-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AeXM9QKSZa5k8o6uxYQFuv0m4hZuhTYmN5bJDOh0a3fcvb1nbNER1GBVdtnE42KJ 073f+jRHSCx8vRGWxjPb+w== 0000899243-98-000530.txt : 19980401 0000899243-98-000530.hdr.sgml : 19980401 ACCESSION NUMBER: 0000899243-98-000530 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 25 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYONDELL PETROCHEMICAL CO CENTRAL INDEX KEY: 0000842635 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 954160558 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10145 FILM NUMBER: 98580478 BUSINESS ADDRESS: STREET 1: 1221 MCKINNEY ST STREET 2: STE 1600 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7136527200 MAIL ADDRESS: STREET 1: 1221 MCKINNEY ST STREET 2: SUITE 1600 CITY: HOUSTON STATE: TX ZIP: 77010 10-K405 1 FORM 10-K ================================================================================ 1997 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 For the fiscal year ended December 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 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. Employee Identification No.) incorporation or organization) 1221 MCKINNEY STREET, SUITE 1600, HOUSTON, TEXAS 77010 (Address of principal executive offices) (Zip Code) 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 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 the 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. [x] ------ There were 79,036,488 shares of the registrant's common stock outstanding on December 31, 1997. The aggregate market value of the voting stock held by non-affiliates of the registrant on February 27, 1998 based on the closing price on the New York Stock Exchange composite tape on that date, was $2,075,103,605. 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, 1997 (incorporated by reference under Part III). ================================================================================ TABLE OF CONTENTS Item Page - ---- ---- PART I 1. and 2. Business and Properties...................................... 1 THE COMPANY'S BUSINESS....................................... 1 --Development of Business.................................... 1 LYONDELL BUSINESS STRATEGY................................... 2 SUMMARY DESCRIPTION OF BUSINESS SEGMENTS..................... 3 EQUISTAR CHEMICALS, LP....................................... 4 EQUISTAR BUSINESS STRATEGY.................................. 4 MANAGEMENT OF EQUISTAR...................................... 4 EQUISTAR PETROCHEMICALS SEGMENT............................. 5 -- Overview................................................. 5 -- Feedstocks and Ethylene Purchases........................ 7 -- Marketing, Sales and Distribution........................ 8 -- Competition and Industry Conditions...................... 8 -- Capital Program.......................................... 9 EQUISTAR POLYMERS SEGMENT................................... 9 -- Overview................................................. 9 -- Feedstocks.............................................. 11 -- Marketing, Sales and Distribution....................... 11 -- Competition and Industry Conditions..................... 12 -- Capital Program......................................... 12 AGREEMENTS BETWEEN LYONDELL AND EQUISTAR................... 12 PROPERTIES................................................. 14 RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS............ 15 EMPLOYEE RELATIONS......................................... 15 LYONDELL-CITGO REFINING COMPANY LTD......................... 16 Overview................................................... 16 LCR Business Strategy...................................... 16 Upgrade Project............................................ 16 1998 Refinancing........................................... 17 Management of LCR.......................................... 17 Feedstocks................................................. 17 Marketing and Sales........................................ 18 Agreements between Lyondell, CITGO and LCR................. 18 Agreements between Equistar and LCR........................ 18 Competition and Industry Conditions........................ 18 Capital Program............................................ 19 Properties................................................. 19 Employee Relations......................................... 19 LYONDELL METHANOL COMPANY, L.P.............................. 20 Overview................................................... 20 Lyondell Methanol Business Strategy........................ 20 Management of Lyondell Methanol............................ 20 Feedstocks................................................. 20 Marketing, Sales and Distribution.......................... 20 Agreements between Equistar and Lyondell Methanol.......... 20 Competition and Industry Conditions........................ 21 Capital Program............................................ 21 Properties................................................. 21 Employee Relations......................................... 21 i TABLE OF CONTENTS (CONTINUED) Item Page - ---- ---- LYONDELL PROPERTY AND EMPLOYEE RELATIONS................... 21 ENVIRONMENTAL MATTERS...................................... 21 3. Legal Proceedings.......................................... 22 EXECUTIVE OFFICERS OF THE REGISTRANT....................... 24 4. Submission of Matters to a Vote of Security Holders........ 24 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................... 25 6. Selected Financial Data.................................... 26 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 26 8. Financial Statements and Supplementary Data................ 40 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................. 99 PART III 10. Directors and Executive Officers of the Registrant......... 99 11. Executive Compensation..................................... 99 12. Security Ownership of Certain Beneficial Owners and Management............................................... 99 13. Certain Relationships and Related Transactions............. 99 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................. 100 ii PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES THE COMPANY'S BUSINESS Lyondell Petrochemical Company ("Lyondell" or the "Company") operates through its interests in three joint ventures in the petrochemicals, polymers, refining and methanol businesses. Through its 57 percent interest in Equistar Chemicals, LP, a Delaware limited partnership ("Equistar"), Lyondell manufactures a wide variety of petrochemicals and polymers. Equistar's petrochemicals business manufactures olefins, methyl tertiary butyl ether ("MTBE"), aromatics and ethyl alcohol. Equistar's petrochemicals products are used primarily in the manufacture of other chemicals and products, including the production of polymers by Equistar and its customers. Equistar's polymers business manufactures polyolefins, including high density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear low density polyethylene ("LLDPE"), polypropylene and performance polymers, all of which are used in the production of a wide variety of consumer and industrial products. Equistar's performance polymers include enhanced grades of polyethylene, including wire and cable resins, concentrates and compounds, and polymeric powders. Through its 58.5 percent interest in LYONDELL-CITGO Refining Company Ltd., a Texas limited liability company ("LCR"), the Company produces refined petroleum products, including gasoline, low sulfur diesel, jet fuel, aromatics and lubricants ("lube oils"). LCR sells its principal refined products primarily to CITGO Petroleum Corporation ("CITGO"). Lyondell produces methanol through its 75 percent interest in Lyondell Methanol Company, L.P., a Texas limited partnership ("Lyondell Methanol"). DEVELOPMENT OF BUSINESS From its formation in 1985 through January 1989, Lyondell operated first as a division, and later as a wholly owned subsidiary, of Atlantic Richfield Company ("ARCO"). In January 1989, ARCO completed an initial public offering of approximately 50.1 percent of the Company's Common Stock. In September 1997, ARCO divested substantially all of its remaining holdings of the Lyondell Common Stock pursuant to the terms of notes issued by ARCO in August 1994, which were satisfied at maturity by the delivery of shares of Lyondell Common Stock held by ARCO. On September 15, 1997, ARCO filed an amendment to its Schedule 13D filed with the Securities and Exchange Commission indicating that, effective as of such date, it had ceased to beneficially own greater than five percent of the outstanding Lyondell Common Stock. In July 1993, pursuant to agreements between the Company and CITGO (and its affiliates), the Company contributed its refining business, including its Houston, Texas refinery ("the Refinery"), its lube oil blending and packaging plant in Birmingport, Alabama and refining working capital to LCR. The Company retained a 90 percent interest in LCR through its wholly owned subsidiary, Lyondell Refining Company, while CITGO held the remaining approximately 10 percent interest. Following completion of a major upgrade project (the "Upgrade Project") at the Refinery in the first quarter of 1997, the Company's interest in LCR was reduced to 58.5 percent. See "LYONDELL-CITGO REFINING COMPANY LTD. -- Upgrade Project". In May 1995, the Company acquired Occidental Chemical Corporation's ALATHON/(R)/ HDPE business. Assets involved in this acquisition included resin production facilities in Matagorda County and Victoria, Texas, related research and development activities and the rights to the ALATHON/(R)/ trademark. In December 1996, the Company announced the formation of Lyondell Methanol with MCN Investment Corporation ("MCNIC"), a division of MCN Corporation, to own the Company's 248 million gallons per year methanol plant. Under the terms of the agreement, MCNIC purchased a 25 percent interest in the methanol plant. Lyondell retained a 75 percent interest and serves as managing partner. Since December 1997 Equistar has served as the operator of Lyondell Methanol. 1 In December 1997, following approval by the stockholders of each company, Lyondell and Millennium Chemicals Inc. ("Millennium") combined most of their petrochemicals and polymers businesses in Equistar. Lyondell contributed substantially all of the assets comprising its petrochemicals and polymers business segments, as well as a $345 million note, in exchange for a 57 percent interest in Equistar. Equistar also assumed $745 million of Lyondell's debt. Millennium contributed substantially all of the assets comprising its olefins, ethyl alcohol, polyethylene, polypropylene and performance products businesses, which had been held in Millennium Petrochemicals Inc. ("Millennium Petrochemicals"), a wholly owned subsidiary of Millennium. In exchange, Millennium received a 43 percent interest in Equistar, Equistar repaid $750 million of debt due to Millennium from its contributed businesses and Millennium retained $250 million of its accounts receivable. On March 20, 1998, Lyondell and Millennium announced an agreement to expand Equistar with the addition of the ethylene, propylene and ethylene oxide ("EO") and ethylene glycol ("EG") derivatives businesses of Occidental Chemical Corporation ("Occidental Chemical"), a subsidiary of Occidental Petroleum Corporation ("Occidental"). This addition will include three olefins plans, an EO/EG derivatives plant and Occidental Petroleum's 50 percent interest in a joint venture with DuPont, which operates an EO/EG plant. Occidental Petroleum will also contribute more than 950 miles of pipelines located on the Gulf Coast of the United States. Equistar will assume approximately $200 million of Occidental Petroleum debt. The Company believes that this transaction will make Equistar the world's second largest producer of ethylene with more than 11.4 billion pounds of annual capacity. The transaction, which is subject to, among other things, Occidental board approval, regulatory approval and the acquisition by Equistar of a larger credit facility, is expected to close by mid-year 1998. At closing, Equistar will borrow approximately $500 million of additional debt in order to distribute cash of approximately $425 million to Occidental Petroleum and $75 million to Millennium. Following the closing, Equistar will be owned 41 percent by Lyondell and Millennium and Occidental will each own 29.5 percent. Equistar and Occidental will also enter into a long-term agreement for Equistar to supply the ethylene requirements for Occidental's chlorovinyls business. The Company's principal executive offices are located at 1221 McKinney Street, Houston, Texas 77010 (Telephone (713) 652-7200). LYONDELL BUSINESS STRATEGY Lyondell's mission is to maximize total return to its stockholders. Lyondell recently announced its goal to grow earnings per share by ten percent on a five- year rolling average. The focus is on generating maximum earnings and cash flow, and deploying that cash in a manner that creates value for Lyondell's stockholders. The Company seeks to achieve this through active management of its joint venture interests. This strategy focuses on three elements: . Pursue efforts to continually improve the low cost structure of its joint ventures. Lyondell believes that the formation of Equistar provides the opportunity to significantly improve the cost position of the petrochemicals and polymers businesses. LCR is implementing a strategic plan to improve the cost structure of the refining segment. . Continue to seek opportunities to expand or diversify Lyondell's business. This could be through focused capital investment, additional joint ventures, acquisitions or other arrangements designed to add economic value. Such opportunities could be undertaken by Lyondell directly or through one of its joint ventures. . Explore all options to maximize total return to stockholders, including various methods of returning cash directly to stockholders. Both the Company's ability to undertake and fund the particular strategies described above and the 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. 2 SUMMARY DESCRIPTION OF BUSINESS SEGMENTS Through the year ended December 31, 1996, the Company reported its results of operations in two segments, petrochemicals and refining. Beginning in 1997, the Company reported the results of its polymers operations as a separate segment. Beginning in 1998, the Company will report results in four segments: petrochemicals, polymers, refining and methanol. Accordingly, for purposes of this summary description of business segments, the Company's methanol business is discussed as a separate segment. The Company operates in the petrochemicals and polymers segments through Equistar, in the refining segment through LCR and in the methanol segment through Lyondell Methanol. The following chart shows the organization of Lyondell's joint ventures and segments, as well as each joint venture's 1997 sales revenues, which, in the case of Equistar represents pro forma sales revenues for 1997 (as if Equistar had been formed on January 1, 1997). Total sales revenue is shown for each joint venture, of which ventures Lyondell owns the specified percentage. [Chart Appears Here showing Lyondell's ownership interests in each of Equistar (57 percent), LCR (58.5 percent) and Lyondell Methanol (75 percent); the 1997 sales revenues of each of Equistar (pro forma), LCR and Lyondell Methanol, which were $4.5 billion, $2.7 billion and $165 million, respectively; and the primary products of each of the petrochemicals, polymers, refining and methanol segments] For additional segment information for each of the three years in the three-year period ended December 31, 1997, see Note 21 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 EQUISTAR CHEMICALS, LP EQUISTAR BUSINESS STRATEGY Equistar's strategies include: . Achieve synergy targets in earnings and cash flow and continue to reduce costs, by focusing on: . Aligning and optimizing processing units for improved on-stream time and increased throughput . Maximizing the value of the olefin co-products produced in the olefins operations . Lowering distribution costs through volume leverage . Reducing raw materials costs . Focus on capital projects designed to increase reliability and undertake cost efficient debottlenecking of value-added product lines. Equistar plans to do this in part by: . Completing 125 million pound HDPE expansion at its Victoria facility with an expected startup in late 1998, with committed sales base in high value products . Proceeding with 480 million pound HDPE resin expansion project at its Matagorda facility for late 1999 startup, to support continued high- molecular weight HDPE film growth . Pursue a market strategy of expanding value-added businesses, with minimal capital especially by: . Increasing sales volume in key markets, such as high molecular weight and medium molecular weight high-density polyethylene film resins, value and specialty injection molding resins, wire and cable resins and sheet resin products . Leverage technology, including by: . Pursuing research on alternative olefins feedstock technology as a method to lower costs and gain competitive advantage . Combining Lyondell-contributed single-site catalyst proprietary technology with Millennium-contributed process technologies, enabling Equistar to optimize production of higher-margin value-added products MANAGEMENT OF EQUISTAR Equistar is a limited partnership organized under the laws of the state of Delaware and is a pass-through entity for federal income tax purposes. Lyondell owns its interest in Equistar through two wholly owned subsidiaries, one of which serves as a general partner of Equistar and one of which serves as a limited partner. Similarly, Millennium owns its interest in Equistar through two wholly owned subsidiaries, one a general partner and one a limited partner. Lyondell holds a 57 percent interest and Millennium holds a 43 percent interest in Equistar. The Partnership Agreement of Equistar (the "Equistar Partnership Agreement") governs, among other things, ownership, cash distributions, capital contributions and management of Equistar. The Equistar Partnership Agreement provides that Equistar is governed by a Partnership Governance Committee, consisting of six representatives, three appointed by each general partner. Matters requiring agreement by the representatives of Lyondell and Millennium include changes in the scope of Equistar's business, the five year strategic plan (and annual updates thereof), the sale or purchase of assets or capital expenditures of more than $30 million not contemplated by the strategic plan, requiring additional investments by Equistar's partners over certain amounts, merging or combining with another business and certain other matters. All decisions of the Partnership Governance Committee that do not require unanimity between Lyondell and Millennium may be made by Lyondell's representatives alone. The day-to-day operations of Equistar are managed by the executive officers of Equistar. Dan Smith, the Chief Executive Officer of Lyondell, also serves as Chief Executive Officer of Equistar. 4 EQUISTAR PETROCHEMICALS SEGMENT OVERVIEW Equistar produces petrochemicals at seven facilities located in five states. The Channelview, Texas facility includes two large olefins plants and related processing units that produce ethylene, propylene, butadiene, butylenes, benzene, toluene, hydrogen and certain specialty products, such as isoprene, dicyclopentadiene ("DCPD"), resin oils and piperylenes, along with gasoline blendstocks and heavy liquid fuels. The La Porte, Texas, Morris, Illinois and Clinton, Iowa complexes each include one large olefins plant that primarily produces ethylene, substantially all of which is consumed internally by Equistar's polymers operations. Feedstocks for the Channelview and LaPorte facilities and ethylene and propylene products are stored at Equistar's Mont Belvieu, Texas storage facility and terminals on the Houston ship channel. A comprehensive pipeline system connects the two plants with major olefins customers. Feedstocks for Equistar's Morris and Clinton facilities are shipped via pipeline. Equistar produces synthetic ethyl alcohol at its Tuscola, Illinois plant by a direct hydration process that combines water and ethylene. Equistar also owns and operates facilities at Newark, New Jersey and Anaheim, California for denaturing ethyl alcohol by the addition of certain chemicals. In addition, it produces small volumes of diethyl ether, a by-product of its ethyl alcohol production, at Tuscola. These ethyl alcohol products are ingredients in various consumer products and are used for other consumer and industrial purposes, as described more fully in the table below. Equistar's petrochemicals products are used to manufacture intermediate chemicals, which are primarily used in a variety of consumer and industrial products. 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 most significant petrochemical in terms of worldwide production volume and is the key building block for polyethylene and a large number of other chemicals, plastics and synthetics. With the strong growth of end-use products derived from ethylene during the past several decades, 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 more than four percent. The following table outlines Equistar's primary petrochemical products, annual capacity and the primary uses for such products. 5
- ----------------------------------------------------------------------------------------------------------------------------- RATED PRODUCT CAPACITY (a) PRIMARY USES - ------- ------------ ------------ - ----------------------------------------------------------------------------------------------------------------------------- OLEFINS - ----------------------------------------------------------------------------------------------------------------------------- ETHYLENE 7.7 billion pounds Ethylene is used as a feedstock to manufacture polyethylene, ethylene oxide, ethylene dichloride and ethylbenzene. Polyethylene is used for films for food packaging and trash bags and for blow-molded bottles for milk, orange juice, shampoo and detergents. Ethylene oxide is used to produce ethylene glycol which in turn is used to produce antifreeze and polyester. Ethylene dichloride is used to produce polyvinyl chloride (PVC) for pipe and other vinyl products. Ethylbenzene is used to produce styrene, which in turn is used to produce polystyrene for food packaging and drinking cups. - ----------------------------------------------------------------------------------------------------------------------------- PROPYLENE 3.4 billion pounds (b) Propylene is used to produce polypropylene, acrylonitrile and propylene oxide. Polypropylene is used in products such as caps, closures, rigid packaging and carpet facing and backing. Acrylonitrile is used in clothing (acrylic fibers) and high impact plastics (computers, auto parts). Propylene oxide is used in polyurethane foams for furniture and insulation. - ----------------------------------------------------------------------------------------------------------------------------- BUTADIENE 840 million pounds Butadiene is used to manufacture styrene butadiene rubber and polybutadiene rubber, which are used in the manufacture of tires, hoses, gaskets and other rubber products. Butadiene is also used in the production of paints, adhesives, nylon clothing, carpets and engineering plastic parts. - ----------------------------------------------------------------------------------------------------------------------------- AROMATICS - ----------------------------------------------------------------------------------------------------------------------------- BENZENE 117 million gallons Benzene is used to produce styrene, phenol and cyclohexane. These products are used in the production of nylon, plastics, rubber, and polystyrene. Polystyrene is used in life preservers, food packaging and drinking cups. - ----------------------------------------------------------------------------------------------------------------------------- TOLUENE 40 million gallons Toluene is used as an octane enhancer in gasoline and as a chemical feedstock for benzene production. - ----------------------------------------------------------------------------------------------------------------------------- OXYGENATED PRODUCTS - ----------------------------------------------------------------------------------------------------------------------------- MTBE 199 million gallons MTBE is an octane enhancer and clean fuel additive in reformulated gasoline. - -----------------------------------------------------------------------------------------------------------------------------
____________________ (a) Represents rated capacity at January 1, 1998. The term "rated capacity", as used in this table, 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. Capacities shown include 100 percent of the capacity of Equistar, of which the Company owns 57 percent. (b) Does not include refinery grade material or production from the product flexibility unit at the Channelview facility, which has a current rated capacity of one billion pounds per year of propylene. 6
- ------------------------------------------------------------------------------------------------------------------------- RATED PRODUCT CAPACITY (a) PRIMARY USES - ------- ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------- SPECIALTY PRODUCTS - ------------------------------------------------------------------------------------------------------------------------- DICYCLOPENT- 100 million pounds DCPD is a component of inks, adhesives and polyester resins for molded ADIENE parts such as tub and shower stalls and boat hulls. (DCPD) - ------------------------------------------------------------------------------------------------------------------------- ISOPRENE 105 million pounds Isoprene is a component of premium tires, adhesive sealants and other rubber products. - ------------------------------------------------------------------------------------------------------------------------- RESIN OIL 120 million pounds Resin oil is used in the production of hot melt adhesives, inks, sealants, paints and varnishes. - ------------------------------------------------------------------------------------------------------------------------- PIPERYLENES 100 million pounds Piperylenes are used in the production of adhesives, inks and sealants. - ------------------------------------------------------------------------------------------------------------------------- HYDROGEN 80 million cubic Required by refineries to remove sulfur from process gas in heavy crude feet/day oil. - ------------------------------------------------------------------------------------------------------------------------- ALKYLATE (c) 19,000 barrels/day Alkylate is a premium blending component used by refiners to meet Clean Air Act standards for reformulated gasoline. - ------------------------------------------------------------------------------------------------------------------------- ETHYL ALCOHOL 50 million gallons Ethyl alcohol is used in the production of solvents, household, medicinal and personal care products and as a chemical intermediate for applications such as vinegar. - ------------------------------------------------------------------------------------------------------------------------- DIETHYL ETHER 5 million gallons Diethyl ether is used in laboratory reagents, gasoline and diesel engine starting fluid, liniments, analgesics and smokeless gun powder. - -------------------------------------------------------------------------------------------------------------------------
____________________ (c) Includes up to 11,250 barrels/day of capacity which is operated for the benefit of LCR. FEEDSTOCKS AND ETHYLENE PURCHASES Feedstock cost is generally the largest component of total cost for the petrochemicals business. 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 petrochemicals prices than olefins plants that are restricted in their feedstock processing capability. 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"). As of January 1, 1998, approximately 50 percent of domestic ethylene capacity was limited to NGL feedstocks, and approximately 45 percent could process to some extent both NGLs and Petroleum Liquids. Petroleum Liquids have had a historical variable margin advantage over ethane and propane. The industry variable margin differential between naphtha and ethane has typically been between one and four cents per pound of ethylene. Equistar has the capability to capture this differential at the Channelview facility due to its feedstock flexibility. The Channelview facility is unusually flexible in that it can process 100 percent Petroleum Liquids or up to 90 percent NGL feedstocks. Equistar's three other olefins facilities currently process only NGLs, however Equistar plans to upgrade the LaPorte, Texas facility and to integrate the operation of the LaPorte and Channelview facilities so that the LaPorte facility can process Petroleum Liquids and its resulting byproducts can be processed at the Channelview facility. Equistar obtains a portion of its olefins feedstock requirements from LCR (NGLs, naphtha and gas oil). The remainder of its Petroleum Liquids requirements are obtained under contracts or on the spot market from a variety of domestic and foreign sources. Equistar also purchases NGLs from a wide variety of domestic sources. In addition to producing its own ethylene, Equistar assumed certain agreements of Millennium Petrochemicals for the purchase of ethylene from Gulf Coast producers at market prices. Ethylene purchase obligations under such contracts will decline to zero by December 2000. 7 MARKETING, SALES AND DISTRIBUTION Ethylene produced by the LaPorte, Morris and Clinton facilities generally is consumed as feedstock by Equistar polymers operations at those sites. The Channelview facility supplies significant amounts of ethylene to Equistar's Pasadena, Texas facility via pipeline and to the Victoria and Matagorda facilities via exchange arrangements. Overall, currently approximately 75 percent of Equistar's sales of ethylene are to its polymers segment. Intersegment sales are made at prices based on current market prices. With respect to sales to third parties, Equistar sells a majority of its olefins products to customers with whom Lyondell had long-standing relationships. Sales to third parties generally are made pursuant to written agreements which typically provide for monthly negotiation of price. The parties are contractually committed to monthly price terms. Nonetheless, in some cases, if the parties fail to agree on a monthly price, deliveries may be suspended for the month. The contracts typically require the customer to purchase a specified minimum quantity. Contract terms are typically three to six years with automatic one or two year term extension provisions. Some contracts are subject to early termination if deliveries have been suspended for several months. Equistar sells most of its aromatics production under contracts that have initial terms ranging from two to three years and that typically contain automatic one year term extension provisions. 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 Equistar for LCR under contracts with similar terms to its own. Benzene produced at the Refinery is sold directly to Equistar at market-related prices. Equistar licenses MTBE technology from a third party and sells a significant portion of MTBE produced at one of its two Channelview units to such party at market-based prices. The production from the second unit is consumed by LCR for gasoline blending. In addition, Equistar 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. Most of the ethylene and propylene production of the Channelview facility is shipped via an extensive pipeline system which has connections to numerous Gulf Coast ethylene and propylene consumers. The pipeline system is owned by a third party, and substantially all of it is leased by Equistar under long-term leasing arrangements. Equistar also owns pipelines, operated by a third party, that are connected to its LaPorte facilities and certain of its customers. Equistar leases other pipelines from other third parties and has exchange agreements with other olefins producers which allow access to customers who are not directly connected to its pipeline systems. Some propylene is shipped by ocean-going vessel. Butadiene, aromatics and other petrochemicals are distributed by pipeline, railcar, truck, barge or ocean-going vessel. COMPETITION AND INDUSTRY CONDITIONS The basis for competition in Equistar's petrochemicals products is product quality, product deliverability, customer service and price. Equistar competes with other large domestic producers of petrochemicals, including Amoco Chemical Company, Chevron Chemical Company, Dow Chemical Company, Exxon Chemical Company, Huntsman Chemical, Mobil Chemical Company, Phillips Petroleum Company, Shell Chemical Company and Union Carbide Company. The combined rated capacity of Equistar's olefins units at January 1, 1998 was approximately 7.7 billion pounds of ethylene per year or approximately 12 percent of total North American production capacity. Based on published rated production capacities, the Company believes that Equistar is the largest producer of ethylene in North America. North American industry ethylene rated capacity at January 1, 1998 was approximately 64 billion pounds per year. Of the total ethylene production capacity in the United States, approximately 95 percent is located along the Gulf Coast, and approximately 75 percent is owned by nine manufacturers. Petrochemicals profitability is affected by the level of demand for petrochemicals and derivatives, including exports throughout the world, along with vigorous price competition among producers which may intensify due to, among other things, the addition of new capacity. In general, weak economic conditions either in the United States or in the world and higher feedstock costs tend to reduce demand and put pressure on margins. Capacity additions in excess of annual 8 growth also put pressure on margins. It is not possible to predict accurately the changes in feedstock costs, market conditions and other factors which will affect petrochemical industry margins in the future. The petrochemicals industry historically has experienced significant volatility in supply and demand. Historically, as a producer of olefins primarily for merchant supply to unaffiliated customers, Lyondell had typically experienced 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. However, Equistar currently sells approximately 75 percent of its ethylene production to Equistar's downstream polymers facilities, which has the effect of reducing historical volatility. Equistar's other major commodity chemical products also experience cyclical market conditions similar to (although not necessarily coincident with) those of ethylene. CAPITAL PROGRAM Lyondell's fixed asset capital expenditures for its petrochemical segment for the first eleven months of 1997, together with such expenditures by Equistar during December 1997, totaled $34 million. The capital budget for Equistar's petrochemicals segment for 1998 is $113 million which includes initial spending for conversion of the LaPorte facility to process a higher percentage of Petroleum Liquids. It is expected that these capital needs will be internally funded by Equistar. As part of its ongoing operations, Equistar periodically conducts maintenance turnarounds on its facilities. 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, some of which are beyond the Equistar's control. EQUISTAR POLYMERS SEGMENT OVERVIEW Through twelve facilities located in four states, Equistar's polymers segment manufactures a wide variety of polyolefins, including various polyethylenes and polypropylene and performance polymers. Equistar currently manufactures polyethylene using a variety of technologies at six facilities in Texas and at its Morris, Illinois and Clinton, Iowa facilities. The Morris and Clinton facilities are the only petrochemical industry polyethylene facilities located in the Midwest and enjoy a freight cost advantage over Gulf Coast producers in delivering products to customers in the Midwest and on the East Coast of the United States. Polyethylenes are used in a wide variety of consumer products, packaging materials and industrial applications, as described more fully in the following table. The Morris and Pasadena facilities manufacture polypropylene using propylene produced as a co-product of Equistar's ethylene production as well as propylene purchased from third parties. Polypropylene is sold for various applications in the automotive, housewares and appliance industries. Equistar also produces performance polymer products, which include enhanced grades of polyethylene and polypropylene, at several of its polymers facilities. The Company believes that, over a business cycle, average selling prices and profit margins for performance polymers tend to be higher than selling prices and profit margins for higher-volume commodity polyethylenes. Equistar produces concentrates and compounds at its facilities in Crockett, Texas, Fairport Harbor, Ohio and Heath, Ohio. Concentrates and compounds are polyethylene compounds impregnated with additives and/or pigments and sold to converters who mix the compounds with larger volumes of polymers, including polyethylene, to produce various products. 9 The following table outlines Equistar's polymers and performance polymers products, annual capacity, the primary uses for such products and Equistar brand names:
- ----------------------------------------------------------------------------------------------------------------------------------- RATED PRODUCT CAPACITY (a) PRIMARY USES BRAND NAMES - ------- ------------ ------------- ----------- - ----------------------------------------------------------------------------------------------------------------------------------- POLYETHYLENE AND POLYPROPYLENE - ----------------------------------------------------------------------------------------------------------------------------------- HIGH DENSITY POLYETHYLENE (HDPE) 3.4 billion Grocery, merchandise and trash bags; food containers ALATHON/(R)/ pounds (b) for items from frozen desserts to margarine; caps and Petrothene/(R)/ closures; liners for boxes of cereal and crackers; plastic drink cups and toys; dairy crates; bread trays and pails for items from paint to fresh fruits and vegetables; safety equipment such as hard hats; house wrap for insulation; bottles for household/industrial chemicals and motor oil; milk/water/juice bottles; large (rotomolded) tanks for storing liquids like agricultural and lawn care chemicals - ----------------------------------------------------------------------------------------------------------------------------------- LOW DENSITY POLYETHYLENE (LDPE) 1.7 billion Food packaging films; plastic bottles for packaging Petrothene/(R)/ pounds food and personal care items; dry cleaning bags; ice Acrythene/(R)/ (EMA) bags; pallet shrink wrap; heavy-duty bags for mulch and Ultrathene/(R)/ (EVA) potting soil; boil-in-bag bags; coatings on flexible packaging products; coating on paper board such as milk cartons. Specialized forms of LDPE are Ethyl Methyl Acrylate (EMA), which provides adhesion in a variety of applications, and Ethylene Vinyl Acetate (EVA), which is used in foamed sheets, bag-in box bags, vacuum cleaner hoses, medical tubing, clear sheet protectors, flexible binders. - ----------------------------------------------------------------------------------------------------------------------------------- LINEAR LOW DENSITY POLYETHYLENE 1.1 billion Garbage/lawn-leaf bags; housewares; lids for coffee Petrothene/(R)/ (LLDPE) pounds cans, margarine tubs; large (rotomolded) toys like outdoor gym sets. - ----------------------------------------------------------------------------------------------------------------------------------- POLYPROPYLENE 680 million Fibers for carpets, rugs, upholstery; housewares; KromaLon/(R)/ pounds automotive battery cases; automotive fascia, running Petrofil/(R)/ boards, bumpers; grid-type flooring for sports Petrothene/(R)/ facilities; fishing tackle boxes; bottle caps and KromaLux/(R)/ closures. KromaTex/(R)/ Flexathene/(R)/ - -----------------------------------------------------------------------------------------------------------------------------------
____________ (a) The term "rated capacity," as used in this table is defined on page 6. (b) Equistar has undertaken a debottleneck project at its Victoria Facility that will expand the plant's HDPE capacity by approximately 125 million pounds and is scheduled to be completed in late 1998. A 480 million pound HDPE resin expansion project at the Matagorda facility has a targeted start up of third quarter 1999. 10
- ----------------------------------------------------------------------------------------------------------------------------------- RATED PRODUCT CAPACITY (a) PRIMARY USES BRAND NAMES - ------- ------------ ------------- ----------- - ----------------------------------------------------------------------------------------------------------------------------------- PERFORMANCE POLYMERS - ----------------------------------------------------------------------------------------------------------------------------------- WIRE AND CABLE (c) Insulation and jacketing resins and compounds for Petrothene/(R)/ RESINS AND automotive wiring, telecommunications and power COMPOUNDS cable, and electronics and computer wiring. - ----------------------------------------------------------------------------------------------------------------------------------- POLYMERIC (c) Component product in structural and bulk molding Microthene/(R)/ POWDERS compounds, parting agents and filters for appliance, automotive and plastics processing industries. - ----------------------------------------------------------------------------------------------------------------------------------- CONCENTRATES AND (c) Provides: color in film, bottles, foam sheet; the Spectratech/(R)/ COMPOUNDS "slip" that keeps film from sticking together; flame retardancy; resistance to UV radiation; the "gas bubbles" to make foamed plastic products. - ----------------------------------------------------------------------------------------------------------------------------------- POLYMERS FOR (c) Component in hot-metal-adhesive formulations for ADHESIVES, case, carton and beverage package sealing, glue Petrothene/(R)/ SEALANTS AND sticks, automotive sealants, carpet backing and Ultrathene/(R)/ COATINGS coextruded adhesive labels. - ----------------------------------------------------------------------------------------------------------------------------------- REACTIVE (c) Functionalized polymers used to bond non-polar and Plexar/(R)/ POLYLEFINS polar substrates in barrier food packaging, wire and cable insulation and jacketing, automotive gas tanks and metal coating applications. - ----------------------------------------------------------------------------------------------------------------------------------- LIQUID (c) A diesel fuel additive to inhibit freezing. Vynathene/(R)/L POLYOLEFINS - -----------------------------------------------------------------------------------------------------------------------------------
____________ (c) These are enhanced grades of polyethylene and are included in the capacity figures for LDPE, HDPE and LLDPE above, as appropriate. Research and development for Equistar's polymers segment is conducted in laboratories at its Cincinnati, Ohio facility and at pilot plants in Matagorda, Texas and Morris, Illinois. These facilities provide product and process technology support for polymers operations and its customers. See "-- RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS." FEEDSTOCKS The polymers operations at the Morris, Clinton and LaPorte facilities receive their primary supply of ethylene from the upstream petrochemicals facilities located at those sites. The ethylene and propylene converted at the Pasadena facility are supplied by the Channelview facility either directly or via exchange arrangements. Equistar supplies from its own production the majority of the ethylene consumed by the Victoria and Matagorda facilities via exchange arrangements. The Port Arthur, Texas facility receives its ethylene via pipeline from Equistar and third parties. MARKETING, SALES AND DISTRIBUTION Equistar's polymers products are primarily sold to an extensive base of established customers, many under term contracts, typically having a duration of one to three years. The remainder is generally sold without contractual term commitments. In either case, in most of the continuous supply relationships, prices are subject to change upon mutual agreement between Equistar and the customer. 11 Polymers are primarily distributed via railcar. Equistar owns or leases, pursuant to long-term lease arrangements, approximately 7,000 railcars for use in its polymers business. Equistar sells its polymers products in the United States primarily through its own sales organization. It generally engages sales agents to market its products in the rest of the world. COMPETITION AND INDUSTRY CONDITIONS The basis for competition in Equistar's polymers products is product performance, product quality, product deliverability, customer service and price. Equistar competes with other large producers of polymers, including Chevron Chemical Corporation, Dow Chemical Company, Eastman Chemical Company, Exxon Chemical Company, Fina, Formosa Plastics, Huntsman Chemical Company, NOVA Corporation, Phillips Petroleum Company, Solvay Polymers, Union Carbide Company and Westlake Polymers. Polymers profitability is affected by the level of demand for polymers, including exports throughout the world, along with 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. It is not possible to predict accurately the changes in feedstock costs, market conditions and other factors which will affect polymers industry margins in the future. Based on published rated industry capacities, Equistar is the largest producer of polyethylene in the world, and is a leading domestic producer of polyolefin powders, compounds, wire and cable resins, and polymers for adhesives. The combined rated capacity of Equistar's polyethylene units as of January 1, 1998, was approximately 6.2 billion pounds per year, or approximately 18% of total North American production capacity. There are 19 other North American producers of polyethylene, including Exxon, Dow, Chevron, Phillips, Union Carbide and Solvay. Equistar's polypropylene capacity, 680 million pounds per year as of January 1, 1998, represents just under 5% of the total North American polypropylene capacity. There are 12 other North American competitors in the polypropylene business, including Montell, Exxon, Amoco and Fina. CAPITAL PROGRAM Lyondell's fixed asset capital expenditures for its polymers segment for the first eleven months of 1997, together with such expenditures by Equistar during December 1997 totaled $17 million. The capital budget for Equistar's polymers segment for 1998 is $87 million which includes the debottleneck at the Victoria facility and expansion of HDPE capacity at the Matagorda facility. It is expected that these capital needs will be internally funded by Equistar. As part of ongoing operations, maintenance turnarounds are periodically conducted on facilities. 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, some of which are beyond Equistar's control. AGREEMENTS BETWEEN LYONDELL AND EQUISTAR Lyondell and Equistar entered into an agreement on December 1, 1997, providing for the transfer of assets to Equistar. Among other things, such agreement sets forth representations and warranties by Lyondell with respect to the transferred assets and requires indemnification by Lyondell with respect thereto. Such agreement also provides for the assumption by Equistar of, among other things, third party claims that are related to certain pre-closing contingent liabilities that are asserted prior to December 1, 2004 to the extent the aggregate thereof does not exceed $7 million, third party claims related to pre- closing contingent liabilities that are asserted after December 1, 2004, certain obligations for indebtedness, liabilities for products sold after December 1, 1997 regardless of when manufactured and certain long term liabilities. Millennium Petrochemicals entered into a similar agreement with Equistar with respect to the transfer of its assets and assumption of liabilities. Also in connection with the formation of Equistar, Lyondell contributed a promissory note for $345 million payable to Equistar. The note matures on the earlier of December 1, 2000 or the occurrence of a refinancing of LCR which results in the repayment of LCR's $450 million construction loan and a distribution to Lyondell of at least $345 million. Lyondell currently anticipates that such refinancing and distribution will occur during the second quarter of 1998. 12 If Lyondell or Millennium or any of their affiliates desires to initiate or pursue an opportunity to undertake, engage in, acquire or invest in a business or activity or operation within the scope of the business of Equistar, such opportunity must be offered to Equistar. Equistar has certain options to participate in such opportunity but if it determines not to participate, the party offering the opportunity is free to pursue it on its own. If the opportunity within Equistar's scope of business constitutes less than 25% of an acquisition that is otherwise not within the scope of the business of Equistar, Lyondell or Millennium, as the case may be, may make such acquisition provided that after such acquisition, the portion within the scope of the business of Equistar is offered to Equistar pursuant to the foregoing provisions. Lyondell has agreed to provide certain administrative services to Equistar, including certain treasury services, tax services and employee benefit plan administration. Equistar has also agreed to provide certain services to Lyondell, such as health safety and environmental services, human resource services, information services and legal services. As a consequence of services being provided by Equistar to Lyondell and by Lyondell to Equistar, a net payment is made by Equistar to Lyondell with respect thereto of approximately $90,000 per month. Equistar and Millennium Petrochemicals are also parties to a number of agreements for the provision of services, utilities and materials from one party to the other at common locations, principally LaPorte and Cinncinnati. Lyondell and Millennium each entered into a Master Intellectual Property Agreement with Equistar. The Master Intellectual Property Agreements provide for (i) the transfer of certain intellectual property of Lyondell and Millennium related to the businesses each contributed to Equistar, (ii) certain irrevocable, perpetual, royalty free, nonexclusive, worldwide rights and licenses to Equistar with respect to intellectual property retained by Lyondell or Millennium that was not solely related to the business of Equistar but is useful in such business and (iii) certain licenses from Equistar to Lyondell and Millennium, respectively, with respect to intellectual property transferred to Equistar that Lyondell and Millennium may use with respect to their other to businesses. Lyondell, Millennium and Equistar are parties to a Parent Agreement dated December 1, 1997, which provides that, among other things, each of Lyondell and Millennium guarantees the performance by their respective subsidiaries under various agreements entered into in connection with the formation of Equistar, including the Partnership Agreement and the asset transfer agreements providing for the transfers of asset by Lyondell and Millennium, respectively, to Equistar. 13 PROPERTIES Equistar's principal manufacturing facilities and principal products are set forth in the following table:
Location Principal Products Owned or Leased Channelview, Texas (a)... Ethylene Owned Propylene Butadiene Benzene Toluene DCPD Isoprene Resin oil Piperylenes Alkylate MTBE Chocolate Bayou, Texas... HDPE Leased Crockett, Texas.......... Wire & cable compounds, Owned additive concentrates and compounds LaPorte, Texas........... Ethylene Owned LDPE LLDPE HDPE Matagorda County, Texas.. HDPE Owned Pasadena, Texas.......... Polypropylene Owned LDPE Port Arthur, Texas....... LDPE Owned HDPE Victoria, Texas.......... HDPE Leased Morris, Illinois......... Ethylene Owned LDPE LLDPE Polypropylene Tuscola, Illinois........ Ethyl alcohol Owned Diethyl ether Compounds for wire & cable Polymeric powders Clinton, Iowa............ Ethylene Leased (b) LDPE HDPE Fairport Harbor, Ohio.... Wire & cable compounds, Leased concentrates Heath, Ohio.............. Compounds, additive and Owned foam concentrates, performance compounds Anaheim, California...... Denatured alcohol Owned Newark, New Jersey....... Denatured alcohol Owned
_____________ (a) Lyondell Methanol owns a methanol plant located within the Channelview facility on property Lyondell Methanol leases from Equistar. A third party owns and operates a facility on land leased from Equistar that is used to purify hydrogen from Lyondell Methanol's methanol plant. Equistar also operates a styrene maleic anhydride unit and a polybutadiene unit which are owned by a third party and are located on property leased from Equistar within the Channelview facility. (b) Leased subject to industrial revenue bonds. Equistar has an option to purchase the property. 14 Equistar 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 facility. Storage capacity for up to approximately 13 million barrels of NGL feedstocks, ethylene, propylene and other hydrocarbons is provided in salt domes at the Mont Belvieu facility. Equistar owns several pipelines connecting the Channelview facility, the Refinery and the Mont Belvieu facility, including six lines used to transport liquid feedstocks, butylenes, benzene, hydrogen, butane, MTBE and unfinished gasolines between the Channelview facility and the Refinery. Equistar also owns other pipelines in connection with its Morris, Clinton and La Porte facilities. Equistar also owns a barge docking facility near the Channelview facility capable of berthing eight barges and related terminal equipment for loading and unloading. Equistar owns or leases pursuant to long-term lease arrangements approximately 7,000 railcars for use in its polymers business. Equistar leases its executive offices and corporate headquarters from Lyondell in downtown Houston. In addition, Equistar owns facilities which house the Morris and Cincinnati research operations. Equistar also leases storage facilities from various third parties for the handling of products, primarily in the Gulf Coast area. RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS Equistar maintains a significant research and development facility in Cincinnati, Ohio. The Cincinnati facility features more than 30 plastics processing lines, all of commercial or semi-commercial size, allowing Equistar engineers and technicians to evaluate polyolefin products under conditions similar to a customer's plant. Equistar has additional research facilities in Morris. Product development efforts are aimed at tailoring products to meet specific customer needs. The Channelview facility employs a proprietary technology owned by Lyondell, the PRODFLEX technology, that converts ethylene and other light petrochemical streams into propylene. In addition, the olefins facilities can upgrade butylene into higher-value products such as MTBE and alkylates used in the production of automotive fuels. Equistar is conducting a research project to investigate alternative feedstocks for use at the Channelview facility. Recent polymers industry announcements relate to the development of metallocene, or single-site, catalysts. Successful development and commercialization of these catalysts are expected to result in enhanced polymer properties. Equistar is conducting a broad search to evaluate outside technology and is concentrating in-house research in an effort to identify and develop single-site catalysts for use in the production of polyolefins resins. Equistar holds several U.S. patents and the rights to certain patents pending in connection with research and development efforts in this area. Equistar uses numerous technologies in its operations, many of which are licensed from third parties. Significant licenses held by Equistar include the BP Chemicals fluid bed polyethylene process for the production of both LLDPE and HDPE, the Unipol process for the production of LLDPE, and certain processes for the production of polyethylene and polypropylene. Several new patent applications to protect newly-developed technologies were submitted by Lyondell and Millennium Petrochemicals during 1997 which were assigned to Equistar in connection with its formation. Equistar acquired rights to numerous recognized brand names from Lyondell and Millennium Petrochemicals in connection with its formation, including ALATHON/(R)/, KromaLon/(R)/, Petrothene/(R)/, Ultrathene/(R)/, Vynathene/(R)/ and Microthene/(R)/. Equistar 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. EMPLOYEE RELATIONS As of December 31, 1997, Equistar employed approximately 4,000 full-time employees. Equistar also uses the services of independent contractors in the routine conduct of its business. Approximately 335 hourly workers are covered by collective bargaining agreements. 15 LYONDELL-CITGO REFINING COMPANY LTD. OVERVIEW Lyondell participates in petroleum refining through an equity interest in LCR. As a result of the completion of the Upgrade Project in the first quarter of 1997, Lyondell holds a 58.5 percent interest and CITGO holds a 41.5 percent interest in LCR. The Refinery is located adjacent to the Houston Ship Channel in Pasadena, Texas. The Refinery's products include conventional and reformulated gasoline, low sulfur diesel, jet fuel, aromatics, lubricants (industrial lubricants, motor oils, white oils and process oils), carbon black oil, sulfur, residual fuel and petroleum coke. 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 was formed in 1993 to upgrade the Refinery's ability to process substantial additional volumes of lower cost, very heavy crude oil. In connection with its formation, LCR entered into a long-term crude supply contract ("Crude Supply Contract") with Lagoven, S.A., now known as PDVSA Petroleo y Gas S.A. ("PDVSA Oil"), an affiliate of CITGO. In addition, under the terms of a long-term product sales agreement ("Products Agreement"), CITGO purchases from LCR substantially all of the refined products produced at the Refinery. Both PDVSA Oil and CITGO are direct or indirect wholly owned subsidiaries of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company of Venezuela. LCR BUSINESS STRATEGY LCR's strategies include seeking to: . Lower cost structure and improve operating efficiency by focusing on: . Maximizing equipment reliability . Improving cost structure with the objective of being in the top quartile of the industry . Implementing shared services plan to outsource staff functions to Lyondell and CITGO . Improving yields to gain greater efficiency . Working to maintain and improve product qualities to meet new industry standards . Increasing margins by: . Selectively investing to increase the volumes of heavy crude oil processed in the coking mode UPGRADE PROJECT The Upgrade Project has increased the heavy crude oil processing capability of the Refinery from 130,000 barrels per day of 22 degree API gravity crude oil to approximately 250,000 barrels per day of 17 degree API gravity crude oil. The Upgrade Project has improved the Refinery's ability to process heavier, higher margin, crude oils. The 17 degree API gravity crude oil is more viscous and dense than traditional crude oil and contains higher concentrations of sulfur and heavy metals, making it more difficult to refine into gasoline and other high value fuel products but less costly to purchase. With the completion of the Upgrade Project, more than 90 percent of the crude oil purchases are made pursuant to the Crude Supply Contract which significantly reduces the crude oil volume which is sensitive to market conditions. The Upgrade Project also included expansion of the Refinery's reformulated gasoline and low sulfur diesel production capability. The earnings potential of LCR has also been enhanced due to the higher margins associated with LCR's increased coking capability, enhanced reformulated fuels and low sulfur diesel production capability and other yield improvements. The Upgrade Project, which cost approximately $1.1 billion, was funded through a combination of approximately $486 million in capital contributions to LCR by CITGO (including cash contributions for financing costs and reinvestment of operating cash distributions), a $450 million construction loan credit facility (the "Construction Facility") provided by a group of banks, and $166 million and $16 million, in subordinated loans to LCR from Lyondell and CITGO, respectively. 16 In exchange for CITGO's Upgrade Project capital contributions, together with an additional $130 million in equity contributions CITGO had previously made to LCR, CITGO's participation interest in LCR increased to 41.5 percent, effective April 1, 1997. CITGO has a one-time option to increase its participation interest in LCR up to 50 percent by making an additional equity contribution. 1998 REFINANCING LCR's indebtedness is scheduled to be refinanced in the second quarter of 1998. In connection therewith, the Company anticipates that LCR would repay the Construction Facility and make cash distributions to Lyondell, including repayment of debt, of approximately $400 to $600 million. Lyondell will use such amount, in part, to repay Lyondell's $345 million note payable to Equistar. See "EQUISTAR CHEMICALS, LP--Agreements between Lyondell and Equistar". 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. Under the terms of a reciprocal Performance Guarantee and Control Agreement, 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. Actions requiring unanimous consent of the Representatives, include, without limitation, amendment of the Regulations, borrowing money in excess of LCR's existing credit facilities, delegations of authority to committees, certain purchase commitments and capital expenditures in excess of designated amounts and budgetary approval. The day-to-day operations of the Refinery are managed by the executive officers of LCR. FEEDSTOCKS LCR is required to purchase, and PDVSA Oil is required to sell, sufficient crude oil to satisfy LCR's coking capacity, or a minimum of 200,000 and up to 230,000 barrels per day of very heavy Venezuelan crude oil. PDVSA Oil has the right, but not the obligation, to supply incremental amounts above 230,000 barrels per day. The Crude Supply 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 and energy costs; (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 inflation rates and energy costs, however, deemed margin adjustments can be less than the rate of inflation. Because deemed operating costs and the slate of refined products deemed to be produced from 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. There are risks associated with enforcing the provisions of contracts with an affiliate of a foreign government such as PDVSA Oil. These risks include enforcing judgments of United States courts against entities whose assets are located outside of the United States and whose management does not reside in the United States. Depending on current market conditions, breach or termination of the Crude Supply Contract could adversely affect the Company. For example, the parties have negotiated alternative arrangements in the event of certain force majeure conditions, including governmental or other actions restricting or otherwise limiting PDVSA Oil's ability to perform its obligations. Any such alternative arrangements may not be as beneficial as the Crude Supply Contract. There can be no assurance that 17 alternative crude oils with similar margins would be available for purchase by LCR. If LCR were required to return to the practice of purchasing all of its crude oil feedstocks in the merchant market, LCR would again be subject 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 PDVSA's strategic interest in expanding its crude oil refining operations in the United States in order to increase the markets for its heavy crude oil and continued 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, low sulfur diesel, jet fuel, aromatics, lubricants 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. Pursuant to the Products Agreement, CITGO purchases all of the gasoline, low sulfur diesel and jet fuel manufactured at the Refinery. These products are purchased by CITGO at market-based prices. For example, the price for gasoline is based on prices published by Platts Oilgram, an industry trade publication. Aromatics extracted as part of the refining process are marketed for LCR by Equistar. With the startup of new and modified hydrotreaters and sulfur plants, LCR is now producing all of its distillate as low sulfur diesel fuel for sale as transportation fuel, a higher-valued product. Blending facilities completed as part of the Upgrade Project enable LCR to supply more than 70 percent of its gasoline capacity as higher-value reformulated or oxygenated fuel. Due to the increasingly competitive lubricants business, LCR elected to close the base oils distillation units at the end of 1996 and now purchases lubricant base stocks in the open market for blending into motor oils. This eliminated approximately 35,000 barrels per day of higher cost sweet crude oil previously used in these units. LCR expects to enter into an agreement with CITGO pursuant to which CITGO will market LCR's production of naphthenic oil, white oil and compounded oil. AGREEMENTS BETWEEN LYONDELL, CITGO AND LCR LCR is a party to a number of agreements with Lyondell and CITGO. Lyondell currently performs administrative services for LCR pursuant to an Administrative Services Agreement. Lyondell, CITGO and LCR are in the process of renegotiating the terms of the Administrative Services Agreement. AGREEMENTS BETWEEN EQUISTAR AND LCR Prior to the formation of Equistar, Lyondell was a party with LCR to multiple agreements designed to preserve much of the synergy between the Refinery and the Channelview facility. Such agreements, including the aromatics marketing agreement described above under "--Marketing and Sales", were assumed by Equistar from Lyondell effective December 1, 1997. Economic evaluations at the Channelview facility 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 facility olefins by-products can be processed by the Refinery into gasoline. Butylenes from the Refinery are tolled through the Channelview facility for the production of alkylate and MTBE for gasoline blending. Hydrogen from the Channelview facility is used at the Refinery for sulfur removal and product stabilization. COMPETITION AND INDUSTRY CONDITIONS All of LCR's gasoline, low sulfur diesel and jet fuel 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. 18 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 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 has the effect of stabilizing future earnings and cash flows and substantially reducing the market driven aspects of such volatility. Among LCR's refining competitors are major integrated petroleum companies and domestic refiners that are owned by or affiliated with major integrated oil companies. Based on published industry data, as of January 1, 1998, there were 163 crude oil refineries in operation in the United States, and total domestic refinery capacity was approximately 16 million barrels per day. During 1997, LCR processed an average of 224,000 barrels per day of blended crude oil or over one percent of domestic capacity. CAPITAL PROGRAM LCR's capital expenditures for additions to fixed assets (excluding spending of $45 million on the Upgrade Project) totaled approximately $40 million in 1997. LCR's capital budget for 1998 is approximately $66 million and is expected to be funded by the owners, of which the Company is obligated to provide $38 million. Of the total 1998 capital budget, approximately $15 million is expected to be spent on environmentally-related capital projects. As part of its ongoing operations, LCR periodically conducts maintenance turnarounds on its facilities. 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, some of which are beyond LCR's control. PROPERTIES LCR owns the real property, plant and equipment which comprise the Refinery, located on approximately 700 acres in Houston, Texas. Units include a fluid catalytic cracking unit, cokers, 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 located in Pasadena, Texas to interconnect with common carrier pipelines. Equistar owns several pipelines connecting the Channelview facility, 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 facility and the Refinery. EMPLOYEE RELATIONS At December 31, 1997, LCR employed approximately 1,300 full-time employees. LCR also uses the services of independent contractors in the routine conduct of its business. Approximately 800 hourly workers are covered by a collective bargaining agreement between LCR and the Oil, Chemical and Atomic Workers Union, which expires in January 1999. 19 LYONDELL METHANOL COMPANY, L.P. OVERVIEW Lyondell produces methanol through its 75 percent interest in Lyondell Methanol, of which Lyondell serves as the managing partner. Effective December 1, 1997, Equistar began serving as the operator of Lyondell Methanol pursuant to an operating agreement with Lyondell Methanol. The remaining 25 percent interest in Lyondell Methanol is held by MCNIC. Lyondell Methanol owns a methanol plant located within the Channelview facility. The methanol plant is a heat- integrated plant, which includes extraction capabilities for co-products such as hydrogen and fusel oil. 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 polyester fibers and plastics. Other end uses include solvents and antifreeze applications. Lyondell Methanol is advantageously located near Gulf Coast MTBE producers. LYONDELL METHANOL BUSINESS STRATEGY Lyondell Methanol's strategic focus is on maintaining and improving efficient, low cost operations. Lyondell Methanol seeks to achieve this by reducing feedstock costs, increasing contract sales, implementing cost reduction technologies and techniques and maximizing the chemical efficiency of its processes. MANAGEMENT OF LYONDELL METHANOL Lyondell Methanol is a limited partnership organized under the laws of the state of Texas and is a pass-through entity for federal income tax purposes. Lyondell owns its interest in Lyondell Methanol through two wholly owned subsidiaries, one of which serves as a general partner and the managing partner of Lyondell Methanol and one of which serves as a limited partner. Similarly, MCNIC owns its interest in Lyondell Methanol through two wholly owned subsidiaries, one a general partner and one a limited partner. FEEDSTOCKS Lyondell Methanol's plant processes natural gas feedstocks. Equistar is connected to a diverse natural gas supply network and it purchases natural gas for use as fuel at its Channelview facility, and sells natural gas to Lyondell Methanol as a feedstock for the methanol plant. MARKETING, SALES AND DISTRIBUTION Substantially all of the methanol output from Lyondell Methanol is sold to Equistar who then sells it to third parties. The agreement between Lyondell Methanol and Equistar concerning such sales generally provides that Lyondell Methanol bears the market risk associated with such sales. Equistar's agreements with third parties for the sale of the methanol have initial terms ranging from two to three years and that typically contain automatic one year term extension provisions. These contracts generally provide for monthly price adjustments based upon current market prices. Methanol is distributed by pipeline, railcar, truck, barge or ocean-going vessel. AGREEMENTS BETWEEN EQUISTAR AND LYONDELL METHANOL Certain agreements entered into by Lyondell and Lyondell Methanol were assigned to Equistar effective December 1, 1997. Equistar acts as operator of Lyondell Methanol pursuant to an operating agreement with Lyondell Methanol. In addition, Equistar sells natural gas to Lyondell Methanol and markets Lyondell Methanol's product pursuant to agreements with Lyondell Methanol. Lyondell Methanol also leases from Equistar the real property on which its methanol plant is located. 20 COMPETITION AND INDUSTRY CONDITIONS The basis for competition in the methanol segment is product deliverability, product quality and price. Lyondell Methanol competes with other large producers of methanol, including Methanex, Borden Chemicals and Plastics and Terra Industries. The rated capacity of Lyondell Methanol's processing unit at January 1, 1998 was 248 million gallons. Based on published rate production capacities, the Company believes that Lyondell Methanol is the third largest methanol producer in the United States. Methanol profitability is affected by the level of demand for products in which methanol is used, including MTBE and plywood (the production of which involves the use of formaldehyde), demand for which in turn is driven by the housing market. Methanol profitability is also affected by the price of its feedstock, natural gas. CAPITAL PROGRAM The capital budget for Lyondell Methanol for 1998 is $13 million. These capital needs are expected to be funded by Lyondell Methanol's internal cash flow. Lyondell Methanol's 1998 capital budget includes capital costs associated with preparations for a turnaround expected to commence in the first quarter of 1999. PROPERTIES Lyondell Methanol's only property is the methanol plant it owns which is located within Equistar's Channelview complex on property leased from Equistar. EMPLOYEE RELATIONS Lyondell Methanol has no employees, since Equistar serves as its operator and marketing agent. LYONDELL PROPERTY AND EMPLOYEE RELATIONS Generally the Company's operations are conducted through Equistar, LCR and Lyondell Methanol (which is operated by Equistar). As of December 31, 1997, Lyondell, excluding Equistar and LCR and Lyondell Methanol, employed approximately 50 full-time employees. Lyondell's only facility, excluding the properties owned or leased by its joint ventures, is its leased corporate offices located in Houston, Texas. ENVIRONMENTAL MATTERS The production facilities of Equistar, LCR and Lyondell Methanol 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 and its joint ventures 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 its joint ventures have all permits and licenses generally necessary to conduct its business or, where necessary, are applying for additional, amended or modified permits and that it meets applicable financial responsibility requirements. The policy of each of Equistar, LCR and Lyondell Methanol is to be in compliance with all applicable environmental laws. Equistar also is committed to Responsible Care/(R)/, a chemical industry initiative to enhance the industry's responsible management of chemicals. The Company's joint ventures (together with the industries in which they operate) are 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 stricter requirements of environmental laws, inspection and enforcement policies and compliance costs therefrom, which might affect the handling, 21 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 operations of the joint ventures 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. Some risk of environmental costs and liabilities is inherent in particular operations and products of the joint ventures, 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 its joint ventures will be affected differentially from the rest of the domestic petrochemicals 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, 1997 and 1996, the Company and its joint ventures spent, in the aggregate, approximately $13 million and $28 million, respectively, for environmentally related capital expenditures at existing facilities. In 1998, the Company currently estimates that environmentally related capital expenditures at existing joint venture facilities will be approximately $20 million. The Company does not anticipate that environmentally related capital expenditures at joint venture facilities in 1999 will be materially different than for 1998. The timing and amount of these expenditures are subject to the regulatory and other uncertainties described above as well as obtaining of the necessary permits and approvals. For periods beyond 1999, 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 is also responsible for a portion of the remediation of certain off-site waste disposal facilities. 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 and its joint ventures, to the extent appropriate, have reserved amounts (without regard to potential insurance recoveries or other third party reimbursements) believed to be sufficient to cover current estimates of the cost for remedial measures at manufacturing facilities and off-site waste disposal facilities based upon their 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" and Item 7 --"Management's Discussion and Analysis of Financial Condition and Results of Operations". ITEM 3. LEGAL PROCEEDINGS GENERAL The Company, its subsidiaries and joint ventures are, from time to time, defendants in lawsuits, some of which are not covered by insurance. Many of these additional suits make no specific claim for relief. Although final determination of legal liability and the resulting financial impact with respect to any such litigation 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 condition of the Company. See Note 20 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS". Although Lyondell, its subsidiaries and joint ventures are involved in numerous and varied legal proceedings, a significant portion of its outstanding litigation arose 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 22 (3) claims for personal injury and/or property damage and air, noise and water pollution allegedly arising out of operations. OTHER MATTERS 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 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 paid a fine of $10,200. In addition, the Company incurred approximately $2 million in capital costs in connection with these waste water streams to achieve on-going compliance with the Benzene NESHAPS regulations. The Criminal Enforcement Division of the EPA opened a formal investigation in the first quarter of 1997 and interviewed certain officials and other personnel of the Company, but has taken no action since then. The Company does not believe any aspects of the matters described above will subject the Company to criminal liability or have a material adverse effect on the financial condition or liquidity of the Company. As a result of flooding during October 1994, three pipelines owned by Colonial Pipeline and Texaco ruptured in the San Jacinto River flood plain, resulting in explosions and fires. As a result of the explosions and fires, the Company was forced to shut down operations at its Channelview facility and destroy large volumes of product. The Company has filed suit seeking damages from Colonial Pipeline and Texaco of $12.5 million for lost profits, destroyed product, and repair costs. Settlement in this matter has not been reached. In June 1996, the Company experienced a fire at its Mont Belvieu terminal due to a valve malfunction. The fire resulted in damage estimated at approximately $14 million plus a before-tax impact on operating income of $2 million. The Company has filed suit seeking recovery of the loss from the valve manufacturer and refurbisher. 23 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the executive officers of Registrant as of March 1, 1998.*
BUSINESS EXPERIENCE DURING PAST NAME, AGE AND PRESENT FIVE YEARS AND PERIOD SERVED AS POSITION WITH LYONDELL OFFICER(S) - -------------------------------------- -------------------------------------- Clifton B. Currin, Jr., 43............ Mr. Currin was named Vice President, Vice President, Corporate Development in December Corporate Development 1997. Mr. Currin has served as a Vice President of the Company since 1994 with responsibilities in the areas of Strategic Development, Petrochemicals Business Management and Olefins. Prior to 1994, Mr. Currin held positions in manufacturing, evaluations and marketing for the Company and for ARCO Products Company. Kerry A. Galvin, 37................... Ms. Galvin was named Chief Corporate Chief Corporate Counsel Counsel and Secretary in December and Secretary 1997. Prior thereto, Ms. Galvin served as Finance and Securities Counsel and Assistant Secretary. Jeffrey R. Pendergraft, 49............ Mr. Pendergraft was named Senior Vice Senior Vice President and Chief President and Chief Administrative Administrative Officer Officer in December 1997. He has served as a Senior Vice President since May 1993. In addition, Mr. Pendergraft has served as Vice President, General Counsel and Secretary since 1988. Prior to 1988, Mr. Pendergraft served as General Attorney of the Lyondell Division and as attorney in various operating divisions and corporate units of ARCO. Edward W. Rich, 47.................... Mr. Rich was named Vice President, Vice President, Finance Finance and Treasurer in January and Treasurer 1998. Previously, Mr. Rich served as Treasurer of Dow Corning Corporation from February 1993 to January 1998. Prior to February 1993, Mr. Rich held various financial and legal positions with The Dow Chemical Company. Dan F. Smith, 51...................... Mr. Smith was named Chief Executive President, Chief Executive Officer Officer and President in December and Director 1996. Mr. Smith has been a Director since 1988. Mr. Smith served as President and Chief Operating Officer of the Company from 1994 to December 1996. Prior to 1994, Mr. Smith held various positions including Executive Vice President, Chief Financial Officer of the Company, Vice President, Corporate Planning of ARCO and Senior Vice President in the areas of management, manufacturing, control and administration for the Company and the Lyondell Division of ARCO.
