting (a) a brief description of the business desired to be brought before the special meeting and the reasons for conducting such business at the special meeting, (b) the name and address, as they appear on the Company's books, of the stockholder intending to propose such business, (c) the class and number of shares of capital stock of the Company which are beneficially owned by the stockholder, (d) a representation that the stockholder is a holder of record of capital stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to present such business, and (e) any material interest of the stockholder in such business. Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at a special meeting except in accordance with the procedures set forth in this Article I. The chairman of the special meeting shall, if the facts warrant, determine and declare to the meeting that (i) the business proposed to be brought before the meeting was not a proper subject therefor and/or (ii) such business was not properly brought before the meeting and in accordance with the provisions of this Article I, and, if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting or not a proper subject therefor shall not be transacted. Section 1.4. Place. Each annual or special meeting of stockholders ----------- ----- shall be held at the principal office of the Company or at such other place in Delaware or elsewhere as the Board of Directors may designate. Section 1.5. Quorum. The presence, in person or by proxy, of ----------- ------ stockholders entitled to cast at least a majority of the votes which all stockholders are entitled to cast on a particular matter shall constitute a quorum for the purpose of considering such matter at a meeting of stockholders. If a quorum is not present in person or by proxy, those present may adjourn from time to time to reconvene at such time and place as they may determine without further notice to the stockholders. Section 1.6. Record Dates. The Board of Directors may fix a time not ----------- ------------ less than ten and not more than sixty days prior to the date of any meeting of stockholders as a record date and not more than sixty days prior to the date fixed for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the stockholders entitled to notice of and to vote at such meeting, or to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares or for the purpose of any other lawful action. In such case, only such stockholders as shall be stockholders of record at the close of business on the date so fixed shall be entitled to notice of or to vote at such meeting, or to receive payment of such dividend or distribution, or to receive such allotment of rights, or to exercise such rights in respect to any change, conversion or exchange of shares, as the case may be, notwithstanding any transfer of any shares on the books of the Company after the record date fixed as aforesaid. Section 1.7. Voting Rights of Stockholders and Proxies. Each ----------- ----------------------------------------- stockholder of record entitled to vote in accordance with the laws of the State of Delaware, the Certificate of Incorporation or these By-Laws, shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of stock entitled to vote standing in his name on the books of the Company, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. 2 ARTICLE II ---------- DIRECTORS --------- Section 2.1. Management of Business. The business of the Company ----------- ---------------------- shall be managed by its Board of Directors. Section 2.2. Number. The number of directors constituting the entire ----------- ------ Board of Directors shall be such number as shall be fixed from time to time by resolution of the Board of Directors. Any such action by the Board of Directors shall require the vote of a majority of the Board of Directors then in office. Section 2.3. Age Qualification. No person who has reached seventy- ----------- ----------------- two years of age prior to January 1 of any year shall be elected or re-elected a director in any year. Section 2.4. (a) Election and Term. The directors shall be elected ----------- ----------------- at the annual meeting of the stockholders, and each director shall be elected to hold office until his successor shall be elected and qualified, or until his earlier resignation or removal. (b) Notification of Nominations. Except for directors selected by or --------------------------- pursuant to the provisions of Section 2.6 hereof, only individuals nominated for election to the Board of Directors pursuant to and in accordance with the provision of this Section 2.4(b) may be elected to and may serve upon the Board of Directors of the Company. Subject to the rights of holders of any class or series of stock of the Company having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote in the election of directors generally. Subject to the foregoing, only a stockholder of record entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting of stockholders and only if written notice of such stockholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Company and has been received by the Secretary not later than the following dates: (i) with respect to an election to be held at an annual meeting of stockholders, 60 days in advance of such meeting if such meeting is to be held on a day which precedes the anniversary of the previous year's annual meeting by 30 or more days, or 90 days in advance of such meeting if such meeting is to be held either less than 30 days prior to or after the anniversary of the previous year's annual meeting and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to stockholders. For purposes of this Section 2.4(b), notice of the meeting shall be deemed to first be given to stockholders when 3 disclosure of such date is first made in a press release reported by the Dow Jones News Services, Associated Press or comparable national news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended. Each such notice to the Company of a nomination shall set forth: (i) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that the stockholder will be a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; and (iv) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors. To be effective, each notice of intent to make a nomination given hereunder shall be accompanied by the written consent of each nominee to serve as a director of the Company if elected. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not properly brought before the meeting in accordance with the provisions hereof and, if he should so determine, he shall declare to the meeting that such nomination was not properly brought before the meeting and, as a result, shall not be considered. Section 2.5. Resignations. Any director of the Company may resign at ----------- ------------ any time by giving written notice to the Company, delivered to the Secretary. Such resignation shall take effect at the time specified therein, if any, or if no time is specified therein, then upon receipt of such notice by the Company; and, unless otherwise provided therein, the acceptance of such resignation shall not be necessary to make it effective. Section 2.6. Vacancies and Newly Created Directorships. Vacancies ----------- ----------------------------------------- and newly created directorships resulting from any 4 increase in the authorized number of directors or any vacancy on the Board of Directors resulting from death, resignation, disqualification, removal or other cause may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director or by the affirmative vote of the majority of all votes entitled to be cast by holders of stock of the Company at a duly called annual or special meeting of such holders or by consent in writing of such holders. Any director so chosen shall hold office until his or her successor shall be elected and qualified, or until his or her earlier resignation or removal. When one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as herein provided in the filling of other vacancies. Section 2.7. Annual Meeting. An annual meeting of the Board of ----------- -------------- Directors shall be held each year in conjunction with the annual meeting of stockholders, at the place where such meeting of stockholders was held or at such other place as the Board of Directors may determine, for the purposes of organization, election or appointment of officers and the transaction of such other business as shall come before the meeting. No notice of the meeting need be given. Section 2.8. Regular Meetings. Regular meetings of the Board of ----------- ---------------- Directors may be held without notice at such times and at such places in Delaware or elsewhere as the Board of Directors may determine. Section 2.9. Special Meetings. Special meetings of the Board of ----------- ---------------- Directors may be called by the Chairman of the Board, the President or a majority of the directors in office, to be held at such time (as will permit the giving of notice as provided in this section) and at such place (in Delaware or elsewhere) as may be designated by the person or persons calling the meeting. Notice of the place, day and hour of each special meeting shall be given to each director by the Secretary by written notice mailed on or before the third full business day before the meeting or by notice received personally or by other means at least twenty-four hours before the meeting. The notice need not refer to the business to be transacted at the meeting. However, whenever notice is required to be given under these By-Laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice and the attendance of a person at a meeting shall constitute a waiver of notice of such meeting. Section 2.10. Quorum of Directors. Except as provided in Sections ------------ ------------------- 2.6 and 2.13 hereof, a majority of the directors in office shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which 5 there is a quorum shall be the act of the Board of Directors. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting of the directors to another time and place. Notice of any adjournment need not be given if such time and place are announced at the meeting. Section 2.11. Meeting by Telephone. One or more directors may ------------ -------------------- participate in a meeting of the Board of Directors or of a committee of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Section 2.12. Compensation. Directors shall receive such ------------ ------------ compensation for their services and expenses for attendance as shall be determined by the Board of Directors; provided, however, that nothing herein contained shall be construed to preclude any director from serving the Company in any other capacity and receiving compensation therefore. Section 2.13. Committees. The Board of Directors may, by resolution ------------ ---------- adopted by a majority of the whole board then in office, appoint an Executive Committee of three or more directors. To the extent provided in such resolution, the Executive Committee shall have and may, subject to applicable law, exercise the authority of the Board of Directors in the management of the business and affairs of the Company (when the Board of Directors is not in session), except that the Executive Committee shall have no power (a) to elect directors; (b) to alter, amend or repeal these By-Laws or any resolution or resolutions of the directors designating an Executive Committee; (c) to declare any dividend or make any other distribution to the stockholders of the Company; or (d) to appoint any member of the Executive Committee. The Board of Directors may appoint such other committees as it may deem advisable, and each such committee shall have such authority and perform such duties as the Board of Directors may determine. At each meeting of the Board of Directors all action taken by each committee since the preceding meeting of the Board of Directors shall be reported to it. Section 2.14. Consent Action. Any action required or permitted to be ------------ -------------- taken at any meeting of the Board of Directors, or any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, and the writings are filed with the minutes of proceedings of the board or the committee. 6 ARTICLE III ----------- Officers and Agents ------------------- Section 3.1. Number; Compensation. The officers of the Company shall ----------- -------------------- be chosen by the Board of Directors. The officers shall be a Chairman of the Board, a President, a Secretary, a Treasurer, and such number of Vice- Presidents, Assistant Secretaries and Assistant Treasurers, and such other officers, if any, as the Board of Directors may from time to time determine. The Board of Directors may choose such other agents as it shall deem necessary. Any number of offices may be held by the same person. The officers shall receive such compensation for their services as may be determined by the Board of Directors or in a manner approved by it. Section 3.2. Term. Each officer and each agent shall hold office ----------- ---- until the next annual meeting of the Board of Directors or until that officer's or agent's successor is elected or appointed and qualified or until that officer or agent's earlier resignation or removal. Section 3.3. Removal. Any officer or agent may be removed from ----------- ------- office at any time by the Board of Directors with or without cause pursuant to a resolution adopted by a majority of the whole Board then in office. Section 3.4. Authority. The officers and agents, if any, shall have ----------- --------- the authority, perform the duties and exercise the powers in the management of the Company usually incident to the offices held by them, respectively, and/or such other authority, duties and powers as may be assigned to them from time to time by the Board of Directors or (except in the case of the Chief Executive Officer) by the Chairman of the Board. In addition to the authority to perform the duties and exercise the powers in the management of the Company usually incident to the office held by him or her, and/or such other authority, duties and powers as may be assigned to him or her from time to time by the Board of Directors, the Chairman of the Board or the President, the Secretary shall record all of the proceedings of the meetings of the stockholders and directors in a book to be kept for that purpose. In the absence or disability of the Secretary, an Assistant Secretary shall have the authority and shall perform the duties of the Secretary. Section 3.5. Voting Securities Owned by the Company. Powers of ----------- -------------------------------------- attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Company may be executed in the name of and on behalf of the Company by the Chairman of the Board, the President or any Vice-President and any such officer may, in the name of and on behalf of the Company, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any 7 corporation in which the Company may own securities and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Company might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. Section 3.6. Corporate Seal. A corporate seal shall be prepared and ----------- -------------- shall be kept in the custody of the Secretary of the Company. The seal or a facsimile thereof may be impressed, affixed or reproduced, and attested to by the Secretary or an Assistant Secretary, for the authentication of documents or instruments requiring the seal and bearing the signature of a duly authorized officer or agent. ARTICLE IV ---------- CAPITAL STOCK ------------- Section 4.1. Stock Certificates. Every holder of stock in the ----------- ------------------ Company shall be entitled to have a certificate signed by, or in the name of the Company by, the Chairman of the Board of Directors, or the President or a Vice- President, and by the Secretary or an Assistant Secretary of the Company, certifying the number of shares owned by him in the Company. Where such certificate is signed (1) by a transfer agent other than the Company or its employee, or (2) by a registrar other than the Company or its employee, the signatures of the officers of the Company may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Company with the same effect as if he were such officer at the date of issue. Section 4.2. Transfers. Stock of the Company shall be transferable ----------- --------- in the manner prescribed by the laws of the State of Delaware. Section 4.3. Registered Holders. Prior to due presentment for ----------- ------------------ registration of transfer of any security of the Company in registered form, the Company shall treat the registered owner as the person exclusively entitled to vote, to receive notifications and to otherwise exercise all the rights and powers of an owner, and shall not be bound to recognize any equitable or other claim to, or interest in, any security, whether or not the Company shall have notice thereof, except as otherwise provided by the laws of the State of Delaware. Section 4.4. New Certificates. The Company shall issue a new ----------- ---------------- certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, if 8 the owner: (1) so requests before the Company has notice that the shares of stock represented by that certificate have been acquired by a bona fide purchaser; (2) files with the Company a