* 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special meeting of stockholders was held November 20, 1997 to vote on the Joint Venture Transaction (as defined in the Joint Proxy Statement dated October 17, 1997), which involved the combination of businesses by Lyondell and Millennium in the form of Equistar. 65,729,436 shares voted for the Joint Venture Transaction, 288,722 shares voted against or were withheld and 120,634 shares abstained. 24 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. 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, 1996 through December 31, 1997, inclusive, were as set forth below.
PERIOD HIGH LOW ------ ---- --- 1996: First Quarter 32-1/4 22-1/2 Second Quarter 31-1/8 22-1/4 Third Quarter 24-3/4 21-5/8 Fourth Quarter 24-1/8 20-3/8 1997: First Quarter 25-1/2 21-5/8 Second Quarter 23-5/8 18-3/8 Third Quarter 27-3/8 21-7/8 Fourth Quarter 27-1/4 23-15/16
On February 27, 1998, the closing price of the Common Stock was $27.25, and there were approximately 1,800 holders of record of the Common Stock. During the last two years, Lyondell has declared $.225 per share quarterly cash dividends (which were paid in the subsequent quarter). 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 $.225 per share. During 1997, the Company paid $72 million in dividends. Certain debt instruments which were assumed by Equistar, but as to which Lyondell remains an obligor as well, contain provisions that generally provide that the holders of such debt may, under certain limited circumstances, require the obligor to repurchase the debt ("Put Rights"). Among other things, the Put Rights may be triggered by the making by either of Lyondell or Equistar of certain unearned distributions to stockholders or partners, respectively, 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. These determinations were made prior to the declaration of $.225 per share dividend paid on March 15, 1998. Lyondell's credit facility also could limit the Company's ability to pay dividends under certain circumstances. See Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations". 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 generally intends to cause Common Stock to be repurchased in the market in order to satisfy these obligations. 25 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information for the Company. FOR THE YEAR ENDED DECEMBER 31 ------------------------------------------------------------------------------ PRO FORMA MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS 1997 (A) 1996 (B) 1996 1995 1994 1993 - ---------------------------------------------- ----------- ------------ ----------- ----------- ----------- ----------- Sales and other operating revenues $2,878 $2,644 $5,052 $4,936 $3,857 $3,850 Income from equity investments 132 2 - - - - - - - - Income before cumulative effect of accounting changes 286 126 126 389 223 4 Net income (c) 286 126 126 389 223 26 Earnings per share before cumulative effect of accounting changes 3.58 1.58 1.58 4.86 2.78 .06 Earnings per share 3.58 1.58 1.58 4.86 2.78 .33 Dividends per share .90 .90 .90 .90 .90 1.35 Total assets 1,559 1,890 3,276 2,606 1,663 1,231 Long-term debt, less current portion 345 744 1,194 807 707 717
(a) Financial information for 1997 includes twelve months of operations for Lyondell and Lyondell Methanol Company, L.P., twelve months of operations of LYONDELL-CITGO Refining Company Ltd. ("LCR") as an equity investment and one month of operations of Equistar Chemicals, LP as an equity investment. (b) The unaudited pro forma financial information in the table above presents the financial position and results of operations of the Company as of December 31, 1996 and for the year then ended using the equity method of accounting for Lyondell's investment in LCR as if the change in accounting method had been effective January 1, 1996. See Note 4 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS." (c) The 1993 amount includes an increase in net income from the cumulative effect of an accounting change for turnarounds of $22 million, or $.27 per share. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Lyondell Petrochemical Company ("Company" or "Lyondell") operates in the petrochemicals, polymers and refining segments through its interests in Equistar Chemicals, LP ("Equistar"), LYONDELL-CITGO Refining Company Ltd. ("LCR") and Lyondell Methanol Company, L.P. ("Lyondell Methanol"). Equistar was formed on December 1, 1997 as a joint venture between Lyondell and Millennium Chemicals Inc. ("Millennium") and is operated as a limited partnership. The Company has a 57 percent interest in Equistar with Millennium owning the remaining 43 percent. Equistar owns and operates the existing petrochemicals and polymers businesses contributed by the two companies. Lyondell accounts for its investment in Equistar under the equity method of accounting, similar to the accounting for its investment in LCR. In December 1996, the Company sold an undivided interest in its methanol facility to MCN Investment Corporation ("MCNIC") and created Lyondell Methanol, a partnership with MCNIC as the minority owner, to own and operate the methanol facility. In accordance with the guidance in Emerging Issues Task Force Issue No. 96-16 ("EITF 96-16"), Lyondell will account for its investment in Lyondell Methanol under the equity method of accounting effective January 1, 1998. 26 In May 1995, the Company acquired Occidental Chemical Corporation's Alathon HDPE business ("ALATHON Business"). Assets involved in the acquisition included the production facilities in Matagorda ("Matagorda Facility") and Victoria ("Victoria Facility"), Texas, related research and development activities and the rights to the Alathon trademark. See Note 6 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS." The petrochemicals segment consists of Lyondell's operations in petrochemicals including: olefins (including ethylene, propylene, butadiene, butylenes and specialty products); aromatics (including benzene and toluene); methanol; methyl tertiary butyl ether ("MTBE"); and refinery blending stocks. Lyondell's interest in Lyondell Methanol for 1997 and the petrochemicals business of Equistar, including ethanol and ethyl ether, for December 1997 are included in the petrochemicals segment. The polymers segment consists of Lyondell's operations in polyolefins including high-density polyethylene ("HDPE"), low-density polyethylene and polypropylene. The polymers, concentrates and compounds and wire and cable resins businesses of Equistar for December 1997 are included in the polymers segment. The Company's operations in the refining segment are conducted through its interest in LCR, a Texas limited liability company owned by subsidiaries of the Company and CITGO Petroleum Corporation ("CITGO"). The refining segment consists of: refined petroleum products, including gasoline, low sulfur diesel, and jet fuel; aromatics produced at the full-conversion Houston, Texas refinery ("Refinery"), including benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial lubricants, motor oils, white oils and process oils; carbon black oil; sulfur; residual oil; petroleum coke fuel; olefins feedstocks; and crude oil resales. LCR completed a major upgrade project at the Refinery ("Upgrade Project") during the first quarter of 1997 to enable the facility to process substantial additional volumes of very heavy crude oil. At inception, LCR entered into a long-term crude oil supply contract ("Crude Supply Contract") with Lagoven, S.A., now known as PDVSA Petroleo y Gas, S.A. ("PDVSA Oil"), an affiliate of CITGO. In addition, under terms of a long-term product sales agreement ("Products Agreement"), CITGO purchases substantially all of the refined products produced at the Refinery. Both PDVSA Oil and CITGO are direct or indirect wholly owned subsidiaries of Petroleos de Venezuela, S.A., the national oil company of Venezuela. RESULTS OF OPERATIONS OVERVIEW Net income for 1997 was $286 million or $3.58 per share compared with $126 million or $1.58 per share in 1996 and $389 million or $4.86 per share in 1995. Earnings for 1997 included unusual charges of approximately $25 million after- tax for costs related to the formation of Equistar. Earnings for 1996 included an approximate $20 million after-tax gain from the sale of an undivided interest in the methanol facility. Excluding these one-time items, the earnings increase in 1997 versus 1996 was primarily due to higher sales margins for olefins and methanol. LCR's profit contribution in 1997 increased as higher volumes of very heavy crude oil, which carry a favorable deemed margin under the Crude Supply Agreement, were processed in 1997 due to the completion of the Upgrade Project. Sales volumes for olefins and methanol also increased in 1997 over 1996 volumes. Excluding the effect of the gain in 1996, the earnings decline in 1996 versus 1995 was primarily due to lower sales margins for petrochemicals and for aromatics at LCR, partially offset by higher polymers earnings. Financial information for 1997 includes twelve months of operations for Lyondell and Lyondell Methanol, twelve months of operations of LCR as an equity investment and one month of operations of Equistar as an equity investment. Due to the formation of Equistar on December 1, 1997, where appropriate, the narrative discussion which follows compares 1997 operating results for the petrochemicals and polymers businesses contributed by Lyondell to Equistar on an annualized basis (as eleven months of operations of the businesses are included in Lyondell's reported results on a consolidated basis) to the comparable twelve month periods in 1996 and 1995. 27 PETROCHEMICALS SEGMENT The following table sets forth: 1) sales volumes for the Company's major products, including production, purchases of products for resale, propylene production from the product flexibility unit, products received on exchange and draws from inventory, and 2) the Company's sales and other revenues, including intersegment sales.
FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------- 1997 1996 1995 ----------- ----------- ---------- SELECTED PETROCHEMICAL PRODUCTS (MILLIONS) Ethylene, propylene and other olefins (pounds) (a) 8,084 7,973 7,688 Methanol (gallons) 234 218 210 Aromatics (gallons) (a) 176 188 175 MILLIONS OF DOLLARS - -------------------- PETROCHEMICAL PRODUCTS REVENUES Ethylene, propylene and other olefins (a) $1,666 $1,515 $1,692 Methanol 130 92 125 Aromatics (a) 166 177 161 Other petrochemical products and other revenues (a) 570 509 365 ---------- ----------- ---------- Total petrochemical products sales $2,532 $2,293 $2,343 ========== =========== =========
____________________ (a) Includes petrochemicals sales volumes and revenues for the eleven months of operations of the petrochemicals business prior to the formation of Equistar on December 1, 1997. Methanol volumes are for twelve months of 1997. SELECTED PRICING INFORMATION The following graphs present industry pricing information for the periods shown below. Chart 1 - Month-end average delivered-contract, monthly low price agreement prices for Ethylene as reported by CMAI Monomers Market Report from January 1995 through December 1997. Chart indicates decreasing prices in 1995 with an annual average of the month-end prices of 26.42 cents per pound. 1996 prices increased steadily, however the annual average of the month-end prices of 23.33 cents per pound is still below the 1995 average. 1997 prices were relatively flat, although slightly decreasing, with an annual average of the month-end prices of 27.42 cents per pound. Selected month-end average prices are as follows: January 1995 - 28.00 cents per pound, December 1995 - 21.00 cents per pound, December 1996 - 26.25 cents per pound, December 1997 - 26.25 cents per pound. Chart 2 - Month-end average spot price WTS low prices for Crude Oil as reported by Platts Oilgram Price Report from January 1995 through December 1997. Chart indicates volatile, but increasing prices in 1995 and 1996 with the chart's peak occurring at $24.32 per barrel in December 1996. Annual average month-end prices were $17.84 per barrel in December 1996. Annual average month-end prices were $17.84 per barrel in 1995 and $21.35 per barrel in 1996. Prices decreased in 1997 with an annual average of the month-end prices of $19.35 per barrel. Prices were volatile in all three years although 1995 was somewhat flat. Selected month-end average prices are as follows: January 1995 - $17.55 per barrel, December 1995 - $18.22 per barrel, December 1996 - $24.32 per barrel, December 1997 - $17.13 per barrel. OPERATING INCOME Excluding income from equity investments, operating income amounted to $444 million in 1997 compared to $240 million in 1996 and $566 million in 1995. On an annualized basis, petrochemicals operating income more than doubled in 1997 due to higher sales margins and sales volumes for olefins and methanol. Sales margins for olefins improved due to higher olefins sales prices, resulting from strong demand for the downstream polyolefins markets, and lower feedstock costs. Olefins sales volumes increased due to strong demand in the downstream polyolefin markets. Methanol sales margins improved as a result of higher industry sales prices, slightly offset by higher natural gas feedstock costs. Sales volumes of methanol improved due to strong demand generated for downstream products by the gasoline end-use markets and housing and plastic packaging industries and significant industry capacity outages as well as delays in the startup of new capacity. The $298 million decline in operating income in 1996 as compared to 1995 was primarily due to lower sales margins for olefins due to higher feedstock costs. Lyondell's olefins feedstocks are primarily condensates and other petroleum liquids which tend to follow the cost trends of crude oil. Since 1995 and through 1996 the price of crude oil increased steadily which resulted in higher feedstock costs for the petrochemicals business; however, crude oil 28 prices began dropping in 1997 and have remained below 1996 prices through the end of 1997. The sales prices for various olefins products are primarily driven by three factors. The first factor is the demand for ethylene, propylene and other by-products as a result of economic conditions in end-use markets. The second factor is the operating rate of the installed capacity to produce olefin products. The third factor driving sales prices is the underlying cost of the feedstock. Strong demand and high operating rates were the primary factor which drove 1997 prices for these products above 1996 levels. Methanol is a component of products used by the housing and plastic packaging industry, as well as being a primary component of MTBE, a product used to blend low-emission reformulated gasoline. Methanol sales prices gradually increased from the fourth quarter of 1995 throughout 1996 due to strong demand by the end- use markets and supply constraints due to industry operating problems. Methanol sales prices have remained at a steady level above 1996 prices through the end of 1997. The price of natural gas, the principal methanol feedstock, increased throughout 1995 and 1996 and into January 1997 as a result of the tight supply and demand balance in the fuels market. After dropping significantly in early 1997, natural gas prices climbed upwards from March to November 1997 due to increased seasonal demand entering the winter months, but dropped in December 1997. REVENUES Sales and other operating revenues, including intersegment sales, were $2.5 billion in 1997 compared to $2.3 billion in 1996 and $2.3 billion in 1995. On an annualized basis, sales and other operating revenues increased 20 percent in 1997 over 1996 due to increased industry sales prices for by-products and ethylene, as well as methanol. Sales prices in 1997 showed significant increases over 1996 as strong demand from the polyolefins markets resulted in a tighter balance of supply and demand for olefins, and also as cost increases for olefins feedstocks over the course of 1996 were reflected in olefins product prices in 1997. In addition, olefins sales volumes increased due to strong demand in the downstream markets as well as planned and unscheduled industry turnarounds. Sales prices for methanol increased in 1997 due to a tighter supply and demand situation caused by unscheduled industry downtime. Methanol sales volumes increased in 1997 over 1996 in response to higher demand generated for downstream products by the gasoline end-use markets and the housing and plastic packaging industries. The $50 million decrease in 1996 compared to 1995 was primarily due to lower sales prices for petrochemicals. Compared to most of 1995, which was a period of strong market conditions for petrochemicals generally, average sales prices for petrochemicals during 1996 were lower due to a decline in market conditions which began in the latter part of 1995. This decline was due to additional olefins capacity that came onstream in 1995 and customer inventory corrections in the latter part of 1995. However, 1996 was still a strong year for petrochemical demand, in particular ethylene, and prices increased throughout the year after bottoming early in 1996 (see Chart 1). In July 1996 a fire occurred at the ARCO PipeLine Company meter station located within the Channelview, Texas petrochemicals facility (the "Channelview Facility"). The fire forced the shutdown of the entire Channelview Facility for several days and more than two weeks for some units. The Company recovered lost profits from ARCO PipeLine Company for this shutdown. The recovery was included in 1996 reported results. INCOME FROM EQUITY INVESTMENT IN EQUISTAR Lyondell's share of Equistar's petrochemicals division earnings for the month of December 1997, before its 57 percent share of the unusual charge consisting of costs related to the formation of Equistar, was $28 million. GAIN ON SALE OF ASSETS Gain on sale of assets resulted primarily from the sale of an undivided interest in the Company's methanol facility to MCNIC in December 1996. COST OF SALES Cost of sales was $2.1 billion in 1997 compared to $2.0 billion in 1996 and $1.7 billion in 1995. On an annualized basis, cost of sales increased nearly ten percent in 1997 over 1996 due to higher production levels to meet sales demand for both olefins and methanol. This increase was offset by lower feedstock costs for olefins, generally due to lower crude oil prices. Natural gas feedstock costs for methanol were slightly higher due to strong seasonal winter demand in the first and fourth quarters of 1997. The 1996 increase of over $300 million compared to 1995 was primarily due to higher olefins feedstock costs reflecting the higher crude oil and related products prices (see Chart 2). 29 SELLING EXPENSES Selling expenses amounted to $26 million in 1997 compared to $34 million in 1996 and $31 million in 1995. On an annualized basis, selling expenses for 1997 decreased over 20 percent due to increased freight reimbursements on exchanges. In addition, terminal expense related to storing product in anticipation of shutting down one of the olefins units for a maintenance turnaround in 1996 was lower in 1997. The $3 million increase in selling expenses in 1996 over 1995 was primarily due to the higher terminal expense related to the olefins units maintenance turnaround. POLYMERS SEGMENT The following table sets forth: 1) sales volumes for the Company's major polymers products, including production, purchases of products for resale, products received on exchange and draws from inventory, and 2) the Company's sales and other revenues, including intersegment sales. The volumes and revenues below include eight months of ownership of the ALATHON Business in 1995. The ALATHON Business was acquired in May 1995.
FOR THE YEAR ENDED DECEMBER 31 ---------------------------------------------- 1997 1996 1995 ------------- -------------- ---------- POLYMERS PRODUCTS (MILLIONS) Polyethylene and polypropylene (pounds) (a) 1,985 2,136 1,598 MILLIONS OF DOLLARS - ------------------- POLYMERS PRODUCTS REVENUES (a) Polyethylene and polypropylene $768 $780 $625 Other polymers products and other revenues 2 3 2 ------------- -------------- ---------- Total polymers products sales $770 $783 $627 ============= ============== ==========
____________________ (a) Includes polymers sales volumes and revenues for eleven months of operations of the polymers business prior to the formation of Equistar on December 1, 1997. OPERATING INCOME Excluding income from equity investments, operating income amounted to $82 million in 1997 compared to $97 million in 1996 and $69 million in 1995. On an annualized basis, polymers operating income decreased over 10 percent due to lower sales prices for polypropylene and higher feedstock costs. Industry sales price increases for most products became effective towards the end of the first quarter of 1997, but started to decrease in the third quarter of 1997. Polypropylene industry sales prices were negatively impacted by additional industry capacity added during 1997. Feedstock costs were higher during 1997 as compared to 1996 due to tighter supply and demand in the olefins markets. The $28 million increase in operating income in 1996 as compared to 1995 was primarily due to higher profits from the ALATHON Business. Lyondell's polymers feedstocks are primarily ethylene and propylene. During 1996 and 1997 the industry sales price of ethylene increased steadily which resulted in higher feedstock costs for the polymers business. The sales prices for various polymers products are primarily driven by two factors. One is the supply and demand balance for the products as a result of industry capacity additions as well as economic conditions in end-use markets such as the auto industry, housing construction and consumer durable and non-durable goods. Secondarily, sales prices are driven by the underlying cost of the feedstock. REVENUES Sales and other operating revenues, including intersegment sales, were $770 million in 1997 compared to $783 million in 1996 and $627 million in 1995. On an annualized basis, polymers revenues increased seven percent due to higher industry sales prices for polyethylene, which were partially offset by decreased industry sales prices for polypropylene. The $156 million increase in 1996 compared to 1995 was primarily due to higher sales resulting from a full year's revenues from the ALATHON Business. INCOME FROM EQUITY INVESTMENT IN EQUISTAR Lyondell's share of Equistar's polymers division earnings for the month of December 1997, before its 57 percent share of the unusual charge consisting of costs related to the formation of Equistar, was $13 million. 30 COST OF SALES Cost of sales was $612 million in 1997 compared to $608 million in 1996 and $505 million in 1995. The annualized 1997 increase of nearly 10 percent was primarily due to increased feedstock costs caused by tight supply and demand in the olefins markets. The 1996 increase of $103 million compared to 1995 was primarily due to higher cost of sales resulting from a full year's operations of the ALATHON Business. SELLING EXPENSES Selling expenses amounted to $76 million in 1997 compared to $78 million in 1996 and $53 million in 1995. On an annualized basis, selling expenses increased in 1997 over 1996 by six percent due to slightly increased annualized sales volumes and inventory levels resulting in higher shipping and storage costs. The $25 million increase in selling expenses in 1996 compared to 1995 was primarily due to the operation of the ALATHON Business for a full year in 1996 compared to eight months in 1995. For the polymers business, the cost of transporting finished products to customers by rail, including rail freight costs and rail car lease expense, is classified as selling expense. REFINING SEGMENT The refining segment consists primarily of the results of operations of LCR. Effective January 1, 1997, Lyondell began accounting for its investment in LCR under the equity method of accounting. LCR's results of operations were consolidated in 1996 and 1995. The narrative discussion that follows compares LCR's 1997 operating results to the information for the comparable periods in 1996 and 1995. The results below include a restatement for a pricing adjustment between LCR and Lyondell recorded in 1996 retroactive to 1993.
FOR THE YEAR ENDED DECEMBER 31 ---------------------------------------------- 1997 1996 1995 ---------- -------- --------- MILLIONS OF DOLLARS - ------------------- Sales and other operating revenues $2,695 $2,816 $2,651 Cost of sales 2,442 2,753 2,462 Selling, general and administrative expenses 72 59 58 ---------- -------- --------- Operating income 181 4 131 Interest expense, net 35 - - (2) State income taxes 1 - - 3 ---------- -------- --------- Net income $ 145 $ 4 $ 130 ========== ======== =========
The following table sets forth: 1) sales volumes for LCR's major products, including production, purchases of products for resale, products received on exchange and draws from inventory and 2) LCR's sales and other revenues, including intersegment sales.
FOR THE YEAR ENDED DECEMBER 31 ---------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- REFINED PRODUCTS (THOUSAND BARRELS PER DAY) Gasoline 111 101 109 Diesel and heating oil 68 47 52 Jet fuel 17 24 29 Aromatics 11 9 10 Other refined products 93 82 75 ----------- ----------- ----------- Total refined products volumes 300 263 275 =========== =========== =========== MILLIONS OF DOLLARS - ------------------- REFINED PRODUCTS REVENUES Gasoline $1,017 $937 $879 Diesel and heating oil 568 421 375 Jet fuel 145 220 220 Aromatics 189 181 258 Other refined products and other revenues 613 621 549 ----------- ----------- ----------- Total refined products sales 2,532 2,380 2,281 =========== =========== =========== Crude oil resales (a) 163 436 370 ----------- ----------- ----------- Total refined products and crude oil sales $2,695 $2,816 $2,651 =========== =========== ===========
31 __________________________ (a) 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 to reduce transportation costs. GENERAL At its inception, LCR entered into the Crude Supply Contract with PDVSA Oil. LCR is required to purchase, and PDVSA Oil is required to sell, sufficient crude oil to satisfy LCR's coking capacity, or a minimum of 200,000 barrels per day and up to 230,000 barrels per day of very heavy Venezuelan crude oil. PDVSA Oil has the right, but not the obligation, to supply incremental amounts above 230,000 barrels per day. In addition, under terms of the Products Agreement, CITGO purchases substantially all of the refined products produced at the Refinery. The Upgrade Project was completed one month ahead of schedule in the first quarter of 1997. The completion enabled LCR to begin to take full benefit of the Crude Supply Contract in March 1997. Beginning in March 1997, increasing volumes of very heavy crude oil were processed, with fourth quarter heavy crude runs averaging 247,000 barrels per day (233,000 barrels per day under the Crude Supply Contract in the coking mode). The following table sets forth processing rates at the Refinery for the periods indicated. Refinery runs for 1996 are primarily heavy crude oil, whereas the 1997 refinery runs reflect higher volumes of very heavy crude oil processed.
FOR THE YEAR ENDED DECEMBER 31 ---------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- REFINERY RUNS (THOUSAND BARRELS PER DAY) Crude oil: Crude Supply Contract - coked 196 116 108 Other heavy crude oil - coked 14 6 2 Other crude oil 14 96 128 ---------- ---------- ---------- Total crude oil 224 218 238 Unfinished stock 70 45 48 ---------- ---------- ---------- Total 294 263 286 ========== ========== ==========
OPERATING INCOME LCR's operating income improved in 1997 to $181 million compared to $4 million in 1996 due to improved margins caused primarily by higher volumes of very heavy crude oil processed in the coking mode under the Crude Supply Contract. These improved margins were offset partially by higher production costs, primarily depreciation expense, and lower paraxylene margins. Operating income for LCR amounted to $4 million in 1996 compared to $131 million in 1995. During 1996, profit performance from refined products benefited from high processing rates of heavy Venezuelan crude oil. However, this improvement was offset by lower margins due to rising feedstock costs for the crude oil runs not covered by the Crude Supply Contract. Operating rates for the crude oil purchased outside the Crude Supply Contract were reduced significantly in the third quarter of 1996 due to poor economics. The $127 million decrease in 1996 compared to 1995 was primarily due to lower aromatics (primarily paraxylene and orthoxylene) and refined products (gasoline, low sulfur diesel and jet fuel) sales margins and to higher period costs. Overall, aromatics sales margins were lower in 1996 primarily due to lower sales prices for orthoxylene and paraxylene. Refined products sales margins decreased due to higher crude oil (see Chart 2) and other feedstock costs, which more than offset higher refined product sales prices, as well as higher fuel costs. Refining period costs were higher in 1996 due to higher maintenance expense and personnel compensation. REVENUES Upon the completion of the Upgrade Project in the first quarter of 1997, LCR began processing increased volumes of very heavy crude oil under the Crude Supply Contract resulting in higher margins. Sales and other operating revenues for LCR, including intersegment sales, were $2.7 billion in 1997 compared to $2.8 billion in 1996. The 1997 decrease of $121 million compared to 1996 primarily resulted from lower crude oil resales, lower refined products pricing and lower aromatics pricing, particularly paraxylene. These decreases were offset by higher sales volumes as production levels after completion of the Upgrade Project increased. Crude oil resales 32 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 to reduce transportation costs. For crude oil purchases outside the Crude Supply Contract, approximately three barrels of crude oil are purchased for every barrel processed with the remaining two barrels traded or resold. Beginning in the second quarter of 1996 and continuing in 1997, paraxylene prices declined due to additional industry capacity and continued inventory reductions in the PET business by plastic beverage container customers and in the polyester fibers business by clothing and fabric manufacturing customers. LCR's sales and other operating revenues, including intersegment sales, were $2.8 billion in 1996 compared to $2.6 billion in 1995. The 1996 increase of $165 million compared to 1995 primarily resulted from higher sales prices for refined products and higher prices on crude oil resales, partially offset by lower paraxylene and orthoxylene prices. Paraxylene and orthoxylene prices were at historical highs during the first half of 1995 before returning to a more normal level in the fourth quarter of 1995 due to increased industry production and lower demand as a result of customers' inventory reductions. COST OF SALES Cost of sales was $2.4 billion in 1997 compared to $2.8 billion in 1996 for LCR. The $311 million decrease in 1997 compared to 1996 was primarily due to lower costs of crude oil and other petroleum feedstock costs. Crude oil feedstock costs are tied to sales prices under the Products Agreement. As industry sales prices declined as a result of lower industry crude prices, feedstock costs for LCR were lower. In addition, crude oil resale costs were lower due to significantly lower volumes of crude oil resales as purchases under the Crude Supply Contract increased in 1997. These lower costs were offset partially by higher production costs, primarily depreciation expense. LCR's cost of sales was $2.8 billion in 1996 compared to $2.5 billion in 1995. The 1996 increase compared to 1995 of $291 million was primarily due to higher crude oil and other petroleum feedstock costs and higher costs of crude oil resales, both of which resulted from higher industry crude oil prices. In addition, period costs, primarily maintenance, increased. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for LCR were $72 million in 1997 compared to $59 million in 1996 and $58 million in 1995. The increase in 1997 is primarily due to increased selling expense as a result of product mix and increased employee compensation including incentive compensation. INTEREST EXPENSE LCR's interest expense was $37 million in 1997 compared to $2 million in 1996 and $1 million in 1995. Interest expense on debt related to construction of the Upgrade Project was capitalized through its completion including the first quarter of 1997, and the years 1996 and 1995. INTEREST INCOME LCR's interest income was $2 million in 1997 compared to $2 million in 1996 and $3 million in 1995. UNALLOCATED GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were $84 million in 1997 compared to $60 million in 1996 and $59 million in 1995. The increase in 1997 compared to 1996 was due to increased employee compensation and computer support costs, primarily due to headcount increases related to software implementation. In addition, employee incentive compensation increased. UNUSUAL CHARGE The unusual charge of $40 million in 1997 consists of costs related to the formation of Equistar comprised primarily of costs associated with a reduction of the workforce and consolidation of certain operations. Lyondell's $24 million share of Equistar's unusual charges was allocated to Lyondell in accordance with its 57 percent ownership percentage. Lyondell also incurred $16 million of costs related to the early termination of incentive compensation plans and executive severance. 33 INTEREST EXPENSE Interest expense was $75 million in 1997 compared to $81 million in 1996 and $80 million in 1995. The decrease in 1997 is primarily due to the transfer of debt to Equistar as of December 1, 1997. INTEREST INCOME Interest income was $14 million in 1997 compared to $3 million in 1996 and $6 million in 1995. The increase in 1997 resulted from higher levels of loans to LCR outstanding during the year. The $3 million decrease in interest income in 1996 compared to 1995 was primarily due to lower levels of excess cash available for investment. MINORITY INTEREST Minority interest was $17 million in 1997 representing the allocated share of Lyondell Methanol net income to MCNIC, the minority owner of Lyondell Methanol. Minority interest of $4 million in 1996 represents the allocated share of LCR net income to CITGO, the minority owner of LCR, and the allocated share of Lyondell Methanol net income to MCNIC. Minority interest was $14 million in 1995 representing the allocated share of LCR net income to CITGO. INCOME TAX The effective income tax rate during 1997 was 37.3 percent compared to 35.7 percent for 1996 and 37.1 percent for 1995. The effective income tax rate increased in 1997 due to the non-deductibility of executive compensation. State income tax was the primary difference between the effective tax rate and the 35 percent federal statutory rate during each of the periods. FINANCIAL CONDITION OPERATING ACTIVITIES Lyondell's cash flow from operating activities totaled $269 million during 1997 compared to $232 million and $471 million generated in 1996 and 1995, respectively. The 1997 improvement is primarily attributable to the increase in net income in 1997 versus 1996 offset by changes in working capital, primarily accounts payable as a result of feedstock price changes between December 31 of each year. INVESTING ACTIVITIES - CAPITAL EXPENDITURES The Company made capital expenditures of $49 million during 1997, primarily for projects at the petrochemical plants. Equistar made capital expenditures of $12 million, of which $7 million is Lyondell's share, during the month of December 1997. Excluding Upgrade Project expenditures totaling $45 million, LCR made capital expenditures of $40 million during 1997, of which $11 million related to environmental projects with the remainder for other maintenance and capital projects. Upgrade Project expenditures during 1997 were funded by $18 million from Lyondell in the form of subordinated loans to LCR, $16 million from CITGO in the form of subordinated loans to LCR, and $10 million and $1 million of contributions made during 1997 by CITGO and Lyondell, respectively. CITGO provided a major portion of the funding for the Upgrade Project which through December 31, 1997 totaled cash contributions of $490 million, including cash contributions for the carrying costs of the debt. CITGO also reinvested approximately $46 million of cash distributions through the first quarter of 1997. In addition, CITGO provided $130 million for funding other non-Upgrade Project capital projects through March 1, 1997. INVESTING ACTIVITIES - CONTRIBUTIONS AND ADVANCES TO/DISTRIBUTIONS FROM AFFILIATE Contributions to Equistar include $1 million in 1997 for the initial funding of Equistar's cash accounts. A distribution in excess of earnings before unusual charges of $27 million from Equistar was received in December 1997. Contributions and advances to LCR in 1997 include $18 million in subordinated loans to LCR for the Upgrade Project expenditures, $2 million in contributions for other capital projects and $65 million in working capital contributions. Distributions in excess of earnings of $45 million were made by LCR to Lyondell in 1997. FINANCING ACTIVITIES Cash used in financing activities in 1997 consisted primarily of the retirement of $112 million of long-term debt. Distributions to MCNIC, the minority owner of Lyondell Methanol, totaled $16 million during 1997. Borrowings of $50 million in 1997 were used primarily to finance costs related to the formation of Equistar in December 1997. Long-term debt, and the current portion thereof, outstanding at December 1, 1997 of $744 million was contributed to Equistar. 34 The Board of Directors authorized a $75 million stock repurchase program in September 1997. The Company had purchased 1,400,012 shares of common stock through March 1, 1998 including 1,015,512 shares of common stock for approximately $26 million through December 31, 1997. In August 1994, Atlantic Richfield Company ("ARCO") issued three-year debt securities ("Exchangeable Notes") which were exchangeable upon maturity on September 15, 1997 into Lyondell common stock or an equivalent cash value, at ARCO's option. On September 15, 1997, ARCO delivered shares of Lyondell common stock to the holders of the Exchangeable Notes. The Company purchased the remaining 383,312 shares of common stock held by ARCO after the conversion. As of September 30, 1997, ARCO owns no shares of common stock of Lyondell. The Company paid regular quarterly dividends of $.225 per share of common stock in each quarter of 1997. On January 23, 1998, the Board of Directors declared a regular quarterly dividend in the amount of $.225 per share of common stock, payable March 15, 1998 to stockholders of record on February 25, 1998. LYONDELL PETROCHEMICAL COMPANY DEBT Effective December 1, 1997, the Company has a 364-day, $225 million revolving credit facility ("Facility") with a group of banks, which replaced the five-year $400 million revolving credit facility. Borrowings under the Facility bear interest at either the eurodollar or prime rates or rates based on a competitive auction feature wherein the interest rate can be established by competitive bids submitted by the sponsoring banks, all at the Company's option. The Facility is available for working capital and general corporate purposes as needed and contains covenants relating to disposition of assets, mergers and consolidations, and certain ratios. At December 31, 1997, no amounts were outstanding under this Facility. The Company also has uncommitted lines of credit totaling $150 million with banks and other financial institutions. These uncommitted lines of credit provide the Company with additional borrowing flexibility and potentially more competitive interest rates. The Company can borrow money on these uncommitted lines of credit on such terms as may be mutually agreed upon at the time amounts are borrowed. The lines of credit can be terminated by the lenders, in their sole discretion, on short notice. As of December 31, 1997, the Company had $100 million outstanding under these uncommitted lines of credit. EQUISTAR CHEMICALS, LP DEBT As of December 31, 1997, Equistar had $744 million of long-term debt (including the current portion) consisting of: (i) $150 million of notes due in 1999; (ii) $100 million of notes due in 2002; (iii) $150 million of notes due in 2006; (iv) $150 million of debentures due in 2026; and (v) $194 million of medium-term notes due from 1998 to 2005. Equistar assumed primary liability for all of the foregoing indebtedness of Lyondell in connection with its formation. Lyondell also continues to be liable on such debt until its maturity. In connection with its formation, on December 1, 1997, Equistar entered into a five-year, $1.25 billion Credit Facility (the "Equistar Credit Facility") with a group of banks expiring November 2002. Borrowings under the Equistar Credit Facility bear interest at either the Federal Funds rate plus 1/2 of 1 percent, LIBOR, a fixed rate offered by one of the sponsoring banks or rates that are based on a competitive auction feature wherein the interest rate can be established by competitive bids submitted by the sponsoring banks, depending on the type of borrowing made under the Facility. The Facility is available for working capital and general purposes as needed and contains covenants relating to liens, sale and leaseback transactions, debt incurrence, leverage and interest coverage ratios, sales of assets and mergers and consolidations. As of December 31, 1997, Equistar had $800 million outstanding under the Equistar Credit Facility. Millennium America, Inc., a subsidiary of Millennium ("Millennium America"), guaranteed the payment of principal and interest on a total of $750 million principal amount of indebtedness under the Equistar Credit Facility; however, the lenders may not proceed against Millennium America until they have exhausted their remedies against Equistar. The guarantee will remain in effect indefinitely, but at any time after the seventh anniversary of the Equistar Credit Facility, Millennium America may elect to terminate the guarantee if certain events occur. LYONDELL-CITGO REFINING COMPANY LTD. DEBT In May 1995, LCR entered into two credit facilities totaling $520 million with a group of banks with The Bank of New York as agent (together the "LCR Credit Facilities"). The first facility, a $70 million, 364-day revolving working capital facility, was renewed in 1997 and is being utilized for general business purposes and for letters of credit. At December 31, 1997, no amounts were outstanding under this credit facility. The second facility is a $450 million, five-year term credit facility that was used to 35 partially fund the Upgrade Project. At December 31, 1997, $450 million was outstanding under this credit facility with a weighted average interest rate of 6.5 percent. Interest for both facilities is based on prime or eurodollar rates at LCR's option. The LCR Credit Facilities contain covenants that require LCR to maintain a minimum net worth which increases each year until 1998 and maintenance of certain financial ratios defined in the agreements. The LCR Credit Facilities also contain other customary covenants which limit LCR's ability to modify certain significant contracts, incur additional debt or liens, dispose of assets, make restricted payments as defined in the agreements or merge or consolidate with other entities. ACCOUNTING STANDARDS In June 1997, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components. SFAS No. 130 requires all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company does not believe the effect of adoption of SFAS No. 130 in 1998 will have a material impact on the Company. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The Company plans to adopt SFAS No. 131 in 1998 and disclose the methanol business currently included in the petrochemicals segment as a separate segment. YEAR 2000 Lyondell and Equistar have replaced many of their business and operating computer systems (including systems operated by Equistar for Lyondell Methanol). Equistar is in the process of replacing the systems for the operations contributed by Millennium. LCR is in the process of replacing many of its business and operating computer systems. The new systems, based on enterprise software from SAP America, Inc., will replace older systems and allow employees at different locations to share financial and operating information more efficiently. The first major use of the software commenced May 1, 1997 for the majority of the financial and operating systems of the operations contributed to Equistar by Lyondell. Remaining phases are targeted for completion late in 1998 and into the first half of 1999. The new systems and software are Year 2000 compatible, thus handling the majority of the Company's Year 2000 conversion requirements. Equistar and LCR are developing conversion strategies for their remaining systems. Management does not believe Year 2000 compliance will be a significant issue. 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. In connection with the transfer of assets and liabilities from Atlantic Richfield Company ("ARCO") to the Company at the time the Company was formed into a separate company, effective July 1, 1988, the Company and ARCO entered into an agreement ("Cross-Indemnity Agreement") whereby the Company agreed to defend and indemnify ARCO against certain 36 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, 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. Pursuant to the Cross-Indemnity Agreement, the Company is currently contributing funds for one site pursuant to its obligation to reimburse ARCO for a portion of its uninsured remediation costs. The Company has reached an agreement-in-principle with ARCO to update the Cross-Indemnity Agreement ("Revised Cross-Indemnity Agreement"). Under the Revised Cross-Indemnity Agreement, both ARCO and the Company waive any claim for reimbursement under the existing Cross-Indemnity Agreement for any prior defense and settlement costs associated with waste site matters, and the Company will assume responsibility for its proportionate share of future costs for waste site matters not covered by ARCO insurance. The obligation described above will continue under the Revised Cross-Indemnity Agreement. Lyondell and Millennium have similar indemnifications with Equistar related to the petrochemicals and polymers business contributions by the companies. Equistar has agreed to indemnify and defend Lyondell and Millennium, individually, against certain uninsured claims and liabilities which Equistar may incur relating the operation of the contributed business prior to December 1, 1997 up to $7 million each within the first seven years of the partnership, subject to certain terms of the Asset Contribution Agreements. The Company reserves for contingencies, including those based upon unasserted claims, that are probable and reasonably estimable. In connection with environmental matters, the Company establishes reserves based upon known facts and circumstances. Based on current environmental laws and regulations, the Company believes 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. Lyondell's environmental reserve at December 31, 1997 was $12 million. The Company spent $1 million, $2 million and $9 million in 1997, 1996 and 1995, respectively, relating to environmental matters. The Company estimates it will spend approximately $2 million in conjunction with environmental matters in 1998, which is included in the December 31, 1997 environmental reserve. CURRENT BUSINESS OUTLOOK On December 1, 1997, the Company and Millennium formed Equistar, which owns and operates the existing petrochemicals and polymers businesses contributed by the two companies. The formation of Equistar is expected to result in cost savings and profit improvement synergies of more than $150 million per year by the year 2000. For 1998, the net positive impact of the synergies, after one-time costs, is expected to be $50 million. During the remainder of 1998, management expects that olefins supply and demand fundamentals will be weakening versus the conditions that prevailed in 1997. Additional industry capacity was added in the fourth quarter of 1997. The relatively greater increase in supply versus demand increases may negatively impact pricing of olefins into 1998. However, unplanned industry outages may somewhat offset the increased supply and mitigate the pricing effect. Feedstock costs are lower in the first quarter of 1998 also offsetting lower pricing effects. The Asian financial crisis in primarily, Thailand, Malaysia, Indonesia and the Philippines continues to have a short-term impact on exports in downstream markets which impacts industry pricing and volumes. Polymers prices are still decreasing slightly and are currently at lower levels than experienced in 1997. Offsetting this will be reduced feedstock costs from decreasing olefins pricing. Additional industry capacity added in the second half of 1997 also may negatively impact prices and margins in 1998. Polymers demand growth in 1998 is expected to remain at historical rates. More than 90 percent of LCR's crude oil purchases are made pursuant to the Crude Supply Contract which significantly reduces the crude oil volume which is sensitive to market conditions. In the last half of 1997, 37 throughput rates were consistent and strong, resulting in increased profitability and cash flow. Although operating rates will be lower in the first quarter of 1998 due to planned maintenance, strong operating results are expected to return beginning in the second quarter of 1998 and continue for the remainder of the year. LCR's indebtedness has been scheduled to be refinanced in the second quarter of 1998. In connection therewith, the Company anticipates that LCR would repay the construction loan and subordinated loans made to LCR by Lyondell, including those made in connection with the Upgrade Project, as well as subordinated loans made to LCR by CITGO, including those made in connection with the Upgrade Project. Additional cash received in the refinancing will be distributed to Lyondell and CITGO. Lyondell proceeds are expected to be in the $400 million to $600 million range. Lyondell anticipates that it will use a portion of its proceeds to repay Lyondell's $345 million note payable to Equistar. Methanol demand growth is expected to slow in 1998. Unscheduled outages in the downstream markets have negatively impacted demand for methanol in the first quarter of 1998. New industry capacity added in the fourth quarter of 1997 is expected to lead to price pressures that could continue through 1998. Offsetting the demand and pricing pressures, natural gas feedstock prices have dropped slightly from the stronger levels experienced in the last half of 1997. As a result, margins are expected to be reduced in 1998 below the levels in 1997. Lyondell's share of budgeted 1998 capital expenditures for Equistar, LCR and Lyondell Methanol totals $116 million, $38 million and $10 million, respectively. The Equistar capital budget of $204 million includes spending for the 460 million pound HDPE resin expansion at the Matagorda Facility, the ethylene conversion to liquid feedstocks at the La Porte Facility, a debottleneck at the Victoria Facility and other projects at the petrochemicals and polymers facilities. The LCR capital budget of $66 million includes spending for process control upgrades, fluid catalytic cracker upgrade and other projects at the Refinery. The Lyondell Methanol capital budget of $13 million includes capital spending for a major maintenance turnaround scheduled to be completed in the first quarter of 1999. Capital expenditures are expected to be funded primarily from the operating cash flow of the ventures. Profitability and cash flows for the petrochemicals, polymers 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 maintenance turnarounds. Turnarounds on major units can have significant financial impacts due to the associated loss of production, resulting in lower profitability. Management believes business conditions will be such that cash balances, cash distributions from Equistar, LCR and Lyondell Methanol and existing lines of credit will be adequate to meet future cash requirements for scheduled debt repayments and to sustain for the reasonably foreseeable future the regular quarterly dividend. Management anticipates, in general, increased cash flow from its businesses because of the creation of Equistar and the LCR venture, which should provide greater financial flexibility to the Company. Management intends to accelerate cash flow from its investment in LCR as a result of LCR replacing its current construction financing with longer-term financing and distributing excess funds to the owners of LCR. Management expects cash flow to be in excess of the amounts needed to fund operations, debt repayments (including the $345 million note payable to Equistar), and to maintain an appropriate capital structure. Management plans to maximize stockholder value by investing excess cash flow in attractive growth opportunities or returning excess cash flow to stockholders. On March 20, 1998, Lyondell and Millennium announced an agreement to expand Equistar with the addition of the ethylene, propylene and ethylene oxide and derivatives businesses of Occidental Chemical Corporation, a subsidiary of Occidental Petroleum. This is expected to increase total value creation from Equistar, through additional synergies created by leveraging costs over a larger asset base. It will also provide expanded diversification into products that use ethylene as a feedstock. The transaction, which is subject to regulatory approval, is expected to close by mid-year 1998. Lyondell's percentage ownership in Equistar would decrease to 41 percent from the current 57 percent ownership as a result of this transaction. 38 FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report, including those regarding the Current Business Outlook, are "forward-looking statements" within the meaning of the federal securities laws. Although Lyondell believes the expectations reflected in such forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and Lyondell can give no assurance that such expectations will prove to have been correct. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the cyclical nature of the petrochemical, polymers and refining industries, uncertainties associated with the United States and worldwide economies, current and potential United States governmental regulatory actions, substantial petrochemical and polymer capacity additions resulting in oversupply and declining prices and margins, and operating interruptions (including leaks, explosions, fires, mechanical failure, unscheduled downtime, transportation interruptions, and spills and releases and other environmental risks). Many of such factors are beyond Lyondell's or its joint ventures' ability to control or predict. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. All subsequent written and oral forward-looking statements attributable to the Company and persons acting on its behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report. 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---------------- LYONDELL PETROCHEMICAL COMPANY Report of Independent Accountants 41 Financial Statements: Consolidated Statements of Income and Retained Earnings (Deficit) 42 Consolidated Balance Sheets 43 Consolidated Statements of Cash Flows 44 Notes to Consolidated Financial Statements 45 EQUISTAR CHEMICALS, LP Report of Independent Accountants 66 Financial Statements: Statement of Income 67 Balance Sheet 68 Statement of Partners' Capital 69 Statements of Cash Flows 70 Notes to Financial Statements 71 LYONDELL-CITGO REFINING COMPANY LTD. Overview 80 Report of Independent Accountants 81 Financial Statements: Statements of Income 82 Balance Sheets 83 Statements of Cash Flows 84 Statements of Members' Equity 85 Notes to Financial Statements 86
40 LYONDELL PETROCHEMICAL COMPANY REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Lyondell Petrochemical Company: We have audited the accompanying consolidated balance sheets of Lyondell Petrochemical Company as of December 31, 1997 and 1996, and the related consolidated statements of income and retained earnings (deficit), and cash flows for each of the three years in the period ended December 31, 1997. 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 assessingy 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Houston, Texas February 16, 1998 (Except as to the information presented in Note 23, for which the date March 20, 1998) 41 LYONDELL PETROCHEMICAL COMPANY CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31 ---------------------------------------------- MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS 1997 1996 1995 - -------------------------------------------- ---------- ----------- ---------- SALES AND OTHER OPERATING REVENUES (NOTE 4): Unrelated parties $2,346 $4,734 $4,611 Related parties 532 318 325 ---------- ----------- ---------- 2,878 5,052 4,936 ---------- ----------- ---------- INCOME FROM EQUITY INVESTMENTS: LYONDELL-CITGO Refining Company Ltd. 102 - - - - Equistar Chemicals, LP (before unusual charge) 30 - - - - ---------- ----------- ---------- 132 - - - - ---------- ----------- ---------- GAIN ON SALE OF ASSETS - - 30 - - ---------- ----------- ---------- OPERATING COSTS AND EXPENSES: Cost of sales: Unrelated parties 1,827 4,320 3,801 Related parties 423 250 225 Selling, general and administrative expenses 186 234 204 Unusual charges (including $24 million from Equistar Chemicals, LP) 40 - - - - ---------- ----------- ---------- 2,476 4,804 4,230 Operating income 534 278 706 Interest expense (75) (81) (80) Interest income 14 3 6 Minority interest (17) (4) (14) ---------- ----------- ---------- Income before income taxes 456 196 618 Provision for income taxes 170 70 229 ---------- ----------- ---------- NET INCOME $286 $126 $389 ========== =========== ========== BASIC AND DILUTED EARNINGS PER SHARE $3.58 $1.58 $4.86 ========== =========== ========== RETAINED EARNINGS (DEFICIT) AT BEGINNING OF YEAR $193 $142 $(175) Net income 286 126 389 Cash dividends (72) (72) (72) OTHER - - (3) - - ---------- ----------- ---------- RETAINED EARNINGS AT END OF YEAR $407 $193 $142 ========== =========== ==========
42 LYONDELL PETROCHEMICAL COMPANY CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ------------------------------ MILLIONS OF DOLLARS 1997 1996 - ------------------- ----------- ------------- ASSETS Current assets: Cash and cash equivalents $ 86 $ 68 Accounts receivable: Trade 1 394 Related parties 4 62 Inventories - - 294 Prepaid expenses and other current assets 12 13 ----------- ------------- Total current assets 103 831 ----------- ------------- Property, plant and equipment 138 4,313 Less accumulated depreciation and amortization (92) (2,043) ----------- ------------- 46 2,270 Investment in affiliates: LYONDELL-CITGO Refining Company Ltd. ("LCR") 104 - - Equistar Chemicals, LP 1,063 - - Receivable from LCR 196 - - Deferred charges and other assets 47 175 ----------- ------------- Total assets $1,559 $ 3,276 =========== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable: Trade $ 87 $ 474 Related parties 97 1 Notes payable 100 60 Current maturities of long-term debt - - 112 Other accrued liabilities 24 124 ----------- ------------- Total current liabilities 308 771 ----------- ------------- Long-term debt 345 1,194 Other liabilities and deferred credits 73 114 Deferred income taxes 209 157 Commitments and contingencies Minority interest 5 609 Stockholders' equity: 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 80 80 Additional paid-in capital 158 158 Retained earnings 407 193 Treasury stock, at cost, 1,015,512 shares (26) - - ----------- ------------- Total stockholders' equity 619 431 ----------- ------------- Total liabilities and stockholders' equity $1,559 $ 3,276 =========== =============
See notes to consolidated financial statements. 43 LYONDELL PETROCHEMICAL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31 ------------------------------------------- MILLIONS OF DOLLARS 1997 1996 1995 - ------------------- ---------- ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 286 $ 126 $ 389 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 84 110 86 Deferred income taxes 43 50 3 Minority interest 17 4 14 Gain on sale of assets - - (30) - - Increase in accounts receivable (64) (94) (1) Increase in inventories (37) (29) (36) Increase (decrease) in accounts payable (44) 160 54 Net change in other working capital accounts (2) 6 (1) Other (14) (71) (37) ---------- ---------- --------- Net cash provided by operating activities 269 232 471 ---------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (49) (609) (982) Proceeds from sales of assets - - 55 - - Purchases of short-term investments - - (76) - - Proceeds from sales of short-term investments - - 76 - - Contributions and advances to affiliates (86) - - - - Distributions from affiliates in excess of earnings 72 - - - - Deconsolidation of affiliate (12) - - - - ---------- ---------- --------- Net cash used in investing activities (75) (554) (982) ---------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Minority owners' (distributions) contributions (16) 146 176 Net change in short-term debt 50 (43) 83 Borrowings of long-term debt - - 499 250 Repayments of long-term debt (112) (150) (10) Repurchase of common stock (26) - - - - Dividends paid (72) (72) (72) ---------- ---------- --------- Net cash provided by (used in) financing activities (176) 380 427 ---------- ---------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18 58 (84) Cash and cash equivalents at beginning of period 68 10 94 ---------- ---------- --------- Cash and cash equivalents at end of period $ 86 $ 68 $ 10 ========== ========== =========
See notes to consolidated financial statements. 44 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. FORMATION OF THE COMPANY AND OPERATIONS Lyondell Petrochemical Company ("Company" or "Lyondell") operates in the petrochemicals, polymers and refining segments through its interests in Equistar Chemicals, LP ("Equistar"), LYONDELL-CITGO Refining Company Ltd. ("LCR"), a Texas limited liability company, and Lyondell Methanol Company, L.P. ("Lyondell Methanol"). Equistar was formed on December 1, 1997 as a joint venture between the Company and Millennium Chemicals Inc. ("Millennium") and is operated as a limited partnership. In December 1996, the Company sold an undivided interest in its methanol facility to MCN Investment Corporation ("MCNIC") and created Lyondell Methanol Company L.P. ("Lyondell Methanol"), a partnership with MCNIC as the minority owner, to own and operate the methanol facility. In 1996 and 1995, Lyondell operated in two segments: the petrochemicals segment, which included the results of operations of the Company's petrochemicals and polymers business, and the refining segment. Beginning in 1997, the petrochemicals segment was split into the petrochemicals and polymers segments. The petrochemicals segment consists of: olefins including ethylene, propylene, butadiene, butylenes and specialty products; aromatics including benzene and toluene; methanol; methyl tertiary butyl ether ("MTBE"); refinery blending stocks and ethyl alcohol. Lyondell's interest in Lyondell Methanol for 1997 and the petrochemicals business of Equistar for December 1997 are included in the petrochemicals segment. The polymers segment consists of Lyondell's operations in polyolefins including high-density polyethylene ("HDPE"), low-density polyethylene and polypropylene. The polymers, concentrates and compounds, and wire and cable businesses contributed by Millennium to Equistar in December 1997 are also included in the polymers segment. The Company's operations in the refining segment are conducted through its interest in LCR, a Texas limited liability company owned by subsidiaries of the Company and CITGO Petroleum Corporation ("CITGO"). The refining segment consists of refined petroleum products, including gasoline, low sulfur diesel, and jet fuel; aromatics produced at LCR's full-conversion Houston, Texas refinery ("Refinery"), including benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial lubricants, motor oils, white oils and process oils; carbon black oil; sulfur; residual oil; petroleum coke fuel; olefins feedstocks; and crude oil resales. LCR completed a major upgrade project at the Refinery ("Upgrade Project") during the first quarter of 1997 to enable the facility to process substantial additional volumes of very heavy crude oil. LCR sells its principal refined products to CITGO (see Note 4). From its formation in 1985 through June 1988, Lyondell operated as a division of Atlantic Richfield Company ("ARCO"). In July 1988, ARCO transferred the division's assets and liabilities along with additional pipeline assets, to its wholly owned subsidiary, Lyondell Petrochemical Company, a Delaware corporation. In January 1989, ARCO completed an initial public offering of approximately 50.1 percent of the Company's common stock. In August 1994, ARCO issued three-year debt securities ("Exchangeable Notes") which were exchangeable upon maturity on September 15, 1997 into Lyondell common stock or an equivalent cash value, at ARCO's option. On September 15, 1997, ARCO delivered shares of Lyondell common stock to the holders of the Exchangeable Notes. The Company purchased the remaining 383,312 shares of common stock held by ARCO after the conversion. As of December 31, 1997, ARCO owns no shares of common stock of Lyondell. Although during the previous five years the contribution to operating profits made by the petrochemicals and polymers segments has been over five times greater than the contribution to operating profits made by the refining segment, this trend could be reversed in any particular year due to margin volatility within the petrochemicals and petroleum refining industries. 45 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The 1997 consolidated financial statements include the accounts of the Company and its subsidiaries, including Lyondell Methanol. LCR is included in the consolidated financial statements of the Company in 1996 and 1995. All significant transactions between the entities of the Company have been eliminated from the consolidated financial statements. The Company's investments in LCR in 1997 and Equistar for December 1997 are shown as equity investments and are not consolidated. Revenue Recognition - Revenue from product sales is generally recognized upon delivery of products to the customer. Cash and Cash Equivalents - Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts purchased with an original maturity date of three months or less. Cash equivalents are stated at cost, which approximates fair value. The Company's policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of these financial institutions which are considered in the Company's investment strategy. The Company has no requirements for compensating balances in a specific amount at a specific point in time. The Company does maintain compensating balances for some of its banking services and products. Such balances are maintained on an average basis and are solely at the Company's discretion. As a result, none of the Company's cash is restricted. 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." Management determines the appropriate classification of investments in debt securities as trading, available-for-sale or held-to-maturity at the time of purchase and reevaluates such designation as of each balance sheet date. Accounts Receivable - The Company, Equistar and LCR sell their products primarily to companies in the petrochemicals and refining industries. The Company, Equistar and LCR perform ongoing credit evaluations of their customers' financial condition and in certain circumstances require letters of credit from them. The Company's allowance for doubtful accounts receivable, which is reflected in the consolidated balance sheet as a reduction of accounts receivable, totaled $3 million at December 31, 1996. The Company had no significant allowance for doubtful accounts recorded at December 31, 1997. 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. Property, Plant and Equipment - Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment 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. The Company's policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year. Turnaround Maintenance and Repair Expenses - Cost of repairs and maintenance incurred in connection with turnarounds of major units at the Company's manufacturing facilities exceeding $5 million are deferred and amortized on a straight-line basis until the next planned turnaround, generally four to six years. 46 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Environmental Remediation Costs - Expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable a liability has been incurred and the amount of the liability can reasonably be estimated. Estimates have not been discounted to present value. Environmental remediation costs are expensed or capitalized in accordance with generally accepted accounting principles. In October 1996 the American Institute of Certified Public Accountants issued Statement of Position 96-1 ("SOP 96-1"), "Environmental Remediation Liabilities," which establishes new accounting and reporting standards for the recognition and disclosure of environmental remediation liabilities. The effect of adoption of SOP 96-1 in 1997 did not have a material impact on the Company's financial position or results of operations. Exchanges - Crude oil and finished product exchange transactions, which are of a homogeneous nature of commodities in the same line of business and do not involve the payment or receipt of cash, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the normal LIFO valuation policy. Exchanges 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 based upon cumulative book and tax differences in the consolidated balance sheets in accordance with SFAS No. 109, "Accounting for Income Taxes." Basic and Diluted Earnings per Share - In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share." SFAS No. 128 establishes standards for computing and presenting earnings per share ("EPS"). SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS and also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. There was no impact on 1997, 1996 or 1995 from the Company's adoption of SFAS No. 128. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications - Certain previously reported amounts have been restated to conform to classifications adopted in 1997. 3. EQUISTAR CHEMICALS, LP Equistar was formed on December 1, 1997 as a joint venture between the Company and Millennium and is operated as a limited partnership. Lyondell contributed substantially all of the assets comprising its petrochemicals and polymers business segments, as well as a $345 million note, in exchange for a 57 percent interest in Equistar, held through two wholly owned subsidiaries. Millennium contributed substantially all of the assets comprising its polyethylene and related products, performance polymers and ethyl alcohol businesses, which had been held in Millennium Petrochemicals, Inc., a wholly owned subsidiary of Millennium. In exchange, Millennium received a 43 percent interest in Equistar, Equistar repaid $750 million of debt due to Millennium from its contributed business and Millennium retained $250 million of certain accounts receivable. Equistar owns and operates the petrochemicals and polymers businesses contributed by the two companies. Because certain management decisions are jointly controlled by Lyondell and Millennium, Lyondell accounts for its investment in Equistar under the equity method of accounting, similar to the accounting for its investment in LCR. Summarized financial information for Equistar is as follows (in millions of dollars). 47 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BALANCE SHEET DECEMBER 31 1997 ----------- Total current assets $1,193 Property, plant and equipment, net 2,118 Goodwill, net 1,139 Deferred charges and other assets 151 ----------- Total assets $4,601 =========== Current maturities of long-term debt $ 36 Other current liabilities 316 Long-term debt 1,512 Other liabilities and deferred credits 34 Partners' capital 3,048 Note receivable from Lyondell (345) ----------- Total liabilities and partners' capital $4,601 =========== FOR THE ONE MONTH ENDED DECEMBER 31 INCOME STATEMENT 1997 ----------- Sales and other operating revenues $ 365 Cost of sales 287 Selling, general and administrative expenses 21 Unusual charge 42 ----------- Operating income 15 Interest expense, net 8 ----------- Net income $ 7 =========== SELECTED CASH FLOW INFORMATION Depreciation and amortization $ 19 Changes in working capital 69 Additions to property, plant and equipment (12)
Lyondell's equity income from investment in Equistar is presented on the consolidated income statement as Lyondell's $30 million share of Equistar's income before the unusual charge for December 1997. Lyondell's $24 million share of the Equistar unusual charge is included in the unusual charges line on the consolidated income statement (see Note 7). 4. LYONDELL-CITGO REFINING COMPANY LTD. In July 1993, LCR was formed to own and operate the Company's refining business. LCR completed the Upgrade Project at the Refinery during the first quarter of 1997, which enables the facility to process substantial additional volumes of very heavy crude oil. As a result of the completion of the Upgrade Project, effective April 1, 1997 the participation interests changed from 86 percent and 14 percent to 58.5 percent and 41.5 percent for Lyondell and CITGO, respectively, to reflect CITGO's equity contribution in the Upgrade Project. CITGO has a one-time option to increase its participation interest in LCR up to 50 percent by making an additional equity contribution. Net income before depreciation expense for the period is allocated to LCR's owners based on participation interests. Depreciation expense is allocated to the owners based on contributed assets. Pursuant to contractual arrangements and concurrent with the completion of the Upgrade Project, the authority and responsibility for certain management decisions previously decided by majority vote, and therefore controlled by Lyondell, changed to unanimous vote resulting in expanded joint control of LCR by Lyondell and CITGO. 48 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Consequently, effective January 1, 1997, Lyondell began accounting for its investment in LCR under the equity method of accounting, meaning that the operations of LCR are no longer consolidated line by line with those of Lyondell. Lyondell's portion of LCR's net earnings are included in the consolidated statements of income as income from equity investment and Lyondell's portion of LCR's net assets appear on a single line in the consolidated balance sheets as investment in affiliate. Cash advances to and distributions in excess of earnings from LCR are reflected as individual line items on the consolidated statements of cash flows. The following unaudited pro forma financial information presents the financial position, results of operations and cash flows of the Company as of and for the year ended December 31, 1996 using the equity method of accounting for Lyondell's investment in LCR as if the change in accounting method had been effective January 1, 1996. This unaudited pro forma information may not be indicative of results that will be obtained in the future.
BALANCE SHEETS PRO FORMA AS REPORTED - -------------- EQUITY METHOD CONSOLIDATED MILLIONS OF DOLLARS DECEMBER 31, 1996 DECEMBER 31, 1996 - -------------------- -------------------- -------------------- Current assets $ 619 $ 831 Property, plant and equipment, net 893 2,270 Investment in affiliate 83 - - Receivable from affiliate 177 - - Deferred charges and other assets 118 175 -------------------- -------------------- Total assets $1,890 $3,276 ==================== ==================== Notes payable $ 50 $ 60 Current maturities of long-term debt 112 112 Other current liabilities 323 599 -------------------- -------------------- Total current liabilities 485 771 Long-term debt 744 1,194 Other liabilities and deferred credits 70 114 Deferred income taxes 157 157 Minority interest 3 609 Total stockholders' equity 431 431 -------------------- -------------------- Total liabilities and stockholders' equity $1,890 $3,276 ==================== ==================== INCOME STATEMENTS PRO FORMA AS REPORTED - ----------------- EQUITY METHOD CONSOLIDATED FOR THE YEAR ENDED FOR THE YEAR ENDED MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS DECEMBER 31, 1996 DECEMBER 31, 1996 - -------------------------------------------- -------------------- -------------------- Sales and other operating revenues $2,644 $5,052 Income from equity investment 2 - - Gain on sale of assets 30 30 Cost of sales 2,228 4,570 Selling, general and administrative expenses 172 234 -------------------- -------------------- Operating income 276 278 Interest expense (79) (81) Interest income 1 3 Minority interest (2) (4) -------------------- -------------------- Income before income taxes 196 196 Provision for income taxes 70 70 -------------------- -------------------- Net income $ 126 $ 126 ==================== ==================== Earnings per share $1.58 $1.58 ==================== ====================
49 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STATEMENTS OF CASH FLOWS PRO FORMA AS REPORTED - ------------------------ EQUITY METHOD CONSOLIDATED FOR THE YEAR ENDED FOR THE YEAR ENDED MILLIONS OF DOLLARS DECEMBER 31, 1996 DECEMBER 31, 1996 - ------------------- ------------------- ------------------ Net income $ 126 $ 126 Depreciation and amortization 74 110 Deferred income taxes 50 50 Minority interest 2 4 Gain on sale of assets (30) (30) Changes in working capital and other (92) (28) ------------------- ------------------ Net cash provided by operating activities 130 232 ------------------- ------------------ Additions to property, plant and equipment (80) (609) Proceeds from sales of assets 55 55 Contributions and advances to affiliate, net (82) - - Deconsolidation of affiliate (4) - - ------------------- ------------------ Net cash used in investing activities (111) (554) ------------------- ------------------ Minority owners' contributions 2 146 Net change in short-term debt (53) (43) Borrowings of long-term debt 300 499 Repayments of long-term debt (150) (150) Dividends paid (72) (72) ------------------- ------------------ Net cash provided by financing activities 27 380 ------------------- ------------------ Increase in cash and cash equivalents 46 58 Cash and cash equivalents, beginning of period 10 10 ------------------- ------------------ Cash and cash equivalents, end of period $ 56 $ 68 =================== ==================
Summarized financial information for LCR is as follows (in millions of dollars). The results below include a restatement for a pricing adjustment between LCR and Lyondell recorded in 1996 retroactive to 1993.
BALANCE SHEETS DECEMBER 31 -------------------------------- 1997 1996 ---------- ------------ Total current assets $ 243 $ 273 Property, plant and equipment, net 1,391 1,391 Deferred charges and other assets 47 56 ---------- ------------ Total assets $ 1,681 $ 1,707 ========== ============ Total current liabilities $ 293 $ 373 Long-term debt 663 627 Other liabilities and deferred credits 52 44 Members' equity 673 663 ---------- ------------ Total liabilities and members' equity $ 1,681 $ 1,707 ========== ============
50 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INCOME STATEMENTS FOR THE YEAR ENDED DECEMBER 31 -------------------------------------------- 1997 1996 1995 ----------- ------------- ------------- Sales and other operating revenues $2,695 $2,816 $2,651 Cost of sales 2,442 2,750 2,462 Selling, general and administrative expenses 72 62 58 ----------- ------------- ------------- Operating income 181 4 131 Interest expense, net 35 - - (2) State income taxes 1 - - 3 ----------- ------------- ------------- Net income $ 145 $ 4 $ 130 =========== ============= ============= STATEMENTS OF CASH FLOWS Depreciation and amortization 91 74 32 Net changes in working capital (26) (49) 25 Additions to property, plant and equipment (85) (80) (506)
Included in sales and other operating revenues above are $181 million, $175 million and $289 million in sales to Lyondell for the eleven months ended November 30, 1997 and the years ended December 31, 1996 and 1995 respectively. Sales to Equistar included above were $7 million for December 1997. In addition, LCR purchased $325 million, $234 million and $193 million, primarily product purchases, from Lyondell for the eleven months ended November 30, 1997, and the years ended December 31, 1996 and 1995, respectively, which is included in LCR's cost of sales. Purchases from Equistar in December 1997 included in LCR's cost of sales totaled $28 million. The Company has various service and cost sharing arrangements with LCR. Billings to LCR were approximately $7 million, $11 million, and $16 million for the years ended December 31, 1997, 1996, and 1995, respectively. Billings from LCR were approximately $5 million, $3 million, and $11 million for the years ended December 31, 1997, 1996 and 1995, respectively. LCR has a long-term crude supply contract ("Crude Supply Contract") with Lagoven, S.A., now known as PDVSA Petroleo y Gas, S.A. ("PDVSA Oil"), an affiliate of CITGO. The Crude Supply 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 and energy costs; (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 inflation rates and energy costs, however, deemed margin adjustments can be less than the rate of inflation. Because deemed operating costs and the slate of refined products deemed to be produced for a given barrel of crude oil or other feedstock do not necessarily reflect the actual costs and yields in any period and 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. Despite the limitations discussed above, the Crude Supply Contract reduces the volatility of earnings and cash flow of the refining operations of LCR irrespective of market fluctuations of either crude oil or refined products. Specifically, if the market value of refined products "deemed" to be produced from the Venezuelan crude oil increases, the "deemed" cost of crude oil to LCR will also increase. Alternatively, if the market value of refined products "deemed" to be produced from the Venezuelan crude oil decreases, the "deemed" cost of crude oil to LCR will also decrease. This results in relatively stable "deemed" margins regardless of refined products market volatility. If the actual yields, costs or volumes differ substantially from those contemplated by the Crude Supply Contract, the benefits of this agreement to LCR could be substantially different than anticipated. In addition, under the terms of a long-term product sales agreement ("Products Agreement"), CITGO purchases substantially all of the refined products produced at the Refinery. Both PDVSA Oil and CITGO are direct or indirect wholly owned subsidiaries of Petroleos de Venezuela, S.A., the national oil company of Venezuela. LCR is required to 51 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) purchase, and PDVSA Oil is required to sell, sufficient crude oil to satisfy LCR's coking capacity, or a minimum of 200,000 barrels per day and up to 230,000 barrels per day of very heavy Venezuelan crude oil. PDVSA Oil has the right, but not the obligation, to supply incremental amounts above 230,000 barrels per day. 5. LYONDELL METHANOL COMPANY, L.P. Lyondell Methanol was formed in December 1996 by Lyondell and MCNIC to own and operate the methanol facility at the Channelview Facility. MCNIC has a 25 percent interest in Lyondell Methanol. Lyondell has a 75 percent interest in Lyondell Methanol and serves as managing partner and operator. In accordance with the guidance in Emerging Issues Task Force Issue No. 96-16 ("EITF 96-16") issued by the FASB in May 1997, Lyondell will account for its investment in Lyondell Methanol under the equity method of accounting effective January 1, 1998. During 1997, Lyondell Methanol revenues were $165 million and net income was $58 million on a book depreciation basis. 6. ACQUISITION OF ALATHON/(R)/ HIGH-DENSITY POLYETHYLENE BUSINESS In May 1995, the Company acquired Occidental Chemical Corporation's Alathon/(R)/ high-density polyethylene ("HDPE") business ("ALATHON Business") for $356 million including certain direct costs, plus approximately $64 million for inventory. Assets involved in the purchase included resin production facilities at Victoria and Matagorda, Texas, associated research and development activities and the rights to the Alathon/(R)/ trademark. These facilities have a combined annual production capacity of approximately 1.5 billion pounds of HDPE. The Company financed the acquisition from internal cash and $230 million of short- term borrowings from its existing financing arrangements. The following unaudited pro forma information combines the results of operations of the Company and the ALATHON Business for the year ended December 31, 1995 and assumes the acquisition of the ALATHON Business occurred on January 1, 1995. This unaudited pro forma information may not be indicative of results that would have actually resulted if this transaction had occurred on January 1, 1995 or which may be obtained in the future.
MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNT 1995 - ------------------------------------------- ------- Sales and other operating revenues $5,130 Net income 409 Earnings per share 5.11
7. UNUSUAL CHARGES During 1997, the Company recognized $40 million of unusual charges related to the formation of Equistar, comprised primarily of costs associated with a reduction of the workforce and consolidation of certain operations. Certain costs were paid by Equistar and allocated to Lyondell and Millennium in accordance with ownership percentages. Lyondell also incurred costs related to the early termination of incentive compensation plans and executive severance. The unusual charges consist of the following items (in millions of dollars).
Lyondell's 57 percent share of the Equistar unusual charge $ 24 Lyondell incentive compensation and executive severance 16 ----------- Total $ 40 ===========
52 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information is summarized as follows.
MILLIONS OF DOLLARS 1997 1996 1995 - ------------------- ----------- ---------- ---------- Cash paid during the year for: Interest: Paid $ 66 $ 103 $ 83 Less amount capitalized - - 32 6 ----------- ---------- ---------- Net $ 66 $ 71 $ 77 =========== ========== ========== Income taxes $ 125 $ 42 $ 252 =========== ========== ==========
At December 31, 1996 and 1995, property, plant and equipment included $9 million and $53 million, respectively, of non-cash additions which related to accounts payable accruals. No such amounts are included at December 31, 1997. The petrochemicals and polymers businesses contributed by the Company to Equistar on December 1, 1997 included non-cash net assets with a net book value of $762 million, including $381 million of accounts receivable, $233 million of inventory, $826 million of net property, plant and equipment and $745 million of long-term debt including the current portion of long-term debt. In addition, the Company contributed a $345 million Term Note payable to Equistar. 9. FINANCIAL INSTRUMENTS The fair value of all financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable, accounts payable and notes payable, approximated their carrying value due to their short maturity. The fair value of the long-term debt payable to Equistar approximated its carrying value due to its variable interest rate. 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 Company's long-term debt, including amounts due within one year, was $1.236 billion at December 31, 1996. 10. RELATED PARTY TRANSACTIONS Atlantic Richfield Company Sales to ARCO, excluding sales to ARCO Chemical Company, were $31 million in 1996 and $4 million in 1995. Costs of sales and selling expenses include charges from ARCO, excluding costs to ARCO Chemical Company, of $23 million in 1996 and $28 million in 1995. The Company purchased 383,312 shares of common stock held by ARCO after the conversion of the Exchangeable Notes on September 15, 1997 at a price of $25.66 per share. Sales to ARCO Chemical Company, an ARCO affiliate, consisting of propylene, MTBE, benzene, ethylene, methanol and other products and services, were $206 million in 1997, $287 million in 1996 and $321 million in 1995. In July 1996, a fire occurred at the ARCO PipeLine Company meter station located within the Channelview Facility. The fire forced the shutdown of the entire Channelview Facility for several days and more than two weeks for some units. The Company recovered lost profits from ARCO PipeLine Company for this shutdown. The recovery was included in 1996 reported results. 53 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LYONDELL-CITGO Refining Company Ltd. During 1997, the Company received interest of approximately $12 million for interest on loans related to funding a portion of the upgrade project and certain other capital expenditures at the Refinery. 11. INVENTORIES The Company's inventory was contributed to Equistar on December 1, 1997. At December 31, 1996 the Company had total inventory of $294 million, which was comprised of $47 million of petrochemicals, $34 million of polymers, $172 million of crude oil and refined products, and $41 million of materials and supplies. For the years ended December 31, 1997 and 1996, the Company increased cost of sales by approximately $1 million and $2 million, respectively; and for the year ended December 31, 1995, the Company reduced cost of sales by approximately $2 million, all associated with the reduction in LIFO inventories. The excess of the current cost of inventories over book value was approximately $189 million at December 31, 1996. 12. PROPERTY, PLANT AND EQUIPMENT The Company's manufacturing facilities and equipment at December 31, 1997 are owned by Lyondell Methanol. The components of property, plant and equipment and their gross value at December 31, 1997 and 1996 were as follows.
MILLIONS OF DOLLARS 1997 1996 - ------------------- ---------- ---------- Manufacturing facilities and equipment $ 138 $3,329 Construction projects in progress - - 953 Land - - 28 Leased assets and improvements - - 3 ---------- ---------- Total property, plant and equipment $ 138 $4,313 ========== ==========
Total interest cost incurred during 1997, 1996 and 1995 was approximately $75 million, $114 million and $86 million, respectively, of which approximately $33 million in 1996 and $6 million in 1995 was capitalized. No interest was capitalized in 1997. 13. DEFERRED CHARGES AND OTHER ASSETS Deferred charges and other assets at December 31, 1997 and 1996 were as follows.
MILLIONS OF DOLLARS 1997 1996 - ------------------- ---------- ---------- Company owned life insurance $ 43 $ 39 Deferred turnaround costs 1 81 Deferred software costs - - 32 Other 3 23 ---------- ---------- Total deferred charges and other assets $ 47 $ 175 ========== ==========
54 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 14. OTHER ACCRUED LIABILITIES Other accrued liabilities at December 31, 1997 and 1996 were as follows.
MILLIONS OF DOLLARS 1997 1996 - ------------------- ---------- ---------- Accrued taxes other than income $ 11 $ 35 Accrued payroll 6 37 Accrued interest 2 18 Income taxes - - 6 Other 5 28 ---------- ---------- Total other accrued liabilities $ 24 $ 124 ========== ==========
15. LONG-TERM DEBT AND FINANCING ARRANGEMENTS Long-term debt at December 31, 1997 and 1996 was comprised of the following.
MILLIONS OF DOLLARS 1997 1996 - ------------------- ---------- ---------- 8.25% Notes due in 1997 $ - - $ 100 10.00% Notes due in 1999 - - 150 9.125% Notes due in 2002 - - 100 6.5% Notes due in 2006 - - 150 7.55% Debentures due in 2026 - - 150 LCR 5-year term credit facility - - 450 Medium-term notes (1998-2005) - - 206 Term note to Equistar 345 - - ---------- ---------- 345 1,306 Less current portion - - 112 ---------- ---------- Total long-term debt $ 345 $1,194 ========== ==========
The 8.25% Notes due in 1997 and $12 million of the medium-term notes were paid in 1997 prior to the contribution of the remaining long-term debt, including current maturities of long-term debt, to Equistar on December 1, 1997. Lyondell remains liable on the debt, which totaled $744 million at December 31,1997, until its maturity. On December 1, 1997, the Company entered into a $345 million Term Note Agreement with Equistar. The note bears interest at LIBOR, which was 5.7 percent at December 31, 1997. The note matures on the earlier of three years or thirty days following a refinancing of LCR which results in the payment of LCR's $450 million term construction loan and a distribution to the Company of at least $345 million. Effective, December 1, 1997, the Company has a 364-day, $225 million revolving credit facility ("Facility") with a group of banks, which replaced the five-year $400 million revolving credit facility. Borrowings under the Facility bear interest at either the eurodollar or prime rates or based on a competitive auction feature wherein the interest rate can be established by competitive bids submitted by the sponsoring banks, all at the Company's option. The Facility is available for working capital and general corporate purposes as needed and contains covenants relating to disposition of assets, mergers and consolidations, and certain ratios. At December 31, 1997, no amounts were outstanding under this Facility. The Company also has uncommitted lines of credit totaling $150 million with banks and other financial institutions. These uncommitted lines of credit provide the Company with additional borrowing flexibility and potentially more competitive interest rates. The Company can borrow money on these uncommitted lines of credit on such terms as may be mutually agreed upon at the time amounts are borrowed. The lines of credit can be terminated by the 55 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) lenders, in their sole discretion, on short notice. As of December 31, 1997, the Company had $100 million outstanding under these uncommitted lines of credit. 16. STOCKHOLDERS' EQUITY Dividends - During 1997, 1996 and 1995, the Company paid regular quarterly dividends of $.225 per share of common stock outstanding. Earnings per Share - Basic and diluted earnings per share for all periods presented are computed based on the weighted average number of shares outstanding for the periods, which was 79,795,788 shares for the year ended December 31, 1997, and 80,000,000 shares for 1996 and 1995. Options to purchase 159,173 shares of common stock at $30 per share were outstanding during 1997 but were not included in the computation of diluted earnings per share because of their anti-dilutive effect. Treasury Stock - Treasury stock is acquired under a resolution the Board of Directors adopted in September 1997 authorizing the Company to purchase, from time to time, shares of the Company's common stock not to exceed $75 million in the aggregate. The Company purchased 1,015,512 shares through December 31, 1997 for approximately $26 million. Rights to Purchase Common Stock - On December 8, 1995, the Board of Directors of Lyondell declared a dividend of one right ("Right") for each outstanding share of the Company's common stock to stockholders of record on December 20, 1995. The Rights become exercisable upon the earlier of (i) ten days following a public announcement by another entity that it has acquired beneficial ownership of 15 percent or more of the outstanding shares of common stock, or (ii) ten business days following the commencement of a tender offer or exchange offer to acquire beneficial ownership of 15 percent or more of the outstanding shares of common stock, excluding ARCO, except under certain circumstances. The Rights expire at the close of business on December 8, 2005 unless earlier redeemed at a price of $.0005 per Right or exchanged by the Company as described in the Rights Agreement dated as of December 8, 1995. Preferred Stock - The Company has authorized 80,000,000 shares of preferred stock, $.01 par value, of which none were issued or outstanding at December 31, 1997. Stock Options - The Company's Executive Long-Term Incentive Plan ("LTI Plan") became effective in November 1988. The last stock options granted under the LTI Plan were granted in March 1994. No additional stock option grants will be made under the LTI Plan. The LTI Plan provided, among other compensation awards, for the granting to officers and other key management employees of non-qualified stock options for the purchase of up to 1,295,000 shares of the Company's common stock. The number of options exercisable each year is equal to 25 percent of the number granted after each year of continuous service starting one year from the date of grant. The LTI Plan provided that the option price per share was not less than 100 percent of the fair market value of the stock on the effective date of the grant. As of December 31, 1997, options covering 732,160 shares were outstanding under the LTI Plan with a weighted average remaining life of 5 years, of which 675,579 were exercisable at prices ranging from $18.25 to $30.00 per share. The following summarizes stock option activity for the LTI Plan.
OPTION PRICE NUMBER AVERAGE MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS OF SHARES PER SHARE TOTAL - --------------------------------------------- -------------- ---------------- ---------- Balance, January 1, 1996 948,256 $23.26 $ 22 Exercised (204,454) 22.64 (5) -------------- ---------- Balance, December 31, 1996 743,802 23.43 17 Exercised (11,642) 19.15 -- -------------- ---------- Balance, December 31, 1997 732,160 23.50 $ 17 ============== ==========
56 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Company's Incentive Stock Option Plan ("ISO Plan"), a tax qualified plan, became effective in January 1989. The last stock options granted under the ISO Plan were granted in March 1993. No additional grants will be made under the ISO Plan. All employees of the Company who were not on the executive payroll were eligible to participate in the ISO Plan, subject to certain restrictions. Various restrictions apply as to when and to the number of stock options that may be exercised during any year. As of December 31, 1997, options covering 156,751 shares were outstanding at prices ranging from $19.44 to $30.00 per share. These options were held by 719 eligible employees and expire in January 1999. At December 31, 1997, 180 stock options were exercisable at an average exercise price of $19.44. The following summarizes stock option activity for the ISO Plan.
OPTION PRICE NUMBER AVERAGE MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS OF SHARES PER SHARE TOTAL - --------------------------------------------- -------------- ---------------- ---------- Balance, January 1, 1996 189,553 $29.64 $ 6 Canceled/forfeited (10,303) 28.51 -- Exercised (3,446) 19.44 -- -------------- ---------- Balance, December 1, 1996 175,804 29.91 6 Canceled/forfeited (18,250) 29.68 (1) Exercised (803) 19.44 -- -------------- ---------- Balance, December 31, 1997 156,751 29.99 5 ============== ==========
17. RETIREMENT PLANS All full-time regular Lyondell, Equistar and LCR employees are covered by defined benefit pension plans. Retirement benefits are based on years of service and the employee's highest three consecutive 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, Equistar and LCR accrue pension costs based on an actuarial valuation and fund the plans through contributions to pension trust funds separate from Lyondell, Equistar or LCR's funds. Lyondell, Equistar and LCR also have unfunded supplemental nonqualified retirement plans which provide pension benefits for certain employees in excess of the tax qualified plans' limits. The following table sets forth the funded status of Lyondell's retirement plans and the amounts recognized in the Company's consolidated balance sheets at December 31, 1997 and 1996. The funded status of LCR's retirement plans are included in 1996 amounts. In connection with the formation of Equistar, no pension assets or obligations were contributed by Lyondell to Equistar. However, the employees transferred to Equistar effective December 1, 1997 became fully vested and will no longer accrue service with Lyondell. 57 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1997 1996 ------------------------------------- ------------------------------------ PLANS WITH PLANS WITH PLANS WITH PLANS WITH ASSETS IN ABO IN ASSETS IN ABO IN EXCESS OF EXCESS OF EXCESS OF EXCESS OF MILLIONS OF DOLLARS ABO ASSETS ABO ASSETS - ------------------- -------------- --------------- --------------- -------------- Actuarial present value of benefit obligations: Vested benefit obligation $ 73 $ 6 $ 85 $ 7 ============== =============== =============== ============== Accumulated benefit obligation ("ABO") $ 78 $ 7 $ 94 $ 7 ============== =============== =============== ============== Projected benefit obligation $ 125 $ 11 $ 150 $ 15 Plan assets at fair value, primarily stocks and bonds 102 -- 122 -- -------------- --------------- --------------- -------------- Projected benefit obligation in of plan assets (23) (11) (28) (15) Unrecognized net loss 19 2 11 7 Prior service cost not yet recognized in pension cost 1 2 4 2 Remaining unrecognized net asset (2) -- (4) (1) -------------- --------------- --------------- -------------- Net pension liability $ (5) $(7) $ (17) $ (7) ============== =============== =============== ============== The Company's net periodic pension cost for 1997, 1996 and 1995 included the following components. MILLIONS OF DOLLARS 1997 1996 1995 - --------------------------- ----------- ---------- --------- Service cost - benefits earned during the period $ 6 $ 10 $ 8 Interest cost on projected benefit obligations 10 12 9 Actual gain on plan assets (13) (19) (20) Net amortization and deferral 7 11 13 ----------- ---------- --------- Net periodic pension cost $ 10 $ 14 $ 10 =========== ========== =========
The assumptions used at December 31, 1997, 1996 and 1995, in determining the net periodic pension cost and net pension liability shown above were as follows.
PERCENT 1997 1996 1995 - ------- ----------- ---------- --------- Discount rate 7.25 7.50 7.10 Rate of salary progression 4.75 5.00 5.00 Long-term rate of return on assets 9.50 9.50 9.50
Lyondell, Equistar and LCR also maintain voluntary defined contribution savings plans for eligible employees. Under provisions of the plans, Lyondell, Equistar and LCR contribute an amount equal to 160 percent of employee contributions up to a maximum matching contribution of eight percent of the employee's base salary. Prior to July 1, 1995, Lyondell and LCR had similar voluntary defined contribution plans. Lyondell contributions to all voluntary defined contribution savings plans totaled $5 million during the year ended December 31, 1997. Lyondell and LCR contributions to all voluntary defined contribution savings plans totaled $10 million and $9 million during the years ended December 31, 1996 and 1995, respectively. 18. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Lyondell, Equistar and LCR sponsor unfunded postretirement benefit plans other than pensions ("OPEB") 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, Equistar 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. During 1997, in connection with the formation of Equistar, an accrued 58 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) postretirement benefit liability of $12 million, associated with Lyondell employees transferred to Equistar, was contributed by Lyondell to Equistar. The following table sets forth the plans' separate postretirement benefit liabilities at December 31, 1997 and 1996.
1997 1996 -------------------------------- ------------------------------ MILLIONS OF DOLLARS MEDICAL LIFE MEDICAL LIFE - ------------------- ------------ --------- ------------ --------- Accumulated postretirement benefit obligation: Retirees $ (3) $ (1) $ (7) $ (7) Fully eligible active plan participants - - - - (7) (2) Other active plan participants - - - - (32) (1) ------------ --------- ------------ --------- (3) (1) (46) (10) Unrecognized prior service cost (20) - - (5) - - Unrecognized net loss 4 (1) 1 - - ------------ --------- ------------ --------- Accrued postretirement benefit liability $ (19) $ (2) $(50) $(10) ============ ========= ============ =========
Net periodic postretirement benefit costs for 1997 was less than $1 million and in 1996 and 1995 included the following components.
1996 1995 ---------------------------- --------------------------- MILLIONS OF DOLLARS MEDICAL LIFE MEDICAL LIFE - --------------------- ------------- ---------- ------------ ---------- Service cost - benefits attributed to service $ 3 $ -- $ 2 $ -- Interest cost on accumulated postretirement obligation 3 1 2 1 ------------- ---------- ------------ ---------- Net periodic postretirement benefit cost $ 6 $ 1 $ 4 $ 1 ============= ========== ============ ==========
For measurement purposes, the assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 1997 was 7 percent for 1998-2001 and 5 percent thereafter. The health care cost trend rate assumption does not have 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, 1997 and the net periodic postretirement benefit cost for the year then ended by less than $1 million each. The accumulated postretirement benefit obligation was calculated utilizing a weighted-average discount rate of 7.25 percent and 7.5 percent at December 31, 1997 and 1996, respectively, and an average rate of salary progression of 4.75 percent and 5.0 percent in 1997 and 1996, respectively. Lyondell, Equistar and LCR's current policy is to fund the postretirement health care and life insurance plans on a pay-as-you-go basis. 19. INCOME TAXES Significant components of the Company's provision for income taxes follow.
MILLIONS OF DOLLARS 1997 1996 1995 - --------------------- ---------- ---------- ---------- Current Federal $ 114 $ 19 $ 206 State 13 1 20 ---------- ---------- ---------- Total current 127 20 226 ---------- ---------- ---------- Deferred Federal 43 48 4 State -- 2 (1) ---------- ---------- ---------- Total deferred 43 50 3 ---------- ---------- ---------- $ 170 $ 70 $ 229 ========== ========== ==========
59 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1997 and 1996 were as follows.
MILLIONS OF DOLLARS 1997 1996 - ------------------- ---------- ---------- Deferred tax liabilities: Investments in partnerships $ 230 $ - - Tax over book depreciation - - 190 Deferred turnaround costs - - 11 Business interruption recovery - - 11 LIFO inventory - - 4 Other - - - - ---------- ---------- Total deferred tax liabilities 230 216 ---------- ---------- Deferred tax assets: Pension and other compensation related obligations 16 23 OPEB obligation 4 18 Environmental reserve 5 6 Other 2 9 ---------- ---------- Total deferred tax assets 27 56 ---------- ---------- Net deferred tax liabilities 203 160 Less current portion of deferred tax liability (asset) (6) 3 ---------- ---------- Long-term deferred income taxes $ 209 $ 157 ========== ==========
The reconciliation of income tax computed at the U.S. federal statutory tax rates to the Company's effective tax rates follows.
1997 1996 1995 DESCRIPTION % % % - ----------- ------- -------- -------- U.S. statutory income tax rates 35.0 35.0 35.0 State income taxes, net of federal 1.8 1.2 2.0 Company owned life insurance (.1) (.1) - - Officer compensation .9 - - - - Other, net (.3) (.4) .1 ------- -------- -------- Effective income tax rate 37.3 35.7 37.1 ======= ======== ========
20. COMMITMENTS AND CONTINGENCIES The Company was party to various unconditional purchase obligation contracts as a purchaser for product and services until the formation of Equistar on December 1, 1997. The Company's total purchases under these agreements, including LCR for 1996 and 1995, were $27 million, $47 million and $21 million in 1997, 1996 and 1995, respectively. Operating lease net rental expenses for 1997, 1996 and 1995, including LCR for 1996 and 1995, were $43 million, $66 million and $60 million, respectively. Depending on market conditions, breach or termination of LCR's 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 PDVSA Oil'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 60 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) purchasing all of its crude oil feedstocks in the merchant market and would again subject LCR to significant volatility and price fluctuations. 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 petrochemicals 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 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 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 1997, the Company and ARCO updated the Cross-Indemnity Agreement ("Revised Cross-Indemnity Agreement"). For current and future cases related to Company products and Company operations, ARCO and the Company bear a proportionate share of judgment and settlement costs according to a formula which allocates responsibility based on years of ownership during the relevant time period. The party with the most significant potential liability exposure is responsible for case management and associated costs while allowing the non-case managing party to protect its interests. Under the Revised Cross-Indemnity Agreement, the Company will assume responsibility for its proportionate share of future costs for waste site matters not covered by ARCO insurance. Subject to the uncertainty inherent in all litigation, management believes the resolution of the matters pursuant to the Revised Cross-Indemnity Agreement will not have a material adverse effect upon the consolidated financial statements or liquidity of the Company. Lyondell and Millennium have similar indemnifications with Equistar related to the petrochemicals and polymers business contributions by the companies. Equistar has agreed to indemnify and defend Lyondell and Millennium, individually, against certain uninsured claims and liabilities which Equistar may incur relating to the operation of the contributed business prior to December 1, 1997 up to $7 million each within the first seven years of the partnership, subject to certain terms of the Asset Contribution Agreements. 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 consolidated financial statements or liquidity of the Company. 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 one waste site (Brio, located near Houston, Texas) under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as amended and the Superfund Amendments and Reauthorization Act of 1986. The Company is also subject to certain assessment and remedial actions at the Refinery under the Resource Conservation and Recovery Act ("RCRA"). In addition, the Company has negotiated an order with the Texas Natural Resource Conservation Commission ("TNRCC") for assessment and remediation of groundwater and soil contamination at the Refinery. 61 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) During July 1994, the Company reported results of an independent investigation conducted by the Audit Committee of the Board of Directors regarding the compliance status of two process waste-water streams under the applicable Benzene National Emissions Standard for Hazardous Air Pollutants ("NESHAPS") regulations and certain issues raised by an employee. 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 paid a fine of $10,200. In addition, the Company incurred approximately $2 million in capital costs in connection with these wastewater streams to achieve ongoing compliance with the Benzene NESHAPS regulations. Although the Criminal Enforcement Division of the EPA is conducting a formal investigation, the Company does not believe any aspects of the matters described above will subject the Company to criminal liability or have a material adverse effect on the consolidated financial statements or liquidity of the Company. As of December 31, 1997 the Company has accrued $12 million related to future CERCLA, RCRA and TNRCC assessment and remediation costs, of which $2 million is included in current liabilities while the remaining amounts are expected to be incurred over the next two to seven years. In the opinion of management, there is currently no material range of loss in excess of the amount recorded. 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 in this Note is not expected to have a material adverse effect on the consolidated financial statements or liquidity of the Company. However, the adverse resolution in any reporting period of one or more of these matters discussed in this Note could have a material impact on the Company's results of operations for that period without giving effect to contribution or indemnification obligations of co-defendants or others, or to the effect of any insurance coverage that may be available to offset the effects of any such award. 21. SEGMENT INFORMATION The petrochemicals segment consists of Lyondell's operations in petrochemicals including: olefins (including ethylene, propylene, butadiene, butylenes and specialty products); aromatics (including benzene and toluene); methanol; methyl tertiary butyl ether ("MTBE"); and refinery blending stocks. Lyondell's interest in Lyondell Methanol for 1997 and the petrochemicals business of Equistar, including ethanol and ethyl ether, for December 1997 are included in the petrochemicals segment. Production sites for the petrochemicals segment are located at the Channelview Facility contributed by Lyondell to Equistar and three of the eleven plant sites contributed by Millennium to Equistar. The polymers segment consists of Lyondell's operations in polyolefins including high-density polyethylene ("HDPE"), low-density polyethylene and polypropylene. The polymers, concentrates and compounds, and wire and cable resins businesses of Equistar for December 1997 are included in the polymers segment. The refining segment, which is primarily composed of LCR operations, consists of refined petroleum products including gasoline, low sulfur diesel and jet fuel; aromatics produced at the Refinery, including benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial lubricants, motor oils, white oils, process oils and base oils; carbon black sulfur; residual oil; petroleum coke fuel; 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 LCR 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 included in Lyondell's consolidated results amounted to $436 million and $370 million for the years ended December 31, 1996 and 1995, respectively. 62 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Consolidated sales to CITGO, substantially all from LCR under the Products Agreement, totaled $1.7 billion in 1996 and $1.4 billion in 1995. No other customer accounted for 10 percent or more of consolidated sales. Summarized below is the segment data for the Company which includes restatements in 1996 and 1995 to split the petrochemicals segment into the petrochemicals and polymers segments and certain reclassifications for an intersegment pricing adjustment recorded in 1996 retroactive to 1993. Intersegment sales between the petrochemicals and refining segments in 1996 and 1995 include olefins feedstocks and benzene produced at the Refinery and gasoline blending stocks and hydrogen produced at the Channelview Facility. Intersegment sales from the petrochemicals segment to the polymers segment include ethylene and propylene produced at the Channelview Facility. Intersegment sales were made at prices based on current market values.