bond sufficient (in the judgment of the Secretary) to indemnify the Company against any claim that may be made against it on account of the alleged loss or theft of that certificate or the issuance of a new certificate; and (3) satisfies any other requirements imposed by the Secretary that are reasonable under the circumstances. A new certificate may be issued without requiring any bond when, in the judgment of directors, it is proper so to do. ARTICLE V --------- MISCELLANEOUS ------------- Section 5.1. Indemnification. ------------ --------------- (a) Indemnification of Officers and Directors. The Company shall ----------------------------------------- indemnify the officers and directors of the Company with respect to all matters to which Section 145 of the General Corporation Law of the State of Delaware may in any way relate, to the fullest extent permitted or allowed by the laws of the State of Delaware, whether or not specifically required, permitted or allowed by said Section 145. Any repeal or modification of this Section shall not in any way diminish any rights to indemnification of such person or the obligations of the Company that may have previously arisen hereunder. (b) Non-Exclusivity of Rights. The right to indemnification and the ------------------------- payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Company's Certificate of Incorporation, any By-Law, any agreement, a vote of Company stockholders or of disinterested Company directors or otherwise, both as to action in that person's official capacity and as to action in any other capacity by holding such office, and shall continue after the person ceases to serve the Company as a director or officer or to serve another entity at the request of the Company. (c) Insurance. The Company may maintain insurance, at its expense, to --------- protect itself and any director or officer of the Company or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss,whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of Delaware. (d) Indemnity Agreements. The Company may from time to time enter -------------------- into indemnity agreements with the persons who are members of 9 its Board of Directors, its elected officers and with such other persons as the Board of Directors may designate, the form of such indemnity agreements to be approved by a majority of the Board then in office. (e) Indemnification of Employees and Agents of the Company. The ------------------------------------------------------ Company may, under procedures authorized from time to time by the Board of Directors, grant rights to indemnification, and to be paid by the Company the expenses incurred in defending any proceeding in advance of its final disposition to any employee or agent of the Company to the fullest extent of the provisions of this Article V. Section 5.2. Fiscal Year and Annual Report. ----------- ----------------------------- (a) Fiscal Year. The fiscal year of the Company shall be the calendar ----------- year. (b) Annual Report. The Board of Directors shall cause an annual ------------- report to be prepared and mailed to the stockholders in accordance with the rules and regulations of the Securities and Exchange Commission and the New York Stock Exchange. Section 5.3. Offices. The registered office of the Company in the ----------- ------- State of Delaware shall be at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The Company may also have offices at other places within and/or without the State of Delaware. Section 5.4. Waivers of Notice; Dispensing with Notice. Whenever any ----------- ----------------------------------------- notice whatever is required to be given under the provisions of the General Corporation Law of the State of Delaware, of the Certificate of Incorporation of the Company, or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. Attendance of a person at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Whenever any notice whatever is required to be given under the provisions of the General Corporation Law of the State of Delaware, of the Certificate of Incorporation of the Company, or of these By-Laws, to any person with whom communication is made unlawful by any law of the United States of America, or by any rule, regulation, proclamation or executive order issued under any such law, then the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or 10 agency for a license or permit to give such notice to such person; and any action or meeting which shall be taken or held without notice to any such person or without giving or without applying for a license or permit to give any such notice to any such person with whom communication is made unlawful as aforesaid, shall have the same force and effect as if such notice had been given as provided under the provisions of the General Corporation Law of the State of Delaware, or under the provisions of the Certificate of Incorporation of the Company or of these By-Laws. In the event that the action taken by the Company is such as to require the filing of a certificate under any of the other sections of this title, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. Section 5.5. Amendment of Bylaws. These By-Laws may be altered, ----------- ------------------- amended or repealed at any meeting of the Board of Directors. Any such action shall require a vote of the majority of the Board of Directors then in office. Section 5.6. Section Headings and Statutory References. The headings ----------- ----------------------------------------- of the Articles and Sections of these By-Laws have been inserted for convenience of reference only and shall not be deemed to be a part of these By-Laws. ARTICLE VI ---------- Emergency By-laws ----------------- Section 6.1. When Operative. The emergency By-Laws provided by the ----------- -------------- following sections shall be operative during any emergency resulting from an attack on the United States, any nuclear disaster, earthquake, or other natural disaster or during the existence of any catastrophe, as a result of which a quorum of the Board of Directors or the Executive Committee thereof cannot be readily convened for action notwithstanding any different provision in the preceding sections of the By-Laws or in the Certificate of Incorporation of the Company or in the General Corporation Law of the State of Delaware. To the extent not inconsistent with the emergency By-Laws, the By-Laws provided in the preceding sections shall remain in effect during such emergency and upon the termination of such emergency, the emergency By-Laws shall cease to be operative unless and until another such emergency shall occur. Section 6.2. Meetings. During any such emergency: ----------- -------- (a) Any meeting of the Board of Directors may be called by any director. Whenever any officer of the Company who is not a director has reason to believe that no director is available to participate in a meeting, such officer may call a meeting to be held under the 11 provisions of this section. (b) Notice of each meeting called under the provisions of this section shall be given by the person calling the meeting or at his request by any officer of the Company. The notice shall specify the time and the place of the meeting, which shall be the principal office of the Company at the time if feasible and otherwise any other place specified in the notice. Notice need be given only to such of the directors as it may be feasible to reach at the time and may be given by such means as may be feasible at the time, including publication or radio. If given by mail, messenger, telephone or telegram, the notice shall be addressed to the director at his residence or business address or such other place as the person giving the notice shall deem suitable. In the case of meetings called by an officer who is not a director, notice shall also be given similarly, to the extent feasible, to the persons named on the list referred to in part (c) of this section. Notice shall be given at least two days before the meeting if feasible in the judgment of the person giving the notice and otherwise the meeting may be held on any shorter notice that he shall deem to be suitable. (c) At any meeting called under the provisions of this section, the director or directors present shall constitute a quorum for the transaction of business. If no director attends a meeting called by an officer who is not a director and if there are present at least three of the persons named on a numbered list of personnel approved by the Board of Directors before the emergency, those present (but not more than nine appearing highest in priority on such list) shall be deemed directors for such meeting and shall constitute a quorum for the transaction of business. Section 6.3. Lines of Succession. The Board of Directors, during as ----------- ------------------- well as before any such emergency, may provide, and from time to time modify, lines of succession in the event that during such an emergency any or all officers or agents of the Company shall for any reason be rendered incapable of discharging their duties. Section 6.4. Offices. The Board of Directors, during as well as ----------- ------- before any such emergency, may, effective during the emergency, change the principal office or designate several alternative principal offices or regional offices, or authorize the officers so to do. Section 6.5. Liability. No officer, director or employee acting in ----------- --------- accordance with these emergency By-Laws shall be liable except for willful misconduct. Section 6.6. Repeal or Change. The emergency By-Laws shall be ----------- ---------------- subject to repeal or change by action of the Board of Directors or by the affirmative vote of at least 66-2/3% of all votes entitled to be cast by the holders of Capital Stock of the Company entitled to vote generally in the election of directors, except 12 that no such repeal or change shall modify the provisions of the next preceding section with regard to action or inaction prior to the time of such repeal or change. 13 EX-10.9 3 RESTRICTED STOCK PLAN EXHIBIT 10.9 RESTRICTED STOCK PLAN OF LYONDELL PETROCHEMICAL COMPANY Section 1 Purpose. ------- The Restricted Stock Plan of Lyondell Petrochemical Company (the "Plan") is intended to provide key employees (including executive officers) of Lyondell Petrochemical Company and its subsidiaries and affiliates (the "Company") with a proprietary interest in the Company's success and progress by granting them shares of the Company's Common Stock ("Common Stock"), that are restricted in accordance with the terms and conditions set forth below ("Restricted Shares"). The Plan is intended to increase the alignment of key employees with the interests of the Company's shareholders in terms of both risk and reward and to strengthen the Company's ability to continue to attract and retain highly qualified employees. Section 2 Eligibility. ----------- Executive officers who are eligible to participate in the Company's Value Share Plan ("Value Share Plan Participants") shall automatically be eligible to participate in this Plan. In addition, the Company's Chief Executive Officer may designate key employees of the Company, other than Value Share Plan Participants, who he determines to be in a position to contribute directly to the Company's continued economic success, as eligible to participate in this Plan. These participants, together with the Value Share Plan Participants, shall be referred to as "Participants". No non-employee director shall be eligible to participate in this Plan. Section 3 Shares Reserved Under the Plan ------------------------------ The shares of Common Stock covered by grants under this Plan as Restricted Shares will not exceed one (1) million shares in the aggregate, subject to adjustment as provided below, and in accordance with and subject to Rule 16b-3 of the Securities and Exchange Act of 1934, ("Exchange Act") as amended. Restricted Shares may be originally issued or treasury shares or a combination of both. Any shares of Common Stock granted as Restricted Shares that are terminated, forfeited or surrendered or which expire for any reason will be available again for issuance under this Plan, provided that those shares shall not be reissued if any Participant subject to Section 16 of the Exchange Act, directly or indirectly received any of the benefits of ownership of those shares of Common Stock prior to termination, forfeiture or surrender. In the event of a recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation, rights offering, separation, reorganization or liquidation, or any other change in the Company's corporate structure or shares, the Compensation Committee ("Committee") of the Board of Directors ("Board") of the Company may make 1 such equitable adjustments in the number and class of shares authorized to be granted as Restricted Shares, as it deems appropriate to prevent dilution or enlargement of rights. Shares issued as a consequence of any such change shall be issued subject to the same restrictions and provisions applicable to the original grant of Restricted Shares. Section 4 Grants. ------ The Chief Executive Officer of the Company may from time to time authorize grants of Restricted Shares to Participants, other than Value Share Plan Participants, who have been designated as eligible under Section 2 of this Plan. At least annually, the Chief Executive Officer shall notify the Committee of key employees designated as eligible and the amount of authorized grants of Restricted Shares to those key employees under this Plan. If the Participant has been awarded Restricted Stock under the Value Share Plan, the Committee shall grant each Value Share Plan Participant a number of Restricted Shares under this Plan equal one third of the total award under the Value Share Plan, divided by the average daily closing share price of Common Stock during the last month of the Performance Cycle on which the award is based. If the Participant has been awarded Restricted Stock as a separate award under the Value Share Plan, the Committee shall grant the Value Share Participant a number of Restricted Shares equal to that separate award based on the share price described above. Grants of Restricted Shares to Participants shall be on the terms and conditions and with the restrictions determined from time to time by the Committee under Section 5 of this Plan. Section 5 Terms and Conditions of Restricted Shares. ----------------------------------------- (a) General. Each grant of Restricted Shares shall be subject to the ------- restrictions under subsection (c) for the Restricted Period of the grant. (b) Restricted Period. The Restricted Period shall begin on the date of ----------------- the grant and shall continue for a period of time determined on the date of the grant, subject to the following conditions: (i) the Restricted Period for a grant to a Value Share Plan Participant shall lapse on the last day of each year following the grant as to one third of the grant of Restricted Shares, until, on the last day of the third year following the grant, the Restricted Period has totally lapsed as to all Restricted Shares for that particular grant; and (ii) the Restricted Period for a grant to Participants who are not Value Share Plan Participants shall not be less than the Restricted Period for a grant to Value Share Plan Participants. (c) Restrictions. One or more of these restrictions shall be a restriction ------------ which constitutes a substantial risk of forfeiture. The Participant shall have all ownership rights and privileges of a shareholder as to the Restricted Shares, including the right to vote such Restricted Shares, except as follows: (i) the Participant shall not be entitled to delivery of a stock certificate representing the number of Restricted Shares granted until the lapse of the Restricted Period; (ii) none of the Restricted Shares may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of during the Restricted Period; and (iii) except as provided in subsection 2 (d), all grants of Restricted Shares shall be forfeited if the Participant fails to satisfy the terms of the grant of Restricted Shares by the end of the Restricted Period. During the Restricted Period, the Restricted Shares may be held on an uncertificated basis or a stock certificate representing the number of Restricted Shares granted may be registered in each Participant's name but held in custody by the Company for the Participant's account and not released to the Participant until the Restricted Period lapses. (d) Forfeiture. ---------- All rights of a Participant to any grant of Restricted Shares shall be forfeited without any further obligation on the Company's part if (i) a Participant ceases to be an employee of the Company for a reason other than Death, Disability, Retirement, Change of Control, or transfer to the Atlantic Richfield Company, LYONDELL-CITGO Refining Company Ltd. or an entity substantially owned or controlled by the Company; or (ii) if the restrictions imposed by the Committee are not otherwise satisfied by the end of the Restricted Period, unless the Committee makes an affirmative decision that any or all of the Participant's grant of Restricted Shares shall not be forfeited. Restricted Shares that are forfeited may be used for other grants of Restricted Shares. (e) Lapse of Restrictions. --------------------- If a Participant ceases to be an employee of the Company by reason of Disability, Death or Retirement or, if a Change of Control occurs, any restrictions on an outstanding grant of Restricted Shares shall immediately lapse and the Participant's right to the grant shall be fully vested. For purposes of thve section, the following definitions apply: (i) "Disability", for Participants other than Value Share Plan Participants, means a permanent and total disability as defined in Section 22(e)(3) of the Internal Revenue Code. "Disability", for Value Share Plan Participants, means the Participant is totally disabled according to the provisions of the Company's Executive Long-Term Disability Plan. (ii) "Retirement" means a termination of employment with a right to commence an immediate retirement allowance under a retirement plan maintained by the Company. (iii)"Change of Control" means a change of control as defined in a Participant's Executive Severance Agreement between the Participant and the Company or, if the Participant does not have an Executive Severance Agreement with the Company, as defined in the Company's Supplemental Executive Benefit Plans Trust Agreement. 3 (f) Delivery of Restricted Shares. A stock certificate for the number of ----------------------------- Restricted Shares which have vested shall be delivered free of all such restrictions to the Participant or the Participant's beneficiary or estate, as the case may be, on the lapse of the Restricted Period. Section 6 Regulatory Compliance. --------------------- A Participant or Participant's beneficiary or estate shall not receive or sell any Common Stock granted pursuant to this Plan until all appropriate listing, registration and qualification requirements and consents and approvals have been satisfied or obtained, free of any condition unacceptable to the Board of Directors. The Committee shall have the authority to remove any or all of the restrictions on the Restricted Shares, including restrictions under the Restricted Period, whenever it determines that such action is appropriate as a result of changes in applicable laws or other circumstances after the date of the grant. Section 7 Administration. -------------- The Plan shall be supervised and administered by the Committee or any successor committee with responsibility for executive compensation. The Committee shall have all necessary authority and discretion to interpret any provision of this Plan or to determine any questions regarding grants of Restricted Shares under this Plan. Any determination or interpretation by the Committee shall be final, conclusive and binding on all persons. Any Committee determination may be made in writing signed by a majority of Committee members, without notice or meeting. Section 8 Termination or Amendment of the Plan. ------------------------------------ The Board may at any time terminate the Plan and may from time to time alter or amend the Plan or any part (including any amendment deemed necessary to ensure that the Company may comply with any regulatory requirement referred to in Section 6) without shareholder approval, unless otherwise required by law or by the rules of the Securities and Exchange Commission or New York Stock Exchange. No termination or amendment of the Plan may impair a Participant's rights with respect to outstanding grants of Restricted Shares under the Plan without the Participant's consent. Section 9 Miscellaneous. ------------- (a) The Company shall have the right to require that the Participant pay any taxes required by law with respect to the issuance or delivery of, or the lapse of restrictions on, Restricted Shares prior to issuance or delivery. 4 (b) Nothing in the Plan shall be deemed to create any right in a Participant to continued employment or other service with the Company. Participants shall have no rights under this Plan other than as general creditors of the Company. Section 10 Governing Law. ------------- The Plan shall be construed according to the law of the State of Texas to the extent federal law does not supersede and preempt State law. Section 11 Effective Date. -------------- The Plan shall become effective as of January 1, 1995, provided that a majority of the holders of the Company's Common Stock shall have approved the Plan at the Company's 1995 Annual Meeting of Stockholders. 5 EX-10.10 4 VALUE SHARE PLAN EXHIBIT 10.10 LYONDELL PETROCHEMICAL COMPANY ------------------------------- VALUE SHARE PLAN Effective January 1, 1995 TABLE OF CONTENTS I.PURPOSE II.DESCRIPTION OF PLAN OPERATION III.OTHER PLAN PROVISIONS IV.DEFINITIONS LYONDELL PETROCHEMICAL COMPANY VALUE SHARE PLAN I. PURPOSE The purpose of the Lyondell Petrochemical Company Value Share Plan (the "Plan") is to: . Focus Participants on key measures of value creation for the Company's shareholders and on operating measures that lead to the creation of value . Provide significant upside and downside award potential commensurate with shareholder value creation . Encourage a long-term management perspective and reward for sustained long-term performance . Enhance the ability of Lyondell to attract and retain highly talented and competent individuals . Reinforce a team orientation among top management . Encourage ownership of the Company's stock among top management II. DESCRIPTION OF PLAN OPERATION II.1 GENERAL PLAN DESCRIPTION The Value Share Plan (the "Plan") provides the opportunity for top executives of Lyondell Petrochemical Company ("Lyondell" or the "Company") to receive incentive awards based on: (1) Performance measured against two key indicators of shareholder value: . Economic Value Added . Market Value Added (2) Performance measured against four key indicators of operating success: . Financial Results . Customer Satisfaction Ranking . Corporate Responsibility Ranking . Employee Productivity Ranking At the beginning of each Performance Cycle (or in some cases during the Performance Cycle), certain top executive officers of the Company will be selected to participate in the Plan for that Performance Cycle. Upon selection, each Participant will be assigned an Allocation Percentage, which will indicate the extent to which each Participant will share in the amounts generated by the Plan. Following the end of each Performance Cycle, two award pools will be created: (1) a Value Award Pool and (2) an Operating Award Pool. The Value Award Pool will be created based upon Lyondell's performance over the Performance Cycle. The Value Award Pool will equal the sum of [a+b], as follows: (a) 4.0% of Average Economic Value Added, plus (b) 1.25% of Average Market Value Added An Operating Award Pool will be created based on Lyondell's operating performance in the areas of financial results, customer satisfaction, corporate responsibility and employee productivity. This pool may be adjusted downward by the Compensation Committee (the "Committee") of the Board of Directors of the Company based on its assessment of Lyondell's financial and strategic performance against any criteria that it deems appropriate. 1 The Value Award Pool and the Operating Award Pool will then be allocated to Participants in accordance with each Participant's Allocation Percentage. Awards to Participants typically will be paid out in three parts [a+b+c], as follows: (a) One-third in cash paid within 90 days following the end of the Performance Cycle; (b) One-third in Restricted Stock issued within 90 days following the end of the Performance Cycle; and (c) One-third in Deferred Cash paid at the time that the related Restricted Stock vests The number of shares of Restricted Stock to be granted to each Participant will be calculated by dividing the Participant's award in (b) above by the Company's average daily closing stock price during the last month of the Performance Cycle. The Restricted Stock will vest annually in three equal installments over three years following the end of the Performance Cycle, and will earn dividends and have voting rights over the restriction period. The Deferred Cash award will be paid out at the time that the related Restricted Stock vests in an amount equal to the value of the Restricted Stock at the time of its vesting. In addition, Participants will receive the cash equivalent to first quarter dividends which otherwise would have been earned on the Restricted Stock if the Restricted Stock grants were made immediately after the end of the Performance Cycle. A detailed description of how the Plan works is presented in the following sections of this document. II.2 ELIGIBILITY Plan participation will be extended to the top executives of the Company who, in the opinion of the Compensation Committee of Lyondell, have the opportunity to significantly impact the long-range success and value of the Company. These executives, referred to as Participants, will be notified in writing of their selection to participate in the Plan within 90 days of being elected an executive officer of the Company. No non-employee directors shall be eligible to participate in this Plan. II.3 ALLOCATION PERCENTAGE All Participants will be assigned an Allocation Percentage for each Performance Cycle by March 30 of the first year of each Performance Cycle. The initial and maximum Allocation Percentages for the Chief Executive Officer and the Chief Operating Officer are 35% and 20%, respectively. Other Allocation Percentages will be determined by the Compensation Committee, based on the number of Participants in the Plan, the position level of each Participant, and other considerations, as deemed appropriate by the Committee. If a Participant is selected to participate in the Plan after March 30 of the first year of the Performance Cycle, the Participant will be assigned an Allocation Percentage commensurate with his/her position level in the organization, as well as other factors that the Committee may consider. The Participant will be notified of the Allocation Percentage within 90 days of selection to participate. Adding new Participants to the Plan during a Performance Cycle may result in Allocation Percentages which total more than 100% for that Performance Cycle. If a Participant ceases to participate in the Plan, Allocation Percentages for ongoing Performance Cycles will not be readjusted for remaining Participants. The Allocation Percentages for Performance Cycles ending in 1995, 1996, 1997, 1998 and 1999 will be established prior to March 30, 1995. 2 II.4 VALUE AWARD POOL Within 60 days following the end of the Performance Cycle, a Value Award Pool will be established based on Lyondell's performance over the Performance Cycle. The Value Award Pool will equal the sum of [a+b] for the Performance Cycle, as follows: (a) 4.0% of Average Economic Value Added, plus (b) 1.25% of Average Market Value Added II.5 AVERAGE ECONOMIC VALUE ADDED Economic Value Added measures the Company's cash flow relative to the return that debt and equity holders expect to receive on the Company's capital. Each year of a Performance Cycle, Economic Value Added will be measured by the difference between (i) cash generated by Company operations and (ii) the sum of the Company's debt and equity capital, multiplied by a factor representing investors' expected rate of return on that capital, as calculated under the formula in Schedule A. Average Economic Value Added will be determined by calculating the sum of Economic Value Added for each year of a Performance Cycle and dividing the total by the number of years in that cycle. II.6 AVERAGE MARKET VALUE ADDED Average Market Value Added measures changes in total return to shareholders during a Performance Cycle, including the value of dividend reinvestment, as calculated under the formula in Schedule B. II.7 OPERATING AWARD POOL Within 60 days following the end of the Performance Cycle, an Operating Award Pool shall be established. The extent to which this pool is created will be contingent upon Lyondell meeting certain criteria during the Performance Cycle. Operating Award Pool amounts to be made available upon the achievement of these criteria include:
OPERATING OPERATING PERFORMANCE STANDARD AWARD POOL ------------------------------ ---------- (1) Financial Performance refers to Net Income in the final year of the Performance Cycle greater than or equal to dividends paid in the final year of the Performance Cycle.............. $ 300,000 (2) Customer Satisfaction Ranking................................ 200,000 (3) Corporate Responsibility Ranking............................. 200,000 (4) Employee Productivity Ranking................................ 300,000 ---------- Total Operating Award Pool................................... $1,000,000 ==========
Within 60 days following the end of the Performance Cycle, the Compensation Committee also will evaluate the Company's performance in the final year of the Performance Cycle on any criteria that it deems appropriate. These criteria may be financial or strategic in nature and could include, but are not limited to, environmental and health measures, key strategic accomplishments, and quality measures. Based on this subjective assessment, the Compensation Committee will rate Lyondell's annual performance and, in its discretion, reduce the Operating Award Pool, if appropriate. The extent of any reduction will be contingent upon Lyondell's performance rating as follows:
DOWNWARD TOTAL OPERATING PERFORMANCE RATING ADJUSTMENT(1) AWARD POOL ------------------ ------------- --------------- Exceptional....................................... $ 0 $1,000,000 Good.............................................. $ 500,000 $ 500,000 Partially meets expectations...................... $ 850,000 $ 150,000 Deficient......................................... $1,000,000 $ 0
-------- (1) Interpolate for performance between discrete points 3 II.8 AWARD CALCULATION Each Participant's award under the Plan for a Performance Cycle will be determined by multiplying the Participant's Allocation Percentage by the sum of the Value Award Pool and the Operating Award Pool in accordance with the formula [a*(b+c)], as follows: (a) Participant's Allocation Percentage, multiplied by the sum of: (b) Value Award Pool, plus (c) Operating Award Pool. The maximum award that can be paid based on the Value Award Pool and the Operating Award Pool for any Participant for any Performance Cycle equals $3,500,000. This maximum amount includes payments in cash, Restricted Stock, and Deferred Cash, as described in Section II.9 below. In addition, a Participant will receive an award in cash equal to the amount of dividends which would have been paid on shares of Restricted Stock for the first quarter in the year of the award, as if the Participant had been granted Restricted Stock immediately after the end of the Performance Cycle. This award shall not be paid if the Participant actually receives the dividends. II.9 PAYOUT OF AWARDS Earned awards (except for Deferred Cash) will be paid out within 90 days following the end of the Performance Cycle. Except in the event of Termination due to death, Retirement, or permanent Disability, awards will be paid out in three parts as follows: (a) One-third in cash paid within 90 days following the end of the Performance Cycle; (b) One-third in shares of Restricted Stock granted within 90 days following the end of the Performance Cycle; and (c) One-third in Deferred Cash paid at the time that the related Restricted Stock vests. Any award of cash equal to dividends under Section II.8 also shall be paid within 90 days of the end of a Performance Cycle. In the event of Termination due to death, Retirement, or permanent Disability, pro-rata awards will be paid out in cash within 90 days following the end of the Performance Cycle in accordance with the provisions of Section III.3. The number of shares of Restricted Stock to be granted to each Participant will be calculated by dividing the Participant's award in (b) above by the Company's average daily closing stock price during the last month of the Performance Cycle. The Restricted Stock will vest in three equal installments on the last day of the year in each of the three years following the end of the Performance Cycle. Restricted Stock will vest immediately upon a Change in Control or upon the Participant's death, Retirement, or permanent Disability. The Restricted Shares will earn dividends, as paid, and have voting rights over the restricted period. The Deferred Cash award will be paid at the time that the related Restricted Stock vests in an amount equal to the number of shares of Restricted Stock vesting multiplied by the Company's closing stock price on the vesting date. II.10 DISCRETION TO REDUCE AWARDS The Committee may exercise negative discretion and reduce any awards based on the Value Award Pool and the Operating Award Pool payable to any individual who participates in the Plan. 4 II.11 SEPARATE DISCRETIONARY AWARDS The Committee may pay discretionary awards which are not based on Allocation Percentages, in addition to any awards paid in accordance with Section II.8 of the Plan, to any Participant in the Plan for any year in cash, Restricted Stock, Deferred Cash, or any combination thereof. II.12 DEFERRALS The Participant may elect to defer cash and Deferred Cash amounts calculated under the Plan under the terms of any deferred compensation plan in which he/she is eligible to participate. If any payment of any amount under this Plan would be disallowed under Code Section 162(m) by reason of the fact that the Participant's applicable employee