PETROCHEMICALS POLYMERS REFINING MILLIONS OF DOLLARS SEGMENT SEGMENT SEGMENT UNALLOCATED ELIMINATIONS CONSOLIDATED - ------------------- -------------- -------- -------- ----------- ------------ ------------ 1997 - ---- Sales and other operating revenues: Customers $2,108 $770 $2,878 Intersegment 424 - - $(424) - - ---------------- ---------- -------------- ------------- 2,532 770 (424) 2,878 Income from equity invest- ments before unusual charges 28 13 $ 102 $ (11) - - 132 Cost of sales 2,062 612 - - - - (424) 2,250 Selling, general and administrative expenses 26 76 - - 84 - - 186 Unusual charges - - - - - - 40 - - 40 ---------------- ---------- ---------- ------------- -------------- ------------- Operating income $ 472 $ 95 $ 102 $(135) $ - - $ 534 ================ ========== ========== ============= ============== ============= Depreciation and amortization expense $ 50 $ 29 - - $ 5 $ 84 ================ ========== ========== ============= ============= Capital expenditures $ 27 $ 13 - - $ 9 $ 49 ================ ========== ========== ============= ============= Identifiable assets $ 447 $349 $ 300 $ 463 $ - - $1,559 ================ ========== ========== ============= ============== ============= 1996 - ---- Sales and other operating revenues: Customers $1,628 $783 $2,641 $5,052 Intersegment 665 - - 171 $(836) - - ---------------- ---------- -------------- ------------- 2,293 783 2,812 (836) 5,052 Gain on sale of assets 30 - - - - - - 30 Cost of sales 2,049 608 2,749 (836) 4,570 Selling, general and administrative expenses 34 78 62 $ 60 - - 234 ---------------- ---------- ---------- ------------- -------------- ------------- Operating income $ 240 $ 97 $ 1 $ (60) $ - - $ 278 ================ ========== ========== ============= ============== ============= Depreciation and amortization expense $ 44 $ 29 $ 34 $ 3 $ 110 ================ ========== ========== ============= ============= Capital expenditures $ 57 $ 20 $ 529 $ 3 $ 609 ================ ========== ========== ============= ============= Identifiable assets $ 870 $624 $1,706 $ 137 $ (61) $3,276 ================ ========== ========== ============= ============== ============= 1995 - ---- Sales and other operating revenues: Customers $1,839 $627 $2,470 $4,936 Intersegment 504 - - 178 $(682) - - ---------------- ---------- ---------- -------------- ------------- 2,343 627 2,648 (682) 4,936 Cost of sales 1,746 505 2,457 (682) 4,026
63 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Selling, general and administrative expenses 31 53 61 $ 59 - - 204 ---------------- ---------- ---------- ------------- -------------- ------------- Operating income $ 566 $ 69 $ 130 $ (59) $ - - $ 706 ================ ========== ========== ============= ============== ============= Depreciation and amortization expense $ 36 $ 18 $ 30 $ 2 $ 86 ================ ========== ========== ============= ============= Capital expenditures $ 95 $376 $ 505 $ 6 $ 982 ================ ========== ========== ============= ============= Identifiable assets $ 736 $605 $1,212 $ 93 $ (40) $2,606 ================ ========== ========== ============= ============== =============
64 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 22. UNAUDITED QUARTERLY RESULTS
FOR THE QUARTER ENDED ------------------------------------------------------------------ MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - -------------------------------------------- -------------- ------------ -------------- ------------- 1997 - ---- Sales and other operating revenues $ 755 $ 789 $ 799 $ 535 Operating income 85 167 182 100 Income before income taxes 63 146 162 85 Net income 40 93 102 51 Earnings per share .50 1.17 1.27 .64 1996 - ---- Sales and other operating revenues $1,165 $1,239 $1,247 $1,401 Operating income 61 45 71 101 Income before income taxes 38 23 55 80 Net income 24 15 35 52 Earnings per share .30 .19 .43 .66
23. SUBSEQUENT EVENT On March 20, 1998, Lyondell and Millennium announced an agreement to expand Equistar with the addition of the ethylene, propylene and ethylene oxide and derivatives businesses of Occidental Chemical Corporation, a subsidiary of Occidental Petroleum. The transaction, which is subject to regulatory approval, is expected to close by mid-year 1998. Lyondell's percentage ownership in Equistar would decrease to 41 percent from the current 57 percent ownership as a result of this transaction. 65 EQUISTAR CHEMICALS, LP REPORT OF INDEPENDENT ACCOUNTANTS To the Partnership Governance Committee of Equistar Chemicals, LP: We have audited the accompanying balance sheet of Equistar Chemicals, LP (the "Partnership") as of December 31, 1997, and the related statements of income, partners' capital, and cash flows for the period from December 1, 1997 (inception) to December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Equistar Chemicals, LP as of December 31, 1997, and the results of its operations and its cash flows for the period from December 1, 1997 (inception) to December 31, 1997 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Price Waterhouse LLP Houston, Texas Morristown, New Jersey February 16, 1998 February 16, 1998 (Except as to the information (Except as to the information presented in Note 18, for which presented in Note 18, for the date is March 20, 1998) which the date is March 20, 1998) 66 EQUISTAR CHEMICALS, LP STATEMENT OF INCOME FOR THE PERIOD FROM DECEMBER 1, 1997 (INCEPTION) TO DECEMBER 31, 1997 MILLIONS OF DOLLARS - ------------------- SALES AND OTHER OPERATING REVENUES: Unrelated parties $ 338 Related parties 27 ------ 365 OPERATING COSTS AND EXPENSES: Cost of sales: Unrelated parties 261 Related parties 26 Selling, general and administrative expenses 21 Unusual charges 42 ------ 350 Operating income 15 Interest expense (10) Interest income 2 ------ NET INCOME $ 7 ====== See notes to financial statements. 67 EQUISTAR CHEMICALS, LP BALANCE SHEET DECEMBER 31, 1997 MILLIONS OF DOLLARS - ------------------- ASSETS Current assets: Cash and cash equivalents $ 41 Accounts receivable: Trade 445 Related parties 36 Receivable from partners 150 Inventories 513 Prepaid expenses and other current assets 24 ------- Total current assets 1,209 ------- Property, plant and equipment 3,678 Less accumulated depreciation and amortization (1,560) -------- 2,118 Goodwill, net 1,139 Deferred charges and other assets 151 ------- Total assets $ 4,617 ======= LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable: Trade $ 171 Related parties 18 Payable to partners 63 Other accrued liabilities 65 Current maturities of long-term debt 36 ------- Total current liabilities 353 ------- Long-term debt 1,512 Other liabilities and deferred credits 34 Commitments and contingencies Partners' capital: Partners' capital 3,063 Note receivable from Lyondell LP (345) ------- Total partners' capital 2,718 ------- Total liabilities and partners' capital $ 4,617 ======= See notes to financial statements. 68 EQUISTAR CHEMICALS, LP STATEMENT OF PARTNERS' CAPITAL FOR THE PERIOD FROM DECEMBER 1, 1997 (INCEPTION) TO DECEMBER 31, 1997
MILLIONS OF DOLLARS LYONDELL MILLENNIUM TOTAL - ------------------- -------- ---------- ----- Balance at December 1, 1997 (inception) $ - - $ - - $ - - Capital contributions at inception: Net assets, at historical cost 763 2,048 2,811 Note receivable from Lyondell LP 345 - - 345 Net income 4 3 7 Distributions to partners (57) (43) (100) -------- ---------- ------ Balance at December 31, 1997 $ 1,055 $ 2,008 $3,063 ======== ========== ======
See notes to financial statements. 69 EQUISTAR CHEMICALS, LP STATEMENT OF CASH FLOWS FOR THE PERIOD FROM DECEMBER 1, 1997 (INCEPTION) TO DECEMBER 31, 1997 MILLIONS OF DOLLARS - ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19 Increase in accounts receivable (100) Increase in receivable from partners (101) Increase in inventories (5) Increase in accounts payable 188 Increase in payable to partners 54 Increase in other accrued liabilities 48 Net change in other working capital accounts (15) Other 7 ----- Net cash provided by operating activities 102 ----- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (12) ----- Net cash used in investing activities (12) ----- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt 50 Cash contributions from partners 1 Distributions to partners (100) ----- Net cash used in financing activities (49) ----- INCREASE IN CASH AND CASH EQUIVALENTS 41 Cash and cash equivalents at beginning of period - - ----- Cash and cash equivalents at end of period $ 41 ===== See notes to financial statements. 70 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS 1. FORMATION OF THE COMPANY AND OPERATIONS Pursuant to a partnership agreement (the "Partnership Agreement") Lyondell Petrochemical Company ("Lyondell") and Millennium Chemicals, Inc. ("Millennium") formed Equistar Chemicals, LP ("Equistar" or the "Partnership"), a Delaware limited partnership, which commenced operations on December 1, 1997 (See note 11 for related discussion). The Partnership is owned 57 percent by Lyondell and 43 percent by Millennium. Lyondell owns its interest in the Partnership through two wholly-owned subsidiaries, Lyondell Petrochemical G.P. Inc. ("Lyondell GP") and Lyondell Petrochemical L.P. Inc. ("Lyondell LP"). Millennium also owns its interest in the Partnership through two wholly-owned subsidiaries, Millennium Petrochemicals GP LLC ("Millennium GP") and Millennium Petrochemicals LP LLC ("Millennium LP"). The Partnership owns and operates the petrochemicals and polymers businesses contributed by Lyondell and Millennium (the "Contributed Businesses") which consist of 15 manufacturing facilities on the US Gulf Coast and in the US Midwest. The petrochemicals segment produces products including ethylene, propylene, ethyl alcohol, butadiene, aromatics and methyl tertiary butyl ether ("MTBE"). These products are used primarily in the production of other chemicals and products, including polymers. The petrochemicals segment also includes sales of methanol produced by Lyondell Methanol LP ("Lyondell Methanol"), which is owned 75 percent by Lyondell. The Partnership operates the Lyondell Methanol facility. The polymers segment produces products that include polyethylene (high-density, low-density and linear low-density) and polypropylene, which are used in the production of a wide variety of consumer and industrial products. The Partnership Agreement provides that Equistar is governed by a Partnership Governance Committee consisting of six representatives, three appointed by each partner. Most of the significant decisions of the Partnership Governance Committee require unanimous consent, including approval of the Partnership's Strategic Plan and annual updates thereof. Pursuant to the Partnership Agreement, net income is allocated among the partners on a pro rata basis based on their percentage ownership of the Partnership. Distributions are made to the partners based on their percentage ownership of the Partnership. Additional contributions required by the Partnership will also be based on the partners' percentage ownership of the Partnership. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition - Revenue from product sales is generally recognized upon shipment of products to the customer. Cash and Cash Equivalents - Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts purchased with an original maturity date of three months or less. Cash equivalents are stated at cost, which approximates fair value. The Partnership's policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution. The Partnership performs periodic evaluations of the relative credit standing of these financial institutions which are considered in the Partnership's investment strategy. The Partnership has no requirements for compensating balances in a specific amount at a specific point in time. The Partnership 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 Partnership's discretion. As a result, none of the Partnership's cash is restricted. 71 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Management determines the appropriate classification of investments in debt securities as trading, available-for-sale or held-to-maturity at the time of purchase and reevaluates such designation as of each balance sheet date. Accounts Receivable - The Partnership sells its products primarily to companies in the petrochemicals and polymers industries. The Partnership performs ongoing credit evaluations of its customers' financial condition and in certain circumstances requires letters of credit from them. 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. Property, Plant and Equipment - Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is computed using the straight-line method over the estimated useful lives of the related assets, generally 5 to 25 years. Upon retirement or sale, the Partnership removes the cost of the assets and the related accumulated depreciation from the accounts and reflects any resulting gains or losses in income. The Partnership's policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year. Turnaround Maintenance and Repair Expenses - Cost of major repairs and maintenance incurred in connection with turnarounds of units at the Partnership's manufacturing facilities are deferred and amortized on a straight- line basis until the next planned turnaround, generally four to six years. Goodwill - Goodwill, which was contributed by Millennium, is being amortized using the straight-line method over forty years. Management periodically evaluates goodwill for impairment based on the anticipated future cash flows attributable to the related operations. Such expected cash flows, on an undiscounted basis, are compared to the carrying value of the tangible and intangible assets, and if impairment is indicated, the carrying value of goodwill, and if necessary other related assets, is adjusted. Management believes that no impairment exists at December 31, 1997. The Partnership amortized $3 million of goodwill during the period from December 1, 1997 (inception) to December 31, 1997. Environmental Remediation Costs - Expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable a liability has been incurred and the amount of the liability can reasonably be estimated. Estimates have not been discounted to present value. Environmental remediation costs are expensed or capitalized in accordance with generally accepted accounting principles. In October 1996 the American Institute of Certified Public Accountants issued Statement of Position 96-1 ("SOP 96-1"), "Environmental Remediation Liabilities," which establishes new accounting and reporting standards for the recognition and disclosure of environmental remediation liabilities. The effect of adoption of SOP 96-1 in 1997 did not have a material impact on the Partnership's financial position or results of operations. Exchanges - Finished product exchange transactions, which are of a homogeneous nature of commodities in the same line of business and do not involve the payment or receipt of cash, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the normal LIFO valuation policy. Exchanges settled through payment and receipt of cash are accounted for as purchases and sales. Income Taxes - The Partnership is not subject to federal income taxes as income is reportable directly by the individual partners; therefore, there is no provision for income taxes in the accompanying financial statements. 72 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. FINANCIAL INSTRUMENTS The fair value of all financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable, accounts payable and notes payable, approximated their carrying value due to their short maturity. Based on the borrowing rates currently available to the Partnership for debt with terms and average maturities similar to the Partnership's debt portfolio, the fair value of the Partnership's long-term debt, including amounts due within one year, was $1.506 billion at December 31, 1997. At December 31, 1997, the Partnership had issued letters of credit totaling $4 million. 4. RELATED PARTY TRANSACTIONS Lyondell provides certain corporate, general and administrative services to the Partnership, including legal, tax, treasury, risk management and other services pursuant to a shared services agreement. The Partnership provides certain general and administrative services to Lyondell, including computer, office lease and employee benefits services. During the period from December 1, 1997 (inception) to December 31, 1997, billings for these services were less than $1 million. The Partnership also provides certain general and administrative services to Millennium, including materials management, certain utilities, office space, health, safety and environmental services and computer services. Millennium provides the Partnership with certain operational services, including waste water treatment and barge dock access. During the period from December 1, 1997 (inception) to December 31, 1997, billings for these services were less than $1 million. The Partnership has several feedstock and product sales agreements with Lyondell-CITGO Refining Company Ltd. ("LCR"), a joint venture investment of Lyondell. Sales to LCR were $27 million and cost of sales to LCR were $26 million for the period from December 1, 1997 (inception) to December 31, 1997. The Partnership has a feedstock, product sales and other services agreement with Lyondell Methanol. Lyondell Methanol sells all of its products to Equistar. Purchases from Lyondell Methanol were $15 million for the period from December 1, 1997 (inception) to December 31, 1997. Lyondell Methanol purchased $4 million of natural gas feedstock from the Partnership during the period from December 1, 1997 (inception) to December 31, 1997. Lyondell Methanol also pays a business management fee to Equistar which was less than $1 million during the period from December 1, 1997 (inception) to December 31, 1997. 73 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 5. INVENTORIES The categories of inventory and their book values at December 31, 1997 were as follows: MILLIONS OF DOLLARS ------------------- Petrochemicals $ 183 Polymers 264 Materials and supplies 66 ----- Total inventories $ 513 ===== For the period from December 1, 1997 (inception) to December 31, 1997, the Partnership increased cost of sales by approximately $1 million associated with the reduction in LIFO inventories. The excess of the current cost of inventories over book value was approximately $103 million at December 31, 1997. 6. PROPERTY, PLANT AND EQUIPMENT The components of property, plant and equipment and their gross value at December 31, 1997 were as follows: MILLIONS OF DOLLARS ------------------- Manufacturing facilities and equipment $ 3,477 Construction projects in progress 127 Land 74 ------- Total property, plant and equipment $ 3,678 ======= 7. DEFERRED CHARGES AND OTHER ASSETS Deferred charges and other assets at December 31, 1997 were as follows: MILLIONS OF DOLLARS ------------------- Deferred turnaround costs, net $ 66 Deferred software costs, net 44 Deferred pension asset 23 Other 18 ----- Total deferred charges and other assets $ 151 ===== 8. OTHER ACCRUED LIABILITIES Other accrued liabilities at December 31, 1997 were as follows: MILLIONS OF DOLLARS ------------------- Accrued severance and other costs related to formation of the Partnership $ 27 Accrued interest 10 Other 28 ----- Total other accrued liabilities $ 65 ===== 74 9. LONG-TERM DEBT AND FINANCING ARRANGEMENTS Long-term debt at December 31, 1997 was comprised of the following: MILLIONS OF DOLLARS ------------------- 10.00% Notes due in 1999 $ 150 9.125% Notes due in 2002 100 5-year term credit facility 800 Medium-term notes (1998-2005) 194 6.5% Notes due in 2006 150 7.55% Debentures due in 2026 150 Other 4 ------ 1,548 Less current portion 36 ------ Total long-term debt $1,512 ====== Aggregate maturities of long-term debt during the five years subsequent to December 31, 1997 are as follows: 1998-$36 million; 1999-$150 million; 2000-$42 million; 2001-$90 million; 2002-$901 million. All of the above debt is guaranteed by the Partners. The medium-term notes mature at various dates from 1998 to 2005 and have a weighted average interest rate at December 31, 1997 of 9.83 percent. The Partnership has a five-year, $1.25 billion credit facility ("Facility") with a group of banks expiring November 2002. Borrowings under the Facility bear interest at either the Federal Funds rate plus 1/2 of 1 percent, LIBOR, which was 5.7 percent at December 31, 1997, a fixed rate offered by one of the sponsoring banks or rates that are based on a competitive auction feature wherein the interest rate can be established by competitive bids submitted by the sponsoring banks, depending on the type of borrowing made under the Facility. The Facility is available for working capital and general purposes as needed and contains covenants relating to liens, sale and leaseback transactions, debt incurrence, leverage and interest coverage ratios, sales of assets and mergers and consolidations. As of December 31, 1997, the Partnership was in compliance with the covenants of the Facility. 10. NOTE RECEIVABLE FROM LYONDELL LP Upon formation of the Partnership, Lyondell LP also contributed capital to the Partnership in the form of a $345 million promissory note (the "Lyondell Note"). The Lyondell Note bears interest at LIBOR plus a market spread. The Lyondell Note will be repaid to the Partnership at the earlier of 3 years from the date the Partnership commenced operations or 30 days after a financing at LCR, a joint venture investment of Lyondell, which results in the repayment of LCR's existing $450 million 5-year term loan and a distribution to Lyondell of at least $345 million. During the period from December 1, 1997 (inception) to December 31, 1997, the Partnership accrued $1.75 million of interest income related to the Lyondell Note. 11. UNUSUAL CHARGES In December 1997, the Partnership recorded $42 million of unusual charges related to the formation of the Partnership. These charges included severance and other costs related to a workforce reduction (approximately 430 employees) that resulted from the consolidation of the businesses contributed to the Partnership ($30 million), various closing costs ($6 million), and various other charges ($6 million). Approximately $15 million of these charges were paid in 1997 and $27 million are included in other accrued liabilities in the accompanying balance sheet and will be paid during 1998. 75 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 12. SUPPLEMENTAL CASH FLOW INFORMATION The historical cost of the net assets contributed to the Partnership at inception are summarized as follows (in millions of dollars): AMOUNT ------ Total current assets $ 948 Property, plant and equipment, net 2,121 Goodwill, net 1,142 Deferred charges and other assets 158 ------ Total assets $4,369 ====== Current maturities of long-term debt $ 36 Other current liabilities 17 Long-term debt 1,462 Other liabilities and deferred credits 43 Partners' capital 3,156 Note receivable from Lyondell LP (345) ------ Total liabilities and partners' capital $4,369 ====== 13. LEASES At December 31, 1997, future minimum rental payments for operating leases with noncancelable lease terms in excess of one year were as follows: MILLIONS OF DOLLARS AMOUNT ------------------- ------ 1998 $ 128 1999 111 2000 80 2001 56 2002 42 Thereafter 369 ------ Total minimum lease payments $ 786 ====== Operating lease net rental expense was $11 million for the period from December 1, 1997 (inception) to December 31, 1997. The Partnership is party to various unconditional purchase obligation contracts as a purchaser for product and services. At December 31, 1997, future minimum payments under these contracts with noncancelable contract terms in excess of one year were as follows: MILLIONS OF DOLLARS AMOUNT ------------------- ------ 1998 $ 30 1999 29 2000 29 2001 26 2002 26 Thereafter 189 ------ Total minimum contract payments $ 329 ====== 76 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS - (CONTINUED) The Partnership's total purchases under these agreements were $3 million during the period from December 1, 1997 (inception) to December 31, 1997. 14. RETIREMENT PLANS All full-time regular employees of the Partnership are covered by defined benefit pension plans sponsored by the Partnership. The plans became effective on January 1, 1998, except for union represented employees, whose plans were contributed to the Partnership at formation. In connection with the formation of the Partnership, there were no pension assets or obligations contributed to the Partnership, except for the union represented plans. Retirement benefits are based on years of service and the employee's highest three consecutive 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. The Partnership accrues pension costs based on an actuarial valuation and funds the plans through contributions to pension trust funds. The Partnership also has unfunded supplemental nonqualified retirement plans which provide pension benefits for certain employees in excess of the tax qualified plans' limits. The following table sets forth the funded status of the union represented plans at December 31, 1997 (the other plans are unfunded as of December 31, 1997): PLANS WITH ASSETS IN EXCESS OF ABO ---------- MILLIONS OF DOLLARS - ------------------- Actuarial present value of benefit obligations: Vested benefit obligation $ 19 ===== Accumulated benefit obligation ("ABO") $ 20 ===== Projected benefit obligation $ 21 Plan assets at fair value, primarily stocks and bonds 40 Plan assets in excess of projected benefit obligation 19 Unrecognized net loss 4 ----- Net pension asset $ 23 ===== As the non-union plans became effective on January 1, 1998, the Partnership did not recognize any net periodic pension cost during the period from December 1, 1997 (inception) to December 31, 1997. The assumptions used at December 31, 1997 in determining the net pension liability shown above were as follows: PERCENT ------- Discount rate 7.25 Rate of salary progression 4.75 Long-term rate of return on assets 9.00 Effective January 1, 1998, the Partnership also maintains voluntary defined contribution savings plans for eligible employees. Under provisions of the plans, the Partnership contributes an amount equal to 160 percent of employee contributions up to a maximum matching contribution of eight percent of the employee's base salary. 77 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 15. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Partnership sponsors unfunded postretirement benefit plans other than pensions ("OPEB") 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, the Partnership pays approximately 80 percent of the cost of the health care plans, but reserves the right to modify the cost-sharing provisions at any time. In connection with the formation of the Partnership, the Partners contributed $31 million of accrued postretirement benefit liabilities for employees that transferred to the Partnership. The following table sets forth the plans' separate postretirement benefit liabilities at December 31, 1997: MILLIONS OF DOLLARS MEDICAL LIFE - ------------------- ------- ---- Accumulated postretirement benefit obligation: Retirees $ - $ - Fully eligible active plan participants (11) (3) Other active plan participants (25) (11) ------- ----- (36) (14) Unrecognized prior service cost - - Unrecognized net loss 14 5 ------- ----- Accrued postretirement benefit liability $ (22) $ (9) ======= ===== The accrued postretirement benefit liabilities were calculated and contributed as of December 31, 1997; therefore, there was no net periodic postretirement benefit costs for the period from December 1, 1997 (inception) to December 31, 1997. For measurement purposes, the assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 1997 was 7 percent for 1998-2001 and 5 percent thereafter. The health care cost trend rate assumption does not have 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, 1997 by less than $1 million. The accumulated postretirement benefit obligation was calculated utilizing a weighted-average discount rate of 7.25 percent at December 31, 1997 and an average rate of salary progression of 4.75 percent. The Partnership's current policy is to fund the postretirement health care and life insurance plans on a pay-as-you-go basis. 16. COMMITMENTS AND CONTINGENCIES The Partnership 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. The Partnership 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 financial statements or liquidity of the Partnership. Equistar has agreed to indemnify and defend Lyondell and Millennium, individually, against certain uninsured claims and liabilities which Equistar may incur relating to the operation of the Contributed Business prior to December 1, 1997 up to $7 million each within the first seven years of the partnership, subject to certain terms of the Asset Contribution Agreements. 78 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS - (CONTINUED) The Partnership's policy is to be in compliance with all applicable environmental laws. The Partnership 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 Partnership 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 the opinion of management, any liability arising from the matters discussed in this Note is not expected to have a material adverse effect on the financial statements or liquidity of the Partnership. However, the adverse resolution in any reporting period of one or more of these matters discussed in this Note could have a material impact on the Partnership's results of operations for that period without giving effect to contribution or indemnification obligations of co-defendants or others, or to the effect of any insurance coverage that may be available to offset the effects of any such award. 17. SEGMENT INFORMATION The petrochemicals segment consists of olefins, including ethylene, propylene, butadiene, butylenes and specialty products; aromatics, including benzene and toluene; and MTBE. The polymers segment consists of polyolefins including polypropylene, high-density polyethylene, low-density polyethylene and linear low-density polyethylene. Summarized below is the segment data for the Partnership. Intersegment sales between the petrochemicals and polymers segments were made at prices based on current market values.
PETROCHEMICALS POLYMERS MILLIONS OF DOLLARS SEGMENT SEGMENT UNALLOCATED ELIMINATIONS CONSOLIDATED - ------------------- -------------- -------- ----------- ------------ ------------ Sales and other operating revenues: Customers $ 179 $ 186 $ 365 Intersegment 105 - - $ (105) - - ------ ------ ------ ------ ------ 284 186 (105) 365 Cost of sales 236 156 (105) 287 Selling, general and administrative expenses 1 8 $ 12 - - 21 Unusual charges - - - - 42 - - 42 ------ ------ ------ ------ ------ Operating income $ 47 $ 22 $ (54) - - $ 15 ====== ====== ====== ====== ====== Depreciation and amortization expense $ 7 $ 7 $ 5 $ - - $ 19 ====== ====== ====== ====== ====== Capital expenditures $ 7 $ 4 $ 1 - - $ 12 ====== ====== ====== ====== ====== Identifiable assets $1,679 $1,510 $1,428 $ - $4,617 ====== ====== ====== ====== ======
18. SUBSEQUENT EVENT On March 20, 1998, Lyondell and Millennium announced an agreement to expand Equistar with the addition of the ethylene, propylene, ethylene oxide and derivatives businesses of Occidental Chemical Corporation ("Occidental"), a subsidiary of Occidental Petroleum Corporation. The transaction, which is subject to regulatory approval, is expected to close by mid-year 1998. After the close of the transaction, Lyondell will have 41 percent ownership interest of the Partnership and Millennium and Occidental will each have 29.5 percent ownership interests. 79 LYONDELL-CITGO REFINING COMPANY LTD. LYONDELL-CITGO Refining Company Ltd. ("LCR") is a limited liability company organized under the laws of the state of Texas. LCR was formed in 1993 by Lyondell Petrochemical Company ("Lyondell") and CITGO Petroleum Corporation ("CITGO"). LCR is owned by two members, Lyondell Refining Company and CITGO Refining Investment Company, which are wholly owned subsidiaries of Lyondell and CITGO, respectively. CITGO is a subsidiary of Petroleos de Venezuela, S.A.("PDVSA"), the national oil company of Venezuela. The operative agreement with respect to the rights of each of the two members 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. 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 wholly owned subsidiaries under the terms of the Regulations. The Regulations provide that LCR is managed by an Owners Committee, which has three representatives ("Representatives") from each member. Actions requiring unanimous consent of the Representatives, include, without limitation, amendment of the Regulations, borrowing money in excess of LCR's existing credit facilities, delegations of authority to committees, certain purchase commitments and capital expenditures in excess of designated amounts and budgetary approval. LCR's daily operations are managed by LCR's executive officers. LCR owns a Refinery located on approximately 700 acres in Houston, Texas and a lube oil blending and packaging plant in Birmingport, Alabama. LCR also owns a pipeline used to transport gasoline, kerosene and heating oil from the Refinery to the GATX Terminal located in Pasadena, Texas to interconnect with common carrier pipelines. Units included in the Refinery are a fluid catalytic cracking unit, cokers, reformers, crude distillation units, sulfur recovery plants and hydrodesulfurization units as well as lube oil manufacturing and packaging facilities and an aromatics recovery unit. As a result of an upgrade project completed in February 1997, the Refinery has a heavy crude oil processing capability of approximately 250,000 barrels per day of 17 degree API gravity crude oil. LCR purchases substantially all of the heavy crude oil processed at the Refinery from subsidiaries of PDVSA. The Refinery produces gasoline, low sulfur diesel, jet fuel, aromatics, lubricants and certain industrial products. All of LCR's gasoline, low sulfur diesel and jet fuel are sold to CITGO. Aromatics such as benzene, toluene, paraxylene and orthoxylene 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. 80 LYONDELL-CITGO REFINING COMPANY LTD. REPORT OF INDEPENDENT ACCOUNTANTS To the Owners Committee of LYONDELL-CITGO Refining Company Ltd. We have audited the accompanying balance sheets of LYONDELL-CITGO Refining Company Ltd. as of December 31, 1997 and 1996 and the related statements of income, members' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 financial position of LYONDELL-CITGO Refining Company Ltd. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Houston, Texas February 6, 1998 81 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31 ------------------------------- MILLIONS OF DOLLARS 1997 1996 1995 - ------------------- ---- ---- ---- SALES AND OTHER OPERATING REVENUES $2,697 $2,823 $2,646 OPERATING COSTS AND EXPENSES: Cost of sales: Crude oil and feedstock 1,960 2,367 2,095 Operating and other expenses 482 386 367 Selling, general and administrative expenses 72 59 58 ------ ------ ------ 2,514 2,812 2,520 ------ ------ ------ Operating income 183 11 126 Interest expense (37) (2) (1) Interest income 2 2 3 ------ ------ ------ Income before state income taxes 148 11 128 Provision for state income taxes 1 - - - 3 ------ ------ ------ NET INCOME $ 147 $ 11 $ 125 ====== ====== ====== See notes to financial statements. 82 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY BALANCE SHEETS DECEMBER 31 ------------------- MILLIONS OF DOLLARS 1997 1996 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 65 $ 12 Accounts receivable: Trade 37 109 Related parties and affiliates 42 53 Inventories 98 98 Prepaid expenses and other current assets 1 1 ------ ------ Total current assets 243 273 ------ ------ Property, plant and equipment 2,228 1,372 Construction projects in progress 52 832 Accumulated depreciation and amortization (889) (826) ------ ------ 1,391 1,378 Deferred charges and other assets 47 56 ------ ------ Total assets $1,681 $1,707 ====== ====== LIABILITIES AND MEMBERS' EQUITY Current liabilities: Accounts payable: Trade $ 72 $ 154 Related parties and affiliates 125 152 Distribution payable to LOwner 36 24 Distribution payable to COwner 25 - - - Loan payable to bank - - - 10 Taxes, payroll and other liabilities 35 33 ------ ------ Total current liabilities 293 373 ------ ------ Commitments and contingencies Loan payable to bank 450 450 Loans payable to LOwner 196 177 Loans payable to COwner 17 - - - Pension, postretirement benefit and other liabilities 52 44 ------ ------ Total long-term liabilities 715 671 ------ ------ Members' equity 673 663 ------ ------ Total liabilities and members' equity $1,681 $1,707 ====== ====== See notes to financial statements. 83 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------- MILLIONS OF DOLLARS 1997 1996 1995 --------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 147 $ 11 $ 125 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 75 25 19 Amortization 16 10 13 (Increase) decrease in accounts receivable - trade 72 (1) (38) (Increase) decrease in accounts receivable - related parties 9 (20) 19 Decrease in inventories - - - 9 3 (Increase) decrease in prepaid expenses and other current assets (1) 6 - - - Increase (decrease) in accounts payable - trade (89) 51 (8) Increase (decrease) in accounts payable - related parties (27) 43 42 Increase (decrease) in taxes, payroll and other liabilities 5 (4) 10 Increase in deferred charges and other assets and change in pension, postretirement benefit and other liabilities 5 (28) (3) --------- --------- -------- Net cash provided by operating activities 212 102 182 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment: Maintenance capital expenditures (12) (10) (5) Environmental capital expenditures (11) (28) (30) Capital enhancement expenditures (17) (18) (11) Refinery upgrade expenditures (45) (473) (458) Capital expenditures to be reimbursed by Lyondell - - - - - - (2) --------- --------- -------- Total capital expenditures (85) (529) (506) Other (1) (1) 1 --------- --------- -------- Net cash used in investing activities (86) (530) (505) --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (repayments of) bank loan (10) 10 (20) Proceeds from bank loan for costs incurred on refinery upgrade - - - 199 251 Proceeds from LOwner loans for costs incurred on refinery upgrade 18 123 25 Contributions from LOwner for working capital facility paydown 65 - - - - - - Proceeds from LOwner loans for costs to be incurred on capital projects 2 29 - - - Contributions from LOwner for costs to be incurred on capital projects 1 8 - - - Distributions to LOwner (147) (84) (146) Distributions to COwner (91) (13) (17) Reimbursements from Lyondell for capital expenditures - - - 4 2 Reimbursements from COwner for costs incurred on refinery upgrade 2 123 171 Reimbursements from COwner for loan costs incurred on refinery upgrade 8 21 5 Contributions from COwner for working capital facility paydown 28 - - - - - - Proceeds from COwner loans for costs incurred on refinery upgrade 16 - - - - - - Contributions from COwner for costs to be incurred on capital projects 35 13 17 --------- --------- -------- Net cash provided by (used in) financing activities (73) 433 288 --------- --------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 53 5 (35) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12 7 42 --------- --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 65 $ 12 $ 7 ========= ========= ========
See notes to financial statements. 84 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY STATEMENTS OF MEMBERS' EQUITY MILLIONS OF DOLLARS LOWNER COWNER TOTAL ------- ------ ------ BALANCE, DECEMBER 31, 1994 $ 182 $ 268 $ 450 Cash contributions 2 193 195 Other contributions - - - 5 5 Distributions (164) (22) (186) Net income 110 15 125 ------- ------ ------ BALANCE, DECEMBER 31, 1995 130 459 589 Cash contributions 8 157 165 Other contributions - - - 1 1 Distributions (91) (12) (103) Net income 10 1 11 ------- ------ ------ BALANCE, DECEMBER 31, 1996 57 606 663 Cash contributions 66 73 139 Other contributions - - - - - - - - - Distributions (158) (118) (276) Net income 103 44 147 ------- ------ ------ BALANCE, DECEMBER 31, 1997 $ 68 $ 605 $ 673 ======= ====== ====== See notes to financial statements. 85 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY NOTES TO FINANCIAL STATEMENTS 1. THE COMPANY On July 1, 1993, Lyondell Petrochemical Company ("Lyondell") and CITGO Petroleum Corporation ("CITGO") announced the commencement of operations of LYONDELL-CITGO Refining Company Ltd. ("LCR" or the "Company"), a new entity formed and owned by subsidiaries of Lyondell and CITGO in order to own and operate a refinery ("Refinery") located adjacent to the Houston Ship Channel in Houston, Texas and a lube oil blending and packaging plant in Birmingport, Alabama. Lyondell owns its interest in the Company through a wholly-owned subsidiary, Lyondell Refining Company ("LOwner"). CITGO holds its interest through CITGO Refining Investment Company ("COwner"), a wholly-owned subsidiary of CITGO. The Company is organized and structured to afford its members the full limitation of liability provided by the Texas Limited Liability Company Act ("Act"). The Act provides as to liability to third parties in the case of companies such as LCR that its members, LOwner and COwner ("Members"), are not liable for the debts, obligations or liabilities of the limited liability company including under a judgment decree, or order of a court. Unless dissolved earlier under the terms of its Amended and Restated Limited Liability Company Regulations ("Regulations"), LCR will continue to exist until December 31, 2017. LOwner and COwner have agreed to allocate net income and cash provided by operating activities based on certain contributions and other factors instead of allocating such amounts based on their equity account balances. Based upon these contributions and other factors, LOwner and COwner had participation interests of approximately 58 percent and 42 percent, respectively, as of December 31, 1997. COwner has a one-time option to make an additional equity contribution sufficient to increase its participation interest in LCR to 50 percent. At December 31, 1997, the Company employed approximately 1,300 full-time employees. Of these, approximately 800 were covered by collective bargaining agreements between the Company and the Oil, Chemical and Atomic Workers Union. The Company also uses the services of independent contractors in the routine conduct of its business. 86 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY NOTES TO FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition - Revenue from product sales is generally recognized upon delivery of products to the customer. Cash and Cash Equivalents - Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts purchased with an original maturity date of three months or less. Cash equivalents are stated at cost, which approximates fair value. The Company's policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of these financial institutions which are considered in the Company's investment strategy. Accounts Receivable - The Company sells its products primarily to companies in the petrochemical and refining industries. The Company performs ongoing credit evaluations of its customers' financial condition and in certain circumstances requires letters of credit from them. The Company's allowance for doubtful accounts receivable, which is reflected in the balance sheet as a reduction in accounts receivable, was $179,000 and $220,000 at December 31, 1997 and 1996, 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. Property, Plant and Equipment - Property, plant and equipment are recorded at cost. Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives of the related assets which range from five to thirty 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. Interest costs incurred on debt during the construction of major projects are capitalized. Refinery Maintenance - Turnaround costs are repair and maintenance costs incurred while performing an overhaul of a manufacturing unit. Significant turnaround costs are deferred and amortized on a straight-line basis over the estimated period until the next planned turnaround, generally four to six years. Other turnaround costs and ordinary repair and maintenance costs are expensed as incurred. Environmental Remediation Costs - Expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable a liability has been incurred and the amount of the liability can reasonably be estimated. Estimates have not been discounted to present value. Environmental remediation costs are expensed or capitalized in accordance with generally accepted accounting principles. 87 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY NOTES TO FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Exchanges - Crude oil and finished product exchange transactions, which are of a homogeneous nature of commodities in the same line of business and do not involve the payment or receipt of cash, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the normal LIFO valuation policy. Exchanges settled through payment and receipt of cash are accounted for as purchases and sales. Income Taxes - Deferred taxes result from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes and are calculated based upon cumulative book and tax differences in the balance sheet in accordance with SFAS No. 109, "Accounting for Income Taxes." Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. RELATED PARTY TRANSACTIONS On July 1, 1993, the Company entered into a long-term crude oil supply contract ("Crude Supply Contract") with Lagoven, S.A., now known as PDVSA Petroleo y Gas, S.A. ("PDVSA Oil"), an affiliate of CITGO. Pursuant to this contract, the Company will purchase a substantial majority of its crude oil supply at market- based prices adjusted for certain indexed items. In addition, under the terms of a long-term product sales agreement, CITGO purchases all of the refined products produced at the Refinery also at market-based prices. Both PDVSA Oil and CITGO are subsidiaries of Petroleos de Venezuela, S.A.("PDVSA"), the national oil company of Venezuela. Also effective July 1, 1993, the Company and Lyondell entered into a number of feedstock and product sales agreements; a tolling agreement, pursuant to which alkylate and methyl tertiary butyl ether will be produced at Lyondell's Channelview, Texas petrochemical complex for the Company; and various administrative services agreements. On December 1, 1997, Lyondell contributed its Channelview, Texas petrochemical complex including its rights and obligations under the related party agreements with LCR to a joint venture named Equistar Chemicals, LP ("Equistar"). Lyondell has a 57 percent interest in Equistar. 88 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY NOTES TO FINANCIAL STATEMENTS 3. RELATED PARTY TRANSACTIONS (CONTINUED) Related party transactions are summarized as follows: FOR THE YEAR ENDED DECEMBER 31 --------------------------------- MILLIONS OF DOLLARS 1997 1996 1995 ------------------- ---- ---- ---- Costs: Crude oil purchases $ 977 $1,046 $ 734 Product purchases 435 246 206 Transportation fees 13 27 22 ------ ------ ------ $1,425 $1,319 $ 962 ====== ====== ====== Sales of crude oil and products $1,987 $1,835 $1,707 ====== ====== ====== The Company billed Lyondell (including in 1997, one month of Equistar operations) approximately $5 million, $3 million and $11 million and Lyondell and Equistar billed the Company approximately $7 million, $11 million and $16 million pursuant to various service and cost sharing arrangements during the years ended December 31, 1997, 1996 and 1995, respectively. In addition, the Company paid Lyondell (including in 1997, one month of Equistar operations) approximately $40 million and $6 million during 1997 and 1996, respectively, pursuant to a hydrogen supply agreement. In September 1997 Atlantic Richfield Company ("ARCO") eliminated its ownership interest in Lyondell by delivering its shares of Lyondell common stock to the holders of certain ARCO notes. For the nine months ended September 30, 1997, the Company paid ARCO PipeLine Company, an affiliate of ARCO, approximately $4 million pursuant to throughput agreements. During 1996 and 1995 the Company paid ARCO PipeLine Company approximately $5 million and $1 million, respectively, pursuant to throughput agreements. The Company recognized revenue from Lyondell of approximately $11 million in 1996 for a pricing adjustment retroactive to 1993. During 1997 and 1996, the Company paid LOwner approximately $13 million and $4 million, respectively, for interest on loans related to funding a portion of the upgrade project at the Refinery and other capital expenditures. In accordance with the terms of the Regulations, during 1997, 1996 and 1995 the Company billed COwner approximately $7 million, $22 million and $6 million, respectively, and COwner paid the Company approximately $8 million, $ 21 million and $5 million, respectively, for financing costs incurred in connection with the bank loan being used to partially fund the upgrade project at the Refinery. 89 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY NOTES TO FINANCIAL STATEMENTS 4. SUPPLEMENTAL CASH FLOW INFORMATION At December 31, 1997, 1996 and 1995, property, plant and equipment included approximately $13 million, $9 million and $53 million, respectively, of non-cash additions which related to accounts payable accruals. Accounts receivable from related parties and affiliates at December 31, 1995 included approximately $4 million of reimbursements due to the Company from Lyondell for additions to fixed assets. During 1997, 1996 and 1995, the Company paid approximately $42 million, $27 million and $7 million, respectively, for interest and approximately $1 million, $4 million and $2 million, respectively, for state income and franchise taxes. Of the interest paid during 1997, 1996 and 1995, approximately $9 million, $25 million and $6 million, respectively, was capitalized. 5. FINANCIAL INSTRUMENTS The fair value of all financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable, accounts payable and notes payable, approximated their carrying value due to their short maturity. The fair value of long-term loans payable approximated their carrying value because they are variable interest rate loans. At December 31, 1997, the Company had issued letters of credit totaling approximately $8 million. The Company is party to take-or-pay contracts for hydrogen and electricity. At December 31, 1997, future minimum payments under these contracts with noncancelable contract terms in excess of one year were as follows: MILLIONS OF DOLLARS AMOUNT - ------------------- ------ 1998 $ 43 1999 43 2000 43 2001 44 2002 33 Thereafter 474 ----- Total minimum payments $ 680 ===== The Company's total purchases under these agreements were approximately $90 million, $35 million and $8 million during 1997, 1996 and 1995, respectively. 90 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY NOTES TO FINANCIAL STATEMENTS 6. INVENTORIES The categories of inventory and their book values were as follows: DECEMBER 31 ----------------- MILLIONS OF DOLLARS 1997 1996 ------------------- ---- ---- Crude oil $ 47 $ 47 Refined products 35 35 Materials and supplies 16 16 ---- ---- $ 98 $ 98 ==== ==== There was no material impact to cost of sales in 1997 associated with a change in LIFO inventories. Cost of sales was reduced approximately $2 million and $3 million in 1996 and 1995 , respectively, associated with reductions in LIFO inventories. The excess of the current cost of inventories over book value was approximately $73 million and $143 million at December 31, 1997 and 1996, respectively. 7. PROPERTY, PLANT AND EQUIPMENT The primary components of property, plant and equipment were manufacturing facilities and equipment. Repair and maintenance expenses for the years ended December 31, 1997, 1996 and 1995 were approximately $75 million, $70 million, and $73 million, respectively. The 1997, 1996 and 1995 amounts include amortization of deferred turnaround costs of approximately $10 million, $5 million, and $11 million, respectively. 8. FINANCING ARRANGEMENTS In May 1995, LCR entered into two credit facilities totaling $520 million with a group of banks. The first facility, a $70 million, 364-day revolving working capital facility, was renewed effective May 1997, and is being utilized for general business purposes and for letters of credit. At December 31, 1997, no amounts were outstanding under this credit facility. At December 31, 1996, $10 million was outstanding under this credit facility with a weighted average interest rate of 7.1 percent. Interest for this credit facility is based on either prime or eurodollar rates or based on a competitive auction feature wherein the interest rate can be established by competitive bids submitted by the participating banks, all at the Company's option. The second facility is a $450 million, five-year term credit facility that was used to partially fund an upgrade project at the Refinery which was completed in February 1997. At both December 31, 1997 and 1996, $450 million was outstanding under this credit facility with a weighted average interest rate of 6.5 percent and 6.3 percent, respectively. Interest for this facility is based on prime or eurodollar rates at the Company's option. This second facility is due in May, 2000. Both facilities contain 91 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY NOTES TO FINANCIAL STATEMENTS 8. FINANCING ARRANGEMENTS (CONTINUED) covenants which require LCR to maintain a minimum net worth which increases each year until 1998 and maintenance of certain financial ratios defined in the agreements. The facilities also contain other customary covenants which limit the Company's ability to modify certain significant contracts, incur additional debt or liens, dispose of assets, make restricted payments as defined in the agreements or merge or consolidate with other entities. In October 1995, pursuant to the Regulations, the Company began borrowing money from LOwner in connection with the upgrade project at the Refinery and other capital expenditures. These loans are due on July 1, 2003 and are subordinate to the two bank credit facilities. At December 31, 1997 and 1996, these subordinated loans totaled approximately $196 million and $178 million, respectively, and had a weighted average interest rate of 6.2 percent and 5.9 percent, respectively. Interest on these loans is based on eurodollar rates and is payable at the end of each calendar quarter. In January 1997, pursuant to the Regulations, the Company began borrowing money from COwner in connection with the upgrade project at the Refinery and other capital expenditures. These loans are due on July 1, 2003 and are subordinate to the two bank facilities. At December 31, 1997, these subordinated loans totaled approximately $17 million and had a weighted average interest rate of 6.2 percent. During 1997, 1996 and 1995, the Company incurred approximately $45 million, $30 million and $7 million of interest cost, respectively, and capitalized approximately $9 million, $27 million and $6 million, respectively, of this amount. 9. LEASES The Company leases crude oil storage facilities, a fleet of railroad tank cars, computers, office equipment and other items. At December 31, 1997, future minimum rental payments for operating leases with noncancelable lease terms in excess of one year were as follows: MILLIONS OF DOLLARS AMOUNT ------------------- ------ 1998 $ 15 1999 14 2000 11 2001 5 2002 9 Thereafter 7 ---- Total minimum lease payments $ 61 ==== 92 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY NOTES TO FINANCIAL STATEMENTS 9. LEASES (CONTINUED) Operating lease net rental expenses for the years ended December 31, 1997, 1996 and 1995 were approximately $22 million, $22 million and $25 million, respectively. 10. RETIREMENT PLANS All full-time, regular employees are covered by defined benefit pension plans. Retirement benefits are based on years of service and the employee's highest three consecutive 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. The Company accrues pension costs based on an actuarial valuation and funds the plans through contributions to a pension trust fund separate from the Company's funds. The Company also has an unfunded supplemental nonqualified retirement plan which provides pension benefits for certain employees in excess of the tax qualified plan's limits. The following table sets forth the funded status of the Company's retirement plans and the amounts recognized in the Company's balance sheet:
DECEMBER 31 -------------------------------------- 1997 1996 ------------------------ ---------- Plans with Plans with Plans with assets in ABO in assets in excess of excess of excess of MILLIONS OF DOLLARS ABO assets ABO - ----------------------- ---------- ---------- ---------- Actuarial present value of benefit obligations: Vested benefit obligation $ 6 $ 28 $ 25 === ==== ====== Accumulated benefit obligation ("ABO") $ 7 $ 31 $ 29 === ==== ====== Projected benefit obligation $11 $ 53 $ 48 Plan assets at fair value, primarily stocks and bonds 7 29 30 --- ---- ------ Projected benefit obligation in excess of plan assets (4) (24) (18) Unrecognized net loss 1 8 3 Prior service cost not yet recognized in pension cost -- 3 3 Remaining unrecognized net asset -- (1) (1) --- ---- ------ Net pension liability $(3) $(14) $ (13) === ==== ======
93 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY NOTES TO FINANCIAL STATEMENTS 10. RETIREMENT PLANS (CONTINUED) The Company's net periodic pension cost included the following components: FOR THE YEAR ENDED DECEMBER 31 -------------------------------- MILLIONS OF DOLLARS 1997 1996 1995 ------------------- ---- ---- ---- Service cost - benefits earned during the period $ 4 $ 4 $ 3 Interest cost on projected benefit obligations 5 4 3 Actual (gain) loss on plan assets (5) (5) (5) Net amortization and deferral 2 3 3 ---- ---- ---- Net periodic pension cost $ 6 $ 6 $ 4 ==== ==== ==== The assumptions used in determining the net periodic pension cost and net pension liability were as follows: DECEMBER 31 ------------------------------- PERCENT 1997 1996 1995 ------- ---- ---- ---- Discount rate 7.25 7.50 7.10 Rate of salary progression 4.75 5.00 5.00 Long-term rate of return on assets 9.50 9.50 9.50 The Company maintains voluntary defined contribution savings plans for its eligible employees. Under the current provisions of the plans, the Company contributes an amount equal to 160 percent of employee contributions up to a maximum Company contribution of eight percent of the employee's base salary. The Company contributed approximately $5 million, $4 million and $4 million to these plans during 1997, 1996 and 1995, respectively. 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company sponsors unfunded postretirement benefit plans other than pensions for both salaried and non-salaried employees which provide medical and life insurance benefits. The postretirement health care plan is contributory while the life insurance plan is non-contributory. Currently, the Company pays approximately 80 percent of the cost of the health care plan, but reserves the right to modify the cost-sharing provisions at any time. 94 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY NOTES TO FINANCIAL STATEMENTS 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) The following table sets forth the plans' separate postretirement benefit liabilities:
DECEMBER 31 ---------------------------------------------- 1997 1996 ------------------ ------------------- MILLIONS OF DOLLARS MEDICAL LIFE MEDICAL LIFE - ------------------- ------- ---- ------- ---- Accumulated postretirement benefit obligation: Retirees $ (4) $ --- $ (3) $ --- Fully eligible active plan participants (6) (1) (4) (1) Other active plan participants (27) (4) (19) (4) ---- --- ---- --- (37) (5) (26) (5) Unrecognized prior service cost (2) -- (3) -- Unrecognized net loss 9 (1) 3 -- ---- --- ---- --- Accrued postretirement benefit liability $(30) $(6) $(26) $(5) ==== === ==== ===
Net periodic postretirement benefit cost included the following component:
FOR THE YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------- 1997 1996 1995 ------------------ ------------------ ------------------ MILLIONS OF DOLLARS MEDICAL LIFE MEDICAL LIFE MEDICAL LIFE - ------------------- ------- ---- ------- ---- ------- ---- Service cost - benefits attributed to $ 1.6 $ 0.2 $ 1.3 $ 0.2 $ 0.8 $ 0.2 service during the period Interest cost on accumulated postretirement benefit 2.4 0.4 1.9 0.4 1.3 0.4 obligation Net amortization and deferral 0.1 -- (0.1) -- (0.2) -- ----- ----- ------ ------ ----- ----- Net periodic postretirement benefit cost $ 4.1 $ 0.6 $ 3.1 $ 0.6 $ 1.9 $ 0.6 ===== ===== ====== ====== ===== =====
For measurement purposes, the assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 1997 was seven percent through 2001 and five 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 obligation as of December 31, 1997 by approximately $8 million and the net periodic postretirement benefit cost for the year then ended by approximately $1 million. The accumulated postretirement benefit obligation was calculated utilizing a weighted-average discount rate of 7.25 percent and 7.5 percent and an average rate of salary progression of 4.75 percent and 5 percent at December 31, 1997 and 1996, respectively. The Company's current policy is to fund the cost of postretirement health care and life insurance plans on a pay-as-you-go basis. 95 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY NOTES TO FINANCIAL STATEMENTS 12. INCOME TAXES The Company is treated as a partnership for federal income tax purposes; consequently, no provision for federal income taxes is required. However, the Company is subject to state income taxes, and therefore a provision for state income taxes has been recorded. Significant temporary differences creating future federal taxable income or tax deductions for the Members are as follows: DECEMBER 31 ----------------- MILLIONS OF DOLLARS 1997 1996 - ------------------- ---- ---- Temporary differences creating future taxable income: LIFO inventory $ 20 $ 32 Deferred turnaround costs 18 10 Tax over book depreciation 199 66 ------ ------ Total future taxable income 237 108 ------ ------ Temporary differences creating future tax deductions: Postretirement benefits (36) (32) Amortization of organization costs (2) (1) Pensions and other compensation liabilities (23) (17) Uniform capitalization (8) (5) ------ ------ Total future tax deductions (69) (55) ------ ------ Net temporary differences $ 168 $ 53 ====== ====== Pretax income was taxed by domestic jurisdictions only. The current provision for state income tax was $1 million in 1997 and $3 million in 1995. There was no current provision for state income tax in 1996. In addition, there was no deferred provision for state income tax in 1997, 1996 and 1995. 13. FRANCHISE TAXES The capital-based portion of the Texas franchise tax during 1997, 1996 and 1995 of approximately $1 million each year is included in selling, general and administrative expenses. 14. COMMITMENTS AND CONTINGENCIES The Company is subject to various lawsuits and proceedings. 96 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY NOTES TO FINANCIAL STATEMENTS 14. COMMITMENTS AND CONTINGENCIES (CONTINUED) With respect to liabilities associated with the Company, Lyondell generally has retained liability for events that occurred prior to July 1, 1993 and certain on-going environmental projects at the Refinery. The Company generally is responsible for liabilities associated with events occurring after June 30, 1993 and on-going environmental compliance inherent to the operation of the Refinery. 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. The Company estimates that it has a liability of approximately $11 million at December 31, 1997 related to future Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), Resource Conservation and Recovery Act ("RCRA"), and Texas Natural Resource Conservation Commission ("TNRCC") assessment and remediation costs. Lyondell has a contractual obligation to reimburse the Company for a portion of this liability which is currently estimated to be approximately $10 million. The Company has accrued a current liability of approximately $1 million related to this liability for which Lyondell does not have any obligation to reimburse the Company. 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 associated with this liability, 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. Depending on 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 PDVSA Oil'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 the Company. Furthermore, the breach or termination of the Crude Supply Contract may require the Company to return to the practice of purchasing all of its crude oil feedstocks in the merchant market and may subject the Company to significant volatility and price fluctuations. 97 LYONDELL-CITGO REFINING COMPANY LTD. A LIMITED LIABILITY COMPANY NOTES TO FINANCIAL STATEMENTS 14. COMMITMENTS AND CONTINGENCIES (CONTINUED) During the first quarter of 1997 the Company settled outstanding litigation for approximately $3.5 million through voluntary mediation. 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 the opinion of management, any liability arising from the matters discussed in this note will not have a material adverse effect on the financial statements or liquidity 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. 15. SUBSEQUENT EVENTS In January 1998, LCR announced a cost reduction plan which is expected to eliminate approximately 100 jobs at LCR over the next twelve months. Approximately 40 of the jobs eliminated would be replaced by positions created at Lyondell and CITGO and billed to LCR under shared service arrangements. Restructuring costs are currently estimated to be approximately $2 million. 98 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None, except as set forth in the Company's Current Report on Form 8-K filed pursuant to the Securities Exchange Act of 1934, as amended, on March 26, 1998. 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 Registrant's definitive proxy statement for its Annual Meeting of Stockholders, to be held on May 15, 1998, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1997, and which is incorporated herein by reference. 99 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: these documents are listed in the Index to Financial Statements. EXHIBITS
3.1 - Amended and Restated Certificate of Incorporation of the Registrant (15) 3.2 - Amended and Restated By-Laws of the Registrant (16) 4.1 - Indenture, as supplemented by a First Supplemental Indenture, between the Registrant and Texas Commerce Bank National Association, as Trustee (2) 4.1(a) - Second Supplemental Indenture between the Registrant, Equistar and Texas Commerce Bank National Association 4.2 - Indenture, as supplemented by a First Supplemental Indenture, between the Registrant and Continental Bank, National Association, as Trustee (4) 4.2(a) - Second Supplemental Indenture between the Registrant, Equistar and First Trust National Association 4.3 - Indenture, as supplemented by a First Supplemental Indenture, between the Registrant and Texas Commerce Bank, as Trustee (12) 4.3(a) - Second Supplemental Indenture between the Registrant, Equistar and Texas Commerce Bank National Association 4.4 - Specimen certificate (1) 4.5 - LYONDELL-CITGO Refining Company Ltd. $70,000,000 Credit Agreement (8) 4.5(a) - Amendment No. 1 to the $70,000,000 Credit Agreement (13) 4.5(b) - Amendment No. 2 to the $70,000,000 Credit Agreement (14) 4.6 - LYONDELL-CITGO Refining Company Ltd. $450,000,000 Credit Agreement (8) 4.6(a) - Amendment No. 1 to the $450,000,000 Credit Agreement (13) 4.6(b) - Amendment No. 2 to the $450,000,000 Credit Agreement (14) 4.7 - Registrant's $225,000,000 Amended and Restated Credit Agreement 4.8 - Rights Agreement between the Registrant and the Bank of New York, as Rights Agent (11)
The Company is a party to several debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Registration S-K, the Company agrees to furnish a copy of such instruments to the Commission upon request.