remuneration, as defined in Code Section 162(m)(4), either exceeds or, if such amount were paid, would exceed the $1,000,000 limitation in Code 162(m)(1), the Committee may, in its sole discretion, defer the payment of this excess amount, but only to the extent that, and for so long as, the Company's tax deduction for the payment would be disallowed under Code Section 162(m). No such payment, however, may be deferred beyond three months after the end of the Company's fiscal year in which the Participant's termination of employment occurs. In addition, the Committee may accelerate the payment of previously deferred amounts if it determines that the amount of the tax deduction that would be disallowed is not significant. Amounts which are deferred under this Section II.12 will be credited with interest at a rate provided for in the Company's Executive Deferral Plan at the time of the deferral or at the prime rate of Citibank, N.A. in effect from time to time if no deferral plan is in effect at the time of the award payout. III. OTHER PLAN PROVISIONS III.1 ACCRUAL OF AWARDS This is an unfunded Plan. Awards will be charged to the Company's earnings according to Generally Accepted Accounting Principles (GAAP). Accrual of awards will not imply a promise by the Company to pay any of a Participant's award. Awards will be paid only upon the completion of the Performance Cycle, in accordance with provisions outlined elsewhere in this document. III.2 EMPLOYMENT In order to receive an award under the Plan, a Participant must be employed by Lyondell at the end of the Performance Cycle, except as otherwise noted below. III.3 TERMINATION, DEMOTIONS, AND TRANSFERS If Termination of the Participant's employment occurs during the Performance Cycle by reason of death, Disability, or Retirement, or if Termination occurs within one year following a Change in Control, or if the Participant is rendered ineligible to Participate in the Plan due to a demotion or a transfer by the Company to an Affiliate, such as LYONDELL-CITGO Refining Company Ltd., the Participant (or the Participant's beneficiary or estate in the event of death) will be eligible to receive a pro-rata award, whereby the Participant's award will be multiplied by the number of full months that the Participant was employed by the Company during the Performance Cycle, divided by the number of months in the Performance Cycle. Pro-rated awards earned pursuant to this Section III.3 will be paid out in their entirety in cash within 120 days following the end of the Performance Cycle. A Participant who terminates employment with the Company prior to the end of the Performance Cycle for any other reason (whether voluntary or involuntary) in the absence of a Change in Control will forfeit the opportunity to earn an award under the Plan. Notwithstanding any other provision of the Plan, the Committee may, in its sole discretion, permit continued participation, pro-ration or early distribution (or a combination) of awards which would otherwise be forfeited. 5 III.4 DESIGNATION OF BENEFICIARIES A Participant may designate a beneficiary or beneficiaries to receive, in the event of the Participant's death, all or part of the amounts to be distributed to the Participant under the Plan. III.5 NEW HIRES AND PROMOTIONS Individuals who have been selected during the Performance Cycle to participate in the Plan and who have a minimum of one month of service as a Participant may be eligible, at the discretion of the Committee, to receive a pro-rata award. If the Participant has been selected to receive a pro-rata award, the Participant's award will be multiplied by the number of full months that the Participant was eligible to participate in the Plan during the Performance Cycle, divided by the number of months in the Performance Cycle. Pro-rated awards earned pursuant to this Section III.5 will be paid out in a combination of cash, Restricted Stock and Deferred Cash in accordance with Section II. 8 of this document. III.6 AMENDMENT OR TERMINATION OF THE PLAN This Plan may be amended, suspended, or terminated at any time by the Committee without notice, provided that no change to the Plan may be made, unless required by law, that adversely affects a previously earned award. In the case of termination of the Plan, the Committee, if it determines in its sole discretion that it is advisable under the circumstances, may authorize the pro-ration and/or early distribution of awards earned under the Plan. However, no amendment or change in the Plan may, without the approval of the shareholders of the Company, be effective with respect to an award which is intended to satisfy the requirements of Code Section 162(m), if such approval is required by Code Section 162(m)(4)(C). III.7 PLAN ADMINISTRATION The Committee has the full power and authority to construe, interpret, and administer the Plan and to make rules and regulations in accordance with Plan provisions. All Committee decisions, actions, determinations, or interpretations will be at the Committee's sole discretion and will be final, conclusive and binding on the Company, Participants and all other persons. In making any determination under the Plan, the Committee will be entitled to rely on opinions, reports, statements, or advice of officers of the Company, and of counsel, public accountants, and other experts or third parties. No member of the Committee will be personally liable for any action taken in good faith, any exercise of power given to the Committee under the Plan, or any action of any other member of the Committee. III.8 LIMITATION OF EMPLOYEE RIGHTS No Employee has a claim or right to be a Participant in the Plan, to continue as a Participant, or to be granted an award under the Plan. Lyondell is not obligated to give uniform treatment (e.g., the assignment of Allocation Percentages) to Employees or Participants under the Plan. Participation in the Plan does not give an Employee the right to be retained in the employment of the Company, nor does it imply or confer any other employment rights. Nothing contained in the Plan will be construed to create a contract of employment with any Participant. Lyondell reserves the right to elect any person to its offices and to remove Employees in any manner and upon any basis permitted by law. Nothing contained in the Plan will be deemed to require Lyondell to deposit, invest or set aside amounts for the payment of any awards. Participation in the Plan does not give a Participant any ownership, security or other rights in any assets of the Company. 6 III.9 WITHHOLDING TAX Lyondell will deduct from all awards paid under the Plan any taxes required by law to be withheld. III.10 EFFECTIVE DATE The Plan is effective as of January 1, 1995, and will remain in effect unless otherwise terminated or amended by the Compensation Committee, provided that the Plan is approved by the Company's shareholders on or before December 31, 1995. III.11 VALIDITY In the event any provision of the Plan is held invalid, void, or unenforceable, the same will not affect, in any respect, the validity of any other provision of the Plan. III.12 APPLICABLE LAW The Plan will be governed by and construed in accordance with the laws of the State of Texas. IV. DEFINITIONS "AFFILIATE" means any entity substantially owned and/or controlled by Lyondell, as determined by the Committee. "ALLOCATION PERCENTAGE" refers to a percentage assigned to a Participant in accordance with Section II.3 of the Plan. "CHANGE IN CONTROL" will have the same meaning as a Participant's Executive Severance Agreement between the Participant and the Company or the Company's Supplemental Executive Benefit Plans Trust Agreement if the Participant does not have an Executive Severance Agreement. "CODE" refers to the Internal Revenue Code of 1986 or any successor statute, as amended from time to time. "COMPANY" refers to Lyondell Petrochemical Company. "COMPENSATION COMMITTEE" OR "COMMITTEE" refers to the Compensation Committee of the Board of Directors of Lyondell. "CORPORATE RESPONSIBILITY RANKING" refers to Lyondell, during the final year of a Performance Cycle, (a) achieving first or second quartile ranking (where first signifies the best performance) in recordable incident rates as reported for its category by the National Petroleum Refining Association (NPRA) and the Chemical Manufacturers Association (CMA) and (b) meeting the CMA time guidelines for implementation of the Responsible Care Guidelines. If the CMA and NPRA no longer issue such reports, the Committee may choose alternate reports issued by other companies or associations. "CUSTOMER SATISFACTION RANKING" refers to Lyondell achieving first or second quartile ranking (where first signifies the best performance) in (a) customer audits of any Company plant or facility held during the final year of a Performance Cycle and (b) customer surveys performed by the Company during the final year of a Performance Cycle. Provided however, that if no customer audits or surveys are done during such year than the Company must have maintained its ISO-9000 rating in the most recent audit performed by the ISO-9000 auditing agency. "DEFERRED CASH" refers to an amount of cash equal to the value of the Restricted Stock determined in accordance with Section II.9 of the Plan. 7 "DISABILITY" refers to total and permanent disability, as defined in the Company's Executive Long-Term Disability Plan. "EMPLOYEE" refers to an Employee of Lyondell Petrochemical Company. "EMPLOYEE PRODUCTIVITY RANKING" refers to Lyondell achieving first or second quartile ranking (where first signifies the best performance) on production cost for Lyondell's Channelview facility, as reported by Solomon Associates, Inc. on its most recent report issued prior to the end of the Performance Cycle. If Solomon Associates, Inc. no longer issues such reports, the Gulf Coast cost of ethylene comparison shall be used as the measurement. "ENDING SHARES OUTSTANDING" OR "ESO" refers to the number of shares outstanding at the end of the final year of the Performance Cycle, adjusted for stock splits and stock dividends. "LYONDELL" refers to Lyondell Petrochemical Company, a Delaware corporation. "NET INCOME" refers to the Company's net income after taxes, as reported in the Company's audited financial statements. "OPERATING AWARD POOL" is the award pool that is created upon Lyondell meeting key operating performance criteria in accordance with Section II.9 of this Plan. "PARTICIPANT" refers to a key Employee and officer of Lyondell or Affiliate selected by the Committee to participate in the Plan. "PERFORMANCE CYCLE" refers to the following time periods, except as provided below.
PERFORMANCE CYCLE PERFORMANCE MEASUREMENT PERIOD ----------- ---------------------------------- 1 January 1, 1991--December 31, 1995 2 January 1, 1992--December 31, 1996 3 January 1, 1993--December 31, 1997 4 January 1, 1994--December 31, 1998 5 January 1, 1995--December 31, 1999 6 January 1, 1996--December 31, 2000 Each cycle continues to advance by one year. The first four Performance Cycles for the Chief Executive Officer and the Chief Operating Officer are as follows:
PERFORMANCE CYCLE PERFORMANCE MEASUREMENT PERIOD ----------- ---------------------------------- 1 January 1, 1995--December 31, 1995 2 January 1, 1995--December 31, 1996 3 January 1, 1995--December 31, 1997 4 January 1, 1995--December 31, 1998
Thereafter, the Performance Cycle will be the same as the Performance Cycle for other Plan Participants. "PLAN" refers to the Lyondell Petrochemical Company Value Share Plan as set forth in this document. "RESTRICTED STOCK" refers to shares of the Company's common stock which will be issued subject to vesting restrictions under the Company's Restricted Stock Plan. These shares will earn dividends, as paid, and have voting rights during the restriction period. 8 "RETIREMENT" refers to a termination of employment with a right to commence an immediate allowance under a retirement plan maintained by the Company. "TAX RATE" refers to the combined maximum Texas and Federal corporate income tax rate. "TERMINATION" refers to the Participant's ceasing his/her service with the Company for any reason whatsoever, whether voluntarily or involuntarily, including by reason of death or permanent Disability. "VALUE AWARD POOL" is the award pool created based on Lyondell's performance on Average Economic Value Added and Average Market Value Added, calculated in accordance with Section II.4 of this Plan. 9 SCHEDULE A I. ECONOMIC VALUE ADDED SHALL BE DETERMINED ACCORDING TO THE FOLLOWING FORMULA: Economic Value Added = ECF-(ECI * WACC) Weighted Average Cost of Capital ("WACC"), as used to calculate Economic Value Added, shall be determined according to the following formula: WACC = After tax cost of long-term debt * [LTD / (LTD + MVE)] + Cost of equity * [MVE / (LTD + MVE)] where [LTD / (LTD + MVE)] equals 30% and [MVE / (LTD + MVE)] equals 70%. Note: These ratios may be amended due to a significant change in the Company's capital structure. ECF and ECI will be determined at year end during each Performance Cycle based on the Company's audited financial statements, as adjusted to recognize the effect of Lyondell's interest in LYONDELL-CITGO Refining Company Ltd. consistent with the economics of the limited liability company arrangement. For example, CITGO's contributions and minority interests, loans for which Lyondell is not liable or interest relating to those loans will not be included in these determinations, regardless of their inclusion on audited financial statements. Similar adjustments consistent with the economics of the LYONDELL-CITGO Refining Company Ltd. arrangement may be warranted. If extraordinary events occur during a Performance Cycle which alter the basis upon which Economic Value Added is calculated, the effect of these events, with the Committee's approval, may be amortized over a period of up to three years, beginning with the year in which the event occurs, provided the decision to amortize is made no later than 90 days following the end of the year in which the event occurs. Events warranting such action may include, but are not limited to, major acquisitions, divestitures, and a recapitalization of the Company. II. DEFINITIONS For purposes of this Section, terms are defined as follows: Cost of Equity means cost of equity as determined under the Capital Asset Pricing Model. Economic Capital Invested ("ECI") means the sum of Common and preferred equity; plus Long-term debt; plus Current portion of long-term debt; plus Other non-current liabilities; plus Deferred taxes; plus Accumulated depreciation, less $482,556,000 (the difference between the gross book value and estimated market value of Lyondell's refining assets in 1991); plus Capitalized value of significant operating leases entered into after January 1, 1995. Economic Cash Flow ("ECF") means the sum of Net income (after accrual of all expenses pursuant to this Plan); plus Depreciation and amortization; plus Other non-cash items; plus Deferred taxes; plus After-tax interest, calculated by multiplying the Company's pre-tax interest by (1-Tax Rate); plus Implicit interest on significant operating leases entered into after January 1, 1995. Long-Term Debt ("LTD") means the book value of Lyondell's long-term debt, including the current portion of long-term debt. Market Value of Equity ("MVE") means the Company's stock price multiplied by the number of outstanding shares of common stock. SCHEDULE B I. AVERAGE MARKET VALUE ADDED SHALL BE DETERMINED ACCORDING TO THE FOLLOWING FORMULA: Average Market Value Added = {[BSP*(l+TSR)n * ESO]-[BSP*BSO]} / n II. TOTAL SHAREHOLDER RETURN, AS USED TO CALCULATE AVERAGE MARKET VALUE ADDED, SHALL BE DETERMINED ACCORDING TO THE FOLLOWING FORMULA: Total Shareholder Return =nX [square root of] [(Adjusted Shares*ESP) / (1Share*BSP)] - 1 III.DEFINITIONS For purposes of this section, terms are defined as follows: Adjusted Shares means the number of shares a shareholder would own at the end of a Performance Cycle if the shareholder owned one share of Lyondell common stock on the last day of the year immediately prior to the Performance Cycle and then reinvested any dividends paid during the Performance Cycle at the end of each month in which the dividend was paid, up to and including the last day of the Performance Cycle. Beginning Shares Outstanding ("BSO") means the number of shares outstanding, adjusted for stock splits and dividends, at the end of the year immediately prior to the beginning of a Performance Cycle. Beginning Share Price ("BSP") means Lyondell's average month-end closing stock price, adjusted for stock splits and dividends, for the year immediately prior to the beginning of a Performance Cycle. The Beginning Share Price used in the Total Shareholder Return calculation for the Performance Cycle beginning January 1, 1991 and ending December 31, 1995 will be $14.63. Ending Shares Outstanding ("ESO") means the number of shares outstanding at the end of the final year of a Performance Cycle, adjusted for stock splits and dividends. Ending Stock Price ("ESP") means the average month-end closing stock price in the final year of a Performance Cycle, adjusted for stock splits and dividends. Total Shareholder Return ("TSR") means the compound annual growth rate of Lyondell's common stock price from the end of the year immediately prior to the first year of a Performance Cycle to the end of the final year of that Performance Cycle, including the value of dividends paid during the Performance Cycle, as if those dividends were reinvested at the end of each month in which a dividend was paid. Number of Years ("n") means number of years in a Performance Cycle. EX-10.11 5 EXEC SEVERANCE AGMT EXHIBIT 10.11 EXECUTIVE SEVERANCE AGREEMENT, DATED AS OF MAY 27, 1994, BETWEEN LYONDELL PETROCHEMICAL COMPANY, A DELAWARE CORPORATION (THE "COMPANY"), AND ______________________ ("EXECUTIVE") TABLE OF CONTENTS -----------------
PAGE ---- Section 1. Stock Options and Performance Units......... 1 (a) Stock Options............................... 1 (b) Performance Units........................... 2 Section 2. Termination Following Change in Control..... 3 (a) Termination Upon Change in Control.......... 3 (b) Change in Control........................... 4 Section 3. Rights and Benefits upon Termination........ 7 (a) Salary and Other Payment at Termination..... 8 (b) Prorated Targeted Bonus..................... 8 (c) Crediting of Additional Pension Benefit..... 8 (d) Stock Options............................... 9 (e) Executive Deferral Plan..................... 9 (f) Insurance and Other Benefits................ 10 (g) Financial Counseling........................ 11 (h) Outplacement................................ 11 (i) No Duty to Mitigate......................... 11 Section 4. Other Benefit Plans......................... 11 Section 5. Payment Obligations Absolute................ 12 Section 6. Combined Gross-up Payment; Tax Defense...... 12 (a) Combined Gross-up Payment................... 12 (b) Tax Defense................................. 12 Section 7. Conditions to the Obligations of the Company............................ 13 Section 8. Confidentiality; Cooperation; Consultancy... 13 (a) Cooperation................................. 13 (b) Consultation................................ 14 (c) Release of Liability........................ 14 Section 9. Term of Agreement........................... 14 Section 10. Arbitration................................. 15 (a) Arbitrable Matters.......................... 15 (b) Submission to Arbitration................... 15
(i) (c) Arbitration Procedures...................... 16 (d) Compliance with Decisions................... 16 (e) Costs and Expenses.......................... 17 Section 11. Notices..................................... 17 Section 12. Miscellaneous............................... 17 (a) Assignment.................................. 17 (b) Construction of Agreement................... 18 (c) Amendment................................... 18 (d) Waiver...................................... 18 (e) Severability................................ 18 (f) Successors.................................. 18 (g) Taxes....................................... 18 (h) Governing Law............................... 19 (i) Entire Agreement............................ 19
(ii) EXECUTIVE SEVERANCE AGREEMENT THIS EXECUTIVE SEVERANCE AGREEMENT, is made and entered into this 27th day of May, 1994, by and between LYONDELL PETROCHEMICAL COMPANY, a Delaware corporation (hereinafter referred to as "Company"), and ________________________________, an individual (hereinafter referred to as "Executive"). W I T N E S S E T H : WHEREAS, the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") has authorized the Company to enter into a severance agreement in the form hereof with Executive; WHEREAS, the Board of Directors of the Company (the "Board") has determined that, in the event the Company becomes subject to any proposed or threatened change in control, it is imperative that the Company and the Board be able to rely upon Executive to continue in Executive's position, and that the Company be able to receive and rely upon Executive's advice, if requested, as to the best interests of the Company and its stockholders without concern that Executive might be distracted by the personal uncertainties and risks created by such a proposal or threat; WHEREAS, in the event the Company receives any such proposal or threat, Executive may, in addition to Executive's regular duties, be called upon to assist in the assessment of such matters, advise management and the Board as to whether such proposals or other matters would be in the best interests of the Company and its stockholders, and to take such other actions as the Board might determine to be appropriate; NOW, THEREFORE, to assure the Company that it will have the continued dedication of Executive and the availability of Executive's advice and counsel notwithstanding the possibility, threat or occurrence of an effort to take over control of the Company, and to induce Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and Executive agree as follows: SECTION 1. STOCK OPTIONS AND PERFORMANCE UNITS. ----------------------------------- (a) Stock Options. If a Change in Control occurs while Executive is ------------- employed by the Company or any subsidiary thereof, then with respect to any stock options granted to Executive under the Company's Executive Long-Term Incentive Plan (the "Stock Option Plan"), notwithstanding any provision of the Stock Option Plan or Executive's associated stock option agreement, if any, to the contrary, all non-vested options shall become 100% vested and fully exercisable as of the last business day immediately preceding the Change in Control. For purposes of this Agreement, all references herein to stock options shall also include all associated dividend share credits granted under the Stock Option Plan with respect to such options. In the further event that there is a "Cessation of Active Market" for the Company's common stock coincident with or within three (3) years following a Change in Control, then notwithstanding any provision of the Stock Option Plan or Executive's associated stock option agreement, if any, to the contrary, with respect to any stock options which Executive has elected not to exercise, Company shall pay to Executive a cash lump-sum payment equal to the "Black-Scholes Value" for all of his unexercised stock options within forty-five (45) calendar days from the date that there is a Cessation of Active Market; provided, however, payment of such amount shall -------- ------- be delayed by the Company for a period of up to six (6) months to the extent that payment at an earlier date could subject Executive to liability for short swing profits under Section 16(b) of the Securities Exchange Act of 1934, as amended ("Exchange Act"). For purposes of this Section, a "Cessation of Active Market" shall be deemed to have occurred if the Company's common stock ceases to meet the requirements for listing on the New York Stock Exchange or any other established securities market or system on which it is listed. For purposes of this Section, "Black-Scholes Value" shall mean the value of the stock options, as calculated by Hewitt Associates, L.L.C., or any other compensation consultant that is mutually agreeable to the parties (the "Compensation Consultant") using the Black-Scholes method of valuation, determined as if the valuation was based on the average closing price of the Company's common stock for the period of thirty (30) trading days ending on the day immediately preceding the date of Cessation of Active Market. Such valuation also shall take into consideration the remaining term of each stock option. In preparing such valuation, the Compensation Consultant in its good faith discretion shall be responsible for designating reasonable and customary parameters for the Black-Scholes method. Company shall deliver to Executive the determination of the Black- Scholes Value of his stock options with the payment therefor. (b) Performance Units. Upon a Change in Control on or prior to March ----------------- 6, 1995 which occurs while Executive is employed by the Company (which for this purpose also shall include LCR (as defined in Section 2(c)) and any subsidiary of the Company or LCR), the number of performance units granted under the Stock Option Plan, if any, and held by Executive as of the Change in Control shall be multiplied by a fraction, the numerator of which is the number of months in the performance cycle that have elapsed as of the Change in Control (including any fraction of a month) and the denominator of which is the number of months in the entire performance cycle ending March 6, 1995 (including any fraction of a month). The product computed in accordance with the preceding sentence shall be deemed the number of performance units held by Executive as of the Change in Control notwithstanding any contrary provision of the Stock Option Plan and any grant of a larger number of performance units to Executive and, moreover, any performance units held by Executive in excess of this product shall be deemed to be void. For purposes of computing the value of performance units deemed held by Executive as of the Change in Control, the ranking of competitor companies, the level 2 of payout (0, 1x or 2x) and the fair market value of the Company's common stock shall be determined, in accordance with the terms of the performance unit, as of the Change in Control. A cash lump-sum payment for the value of Executive's performance units, computed in accordance with the preceding sentence as of the Change in Control, shall be made by Company to Executive as of the earlier of (i) the last day of the Executive's employment with the Company or any of its subsidiaries or (ii) March 6, 1995. (c) Any long-term incentive compensation program, including subsequent awards of performance units, that may exist or that may be adopted in the future, shall follow the intent of this Agreement as described under Sections 1(a) and 1(b) hereof with respect to the complete vesting and payout of a pro rata share of awards effective with a Change in Control. (d) Capitalized terms not defined in this Section are defined in Section 2(c) of this Agreement. SECTION 2. TERMINATION FOLLOWING CHANGE IN CONTROL. --------------------------------------- (a) Termination Upon Change in Control. The Company will provide or ---------------------------------- cause to be provided to Executive the rights and benefits described in Section 3 of this Agreement in the event that Executive's employment by the Company (which for this purpose also shall include LCR and any subsidiary of the Company or LCR) is terminated at any time within three (3) years following a Change in Control (as defined in Section 2(b)): (1) by the Company for reasons other than (A) "Cause" (as defined in Section 7), (B) Executive's death or permanent disability or (C) Executive's retirement upon reaching age 65 ("Normal Retirement Date"), or (2) by Executive within ninety (90) days following the occurrence of any of the following events without Executive's written consent which events shall constitute "Constructive Termination for Good Reason": (i) the assignment of Executive to any duties or responsibilities that are inconsistent with Executive's position, offices, duties, responsibilities or status immediately preceding such Change in Control, or a change in Executive's reporting responsibilities or titles in effect at such time resulting in a reduction of Executive's responsibilities or position at the Company; (ii) the reduction of Executive's annual salary (including any deferred portions thereof) or Targeted Bonus, or a material reduction in the level of benefits or supplemental compensation provided to Executive; or (iii) the actual transfer, or the proposed transfer, as evidenced in a written communication from Company to Executive, of Executive to another location other than the location at which he was primarily employed immediately preceding the Change in Control, unless such new location is a major operating unit or facility of the Company 3 that is located within 50 miles of Executive's primary location as of the date immediately preceding such Change in Control; provided, however, (1) -------- ------- Executive, within thirty (30) days from the date that he is given written notice by the Company of such actual or proposed transfer, shall provide the Board with written notice that such transfer shall constitute a Constructive Termination for Good Reason hereunder, (2) Company within twenty (20) days of receipt of such notice by the Board shall fail to provide Executive with written notice rescinding such actual or proposed transfer and (3) if the transfer is not rescinded by the Company, Executive must terminate his employment due to Constructive Termination for Good Reason within forty (40) days following expiration of the 20-day period referred to in the preceding clause so that in any event Executive shall have terminated his employment with the Company within 90 days after Executive first receives written notice from the Company of such actual or proposed transfer. (b) Change in Control. For purposes of this Agreement, a "Change in ----------------- Control" shall be deemed to have occurred as of the date that one or more of the following occurs: (i) Individuals who, as of the date hereof, constitute the entire Board of Directors of the Company ("Incumbent Directors") cease for any reason to constitute at least a majority of the Board; provided, however, -------- ------- that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the then Incumbent Directors shall be considered as though such individual was an Incumbent Director, but excluding, for this purpose any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest, as such terms are used in Rule 14a-11 under the Exchange Act or other actual or threatened solicitation of proxies or consents by or on behalf of any Person (as defined below) other than the Board; provided, -------- further, that in the event ARCO at any time determines to achieve minority ------- representation on the Company's Board of Directors approximately equal to its then ownership percentage of the Company's common stock, its implementation of such determination through the election of ARCO employees as directors of the Company shall not be deemed to be a Change in Control and such ARCO employees shall constitute Incumbent Directors; (ii) The stockholders of the Company shall approve (A) any merger, consolidation or recapitalization of the Company (or, if the capital stock of the Company is affected, any subsidiary of the Company), or any sale, lease, or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company (each of the foregoing being an "Acquisition Transaction") where (1) the shareholders of the Company immediately prior to such Acquisition Transaction would not immediately after such Acquisition Transaction beneficially own, directly or indirectly, shares or other ownership interests representing in the aggregate eighty percent (80%) or more of (a) the then outstanding common stock or other equity interests of the corporation or other entity surviving or 4 resulting from such merger, consolidation or recapitalization or acquiring such assets of the Company, as the case may be (the "Surviving Entity") (or of its ultimate parent corporation or other entity, if any), and (b) the Combined Voting Power of the then outstanding Voting Securities of the Surviving Entity (or of its ultimate parent corporation or other entity, if any) or (2) the Incumbent Directors at the time of the initial approval of such Acquisition Transaction would not immediately after such Acquisition Transaction constitute a majority of the Board of Directors, or similar managing group, of the Surviving Entity (or of its ultimate parent corporation or other entity, if any), or (B) any plan or proposal for the liquidation or dissolution of the Company; (iii) Any Person except for ARCO shall be or become the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of securities of the Company representing in the aggregate more than twenty percent (20%) of either (A) the then outstanding shares of common stock of the Company ("Common Shares") or (B) the Combined Voting Power of all then outstanding Voting Securities of the Company; provided, however, that notwithstanding the foregoing, a "Change of -------- ------- Control" shall not be deemed to have occurred for purposes of this Subsection (iii): (1) Solely as a result of an acquisition of securities by the Company which, by reducing the number of Common Shares or other Voting Securities outstanding, increases (a) the proportionate number of Common Shares beneficially owned by any Person to more than twenty percent (20%) of the Common Shares then outstanding, or (b) the proportionate voting power represented by the Voting Securities beneficially owned by any Person to more than twenty percent (20%) of the Combined Voting Power of all then outstanding Voting Securities; or (2) Solely as a result of an acquisition of securities directly from the Company except for any conversion of a security that was not acquired directly from the Company, provided, further, that if any Person referred to in paragraph (1) or (2) -------- ------- of this Subsection (iii) shall thereafter become the beneficial owner of any additional Common Shares or other Voting Securities of the Company (other than pursuant to a stock split, stock dividend or similar transaction), then a "Change of Control" shall be deemed to have occurred for purposes of this Subsection (iii); or (iv) ARCO shall become the owner, directly or indirectly, of securities of the Company representing in the aggregate more than fifty percent (50%) of either (i) the then outstanding