EXECUTIVE COMPENSATION: 10.1 - Amended and Restated Executive Supplementary Savings Plan (15) 10.2 - Amended and Restated Executive Long-Term Incentive Plan (3) 10.3 - Amended and Restated Supplementary Executive Retirement Plan 10.3(a) - Amendment to the Amended and Restated Supplementary Executive Retirement Plan 10.4 - Executive Medical Plan (15) 10.4(a) - Amendment No. 1 to the Executive Medical Plan (15) 10.4(b) - Amendment No. 2 to the Executive Medical Plan (15) 10.5 - Amended and Restated Executive Deferral Plan 10.6 - Executive Long-Term Disability Plan (4) 10.6(a) - Amendment No. 1 to the Executive Long-Term Disability Plan (15) 10.7 - Executive Life Insurance Plan (4) 10.8 - Amended and Restated Supplemental Executive Benefit Plans Trust Agreement 10.8(a) - Amendment to the Amended and Restated Supplemental Executive Benefit Plans Trust Agreement 10.9 - Restricted Stock Plan (7) 10.9(a) - Amendment No. 1 to the Restricted Stock Plan (10)
100
10.9(b) - Amendment No. 2 to the Restricted Stock Plan 10.10 - Form of Registrant's Indemnity Agreement with Officers and Directors (1) 10.11 - Amended and Restated Elective Deferral Plan for Non-Employee Directors (15) 10.11(a)- Amendment No. 1 to the Amended and Restated Elective Deferral Plan for Non-Employee Directors (15) 10.11(b)- Amendment No. 2 to the Amended and Restated Elective Deferral Plan for Non-Employee Directors 10.12 - Amended and Restated Retirement Plan for Non-Employee Directors 10.12(a)- Amendment to the Amended and Restated Retirement Plan for Non-Employee Directors 10.13 - Restricted Stock Plan for Non-Employee Directors (13) 10.13(a)- Amendment to the Restricted Stock Plan for Non-Employee Directors 10.14 - Non-Employee Directors Benefit Plans Trust Agreement 10.14(a)- Amendment to the Non-Employee Directors Benefit Plans Trust Agreement OTHER MATERIAL CONTRACTS: 10.15 - Conveyance (conformed without exhibits) between the Registrant and ARCO (1) 10.16 - Asset Purchase Agreement (conformed without exhibits) between the Registrant and Rexene Products Company (2) 10.17 - Amended and Restated Limited Liability Company Regulations of LYONDELL-CITGO Refining Company Ltd. (5) 10.17(a)- Amendment No. 1 to the Amended and Restated Limited Liability Company Regulations of LYONDELL-CITGO Refining Company Ltd. (8) 10.17(b)- Amendment No. 2 to the Amended and Restated Limited Liability Company Regulations of LYONDELL-CITGO Refining Company Ltd. 10.17(c)- Amendment No. 3 to the Amended and Restated Limited Liability Company Regulations of LYONDELL-CITGO Refining Company Ltd. 10.18 - Contribution Agreement between the Registrant and LYONDELL-CITGO Refining Company Ltd. (5) 10.19 - Crude Oil Supply Agreement between LYONDELL-CITGO Refining Company Ltd. and Lagoven, S.A. (5) 10.20 - Asset Purchase Agreement between the Registrant and Occidental Chemical Company. (9) 10.21 - Limited Partnership Agreement of Equistar Chemicals, LP (18) 10.22 - Asset Contribution Agreement among the Registrant, Lyondell Petrochemical LP and Equistar Chemicals, LP (18) 10.23 - Asset Contribution Agreement among Millennium Petrochemicals Inc., Millennium LP and Equistar Chemicals, LP (18) 10.24 - Parent Agreement among the Registrant, Millennium Chemicals Inc. and Equistar Chemicals, LP (18) 10.25 - Master Transaction Agreement between the Registrant, Equistar Chemicals, LP, Occidental Petroleum Corporation and Millennium Chemicals Inc. 21 - Subsidiaries of the Registrant 23(a) - Consent of Coopers & Lybrand L.L.P 23(b) - Consent of Coopers & Lybrand L.L.P. and Price Waterhouse L.L.P. 24 - Powers of Attorney 27 - Financial Data Schedule
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No. 33-25407) and incorporated herein by reference. (2) 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. (3) 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. (4) 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. 101 (5) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of July 1, 1993 and incorporated herein by reference. (6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (7) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December, 31, 1994 and incorporated herein by reference. (8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and incorporated herein by reference. (9) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of May 1, 1995 and incorporated herein by reference. (10) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference. (11) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated December 8, 1995 and incorporated herein by reference. (12) Filed as an exhibit to Registrant's Registration Statement on Form S-3 dated as of January 31, 1996 and incorporated herein by reference. (13) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1996 and incorporated herein by reference. (14) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1996 and incorporated herein by reference. (15) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. (16) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997 and incorporated herein by reference. (17) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of July 25, 1997 and incorporated herein by reference. (18) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of October 17, 1997 and incorporated herein by reference. (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 Financial Statements on page 40. (2) Financial Statement Schedules 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: The following Current Reports on Form 8-K were filed during the quarter ended December 31, 1997 through March 26, 1998. Date of Report Item No. Financial Statements -------------- -------- -------------------- October 17, 1997 7 No December 1, 1997 2 Yes March 13, 1998 4 and 5 No 102 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: DAN F. SMITH* -------------------------- Dan F. Smith President 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 --------- ----- ---- WILLIAM T. BUTLER* Chairman of the Board March 30, 1998 - ----------------------------------------------- (William T. Butler) DAN F. SMITH* President, Chief Executive Officer and March 30, 1998 - ----------------------------------------------- Director (Dan F. Smith, Principal Executive Officer) CURTIS J. CRAWFORD* Director March 30, 1998 - ----------------------------------------------- (Curtis J. Crawford) TRAVIS ENGEN* Director March 30, 1998 - ----------------------------------------------- (Travis Engen) STEPHEN F. HINCHLIFFE, JR.* Director March 30, 1998 - ----------------------------------------------- (Stephen F. Hinchliffe, Jr.) DUDLEY C. MECUM II* Director March 30, 1998 - ----------------------------------------------- (Dudley C. Mecum II) PAUL R. STALEY* Director March 30, 1998 - ----------------------------------------------- (Paul R. Staley) EDWARD W. RICH* Vice President, Finance and Treasurer March 30, 1998 - ----------------------------------------------- (Edward W. Rich, Principal Financial and Accounting Officer) *By: JEFFREY R. PENDERGRAFT March 30, 1998 ----------------------------- (Jeffrey R. Pendergraft, as Attorney-in-fact)
103 EX-4.1A 2 TEXAS COMMERCE SUPPLEMENTAL INDENTURE EXHIBIT 4.1(A) EXECUTION COPY LYONDELL PETROCHEMICAL COMPANY, EQUISTAR CHEMICALS, LP AND TEXAS COMMERCE BANK NATIONAL ASSOCIATION, TRUSTEE SECOND SUPPLEMENTAL INDENTURE DATED AS OF DECEMBER 1, 1997 TO INDENTURE DATED AS OF MAY 31, 1989 (AS SUPPLEMENTED BY THE FIRST SUPPLEMENTAL INDENTURE DATED AS OF MAY 31, 1989) THIS SECOND SUPPLEMENTAL INDENTURE (this "Supplement"), dated as of December 1, 1997, between Lyondell Petrochemical Company, a Delaware corporation ("Lyondell"), Equistar Chemicals, LP, a Delaware limited partnership ("Equistar") and Texas Commerce Bank National Association, as Trustee (the "Trustee"), supplements the Indenture dated as of May 31, 1989 (the "Indenture"), between Lyondell and the Trustee, as supplemented by the First Supplemental Indenture dated as of May 31, 1989 (the "First Supplemental Indenture"), pursuant to which the Company's 10.00% Notes Due 1999 (the "Notes") were issued and are outstanding. RECITALS WHEREAS, Lyondell has executed and delivered to the Trustee the Indenture, providing for the issuance from time to time of Lyondell's unsecured debentures, notes or other evidences of indebtedness, issuable in one or more series (the "Securities"), and Lyondell has executed and delivered to the Trustee the First Supplemental Indenture, providing for the issuance of the Notes, which are Securities under the Indenture; WHEREAS, Lyondell and Millennium Chemicals Inc., a Delaware corporation ("Millennium"), have entered into a Master Transaction Agreement dated July 25, 1997, as amended (the "Master Transaction Agreement"), which provides that, on the Closing Date (as defined in the Master Transaction Agreement) each of Lyondell and Millennium will contribute or cause to be contributed certain assets to a joint venture partnership and that such joint venture partnership will assume certain liabilities of each of Lyondell and Millennium; WHEREAS, Lyondell has caused two of its wholly-owned subsidiaries, Lyondell Petrochemical L.P. Inc. ("Lyondell LP") and Lyondell Petrochemical G.P. Inc., each a Delaware corporation, and Millennium has caused two of its wholly- owned subsidiaries, to execute and deliver the Limited Partnership Agreement of Equistar dated as of October 10, 1997, and Equistar has been organized by the partners thereof to serve as the joint venture partnership contemplated by the Master Transaction Agreement; WHEREAS, the Master Transaction Agreement provides that Lyondell will contribute certain specified assets (the "Assets") to Equistar and that Equistar will assume certain specified liabilities of Lyondell, including the Notes, pursuant to an Asset Contribution Agreement to be entered into on the Closing Date between Lyondell, Lyondell LP and Equistar (the "Asset Contribution Agreement"), the form of which is attached as an exhibit to the Master Transaction Agreement; WHEREAS, pursuant to the Asset Contribution Agreement, on the Closing Date, Lyondell will contribute the Assets to Equistar and Equistar will assume the Notes; WHEREAS, Section 12.01 of the Indenture provides that nothing contained in the Indenture or in any of the Securities shall prevent any sale or conveyance of all or substantially all the property of Lyondell to any other corporation, provided that upon any such sale or conveyance the due and punctual payment of the principal of and premium, if any, and interest, if any, on all of the Securities, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Indenture and in such series to be performed by Lyondell shall be expressly assumed, by supplemental indenture, by the corporation which shall have acquired such property; WHEREAS, for purposes of Section 12.01 of the Indenture, the Assets constitute substantially all of the assets of Lyondell; WHEREAS, pursuant to Section 12.03 of the Indenture, upon such assumption by supplemental indenture as specified in the foregoing paragraph, the transferee shall succeed to and be substituted for Lyondell, with the same effect as if it had been named in the Indenture; WHEREAS, Section 11.01 of the Indenture provides that under certain conditions, Lyondell and the Trustee may, from time to time and at any time enter into an indenture or indentures supplemental to the Indenture, inter alia, to evidence the succession of another corporation to the Company and the assumption by any such successor, pursuant to Article 12 of the Indenture of the covenants, agreements and obligations of Lyondell contained in the Indenture and the Securities; and WHEREAS, in connection with the contribution of the Assets to Equistar by Lyondell and the assumption of the Notes by Equistar, Lyondell and Equistar have duly determined to make, execute and deliver to the Trustee this Supplement pursuant to the Indenture; NOW, THEREFORE, THIS SUPPLEMENT WITNESSETH: In consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to comply with Sections 12.01 and 12.03 of the Indenture, the parties hereto hereby agree, for the equal and proportionate benefit of the respective Holders from time to time of the Securities, as follows: SECTION ONE DEFINITIONS Capitalized terms used and not otherwise defined herein have the respective meanings assigned to such terms in the Indenture. -3- SECTION TWO SUCCESSION BY TRANSFER OF ASSETS On the Closing Date, the Assets will be transferred to Equistar, and effective upon such transfer, (a) Equistar hereby expressly assumes the due and punctual payment of the principal of and premium, if any, and interest, if any, on all of the Securities of each series and the due and punctual performance of all of the covenants and conditions of the Indenture, as supplemented by the First Supplemental Indenture and this Supplement, and in such series to be performed by Lyondell; and (b) Equistar will succeed to and be substituted for Lyondell as the "Company" for purposes of the Indenture, with the same effect as if Equistar had been named as the "Company" in the Indenture, as supplemented; provided, however, that Lyondell shall not be released from any of its obligations under the Indenture and under the Securities of each series, including the obligation to pay the principal of and premium, if any, and interest, if any, on the Securities. After the Closing Date, for purposes of the Indenture, the term "Company" shall mean and include both Equistar and Lyondell, and Equistar shall not be a "Subsidiary" of Lyondell. SECTION THREE RATIFICATION Except as expressly amended and supplemented on this Supplement, the Indenture shall remain unchanged and in full force and effect. This Supplement shall be construed as supplemental to the Indenture and shall form a part thereof. SECTION FOUR GOVERNING LAW This Supplement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed therein. SECTION FIVE COUNTERPARTS This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. -4- IN WITNESS WHEREOF, each of Lyondell Petrochemical Company and Equistar Chemicals, LP have caused this Second Supplemental Indenture to be duly executed and its seal to be affixed hereunto and the same to be attested by its Secretary or an Assistant Secretary, and Texas Commerce Bank National Association as Trustee, has caused this Second Supplemental Indenture to be signed by one of its Vice Presidents or Assistant Vice Presidents as of the day and year first above written. LYONDELL PETROCHEMICAL COMPANY [SEAL] By /s/ Russell S. Young --------------------------------------- Name: Russell S. Young Title: Senior Vice President, Chief Financial Officer and Treasurer Attest: /s/ Kerry A. Galvin - ------------------------------- Name: Kerry A. Galvin Title: Assistant Secretary EQUISTAR CHEMICALS, LP [SEAL] By /s/ Joseph M. Putz --------------------------------------- Name: Joseph M. Putz Title: Senior Vice President, Finance and Administration Attest: /s/ Gerald A. O'Brien - ------------------------------- Name: Gerald A. O'Brien Title: Vice President and Secretary TEXAS COMMERCE BANK NATIONAL ASSOCIATION, Trustee By /s/ Mauri J. Cowen --------------------------------------- Name: Mauri J. Cowen Title: Vice President and Trust Officer -5- EX-4.2A 3 FIRST TRUST SUPPLEMENTAL INDENTURE EXHIBIT 4.2(A) EXECUTION COPY LYONDELL PETROCHEMICAL COMPANY, EQUISTAR CHEMICALS, LP AND FIRST TRUST NATIONAL ASSOCIATION, TRUSTEE SECOND SUPPLEMENTAL INDENTURE DATED AS OF DECEMBER 1, 1997 TO INDENTURE DATED AS OF MARCH 10, 1992 (AS SUPPLEMENTED BY THE FIRST SUPPLEMENTAL INDENTURE DATED AS OF MARCH 10, 1992) THIS SECOND SUPPLEMENTAL INDENTURE (this "Supplement"), dated as of December 1, 1997, between Lyondell Petrochemical Company, a Delaware corporation ("Lyondell"), Equistar Chemicals, LP, a Delaware limited partnership ("Equistar") and First Trust National Association, as Trustee (the "Trustee"), supplements the Indenture dated as of March 10, 1992 (the "Indenture"), between Lyondell and Continental Bank, National Association, as the previous Trustee under the Indenture, as supplemented by the First Supplemental Indenture dated as of March 10, 1992 (the "First Supplemental Indenture"), pursuant to which the Company's 9.125% Notes Due 2002 (the "Notes") were issued and are outstanding. RECITALS WHEREAS, Lyondell has executed and delivered to the Trustee the Indenture, providing for the issuance from time to time of Lyondell's unsecured debentures, notes or other evidences of indebtedness, issuable in one or more series (the "Securities"), and Lyondell has executed and delivered to the Trustee the First Supplemental Indenture, providing for the issuance of the Notes, which are Securities under the Indenture; WHEREAS, Lyondell and Millennium Chemicals Inc., a Delaware corporation ("Millennium"), have entered into a Master Transaction Agreement dated July 25, 1997, as amended (the "Master Transaction Agreement"), which provides that, on the Closing Date (as defined in the Master Transaction Agreement) each of Lyondell and Millennium will contribute or cause to be contributed certain assets to a joint venture partnership and that such joint venture partnership will assume certain liabilities of each of Lyondell and Millennium; WHEREAS, Lyondell has caused two of its wholly-owned subsidiaries, Lyondell Petrochemical L.P. Inc. ("Lyondell LP") and Lyondell Petrochemical G.P. Inc., each a Delaware corporation, and Millennium has caused two of its wholly- owned subsidiaries, to execute and deliver the Limited Partnership Agreement of Equistar dated as of October 10, 1997, and Equistar has been organized by the partners thereof to serve as the joint venture partnership contemplated by the Master Transaction Agreement; WHEREAS, the Master Transaction Agreement provides that Lyondell will contribute certain specified assets (the "Assets") to Equistar and that Equistar will assume certain specified liabilities of Lyondell, including the Notes, pursuant to an Asset Contribution Agreement to be entered into on the Closing Date between Lyondell, Lyondell LP and Equistar (the "Asset Contribution Agreement"), the form of which is attached as an exhibit to the Master Transaction Agreement; WHEREAS, pursuant to the Asset Contribution Agreement, on the Closing Date, Lyondell will contribute the Assets to Equistar and Equistar will assume the Notes; WHEREAS, Section 12.01 of the Indenture provides that nothing contained in the Indenture or in any of the Securities shall prevent any sale or conveyance of all or substantially all the property of Lyondell to any other corporation, provided that upon any such sale or conveyance the due and punctual payment of the principal of and premium, if any, and interest, if any, on all of the Securities, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Indenture and in such series to be performed by Lyondell shall be expressly assumed, by supplemental indenture, by the corporation which shall have acquired such property; WHEREAS, for purposes of Section 12.01 of the Indenture, the Assets constitute substantially all of the assets of Lyondell; WHEREAS, pursuant to Section 12.03 of the Indenture, upon such assumption by supplemental indenture as specified in the foregoing paragraph, the transferee shall succeed to and be substituted for Lyondell, with the same effect as if it had been named in the Indenture; WHEREAS, Section 11.01 of the Indenture provides that under certain conditions, Lyondell and the Trustee may, from time to time and at any time enter into an indenture or indentures supplemental to the Indenture, inter alia, to evidence the succession of another corporation to the Company and the assumption by any such successor, pursuant to Article 12 of the Indenture of the covenants, agreements and obligations of Lyondell contained in the Indenture and the Securities; and WHEREAS, in connection with the contribution of the Assets to Equistar by Lyondell and the assumption of the Notes by Equistar, Lyondell and Equistar have duly determined to make, execute and deliver to the Trustee this Supplement pursuant to the Indenture; NOW, THEREFORE, THIS SUPPLEMENT WITNESSETH: In consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to comply with Sections 12.01 and 12.03 of the Indenture, the parties hereto hereby agree, for the equal and proportionate benefit of the respective Holders from time to time of the Securities, as follows: SECTION ONE DEFINITIONS Capitalized terms used and not otherwise defined herein have the respective meanings assigned to such terms in the Indenture. -3- SECTION TWO SUCCESSION BY TRANSFER OF ASSETS On the Closing Date, the Assets will be transferred to Equistar, and effective upon such transfer, (a) Equistar hereby expressly assumes the due and punctual payment of the principal of and premium, if any, and interest, if any, on all of the Securities of each series, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Indenture, as supplemented by the First Supplemental Indenture and this Supplement, and in such series to be performed by Lyondell; and (b) Equistar will succeed to and be substituted for Lyondell as the "Company" for purposes of the Indenture, with the same effect as if Equistar had been named as the "Company" in the Indenture, as supplemented; provided, however, that Lyondell shall not be released from any of its obligations under the Indenture and under the Securities of each series, including the obligation to pay the principal of and premium, if any, and interest, if any, on the Securities. After the Closing Date, for purposes of the Indenture, the term "Company" shall mean and include both Equistar and Lyondell, and Equistar shall not be a "Subsidiary" of Lyondell. SECTION THREE RATIFICATION Except as expressly amended and supplemented on this Supplement, the Indenture shall remain unchanged and in full force and effect. This Supplement shall be construed as supplemental to the Indenture and shall form a part thereof. SECTION FOUR GOVERNING LAW This Supplement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed therein. SECTION FIVE COUNTERPARTS This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. -4- IN WITNESS WHEREOF, each of Lyondell Petrochemical Company and Equistar Chemicals, LP have caused this Second Supplemental Indenture to be duly executed and its seal to be affixed hereunto and the same to be attested by its Secretary or an Assistant Secretary, and First Trust National Association as Trustee, has caused this Second Supplemental Indenture to be signed by one of its Vice Presidents or Assistant Vice Presidents as of the day and year first above written. LYONDELL PETROCHEMICAL COMPANY [SEAL] By /s/ Russell S. Young --------------------------------------- Name: Russell S. Young Title: Senior Vice President, Chief Financial Officer and Treasurer Attest: /s/ Kerry A. Galvin - ------------------------------- Name: Kerry A. Galvin Title: Assistant Secretary EQUISTAR CHEMICALS, LP [SEAL] By /s/ Joseph M. Putz --------------------------------------- Name: Joseph M. Putz Title: Senior Vice President, Finance and Administration Attest: /s/ Gerald A. O'Brien - ------------------------------- Name: Gerald A. O'Brien Title: Vice President and Secretary FIRST TRUST NATIONAL ASSOCIATION, Trustee By /s/ Bud W. Lord --------------------------------------- Name: Bud W. Lord Title: Asst. Vice President -5- EX-4.3A 4 SUPPLEMENTAL INDENTURE EXHIBIT 4.3(A) EXECUTION COPY LYONDELL PETROCHEMICAL COMPANY, EQUISTAR CHEMICALS, LP AND TEXAS COMMERCE BANK NATIONAL ASSOCIATION, TRUSTEE SECOND SUPPLEMENTAL INDENTURE DATED AS OF DECEMBER 1, 1997 TO INDENTURE DATED AS OF JANUARY 29, 1996 (AS SUPPLEMENTED BY THE FIRST SUPPLEMENTAL INDENTURE DATED AS OF FEBRUARY 15, 1996) THIS SECOND SUPPLEMENTAL INDENTURE (this "Supplement"), dated as of December 1, 1997, between Lyondell Petrochemical Company, a Delaware corporation ("Lyondell"), Equistar Chemicals, LP, a Delaware limited partnership ("Equistar") and Texas Commerce Bank National Association, as Trustee (the "Trustee"), supplements the Indenture dated as of January 29, 1996 (the "Indenture"), between Lyondell and the Trustee, as supplemented by the First Supplemental Indenture dated as of February 15, 1996 (the "First Supplemental Indenture"), pursuant to which the Company's 6.50% Notes Due 2006 and 7.55% Notes Due 2026 (collectively, the "Notes") were issued and are outstanding. RECITALS WHEREAS, Lyondell has executed and delivered to the Trustee the Indenture, providing for the issuance from time to time of Lyondell's unsecured debentures, notes or other evidences of indebtedness, issuable in one or more series (the "Securities"), and Lyondell has executed and delivered to the Trustee the First Supplemental Indenture, providing for the issuance of the Notes, which are Securities under the Indenture; WHEREAS, Lyondell and Millennium Chemicals Inc., a Delaware corporation ("Millennium"), have entered into a Master Transaction Agreement dated July 25, 1997, as amended (the "Master Transaction Agreement"), which provides that, on the Closing Date (as defined in the Master Transaction Agreement) each of Lyondell and Millennium will contribute or cause to be contributed certain assets to a joint venture partnership and that such joint venture partnership will assume certain liabilities of each of Lyondell and Millennium; WHEREAS, Lyondell has caused two of its wholly-owned subsidiaries, Lyondell Petrochemical L.P. Inc. ("Lyondell LP") and Lyondell Petrochemical G.P. Inc., each a Delaware corporation, and Millennium has caused two of its wholly- owned subsidiaries, to execute and deliver the Limited Partnership Agreement of Equistar dated as of October 10, 1997, and Equistar has been organized by the partners thereof to serve as the joint venture partnership contemplated by the Master Transaction Agreement; WHEREAS, the Master Transaction Agreement provides that Lyondell will contribute certain specified assets (the "Assets") to Equistar and that Equistar will assume certain specified liabilities of Lyondell, including the Notes, pursuant to an Asset Contribution Agreement to be entered into on the Closing Date between Lyondell, Lyondell LP and Equistar (the "Asset Contribution Agreement"), the form of which is attached as an exhibit to the Master Transaction Agreement; WHEREAS, pursuant to the Asset Contribution Agreement, on the Closing Date, Lyondell will contribute the Assets to Equistar and Equistar will assume the Notes; WHEREAS, Section 12.01 of the Indenture provides that nothing contained in the Indenture or in any of the Securities shall prevent any sale or conveyance of all or substantially all the property of Lyondell to any other corporation, provided that upon any such sale or conveyance the due and punctual payment of the principal of and premium, if any, and interest, if any, on all of the Securities, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Indenture and in such series to be performed by Lyondell shall be expressly assumed, by supplemental indenture, by the corporation which shall have acquired such property; WHEREAS, for purposes of Section 12.01 of the Indenture, the Assets constitute substantially all of the assets of Lyondell; WHEREAS, pursuant to Section 12.03 of the Indenture, upon such assumption by supplemental indenture as specified in the foregoing paragraph, the transferee shall succeed to and be substituted for Lyondell, with the same effect as if it had been named in the Indenture; WHEREAS, Section 11.01 of the Indenture provides that under certain conditions, Lyondell and the Trustee may, from time to time and at any time enter into an indenture or indentures supplemental to the Indenture, inter alia, to evidence the succession of another corporation to the Company and the assumption by any such successor, pursuant to Article 12 of the Indenture of the covenants, agreements and obligations of Lyondell contained in the Indenture and the Securities; and WHEREAS, in connection with the contribution of the Assets to Equistar by Lyondell and the assumption of the Notes by Equistar, Lyondell and Equistar have duly determined to make, execute and deliver to the Trustee this Supplement pursuant to the Indenture; NOW, THEREFORE, THIS SUPPLEMENT WITNESSETH: In consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to comply with Sections 12.01 and 12.03 of the Indenture, the parties hereto hereby agree, for the equal and proportionate benefit of the respective Holders from time to time of the Securities, as follows: SECTION ONE DEFINITIONS Capitalized terms used and not otherwise defined herein have the respective meanings assigned to such terms in the Indenture. -3- SECTION TWO SUCCESSION BY TRANSFER OF ASSETS On the Closing Date, the Assets will be transferred to Equistar, and effective upon such transfer, (a) Equistar hereby expressly assumes the due and punctual payment of the principal of and premium, if any, and interest, if any, on all of the Securities of each series and the due and punctual performance of all of the covenants and conditions of the Indenture, as supplemented by the First Supplemental Indenture and this Supplement, and in such series to be performed by Lyondell; and (b) Equistar will succeed to and be substituted for Lyondell as the "Company" for purposes of the Indenture, with the same effect as if Equistar had been named as the "Company" in the Indenture, as supplemented; provided, however, that Lyondell shall not be released from any of its obligations under the Indenture and under the Securities of each series, including the obligation to pay the principal of and premium, if any, and interest, if any, on the Securities. After the Closing Date, for purposes of the Indenture, the term "Company" shall mean and include both Equistar and Lyondell, and Equistar shall not be a "Subsidiary" of Lyondell. SECTION THREE RATIFICATION Except as expressly amended and supplemented on this Supplement, the Indenture shall remain unchanged and in full force and effect. This Supplement shall be construed as supplemental to the Indenture and shall form a part thereof. SECTION FOUR GOVERNING LAW This Supplement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed therein. SECTION FIVE COUNTERPARTS This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. -4- IN WITNESS WHEREOF, each of Lyondell Petrochemical Company and Equistar Chemicals, LP have caused this Second Supplemental Indenture to be duly executed and its seal to be affixed hereunto and the same to be attested by its Secretary or an Assistant Secretary, and Texas Commerce Bank National Association as Trustee, has caused this Second Supplemental Indenture to be signed by one of its Vice Presidents or Assistant Vice Presidents as of the day and year first above written. LYONDELL PETROCHEMICAL COMPANY [SEAL] By /s/ Russell S. Young --------------------------------------- Name: Russell S. Young Title: Senior Vice President, Chief Financial Officer and Treasurer Attest: /s/ Kerry A. Galvin - ------------------------------- Name: Kerry A. Galvin Title: Assistant Secretary EQUISTAR CHEMICALS, LP [SEAL] By /s/ Joseph M. Putz --------------------------------------- Name: Joseph M. Putz Title: Senior Vice President, Finance and Administration Attest: /s/ Gerald A. O'Brien - ------------------------------- Name: Gerald A. O'Brien Title: Vice President and Secretary TEXAS COMMERCE BANK NATIONAL ASSOCIATION, Trustee By /s/ Mauri J. Cowen --------------------------------------- Name: Mauri J. Cowen Title: Vice President and Trust Officer -5- EX-4.7 5 CREDIT AGREEMENT EXHIBIT 4.7 ________________________________________________________________________________ LYONDELL PETROCHEMICAL COMPANY $225,000,000 CREDIT AGREEMENT DATED AS OF DECEMBER 1, 1997 TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS DOCUMENTATION AGENT, THE CHASE MANHATTAN BANK, AS AUCTION AGENT, AND THE BANKS FROM TIME TO TIME PARTY HERETO ________________________________________________________________________________ TABLE OF CONTENTS ARTICLE I DEFINITIONS SECTION 1.01. Definitions........................................................ 1 1.02. Accounting Terms and Determinations................................18 1.03. Types of Loans and Borrowings......................................18 1.04. Terms Generally....................................................18 ARTICLE II THE CREDITS 2.01. Commitments to Lend................................................19 2.02. Notice of Committed Borrowings.....................................21 2.03. Letters of Credit..................................................22 2.04. Notice to Banks; Funding of Committed Loans........................27 2.05. Committed Notes....................................................28 2.06. Maturity of Committed Loans........................................29 2.07. Interest Rates.....................................................29 2.08. Conversions and Continuances.......................................30 2.09. Pro Rata Committed Borrowings......................................31 2.10. Competitive Borrowings.............................................31 2.11. Optional Termination or Reduction of Commitments...................35 2.12. Mandatory Termination of Commitments...............................35 2.13. Optional Prepayments...............................................35 2.14. General Provisions as to Payments..................................36 2.15. Funding Losses.....................................................36 2.16. Fees...............................................................37 2.17. Computation of Interest and Fees...................................37 2.18. Maximum Interest Rate..............................................38 2.19. Withholding Tax Exemption..........................................40 ARTICLE III CONDITIONS SECTION 3.01. Effectiveness......................................................41 3.02. Credit Events......................................................43
ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower.....................45 ARTICLE V COVENANTS SECTION 5.01. Certain Information to be Furnished by the Borrower................50 5.02. Maintenance of Property; Insurance.................................54 5.03. Limitation on Liens................................................54 5.04. Consolidation, Merger, Disposition of Assets.......................57 5.05. Use of Proceeds....................................................58 5.06. Payment of Taxes...................................................58 5.07. LCR Matters........................................................58 5.08. Equistar Matters...................................................59 5.09. Financial Covenants................................................59 5.10. No Subsidiary Debt.................................................61 5.11. Disposition of Interests in Subsidiaries...........................61 ARTICLE VI DEFAULTS AND REMEDIES SECTION 6.01. Defaults...........................................................62 6.02. Other Remedies.....................................................64 6.03. Rights of Setoff...................................................64 ARTICLE VII THE AGENTS SECTION 7.01. Appointment and Authorization......................................65 7.02. Agents and Affiliates..............................................65 7.03. Action by Agents...................................................65 7.04. Consultation with Experts..........................................65 7.05. Liability of Agents................................................66 7.06. INDEMNIFICATION....................................................66 7.07. Credit Decision....................................................66 7.08. Successor Agents...................................................67
ii ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair...........67 8.02. Illegality.........................................................68 8.03. Increased Cost and Reduced Return..................................68 8.04. Substitute Loans...................................................70 8.05. Regulation D Compensation..........................................71 8.06. Substitution of Bank...............................................71 ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices............................................................72 9.02. No Waiver..........................................................72 9.03. GOVERNING LAW......................................................72 9.04. Expenses; Documentary Taxes; Indemnification.......................72 9.05. Amendments, Etc....................................................74 9.06. Counterparts; Integration..........................................74 9.07. Successors and Assigns.............................................74 9.08. Survival...........................................................76 9.09. Acknowledgment.....................................................76 9.10. Headings...........................................................76 9.11. Sharing of Setoffs.................................................76 9.12. Collateral.........................................................77 9.13. CONSENT TO JURISDICTION............................................77 9.14. FINAL AGREEMENT OF THE PARTIES.....................................78
SCHEDULE I - Commitments SCHEDULE 5.03(c) - Existing and Contemplated Liens EXHIBIT 2.02 - Form of Notice of Committed Borrowing EXHIBIT 2.03 - Form of Letter of Credit Request EXHIBIT 2.05 - Form of Committed Note EXHIBIT 2.08 - Form of Notice of Conversion EXHIBIT 2.10(a) - Form of Competitive Bid Request EXHIBIT 2.10(b) - Form of Notice of Competitive Bid Request EXHIBIT 2.10(c) - Form of Competitive Bid EXHIBIT 2.10(d) - Form of Competitive Note EXHIBIT 3.01(ii) - Form of Certificate of Incumbency EXHIBIT 3.01(iv) - Form of Opinion of Counsel for the Borrower iii EXHIBIT 3.01(v) - Form of Opinion of Special Counsel for the Agents iv THIS CREDIT AGREEMENT (this"Agreement") dated as of December 1, 1997 among LYONDELL PETROCHEMICAL COMPANY, a Delaware corporation, the BANKS listed on the signature pages hereof and/or those BANKS that hereafter become party to this Agreement pursuant to Section 9.07(c), TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Administrative Agent, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Documentation Agent, and THE CHASE MANHATTAN BANK, as Auction Agent. The Borrower (such term and each other capitalized term used but not otherwise defined herein having the meaning assigned to it in Article I) has requested the Banks to extend credit in order to enable it to borrow on a revolving basis and obtain the issuance of Letters of Credit in an aggregate amount not in excess of $225,000,000. The proceeds of the Loans and the Letters of Credit are to be used to provide working capital availability and for general corporate purposes. The Banks are willing to extend such credit to the Borrower on the terms and subject to the conditions set forth herein. Accordingly, in consideration of the mutual agreements herein contained and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. In addition to terms defined elsewhere in ----------- this Agreement, as used in this Agreement the following terms have the following meanings (all terms defined in this Agreement in the singular to have the same meanings when used in the plural and vice versa): "Administrative Questionnaire" means, with respect to each Bank, the administrative questionnaire in the form submitted to such Bank by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Borrower) duly completed by such Bank. "Administrative Agent" means Texas Commerce Bank National Association in its capacity as administrative and syndication agent for the Banks hereunder and its successors in such capacity. "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with such Person. 1 "Agents" means the Administrative Agent, the Documentation Agent and the Auction Agent. "Agreement" has the meaning specified in the introduction hereto, as the same may hereafter be amended, extended and modified from time to time. "Alternate Competitive Loan" means any Competitive Loan bearing interest at a fixed percentage rate per annum specified by the Bank making such Loan in its Competitive Bid. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Base Rate Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Committed Loans and Euro-Dollar Competitive Loans, its Euro- Dollar Lending Office, and (iii) with respect to the Issuing Bank, its Domestic Lending Office. "Applicable Margin" means (a) 0.55% with respect to the Euro-Dollar Committed Loans and 0.20% per annum with respect to the Facility Fee, in each case for the period from the date of this Agreement until the first Determination Date after the date of this Agreement and (b) for any subsequent period from and including any Determination Date, beginning with the first Determination Date after the date of this Agreement, if the Applicable Percentage Ratio on the first day of such period is within a range set forth in column A below, the per annum percentage equal to the percentage set forth for that range in the column for Euro-Dollar Committed Loans or the Facility Fee, as the case may be:
A Euro-Dollar Committed Loans Facility Fee - -------------- --------------------------- ------------ less than or equal 0.55% 0.20% to 1.0 to 1.0 greater than 1.0 to 1.0 0.75% 0.25%
"Applicable Percentage Ratio" means (a) as of any Determination Date as defined in clause (a) of that definition, the ratio of (i) Consolidated Debt as of the end of the Borrower's most recently ended fiscal quarter or fiscal year, as the case may be, to (ii) Consolidated Cash Flow for the Borrower's four most recently ended fiscal quarters and (b) as of any other Determination Date, a ratio greater than 1.0 to 1.0 until such time as the Administrative Agent receives the requisite financial statements referred to in clause (b) or (c) of the definition of Determination Date, as the case may be. "Assignee" has the meaning set forth in Section 9.07(c). 2 "Auction Agent" means The Chase Manhattan Bank in its capacity as auction agent for the Banks hereunder and its successors in such capacity. "Authorized Officer" and "Authorized Representative" of the Borrower shall mean an officer or other representative of the Borrower designated as such in the latest Certificate of Incumbency of the Borrower. The Agents and the Banks shall be conclusively entitled to rely on the latest such Certificate of Incumbency of the Borrower delivered to the Administrative Agent. "Bank" means each financial institution which is listed on the signature pages hereof as being a "Bank" and which has executed and delivered this Agreement and/or each Assignee which becomes a "Bank" pursuant to Section 9.07(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the lesser of (i) the higher of (x) the Prime Rate for such day, or (y) the Federal Funds Rate for such day, plus 1/2 of 1 percent, or (ii) the Highest Lawful Rate. "Base Rate Loan" means a Committed Loan to be made by a Bank as a Base Rate Loan in accordance with the applicable Notice of Committed Borrowing or pursuant to Article VIII. "Borrower" means Lyondell Petrochemical Company, a Delaware corporation, and its successors. "Borrowing" has the meaning set forth in Section 1.03. "Borrowing Date" means, with respect to each Borrowing, the Domestic Business Day or Euro-Dollar Business Day upon which the proceeds of such Borrowing are to be made available to the Borrower. "Certificate of Incumbency" shall mean a Certificate of Incumbency described in clause (ii) of Section 3.01 and any successor or replacement Certificate of Incumbency delivered hereunder. "CITGO" means CITGO Petroleum Corporation, a Delaware corporation, and its successors and assigns. "CITGO Refining" means CITGO Refining Investment Company, an Oklahoma corporation, and its successors (including any entity that assumes Citgo Refining's obligations under the Company Regulations). 3 "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Commitment" means, as to each Bank, the amount set forth opposite its name on Schedule I under the heading "Commitment" or as set forth in an instrument signed by all appropriate parties in accordance with Section 9.07(c) (as such amount may be increased from time to time pursuant to Section 2.01(b) or reduced from time to time as provided in Section 2.10 or 2.11). "Commitment Percentage" of any Bank means, at any time, the ratio which its Commitment bears to the aggregate of all the Banks' Commitments or, if the Commitments have been terminated, the ratio which the aggregate outstanding principal amount of the Committed Loans made by such Bank bears to the aggregate outstanding principal amount of all Committed Loans made by the Banks. "Committed Amount" means, at any time, the aggregate principal amount of the Commitments at such time. "Committed Borrowing" is a Borrowing under Sections 2.01 and 2.02. "Committed Loan" means a Loan made pursuant to Section 2.01. "Competitive Bid" means an offer by a Bank to the Borrower to make a Competitive Loan in the form of Exhibit 2.10(c). "Competitive Bid Request" has the meaning set forth in Section 2.10(a). "Competitive Borrowing" is a Borrowing under Section 2.10. "Competitive Loan" means a Loan made pursuant to Section 2.10. "Consolidated Capital Expenditures" means, for any period with respect to any Person, the gross additions to fixed assets attributable to cash flows from investing activities as reflected on the consolidated statement of cash flows of that Person and its Consolidated Subsidiaries for such period. "Consolidated Cash Flow" means, for any period with respect to the Borrower and its Consolidated Subsidiaries, without duplication, (a) EBITDA of the Borrower as of the end of that period, plus (b) all distributions to the Borrower from earnings and all distributions to the Borrower in excess of earnings from LCR, Equistar, Methanol and each Other Equity Person, in each case, as reflected on the consolidated statement of cash flows of the Borrower and its Consolidated Subsidiaries as of the end of that period, minus (c) an amount equal to the sum of (i) the amount of all distributions to 4 the Borrower derived from financing activities of LCR, Equistar, Methanol and each Other Equity Person, plus (ii) the amount of all capital contributions by the Borrower to LCR, Equistar, Methanol and each Other Equity Person. "Consolidated Debt" means, as of the date of any determination thereof with respect to any Person, all Debt of that Person and its Consolidated Subsidiaries. "Consolidated Interest Expense" means, for any period with respect to any Person, the Interest Expense reflected on the consolidated statement of income of that Person and its Consolidated Subsidiaries for such period. "Consolidated Net Income or Loss" means, for any period with respect to any Person, the net income (loss) reflected on the consolidated statement of income of that Person and its Consolidated Subsidiaries for such period. "Consolidated Net Tangible Assets" means, with respect to any Person, the total amount of assets (less applicable reserves and other properly deductible items) after deducting therefrom (i) all current liabilities (excluding any liabilities that are by their terms extendible or renewable at the option of the obligor thereon to a time more than 12 months after the time as of which the amount thereof is being computed), and (ii) all goodwill, trade names, trademarks, patents, purchased technology, unamortized debt discount and other like intangible assets, all as set forth on the most recent quarterly consolidated balance sheet of that Person and its Consolidated Subsidiaries. "Consolidated Subsidiary" means at any date with respect to any Person any Subsidiary of that Person or other entity the accounts of which are consolidated with those of that Person in that Person's consolidated financial statements as of such date. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Code. "Credit Event" means the making of a Loan or the occasion of any other Borrowing hereunder or the issuance, renewal or extension of any Letter of Credit hereunder. "Debt" of any Person means without duplication, as of the date of any determination thereof (i) the aggregate outstanding principal amount of all indebtedness for borrowed money of such Person, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments (including letters of credit), (iii) all obligations of such Person to pay the deferred purchase price of 5 property or services, except trade accounts payable incurred in the ordinary course of business, (iv) the capitalized amount of all obligations of such Person as lessee under capital leases, (v) all obligations of others of the type described in clauses (i) through (iv) of this definition to the extent secured by a Lien on any asset of such Person, whether or not such obligations are assumed by such Person and (vi) all obligations of others of the type described in clauses (i) through (iv) of this definition to the extent Guaranteed by such Person. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Determination Date" means, for purposes of determining the Applicable Margin or the Letter of Credit Percentage from time to time, (a) the first date after the end of a fiscal quarter or fiscal year, as the case may be, of the Borrower on which the Administrative Agent receives the financial statements as of the end of that fiscal quarter or fiscal year required by Section 5.01(a) or Section 5.01(b), as the case may be, (b) the 61st day after the end of any fiscal quarter of the Borrower if the Administrative Agent has not received the financial statements as of the end of that fiscal quarter required by Section 5.01(b) and (c) the 121st day after the end of any fiscal year of the Borrower if the Administrative Agent has not received the financial statements required by Section 5.01(a). "Dividend" means any cash dividend paid or declared by the board of directors of the Borrower in respect of the Borrower's stock now or hereafter outstanding. "Documentation Agent" means Bank of America National Trust and Savings Association in its capacity as documentation agent for the Banks hereunder and its successors in such capacity. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Houston or New York City are authorized by law to close. "Domestic Lending Office" means, as to each Bank, including the Issuing Bank, its office, branch or Affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office, branch or Affiliate as such Bank may from time to time specify to the Administrative Agent and the Borrower as its Domestic Lending Office. "Drawing" means any drawing under a Letter of Credit. 6 "EBITDA" means, for any period with respect to any Person, the sum of (a) Consolidated Net Income or Loss of that Person for such period, minus (b) interest income of that Person and its Consolidated Subsidiaries for such period, plus (c) Consolidated Interest Expense of that Person for such period, plus (d) depreciation, amortization and provisions for deferred taxes of that Person and its Consolidated Subsidiaries for such period, and plus or minus (e) any Non-Operating Special Items. "EBITDA Adjustment" means, for any fiscal quarter in which the Borrower, LCR, Equistar, Methanol or any Other Equity Person or any of their respective Consolidated Subsidiaries shall incur downtime at or with respect to any plant or manufacturing or processing unit (as determined by the Borrower in its sole discretion), an amount equal to the lesser of (i) the estimated amount by which the combined EBITDA of all such Persons is impacted by such downtime or (ii) $20,000,000, which amount may be included in the calculation of Global EBITDA for that fiscal quarter; provided, that such adjustment of up to $20,000,000 for -------- all such Persons may only be made for one fiscal quarter during the term of this Agreement. "Effective Date" means December 1, 1997, on satisfaction of the conditions set forth in clauses (a) and (b) of Section 3.01. "Environmental Laws" means federal, state or local laws, rules or regulations, including any administrative order, permit or approval pertaining to health, safety or the environment in effect in the applicable jurisdiction at the time in question, including the Clean Air Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), ------ the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act, as amended, the Resource Conservation and Recovery Act, as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendment and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, comparable state and local laws, and other environmental conservation and protection laws. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Equistar" means Equistar Chemicals, LP, a Delaware limited partnership, the general partners of which on the date hereof are Lyondell Equistar G.P. and Millennium Equistar GP and the limited partners of which on the date hereof are Lyondell Equistar LP and Millennium Equistar LP, and its successors. "Equistar Debt" means the Debt of Lyondell Equistar LP evidenced by its promissory note dated December 1, 1997 in the principal face amount of $345,000,000 payable to Equistar on the terms provided for therein. 7 "Equistar Partnership Agreement" means the limited partnership agreement of Equistar dated October 10, 1997, as amended from time to time, subject, however, to Section 5.08. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Committed Loan" means a Committed Loan to be made by a Bank as a Euro-Dollar Committed Loan in accordance with the applicable Notice of Committed Borrowing. "Euro-Dollar Competitive Loan" means a Competitive Loan to be made by a Bank as a Euro-Dollar Competitive Loan in accordance with the applicable Competitive Bid. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or Affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or Affiliate of such Bank as it may from time to time specify to the Administrative Agent and the Borrower as its Euro- Dollar Lending Office. "Euro-Dollar Margin" has the meaning set forth in Section 2.07(b). "Euro-Dollar Rate" has the meaning set forth in Section 2.07(b). "Euro-Dollar Reserve Percentage" means with respect to any Bank for any day that percentage (expressed as a decimal) which is in effect on such day as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirement (including without limitation any basic, supplemental or emergency reserves) imposed on such Bank in respect of "Euro-currency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Committed Loans is determined or in respect of any category of extensions of credit or other assets which includes loans by a non-United States office of such Bank to United States residents). "Event of Default" has the meaning set forth in Section 6.01. "Facility Fee" has the meaning specified in Section 2.16(a). "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/1OOth of 1 percent) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal 8 Reserve Bank of Dallas on the Domestic Business Day next succeeding such day; provided, however, that (i) if such day is not a Domestic Business Day, the - -------- ------- Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Texas Commerce Bank National Association on such day for such transactions as determined by the Administrative Agent. "Global Debt" means the sum of (a) the Borrower's Consolidated Debt, plus (b) the amount equal to the Ownership Percentage in LCR of LCR's Consolidated Debt, plus (c) the amount equal to the Ownership Percentage in Equistar of Equistar's Consolidated Debt, plus (d) the amount equal to the Ownership Percentage in Methanol of Methanol's Consolidated Debt, plus (e) the amount equal to the Ownership Percentage in each Other Equity Person of such Other Equity Person's Consolidated Debt; provided, however, Global Debt shall not include any Debt of LCR, Equistar, Methanol or any Other Equity Person owing to the Borrower. "Global EBITDA" means (a) the Borrower's EBITDA, plus (b) the amount equal to the Ownership Percentage in LCR of LCR's EBITDA, plus (c) the amount equal to the Ownership Percentage in Equistar of Equistar's EBITDA, plus (d) the amount equal to the Ownership Interest in Methanol of Methanol's EBITDA, plus (e) the amount equal to the Ownership Percentage in each Other Equity Person of such Other Equity Person's EBITDA, plus (e) any EBITDA Adjustment. "Guarantee"means, in respect of any Person, for that Person to guarantee or act, directly or indirectly, as a surety for any Debt of any other Person and, without limiting the generality of the foregoing, to (i) incur or assume any such Debt, direct or indirect, contingent or otherwise, (ii) purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by binding agreement to keep- well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (iii) assure in any other manner the obligee of such Debt of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, -------- however, in no event shall the term "Guarantee"mean to endorse for collection or - ------- deposit in the ordinary course of business. "Hazardous Materials" means any pollutant, contaminant, solid waste, asbestos, petroleum product, crude oil or a fraction thereof, any toxic or hazardous substance, material or waste, any flammable, explosive or radioactive material or any other material or substance not mentioned above which is regulated under any Environmental Law. 9 "Highest Lawful Rate" has the meaning set forth in Section 2.18. "Interest Expense" means, for any period and for any Person, without duplication, the total interest expense of such Person as reflected on an income statement of such Person for such period. "Interest Period" means: (1) with respect to each Euro-Dollar Committed Borrowing, the period commencing on the date of such Committed Borrowing and ending one through seven days (subject to market availability), or one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice of Committed Borrowing or Notice of Conversion; provided, however, that: -------- ------- (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day, unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) immediately below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period applicable to any Euro-Dollar Committed Loan of any Bank which begins before the Termination Date and would otherwise end after the Termination Date shall end on the Termination Date; (2) with respect to each Base Rate Borrowing, the period commencing on the date of such Committed Borrowing and ending 90 days thereafter; provided, -------- however, that: - ------- (a) any Interest Period (other than an Interest Period determined pursuant to clause (b) immediately below) which would otherwise end on a day which is not a Domestic Business Day shall be extended to the next succeeding Domestic Business Day; and (b) any Interest Period applicable to any Base Rate Loan of any Bank which begins before the Termination Date and would otherwise end after the Termination Date shall end on the Termination Date; and 10 (3) with respect to each Competitive Borrowing, the period commencing on the date of such Competitive Borrowing and ending on such date as the Borrower may elect in the applicable Competitive Bid Request, provided, however, that: -------- ------- (a) any Interest Period (other than an Interest Period determined pursuant to clause (c) immediately below) applicable to a Alternative Competitive Loan which would otherwise end on a day which is not a Domestic Business Day shall be extended to the next succeeding Domestic Business Day; (b) any Interest Period (other than an Interest Period determined pursuant to clause (c) immediately below) applicable to a Euro-Dollar Competitive Loan which would otherwise end on a day which is not a Euro- Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; and (c) any Interest Period applicable to any Competitive Borrowing which begins before the Termination Date and would otherwise end after the Termination Date shall end on the Termination Date. "Issuing Bank" means Texas Commerce Bank National Association or such other Bank as the Borrower may have requested and which has consented to serve as Issuing Bank that issues a Letter of Credit. "Joint Proxy Statement" shall mean the Joint Proxy Statement filed by the Borrower and Millennium with the Securities and Exchange Commission on October 17, 1997. "Joint Venture" shall mean the combination of certain of the Borrower's and Millennium's respective petrochemicals businesses to form a joint venture, which will be organized as a Delaware limited partnership named Equistar Chemicals, LP and headquartered in Houston, Texas, all on terms and in a manner not materially inconsistent with the Master Transaction Agreement, the Asset Contribution Agreements, the Limited Partnership Agreement and the description thereof in the Joint Proxy Statement. "LCR" means LYONDELL-CITGO Refining Company Ltd., a Texas limited liability company, and its successors. "LCR Regulations" means the amended and restated limited liability company regulations of LCR dated as of July 1, 1993, as further amended to the date hereof and as hereafter amended from time to time, subject, however, to Section 5.07. 11 "Letter of Credit" has the meaning set forth in Section 2.03(a). "Letter of Credit Application" has the meaning set forth in Section 2.03(a). "Letter of Credit Fee" has the meaning set forth in Section 2.03(n). "Letter of Credit Limit" means $75,000,000. "Letter of Credit Outstandings" means, at any time, the sum of (a) the aggregate Stated Amount of all outstanding Letters of Credit and (b) the amount of all Unpaid Drawings in respect of all Letters of Credit. "Letter of Credit Percentage" means (a) 0.75% for the period from the date of this Agreement until the first Determination Date after the date of this Agreement and (b) for any subsequent period from and including any Determination Date, beginning with the first Determination Date after the date of this Agreement, (i) 0.75% if the Applicable Percentage Ratio is less than or equal to 1.0 to 1.0 and (ii) 1.00% if the Applicable Percentage Ratio is greater than 1.0 to 1.0. "Letter of Credit Request" has the meaning set forth in Section 2.03(a). "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, any Person or any Subsidiary of that Person shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Committed Loan or a Competitive Loan and "Loans" means Committed Loans or Competitive Loans or any combination of the foregoing. "Loan Documents" means this Agreement (including all Exhibits), the Notes and the Letter of Credit Applications. "LRC" means Lyondell Refining Company, a Delaware corporation and a wholly- owned Subsidiary of the Borrower, and its successors (including any entity that assumes LRC's obligations under the LCR Regulations). "Lyondell Equistar GP" means Lyondell Petrochemical G.P. Inc., a Delaware corporation and wholly-owned Subsidiary of the Borrower, and its successors (including any entity that assumes Lyondell Equistar GP's obligations under the Equistar Partnership Agreement). 12 "Lyondell Equistar LP" means Lyondell Petrochemical L.P. Inc., a Delaware corporation and wholly-owned Subsidiary of the Borrower, and its successors (including any entity that assumes Lyondell Equistar LP's obligations under the Equistar Partnership Agreement). "Lyondell Equistar Partners" means Lyondell Equistar GP and Lyondell Equistar LP. "Lyondell Methanol GP" means Lyondell General Methanol Company, a Delaware corporation and wholly-owned Subsidiary of the Borrower, and its successors (including any entity that assumes Lyondell Methanol GP's obligations under the Methanol Partnership Agreement). "Lyondell Methanol LP" means Lyondell Limited Methanol Company, a Delaware corporation and wholly-owned Subsidiary of the Borrower, and its successors (including any entity that assumes Lyondell Methanol LP's obligations under the Methanol Partnership Agreement). "Lyondell Methanol Partners" means Lyondell Methanol GP and Lyondell Methanol LP. "Material Adverse Effect" means relative to the occurrence of any event and after taking into account existing or reasonably anticipated insurance coverage and indemnification rights with respect to such occurrence, a material adverse effect (i) on the business, operations, affairs, assets, condition (financial or otherwise) or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or (ii) on the ability of the Borrower to perform its obligations hereunder and under the Notes. "Material Plan" means a Plan or Plans having aggregate Unfunded Vested Liabilities in excess of $25,000,000. "MCNIC" means MCN Investment Corporation, a Michigan corporation, and its successors and assigns. "MCNIC Methanol GP" means MCNIC General Methanol Company, a Michigan corporation and a wholly-owned Subsidiary of MCNIC, and its successors (including any entity that assumes MCNIC Methanol GP's obligations under the Methanol Partnership Agreement). "MCNIC Methanol LP" means MCNIC General Methanol Company, a Michigan corporation and a wholly-owned Subsidiary of MCNIC, and its successors (including 13 any entity that assumes MCNIC Methanol LP's obligations under the Methanol Partnership Agreement). "Methanol Partnership Agreement" means the limited partnership agreement of Methanol dated December 12, 1996, as amended from time to time. "Methanol" means Lyondell Methanol Company, L.P., a Texas limited partnership, the general partners of which on the date hereof are Lyondell Methanol GP and MCNIC Methanol GP and the limited partners of which on the date hereof are Lyondell Methanol LP and MCNIC Methanol LP, and its successors. "Millennium" means Millennium Chemicals Inc., a Delaware corporation, and its successors and assigns. "Millennium Equistar GP" means Millennium Petrochemicals GP LLC, a Delaware limited liability company and indirect, wholly-owned Subsidiary of Millennium, and its successors (including any entity that assumes Millennium Equistar GP's obligations under the Equistar Partnership Agreement). "Millennium Equistar LP" means Millennium Petrochemicals LP LLC, a Delaware limited liability company and an indirect, wholly-owned Subsidiary of Millennium, and its successors (including any entity that assumes Millennium Equistar LP's obligations under the Equistar Partnership Agreement). "Millennium Equistar Partners" means Millennium Equistar GP and Millennium Equistar LP. "Net Interest" means the sum of (a) interest on Replacement Debt, minus (b) any interest earned on the proceeds from Replacement Debt, plus (c) interest on Replaced Debt. "Non-Operating Special Item" means (a) any item resulting from a change in one or more accounting principles, (b) any extraordinary or non-recurring item or (c) any material operating item which is unusual in nature or infrequent in occurrence; provided, however, that with respect to the designation of any item -------- ------- (other than non-cash items) described in clause (c), the Borrower must obtain the agreement of the Administrative Agent and the Documentation Agent that such designation is appropriate, which agreement shall not be unreasonably withheld. "Notes" means Committed Notes of the Borrower, substantially in the form of Exhibit 2.05, and Competitive Notes of the Borrower, substantially in the form of Exhibit 2.10(d), evidencing the obligation of the Borrower to repay the Loans made 14 thereunder, and "Note" means any one of such Committed Notes or Competitive Notes. "Notice of Committed Borrowing" means a Notice of Committed Borrowing made pursuant to Section 2.02 in the form of Exhibit 2.02. "Notice of Competitive Bid Request" means a Notice of Competitive Bid Request made pursuant to Section 2.10(a) in the form of Exhibit 2.10(b). "Notice of Conversion" has the meaning set forth in Section 2.08. "Obligations" means all the obligations of the Borrower now or hereafter existing under the Loan Documents, whether for principal, Unpaid Drawings, interest, fees, expenses, indemnification or otherwise. "Other Equity Person" means any Person other than LCR, Equistar and Methanol in which the Borrower owns investments which are accounted for on the equity basis of accounting by the Borrower. "Owner" has the meaning assigned to that term in the LCR Regulations. "Ownership Percentage" means, at any time, the percentage represented by the ratio of the equity interests owned, directly or indirectly, by the Borrower in any Person to all equity interests of that Person issued and outstanding, at that time. "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.07(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a limited liability company, a limited or general partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by a member of the Controlled Group for employees of a member of the Controlled Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then 15 making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Prime Rate" means the prime rate of interest most recently determined by Texas Commerce Bank National Association and thereafter entered in the minutes of its Loan and Discount Committee, automatically fluctuating upward and downward with and at the time specified in each such determination, without notice to the Borrower or any other Person, which prime rate may not necessarily represent the lowest or best rate actually charged to a customer. "Reference Bank" means Texas Commerce Bank National Association. "Refunding Borrowing" means a Committed Borrowing which, after application of the proceeds thereof, results in no net increase in the outstanding principal amount of Loans made by any Bank. "Regulation G" shall mean Regulation G of the Board of Governors of the Federal Reserve System, as in effect from time to time (including any successor provision thereto). "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time (including any successor provision thereto). "Regulation X" shall mean Regulation X of the Board of Governors of the Federal Reserve System, as in effect from time to time (including any successor provision thereto). "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment (including the abandonment or discarding of barrels, containers and other closed receptacles). "Required Banks" means, at any date, Banks holding at least 66-2/3 percent of the then aggregate unpaid principal amount of the Committed Loans and participations in the Letter of Credit Outstandings, or, if no such principal amount is then outstanding and no Letter of Credit Outstandings exist, then Banks having at least 66-2/3 percent of the Commitments; if no such principal amount is then outstanding and no Letter of Credit Outstandings exist and all Commitments have been terminated, then Banks holding at least 66-2/3 percent of the then aggregate unpaid principal amount of the Competitive Loans. 