Common Shares or (ii) the Combined Voting Power of all then outstanding Voting Securities of the Company except as the result of an acquisition of securities by the Company which, by reducing the number of Common Shares or other Voting Securities outstanding, increases (x) the proportionate number of Common Shares 5 beneficially owned by ARCO to more than fifty percent (50%) of the Common Shares then outstanding, or (y) the proportionate voting power represented by the Voting Securities beneficially owned by ARCO to more than fifty percent (50%) of the Combined Voting Power of all then outstanding Voting Securities; provided, however, that if thereafter ARCO becomes the -------- ------- beneficial owner of any additional Common Shares or other Voting Securities of the Company (other than pursuant to a stock split, stock dividend or similar transaction) the exception provided above shall no longer apply; provided, further, that for purposes of this Subsection (iv), neither -------- ------- record ownership of common stock of the Company by the Trustee for ARCO's 401(a) qualified plans nor beneficial ownership of common stock of the Company by any of ARCO's directors for their personal account shall be deemed to constitute "indirect" ownership of common stock of the Company by ARCO; provided, further, that notwithstanding any contrary provision of -------- ------- this Agreement, no Change in Control shall be deemed to have occurred pursuant to this Subsection (iv) if as a result of an inadvertent act ARCO becomes the owner, directly or indirectly, of additional Common Shares or Voting Securities and such securities are sold or otherwise disposed of by ARCO within 30 days after ARCO discovers, or is notified by the Company as to, the potential Change of Control resulting from such ownership, so that, as a result of such subsequent sale or other disposition by ARCO, no Change in Control would otherwise be deemed to have occurred pursuant to the terms (excluding this proviso) of this Subsection (iv). Notwithstanding any of the foregoing, no Change in Control shall be deemed to have occurred as a result solely of (i) the registration by ARCO of the Exchangeable Notes pursuant to the Registration Statement, (ii) the issuance and sale by ARCO of the Exchangeable Notes to the underwriters in accordance with the Registration Statement, or (iii) prior to the maturity of the Exchangeable Notes, purchases and sales of the Exchangeable Notes. (c) For purposes of this Agreement: (i) "Affiliate" shall mean, as to a specified Person, another Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the specified Person, within the meaning of such terms as used in Rule 405 under the Securities Act of 1933, as amended, or any successor rule. (ii) "ARCO" shall mean Atlantic Richfield Company and any of its Affiliates, excluding the Company. (iii) "Combined Voting Power" shall mean the aggregate votes entitled to be cast generally in the election of the Board of Directors, or similar managing group, of a corporation or other entity by holders of then outstanding Voting Securities of such corporation or other entity. 6 (iv) "Exchangeable Notes" shall mean the debt securities exchangeable upon maturity, at ARCO's option, into shares of the Company's common stock or cash, as such debt securities are described in the Registration Statement. (v) "LCR" shall mean LYONDELL-CITGO Refining Company Ltd., a Limited Liability Company organized under the laws of the State of Texas. (vi) "Person" shall mean any individual, entity (including, without limitation, any corporation, partnership, trust, joint venture, association or governmental body) or group (as defined in Sections 14(d)(3) or 15(d)(2) of the Exchange Act and the rules and regulations thereunder); provided, -------- however, that Person shall not include the Company or LCR, any of their ------- subsidiaries, any employee benefit plan of the Company or LCR or any of their majority-owned subsidiaries or any entity organized, appointed or established by the Company, LCR or such subsidiaries for or pursuant to the terms of any such plan. (vii) "Registration Statement" shall mean ARCO's registration statement on Form S-3 (Registration No. 33-53481) with respect to the Exchangeable Notes. (viii) "Targeted Bonus" shall mean an amount equal to the difference between (1) the sixtieth (60th) percentile of total cash compensation and (2) the sixtieth (60th) percentile of annual base compensation for the Executive's position as determined by the most recent annual executive compensation survey analysis performed by the Company. If the Executive's position is not capable of being matched to a position in the executive compensation survey or if an annual executive compensation survey analysis has not been performed within twelve (12) months of Executive's Termination, the Targeted Bonus shall be a percentage of the Executive's current annual base salary and, in such situation, the applicable percentage shall be determined by the Compensation Consultant (as defined in Section 1(a)), but in no event shall the Targeted Bonus be less than the highest average of Executive's annual bonuses for any consecutive thirty- six (36) month period during the sixty (60) months immediately preceding Termination. (ix) "Voting Securities" shall mean all securities of a corporation or other entity having the right under ordinary circumstances to vote in an election of the Board of Directors, or similar managing group, of such corporation or other entity. SECTION 3. RIGHTS AND BENEFITS UPON TERMINATION. In the event Executive ------------------------------------ is entitled pursuant to Section 2 to receive the rights and benefits described in this Section as a result of the termination or Constructive Termination for Good Reason of Executive's employment within three years following a Change in Control (hereinafter collectively referred to as "Termination"), the Company agrees to provide or cause to be provided to Executive the following rights and benefits: 7 (a) Salary and Other Payment at Termination. Company shall pay to --------------------------------------- Executive not later than thirty (30) days following Termination a lump-sum payment in cash in the amount of three (3) times Executive's "Applicable Annual Earnings" (as defined below); provided, however, if there are fewer -------- ------- than thirty-six (36) full months remaining from the date of Termination to Executive's Normal Retirement Date, the payment Executive shall be entitled to receive pursuant to this Section 3(a) will equal such amount multiplied by a fraction, the numerator of which is the number of months (including any fraction of a month) so remaining to Executive's Normal Retirement Date and the denominator of which is 36. For purposes of this Agreement, "Applicable Annual Earnings" shall mean the sum of the Executive's current annual base salary and Targeted Bonus (in each case determined using the highest rate in effect up to and including the effective date of Termination, whether or not paid) for personal services on behalf of the Company, LCR or their subsidiaries for the calendar year in which the Termination occurs (except that if Executive is subject to a Constructive Termination for Good Reason because his salary or Targeted Bonus is reduced, then the current annual base salary and Targeted Bonus used to determine Applicable Annual Earnings shall be the annual base salary in effect or Targeted Bonus, as applicable, immediately prior to such Constructive Termination for Good Reason). Applicable Annual Earnings shall include Executive's current annual base salary and Targeted Bonus whether or not paid on a deferred basis, including, without limitation, amounts contributed by or on behalf of Executive under a Company-sponsored plan, such as (i) a plan described in Section 125 or 401(k) of the Internal Revenue Code of 1986, as amended, or (ii) the Company's Executive Deferral Plan or an "excess benefit plan" as defined in the Employee Retirement Income Security Act of 1974, as amended. Notwithstanding the preceding provisions of this paragraph, Applicable Annual Earnings does not include any income attributable to stock options, stock appreciation rights, performance awards, dividend credits, and restricted stock granted under, and dividends on shares acquired pursuant to, any stock option plan, restricted stock plan or performance unit plan. (b) Prorated Targeted Bonus. Company shall pay to Executive, not ----------------------- later than thirty (30) days following Termination, a cash lump-sum payment equal to his Targeted Bonus for the year of Termination (except that, if Executive is subject to Constructive Termination for Good Reason because his Targeted Bonus was reduced, then Targeted Bonus for this purpose shall be the Targeted Bonus prior to such Constructive Termination for Good Reason) multiplied by a fraction, the numerator of which is the number of elapsed days in the year of Termination up to and including the date of Termination and the denominator of which is 365. (c) Crediting of Additional Pension Benefit. In accordance with the --------------------------------------- special supplemental retirement benefit authorized by the Compensation Committee on September 13, 1991, Company shall credit Executive with an additional five (5) years of (i) age (not to exceed age 65) and (ii) service with the Company, under the 8 Company's Supplementary Executive Retirement Plan (or its successor) for purposes of determining his accrued benefits thereunder. (d) Stock Options. Notwithstanding any provision of the Stock Option ------------- Plan or Executive's stock option agreement, if any, to the contrary, all stock options owned by Executive shall be freely exercisable following Termination for the remainder of their existing terms without regard to any earlier date that may be specified therein including, without limitation, an earlier expiration date specified with respect to Executive's termination of employment. (e) Executive Deferral Plan. The provisions of this Section 3(e) ----------------------- shall apply notwithstanding any provisions of the Company's Executive Deferral Plan (the "Deferral Plan") or the initial paragraph of Section 3 hereof to the contrary. In the event that (i) there is a "Termination or Adverse Amendment" (as defined below) of the Deferral Plan within three years following a Change in Control and (ii) a Termination within the meaning of this Agreement has not occurred with respect to Executive, then, notwithstanding any other provision of this Agreement, the full amount of contributions and earnings accrued or credited to Executive's account balance under the Deferral Plan (as of the date immediately preceding the Termination or Adverse Amendment) shall be immediately distributed to Executive in a cash lump-sum payment and the Company shall pay Executive in a cash lump-sum payment an additional amount equal to the "Income Tax Gross-up" (as defined below). In the event that Executive as of his Termination date is not eligible to receive an "Immediate Retirement Benefit" (as defined below), then the full amount of contributions and earnings accrued or credited to Executive's account balance under the Deferral Plan (as of the date immediately preceding his Termination) shall be immediately distributed to Executive in a cash lump-sum payment and the Company shall pay Executive in a cash lump-sum payment an additional amount equal to the Income Tax Gross- up, without regard to whether or not there has been a Termination or Adverse Amendment. In the event that (i) there is a Termination or Adverse Amendment of the Deferral Plan following a Change in Control and (ii) Executive as of his Termination date is either eligible to receive an Immediate Retirement Benefit or elects (or has elected) to commence an Immediate Retirement Benefit, then the full amount of contributions and earnings accrued or credited to Executive's account balance under the Deferral Plan (as of the date immediately preceding the Termination or Adverse Amendment) shall be immediately distributed to Executive in a cash lump-sum payment and the Company shall pay Executive in a cash lump-sum payment an additional amount equal to the Income Tax Gross-up. For purposes of this Agreement, "Termination or Adverse Amendment" means that the Deferral Plan is either (i) terminated for whatever reason by the Company or (ii) 9 amended by the Company in any way that adversely affects Executive's rights, privileges or benefits thereunder including, without limitation, an amendment that results in a change to the methodology used to determine the interest rate for earnings credited to Executive's account balance, without the Executive's written consent to such amendment, other than an amendment which is required by law. For purposes of this Agreement, "Immediate Retirement Benefit" means Executive is eligible (after giving effect to Section 3(c)) to receive an immediate allowance or distribution (whether reduced or unreduced) from a retirement plan maintained by the Company which is intended to be a qualified plan under Section 401(a) of the Internal Revenue Code of 1986, as amended. For purposes of this Agreement, "Income Tax Gross-up" shall mean the amount necessary so that after payment of any federal, state and local income or employment tax by Executive on the distribution of amounts under the Deferral Plan and the Income Tax Gross-up, the net amount retained by Executive shall be the full amount accrued and credited to his account balance under the Deferral Plan at the time immediately preceding distribution. For purposes of determining the amount of the Income Tax Gross-up, Executive shall be deemed (i) to pay federal income taxes at the highest stated rate of federal income taxation (including surtaxes, if any) for the calendar year in which the Income Tax Gross-up is to be made (for 1994, the highest stated rate is 39.6%); and (ii) to pay any applicable state and local income taxes at the highest stated rate of taxation (including surtaxes, if any) for the calendar year in which the Income Tax Gross-up is to be made. Any Income Tax Gross-up required hereunder shall be paid by Company to Executive at the same time that any payment made under the Deferral Plan which is subject to income tax is paid or deemed received by Executive. (f) Insurance and Other Benefits. To the extent that Executive is ---------------------------- eligible thereunder, then for a period of thirty-six (36) months following Termination, Executive (and his dependents, as applicable) shall continue to be covered at Company's expense by the life insurance, medical and dental plans, and accident and disability plans of the Company and its subsidiaries, or any successor to a plan or program in effect at Termination for employees in the same class or category as Executive (hereafter individually and collectively referred to as "Company Welfare Plan"), subject to the terms of the Company Welfare Plan and to Executive's making any required contributions thereto which contributions shall not exceed those charged to employees in the same class or category in which Executive was employed by the Company. In the event that Executive is ineligible to continue to be so covered under the terms of any Company Welfare Plan, or in the event that Executive is eligible but the benefits applicable to Executive (and his dependents, as applicable) are not substantially equivalent to such benefits immediately prior to Termination, then, for a period of thirty-six (36) months following Termination, the Company shall at its expense provide to Executive (and his dependents, as applicable) through other sources such benefits as may be necessary to make the benefits applicable to Executive (and his dependents, as 10 applicable) substantially equivalent to those in effect immediately prior to Termination. Continuation coverage provided hereunder pursuant to any group health plan maintained by the Company or a subsidiary shall be in lieu of, and not in addition to, any continuation coverage required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"). Any retiree coverage provided to Executive by Company shall be on the same terms and conditions, including bridging of coverage, as that provided to executives in the same class or category in which Executive was employed by Company. (g) Financial Counseling. For a period of one year following -------------------- Termination, Executive shall continue to be covered at Company's expense under the financial counseling program of Company, or any successor program, in effect at Termination for employees in the same class or category as Executive, subject to the terms of such program. In the event the benefits available to Executive under such financial counseling program are not substantially equivalent to the benefits available to Executive at Termination, Company at its expense shall provide to Executive through other sources such benefits as may be necessary to make the benefits available to Executive substantially equivalent to those in effect at Termination. (h) Outplacement. Company shall provide to Executive, at Company's ------------ expense but not to exceed fifteen percent (15%) of Executive's Applicable Annual Earnings, outplacement assistance for Executive from a professional outplacement assistance firm which is reasonably suitable to Executive. (i) No Duty to Mitigate. Executive's entitlement to benefits ------------------- hereunder shall not be governed by any duty to mitigate Executive's damages by seeking further employment nor offset by any compensation which Executive may receive from future employment. SECTION 4. OTHER BENEFIT PLANS. The specific arrangements referred to in ------------------- this Agreement are not intended (i) to exclude or limit Executive's participation in other benefit plans or programs in which Executive currently participates or may participate including, without limitation, retiree benefits, or benefits which are available to executive personnel generally in the same class or category as Executive (excluding only the Company's Special Termination Plan and the special supplemental retirement benefit authorized by the Compensation Committee on September 13, 1991) or (ii) to preclude or limit other compensation or benefits as may be authorized by the Compensation Committee or the Board from time to time. To the extent not otherwise paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's dependents any other amounts or benefits required to be paid or provided or which the Executive or the Executive's dependents are eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its Affiliates as in effect and applicable generally to executive personnel in the same class or category of Executive. 