16 "Requirements of Environmental Laws" means, as to any Person, the requirements of any Environmental Laws applicable to such Person or the condition or operation of such Person's business or its properties, both real and personal. "Restricted Property" means: (a) any plant (including fixtures and equipment) for the refining of petroleum or the production of petrochemicals owned by the Borrower, or any of its Subsidiaries, except (i) related facilities which in the opinion of the Board of Directors of the Borrower are transportation or marketing facilities and (ii) any plant for the refining of petroleum or the production of petrochemicals which in the reasonable opinion of the Board of Directors of the Borrower is not a principal plant of the Borrower and its Subsidiaries; (b) any inventory of the Borrower or a Subsidiary; (c) any trade accounts receivable of the Borrower or any of its Subsidiaries; and (d) any shares of capital stock or indebtedness of a Restricted Subsidiary owned by the Borrower or any of its Subsidiaries (excluding any of such shares that constitute "margin stock" as defined in Regulation U). "Restricted Subsidiary" shall mean any Subsidiary of the Borrower which owns any Restricted Property. "Stated Amount" means, with respect to each Letter of Credit, at any time, the maximum amount then available to be drawn thereunder, assuming satisfaction of all conditions to such drawing. "Stub Period Global EBITDA" means the sum of (a) the Borrower's EBITDA, plus (b) an amount equal to the Ownership Percentage in LCR of LCR's EBITDA. "Subsidiary" means, with respect to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions (whether or not any other class of securities has or might have voting power by reason of the happening of a contingency) are at the time owned or controlled directly or indirectly by that Person. Without in any other way limiting the foregoing, none of LCR, Equistar, Methanol or any Other Equity Person shall be deemed to be a Subsidiary of the Borrower. 17 "Termination Date" means for any Bank the earlier of (a) the later of (i) the 364th day after the date of this Agreement and (ii) such later date as may be accepted by such Bank from time to time pursuant to Section 2.01(b) and (b) any date on which the Loans become due and payable in full, whether by acceleration or otherwise in accordance with this Agreement. "'34 Act Report" has the meaning set forth in Section 4.01(f). "Total Capitalization" means at any time, with respect to the Borrower and its Subsidiaries, the sum of (a) the Consolidated Debt of the Borrower and (b) the shareholder's equity of the Borrower and its Subsidiaries determined on a consolidated basis. "Unfunded Vested Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all vested nonforfeitable benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the Controlled Group to the PBGC or the Plan under Title IV of ERISA. "Unpaid Drawing" has the meaning specified in Section 2.03(g). SECTION 1.02. Accounting Terms and Determinations. Unless otherwise ----------------------------------- specified herein, with respect to any Person, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by such Person's independent public accountants) with the most recent audited consolidated financial statements of such Person and its Consolidated Subsidiaries delivered to the Administrative Agent. SECTION 1.03. Types of Loans and Borrowings. The term "Borrowing" denotes ----------------------------- the aggregation of Loans of one or more Banks to be made to the Borrower or converted or continued pursuant to Article II on a single date and for a single Interest Period. Loans and Borrowings are classified for purposes of this Agreement by reference to the Loans comprising such Borrowings and the pricing of such Loans (e.g., a "Euro-Dollar Committed Borrowing" is a Borrowing comprised of Committed Euro-Dollar Loans). SECTION 1.04. Terms Generally. When used in this Agreement, (i) the words --------------- "herein," "hereof," "hereto" and "hereunder" and words of similar import shall refer to this Agreement as a whole unless otherwise specified, (ii) the words "Article," "Section," "Exhibit" and "Schedule" shall refer to Articles and Sections of, and 18 Exhibits and Schedules to, this Agreement unless otherwise specified. For purposes of Section 2.18, the term "Bank" shall also include the Issuing Bank and (iii) the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such terms. ARTICLE II THE CREDITS SECTION 2.01. Commitments to Lend. (a) Each Bank severally agrees, on ------------------- the terms and conditions set forth in this Agreement, from time to time to lend to the Borrower pursuant to this Section 2.01 in amounts such that the aggregate outstanding principal amount of Committed Loans by such Bank, plus its Commitment Percentage of the Letter of Credit Outstandings at any one time outstanding shall not exceed the amount of its Commitment. Without in any way limiting the foregoing, at no time will the sum of (A) the Letter of Credit Outstandings, plus (B) the aggregate outstanding principal amount of the Committed Loans, plus (c) the aggregate outstanding principal amount of the Competitive Loans exceed the Committed Amount. Each Committed Borrowing under this Section 2.01 shall be in an aggregate principal amount of $5,000,000 or any larger multiple of $1,000,000 (except that any such Committed Borrowing may be in an aggregate amount such that, immediately after giving effect to such Borrowing, the sum of (A) the Letter of Credit Outstandings, plus (B) the aggregate outstanding principal amount of the Committed Loans, plus (C) the aggregate outstanding principal amount of the Competitive Loans will equal the Committed Amount) and shall be made by the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, prior to the Termination Date the Borrower may borrow under this Section 2.01, repay, or to the extent permitted by Section 2.13, prepay Committed Loans and re-borrow at any time. (b) At any time after the 61st day prior to the then current Termination Date, the Borrower may request that the Termination Date be extended, effective on the then current Termination Date, to the date which is the 364th day after the then current Termination Date and the Banks may, at their option, accept or reject such request. To request an extension, the Borrower shall notify the Administrative Agent of the Borrower's request to extend the Termination Date, and the Administrative Agent shall promptly notify the Banks of each such request. Each Bank shall notify the Administrative Agent in writing within 30 days after receipt of such request whether it consents to such extension; provided that no Bank shall be required to give notice of consent prior to 30 - -------- days prior to the then current Termination Date (the later of such days shall be referred to as the "Extension Response Date"). If any Bank shall fail to give such notice to the Administrative Agent by the Extension Response Date, such Bank shall be deemed to have rejected the requested extension. If all the Banks consent to the requested extension by the Extension Response Date, the Termination 19 Date shall be automatically extended to the date which is the 364th day after the then current Termination Date. If fewer than all the Banks so consent (each Bank rejecting the requested extension being referred to as a "Terminating ----------- Bank"), the Borrower shall within five days after the Extension Response Date - ---- notify the Administrative Agent (which shall promptly notify each Bank) whether the Borrower elects to withdraw its request for an extension of the Termination Date or to extend the Termination Date for all the Banks that have consented to such extension. If the Borrower elects to so extend the Termination Date as to fewer than all the Banks, the Administrative Agent shall promptly notify the non-Terminating Banks of the Borrower's decision, and each Bank which is not a Terminating Bank shall have the right, but not the obligation, to elect to increase its Commitment by an amount not to exceed the aggregate amount of the Commitments of the Terminating Banks, which election shall be made by notice from each such non-Terminating Bank to the Administrative Agent and the Borrower given not later than five Business Days after the date notified by the Administrative Agent, specifying the amount of such proposed increase in such non-Terminating Bank's Commitment. (c) If the aggregate amount of the proposed increases in the respective Commitments of all such non-Terminating Banks making such an election is in excess of the aggregate Commitments of the Terminating Banks, (i) the respective Commitments of the Terminating Banks shall be allocated pro rata among such non- -------- Terminating Banks based on the respective amounts of the proposed increases to their Commitments elected by such non-Terminating Banks and (ii) the respective Commitments of such non-Terminating Banks shall be increased by the respective amounts allocated pursuant to clause (i) above so that, after giving effect to such Commitment terminations and increases, the aggregate amount of the Commitments of the non-Terminating Banks will be the same as the Committed Amount prior to the Extension Response Date. If the aggregate amount of the proposed increases to the respective Commitments of all non-Terminating Banks making such an election equals the aggregate Commitments of the Terminating Banks, the respective Commitments of such non-Terminating Banks shall be increased by the respective amounts of their proposed increases, so that after giving effect to such Commitment terminations and increases, the aggregate amount of the Commitments non-Terminating Banks will be the same as the Committed Amount prior to the Extension Response Date. If the aggregate amount of the proposed increases to the respective Commitments of all non-Terminating Banks making such an election is less than the aggregate Commitments of the Terminating Banks, (i) the respective Commitments of such non-Terminating Banks shall be increased by the respective amounts of their proposed increases and (ii) the Borrower shall have the right to add one or more banks and other financial institutions as parties to this Agreement (in such capacity, each a "Purchasing Bank") to replace such Terminating Banks, which Purchasing Banks --------------- shall have aggregate Commitments not greater than those of the Terminating Banks, less the amounts thereof, if any, assumed by the non-Terminating Banks, as described 20 immediately above. The transfer of Commitments and outstanding Loans from Terminating Banks to Purchasing Banks and non-Terminating Banks shall take place on the effective date of, and pursuant to the execution, delivery, acceptance and recording of, instruments of assignment and acceptance in accordance with the procedures set forth in Section 9.07(c). (d) To the extent that any Terminating Bank does not transfer all its Commitment and outstanding Loans to a Purchasing Bank or a non-Terminating Bank pursuant to subsection (c) immediately above, on the Termination Date applicable to each such Terminating Bank, the Committed Amount shall be reduced by the amount of the Commitment of each such Terminating Bank and, concurrently with such reduction in the Committed Amount, the Borrower shall pay the outstanding principal amount of the Loans of each such Terminating Bank, together with all accrued and unpaid interest thereon, each such Terminating Bank's ratable share of all accrued and unpaid Facility Fees and all other amounts then owing to such Terminating Bank hereunder, in each case, to the extent not transferred pursuant to subsection (c) immediately above. (e) Each Terminating Bank's Commitment shall expire no later than its Termination Date and each Terminating Bank shall have no further rights or obligations hereunder following (i) the transfer of such Terminating Bank's Commitment and outstanding Loans from such Terminating Bank to Purchasing Banks or non-Terminating Banks and (ii) the payment in full of all amounts due and owing to such Terminating Bank on its Termination Date. (f) Notwithstanding any other provision of this Section 2.01, the Administrative Agent and the Borrower shall have the right, without consent of the Required Banks, to amend the procedures for the extension of the Termination Date set forth in this Section 2.01 to the extent the Administrative Agent shall determine such amendment to be necessary to ensure that the Banks will not be required to maintain capital against their Commitments under applicable rules, regulations and interpretations of bank regulatory authorities; provided, that -------- no such amendment shall permit the extension of any Bank's Commitment without the consent of such Bank. SECTION 2.02. Notice of Committed Borrowings. The Borrower shall give ------------------------------ the Administrative Agent notice (a "Notice of Committed Borrowing") substantially in the form of Exhibit 2.02 not later than 10:00 a.m. (Houston time) on (i) the date of each Base Rate Borrowing or each Euro-Dollar Committed Borrowing with an Interest Period of seven days or less and (ii) the third Euro- Dollar Business Day before each Euro-Dollar Committed Borrowing with an Interest Period greater than seven days, specifying: 21 (a) the date of such Committed Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Committed Borrowing; (b) the aggregate amount of such Committed Borrowing; (c) whether the Loans comprising such Committed Borrowing are to be Base Rate Loans or Euro-Dollar Committed Loans; (d) in the case of a Euro-Dollar Committed Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period; (e) the aggregate outstanding principal amount of Debt of the Borrower and its Subsidiaries incurred after the Effective Date and, if required, a calculation as of the date of such Notice of Committed Borrowing pursuant to Section 5.09(a); (f) more than one Notice of Committed Borrowing may be given on any Domestic Business Day or any Euro-Dollar Business Day, as the case may be. SECTION 2.03. Letters of Credit. ----------------- (a) Subject to and upon the terms and conditions hereof and the execution and delivery of a letter of credit application ("Letter of Credit Application"), and a letter of credit request ("Letter of Credit Request") substantially in the form of Exhibit 2.03(b) , the Issuing Bank agrees that it will, at any time and from time to time on or after the Effective Date and prior to the Termination Date, renew, extend and issue for the account of the Borrower (in support of its obligations or the obligations of its Consolidated Subsidiaries) one or more irrevocable standby letters of credit (each such letter of credit, a "Letter of Credit"); provided, however, that the Issuing Bank shall not extend, renew or -------- ------- issue any Letter of Credit if at the time of such issuance, extension or renewal and after giving effect thereto: (i) the sum of the Letter of Credit Outstandings at such time, plus the aggregate principal amount of all Loans then outstanding or requested would exceed the Commitment Amount; or (ii) the Letter of Credit Outstandings at such time, would exceed the Letter of Credit Limit; or 22 (iii) the expiry date or, in the case of any Letter of Credit containing an expiry date that is extendible at the option of the Issuing Bank, the initial expiry date of such Letter of Credit, is a date that is later than the Termination Date; or (iv) such issuance, renewal or extension shall be prohibited by applicable law. (b) The Issuing Bank shall neither renew nor permit the renewal of any Letter of Credit if any of the conditions precedent to such renewal set forth in Section 3.02 are not satisfied or, after giving effect to such renewal, the expiry date of such Letter of Credit would be a date that is later than the Termination Date. (c) Whenever the Borrower requests that a Letter of Credit be issued or renewed for its account or an existing expiry date be extended, it shall forward an executed Letter of Credit Request and Letter of Credit Application to the Issuing Bank (with copies to be sent to the Administrative Agent (if different from the Issuing Bank)) (i) in the case of a Letter of Credit to be issued or renewed at least four Domestic Business Days' prior to the proposed date of issuance or renewal and (ii) in the case of the extension of the existing expiry date of any Letter of Credit, at least five Domestic Business Days prior to the date on which the Issuing Bank must notify the beneficiary thereof that the Issuing Bank does not intend to extend such existing expiry date. Each Letter of Credit shall be denominated in U.S. dollars, shall expire no later than the date specified in paragraph (a) above, shall not be in an amount greater than is permitted under this Section 2.03 and shall be in such form as may be approved from time to time by the Issuing Bank and the Borrower. (d) The making of each Letter of Credit Request shall be deemed to be a representation and warranty by the Borrower that such Letter of Credit may be renewed, extended or issued in accordance with, and will not violate the requirements of this Agreement. Unless the Issuing Bank has received notice from the Administrative Agent (if different from the Issuing Bank) before it issues or renews the respective Letter of Credit or extends the existing expiry date of a Letter of Credit that one or more of the conditions specified in Article III are not then satisfied, or that the renewal, extension or issuance of such Letter of Credit would violate any of the terms of this Agreement, then the Issuing Bank may renew, extend or issue the requested Letter of Credit for the account of the Borrower (in support of its obligations and the obligations of its Consolidated Subsidiaries) in accordance with the Issuing Bank's usual and customary practices. Upon its issuance or renewal of any Letter of Credit or the extension of the existing expiry date of any Letter of Credit, as the case may be, the Issuing Bank shall promptly notify the Borrower, the Administrative Agent and each Bank of such issuance, renewal or extension, which notice shall be accompanied by a copy of the Letter of Credit actually issued or renewed or a copy of any 23 amendment extending the existing expiry date of any Letter of Credit, as the case may be. (e) Upon the renewal, extension or issuance by the Issuing Bank of each Letter of Credit, the Issuing Bank shall be deemed to have sold and transferred to each Bank, and each Bank shall be deemed irrevocably and unconditionally to have purchased and received from the Issuing Bank, without recourse or warranty, an undivided interest and participation, to the extent of such Bank's Commitment Percentage in each such Letter of Credit (including extensions of the expiry date thereof), each substitute letter of credit, each drawing made thereunder and the Obligations of the Borrower under this Agreement and the other Loan Documents with respect thereto and any security, if any, therefor. (f) In determining whether to pay under any Letter of Credit, the Issuing Bank shall have no obligation relative to the Banks other than to confirm that any documents required to be delivered under such Letter of Credit appear to have been delivered and that they appear to comply on their face with the requirements of such Letter of Credit. (g) Upon the receipt by the Issuing Bank of any documentation presented for a drawing from a beneficiary under a Letter of Credit, the Issuing Bank promptly will provide the Administrative Agent (if different from the Issuing Bank), the Banks and the Borrower with telecopy notice thereof and the Issuing Bank will promptly examine the documentation presented for such drawing in accordance with its customary procedures for conformity to the requirements of such Letter of Credit. The Borrower hereby agrees to reimburse the Issuing Bank by making payment to the Administrative Agent in immediately available funds (which payment may be made by application of the proceeds of Loans made to the Borrower in accordance with this Agreement) for any payment so made by the Issuing Bank under any Letter of Credit issued by it (each such amount so paid until reimbursed by the Borrower, including by application of the proceeds of Loans to the Borrower in accordance with this Agreement, an "Unpaid Drawing") upon demand on or after the date of such payment, with interest on the amount so paid by the Issuing Bank, to the extent not reimbursed prior to 2:00 p.m. (Houston time) on the date of such payment, from and including the date paid to but excluding the date reimbursement is made as provided above, at a rate per annum equal to the lesser of (i) the sum of 2 percent, plus the Base Rate, or (ii) the Highest Lawful Rate. (h) In the event that the Issuing Bank makes any payment under any Letter of Credit and the Borrower shall not have reimbursed such amount in full to the Issuing Bank (including by any application of the proceeds of Loans) pursuant to paragraph (g) above, the Issuing Bank shall promptly notify the Administrative Agent (if different from the Issuing Bank) and the Administrative Agent, shall promptly notify each Bank 24 of such failure, and each Bank shall promptly and unconditionally pay the Administrative Agent for the account of the Issuing Bank the amount of such Bank's Commitment Percentage of such unreimbursed payment in dollars and in funds immediately available in Houston. If the Administrative Agent so notifies, prior to 11:00 a.m. (Houston time) on any Domestic Business Day, any Bank required to fund a payment under a Letter of Credit, such Bank shall make available to the Administrative Agent for the account of the Issuing Bank such Bank's Commitment Percentage of the amount of such payment on such Domestic Business Day in funds immediately available in Houston. If and to the extent such Bank shall not have so made its Commitment Percentage of the amount of such payment available to the Administrative Agent for the account of the Issuing Bank, such Bank agrees to pay to the Administrative Agent for the account of the Issuing Bank, forthwith on demand such amount, together with the interest thereon, for each day from such date until the date such amount is paid to the Administrative Agent for the account of the Issuing Bank at the Federal Funds Rate. The failure of any Bank to make available to the Administrative Agent for the account of the Issuing Bank, its Commitment Percentage of any payment under any Letter of Credit shall not relieve any other Bank of its obligation hereunder to make available to the Administrative Agent for the account of the Issuing Bank its Commitment Percentage of any payment under any Letter of Credit on the date required, as specified above, but no Bank shall be responsible for the failure of any other Bank to make available to the Administrative Agent for the account of the Issuing Bank such other Bank's Commitment Percentage of any such payment. (i) Whenever the Issuing Bank receives a payment of a reimbursement obligation as to which the Administrative Agent has received for the account of the Issuing Bank any payments from a Bank pursuant to paragraph (h) above, the Issuing Bank shall pay to the Administrative Agent (if different from the Issuing Bank) and the Administrative Agent shall promptly pay to each Bank which has paid its Commitment Percentage thereof, in dollars and in same day funds, an amount equal to such Bank's Commitment Percentage thereof together with any interest on such reimbursement obligation allocable to such Bank's Commitment Percentage paid by the Borrower to the Issuing Bank and received by the Administrative Agent pursuant to paragraph (g) above. (j) The obligations of the Banks to make payments to the Administrative Agent for the account of the Issuing Bank with respect to Letters of Credit shall be irrevocable and not subject to any qualification or exception whatsoever (except for the gross negligence or willful misconduct of the Issuing Bank) and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including any of the following circumstances: 25 (1) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (2) the existence of any claim, setoff, defense or other right which the Borrower may have at any time against a beneficiary named in a Letter of Credit, any transferee of Letter of Credit, any Agent, the Issuing Bank, any other Bank, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions; (3) any draft, certificate or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (4) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; or (5) the occurrence of any Default or Event of Default. (k) The Borrower also agrees with the Issuing Bank and the Banks that the Issuing Bank shall not be responsible for, and the Borrower's reimbursement obligations under paragraph (g) above are absolute and unconditional and shall not be affected by any of the following (absent any gross negligence, willful misconduct or violation of law on the part of any of the Issuing Bank, the Agents and the other Banks): the validity or genuineness of documents or any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among the Borrower and the beneficiary of any letter of Credit or any other party to which such Letter of Credit may be transferred or any claims whatsoever of the Borrower against any beneficiary of such Letter of Credit or any such transferee or any other matter or event similar to any of the foregoing or any setoff, counterclaim or defense to payment which the Borrower may have. (l) The Issuing Bank, its officers, directors, agents and employees, shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors, omissions, interruptions or delays caused by the Issuing Bank's gross negligence or willful misconduct or violation of law. IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT THE ISSUING BANK SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DEFICIENCIES, JUDGMENTS OR REASONABLE EXPENSES ARISING OUT OF OR RESULTING FROM THE ORDINARY NEGLIGENCE (WHETHER SOLE OR CONTRIBUTORY) OF THE ISSUING BANK IN CONNECTION WITH ANY SUCH ERROR, OMISSION, INTERRUPTION OR DELAY AS AFORESAID. The Borrower agrees that 26 any action taken or omitted by the Issuing Bank under or in connection with any Letter of Credit or the related drafts or documents if done in accordance with the standards of care specified in the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce, as in effect from time to time, and, to the extent not inconsistent therewith, the Uniform Commercial Code of the State of Texas, shall not result in any liability of the Issuing Bank to the Borrower. (m) To the extent that any provision of any Letter of Credit Application related to any Letter of Credit is inconsistent with the provisions of this Agreement, the provisions of this Agreement shall control and no Letter of Credit Application or any other document relating to any Letter of Credit shall give the Agents or the Banks any additional rights than they would otherwise have under this Agreement. (n) The Borrower shall, on the date of issuance or any extension or renewal of any Letter of Credit and at such other time or times as such charges are customarily made by the Issuing Bank, pay an upfront fee (in each case, a "Letter of Credit Fee") to the Administrative Agent in respect of each Letter of Credit so issued in an amount equal to the Letter of Credit Percentage in effect from time to time of the face amount of such Letter of Credit, as the case may be, plus a fronting fee for the benefit of the Issuing Bank equal to 0.125% (computed on an annualized basis), plus the Issuing Bank's issuance, amendment and other administrative fees and charges customarily charged to its customers similarly situated. Such Letter of Credit Fee (but not such customary issuance, amendment fee or other administrative fees and charges, or the fronting fee, all of which shall be solely for the account of the Issuing Bank) shall be for the accounts of the Banks in accordance with their respective Commitment Percentages. Such upfront fees and fronting fees shall be based on a 360-day year, except that if the use of a 360-day year would cause any such fees constituting interest (within the meaning of all applicable laws) to exceed the Highest Lawful Rate, then such interest and fees will be computed on the basis of a year of 365 days (or 366 in a leap year). SECTION 2.04. Notice to Banks; Funding of Committed Loans. ------------------------------------------- (a) Upon receipt of a Notice of Committed Borrowing, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Committed Borrowing and such Notice of Committed Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 12:00 noon (Houston time) on the date of each Committed Borrowing, each Bank participating therein shall (except as provided in subsection (c) of this Section) make available its share of such Committed Borrowing, in funds immediately available in Houston, to the Administrative Agent at its address specified in or pursuant to Section 9.01. Unless the Administrative Agent determines that any 27 applicable condition specified in Article III has not been satisfied, the Administrative Agent will make the funds so received from the Banks available to the Borrower at the Administrative Agent's aforesaid address. (c) If any Bank makes a new Committed Loan hereunder on a day on which the Borrower is to repay all or any part of an outstanding Committed Loan from such Bank, such Bank shall apply the proceeds of its new Committed Loan to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed and the principal amount being repaid shall be made available by such Bank to the Administrative Agent as provided in subsection (b) immediately above, or remitted by the Borrower to the Administrative Agent as provided in Section 2.14, as the case may be. (d) Unless the Administrative Agent shall have received notice from a Bank prior to or on the date of any Committed Borrowing that such Bank will not make available to the Administrative Agent such Bank's share of such Committed Borrowing, the Administrative Agent may assume that such Bank has made such share available to the Administrative Agent on the date of such Committed Borrowing in accordance with subsections (b) and (c) of this Section 2.04 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Administrative Agent, such Bank and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.07 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's Committed Loan included in such Committed Borrowing for purposes of this Agreement. In no event shall any payment by the Administrative Agent, or repayment by the Borrower, of any amount pursuant to this subsection (d) relieve the Bank that failed to make available its share of the related Committed Borrowing of its obligations hereunder. SECTION 2.05. Committed Notes. (a) The Committed Loans of each Bank --------------- shall be evidenced by a single Committed Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to such Bank's Commitment. (b) Upon receipt of each Bank's Committed Note pursuant to Section 3.01, the Administrative Agent shall send by overnight mail such Committed Note to such Bank. Each Bank shall record the date, amount and maturity of each Committed Loan 28 made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and prior to any transfer of its Committed Note shall endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Committed Loan then outstanding; provided, however, that the failure of any Bank to make any such -------- ------- recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Committed Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Committed Note and to attach to and make a part of its Committed Note a continuation of any such schedule as and when required. SECTION 2.06. Maturity of Committed Loans. Subject to any rights of the --------------------------- Borrower under Section 2.08, each Committed Loan included in any Committed Borrowing shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Committed Borrowing. SECTION 2.07. Interest Rates. (a) Each Base Rate Loan shall bear -------------- interest on the outstanding principal amount thereof, for each day from the date such Committed Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable for each Interest Period on the last day thereof. Any overdue principal of and, to the extent permitted by law, overdue interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the lesser of (i) the sum of 2 percent, plus the rate otherwise applicable to Base Rate Loans for such day, or (ii) the Highest Lawful Rate. (b) Each Euro-Dollar Committed Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the lesser of (i) the sum of the Euro-Dollar Margin (as in effect on the first day of such Interest Period), plus the Euro-Dollar Rate or (ii) the Highest Lawful Rate. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. "Euro-Dollar Margin" means, for any Interest Period, the Applicable Margin for Euro-Dollar Committed Loans. "Euro-Dollar Rate" means, for the Interest Period for each Euro-Dollar Committed Loan comprising part of the same Borrowing, an interest rate per annum equal to the rate per annum at which deposits in U.S. dollars are offered by the principal office of the Reference Bank to first class banks in the interbank eurodollar market selected by the Reference Bank, as shown on the Dow Jones Telerate Screen (Pages 314, 872 and 4833) or, if the Dow Jones Telerate Screen is not available, as shown on the Bloomberg Screen British Banker's LIBOR fixing, at or around 9:00 a.m. (Houston time), two (2) Business Days before the first day of such Interest Period (except in the 29 case of a Borrowing with an Interest Period of 7 days or less, which shall be 10:30 a.m. (Houston time) on the Business Day of such Borrowing) in an amount substantially equal to the amount of the Euro-Dollar Committed Loan of the Reference Bank comprising part of such Borrowing to be outstanding during such Interest Period and for a period equal to such Interest Period. (c) Any overdue principal of and, to the extent permitted by law, overdue interest on any Euro-Dollar Committed Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the lesser of (i) the sum of 2 percent, plus the rate applicable to Base Rate Loans for such day or (ii) the Highest Lawful Rate. (d) The Administrative Agent shall determine each interest rate applicable to the Committed Loans hereunder. The Administrative Agent shall give prompt notice to the Borrower and the participating Banks by telecopy, telex or cable of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (e) The Reference Bank, if not the Administrative Agent, agrees to use its best efforts to furnish quotations to the Administrative Agent as contemplated by this Section. If the Reference Bank, if not the Administrative Agent, does not furnish a timely quotation, the Administrative Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. (f) Competitive Loans shall bear interest as set forth in Section 2.10(i). SECTION 2.08. Conversions and Continuances. At the end of any Interest ---------------------------- Period, the Borrower shall have the option to convert or continue all or a portion, equal to not less than $5,000,000 ($1,000,000 in the case of conversions or continuations into Base Rate Loans), of the outstanding principal amount of one Type of its Committed Loans made pursuant to one or more Committed Borrowings into a Committed Borrowing or Committed Borrowings of the other Type or Types of Committed Loans; provided, however, that except as otherwise -------- ------- provided in Section 8.03, no partial conversion or continuation of Euro-Dollar Committed Loans shall reduce the outstanding principal amount of Euro-Dollar Committed Loans made pursuant to any single Borrowing to less than $5,000,000 and (ii) Base Rate Loans may be converted into Euro-Dollar Committed Loans or continued as Base Rate Loans, and Euro-Dollar Committed Loans may be continued as Euro-Dollar Committed Loans or converted into Base Rate Loans for additional Interest Periods if and only if, in either case no Default or Event of Default is in existence on the date of the conversion or 30 continuation. Each such conversion or continuation shall be effected by the Borrower giving the Administrative Agent notice substantially in the form of Exhibit 2.08 (each a "Notice of Conversion") prior to 11:00 a.m. (Houston time) at least (a) three Euro-Dollar Business Days prior to the date of such conversion or continuation in the case of a conversion or continuation into Euro-Dollar Committed Loans (unless such conversion or continuation of Euro- Dollar Committed Loans is into an Interest Period of seven days or less, in which event such notice shall be delivered no later than 10:30 a.m. (Houston time) on the Business Day of such Borrowing) and (b) one Domestic Business Day in the case of a conversion or continuation into Base Rate Loans, specifying each Type of Borrowing (or portions thereof) to be so converted or continued and, if to be converted or continued into Euro-Dollar Committed Loans, the Interest Period to be initially applicable thereto. The Administrative Agent shall promptly give the Banks written or telephonic notice (promptly confirmed in writing) of any such proposed conversion or continuation affecting any of its Loans. SECTION 2.09. Pro Rata Committed Borrowings. All Committed Borrowings ----------------------------- under this Agreement shall be incurred from the Banks ratably in proportion to their respective Commitments. It is understood that no Bank shall be responsible for any default by any other Bank in its obligation to make Committed Loans hereunder and that each Bank shall be obligated to make the Loans provided to be made by it hereunder, regardless of the failure of any other Bank to fulfill its Commitment hereunder. SECTION 2.10. Competitive Borrowings. (a) The Borrower may, from time ---------------------- to time, request the Auction Agent to deliver to the Banks a request for Competitive Bids, to which any one or more of the Banks may, but are not obligated to, respond. To request a Competitive Bid, the Borrower shall hand deliver, telex or telecopy to the Auction Agent a duly completed request for Competitive Bid in the form of Exhibit 2.10(a) (a "Competitive Bid Request"), to --------------- ----------------------- be received by the Auction Agent (i) in the case of: a Euro-Dollar Competitive Loan, not later than 9:00 a.m. (Houston time), four Euro-Dollar Business Days before the Borrowing Date specified for a proposed Competitive Borrowing and (ii) in the case of an Alternate Competitive Loan, not later than 9:00 a.m. (Houston time), one Domestic Business Day before the Borrowing Date specified for a proposed Competitive Borrowing. A Competitive Bid Request that does not conform substantially to the format of Exhibit 2.10(a) may be rejected in the --------------- Auction Agent's sole discretion, and the Auction Agent shall promptly notify the Borrower of such rejection by telex or telecopier. Each Competitive Bid Request shall in each case refer to this Agreement and specify (i) whether the Competitive Loans then being requested are to be Euro-Dollar Competitive Loans or Alternate Competitive Loans, (ii) the Borrowing Date of such Competitive Loans and the aggregate principal amount thereof which shall not be less than $5,000,000 or greater than the unused Committed Amount on such Borrowing Date and shall be in integral multiples of $1,000,000), (iii) the Interest Period with respect thereto and (iv) the total Borrowings 31 (Committed and Competitive) outstanding hereunder. Upon receipt of a satisfactory Competitive Bid Requests, the Auction Agent shall forward a Notice of Competitive Bid Request on to each of the Banks by telex or telecopier on the terms and conditions of this Agreement, to make Competitive Bids pursuant to such Notice of Competitive Bid Request. The Notice of Competitive Bid Request with respect to any proposed Competitive Borrowing shall be given to the Banks promptly, and in no event later than 12:00 noon (Houston time), (i) in the case of Euro-Dollar Competitive Loans, four Euro-Dollar Business Days before the Borrowing Date specified for such proposed Competitive Borrowing, and (ii) in the case of Alternate Competitive Loans, one Business Day before the Borrowing Date specified for such Competitive Borrowing. (b) (i) Each Bank may, in its sole discretion, make a Competitive Bid to the Borrower responsive to each Notice of Competitive Bid Request. Each Competitive Bid by a Bank must be submitted to the Auction Agent via telex or telecopier, (A) in the case of Euro-Dollar Competitive Loans, not later than 8:30 a.m. (Houston time), three Euro-Dollar Business Days before the Borrowing Date specified for a proposed Competitive Borrowing and (B) in the case of Alternate Competitive Loans, not later than 8:30 a.m. (Houston time), on the Borrowing Date specified for a proposed Competitive Borrowing. Each Competitive Bid shall refer to this Agreement and (A) specify the principal amount which shall not be less than $5,000,000 and integral multiples of $1,000,000, or (B) specify the interest rate or rates at which the Bank is prepared to make the Competitive Loan and (C) confirm the Borrowing Date and the Interest Period (if any) with respect thereto specified by the Borrower. If any Bank shall elect not to make a Competitive Bid, such Bank shall so notify the Auction Agent via telex or telecopier (A) in the case of Euro-Dollar Competitive Loans, not later than 8:30 a.m. (Houston time), three Euro-Dollar Business Days before the Borrowing Date specified for a proposed Competitive Borrowing and (B) in the case of Alternate Competitive Loans, not later than 8:30 a.m. (Houston time), on the Borrowing Date specified for a proposed Competitive Borrowing; provided, -------- however, that failure by any Bank to give such notice shall not cause such Bank - ------- to be obligated to make any Competitive Loan as part of such Competitive Borrowing and shall constitute rejection. A Competitive Bid submitted by a Bank pursuant to this paragraph shall be irrevocable; (ii) with respect to any Competitive Bid for a Euro-Dollar Competitive Borrowing, the interest rate shall be calculated on the basis of the LIBO Rate, which means an interest rate per annum equal to the arithmetic average (rounded upwards, if not already a whole multiple of 1/16 of 1%, to the next higher 1/16 of 1%) of the rate per annum at which deposits in U.S. dollars are offered in immediately available funds to the principal office of the Reference Bank in London, England (or if a Reference Bank does not at the time any such determination is made maintain an office in London, England, the principal office of any Affiliate of such Reference Bank in London, England), at 11:00 a.m., London time (or as soon thereafter as practicable), 32 two Business Days before the first day of such Interest Period with a maturity equal to the applicable Interest Period. (c) The Auction Agent will arrange the bids in ascending yield order. In the case of (i) Euro-Dollar Competitive Loans, not later than 9:00 a.m. (Houston time), three Euro-Dollar Business Days before the proposed Borrowing Date specified for a proposed Competitive Borrowing and (ii) Alternate Competitive Loans, not later than 9:00 a.m. (Houston time), on the Borrowing Date specified for a proposed Competitive Borrowing, the Auction Agent shall notify the Borrower of the terms (i) of any Competitive Bid submitted by a Bank that is in accordance with subsection (b) of this Section and (ii) of any subsequent Competitive Bids submitted by such Bank with respect to the same Notice of Competitive Bid Request; provided that any such subsequent Competitive Bid shall -------- be disregarded by the Auction Agent unless such subsequent Competitive Bid is submitted solely to correct a manifest error in such former Competitive Bid. The Auction Agent's notice to the Borrower shall specify (i) the aggregate principal amount of Competitive Bids for which offers have been received for each Interest Period specified in the related Notice of Competitive Bid Request, (ii) the respective principal amounts and interest rates, so offered and (iii) if applicable, limitations on the aggregate principal amount of Competitive Bids for which offers in any single Notice of Competitive Bid Request may be accepted. (d) If offers are made by two or more Banks with the same interest rates for a greater aggregate principal amount of Competitive Loans than can be accepted for the related Interest Period (after giving effect to the acceptance of all lower Interest Rates, as the case may be, properly offered for such Interest Period), the principal amount of Competitive Loans which can be accepted shall be allocated by the Borrower among such Banks as nearly as possible (in such multiples of $1,000,000 (or the approximate equivalent amount thereof), as the Borrower may deem appropriate) in proportion to the aggregate principal amount of such offers. Determinations by the Borrower of the amounts of Competitive Loans to be made by each Bank shall be conclusive in the absence of manifest error. (e) The Borrower may in its sole and absolute discretion, subject only to the provisions of this paragraph, accept or reject any Competitive Bid and shall notify Auction Agent by telex or telecopier whether and to what extent it has decided to accept or reject the bids (i) in the case of Euro-Dollar Competitive Loans, not later than 10:00 a.m. (Houston time), three Euro-Dollar Business Days before the Borrowing Date specified for a proposed Competitive Borrowing and (ii) in the case of Alternate Competitive Loans, not later than 10:00 a.m. (Houston time), on the Borrowing Date specified for a proposed Competitive Borrowing; provided, however, that (y) the failure of the Borrower to accept or -------- ------- reject any bid within the time period specified shall be deemed to be a rejection of such bid and (z) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the principal amount specified in the 33 Notice of Competitive Bid Request. Failure to notify the Auction Agent of acceptance by said time shall be deemed a rejection of a Competitive Bid. (f) Upon receipt of a notice of the Borrower's acceptance of a Competitive Bid, the Auction Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such Competitive Loan and such notice of the Borrower's acceptance of a Competitive Bid shall not thereafter be revocable by the Borrower giving such notice. The Borrower shall notify the Auction Agent and the Auction Agent shall also notify each Bank of the aggregate principal amount of all Competitive Bids accepted. Promptly, upon notice from the Auction Agent of the Borrower's acceptance of a Competitive Bid, the successful bidders will become bound, subject to the other applicable conditions hereof, to make the Competitive Loan in respect of which its bid has been accepted and shall forward the required funds to the Borrower on the Borrowing Date indicated in its Competitive Bid. (g) All Competitive Loans shall reduce the unused portion of the Committed Amount by the total amount advanced; provided, however, that each Bank's --------- -------- percentage of the aggregate unused Commitment shall remain unchanged, regardless of the extent to which such Bank participates in any Competitive Borrowing. (h) (i) The Competitive Loan of each Bank shall be evidenced by a single Competitive Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the Committed Amount. (ii) Upon receipt of each Bank's Competitive Note pursuant to Section 3.01, the Administrative Agent shall send by overnight mail said Competitive Note to such Bank. Each Bank shall record the date, amount and maturity of each Competitive Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and prior to any transfer of its Competitive Note shall endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Competitive Loan then outstanding; provided, however, that the failure of any Bank to make any -------- ------- such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Competitive Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Competitive Note and to attach to and make a part of its Competitive Note a continuation of any such schedule as and when required. (i) Each Competitive Loan shall bear interest at the rate set forth in the Competitive Bid by the bidding Bank which has been accepted by the Borrower. Any overdue principal of and, to the extent permitted by law, overdue interest on any Competitive Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the lesser of (i) the sum of 2 percent, plus the rate applicable to Base Rate Loans for such day or (ii) the Highest Lawful Rate. 34 SECTION 2.11. Optional Termination or Reduction of Commitments. The ------------------------------------------------ Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, (i) terminate the Commitments at any time, if no Loans or Letters of Credit are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $5,000,000 or any larger multiple of $1,000,000, the Committed Amount in excess of the sum of the aggregate outstanding principal amount of the Loans, plus the Letter of Credit Outstandings; provided, however, that if no Loans are then outstanding, the -------- ------- Borrower may terminate the Commitments at any time when there are outstanding Letters of Credit by depositing with the Administrative Agent such amount of cash as is equal to the aggregate Stated Amount of the Letters of Credit then outstanding to be held in an interest bearing account with the Administrative Agent, all such cash and interest to be held by the Administrative Agent as security for the obligations of the Borrower in respect of such Letters of Credit; provided further, that the Borrower shall remain liable for any expenses -------- ------- and other liabilities in respect of such Letters of Credit on terms consistent with Section 9.04, but for all other purposes of this Agreement and the other Loan Documents the Obligations will be deemed paid in full and not outstanding. Any reduction of the Commitments shall apply proportionately to the Commitment of each Bank in accordance with its Commitment Percentage and any such reduction shall be permanent. SECTION 2.12. Mandatory Termination of Commitments. The Commitment of ------------------------------------ each Bank shall terminate on the Termination Date, and all Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date; provided, however, if there are any Letter of Credit Outstandings or -------- ------- unpaid Loans on the Termination Date, all obligations of the Borrower and all rights and remedies of the Banks hereunder shall continue, subject to the provisos of Section 2.10, until the full and final repayment thereof. SECTION 2.13. Optional Prepayments. (a) The Borrower may, upon at -------------------- least one Domestic Business Day's notice to the Administrative Agent, prepay any Base Rate Borrowing (or any other Borrowing bearing interest at the Base Rate pursuant to Article VIII) or, subject to Section 2.15 and upon at least three Euro-Dollar Business Days' notice to the Administrative Agent, prepay any Euro- Dollar Committed Borrowing, in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to but excluding the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Committed Loans of the several Banks included in such Committed Borrowing. Competitive Loans may not be prepaid. (b) Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Bank of the contents thereof and of 35 such Bank's ratable share (if any) of such prepayment and such notice shall not there after be revocable by the Borrower. SECTION 2.14. General Provisions as to Payments. --------------------------------- (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 12:00 noon (Houston time) on the date when due, in Federal or other funds immediately available in Houston, to the Administrative Agent at its address referred to in Section 9.01. The Administrative Agent will promptly distribute to each Bank its ratable share, if any, of each such payment received by the Administrative Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Base Rate Loans or Alternate Competitive Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Committed Loans and the Euro-Dollar Competitive Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro- Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate. SECTION 2.15. Funding Losses. The Borrower shall pay to the -------------- Administrative Agent for the account of each Bank, upon the request of such Bank through the Administrative Agent, such amount or amounts as shall compensate such Bank for any reasonable loss, cost or expense actually incurred by such Bank (or, subject to Section 9.07(b), by any existing Participant in the related Committed Loan or Competitive Loan) as a result of: 36 (a) any payment or prepayment of a Euro-Dollar Committed Loan or a Competitive Loan (pursuant to Section 2.11 or Article VI or VIII or otherwise) held by such Bank (or such Participant) on a date other than the last day of the Interest Period applicable thereto, or (b) any failure by the Borrower to borrow a Euro-Dollar Committed Loan or any Competitive Loan held or to be held by such Bank (or such Participant) on the date for such Borrowing specified in the relevant Notice of Committed Borrowing or Request for Competitive Bid, such compensation to include, without limitation, an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so paid or prepaid, or not converted or borrowed, for the period from the date of such payment or prepayment or failure to borrow or convert to the last day of such Interest Period (or, in the case of a failure to borrow, the Interest Period for such Euro-Dollar Committed Loan or Competitive Loan which would have commenced on the date of such failure to convert or borrow) in each case at the applicable rate of interest for such Euro-Dollar Committed Loan provided for herein (excluding, however, the Euro-Dollar Margin included therein) or Competitive Loan over (ii) the amount of interest (as reasonably determined by such Bank or Participant) which would have accrued to such Bank or Participant on such amount by placing such amount on deposit for a comparable period with leading banks in the relevant interbank market; provided, however, that such -------- ------- Bank shall have delivered to the Borrower, within 60 days after the date of such payment or prepayment or failure to borrow, a certificate as to the amount of such actual loss or expense, which certificate shall set forth in reasonable detail the basis for such loss or expense and shall be conclusive in the absence of manifest error. Any payment required to be made pursuant to this Section 2.15 shall be made within 5 days after receipt of the certificate referred to above. SECTION 2.16. Fees. ---- (a) Facility Fee. The Borrower shall pay to the Administrative Agent for ------------ the account of each Bank a facility fee (the "Facility Fee") equal to the Applicable Margin in effect from time to time on the amount of the Commitment (whether used or unused) of that Bank. The Facility Fee shall accrue for the account of each Bank from and including the date of this Agreement to but excluding the Termination Date. (b) Payments. Accrued fees under this Section for the account of any Bank -------- shall be payable quarterly in arrears on each March 31, June 30, September 30 and December 31 and upon the Termination Date. SECTION 2.17. Computation of Interest and Fees. Interest based on the -------------------------------- Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year) 37 and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and all fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day) except that if use of a 360-day year would cause any interest or fees constituting interest (within the meaning of all applicable laws) to exceed the Highest Lawful Rate, then such interest and fees will be computed on the basis of a year of 365 days (or 366 in a leap year). SECTION 2.18. Maximum Interest Rate. (a) It is the intention of each --------------------- party hereto to comply strictly with all usury laws applicable to it regarding the contracting for, and the taking, reserving, charging, collection, payment and receipt of, interest (which, for purposes of this Section 2.18, shall be deemed to include, without limitation, any compensation received by any Agent or any Bank for the use, forbearance or detention of money (as such terms are used in Tex. Rev. Civ. Stat. Ann. Art. 5069-1.01(a), the Texas Finance Code and the Texas Credit Title) under or in connection with this Agreement and the Notes), whether such laws are now or hereafter in effect and whether such laws are those of the United States of America or other applicable jurisdiction (the "Applicable Usury Laws"). (b) With respect to any Bank, if any payment by the Borrower or any other Person to any Agent or such Bank hereunder or in connection with any transaction contemplated hereby (including any payment upon acceleration of the maturity of any Note of such Bank) would produce a rate of interest in excess of the "Highest Lawful Rate" (as defined in paragraph (e) below), or if any such payment would result in the Borrower or any other Person paying or being deemed to have paid to any Agent or such Bank any interest in excess of the "Maximum Amount," (as defined in paragraph (c) below) or if any Agent or such Bank shall for any reason receive any unearned interest in violation of any Applicable Usury Law, or if any transaction contemplated by, or any provision of, this Agreement, any Note, any Letter of Credit Application or any other agreement or instrument executed and delivered pursuant to or in connection with this Agreement or any transaction contemplated hereby (collectively, such Bank's "Loan Documents") would otherwise be usurious under Applicable Usury Laws, then, notwithstanding anything to the contrary in such Bank's Loan Documents, the parties hereto agree, to the maximum extent that they may do so under applicable law, that: (i) the provisions of this Section 2.18 shall govern and control; (ii) the aggregate amount of all interest under Applicable Usury Laws that is contracted for, taken, reserved, charged, collected or received pursuant to such Bank's Loan Documents or otherwise shall be limited such that under no circumstances shall such interest exceed the Maximum Amount; (iii) neither the Borrower nor any other Person shall be obligated to pay any amount of interest that exceeds the Maximum Amount; and (iv) the provisions of such Bank's Loan Documents immediately shall be deemed reformed, without the necessity of the execution of any new document or instrument, so as to comply with the Applicable Usury Laws (it being the intention of the parties hereto, 38 to the fullest extent permitted by applicable law, to render inapplicable any and all penalties of any kind provided by any Applicable Usury Law as a result of any such excess interest). (c) To the fullest extent permitted by Applicable Usury Laws, If any payment by the Borrower or any other Person under any Bank's Loan Documents (including any payment upon acceleration of the maturity of any Note) results in the Borrower actually having paid to such Bank or any Agent any interest in excess of the maximum amount of interest that such Bank or Agent may contract for, take, reserve, charge, collect or receive under Applicable Usury Laws (the "Maximum Amount"), then such excess amount shall be applied to the reduction of the principal balance of such Bank's Loans or to other amounts (other than interest) payable hereunder, and if no such principal is then outstanding, and no such other amount is then payable, such excess or part thereof remaining shall be repaid to the Borrower or such other Person. (d) All interest paid, or agreed to be paid, pursuant to any Bank's Loan Documents shall, to the fullest extent permitted by Applicable Usury Laws, be amortized, prorated, allocated and spread throughout the stated term of any indebtedness incurred under or evidenced by such Bank's Loan Documents. (e) As used herein, the term "Highest Lawful Rate" means, with respect to any Bank in all its various capacities hereunder, the maximum rate of interest that may be contracted for, taken, reserved, charged, collected or received by such Bank in respect of the extensions of credit under or evidenced by such Bank's Loan Documents under the Applicable Usury Laws. In this connection, insofar as Texas law is ultimately determinative of the Highest Lawful Rate, the Highest Lawful Rate shall be computed on the basis of (i) the "indicated rate ceiling" from time to time in effect referred to in Tex. Rev. Civ. Stat. Ann. Art. 5069-1.04, as modified by Section (a)(1) of such Art. 5069-1.04, and, to the extent applicable after the date hereof, (ii) the "weekly ceiling" from time to time in effect referred to in Section 303.21 of the Texas Finance Code and Articles 1D.002 and 1D.003 of the Texas Credit Title; provided, however, that to -------- ------- the fullest extent permitted by Tex. Rev. Civ. Stat. Ann. Art. 5069, the Texas Finance Code and the Texas Credit Title, as applicable, each Agent and each Bank reserves the right to change from time to time the ceiling on which the Highest Lawful Rate is based under such Texas laws by giving written notice thereof to the Borrower in the manner and to the extent required such Texas laws. Notwithstanding the foregoing, the Highest Lawful Rate for any Bank in all of its various capacities hereunder shall not be limited to rate ceilings permitted under Texas law, if other Applicable Usury Laws (whether applicable federal or state laws and whether now or hereafter in effect) shall permit a higher rate of interest to be contracted for, taken, reserved, charged, collected and received under such Bank's Loan Documents. 