11 SECTION 5. PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay ---------------------------- or provide or cause to be paid or provided to Executive the amounts and benefits, and to make the arrangements, provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstances (including, without limitation, any setoff, claim, counterclaim, recoupment, defense or other right, which the Company may have against Executive or anyone else). All amounts payable by or on behalf of the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by or on behalf of the Company shall be final and the Company and its subsidiaries shall not, for any reason whatsoever, seek to recover all or any part of such payment from Executive or from whomever shall be entitled thereto. In no event shall an asserted violation of any provision of this Agreement constitute a basis for deferring or withholding any amount payable to, or on behalf of, Executive under this Agreement. SECTION 6. COMBINED GROSS-UP PAYMENT; TAX DEFENSE. -------------------------------------- (a) Combined Gross-up Payment. If the Executive becomes entitled to ------------------------- one or more payments (with a "payment" including, without limitation, an increase in pension benefits and the vesting of an option or other non-cash benefit or property) pursuant to the terms of any plan, arrangement or agreement with the Company (the "Total Payments"), which are or become subject to the tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that may hereafter be imposed) (the "Excise Tax"), the Company shall pay to Executive an additional cash amount (the "Combined Gross-up Payment") such that the net amount retained by Executive after reduction for (i) any Excise Tax on the Total Payments and (ii) any federal, state and local income or employment tax and Excise Tax payable with respect to the Combined Gross-up Payment, shall equal the Total Payments. For purposes of determining the amount of the Combined Gross-up Payment, Executive shall be deemed (i) to pay federal income taxes at the highest stated rate of federal income taxation (including surtaxes, if any) for the calendar year in which the Combined Gross-up Payment is to be made (for 1994, the highest stated rate is 39.6%); and (ii) to pay any applicable state and local income taxes at the highest stated rate of taxation (including surtaxes, if any) for the calendar year in which the Combined Gross-up Payment is to be made. Any Combined Gross-up Payment required hereunder shall be made to Executive at the same time any Total Payment subject to the Excise Tax is paid or deemed received by Executive. (b) Tax Defense. If in connection with the examination of Executive's ----------- tax return the Internal Revenue Service asserts that any amount payable or benefit provided hereunder is a "parachute payment" as defined in the Code and such amount or benefit was not treated as a parachute payment in determining the Combined Gross-up Payment (as defined in Section 6(a) above), Company at its cost shall assume the defense of any controversy involving such issue and shall indemnify and hold Executive harmless for all liabilities, costs, taxes, interest and penalties attributable to such issue and shall to the extent necessary (without duplication) increase the Combined Gross-up Payment to give 12 effect to any additional amount or benefit determined to be a parachute payment. Executive shall cooperate with Company so that Company will be able to challenge any adverse determination by the Internal Revenue Service through administrative proceedings and, if determined by Company, through litigation. SECTION 7. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The Company -------------------------------------------- shall have no obligation to provide or cause to be provided to Executive the rights and benefits described in this Agreement if the Company shall terminate Executive's employment for "Cause", which for purposes of this Agreement shall be defined and limited to: (i) the continued and willful refusal by Executive to substantially perform his duties (other than a willful refusal to perform a duty which constitutes Constructive Termination for Good Reason or a refusal resulting from Executive's incapacity due to physical or mental illness), after demand for substantial performance is delivered by the Board, which demand specifically identifies the manner in which the Board has determined that Executive has not substantially performed his duties, and Executive's performance is not cured to the Board's reasonable satisfaction within thirty (30) days from such demand; (ii) the engagement by Executive in willful misconduct or dishonesty that is materially injurious to the Company, monetarily or otherwise; or (iii) Executive's final conviction of a felony. Notwithstanding the foregoing, the Company shall not be deemed to have terminated Executive for Cause without (1) reasonable written notice to Executive setting forth the reasons for the Company's intention to terminate Executive for Cause and (2) an opportunity for Executive, together with his counsel, to be heard before the Board. Notwithstanding any contrary provision of this Agreement, it is specifically agreed that Cause shall not include any act or omission by Executive in the good faith exercise of Executive's business judgment as an officer of the Company or as a member of the Board. If Executive is terminated for Cause, Company, in accordance with and subject to the provisions of the immediately preceding paragraph, shall not be required to provide Executive with at least sixty (60) days advance written notice of such termination for Cause. If Executive is terminated for a reason other than for Cause, Company shall be required to provide sixty (60) days advance written notice to Executive unless Executive agrees to a shorter notice period. Regardless of the reason for termination, Executive shall receive, in addition to any other payments provided to Executive hereunder or otherwise, payment for his accrued base salary and a vacation allowance based on years of service through his termination date. SECTION 8. CONFIDENTIALITY; COOPERATION; CONSULTANCY. ----------------------------------------- (a) Cooperation. Executive agrees that, at all times following ----------- Termination, Executive will furnish such information and render such assistance and cooperation as may reasonably be requested in connection with any litigation or legal proceedings concerning the Company or any of its subsidiaries (other than any legal proceedings arising out of or concerning Executive's employment or its termination). In connection with such cooperation, the Company will pay or reimburse Executive for reasonable expenses. 13 (b) Consultation. Executive agrees that, for a period of six (6) ------------ months following the date of Termination, Executive will use reasonable efforts to be available to the Company and its subsidiaries for consultation with senior officers of the Company or one of its subsidiaries, as the case may be; provided, however, Executive shall not be required to perform consulting services (i) for more than five (5) days in any month or (ii) for more than thirty (30) hours in any month. It is expressly agreed that Executive's consulting services will be required at such time and such places as will result in the least inconvenience to Executive, taking into consideration Executive's other business and personal commitments during such period which may obligate Executive to honor such other commitments prior to the rendering of consulting services by Executive. It is further agreed that Executive's consulting services shall be rendered by personal consultation at Executive's principal residence or office, wherever maintained, or by correspondence through mail, telephone or facsimile machine or other similar modes of communication at times, including weekends and evenings, most convenient to Executive. The Company and Executive agree that if, during such period, Executive should enter into the full-time employ of another company or firm, Executive shall not be required to consult at times that will conflict with Executive's responsibilities with respect to such employment. No additional consideration shall be provided to Executive for making such consulting services available to Company regardless of whether Company elects to utilize such services; provided, however, Company shall reimburse -------- ------- Executive for all reasonable out-of-pocket expenses incurred by Employee in the course of his performance of consulting services hereunder, including, without limitation, supplies, mileage and travel expenses. (c) Release of Liability. Executive hereby represents and covenants -------------------- that prior to the time he is eligible to receive any payments provided for in Section 3 of this Agreement, he will execute and deliver to the Company, on a form reasonably satisfactory to the Company and the Executive, a separate release and waiver, which, without limiting the generality of the foregoing, shall include a release and discharge of the Company and its subsidiaries and affiliates, and its and their directors, officers, employees, owners, agents, successors and assigns from any and all suits, causes of action, demands, claims, charges, complaints, liabilities, costs, losses, damages, injuries, bonds, judgments, attorneys' fees and expenses, in any form whatsoever, in law or in equity, whether known or unknown, whether suspected or unsuspected, arising out of Executive's employment with Company through his Termination, including, without limitation, claims arising under any federal, state or local law for breach of an implied covenant of good faith and fair dealing, breach of contract, defamation, slander, negligent misrepresentation, fraud, intentional or negligent interference with business relations, and employment discrimination, including, but not limited to, claims under the Age Discrimination in Employment Act, the Americans with Disabilities Act and the Texas Commission on Human Rights Act. SECTION 9. TERM OF AGREEMENT. This Agreement shall terminate at midnight ----------------- on August 31, 1995 (the "Expiration Date"). Notwithstanding the foregoing, in no event shall this 14 Agreement terminate, within three (3) years after a Change in Control without the written consent of Executive. It is the Company's intention to provide to Executive the benefits set forth herein if the Company is subject to any Change in Control and the other applicable conditions are satisfied. However, the Compensation Committee has determined that the term of this Agreement shall not be automatically renewed, but shall be renewed only with the express approval of the Compensation Committee. For so long as the Agreement is in effect, the Company agrees that at least ninety (90) days prior to the Expiration Date it shall request the Compensation Committee to decide whether the term of the Agreement should be extended. The Company shall notify Executive in writing of the Compensation Committee's determination of whether the Company will extend the term of the Agreement beyond the Expiration Date. If no notice is received by Executive indicating that the term of the Agreement is extended, then subject to the second sentence of this Section 9, the Agreement will terminate on the Expiration Date. SECTION 10. ARBITRATION. ----------- (a) Arbitrable Matters. Any dispute under this Agreement arising ------------------ between the parties shall be settled by binding arbitration. In the event of any dispute between Executive and Company hereunder, either party shall be entitled to submit the dispute to arbitration. The arbitration proceeding shall be held in Houston, Texas (unless otherwise mutually agreed by the parties), and shall be conducted in accordance with the Center for Public Resources ("CPR") Rules for Non-Administered Arbitration of Business Disputes. The arbitration shall be conducted by a sole arbitrator appointed in accordance with rules established by CPR (the "Arbitrator"). Any arbitration between Executive and Company pursuant to this Agreement shall be governed by the United States Arbitration Act, 9 U.S.C. (S)(S) 1-16 (or its successor). If the United States Arbitration Act is determined by the Arbitrator not to apply to this type of employer/employee agreement based on precedential legal authority, the parties agree to arbitrate any dispute under the Texas General Arbitration Act, V.A.T.S. Art. 238-6 et. seq. (or its successor). (b) Submission to Arbitration. The party submitting any matter ------------------------- arising out of this Agreement to arbitration (the "demanding party") shall do so by delivering written notice thereof (the "arbitration notice") to the other party (the "noticed party"). In addition to indicating the demanding party's intention to commence arbitration proceedings, the arbitration notice shall state the nature, with reasonable detail, of the dispute and the demanding party's claim or claims, the question or questions to be submitted for decision or award by arbitration and the relief or remedy sought. A copy of the arbitration notice shall be concurrently provided to CPR, along with a copy of this Agreement and a request to appoint an Arbitrator. Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement. 15 (c) Arbitration Procedures. The Arbitrator shall apply the ---------------------- substantive law (and the law of remedies, if applicable) of the State of Texas as applicable to the claim asserted. The Federal Rules of Evidence shall apply. The Arbitrator shall have no authority to change this Agreement unless otherwise agreed by both parties. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement is void or voidable. Any party may be represented by an attorney or other representative selected by the party. The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold pre-hearing conferences by telephone or in person as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. At any time after the date of receipt of the arbitration notice, each party can make discovery requests of the other in any form permitted under the Federal Rules of Civil Procedure. The recipient of a discovery request shall have 20 days after the receipt of such request to object to any or all portions of such request, and shall respond to any portions of such request not so objected to within 30 days of the receipt of such request. All objections shall be in writing and shall indicate the reasons for such objections. The objecting party shall insure that all objections and responses are received by other parties within the above time periods. Any party seeking to compel discovery following receipt of an objection shall file with the other party and the Arbitrator a motion to compel, including a copy of the initial request and the objection. The Arbitrator shall allow 10 days for responses to the motion to compel before ruling. Claims of privilege and other objections shall be determined as they would in federal court in a case applying Texas law. At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any expert witnesses, and copies of all exhibits intended to be used at the arbitration. Each party shall have the right to subpoena witnesses and documents for the arbitration. Either party may arrange for a court reporter to provide a stenographic record of proceedings. The cost of the court reporter will be paid by the Company. (d) Compliance with Decisions. To the extent permissible under ------------------------- applicable law, the parties agree that the award of the Arbitrator shall be final and binding and shall be subject only to the judicial review permitted by the United States Arbitration Act or other applicable arbitration law pursuant to Section 10(a) hereof. Judgment on the arbitration award may be entered and enforced in any court having jurisdiction over the parties or their assets. It is the intent of the parties that the arbitration provisions hereof be enforced to the fullest extent permitted by applicable law. 16 (e) Costs and Expenses. The Company shall promptly pay or reimburse ------------------ Executive for all costs and expenses, including, without limitation, attorneys' fees and witnesses' fees, incurred by Executive as result of any arbitration (regardless of the outcome thereof) arising out of this Agreement. All expenses of such arbitration, including the reasonable fees and expenses of legal counsel for Executive and the costs and expenses incurred by the Arbitrator, shall be borne by the Company. SECTION 11. NOTICES. All notices, requests, demands and other ------- communications required or permitted to be given hereunder (hereinafter referred to as "notices") shall be in writing and shall be deemed to have been duly given if delivered by-hand, given by prepaid telecopy, telex or telegram, or mailed via certified or registered U.S. mail, to the party to receive such notice at such party's address set forth below; provided that either party may change its address for notice by giving to the other party written notice of such change. If to Company: Lyondell Petrochemical Company 1221 McKinney, Suite 1600 Houston, TX 77002 Attn: Chairman of the Board of Directors If to Executive: -------------------------------------- -------------------------------------- -------------------------------------- Any notice given pursuant to this Agreement shall be deemed received (i) if delivered by-hand, when delivered; (ii) if sent by telecopy, telex or telegram, 24 hours after sending; and (iii) if mailed, when delivered. SECTION 12. MISCELLANEOUS. ------------- (a) Assignment. No right, benefit or interest hereunder shall be ---------- subject to assignment, anticipation, alienation, sale, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution; attachment, levy or similar process; provided, -------- however, that Executive may assign any right, benefit or interest hereunder ------- if such assignment is permitted under the terms of any plan or policy of insurance, or annuity contract governing such right, benefit or interest. (b) Construction of Agreement. Nothing in this Agreement shall be ------------------------- construed to amend any provision of any plan or policy of the Company except as otherwise expressly noted herein. This Agreement is not, and nothing herein shall be deemed to 17 create, a commitment of continued employment of Executive by the Company or any of its subsidiaries. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. Whenever the context of this Agreement so requires, the masculine gender includes the feminine gender, and words used in the singular or plural will include the other. The words "herein", "hereunder," and other similar compounds of the word "here" refer to the entire Agreement and not to any particular, section or provision. (c) Amendment. This Agreement may not be amended, modified or --------- canceled except by written agreement of the parties or their respective successors and legal representatives. (d) Waiver. No provision of this Agreement may be waived except by a ------ writing signed by the party to be bound thereby. (e) Severability. In the event that any provision or portion of this ------------ Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. (f) Successors. This Agreement is personal to Executive and without ---------- the prior written consent of the Company shall not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. The Company will require any successor (whether direct or indirect) by purchase, merger, consolidation or otherwise of all or substantially all of the business and/or assets of the Company or of any division or subsidiary thereof, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform this Agreement if no such succession had taken place. Failure of the Company to obtain such assumption and agreement, prior to the effective date for any such succession, shall constitute a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as he would be entitled hereunder with respect to Constructive Termination for Good Reason. This Agreement shall be binding upon and inure to the benefit of the Company and any successor organization or organizations which shall succeed to substantially all of the business and/or assets of the Company (whether direct or indirect by means of merger, consolidation, acquisition of substantially all the assets of the Company, or otherwise, including by operation of law). (g) Taxes. Any payment or delivery required under this Agreement ----- shall be subject to all requirements of the law with regard to withholding of taxes, filing, making of reports and the like. 18 (h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ------------- ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO ITS CONFLICTS OF LAW PRINCIPLES. (i) Entire Agreement. Except as otherwise provided in Section 4 or ---------------- Section 12(b) hereof, this Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the matters covered hereby. [signature page follows] 18 IN WITNESS WHEREOF, the parties have executed this Agreement as of the _____ day of ____________________, 1994. LYONDELL PETROCHEMICAL COMPANY By: ____________________________________________ [Name and Title] EXECUTIVE _________________________________________________ [Signature of Executive] 20 EX-10.15 6 FORM OF RESTR STOCK AGMT EXHIBIT 10.15 October 21, 1994 [Outside Directors] Board of Directors Lyondell Petrochemical Company Dear ______________: The Executive Committee has granted to you _____________ Restricted Shares effective as of November 1, 1994. The grant is intended to acknowledge your valuable contributions and the expenditure of significant amounts of your time in connection with the evaluation of the 1994 Atlantic Richfield Company debt offering, the subsequent transition of the Board and establishment of various corporate governance principles, as well as to create an additional incentive for you to continue making your valuable contributions of time and service to the Company and to increase the alignment of personal economic interest between you and stockholders generally. "Restricted Shares" means shares of the Company's common stock which may not be assigned or transferred for a stated period of time (the "Restriction Period") and which are forfeited if the holder resigns or otherwise terminates his or her directorship of the Company during the Restriction Period, upon the terms set forth below. The Restriction Period applicable to these Restricted Shares is one (1) year from November 1, 1994. The following are additional terms, conditions and provisions applicable to this award: 1. Your rights in regard to these Restricted Shares are not vested, and you understand and agree, by your signature to this Agreement, that your entire interest in these Restricted Shares may be forfeited if you fail to remain as a Director of the [Name of Outside Director] October 21, 1994 Page 2 Company for the full term of the Restriction Period or in the event of any failure of any of the terms or conditions attached to this award and set out in this Agreement. 2. Specifically, the Restricted Shares shall not vest in you until the expiration of the Restriction Period and shall be wholly forfeited in the event of your resignation or discharge prior to such time; provided, however, in the event of any termination of your directorship on account of death, disability which in the determination of the Committee prevents you from carrying out your duties or termination for reasons other than cause or voluntary resignation, and provided you are not otherwise in default hereunder, the Restricted Shares shall not be forfeited but shall immediately vest in you or your estate, as the case may be, free of any restrictions (except as provided in Section 6). 3. During the Restriction Period, the Restricted Shares will be evidenced by a certificate issued in your name but such certificate will not be delivered to you and shall be held by the Company until the expiration of the Restriction Period or until earlier forfeiture. During the Restriction Period (and prior to any forfeiture), your rights in respect of the Restricted Shares shall be as follows: (i) You will be entitled to receive cash dividends when paid on the Restricted Shares and you will be entitled to vote the Restricted Shares; (ii) During the Restriction Period you shall not be entitled to delivery of any stock certificate evidencing the Restricted Shares; (iii) The certificates for the Restricted Shares may have imprinted thereon such restrictive legends, and such stop-transfer orders, dividend payment orders and such other orders as may be given in respect thereof by the Executive Committee [Name of Outside Director] October 21, 1994 Page 3 as the Executive Committee may determine in its sole discretion; (iv) During the Restriction Period you may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of any of the Restricted Shares; and (v) Stock dividends paid on the Restricted Shares shall not be paid to you, but shall be held by the Company on the same terms as the Restricted Shares on which they were paid; provided, however, the Executive Committee in its discretion may direct the payment of any such stock dividends directly to you, free of the restriction imposed by this Agreement. 4. At the end of the Restriction Period, the Restricted Shares which have not been forfeited, together with any cash held on account of dividends on such Restricted Shares, shall be delivered to you, except that the Company may withhold sufficient Restricted Shares and cash to enable it to satisfy its federal, state and local tax withholding obligations, if any. 5. Shares of common stock delivered pursuant to the terms hereof will be Treasury shares of the Company. 6. Shares of common stock delivered hereunder after the release of any conditions thereto may nonetheless be restricted stock under the Securities Act of 1933, as amended (the "1933 Act"), and the certificates for such shares may have a legend imprinted thereon restricting the sale, hypothecation or further transfer of said shares except pursuant to an offer registered under the 1933 Act or pursuant to an exemption from registration which, in the opinion of the Company, is applicable to such transaction. 7. In the event of a Change in Control (as defined in the Company's Key Management Severance Plan (effective as of May 27, 1994)), the Restriction [Name of Outside Director] October 21, 1994 Page 4 Period will terminate forthwith and the Restricted Shares shall not be subject to forfeiture. 8. This Agreement shall be executed and delivered by you in the City of Houston, County of Harris, Texas and shall be governed by Texas Law. Counsel for the Company has advised that in the opinion of such counsel: 1. Any cash dividends which are paid to you on the Restricted Shares will constitute taxable income to you when received. Generally, at such time as the restrictions on the Restricted Shares are released or satisfied and your right to the Restricted Shares becomes non-forfeitable you will have taxable income in an amount equal to the then fair market value of the Restricted Shares. You may accelerate the time at which you have taxable income by making a special election; however, this election must be filed within 30 days of the grant date. YOU ARE URGED TO CONTACT YOUR OWN PERSONAL TAX ADVISOR IMMEDIATELY CONCERNING THE TAX CONSEQUENCES ASSOCIATED WITH HOLDING THE RESTRICTED SHARES. 2. You are subject to the requirement of filing reports under section 16(a) of the Securities Exchange Act of 1934 upon changes in your beneficial ownership of shares of the Company's common stock, and therefore you must report the award of Restricted Shares on Form 4, Statement of Changes in Beneficial Ownership, for the month in which the award was received. This Agreement, dated as of October 21, 1994, has been executed and delivered by the parties hereto in Houston, Texas. Very truly yours, LYONDELL PETROCHEMICAL COMPANY By __________________________________ Bob G. Gower Chairman, Executive Committee [Name of Outside Director] October 21, 1994 Page 5 Acknowledgment -------------- The undersigned, ____________________, grantee of the award of Restricted Shares pursuant to this Agreement, hereby accepts said award on the terms, conditions and provisions contained in this Agreement. The undersigned acknowledges receipt of a copy of the Agreement and understands that his rights in respect of the Restricted Shares may be forfeited as provided in this Agreement. Dated ____________________, 1994. ------------------------------ [Awardee's Name] EX-22 7 SUBSDIARIES EXHIBIT 22 SUBSIDIARIES Lyondell Refining Company Lyondell Mont Belvieu Corporation Lyondell Petrochemical de Mexico, Inc. EX-24 8 CONSENT C & L EXHIBIT 24 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following registration statements of Lyondell Petrochemical Company, Post-Effective Amendment No. 3 to Registration Statement on Form S-8 (No. 33-26866), Post Effective Amendment No. 3 to Registration Statement on Form S-8 (No. 33-26867), Registration Statement on Form S-8 (No. 33-31564), Registration Statement on Form S-8 (No. 33-32683), of our report dated February 10, 1995 on our audits of the consolidated financial statements of Lyondell Petrochemical Company as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Houston, Texas March 29, 1995 EX-25 9 POWER OF ATTY EXHIBIT 25 LYONDELL PETROCHEMICAL COMPANY POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Bob G. Gower, Joseph M. Putz and Russell S. Young, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, in connection with any outstanding securities of Lyondell Petrochemical Company (the "Company"), or any public offering or other issuance of any securities of the Company authorized by the Board of Directors of the Company, or by the Executive Committee thereof pursuant to due authorization by such Board, (1) to execute and file, or cause to be filed, with the United States Securities and Exchange Commission (the "Commission"), (A) Registration Statements and any and all amendments (including post-effective amendments) thereto and to file, or cause to be filed, all exhibits thereto and other documents in connection therewith as required by the Commission in connection with such registration under the Securities Act of 1933, 1 of 4 as amended, and (B) any report or other document required to be filed by the Company with the Commission pursuant to the Securities Exchange Act of 1934, as amended, (2) to execute and file, or cause to be filed, any application for registration or exemption therefrom, any report or any other document required to be filed by the Company under the Blue Sky or securities law of any of the United States and to furnish any other information required in connection therewith, (3) to execute and file, or cause to be filed, any application for registration or exemption therefrom under the securities laws of any jurisdiction outside the United States, including any reports or other documents required to be filed subsequent to the issuance of such securities, and (4) to execute and file, or cause to be filed, any application for listing such securities on the New York Stock Exchange, or any other securities exchange in any other jurisdiction where any such securities are proposed to be sold, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act required to be done as he or she might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, and each of them, may lawfully do or cause to be done by virtue of this power of attorney. Each person whose signature appears below may at any time revoke this power of attorney as to himself or herself only by an instrument in writing specifying that this power of attorney is 2 of 4 revoked as to him or her as of the date of execution of such instrument or at a subsequent specified date. This power of attorney shall be revoked automatically with respect to any person whose signature appears below effective on the date he or she ceases to be a member of the Board of Directors or an officer of the Company. Any revocation hereof shall not void or otherwise affect any acts performed by any attorney-in-fact and agent named herein pursuant to this power of attorney prior to the effective date of such revocation. Dated: March 24, 1995 Signature Title --------- ----- /s/ Bob G. Gower ______________________________ Chairman, Chief Executive Bob G. Gower Officer and Director (Principal Executive Officer) /s/ Russell S. Young ______________________________ Senior Vice President, Russell S. Young Chief Financial Officer and (Principal Financial Officer) Treasurer /s/ Joseph M. Putz ______________________________ Vice President and Joseph M. Putz Controller (Principal Accounting Officer) 3 of 4 Signature Title --------- ----- /s/ Dr. William T. Butler ______________________________ Director Dr. William T. Butler /s/ D. Travis Engen ______________________________ Director D. Travis Engen* /s/ Stephen F. Hinchliffe, Jr. ______________________________ Director Stephen F. Hinchliffe, Jr. /s/ Dudley C. Mecum II ______________________________ Director Dudley C. Mecum II /s/ Dan F. Smith ______________________________ Director Dan F. Smith /s/ Paul R. Staley ______________________________ Director Paul R. Staley * Effective as of April 1, 1995 4 of 4 EX-27 10 FDS
5 1,000,000 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 94 0 360 3 229 697 2,810 1,930 1,663 433 707 80 0 0 (17) 1,663 3,857 3,857 3,296 3,296 137 0 74 349 126 223 0 0 0 223 2.78 2.78