39 (f) In the event that any rate of interest set forth in Section 2.07 or 8.01 on any Loan of any Bank (a "Stated Rate"), together with any fees or other amounts payable under such Bank's Loan Documents to any Agent or such Bank, in any of such Bank's capacities hereunder, deemed to constitute interest under Applicable Usury Laws ("Additional Interest"), exceeds the Highest Lawful Rate, then, the rate at which interest will accrue pursuant to such Bank's Loan Documents shall be limited, notwithstanding anything to the contrary in such Bank's Loan Documents, to the Highest Lawful Rate; provided, however, that, to -------- ------- the fullest extent permitted by Applicable Usury Laws, any subsequent reductions in any Stated Rate shall not reduce the rate at which interest will accrue pursuant to such Bank's Loan Documents below the Highest Lawful Rate until the aggregate amount of interest payable to such Bank actually accrued pursuant to such Bank's Loan Documents, together with all Additional Interest payable to such Bank, equals the amount of interest which would have accrued if the Stated Rates had at all times been in effect and such Additional Interest, if any, had been paid in full. (g) In the event that, at maturity or upon payment in full of all amounts payable under any Bank's Loan Documents, the total amount of interest (including all Additional Interest) accrued and paid under the terms of such Bank's Loan Documents is less than the total amount of interest (including Additional Interest) which would have accrued and been paid under such Bank's Loan Documents if the Stated Rates had at all times been in effect and all Additional Interest had been paid in full, then the Borrower shall, to the extent permitted by Applicable Usury Laws, pay to the Administrative Agent for the account of such Bank an amount equal to the difference between (1) the lesser of (i) the amount of interest which would have accrued and been paid if the Highest Lawful Rate for such Bank had at all times been in effect or (ii) the amount of interest which would have accrued and been paid if the Stated Rates had at all times been in effect and all Additional Interest had been paid in full and (2) the amount of interest (including all Additional Interest) actually accrued and paid to such Bank pursuant to such Bank's Loan Documents. (h) To the extent permitted by applicable law, the Borrower, the Agents and the Banks agree that, except for Article 15.10(b) thereof, the provisions of Chapter 15, Subtitle 79, Revised Civil Statutes of Texas, 1925, as amended (which regulates certain revolving credit loan accounts and revolving tri-party accounts), do not apply to this Agreement or any of the Notes or any of the Obligations. SECTION 2.19. Withholding Tax Exemption. At least five Domestic ------------------------- Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to each of the Borrower and the Administrative Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is 40 entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Borrower and the Administrative Agent two additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Administrative Agent, in each case certifying that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred after the date hereof and prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Borrower and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. Any Bank that is not capable of receiving payments without any deduction or withholding of United States federal income tax will promptly notify the Borrower and the Administrative Agent to that effect and will designate a different Applicable Lending Office if such designation will render such Bank capable of receiving payments without any such deduction or withholding and will not, in the reasonable judgment of such Bank, be otherwise disadvantageous. If the Borrower shall receive a certificate of such Bank claiming the need for deductions or withholdings under this Section 2.19, the Borrower shall, subject to Section 8.06, commence making any deductions and withholding any amounts with respect to payments for the account of such Bank that are required by applicable law. ARTICLE III CONDITIONS SECTION 3.01. Effectiveness. This Agreement shall become effective as ------------- of December 1, 1997 on (a) execution of this Agreement by the Administrative Agent and the Borrower and receipt by the Administrative Agent of counterparts of this Agreement signed by the other Agents and the Banks listed on the signature pages hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form reasonably satisfactory to it of telecopied, telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party) and (b) receipt by the Administrative Agent of evidence of termination by the Borrower of the "Commitments" of the "Banks" under and as such terms are defined in the Borrower's $400,000,000 Amended and Restated Credit Agreement dated as of June 27, 1995, as amended, among the Borrower, the Agents (or the predecessors thereof) and the other financial 41 institutions party thereto, and the payment of all fees and other "Obligations" becoming due and payable thereunder as a result of such termination; provided, -------- however, the respective obligations hereunder of the Banks to make their initial - ------- Loans and of the Issuing Bank to issue its intial Letter of Credit shall be subject to the satisfaction of the following conditions precedent on or prior to the date of any such Credit Event (or the waiver thereof in accordance with Section 9.05): (i) receipt by the Administrative Agent of (1) certified copies of the Certificate of Incorporation and By-Laws of the Borrower and the resolutions of the Board of Directors of the Borrower authorizing the transactions contemplated hereby, (2) certified copies of the Equistar Partnership Agreement and (3) such other documents as the Administrative Agent or the Required Banks may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Administrative Agent; (ii) receipt by the Administrative Agent of a Certificate of Incumbency dated on or after the Effective Date executed by the Secretary or an Assistant Secretary of the Borrower in substantially the form of Exhibit 3.01(ii), setting forth the name, title and specimen signature of each Authorized Officer or Authorized Representative of the Borrower (1) who has signed this Agreement on behalf of the Borrower, (2) who will sign the Notes on behalf of the Borrower or (3) who will, until replaced by another officer or representative duly authorized for that purpose, act as the representative of the Borrower for the purposes of signing documents and giving notices and other communications by the Borrower in connection with this Agreement and the transactions contemplated hereby; (iii) receipt by the Administrative Agent of a certificate dated on or after the Effective Date signed by the Chief Executive Officer or Chief Administrative Officer of the Borrower to the effects set forth in clauses (iii) and (iv) of Section 3.02; (iv) receipt by the Administrative Agent of an opinion of the Chief Corporate Counsel of the Borrower dated on or after the Effective Date in substantially the form of Exhibit 3.01(iv) and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (v) receipt by the Agents of an opinion of Andrews & Kurth L.L.P., counsel for the Agents, dated on or after the Effective Date in substantially the form of Exhibit 3.01(v) and covering such additional matters relating to the 42 transactions contemplated hereby as the Required Banks may reasonably request; (vi) receipt by the Administrative Agent of a certificate dated on or after the Effective Date signed by the Chief Executive Officer or any Vice President of LRC to the effect that LRC is not in default in its material obligations pursuant to the LCR Regulations; (viii) receipt by the Administrative Agent of certificates dated on or after the Effective Date signed by the Chief Executive Officer, any Vice President or the Treasurer of each of the Lyondell Equistar Partners, Lyondell Methanol GP and Lyondell Methanol LP to the effect that such Persons are not in default in their respective material obligations under the Equistar Partnership Agreement or the Methanol Partnership Agreement, as the case may be; and (ix) receipt by the Administrative Agent for the account of each Bank of a duly executed Committed Note dated the Effective Date, complying with the provisions of Section 2.05 and a duly executed Competitive Note dated the Effective Date, complying with the provisions of Section 2.10. The Administrative Agent shall promptly notify the Borrower and the Banks of the Effective Date, and such notice shall be conclusive and binding on all parties hereto. The Administrative Agent shall, promptly after the receipt thereof, forward to the Banks copies of the documents delivered pursuant to this Section 3.01. SECTION 3.02. Credit Events. (a) The obligation of any Bank to make a ------------- Committed Loan on the occasion of any Committed Borrowing hereunder and the obligation of the Issuing Bank to issue, renew or extend any Letter of Credit hereunder are subject to the satisfaction of the following conditions: (i) receipt by the Administrative Agent of a Notice of Committed Borrowing as required by Section 2.02 or receipt by the Issuing Bank of a Letter of Credit Request as required by Section 2.03, as the case may be; (ii) the fact that, immediately after such Credit Event, the aggregate outstanding principal amount of the Committed Loans, plus the Letter of Credit Outstandings, plus the aggregate outstanding principal amount of the Competitive Loans will not exceed the Committed Amount; (iii) the fact that, immediately before and after such Credit Event, no Default or Event of Default shall have occurred and be continuing; and 43 (iv) the fact that the representations and warranties of the Borrower contained in this Agreement shall be true in all material respects on and as of the date of such Credit Event as if made on and as of such date (except in the case of a Refunding Borrowing, the representations and warranties set forth in paragraphs (f), (g), (m) and (n) of Section 4.01), unless a representation and warranty expressly relates to an earlier date, in which event such representation and warranty was true in all material respects at such date. (b) The obligation of each Bank bound to make a Competitive Loan pursuant to Section 2.10 on the occasion of a Competitive Borrowing (including the initial Competitive Borrowing) is subject to the further condition precedent that: (i) The Auction Agent and the Administrative Agent shall have received a Competitive Bid Request with respect thereto; and (ii) On the Borrowing Date of such Competitive Borrowing, the following statements shall be true (and each of the giving of the applicable Competitive Bid Request and the acceptance by the Borrower of the proceeds of such Competitive Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Competitive Borrowing such statements are true): (A) the fact that, immediately after such Credit Event, the aggregate outstanding principal amount of the Committed Loans, plus the Letter of Credit Outstandings, plus the aggregate outstanding principal amount of the Competitive Loans, will not exceed the Committed Amount; (B) the fact that, immediately before and after such Credit Event, no Default or Event of Default shall have occurred and be continuing; and (C) the fact that the representations and warranties of the Borrower contained in this Agreement shall be true in all material respects on and as of the date of such Credit Event as if made on and as of such date, unless a representation and warranty expressly relates to an earlier date, in which event such representation and warranty was true in all material respects at such date. Each Credit Event hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (ii), (iii) and (iv) of paragraph (a) or clause (ii) of paragraph (b), as the case may be. 44 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower. The ---------------------------------------------- Borrower represents and warrants to the Agents and the Banks as follows: (a)(1) The Borrower is (i) a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and (ii) qualified to do business and in good standing in each jurisdiction where the ownership of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect. (2) The Borrower has all corporate power and authority, governmental permits, licenses, consents, authorizations, orders and approvals and other authorizations and powers as are necessary to carry on its business substantially as presently conducted, except where the failure to have such power, authority, permits, licenses, consents, authorizations, orders and approvals would not have a Material Adverse Effect. (3) The execution, delivery and performance by the Borrower of this Agreement and of the Notes, and the Borrowings and other extensions of credit hereunder, are within the Borrower's corporate power and authority and have been duly authorized by all necessary corporate proceedings. (4) Neither such authorization nor the execution, delivery and performance by the Borrower of this Agreement or of the Notes, nor any Borrowing or Letter of Credit when made or issued, as the case may be, hereunder will conflict with, result in a breach of or constitute a default under any of the terms, conditions or provisions of any law or any regulation, order, writ, injunction or decree of any court or governmental authority or of the Certificate of Incorporation or By-Laws of the Borrower or result in the violation or contravention of, or the acceleration of any obligation under, or cause the creation of any Lien on any of the assets of the Borrower pursuant to the provisions of, any indenture, loan or credit agreement or other material instrument to which it is a party or by which it is bound. (5) Assuming its due execution by the Banks and the Agents, this Agreement constitutes a legal, valid and binding agreement of the Borrower and the Notes, when duly executed on behalf of the Borrower and delivered in accordance with this Agreement, will constitute legal, valid and binding obligations of the Borrower. 45 (b)(1) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1996 and the related consolidated statements of income and cash flows for the fiscal year ended that date, reported on by Coopers & Lybrand, L.L.P., copies of which have been delivered to the Administrative Agent, present fairly, in all material respects, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year, in conformity with generally accepted accounting principles consistently applied. (2) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 1997 and the related unaudited consolidated statements of income and cash flows for the nine- month period then ended, copies of which have been delivered to the Administrative Agent, present fairly, in all material respects, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in paragraph (b)(1) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such nine-month period (subject to normal year-end adjustments and not including footnotes or schedules required by generally accepted accounting principles). (c)(1) The balance sheet of LCR as of December 31, 1996 and the related statements of income and cash flows for the fiscal year ended that date, reported on by Coopers & Lybrand, L.L.P., copies of which have been delivered to the Administrative Agent, present fairly, in all material respects, the financial position of LCR as of such date and its results of operations and cash flows for such fiscal year, in conformity with generally accepted accounting principles consistently applied. (2) The unaudited balance sheet of LCR as of September 30, 1997 and the related statements of income and cash flows for the nine-month period then ended, copies of which have been delivered to the Administrative Agent, present fairly, in all material respects, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in paragraph (c)(1) of this Section, the financial position of LCR as of such date and its results of operations and cash flows for such three-month period (subject to normal year-end adjustments and not including footnotes or schedules required by generally accepted accounting principles). (d) The Borrower has heretofore furnished to the Administrative Agent and the Banks the unaudited balance sheet of Equistar and its Subsidiaries prepared on a pro forma combined basis, as of June 30, 1997 and the 46 unaudited income statement of Equistar and its Subsidiaries prepared on a pro forma combined basis for the 12-month period ended December 31, 1996 and for the six-month period ended June 30, 1997. Such pro forma balance sheet and income statements have been prepared in good faith based on the assumptions used to prepare the pro forma financial information continued in the Joint Proxy Statement (which assumptions are believed by the Borrower on the date hereof to be reasonable), are based on the best information available to the Borrower as of the date of the furnishing thereof, accurately reflect all adjustments required to be made to give effect the Joint Venture and present fairly, in all material respects, on a pro forma basis the estimated combined financial position of Equistar and its Subsidiaries as of June 30, 1997 and the 12-month and six-month periods ended December 31, 1996 and June 30, 1997, respectively. (e) The unaudited balance sheet of Methanol as of September 30, 1997 and the related statement of income for the nine-month period then ended, copies of which have been delivered to the Administrative Agent and the Banks, present fairly, in all material respects, in conformity with generally accepted accounting principles, the financial position of Methanol as of such date and its results of operations for such nine-month period (subject to normal year-end adjustments and not including footnotes or schedules required by generally accepted accounting principles). (f) Except as described in the Borrower's Annual Report on Form 10-K for the year ended December 31, 1996 ("1996 Form 10-K") or any document filed subsequently by the Borrower pursuant to the Securities Exchange Act of 1934 ("'34 Act Report") or as otherwise disclosed in writing to the Administrative Agent and delivered to the Banks, there is no action, suit or proceeding pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its Consolidated Subsidiaries in any court or before or by any arbitrator, governmental department, agency or instrumentality, an adverse decision in which could reasonably be expected to have a Material Adverse Effect. (g) Except as described in the 1996 Form 10-K or any subsequent '34 Act Report or as otherwise disclosed in writing to the Administrative Agent and delivered to the Banks, there has been no material adverse change since December 31, 1996 in the business, operations, affairs, assets, condition (financial or otherwise) or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. (h) No Default or Event of Default has occurred and is continuing. 47 (i) No consent, authorization, order or approval of (or filing or registration with) any governmental commission or board or other governmental regulatory authority (other than routine reporting requirements) is required for the execution, delivery and performance by the Borrower of this Agreement or of the Notes. (j) Each member of the Controlled Group has fulfilled its obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance with the presently applicable provisions of ERISA and the Code, except to the extent that any noncompliance would not reasonably be expected to have a Material Adverse Effect. No member of the Controlled Group has incurred any liability to the PBGC (other than for routine premiums due to the PBGC) or a Plan under Title IV of ERISA that would have a Material Adverse Effect. (k)(1) Each corporate Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business substantially as presently conducted except for such powers, licenses, authorizations, consents or approvals the absence of which would not reasonably be expected to have a Material Adverse Effect. (2) LCR is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Texas and is registered, qualified or licensed (or has applied for such registration, qualification or licensing) to do business and is in good standing in each of the jurisdictions within the United States where ownership of its properties or the conduct of its business requires such registration, qualification or licensing, except in all cases where the failure to be so registered, qualified or licensed would not reasonably be expected to have a Material Adverse Effect. LCR also has all power and authority, governmental permits, licenses, consents, authorizations, orders and approvals and other authorizations as are necessary to carry on its business substantially as presently conducted except in all cases where the failure to have any of the foregoing would not reasonably be expected to have a Material Adverse Effect. (3) Each of Equistar and Methanol is a limited partnership duly formed, validly existing and in good standing under the laws of the State of Delaware and, where applicable, is registered, qualified or licensed (or has applied for such registration, qualification or licensing) to do business and is in good standing in each of the jurisdictions within the United States where ownership of its properties or the conduct of its business requires such registration, qualification 48 or licensing, except in all cases where the failure to be so registered, qualified or licensed would not reasonably be expected to have a Material Adverse Effect. Each of Equistar and Methanol also has all power and authority, governmental permits, licenses, consents, authorizations, orders and approvals and other authorizations as are necessary to carry on its business substantially as presently conducted except in all cases where the failure to have any of the foregoing would not reasonably be expected to have a Material Adverse Effect. (l) The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "public-utility company" or a "holding company" within the meaning of the Public Utility Holding Company Act of 1935 or a "public utility" under the laws of the State of Texas. (m) Except as described in the Borrower's 1996 Form 10-K or any subsequent '34 Act Report or as otherwise disclosed in writing to the Administrative Agent and delivered to the Banks, to the best of its knowledge (i) the Borrower and each of its Consolidated Subsidiaries possess all environmental, health and safety licenses, permits, authorizations, registrations, approvals and similar rights necessary for the Borrower or such Consolidated Subsidiary to conduct its operations as now being conducted, except where the failure to possess or maintain any of the foregoing would not reasonably be expected to have a Material Adverse Effect and (ii) the Borrower and each of its Consolidated Subsidiaries are in compliance with all terms, conditions or other provisions of such licenses, permits, authorizations, registrations, approvals and similar rights, except for such failure or noncompliance that would not reasonably be expected to have a Material Adverse Effect. (n) Except as described in the Borrower's 1996 Form 10-K or any subsequent '34 Act Report or as otherwise disclosed in writing to the Administrative Agent and delivered to the Banks, to the best of its knowledge, there does not exist any Release of a Hazardous Material or any violation of the Requirements of Environmental Laws that reasonably would be expected to impose a liability on the Borrower or a Consolidated Subsidiary, or require an expenditure by the Borrower or a Consolidated Subsidiary to cure such violation, in any case where such liability or expenditure would reasonably be expected to have a Material Adverse Effect. (o) Each of the Borrower and its Consolidated Subsidiaries has filed all federal income tax returns and other material tax returns, statements and reports (or obtained extensions with respect thereto) which are required to be filed and have paid or deposited or made adequate provision in accordance with generally accepted accounting standards for the payment of all taxes (including 49 estimated taxes shown on such returns, statements and reports) which are shown to be due pursuant to such returns. (p) Each of the LCR Regulations, the Equistar Partnership Agreement and the Methanol Partnership Agreement is in full force and effect. (q) LRC is not in default of its material obligations under the LCR Regulations; none of the Lyondell Equistar Partners is in default of its material obligations under the Equistar Partnership Agreement; and neither Lyondell Methanol GP nor Lyondell Methanol LP is in default of its material obligations under the Methanol Partnership Agreement. (r) On the date of this Agreement, the Borrower has no Restricted Subsidiaries. ARTICLE V COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note or in respect of any Letter of Credit remains unpaid: SECTION 5.01. Certain Information to be Furnished by the Borrower. The --------------------------------------------------- Borrower will deliver to the Administrative Agent and the Administrative Agent shall promptly deliver to the Banks: (a)(1) as soon as available and in any event within 120 days after the end of each of its fiscal years, the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, together with the audit report thereon of a nationally recognized firm of independent certified public accountants; (2) as soon as available and in any event within 120 days after the end of each of its fiscal years, the balance sheet of LCR as of the end of such fiscal year and the related statements of income and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, together with an audit report thereon of a nationally recognized firm of independent certified public accountants; 50 (3) as soon as available and in any event within 120 days after the end of each of its fiscal years, the balance sheet of Equistar as of the end of such fiscal year and the related statements of income, cash flows and partners' equity for such year, setting forth in each case (commencing with its fiscal year ending December 31, 1998) in comparative form the figures for the previous fiscal year, together with an audit report thereon of a nationally recognized firm of independent certified public accountants; (4) as soon as available and in any event within 120 days after the end of each of its fiscal years, the unaudited balance sheet of Methanol as of the end of such fiscal year and the related statement of income for such year, setting forth in each case (commencing with its fiscal year ending December 31, 1998) in comparative form the figures for the previous fiscal year; (b)(1) as soon as available and in any event within 60 days after the end of each of the first three quarters of each of its fiscal years, (i) the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal quarter, (ii) the related consolidated statement of income for such fiscal quarter and for the portion of the fiscal year ended with such quarter and (iii) the related consolidated statements of income and cash flows for the portion of the fiscal year ended with such quarter, setting forth, with respect to (iii), in comparative form the figures for the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments and not including footnotes or schedules required by generally accepted accounting principles) by the chief financial officer or the chief accounting officer of the Borrower to present fairly, in all material respects, the financial position, results of operations and cash flows of the Borrower and its Consolidated Subsidiaries in accordance with generally accepted accounting principles (except as otherwise stated therein) applied on a basis consistent with the financial statements referred to in paragraph (a)(1) of this Section; (2) as soon as available and in any event within 60 days after the end of each of the first three quarters of each of its fiscal years, (i) the balance sheet of LCR as of the end of such fiscal quarter, (ii) the related statement of income for such fiscal quarter and for the portion of the fiscal year ended with such quarter and (iii) the related statements of income and cash flows for the portion of the fiscal year ended with such quarter, setting forth, with respect to (iii), in comparative form the figures for the corresponding portion of LCR's previous fiscal year, all certified (subject to normal year-end adjustments and not including footnotes or schedules required by generally accepted accounting principles) by the chief financial officer or the chief accounting officer of LCR to present fairly, in all material respects, the financial position, results of operations and cash flows of LCR in accordance with generally accepted 51 accounting principles (except as otherwise stated therein) applied on a basis consistent with the financial statements referred to in paragraph (a)(2) of this Section; (3) as soon as available and in any event within 60 days after the end of each of the first three quarters of each of its fiscal years, (i) the balance sheet of Equistar as of the end of such fiscal quarter, (ii) the related statement of income for such fiscal quarter and for the portion of the fiscal year ended with such quarter and (iii) the related statements of income and cash flows and partners' equity for the portion of the fiscal year ended with such quarter, setting forth, with respect to (iii), commencing with its fiscal quarter ending March 31, 1999, in comparative form the figures for the corresponding portion of Equistar's previous fiscal year, all certified (subject to normal year-end adjustments and not including footnotes or schedules required by generally accepted accounting principles) by the chief financial officer or the chief accounting officer of Lyondell Equistar GP to present fairly, in all material respects, the financial position, results of operations, cash flows and partners' equity of Equistar in accordance with generally accepted accounting principles (except as otherwise stated therein) applied on a basis consistent with the financial statements referred to in paragraph (a)(3) of this Section; (4) at such time as the Borrower causes to be prepared routinely on a quarterly basis financial statements for Methanol, promptly after the preparation thereof after the end of each of the first three quarters of each of Methanol's fiscal years thereafter, (i) the balance sheet of Methanol as of the end of such fiscal quarter, (ii) the related statement of income for such fiscal quarter and for the portion of the fiscal year ended with such quarter and (iii) the related statement of income for the portion of the fiscal year ended with such quarter, which financial statements shall set forth with respect to (iii) (commencing with any such financial statements prepared after December 31, 1997), in comparative form the figures for the corresponding portion of Methanol's previous fiscal year, all certified (subject to normal year-end adjustments and not including footnotes or schedules required by generally accepted accounting principles) by the chief financial officer or the chief accounting officer of Lyondell Methanol GP to present fairly, in all material respects, the financial position and results of operations of Methanol in accordance with generally accepted accounting principles (except as otherwise stated therein) applied on a basis consistent with the financial statements referred to in paragraph (a)(4) of this Section; (c) promptly after the same are sent to shareholders or filed, copies of all (i) financial statements, notices, reports and proxy materials sent by the Borrower to shareholders of the Borrower and (ii) registration statements (other 52 than exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Form 10-K, 10-Q and 8-K (or their equivalents) filed by the Borrower with the Securities and Exchange Commission (or any governmental agency succeeding to the functions of such Commission); (d) simultaneously with the delivery of the financial statements referred to in paragraphs (a) and (b) above, (i) a certificate of the Borrower signed by the Treasurer or any Assistant Treasurer of the Borrower stating whether there exists to the knowledge of such officer of the Borrower on the date of such certificate any Default, and, if any such Default then exists, specifying the nature and period of existence thereof and the action the Borrower is taking or is causing to be taken and proposes to take or cause to be taken with respect thereto and (ii) a certificate of the Borrower signed by the Treasurer or any Assistant Treasurer of the Borrower stating that the Borrower is in compliance with the provisions of Section 5.08 and setting forth all computations relating thereto; (e) forthwith, if at any time any officer of the Borrower shall obtain knowledge of any Default, a certificate of the Treasurer or any Assistant Treasurer specifying the nature and period of existence thereof and the action the Borrower is taking or is causing to be taken and proposes to take or cause to be taken with respect thereto; (f) promptly upon obtaining knowledge thereof, a copy of each of the following notices: if and when any member of the Controlled Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might reasonably be expected to constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; or (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, a copy of such notice; (g) in the event of any damage, loss or casualty to or destruction of any portion of any facility of the Borrower, any of its Subsidiaries, LCR, Equistar, Methanol or any Other Equity Person, prompt notice thereof, specifying the nature and extent of such damage, loss, casualty or destruction and stating whether such damage, loss, casualty or destruction, in the reasonable judgment of the Borrower, materially adversely affects the production capacity of such facility or the economic value of such facility; 53 provided, however, that the Borrower shall have no obligation to deliver -------- ------- such notice if the damage to the facility in the good faith judgment of the Borrower will not cost in excess of $15,000,000 to rebuild, replace or restore or if such damage does not materially adversely affect such production capacity or the economic value of the facility; (h) in the event of any total or partial shutdown of any production or storage facility of the Borrower, any of its Consolidated Subsidiaries, LCR, Equistar, Methanol or any Other Equity Person in connection with any Release, prompt notice thereof to the Administrative Agent, specifying the reason for such shutdown; provided, however, that the Borrower shall have -------- ------- no obligation to deliver such notice if in the good faith judgment of the Borrower such shutdown will not result in a reduction of the combined Consolidated Net Income of the Borrower, LCR, Equistar, Methanol and each Other Equity Person of $10,000,000 or more over a period of five years beginning with the date of such shutdown; (i) in addition to its obligations pursuant to Section 2.02, prompt written notice of any Debt of the Borrower, other than Borrowings, incurred subsequent to the date of this Agreement; and (j) from time to time such further information regarding compliance with this Agreement or the business, operations, affairs, assets, condition (financial or otherwise) or results of operations of the Borrower and its Consolidated Subsidiaries, LCR, Equistar, Methanol and Other Equity Persons as the Administrative Agent, at the request of any Bank, may reasonably request. SECTION 5.02. Maintenance of Property; Insurance. ---------------------------------- (a) The Borrower will keep, and will cause each of its Subsidiaries to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will, and will cause each of its Subsidiaries to, maintain insurance consistent either with the insurance practices of the Borrower and its Subsidiaries in effect on the date hereof, or with then existing industry practice, in either case to the extent available to the Borrower and its Subsidiaries on commercially reasonable terms, and will furnish to the Administrative Agent, upon request from the Administrative Agent, information presented in reasonable detail as to the insurance so carried. SECTION 5.03. Limitation on Liens. Except as otherwise specifically ------------------- provided in this Agreement, nothing contained in this Agreement shall in any way restrict or 54 prevent the Borrower or any Subsidiary from incurring any Debt; provided, -------- however, that neither the Borrower nor any Restricted Subsidiary will issue, - ------- assume or incur any Debt secured by any Lien upon any Restricted Property or grant any Lien on any such Restricted Property to secure any such Debt without effectively providing that all of the Notes and the Letter of Credit Outstandings (together with, if the Borrower so determines, any other Debt then existing and any other Debt thereafter created ranking equally with the Notes) shall be secured equally and ratably with (or prior to) such Debt so long as such Debt shall be so secured. To the extent, if any, that the following Liens would otherwise be prohibited by the foregoing provisions, the foregoing provisions shall not apply to: (a) Liens on any property of a corporation or other Person existing at the time it becomes a Subsidiary or at the time it is merged into or consolidated with the Borrower or a Subsidiary and not created in contemplation of such event; (b) Liens on any assets (i) existing at the time of acquisition thereof and not created in contemplation of such event or (ii) incurred to secure payment of all or part of the purchase price thereof or (iii) incurred to secure Debt incurred prior to, at the time of or within 120 days after acquisition thereof for the purpose of financing all or part of the purchase price thereof; (c) Liens on property of the Borrower or any of its Subsidiaries existing or contemplated on the date hereof and listed on Schedule 5.03(c); (d) Liens on any new plant (including any processing unit or production or storage facility) or the real estate on which such plant is situated or is to be constructed securing Debt incurred or assumed either (i) at the time of or within 24 months after commencement of improvement or construction or (ii) within 120 days after completion of improvement or construction of such plant in a principal amount not exceeding the cost of such improvement or construction and the cost of acquisition of such plant and such real estate; (e) Liens which secure only Debt owing by a Subsidiary to the Borrower or another Subsidiary; (f) Liens in favor of the United States of America or any state thereof or any department, agency, instrumentality or political subdivision of any such jurisdiction to secure partial, progress, advance or other payments pursuant to any contract or statute or to secure any Debt incurred for the purpose of financing all or any part of the purchase price or cost of constructing or improving the property subject to such Lien, including, without limitation, Liens to secure Debt of the pollution control or industrial revenue bond type; 55 (g) Liens required by any contract or statute in order to permit the Borrower or a Subsidiary to perform any contract or subcontract made by it with or at the request of the United States of America, any state or any department, agency or instrumentality or political subdivision of either; or (h) Liens securing taxes, assessments, governmental charges or levies, statutory Liens of landlords and Liens of carriers, warehousemen, materialmen, mechanics and other like Persons not yet due or the payment of which is not then required; provided, however, that this paragraph (h) shall not be deemed to -------- ------- permit any Liens which may be imposed pursuant to Section 4068 of ERISA; (i) Liens of or resulting from any judgment or award not in excess of $25,000,000, the time for the appeal or petition for rehearing of which shall not have expired, or in respect of which the obligor shall at any time in good faith be prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review shall have been secured; (j) Liens incurred or deposits made in the ordinary course of business (i) in connection with workers' compensation, unemployment insurance and other types of social security, or (ii) to secure reimbursement obligations in respect of documentary letters of credit secured by collateral customarily and normally provided to banks issuing documentary letters of credit; provided, however, that -------- ------- any obligation secured by any such Lien shall not be overdue or, if overdue, is being contested in good faith by appropriate actions or proceedings during which there is no right to exercise remedies and with respect to which adequate book reserves are maintained to the extent required by generally accepted accounting principles; provided further, that paragraph (j) shall not be deemed to permit -------- ------- any Liens which may be imposed pursuant to Section 4068 of ERISA; (k) minor survey exceptions and minor encumbrances, easements or reservations, or rights of others for rights-of-way, utilities and other similar purposes, or zoning or other restrictions as to the use of real properties, which are necessary for the conduct of the activities of Borrower or any Subsidiary or which customarily exist on properties of corporations or other Persons engaged in similar activities and similarly situated; (l) any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Lien referred to in the foregoing paragraphs (a) to (k) inclusive or of any Debt secured thereby, provided that the principal amount of Debt secured thereby shall not exceed the principal amount of Debt so secured at the time of such extension, renewal or replacement, and that such extension, renewal or replacement Lien shall be limited to all or part of substantially 56 the same property which secured the Lien extended, renewed or replaced, plus improvements on such property; provided, however, that the Borrower and any one or more Restricted Subsidiaries - -------- ------- may issue, assume or incur Debt secured by Liens which would otherwise be subject to the foregoing restrictions or grant any such Lien to secure any such Debt in an aggregate principal amount which, together with the aggregate outstanding principal amount of all Debt of the Borrower and the Restricted Subsidiaries which would otherwise be subject to the foregoing restrictions (not including Debt permitted to be secured under paragraphs (a) to (l) inclusive above), does not at any one time exceed the greater of $50,000,000 or 10 percent of Consolidated Net Tangible Assets of the Borrower and its Consolidated Subsidiaries. SECTION 5.04. Consolidation, Merger, Disposition of Assets. (a) -------------------------------------------- Subject to the provisions of Section 5.04(b), nothing contained in this Agreement shall prevent any consolidation or merger of the Borrower with or into any other entity or entities (whether or not an Affiliate of the Borrower), or successive consolidations or mergers in which the Borrower or its successor or successors shall be a party or parties, or shall prevent any sale or conveyance of all the property and assets of the Borrower substantially as an entirety, to any other Person (whether or not an Affiliate of the Borrower) authorized to acquire and operate the same; provided, however, that upon any such -------- ------- consolidation, merger, sale or conveyance, other than a consolidation or merger in which the Borrower is the continuing entity, the surviving entity must be chartered under the laws of the United States or one of its states and the due and punctual payment of the principal of and interest on all of the Notes, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of this Agreement, shall be expressly assumed by instrument reasonably satisfactory in form to the Required Banks and executed and delivered to the Administrative Agent by the corporation (if other than the Borrower) formed by such consolidation or into which the Borrower shall have been merged or by the Person which shall have acquired such property; and provided further, that no Default or Event of Default shall exist hereunder - -------- ------- after giving effect to such consolidation, merger or sale of assets. Notwithstanding the foregoing, the provisos of this Section 5.04(a) shall not apply to the direct or indirect transfer by the Borrower to Equistar of the properties and assets of the Borrower described in the Joint Proxy Statement. (b) If, upon any consolidation or merger of the Borrower with or into any other corporation, or upon the sale or conveyance of all the property and assets of the Borrower substantially as an entirety to any other Person or if any of the remaining property of the Borrower or of any Restricted Subsidiary would thereupon become subject to any Lien, the Borrower, prior to or simultaneously with such consolidation, merger, sale or conveyance, will secure the Notes, the Letter of Credit Outstandings and all other obligations of the Borrower under this Agreement equally and ratably with 57 any other obligations of the Borrower (or any Restricted Subsidiary if applicable) then entitled thereto, by a direct Lien on all such property prior to all Liens other than any theretofore existing thereon. SECTION 5.05. Use of Proceeds. The proceeds of the Loans made and --------------- Letters of Credit issued under this Agreement will be used by the Borrower and its Subsidiaries for general business purposes; provided, however, without the ----------------- prior consent of the Required Lenders, the Borrower and its Subsidiaries will not acquire in one or more transactions operating assets with proceeds of Loans aggregating more than $75,000,000. No proceeds of any Loan will be used in violation of Regulation U, Regulation X, Regulation G or of any similar laws or regulations relating to Debt secured directly or indirectly by equity securities. SECTION 5.06. Payment of Taxes. The Borrower will, and will cause each ---------------- Consolidated Subsidiary to, pay and discharge, or make adequate provision for, all material taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it; provided, however, that neither the Borrower nor any Consolidated Subsidiary - -------- ------- shall be required to pay or discharge or cause to be paid or discharged any such taxes, assessments, charges or levies whose amount, applicability or validity is being contested in good faith by appropriate actions or proceedings and as to which reserves have been established if required by generally accepted accounting principles. SECTION 5.07. LCR Matters. ------------ (a) The Borrower will not permit LRC, as an Owner of LCR, to consent to any amendment or modification to the LCR Regulations, or to take any other action, that would in each case result in LRC's Participation Percentage (as defined in the LCR Regulations) to be less than 50 percent, without the consent of Banks having at least 70 percent of the aggregate Commitments. (b) Unless the Banks having at least 70 percent of the aggregate Commitments agree otherwise, the Borrower shall cause LRC (within the bounds of good business judgment and its legal obligations under or in connection with the LCR Regulations), as an Owner of LCR, to withhold its consent, which is required under Section 3.8 of the LCR Regulations, with respect to any action that would cause or permit LCR (or any Person acting in the name or on behalf of LCR), directly or indirectly, to undertake any of the following: (1) to fail to maintain insurance consistent either with the insurance practices of the Borrower and its Subsidiaries in effect on the date hereof or with then existing industry practice, in either case to the extent available to LCR on commercially reasonable terms; and 58 (2) to amend, or alter the LCR Regulations in any way that would materially adversely affect (i) the Borrower's access to its share of distributable cash from LCR or (ii) other material rights and obligations of the Borrower or LRC under the LCR Regulations (including without limitation materially increasing an obligation of the Borrower or LRC to make contributions to LCR or materially decreasing an obligation of CITGO or CITGO Refining to make contributions to LCR), provided, however, that in -------- ------- any event the Borrower will provide promptly thereafter to the Administrative Agent notice and copies of all amendments to the LCR Regulations. SECTION 5.08 Equistar Matters. Unless the Banks having at least 70 ---------------- percent of the aggregate Commitments agree otherwise, the Borrower shall cause each of the Lyondell Equistar Partners (within the bounds of good business judgment and its legal obligations under or in connection with the Equistar Partnership Agreement), as partners of Equistar, to withhold its consent, which is required under Section 6.7 or Section 13.23 of the Equistar Partnership Agreement, with respect to any action that would cause or permit Equistar (or any Person acting in the name or on behalf of Equistar), directly or indirectly, to undertake any of the following: (a) to fail to maintain insurance consistent either with the insurance practices of the Borrower and its Subsidiaries (including such insurance coverage for Methanol) in effect on the date hereof or with then existing industry practice, in either case to the extent available to Equistar on commercially reasonable terms; and (b) to amend, or alter the Equistar Partnership Agreement in any way that would materially adversely affect (i) the Borrower's access to its share of distributable cash from Equistar or (ii) other material rights and obligations of the Borrower or the Lyondell Equistar Partners under the Equistar Partnership Agreement (including, without limitation, materially increasing an obligation of the Borrower or the Lyondell Equistar Partners to make contributions to Equistar or materially decreasing an obligation of the Millennium Equistar Partners to make contributions to Equistar), provided, however, that in any event the Borrower will provide promptly -------- ------- thereafter to the Administrative Agent notice and copies of all amendments to the Equistar Partnership Agreement. SECTION 5.09. Financial Covenants. The Borrower will comply with the -------------------- covenants described in this Section. (a) Debt Incurrence Test. If at any time the aggregate outstanding -------------------- principal amount of the Loans exceeds $50,000,000, then the Borrower will not be permitted to make any additional Borrowings hereunder (other than Borrowings constituting conversions and continuations pursuant to Article II) unless, after giving effect to any 59 such Borrowing, (i) the ratio of Global Debt to Stub Period Global EBITDA, for the four-fiscal-quarter period of the Borrower ended September 30, 1997, if such Borrowing will be made at any time prior to the first Determination Date, or (ii) the ratio of Global Debt to Global EBITDA, for the four-fiscal-quarter Period of the Borrower most recently ended after September 30, 1997, if such Borrowing will be made on or after the first Determination Date, in each case, is less than or equal to 3.75 to 1.0; provided, however, that each such -------- ------- determination shall be made by giving effect to (A) all Global Debt actually outstanding during any portion of such four-fiscal-quarter period and by assuming that such proposed Borrowing had been incurred on the first day of such four-fiscal-quarter period and (B) all operating assets acquired during such four-fiscal-quarter period and by assuming that such assets were acquired on the first day of such four-fiscal-quarter period. (b) Fixed Charge Coverage Ratio. The Borrower will not permit, as of the --------------------------- end of any fiscal quarter, the ratio of (i) Consolidated Cash Flow, minus Consolidated Capital Expenditures of the Borrower, to (ii) Consolidated Interest Expense of the Borrower, in each case for the four-fiscal-quarter period most recently ended, to be less than 3.0 to 1.0. (c) Leverage. (i) The Borrower will not permit, as of the end of any -------- fiscal quarter, the ratio of Consolidated Debt of the Borrower to Consolidated Cash Flow, computed in each case for the four-fiscal-quarter period most recently ended, to be greater than 2.0 to 1.0. (ii) The Borrower will not permit, as of the end of any fiscal quarter, the ratio of Consolidated Debt of the Borrower to Total Capitalization to be greater than 0.5 to 1.0. (d) Dividend Payments. The Borrower will not at any time declare, make or ----------------- pay, or incur any liability to make or pay, or cause or permit to be declared, made or paid any Dividend unless at the time of declaring such Dividend, and after giving effect thereto, the aggregate amount of all such Dividends declared or paid on or after January 1, 1998 shall not exceed an amount equal to the sum of (i) $50,000,000, plus (ii) 75 percent of Consolidated Net Income or Loss of the Borrower, excluding non-cash Non-Operating Special Items used in determining Consolidated Net Income or Loss, for the period commencing January 1, 1998 and ending with the most recently completed fiscal quarter of the Borrower (treated as a single accounting period). (e) Methodology for Determining Covenant Compliance. Notwithstanding any ------------------------------------------------ contrary provision of this Agreement, the Borrower's compliance with each of the covenants described in this Section shall be determined in accordance with the following methodology: 60 (1) In the event the Borrower, LCR, Equistar, Methanol or any Other Equity Person issues Debt ("Replacement Debt") for the purpose of refinancing Debt outstanding under any of such Person's public indentures or medium-term note programs ("Replaced Debt"), the aggregate principal amount of such Replacement Debt shall be substituted in place of the Replaced Debt for purposes of all determinations and the calculations, in paragraphs (a) and (c) of this Section; provided, however, that the Net -------- ------- Interest associated with such Replacement Debt of the Borrower shall be included in Interest Expense of the Borrower for purposes of the calculation in paragraph (b) of this Section; and further provided, that ------- -------- the treasurer of the Borrower shall certify to the Administrative Agent that such Replacement Debt will be used to refinance Replaced Debt. (2) The results of operations for, and all information pertaining to, the Borrower's most recently completed quarter or four fiscal quarter period, as applicable, shall be determined based upon the last quarter, or the four fiscal quarter period (the last quarter of which is the most recent quarter), for which the Borrower made a public announcement of its Consolidated Net Income or Loss. Section 5.10. No Subsidiary Debt. The Borrower will not permit any of ------------------ LRC, the Lyondell Equistar Partners, Lyondell Methanol GP or Lyondell Methanol LP to incur, issue, create, assume or permit to exist any Debt; provided, however, the foregoing prohibition will not apply to the Equistar Debt or any obligation of such Person in respect of LRC, Equistar or Methanol, as the case may be, by reason of that Person's legal status as an Owner of LCR or a partner of Equistar or Methanol, as the case may be. Section 5.11. Disposition of Interests in Subsidiaries. The Borrower ---------------------------------------- shall not convey, sell, assign, transfer, pledge or otherwise dispose of any of its equity interests in any of LRC, the Lyondell Equistar Partners, Lyondell Methanol GP or Lyondell Methanol LP; provided, however, the foregoing prohibition shall not apply if, after giving effect to any such disposition, the aggregate amount of Net Cash Proceeds (as such term is hereinafter defined) from all such dispositions actually received by the Borrower therefrom since the date of this Agreement does not exceed $100,000,000 or, if the aggregate amount of Net Cash Proceeds does exceed $100,000,000 (such excess Net Cash Proceeds being the "Excess Proceeds"), concurrently with the receipt of those Excess Proceeds from time to time, the Borrower reduces the Commitment Amount by an amount equal to 80% of the Excess Proceeds so received. Any reduction of the Commitments shall apply proportionately to the Commitment of each Bank in accordance with its Commitment Percentage and any such reduction shall be permanent. For purposes of this Section 5.11, "Net Cash Proceeds" means the sum of all cash (including all installments under any note when received) received in 61 connection with any such disposition, minus all reasonable fees, expenses and other costs incurred by the Borrower in connection with such disposition. ARTICLE VI DEFAULTS AND REMEDIES SECTION 6.01. Defaults. If one or more of the following events (herein -------- called "Events of Default") shall occur and be continuing: (a) the Borrower shall default in the payment when due of any principal of any Loan or any reimbursement obligation in respect of any Letter of Credit, or shall default in the payment within five days after the due date thereof of any interest on any Loan or any other amount payable hereunder; (b) the Borrower shall fail to perform or observe any covenant or agreement to be performed by it contained in Section 5.01(e), Section 5.02(b) or Sections 5.03 through 5.09; (c) the Borrower shall fail to perform or observe any covenant or agreement to be performed by it contained in this Agreement (other than those covered by paragraphs (a) or (b) above) for 30 consecutive days after written notice of such failure is given to the Borrower by the Administrative Agent at the request of any Bank; (d) the Borrower shall have made, or be deemed to have made pursuant to Section 3.02, any representation or warranty in this Agreement or in any certificate or other document delivered pursuant hereto or in respect of any financial statement delivered pursuant hereto, which shall prove to have been incorrect in any material respect when so made or deemed to have been made; (e) the Borrower or any of its Subsidiaries shall fail to pay any indebtedness for borrowed money (other than the Loans or any reimbursement obligation in respect of any Letters of Credit) payable or Guaranteed by it, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt or Guarantee; provided, however, that the aggregate amount of such Debt or Guaranteed -------- ------- Debt, including any accrued and unpaid interest or premium thereon, shall exceed $15,000,000; 62 (f) LRC shall be determined (upon exhaustion of all appeals and expiration of all cure periods as provided in the LCR Regulations) to be in default of any of its material obligations pursuant to the LCR Regulations or the Lyondell Equistar Partners shall be determined (upon exhaustion of all appeals and expiration of all cure periods as provided in the Equistar Partnership Agreement) to be in default of any of their material obligations pursuant to the Equistar Partnership Agreement; (g) the Borrower, any Restricted Subsidiary, LCR or Equistar shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall take any corporate action to authorize any of the foregoing, or shall fail generally to pay its debts as they become due, or shall admit in writing its inability to pay its debts as they become due; (h) an involuntary case or other proceeding shall be commenced against the Borrower, any Restricted Subsidiary, LCR or Equistar seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower, any Restricted Subsidiary, LCR or Equistar under the federal bankruptcy laws as now or hereafter in effect; (i) any member of the Controlled Group shall fail to pay when due an amount or amounts aggregating in excess of $25,000,000 which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Material Plan or a proceeding shall be instituted by a fiduciary of any Material Plan against any member of the Controlled Group to enforce Section 515 of ERISA and such proceeding shall not have been dismissed within 90 days thereafter; (j) a final, non-appealable judgment or order for the payment of money in excess of $15,000,000 shall be rendered against the Borrower, any 63 Restricted Subsidiary, LCR or Equistar and such judgment or order shall continue unsatisfied for a period of 30 days; then, and without notice upon the occurrence of an Event of Default specified in Section 6.01(g) or Section 6.01(h), or, by notice to the Borrower upon the occurrence and during the continuation of any other Event of Default, the Administrative Agent may and, upon the written request of the Required Banks shall, take any or all of the following actions: (i) declare the Banks' Commitments terminated, whereupon the Commitments of the Banks shall forthwith terminate immediately and any accrued and unpaid Facility Fee shall forthwith become due and payable without any other notice of any kind; (ii) declare the principal of and any accrued and unpaid interest in respect of all Loans and all Obligations owing hereunder, to be, whereupon the same shall become, forthwith due and payable without further presentment, demand, notice of demand or of dishonor and non-payment, protest, notice of protest, notice of intent to accelerate, declaration or notice of acceleration or any other notice of any kind, all of which are hereby waived by the Borrower; and (iii) direct the Borrower to pay, and the Borrower agrees that upon receipt of such notice (or upon the occurrence of an Event of Default specified in Section 6.01(g) or Section 6.01(h)), it will pay to the Administrative Agent such additional amount of cash as is equal to the aggregate Stated Amount of all Letters of Credit then outstanding to be held in an interest bearing account with the Administrative Agent, all such cash and interest to be held by the Administrative Agent as security for the Obligations of the Borrower hereunder and under the Notes and the other Loan Documents. SECTION 6.02. Other Remedies. Upon the occurrence and during the -------------- continuance of any Event of Default, the Administrative Agent, acting at the request of the Required Banks, may proceed to protect and enforce its rights, either by suit in equity or by action at law or both, or may proceed to enforce the payment of all amounts owing to the Agents and the Banks under the Loan Documents and interest thereon in the manner set forth herein or therein; it being intended by the parties hereto that, to the maximum extent permitted by applicable law, no remedy conferred herein or in any of the other Loan Documents is to be exclusive of any other remedy and each and every remedy contained herein or in any other Loan Document shall be cumulative and shall be in addition to every other remedy given hereunder and under the other Loan Documents now or hereafter existing at law or in equity or by a statute or otherwise. SECTION 6.03. Rights of Setoff. If any Event of Default shall have ---------------- occurred and be continuing, each Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other 64 indebtedness at any time owing by such Bank, or any branch, subsidiary or Affiliate of such Bank, to or for the credit or the account of the Borrower against any and all the Obligations of the Borrower now or hereafter existing under this Agreement and the other Loan Documents irrespective of whether or not such Bank or the Administrative Agent shall have made any demand under this Agreement, such Note, or the Obligations and although the Obligations may be unmatured. Each Bank agrees promptly to notify the Borrower after any such setoff and application made by such Bank, but the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Bank under this Section are in addition to other rights and remedies (including other rights of setoff) which such Bank may have. ARTICLE VII THE AGENTS SECTION 7.01. Appointment and Authorization. Each Bank irrevocably ----------------------------- appoints and authorizes each of the Administrative Agent, the Documentation Agent and the Auction Agent to take such action as Administrative Agent, the Documentation Agent or the Auction Agent, as the case may be, on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Administrative Agent, the Documentation Agent or the Auction Agent, as the case may be, by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. Agents and Affiliates. Each of the Administrative Agent --------------------- and the Documentation Agent shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though they were not the Agents, and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or LCR or any Affiliate thereof as if they were not the Agents hereunder. SECTION 7.03. Action by Agents. The obligations of the Administrative ---------------- Agent and the Auction Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agents shall not be required to take any action with respect to any Default, except as expressly provided in Article VI. The Documentation Agent shall have no duties or obligations hereunder. SECTION 7.04. Consultation with Experts. The Agents may consult with ------------------------- legal counsel, independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. 65 SECTION 7.05. Liability of Agents. NEITHER THE AGENTS NOR ANY OF THEIR ------------------- RESPECTIVE DIRECTORS, OFFICERS, AGENTS OR EMPLOYEES SHALL BE LIABLE TO ANY BANK FOR ANY ACTION TAKEN OR NOT TAKEN BY THEM IN CONNECTION HEREWITH (I) WITH THE CONSENT OR AT THE REQUEST OF THE REQUIRED BANKS OR (II) IN THE ABSENCE OF ITS OWN GROSS NEGLIGENCE, UNLAWFUL ACT OR WILLFUL MISCONDUCT. IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT THE AGENTS, THEIR RESPECTIVE DIRECTORS, OFFICERS, AGENTS OR EMPLOYEES SHALL BE INDEMNIFIED AND HELD HARMLESS BY THE BANKS FROM ALL COSTS, EXPENSES (INCLUDING COUNSEL FEES AND DISBURSEMENTS) CLAIMS, DEMANDS, ACTIONS, LOSSES OR LIABILITIES ARISING OUT OF THE NEGLIGENCE (WHETHER SOLE OR CONTRIBUTORY) OF SUCH PERSONS. Neither the Agents nor any of their directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any Credit Event hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Administrative Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Agents shall not incur any liability to any Bank by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) reasonably believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.06. INDEMNIFICATION. EACH BANK SHALL RATABLY IN ACCORDANCE --------------- WITH ITS COMMITMENT, INDEMNIFY EACH OF THE AGENTS (TO THE EXTENT NOT REIMBURSED BY THE BORROWER) AGAINST ANY COST, EXPENSE (INCLUDING COUNSEL FEES AND DISBURSEMENTS), CLAIM, DEMAND, ACTION, LOSS OR LIABILITY INCLUDING ANY LIABILITY ----------------------- FOR ANY OF THE AGENTS' OWN NEGLIGENCE (EXCEPT SUCH AS RESULT FROM SUCH AGENT'S - ------------------------------------- GROSS NEGLIGENCE, UNLAWFUL ACT OR WILLFUL MISCONDUCT) THAT SUCH AGENT MAY SUFFER OR INCUR IN CONNECTION WITH THIS AGREEMENT OR ANY ACTION TAKEN OR OMITTED BY SUCH AGENT HEREUNDER. IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT THE AGENTS, THEIR RESPECTIVE DIRECTORS, OFFICERS, AGENTS OR EMPLOYEES SHALL BE INDEMNIFIED AND HELD HARMLESS BY THE BANKS FROM ALL COSTS, EXPENSES (INCLUDING COUNSEL FEES AND DISBURSEMENTS) CLAIMS, DEMANDS, ACTIONS, LOSSES OR LIABILITIES ARISING OUT OF OR RESULTING FROM THE ORDINARY NEGLIGENCE (WHETHER SOLE OR CONTRIBUTORY) OF SUCH PERSONS. SECTION 7.07. Credit Decision. Each Bank acknowledges that it has, --------------- independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that 66 it will, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.08. Successor Agents. Any of the Agents may resign at any ---------------- time by giving written notice thereof to the Banks and the Borrower, with such resignation to be effective upon the acceptance by a successor Agent of its appointment as agent hereunder, as set forth below. Further, upon vote of the Required Banks, any of the Agents may be replaced by any other Bank consented to by the Borrower (which consent shall not be unreasonably withheld) and which Bank consents to assume the duties of such Agent being replaced; provided, -------- however, that upon any such resignation or removal, a remaining Agent (at its - ------- sole discretion) may assume the role and responsibilities of the resigning Agent, with the consent of the Borrower, which consent shall not be unreasonably withheld. If a remaining Agent chooses not to accept such appointment following a resignation, the Required Banks shall have the right to appoint a successor Agent, with the consent of the Borrower, which consent shall not be unreasonably withheld. If no successor Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a Bank or a commercial bank organized under the laws of the United States of America or of any state thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as an Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was an Agent. ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair. -------------------------------------------------------- If on or prior to the first day of any Interest Period for any Euro-Dollar Committed Borrowing: (1) the Administrative Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or 67 (2) the Required Banks advise the Administrative Agent that the Euro- Dollar Rate, as determined by the Administrative Agent, will not adequately and fairly reflect the cost to such Banks of funding their Euro-Dollar Committed Loans for such Interest Period, the Administrative Agent shall forthwith give notice thereof to the Borrower and the Banks; whereupon, until the Administrative Agent notifies the Borrower that the circumstances giving rise to such notice no longer exist, (A) the obligations of the Banks to make Euro-Dollar Committed Loans shall be suspended and (B) unless the Borrower notifies the Administrative Agent at least one Domestic Business Day before the date of any Euro-Dollar Committed Borrowing for which a Notice of Committed Borrowing has previously been given that it elects not to borrow on such date, such Euro-Dollar Committed Borrowing shall be made as a Base Rate Borrowing. SECTION 8.02. Illegality. If, after the Effective Date, the adoption of ---------- any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Committed Loans or its Euro-Dollar Competitive Loans and such Bank shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Banks and the Borrower whereupon until such Bank notifies the Borrower and the Administrative Agent that the circumstances giving rise to such suspension no longer exist (which such Bank shall do forthwith) the obligation of such Bank to make Euro-Dollar Committed Loans or its Euro-Dollar Competitive Loans shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the reasonable judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Committed Loans or its Euro-Dollar Competitive Loans to maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of each such affected Euro- Dollar Committed Loan or Euro-Dollar Competitive Loan, together with accrued interest thereon. Concurrently with prepaying each such affected Euro-Dollar Committed Loan or Euro-Dollar Competitive Loan, the Borrower shall borrow a Base Rate Loan and such Bank shall make such Base Rate Loan. SECTION 8.03. Increased Cost and Reduced Return. (a) If on or after --------------------------------- the Effective Date, in the case of any Loan or any obligation to make Loans or any 68 obligations to issue or participate in any Letters of Credit, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Parent or Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject any Bank (or its Applicable Lending Office) to any tax, duty or other charge with respect to its Euro-Dollar Committed Loans, its Competitive Loans or participation in Letters of Credit, its Committed Notes, its Competitive Notes or its obligation to make Euro-Dollar Committed Loans or issue Letters of Credit, or shall change the basis of taxation of payments to any Bank (or its Applicable Lending Office) of the principal of or interest on its Euro-Dollar Committed Loans, its Competitive Loans or Letters of Credit or any other amounts due under this Agreement in respect of its Euro-Dollar Committed Loans, its Competitive Loans or Letters of Credit or its obligation to make Euro-Dollar Committed Loans or issue or participate in Letters of Credit (except for changes in the rate of tax on the income of such Bank or its Applicable Lending Office or changes in franchise taxes imposed on it under applicable law); or (ii) shall impose, modify or deem applicable any reserve, special deposit, deposit insurance assessment or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding, with respect to any Euro- Dollar Committed Loan or Euro-Dollar Competitive Loan, any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 8.05) against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the London interbank market any other condition affecting its Euro-Dollar Committed Loans, its Competitive Loans, its Committed Notes, its Competitive Notes or its obligation to make Euro- Dollar Committed Loans; and the result of any of the foregoing is to increase the actual cost to such Bank (or its Applicable Lending Office) of making or maintaining any Euro-Dollar Committed Loan or Competitive Loan or issuing or participating in any Letter of Credit, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Committed Notes or Competitive Notes with respect thereto, by an amount reasonably deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank (without duplication of amounts otherwise payable hereunder) such additional amount or amounts as will 69 compensate such Bank for such increased cost or reduction with respect to such affected Euro-Dollar Committed Loan, Competitive Loan or Letter of Credit or such affected sum. (b) If any Bank shall have reasonably determined that the adoption of any applicable law, rule or regulation regarding capital adequacy or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Parent or Applicable Lending Office) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or has had the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank or its Parent could have achieved but for such adoption, change or compliance (taking into consideration such Bank's policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank (without duplication of amounts otherwise payable hereunder) such additional amount or amounts as will compensate such Bank or its Parent for such reduction. (c) Each Bank will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the Effective Date, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the reasonable judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section, setting forth the additional amount or amounts to be paid to it hereunder and setting forth in reasonable detail the basis for such compensation shall be conclusive in the absence of manifest error, and the amount set forth therein shall be payable by the Borrower within five days after receipt of such certificate. In determining such amount, such Bank may use any reasonable averaging and attribution methods. SECTION 8.04. Substitute Loans. If (i) the obligation of any Bank to ---------------- make Euro-Dollar Committed or Euro-Dollar Competitive Loans has been suspended pursuant to Section 8.01 or 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply (which such Bank shall do forthwith): 70 (a) all Loans which would otherwise be made by such Bank as Euro- Dollar Committed Loans or Euro-Dollar Competitive Loans, as the case may be, shall be made instead as Base Rate Loans, and (b) after each of its Euro-Dollar Committed Loans or Euro-Dollar Competitive Loans, as the case may be, has been repaid, all payments of principal which would otherwise be applied to repay such Euro-Dollar Committed Loans or Euro-Dollar Competitive Loans, as the case may be, shall instead be applied to repay its Loans made pursuant to Section 8.02 or clause (a) above. SECTION 8.05. Regulation D Compensation. Each Bank may require the ------------------------- Borrower to pay, contemporaneously with each payment of interest on Euro-Dollar Committed Borrowings or Euro-Dollar Competitive Borrowings, additional interest on the related Euro-Dollar Committed Loan or Euro-Dollar Competitive Loan of such Bank at a rate per annum equal to the excess of (i) (A) the applicable Euro-Dollar Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the rate specified in clause (i)(A). Any Bank electing to require payment of such additional interest (x) shall so notify the Borrower and the Administrative Agent, in which case such additional interest on the Euro-Dollar Committed Loans or Euro-Dollar Competitive Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least five Euro-Dollar Business Days after the giving of such notice and (y) shall notify the Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Committed Loans of the amount then due it under this Section. SECTION 8.06. Substitution of Bank. If (i) the obligation of any Bank -------------------- to make Euro-Dollar Committed Loans or Euro-Dollar Competitive Loans has been suspended pursuant to Section 8.01 or 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.05, or if any Bank has notified the Borrower that it is not capable of receiving payments without deduction or withholding pursuant to Section 2.19 the Borrower shall have the right, with the assistance of the Administrative Agent, to seek a mutually satisfactory substitute bank or banks (which may be one or more of the Banks) to purchase the Committed Notes or Competitive Notes for cash without recourse to such Bank and assume the Commitment and participation in any Letters of Credit of such Bank. Any such purchase shall be at par, shall be subject to the provisions of Section 2.15, shall be without prejudice to the Borrower's obligations under Section 9.04 and shall release such Bank from all further obligations under this Agreement. 71 ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices. All notices and other communications provided ------- for herein shall be in writing (including bank wire, telex, telegraph, telecopy, cable or similar writing) and shall be given to the intended recipient at the "Address for Notices" specified, if the intended recipient is the Borrower or any of the Agents, below its name on the signature pages hereof or, if the intended recipient is a Bank, in such Bank's Administrative Questionnaire, or, as to any party, at such other address as shall be designated by such party in a notice to the Borrower and the Administrative Agent. All notices and other communications shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, (iii) if given by telecopier, upon telephone confirmation that the telecopied document has been received by the individual to whom it was addressed, or (iv) if given by any other means, when delivered at the address specified in this Section; provided, however, that notices to the Administrative -------- ------- Agent under Article II or VIII hereof shall not be effective until received and notices to the Borrower under Section 6.01 shall not be effective until such notice is received. SECTION 9.02. No Waiver. No failure on the part of any of the Agents or --------- any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement or any Note shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement or any Note preclude any other or further exercise thereof or the exercise of any other right, power or privilege. To the extent permitted by applicable law, the remedies provided herein are cumulative and not exclusive of any remedies provided by law. SECTION 9.03. GOVERNING LAW. THIS AGREEMENT AND THE NOTES SHALL BE ------------- GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. SECTION 9.04. Expenses; Documentary Taxes; Indemnification. (a) The -------------------------------------------- Borrower shall pay, within 30 days after receipt of a reasonably detailed statement setting forth the amount and nature thereof, (i) all out-of-pocket expenses of the Agents, including the reasonable fees and disbursements of one firm serving as special counsel for both Agents, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Agents or any Bank, including reasonable fees and disbursements of 72 counsel (either outside counsel or in-house counsel, as the case may be), in connection with such Event of Default and collection and other enforcement proceedings resulting therefrom. The Borrower shall indemnify each Bank against any transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Agreement or the Notes. (B) THE BORROWER AGREES TO INDEMNIFY EACH BANK (AND ITS AFFILIATES DIRECTORS, OFFICERS, AGENTS AND EMPLOYEES) AND EACH AGENT (AND ITS AFFILIATES DIRECTORS, OFFICERS, AGENTS AND EMPLOYEES) AND HOLD EACH BANK AND EACH AGENT HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES, LOSSES, DAMAGES, COSTS AND EXPENSES OF ANY KIND (INCLUDING THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL (EITHER OUTSIDE COUNSEL OR IN-HOUSE COUNSEL, AS THE CASE MAY BE) FOR ANY BANK AND ANY AGENT IN CONNECTION WITH ANY INVESTIGATIVE, ADMINISTRATIVE OR JUDICIAL PROCEEDING, WHETHER OR NOT SUCH BANK OR SUCH AGENT SHALL BE DESIGNATED A PARTY THERETO) WHICH MAY BE INCURRED BY SUCH BANK, OR BY SUCH AGENT IN CONNECTION WITH ITS ACTIONS AS AN AGENT HEREUNDER, RELATING TO OR ARISING OUT OF ARTICLE VI OR VII OF THIS AGREEMENT OR ANY ACTUAL OR PROPOSED USE OF PROCEEDS OF LOANS HEREUNDER. (C) EACH AGENT AND EACH BANK ENTITLED TO INDEMNITY FROM THE BORROWER UNDER ANY PROVISION OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE INDEMNIFIED AND HELD HARMLESS TO THE EXTENT PROVIDED THEREUNDER AGAINST ANY AND ALL LOSSES, LIABILITIES, DAMAGES, CLAIMS, DEFICIENCIES, JUDGMENTS, COSTS OR REASONABLE EXPENSES RELATING TO ENVIRONMENTAL LAWS OR RELEASES IF ANY OF SUCH LOSSES, LIABILITIES, DAMAGES, CLAIMS, DEFICIENCIES, JUDGMENTS, COSTS OR EXPENSES RELATE TO VIOLATIONS OF REQUIREMENTS OF ENVIRONMENTAL LAWS RESULTING FROM ANY OF THE BORROWER'S AND ITS CONSOLIDATED SUBSIDIARIES' OPERATIONS (OTHER THAN AS A RESULT OF SUCH INDEMNIFIED PERSON'S ACTS OR OMISSIONS IF SUCH INDEMNIFIED PERSON IS DEEMED TO BE A "PERSON IN CONTROL" UNDER ANY STATE OR FEDERAL STATUTE OR REGULATION). (D) WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS BUT IN ALL EVENTS SUBJECT TO PARAGRAPH (E) OF THIS SECTION 9.04, IT IS THE EXPRESS INTENTION OF THE BORROWER AND THE OTHER PARTIES HERETO THAT EACH INDEMNIFIED PERSON ENTITLED TO INDEMNITY UNDER ANY PROVISION OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE INDEMNIFIED AND HELD HARMLESS TO THE EXTENT PROVIDED THEREUNDER AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DEFICIENCIES, JUDGMENTS OR REASONABLE EXPENSES ARISING OUT OF OR RESULTING FROM THE ORDINARY NEGLIGENCE (WHETHER SOLE OR CONTRIBUTORY) OF SUCH INDEMNIFIED PERSON. (E) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY OTHER DOCUMENT OR INSTRUMENT, IN NO EVENT SHALL THE BORROWER BE LIABLE TO ANY INDEMNIFIED PERSON IN 73 ANY MANNER WITH RESPECT TO ANY LIABILITIES DAMAGES, LOSSES, CLAIMS, DEFICIENCIES, JUDGMENTS, COSTS OR EXPENSES OF ANY KIND FOR ANY ACTS OR OMISSIONS CONSTITUTING GROSS NEGLIGENCE, AN UNLAWFUL ACT OR WILLFUL MISCONDUCT OR VIOLATION OF LAW ON THE PART OF SUCH INDEMNIFIED PERSON. SECTION 9.05. Amendments, Etc. Any provision of this Agreement or the ---------------- Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of any Agent are affected thereby, by such Agent); provided, however, -------- ------- that no such amendment, waiver or modification shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for increases to the Commitment of any Bank pursuant to Section 8.06 to which such Bank has agreed in writing), (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any termination of any Commitment, (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement or (v) amend or waive any provision of Section 3.01 or this Section 9.05. Notwithstanding the foregoing, the Administrative Agent and the Borrower shall have the right, without consent of the Required Banks, to amend the procedures for the extension of the Termination Date set forth in Section 2.01 to the extent the Administrative Agent shall determine such amendment to be necessary to ensure that the Banks will not be required to maintain capital against their Commitments under applicable rules, regulations and interpretations of bank regulatory authorities; provided, that no such amendment shall permit the extension of any -------- Bank's Commitment without the consent of such Bank. SECTION 9.06. Counterparts; Integration. This Agreement may be executed ------------------------- in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. SECTION 9.07. Successors and Assigns. (a) The provisions of this ---------------------- Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. 74 (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans or any or all of its Commitment Percentage of Letter of Credit Outstandings. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Agents, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Agents shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided, however, -------- ------- that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii), (iii) or (iv) of Section 9.05 without the consent of the Participant. The Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.14 and 9.04 and Article VIII with respect to its participating interest; provided, however, that all amounts payable to a Bank for the account -------- ------- of a Participant under Sections 2.14 and 9.04 and Article VIII shall be determined as if such Bank had not granted such participation to the Participant. An assignment or other transfer which is not permitted by subsection (c) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may, upon 5 days notice to the Administrative Agent and the Borrower, assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part of all (in minimum amounts of $10,000,000 and in multiples of $1,000,000), of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an instrument executed by such Assignee and such transferor Bank, with (and subject to) the written consent of the Borrower and the Administrative Agent; which shall not be unreasonably withheld; provided, however, that if an Assignee -------- ------- is the local Federal Reserve Bank branch for the region in which such Bank is located and is receiving a collateral assignment or is an Affiliate of such transferor Bank, no such consent shall be required. Upon execution by the transferor Bank, the Borrower, the Assignee and the Agents, and delivery of, such an instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to the extent of such assignment, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agents and 75 the Borrower shall make appropriate arrangements so that, if required, new Notes are issued to the Assignee. Prior to the issuance of any such new Note, the Assignee to which such Note is issued shall pay to the Administrative Agent a fee of $2,000.00. (d) No Assignee or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.03 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02 or 8.03 requiring such Bank to designate a different Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. (e) If the Reference Bank assigns its Notes to an institution that is not an Affiliate, the Administrative Agent shall, in consultation with the Borrower and with the consent of the Required Banks, appoint another bank to act as the Reference Bank hereunder. SECTION 9.08. Survival. The obligations of the Borrower under Article -------- VIII and Section 9.04 shall survive the repayment of the Loans and the satisfaction of the Letter of Credit Outstandings and the termination of the Commitments. SECTION 9.09. Acknowledgment. The Borrower acknowledges that the Banks -------------- have entered into this Agreement in reliance on the Borrower's assurance that the Borrower does not intend to use the proceeds of any Borrowings hereunder in a manner which would violate any applicable law or governmental rule or regulation. SECTION 9.10. Headings. The Table of Contents and Article and Section -------- headings used herein shall not affect the interpretation of any provision of this Agreement. SECTION 9.11. Sharing of Setoffs. Each Bank agrees that, if it shall, ------------------ by exercising any right of setoff or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Committed Note or Competitive Note held by it or any Letter of Credit Outstandings which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Committed Note or Competitive Note held by such other Bank or any Letter of Credit Outstandings (other than disproportionate payments to any Bank provided for by this Agreement), the Bank receiving such proportionately greater payment shall purchase such participation in the Committed Notes or the Competitive Notes held by, or the rights in respect of Letter of Credit Outstandings of, the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Committed Notes or the Competitive Notes and Letter 76 of Credit Outstandings held by the Banks shall be shared by the Banks pro rata; provided, however, that nothing in this Section shall impair the right of - -------- ------- any Bank to exercise any right of setoff or counterclaim it may have and to apply the amount recovered thereby to the payment of indebtedness of the Borrower other than its indebtedness under the Notes, or in respect of Letter of Credit Outstandings. If under any applicable bankruptcy, insolvency or other similar law, any Bank receives a secured claim in lieu of a setoff to which this Section applies, such Bank shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Banks entitled under this Section to share in the benefits of any recovery on such secured claim. SECTION 9.12. Collateral. Each of the Banks represents to the Agents ---------- and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.13. CONSENT TO JURISDICTION. (a) TO THE EXTENT PERMITTED BY ----------------------- APPLICABLE LAW, THE BORROWER IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY FEDERAL OR STATE COURT SITTING IN HARRIS COUNTY, TEXAS OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY NOTE OR ANY LETTER OF CREDIT. THE BORROWER IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. THE BORROWER AGREES THAT A FINAL, NONAPPEALABLE JUDGMENT IN ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH A COURT SHALL BE CONCLUSIVE AND BINDING UPON THE BORROWER AND MAY BE ENFORCED IN ANY FEDERAL OF STATE COURT SITTING IN THE STATE OF TEXAS (OR ANY OTHER COURTS TO THE JURISDICTION OF WHICH THE BORROWER IS OR MAY BE SUBJECT) BY A SUIT UPON SUCH JUDGMENT; PROVIDED, HOWEVER, THAT SERVICE OF PROCESS IS EFFECTED UPON THE -------- ------- BORROWER IN ONE OF THE MANNERS SPECIFIED IN SUBSECTION (b) OF THIS SECTION OR AS OTHERWISE PERMITTED BY LAW. (b) SERVICE OF PROCESS. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE ------------------ BORROWER HEREBY CONSENTS TO PROCESS BEING SERVED IN ANY SUIT, ACTION OR PROCEEDING REFERRED TO IN THE FIRST SENTENCE OF SUBSECTION (a) OF THIS SECTION IN ANY FEDERAL OR STATE COURT SITTING IN HARRIS COUNTY, TEXAS BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED AIR MAIL, POSTAGE PREPAID, RETURN RECEIPT REQUESTED, TO THE BORROWER AT ITS ADDRESS FOR NOTICES DETERMINED PURSUANT TO SECTION 9.01. THE BORROWER IRREVOCABLY WAIVES ALL CLAIM OF ERROR BY REASON 77 OF ANY SUCH SERVICE IN ANY SUIT, ACTION OR PROCEEDING BROUGHT BY ANY AGENT OR ANY BANK. THE BORROWER AGREES THAT SUCH SERVICE SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE BORROWER IN ANY SUCH SUIT, ACTION OR PROCEEDING AND SHALL BE TAKEN AND HELD TO BE VALID AND PERSONAL SERVICE UPON AND PERSONAL DELIVERY TO THE BORROWER. (c) NO LIMITATION ON SERVICE OR SUIT. NOTHING IN THIS ARTICLE IS INTENDED -------------------------------- TO AFFECT THE RIGHT OF ANY AGENT OR ANY BANK TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR LIMIT THE RIGHT OF ANY AGENT OR ANY BANK TO BRING PROCEEDINGS OTHERWISE PERMITTED BY LAW AGAINST THE BORROWER IN THE COURTS OF THE JURISDICTION OF ANY BANK'S LENDING OFFICE OR THE COURTS OF ANY JURISDICTION OR JURISDICTIONS IN WHICH THE BORROWER HAS ANY ASSETS. SECTION 9.14. FINAL AGREEMENT OF THE PARTIES. THIS AGREEMENT (INCLUDING ------------------------------ THE SCHEDULES AND EXHIBITS HERETO), THE NOTES AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(A) OF THE TEXAS BUSINESS AND COMMERCE CODE, AND REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 78 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. LYONDELL PETROCHEMICAL COMPANY By:________________________________________ Name: Jeffrey R. Pendergraft Title: Senior Vice President and Chief Administrative Officer Address for Notices: One Houston Center Suite 1600 1221 McKinney Street P.O. Box 3646 Houston, TX 77253-3646 Attn: Treasurer Telephone No.: (713) 652-7200 Telecopier No.: (713) 652-7430 TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Administrative Agent By:________________________________________ Name: D. G. Mills Title: Vice President Address for Notices: 712 Main Street Houston, TX 77002 Attn: Syndications Department Telephone No.: (713) 216-4037 Telecopier No.: (713) 216-2339 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Documentation Agent By:________________________________________ Name: Michael J. Dillon Title: Managing Director Address for Notices: 231 South LaSalle Street, 10th Floor Chicago, IL 60697 Attn: Gloria Turner Telephone No.: (312) 828-4575 Telecopier No.: (312) 974-9626 THE CHASE MANHATTAN BANK, as Auction Agent By:________________________________________ Name: Sandra J. Miklave Title: Vice President Address for Notices: 1 Chase Manhattan Plaza, 8th Floor New York, NY 10081 Attn: Christopher Consomer Telephone No.: (212) 552-7259 Telecopier No.: (212) 522-5627 A BANK: BANK OF AMERICA NATIONAL TRUST AND - ------ SAVINGS ASSOCIATION By:________________________________________ Name:______________________________________ Title:_____________________________________ A BANK: TEXAS COMMERCE BANK NATIONAL ASSOCIATION - ------ By:________________________________________ Name:______________________________________ Title:_____________________________________ A BANK: THE BANK OF NEW YORK - ------ By:________________________________________ Name:______________________________________ Title:_____________________________________ A BANK: THE BANK OF NOVA SCOTIA - ------ By:________________________________________ Name: F. C. H. Ashby Title: Senior Manager Loan Operations A BANK: THE BANK OF TOKYO-MITSUBISHI, LTD., - ------ HOUSTON AGENCY By:________________________________________ Name:______________________________________ Title:_____________________________________ A BANK: CREDIT LYONNAIS NEW YORK BRANCH - ------ By:________________________________________ Name:______________________________________ Title:_____________________________________ A BANK: THE FUJI BANK, LTD. - ------ By:________________________________________ Name: Jacques Azagury Title: Vice President and Manager A BANK: NATIONSBANK OF TEXAS, N.A. - ------ By:________________________________________ Name: Patrick M. Delaney Title: Senior Vice President A BANK: SOCIETE GENERALE, SOUTHWEST AGENCY - ------ By:________________________________________ Name:______________________________________ Title:_____________________________________ A BANK: UNION BANK OF SWITZERLAND - ------ By:________________________________________ Name:______________________________________ Title:_____________________________________ By:________________________________________ Name:______________________________________ Title:_____________________________________ A BANK: THE FIRST NATIONAL BANK OF CHICAGO - ------ By:________________________________________ Name:______________________________________ Title:_____________________________________ A BANK: BANK OF SCOTLAND - ------ By:________________________________________ Name:______________________________________ Title:_____________________________________ A BANK: THE LONG-TERM CREDIT BANK OF JAPAN, LTD. - ------ By:________________________________________ Name:______________________________________ Title:_____________________________________ A BANK: PNC BANK, NATIONAL ASSOCIATION - ------ By:________________________________________ Name:______________________________________ Title:_____________________________________ SCHEDULE I COMMITMENTS
Bank Commitment - ---- ---------- Bank of American National Trust and Savings Association $ 20,000,000 Texas Commerce Bank National Association $ 20,000,000 The Bank of New York $ 17,500,000 The Bank of Nova Scotia $ 17,500,000 The Bank of Tokyo-Mitsubishi, Ltd. $ 17,500,000 Credit Lyonnais New York Branch $ 17,500,000 The Fuji Bank, Ltd. $ 17,500,000 NationsBank of Texas, N.A. $ 17,500,000 Societe Generale, Southwest Agency $ 17,500,000 Union Bank of Switzerland $ 17,500,000 The First National Bank of Chicago $ 15,000,000 Bank of Scotland $ 10,000,000 The Long-Term Credit Bank of Japan, Lt.d $ 10,000,000 PNC Bank, National Association $ 10,000,000 ------------ Total Commitments $225,000,000 ============
SCHEDULE 5.03(C) None EX-10.3 6 EXECUTIVE RETIREMENT PLAN EXHIBIT 10.3 INSTRUMENT AMENDING AND RESTATING LYONDELL PETROCHEMICAL COMPANY SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN Lyondell Petrochemical Company hereby amends and restates the Supplementary Executive Retirement Plan, effective as of November 1, 1996, to read in its entirety as the document entitled "Lyondell Petrochemical Company Supplementary Executive Retirement Plan" that is attached hereto. IN WITNESS WHEREOF, the undersigned, being duly authorized on behalf of the Company, has executed this Instrument on this ___ day of June, 1997. ATTEST: LYONDELL PETROCHEMICAL COMPANY BY:_______________________ BY:___________________________________ Assistant Secretary Richard W. Park Vice President, Human Resources LYONDELL PETROCHEMICAL COMPANY - -------------------------------------------------------------------------------- SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN EFFECTIVE NOVEMBER 1, 1996 LYONDELL PETROCHEMICAL COMPANY SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN TABLE OF CONTENTS
PAGE ARTICLE I - GENERAL PROVISIONS.............................................................. 1 Section 1.1 Purpose and Intent of Plan.............................................. 1 Section 1.2 Effective Date of Plan.................................................. 2 Section 1.3 Costs of Plan........................................................... 2 Section 1.4 Definitions............................................................. 2 ARTICLE II - SUPPLEMENTARY BENEFITS......................................................... 6 Section 2.1 Types of Supplementary Benefits Provided................................ 6 Section 2.2 Eligibility in General.................................................. 6 (a) Eligibility for Participant's Benefit.............................. 6 (b) Eligibility for Survivor's Benefit................................. 6 Section 2.3 Amount of Supplementary Benefits (or Survivor Benefit) in General..................................................... 7 Section 2.4 Deferral/Incentive Supplement........................................... 8 (a) Eligibility for Deferral/Incentive Supplement...................... 8 (b) Amount of Deferral/Incentive Supplement............................ 8 (1) Participant's Benefit......................................... 8 (2) Survivor Benefit.............................................. 8 (3) Special Rule for Certain Participants.................................................. 9 (4) No Proration for Certain Portion of Deferral/Incentive Supplement...................... 9 (c) Maximum Limitation on Deferral/Incentive Supplement Benefits................................................ 9 (d) Computation Procedure.............................................. 9 (e) Termination of Employment.......................................... 10 Section 2.5 Qualification Limitation Supplement..................................... 10 (a) Eligibility for Qualification Limitation Supplement.............................................. 10 (b) Amount of Qualification Limitation Supplement...................... 10 (1) Participant's Benefit......................................... 10 (2) Survivor Benefit.............................................. 11
(i) LYONDELL PETROCHEMICAL COMPANY SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN TABLE OF CONTENTS (CONT'D)
Section 2.6 Special Supplements........................................ 11 (a) Change in Control Supplement............................... 11 (1) Eligibility for Change in Control Supplement............................................ 11 (2) Amount of Change in Control Supplement................ 11 (3) Form and Timing of Change in Control Supplement....... 13 (b) Other Special Supplements.................................. 13 ARTICLE III - FORM OF BENEFIT....................................................... 15 Section 3.1 Supplementary Benefits.......................................... 15 (a) Optional Forms of Benefit.................................. 15 (b) Elections.................................................. 15 Section 3.2 Special Supplements............................................. 16 ARTICLE IV - TIMING OF PAYMENT OF BENEFIT........................................... 17 Section 4.1 Supplementary Benefits.......................................... 17 Section 4.2 Special Supplements............................................. 17 ARTICLE V - BENEFITS ON CHANGE IN CONTROL........................................... 18 Section 5.1 Events Constituting a "Change in Control"....................... 18 Section 5.2 Amount of Benefit on Change in Control.......................... 20 Section 5.3 Form of Benefit on Change in Control............................ 20 Section 5.4 Payment on Change in Control.................................... 20 ARTICLE VI - ADMINISTRATION......................................................... 21 Section 6.1 Administrative Committee........................................ 21 Section 6.2 Rules of Conduct; Administrative Provisions..................... 21 Section 6.3 Legal, Accounting, Clerical and Other Services.................. 21 Section 6.4 Interpretation of Provisions.................................... 21 Section 6.5 Records of Administration....................................... 21 Section 6.6 Denial of Claim................................................. 21 Section 6.7 Liability of Committee.......................................... 22 ARTICLE VII - FACILITY OF PAYMENT AND LAPSE OF BENEFITS............................. 23 Section 7.1 Provisions for Incapacity....................................... 23 Section 7.2 Payments of Deposits............................................ 23
ii LYONDELL PETROCHEMICAL COMPANY SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN TABLE OF CONTENTS (CONT'D)
ARTICLE VIII - MISCELLANEOUS............................................... 24 Section 8.1 Unfunded Benefit Plan.................................. 24 Section 8.2 Unsecured General Creditor............................. 24 Section 8.3 Grantor Trust.......................................... 24 Section 8.4 Payments and Benefits Not Assignable................... 24 Section 8.5 No Right of Employment................................. 25 Section 8.6 Adjustments............................................ 25 Section 8.7 Obligation to Company.................................. 25 Section 8.8 Protective Provisions.................................. 25 Section 8.9 Gender, Singular and Plural............................ 25 Section 8.10 Law Governing.......................................... 26 Section 8.11 Validity............................................... 26 Section 8.12 Notice................................................. 26 Section 8.13 Successors and Assigns................................. 26 ARTICLE IX - AMENDMENT AND DISCONTINUANCE.................................. 27 Section 9.1 Amendment of Plan...................................... 27 Section 9.2 Termination............................................ 27 Section 9.3 Effect of Amendment or Termination..................... 27
(iii) ARTICLE I GENERAL PROVISIONS SECTION 1.1 PURPOSE AND INTENT OF PLAN. The Prior Plan was originally adopted in 1990 in conjunction with the adoption of the Atlantic Richfield Company Supplementary Executive Retirement Plan and the ARCO Chemical Company Supplementary Executive Retirement Plan, the provisions of which are substantially identical to the Prior Plan. Recognizing that an Employee may transfer among Lyondell Petrochemical Company, ARCO and ARCO Chemical Company during his service, each of the 3 companies has agreed to pay a prorata share of the Employee's benefit under Articles II and III (which were identical provisions under each of those 3 plans) of each of those 3 plans, and which articles related to Deferral/Incentive Supplements and Qualification Limitations, respectively. Subsequent to the adoption of the Prior Plan, Amendment No. 1 and Amendment No. 2 were adopted. It has now been determined to be desirable to adopt certain additional amendments that may become operative in the event of a potential change in control of Lyondell Petrochemical Company and, for ease of administration, to incorporate such amendments and the prior amendments into this amended and restated Plan document. Nothing in such restatement of the Plan is intended to reduce or adversely affect, solely as a result of such restatement, the rights or benefits to which any Participant or Beneficiary hereunder was entitled. Accordingly, this Plan is adopted as a complete amendment, restatement, and continuation of the Prior Plan under the provisions hereinafter set forth, without a gap or lapse in coverage, time, or effect. This Plan is intended to provide supplemental retirement allowances in accordance with the provisions of the Plan contained herein, to those Employees who: (a) have received Awards under the Lyondell Petrochemical Company Value Share Plan, the Lyondell Petrochemical Company Management Value Share Plan, the Lyondell Petrochemical Company Annual Incentive Plan, the Atlantic Richfield Company Annual Incentive Plan, the ARCO Chemical Company Annual Incentive Plan, and/or the LYONDELL-CITGO Refining Company Ltd. Annual Incentive Plan or its equivalent, (b) have deferred a portion of their Salary under the Lyondell Petrochemical Company Executive Deferral Plan, the Atlantic Richfield Company Executive Deferral Plan, the ARCO Chemical Company Key Management Deferral Plan, and/or the LYONDELL-CITGO Refining Company Ltd. Executive Deferral Plan, (c) have had the amount of their benefit reduced, due to federal legal requirements, under a tax-qualified, defined benefit retirement plan maintained by Lyondell Petrochemical Company, ARCO, ARCO Chemical Company, and/or LCR, or 1 (d) have been granted a Special Supplement in accordance with the provisions of Section 2.6 of this Plan. SECTION 1.2 EFFECTIVE DATE OF PLAN. This amended and restated Plan document shall be generally effective as of November 1, 1996 and shall apply to those Employees who are employed by the Company on or after November 1, 1996, except to the extent that certain provisions hereof specify that they are effective as of a different date. This Plan is an amendment and restatement of the Lyondell Petrochemical Company Executive Supplementary Retirement Plan, effective as of April 1, 1989; the Lyondell Petrochemical Company Retirement Benefit Restoration Plan, effective as of April 1, 1989; and the Prior Plan. SECTION 1.3 COSTS OF PLAN. All costs of this Plan, including the administration thereof, shall be borne by the Company and no Employee contributions shall be required or permitted. SECTION 1.4 DEFINITIONS. Actuarial Equivalent or Actuarially Equivalent mean, in comparing ---------------------------------------------- payable in different forms or at different times or in different circumstances, a value under one such set of circumstances which is the same as the value under a different set of circumstances. Such value shall be computed and determined with reference to mortality assumptions, interest rates and other actuarial factors and assumptions then in effect under the Retirement Plan for the purpose of calculating the actuarial equivalent under that Plan. Administrative Committee means the committee serving as the ------------------------ Administrative Committee of the Retirement Plan. ARCO means the Atlantic Richfield Company. ---- Award means a cash award made under the Lyondell Petrochemical Company ----- Value Share Plan, the Lyondell Petrochemical Company Management Value Share Plan, the Lyondell Petrochemical Company Annual Incentive Plan, the Atlantic Richfield Company Annual Incentive Plan, the ARCO Chemical Company Annual Incentive Plan, and/or the LYONDELL-CITGO Refining Company, Ltd. Annual Incentive Plan or its equivalent. Award does not include Deferred Cash as such term is used in the Lyondell Petrochemical Company Value Share Plan or Management Value Share Plan. Base Pay means "Annual Base Pay" as defined in the Retirement Plan. -------- 2 Basic Allowance means an annuity payable for the life of the --------------- Participant, with a guarantee that an amount equal to 60 monthly payments will be paid to the Participant and his Beneficiary. Beneficiary means a person who is entitled to receive the Survivor ----------- Benefit under Sections 2.4, 2.5 and/or 2.6(a) (and, if applicable, Section 2.6(b)) of this Plan in the event of the Participant's death. Change in Control Supplement means a supplementary benefit as described ---------------------------- in Section 2.6(a) of this Plan. Code means the Internal Revenue Code of 1986, as amended, including any ---- successor provisions thereof and any regulations or other guidance promulgated pursuant thereto by applicable governmental agencies. Company means Lyondell Petrochemical Company, a Delaware corporation, or ------- its successor. Deferral/Incentive Supplement means a Supplementary Benefit as described ----------------------------- under Section 2.4 of this Plan. Deferred Compensation means any amount of Salary which a Participant --------------------- elects to defer pursuant to the provisions of the Lyondell Petrochemical Company Executive Deferral Plan, Atlantic Richfield Company Executive Deferral Plan, the ARCO Chemical Company Key Management Deferral Plan, and/or the LYONDELL-CITGO Refining Company, Ltd. Executive Deferral Plan. Eligible Termination Date means, for purposes of Section 2.6(a), the ------------------------- date on which an Employee terminates employment with the Company for one or more of the reasons that entitle him to benefits under Section 3 of an Executive Severance Agreement entered into between such Employee and the Company. Employee means any person who is regularly employed by the Company on or -------- after October 1, 1990 and who is an exempt, salaried employee. ERISA means the Employee Retirement Income Security Act of 1974, as ----- amended, including any successor provisions thereof, and any regulations or other guidance promulgated pursuant thereto by applicable governmental agencies. Fifty Percent Joint and Survivor Annuity means an annuity providing ---------------------------------------- payments for the life of a Participant, with a survivor annuity for the life of his Beneficiary under which each payment to the Beneficiary is 50 percent of the reduced amount payable during the life of the Participant. Each reduced payment during the life of the Participant shall be a percentage of the amount otherwise 3 payable to the Participant in the form of a Basic Allowance, so that the Fifty Percent Joint and Survivor Annuity is the Actuarial Equivalent of the Basic Allowance otherwise payable to the Participant. Financial Hardship means a condition of financial difficulty, determined ------------------ by the Administrative Committee, upon advice of counsel, to be sufficient to justify a change of election of the form of benefit under Section 3.1 without causing, in the judgment of counsel, the receipt of taxable income by any other Participant in the Plan in advance of the payment to him of Plan benefits. LCR means LYONDELL-CITGO Refining Company, Ltd. --- Lump Sum means a single payment of the benefit that is the Actuarial -------- Equivalent of the Basic Allowance. Participant means an active Employee or a former Employee who, at time ----------- of his Termination of Employment, retirement or death was employed by the Company, ARCO, ARCO Chemical Company, or LCR and who is entitled to receive benefits under this Plan by reason of his having (a) received one or more Awards during the computation period that would be used in computing the Employee's Average Final Base Pay under the Retirement Plans if the Awards were recognized as a part of Base Pay under the Retirement Plans; (b) deferred a portion of his Salary during the computation period that would be used in calculating the Employee's Average Final Base Pay under the Retirement Plans if the Deferred Salary were recognized as a part of Base Pay under the Retirement Plans; (c) had his benefit under the Retirement Plans reduced due to required limitations under the Code or ERISA; (d) been granted a benefit described in Section 2.6(a) in connection with a change in control of Lyondell Petrochemical Company; and/or (e) been granted a Special Supplement pursuant to Section 2.6(b) of this Plan; and shall include a former Employee who has not received the entire benefit to which he is entitled under this Plan. Plan means this Supplementary Executive Retirement Plan of Lyondell ---- Petrochemical Company. Pre-Retirement Annuity means the annuity paid under the Retirement Plans ---------------------- to a survivor, that is attributable to Company contributions and that is payable on account of the Member's death prior to commencing a retirement allowance and following attainment of entitlement to a retirement allowance derived from Company contributions. Prior Plan means this Plan as in effect prior to its amendment and ---------- restatement in the form of this Plan. Proration Percentage means the percentage calculated in accordance with -------------------- Section 2.3 of this Plan. 4 Qualified Limitation Supplement means a Supplementary Benefit as ------------------------------- described under Section 2.5 of this Plan. Retirement Plan means the Lyondell Petrochemical Company Retirement Plan --------------- for Non-Represented Employees. Retirement Plans means the Lyondell Petrochemical Company Retirement ---------------- Plan for Non-Represented Employees and any other defined benefit, tax-qualified retirement plan, other than any such plan maintained exclusively or primarily for the benefit of employees represented by collective bargaining units, as defined in Section 3(35) of ERISA and Section 401(a) of the Code, maintained by the Company, ARCO or ARCO Chemical Company. Salary means the Employee's regular base salary paid by the Company, ------ ARCO, ARCO Chemical Company, and/or LCR, but excluding Awards and any other special or additional compensatory payments made by any such companies. Special Supplement means a supplementary retirement benefit approved for ------------------ payment to an Employee under Section 2.6(a) or Section 2.6(b) of this Plan. Subsidiary or Affiliate means: ----------------------------- (a) Any corporation, other than ARCO, that is a member of a controlled group of corporations within the meaning of Section 1563(a) of the Code (determined without regard to Section 1563(a)(4) and Section 1563(e)(3)(C) of said Code) and of which Lyondell Petrochemical Company is then a member, and (b) All trades or businesses, other than ARCO, whether or not incorporated, which, under the regulations prescribed by the Secretary of the Treasury pursuant to Section 210(d) of ERISA, are then under common control with Lyondell Petrochemical Company. Supplementary Benefit means any of the types of supplementary benefits --------------------- provided in Sections 2.4 or 2.5 of this Plan. Supplementary Benefits means, collectively, all Supplementary Benefits ---------------------- provided by this Plan, or all of such Supplementary Benefits to which a particular Participant is entitled, as the context requires. Survivor Benefit means any survivor benefit that is payable to a ---------------- Participant's Beneficiary under the provisions of Article II. Termination of Employment or Terminate Employment means a cessation of the performance of services as an employee for the Company, ARCO, ARCO Chemical Company, LCR or any Subsidiary or Affiliate of any of said companies; provided, -------- however, that in no event - ------- 5 will an individual be considered to have Terminated Employment for purposes of this Plan solely by reason of a change in the identity of his employer due to a sale of substantially all of the assets at which, or of the stock of the entity by which, such individual was employed immediately prior to such sale, in any case in which such individual continues, after such sale, to perform for the purchaser substantially the same services as he performed immediately prior to such sale. 6 ARTICLE II SUPPLEMENTARY BENEFITS SECTION 2.1 TYPES OF SUPPLEMENTARY BENEFITS PROVIDED. This Plan provides for the following types of Supplementary Benefits: (a) Deferral/Incentive Supplements, as described in Section 2.4; and (b) Qualification Limitation Supplements, as described in Section 2.5, In addition, the Plan provides for the discretionary award of Change in Control Supplements, as described in Section 2.6(a) and Special Supplements as described in Section 2.6(b). SECTION 2.2 ELIGIBILITY IN GENERAL. (a) ELIGIBILITY FOR PARTICIPANT'S BENEFIT. An Employee who either (i) retires on an allowance from the Retirement Plans that commences immediately, or that could have commenced immediately, upon his Termination of Employment; (ii) terminates employment with a nonforfeitable right to an allowance from the Retirement Plans commencing on a later date, or (iii) who has a non-forfeitable right to an allowance from the Retirement Plan at the time of a Change in Control shall automatically be eligible for each type of Supplementary Benefit provided by Sections 2.4 and 2.5 with respect to which he satisfies the specific eligibility requirements prescribed in the applicable Section of the Plan. Supplementary Benefits to which a Participant is entitled shall be paid in the form and at the time provided under Articles III and IV, respectively, without the necessity for filing an application for such benefits. (b) ELIGIBILITY FOR SURVIVOR'S BENEFIT. In the event of a Participant's death prior to the commencement of any Supplementary Benefit to which such Participant is entitled, any person who is designated by such Participant as his Beneficiary will be eligible to receive the Survivor Benefit that relates to the particular Supplementary Benefit to which such Participant was entitled; provided, however, that the Participant must designate the - -------- ------- same person as his Beneficiary for purposes of all Survivor Benefits payable under this Plan with respect to such Participant. Survivor Benefits to which such Beneficiary is entitled under this Article will automatically be paid to such person without the necessity for filing an application. In the case of the Participant's death prior to commencement of any such Supplementary Benefits without his having designated a Beneficiary, the Beneficiary shall be the Participant's spouse if the Participant was married at the time of death, and the Participant's estate if the Participant was single at the time of death. In the event of a Participant's death after the commencement of benefits under this Plan in a form that provides for the continuation of payments after such Participant's death, such payment of benefits shall continue in accordance with the terms and provisions of such form of benefit, unless otherwise required under Article V. 7 SECTION 2.3 AMOUNT OF SUPPLEMENTARY BENEFITS (OR SURVIVOR BENEFIT) IN GENERAL. (a) The total amount of a Participant's Supplementary Benefits (or Survivor Benefits, if applicable) payable under this Plan shall be the sum of the Participant benefits to which such Participant is entitled (or Survivor Benefits to which such Participant's Beneficiary is entitled, if applicable) under all types of Supplementary Benefits whose requirements are satisfied by or with respect to such Participant. (b) The benefits provided by this Plan are designated to coordinate with corresponding benefits provided by the Atlantic Richfield Company Supplementary Executive Retirement Plan ("ARCO SERP") and the ARCO Chemical Company Supplementary Executive Retirement Plan ("ARCO Chemical SERP"). Accordingly, with respect to each type of Supplementary Benefit provided by this Plan, the amount of Participant or Survivor Benefit, as applicable, payable by this Plan is a portion of the sum of separate, identical Supplementary Benefits prescribed under each applicable provision of this Plan, and related provisions pertaining to the same type of benefit under the ARCO SERP and the ARCO Chemical SERP. Therefore, the determination of the amount of each type of Supplementary Benefit payable to or with respect to any Participant from this Plan entails the calculation of the aggregate Supplementary Benefits payable from all three of such plans, followed by the allocation of a prorata portion of each such aggregate Supplementary Benefit to this Plan, as described hereinafter, which prorata portion is the benefit payable by this Plan with respect to that particular type of Supplementary Benefit. The portion of such aggregate Supplementary Benefit of each type that is payable to a Participant from this Plan is his "Proration Percentage" of his "Excess Retirement Benefit," as such terms are described herein. A Participant's Proration Percentage with respect to each type of Supplementary Benefit shall be the percentage that is equivalent to a fraction of which the numerator is the number of years of service credited to the Participant for benefit accrual purposes under the Retirement Plan and any other tax-qualified, defined benefit retirement plan maintained by the Company, and the denominator of which is the total number of years of service credited to the Participant for benefit accrual purposes under the Retirement Plans. A Participant's "Excess Retirement Benefit" means the excess of: (1) such Participant's "Hypothetical Amount" as defined separately for purposes of each type of Supplementary Benefit; over (2) the amount of monthly allowance the Participant is actually entitled to receive at retirement, in the form of the Basic Allowance, from the Retirement Plans. 8 SECTION 2.4. DEFERRAL/INCENTIVE SUPPLEMENT. (a) ELIGIBILITY FOR DEFERRAL/INCENTIVE SUPPLEMENT. An Employee shall be eligible for a Participant's Deferral/Incentive Supplement under the Plan if his Excess Retirement Benefit described in Section 2.4(b)(1)(ii) below is a positive amount. If a Participant who is entitled to receive a Deferral/Incentive Supplement dies prior to commencing receipt of such benefit, his Beneficiary will be paid a monthly Survivor Benefit described in Section 2.4(b)(2) below. (b) AMOUNT OF DEFERRAL/INCENTIVE SUPPLEMENT. (1) PARTICIPANT'S BENEFIT. Subject to Sections 2.4(b)(3), and 2.4(c), (d) and (e) below, the monthly amount of the Participant's Deferral/Incentive Supplement shall be: (i) such Participant's Proration Percentage, multiplied by: (ii) his Excess Retirement Benefit which, for purposes of the Deferral/Incentive Supplement, means (A) minus (B) where: (A) is such Participant's Hypothetical Amount, which, for this purpose, means the amount of monthly allowance the Participant would have received at retirement, in the form of the Basic Allowance, from the Retirement Plans if the Base Pay used in calculating such monthly allowance under the Retirement Plans had included the Participant's Awards and Deferred Compensation, and (B) is the amount of monthly retirement allowance such Participant is actually entitled to receive at retirement, in the form of the Basic Allowance, under the Retirement Plans. (2) SURVIVOR BENEFIT. The monthly amount of the Survivor Benefit payable with respect to a Participant who dies while entitled to but before commencing receipt of a Deferral/Incentive Supplement under this Plan shall be: (i) such Participant's Proration Percentage, multiplied by: (ii) (A) minus (B), where: (A) is the monthly Pre-Retirement Annuity that would be payable with respect to such Participant from the Retirement Plans if it were calculated on the basis of the Participant's Hypothetical Amount described in Section 2.4(b)(1)(ii)(A), and (B) is the monthly amount of Pre-Retirement Annuity actually payable with respect to such Participant from the Retirement Plans. 9 (3) SPECIAL RULE FOR CERTAIN PARTICIPANTS. For purposes of calculating the Hypothetical Amount described in Section 2.4(b)(1)(ii)(A), if the Participant transferred directly on or after July 1, 1993 from the employment of the Company to the employment of LCR, such calculation will take into account any Awards made to and deferred compensation elected by such Participant during or with respect to his employment by LCR, on the same basis that salary earned by the Participant while employed by LCR is taken into account in determining the Participant's benefits under the Retirement Plan. (4) NO PRORATION FOR CERTAIN PORTION OF DEFERRAL/INCENTIVE SUPPLEMENT. Notwithstanding the provisions of Sections 2.4(b)(1) and (2) above, the portion of a Participant's Deferral/Incentive Supplement that is attributable to his period of service with LCR (including any Awards, deferrals of Salary, and/or limitations on his retirement benefits under the defined benefit tax-qualified retirement plan maintained by LCR) shall not be prorated under the provisions of Section 2.4(b)(1), nor shall any related Survivor Benefit payable with respect to such a Participant be prorated under the provisions of Section 2.4(b)(2). Accordingly, the portion of a Participant's Hypothetical Amount that is attributable to period of service with LCR shall be subtracted from his total Hypothetical Amount before the balance of such Hypothetical Amount is subjected to the proration procedure described in Sections 2.4(b)(1) and (2); and any such Participant's Deferral/Incentive Supplement (or related Survivor Benefit, as applicable), to the extent attributable to his period of service with LCR shall be payable entirely from this Plan. (C) MAXIMUM LIMITATION ON DEFERRAL/INCENTIVE SUPPLEMENT BENEFITS. (1) Notwithstanding the provisions of Paragraphs (a) and (b) of this Section 2.4, the amount of Deferral/Incentive Supplement payable to a Participant (or Survivor Benefit payable with respect to such Participant, as applicable) shall be limited to the extent necessary so that the total annual benefits payable to or with respect to such Participant (i) from the Retirement Plans under the form of allowance elected under the Retirement Plans; (ii) as a Qualification Limitation Supplement, if any, payable under Section 2.5 of this Plan; (iii) as a Deferral/ Incentive Supplement, payable under this Section 2.4; and (iv) added to the sum of any corresponding deferral/incentive supplementary benefits to which such Participant is entitled under the ARCO SERP and/or the ARCO Chemical SERP, will not exceed 65 percent of the greater of (i) the sum of the Participant's annual Salary as of his Termination of Employment plus his most recent Award, or (ii) the average, during the Participant's prior ten years of employment with the Company, ARCO, ARCO Chemical Company and/or LCR, of the Participant's highest 3 consecutive years of Salary and Awards during each year. (2) Annuities resulting from voluntary employee contributions to the Retirement Plans and increased benefits resulting from election of a Level Income Option under the Retirement Plans shall not be considered in applying the foregoing limitations. (D) COMPUTATION PROCEDURE. For purposes of computing the amount of monthly benefit payable as a Deferral/Incentive Supplement under Sections 2.4(b)(1) or 2.4(b)(2), as 10 applicable, it shall be assumed that an Award has been made with respect to the calendar year in which a Change in Control occurred or in which a Participant's Termination of Employment or death occurs that is equal in amount to a prorata share of the Award, if any, made with respect to the calendar year immediately preceding such event. If the Participant receives an Award following Termination of Employment and after commencement of a Deferral/Incentive Supplement, such benefits shall be re-calculated, using the actual Award granted subsequent to the Participant's Termination of Employment rather than the Award calculated on the prorata basis; provided, however, that such re-calculation shall not result -------- ------- in a reduction of the Deferral/Incentive Supplement that has commenced. If a Participant receives an Award following a Change in Control, benefits shall not be recalculated. (E) TERMINATION OF EMPLOYMENT. Unless a Participant, at the time of his Termination of Employment or at the time of a Change in Control, is eligible for an immediate or deferred retirement allowance from the Retirement Plans or unless a Survivor Benefit is payable under Section 2.4(b)(2) by reason of the death of the Participant, rights of the Participant, and any person claiming under or by right of the Participant, to any Deferral/Incentive Supplement benefits shall cease. SECTION 2.5 QUALIFICATION LIMITATION SUPPLEMENT. (a) ELIGIBILITY FOR QUALIFICATION LIMITATION SUPPLEMENT. An Employee shall be eligible for a Participant's Qualification Limitation Supplement under this Plan if his Excess Retirement Benefit described in Section 2.5(b)(1)(ii) is a positive amount. If a Participant who is entitled to receive a Qualification Limitation Supplement dies prior to commencing receipt of such benefit, his Beneficiary will be paid a monthly Survivor Benefit described in Section 2.5(b)(2) below. (b) AMOUNT OF QUALIFICATION LIMITATION SUPPLEMENT. (1) PARTICIPANT'S BENEFIT. The monthly amount of the Participant's Qualification Limitation Supplement shall be: (i) such Participant's Proration Percentage, multiplied by: (ii) his Excess Retirement Benefit which, for purposes of this Qualification Limitation Supplement, means (A) minus (B) where: (A) is such Participant's Hypothetical Amount, which, for this purpose, means the amount of monthly allowance the Participant would have received, at retirement, in the form of the Basic Allowance, from the Retirement Plans if the amount of the Participant's retirement allowance under such plans, on which such annuity is based, were not subject to limitations or reductions required under the Code or ERISA, and 11 (B) is the amount of monthly allowance such Participant is actually entitled to receive at retirement, in the form of the Basic Allowance, from the Retirement Plans. 12 (2) SURVIVOR BENEFIT. The monthly amount of the Survivor Benefit payable with respect to a Participant who dies while entitled to but before commencing receipt of a Qualification Limitation Supplement under this Plan shall be: (i) such Participant's Proration Percentage, multiplied by: (ii) (A) minus (B), where: (A) is the monthly Pre-Retirement Annuity that would be payable from the Retirement Plans if the amount of the Participant's retirement allowance under such plans, on which such annuity is based, were not subject to limitations or reductions required under the Code or ERISA, and (B) is the actual monthly Pre-Retirement Annuity Payable from the Retirement Plans with respect to such Participant. SECTION 2.6 SPECIAL SUPPLEMENTS. (a) CHANGE IN CONTROL SUPPLEMENT. (1) ELIGIBILITY FOR CHANGE IN CONTROL SUPPLEMENT. An Employee is eligible for a Change in Control Supplement if his Termination of Employment occurs under circumstances that entitle him to receive benefits provided under Section 3 of an Executive Severance Agreement entered into between such Employee and the Company. (2) AMOUNT OF CHANGE IN CONTROL SUPPLEMENT. (i) PARTICIPANT'S BENEFIT. A Participant who is eligible under Section 2.6(a)(1) for a Change in Control Supplement will receive a monthly benefit that is: (A) such Participant's Proration Percentage, multiplied by: (B) his Excess Retirement Benefit which, for purposes of this Change in Control Supplement means, (I) minus (II) where: (I) is such Participant's Hypothetical Amount, as defined in Section 2.6(a)(2)(i)(C) below, and (II) is the aggregate amount of monthly allowance the Participant is actually entitled to receive from this Plan (other than any Change in Control Supplement to which a Participant is entitled by reason of this Section 2.6(a)), and from the Retirement Plans, determined as of such Participant's Eligible Termination Date, in the form of the Basic Allowance under the Retirement Plans. 13 (C) HYPOTHETICAL AMOUNT. For purposes of determining the amount of a Change of Control Supplement, an Participant's Hypothetical Amount shall be the amount of monthly allowance he would have been entitled to receive from this Plan (other than any Change in Control Supplement to which a Participant is entitled by reason of this Section 2.6(a)), and from the Retirement Plans in the form of a Basic Allowance under the Retirement Plans, determined as of his Eligible Termination Date, if such Basic Allowance were calculated as though: (I) Such Participant's age were 5 years greater than his actual age at such time; (II) such Participant had been credited for benefit accrual purposes with 5 additional years of service; provided, however, that if -------- ------- such Participant is age 60 or older at his Eligible Termination Date, the additional years of service for benefit accrual shall be the number of years (including fractional years) remaining until he reaches the age of 65 years; and (III) such Participant's average final compensation taken into account under the Retirement Plans were the sum of: (x) his annualized Salary (as in effect on his Eligible Terminate Date); and (y) the greatest of: (i) his Award for the most recent plan year (as defined in the applicable plans); (ii) the average of his Awards for his last 3 calendar years of employment with the Company, ARCO, ARCO Chemical Company and/or LYONDELL-CITGO Refining Company, Ltd.; or (iii) the average amount of Awards and Deferred Compensation that would be used in the calculation of the Deferral Incentive Supplement in Section 2.4(b)(1)(ii)(A) above; For purposes of determining a Participant's "average final compensation" under Section 2.6(a)(2)(i)(C)(III), in the case of a Participant who is subject to a "Constructive Termination for Good Reason" (as such term is defined in an Executive Severance Agreement entered into between such Participant and the Company) because (a) his Salary was reduced, then in lieu of his "annualized Salary as in effect on his Eligible Termination Date" described in subclause (III)(x) above, his annual Salary as in effect immediately before such reduction of his Salary shall be used for purposes of such subclause (III)(x); and/or (b) his Award was reduced as a result of an adverse change in plan terms, then in lieu of his "Award for the most 14 recent plan year" as described in subclause (III)(y)(i) above, his Award as in effect immediately before such reduction of his Award shall be used for purposes of subclauses (III)(y)(i), (ii) and (iii). (ii) SURVIVOR BENEFIT. The monthly amount of the Survivor Benefit payable under this Plan with respect to a Participant who dies both while entitled to a Change in Control Supplement and before commencing receipt of such Change in Control Supplement, shall be: (A) such Participant's Proration Percentage, multiplied by: (B) (I) minus (II), where: (I) is the monthly Pre-Retirement Annuity that would be payable with respect to the Participant from this Plan (other than any Change in Control Supplement to which the Participant is entitled by reason of Section 2.6(a), and from the Retirement Plans if it were calculated on the basis of the Participant's Hypothetical Amount described in Section 2.6(a)(2)(i)(C), and (II) is the monthly amount of Pre-Retirement Annuity actually payable with respect to such Employee under this Plan (other than any Change in Control Supplement to which the Participant is entitled by reason of Section 2.6(a), and from the Retirement Plans. (3) FORM AND TIMING OF CHANGE IN CONTROL SUPPLEMENT. If, at the time of his Termination of Employment, a Participant is entitled to a Change in Control Supplement, the Change in Control Supplement shall be paid immediately after his Termination of Employment in a lump sum cash payment. The provisions of this Paragraph 3 shall apply both to such Participant's benefit and to a Survivor Benefit payable with respect to such Participant. (b) OTHER SPECIAL SUPPLEMENTS. In addition to any other Supplementary Benefits and/or Change in Control Supplement to which an Employee may be entitled under this Plan, at its sole discretion the Compensation Committee of the Board of Directors of Lyondell Petrochemical Company may award a Special Supplement to any Employee in such amount, or to be computed on such basis, as it may determine. Such awards may be granted for any reason deemed appropriate by such Compensation Committee, including without limitation, recognition of all or any part of the Employee's years of service with an organization or entity acquired by, or merged into, Lyondell Petrochemical Company, any of its Subsidiaries or Affiliates, or by any predecessor company of Lyondell Petrochemical Company or any of its Subsidiaries or Affiliates. In no event shall a Special Supplement be granted under the Plan to or on account of any Employee who is not a member of a select group of management or other highly compensated employees as defined from time to time by the Compensation Committee. A certified copy of the resolutions granting a Special Supplement shall be furnished to the Administrative Committee prior to the date any payment on account thereof is to be made under the Plan. The form, the time of commencement, 15 the duration of any periodic payments, 16 and any other relevant factors affecting the Company's obligation for providing a Special Supplement to an Employee, or any related Survivor Benefit to such Employee's Beneficiary if such benefit is specified by such Compensation Committee, shall be determined in the sole discretion of the aforementioned Compensation Committee and shall be set forth in the certified copy of the resolutions furnished to the Administrative Committee. 17 ARTICLE III FORM OF BENEFIT SECTION 3.1. SUPPLEMENTARY BENEFITS. (a) OPTIONAL FORMS OF BENEFIT. Except as provided in Article V, the Participant may elect to receive payment of his Supplementary Benefits described in Sections 2.4 and 2.5 in any form available for payment of the normal retirement benefit under the Retirement Plan, provided that (1) the same form of payment must be elected for all Supplementary Benefits to which such Participant is entitled and (2) if the Participant elects a form of annuity for such Supplementary Benefits and under the Retirement Plan, then he must elect the same form of annuity under this Plan and the Retirement Plans. (b) ELECTIONS. (1) The Participant must elect the form of payment of his Supplementary Benefit within the time period, and on the election form, prescribed by the Administrative Committee and communicated to the Participant in advance of the date the Participant is eligible to commence Supplementary Benefit payments. (2) If the Participant fails to file an election of the form of Supplementary Benefit payment within the time period designated by the Administrative Committee, then upon retirement the Participant may only elect one of the forms of annuity then available under the Retirement Plan. Absent an election of a specific form of annuity at the time of retirement, the Participant will receive (i) an annuity payment in the form of a Fifty Percent Joint and Survivor Annuity, with the surviving spouse as the Beneficiary, if the Participant is married at the time of retirement, or (ii) an annuity in the form of the Basic Allowance, if the Participant is single at the time of retirement. (3) If the Participant makes an election of the form of payment of his benefit within the time period designated by the Administrative Committee and subsequently wishes to change such election prior to commencement of the benefit or, in the case of an annuity form of payment under which payments have commenced, to receive the Actuarial Equivalent of the remaining annuity installments, then he may request, by written application to the Administrative Committee, to change the form of payment previously elected, (i) without any reduction in, or imposition of any penalty on, the amount of Supplementary Benefits to which the Participant is entitled under the Plan, provided that the Administrative Committee determines that the Participant has experienced a Financial Hardship justifying the request for a change of election, or (ii) the Administrative Committee, in its sole discretion, determines that it is appropriate to grant the Participant's request. 18 (4) The Participant may elect the form of payment of the Survivor Benefit that is payable in the event of the Participant's death prior to commencement of his benefit. If the Participant fails to make the election, payment to the Beneficiary will be in the form of a life annuity, payable for the life of Beneficiary and having a value equal to the Actuarially Equivalent value of such Survivor Benefit payable in any other available form for payment. However, the Beneficiary may request the Administrative Committee to change the Participant's prior election provided that the Administrative Committee makes a finding as described in either clause (i) or (ii) under Section 3.1(b)(3). SECTION 3.2 SPECIAL SUPPLEMENTS. The form of payment of any Special Supplement described in Section 2.6(b), including any Survivor Benefit provisions, shall be determined by the Compensation Committee of the Board of Directors of Lyondell Petrochemical Company and prescribed in such Committee's resolutions conferring such benefit. 19 ARTICLE IV TIMING OF PAYMENT OF BENEFIT SECTION 4.1 SUPPLEMENTARY BENEFITS. (a) Supplementary Benefits payable to a Participant under Sections 2.4 and 2.5 shall commence at the same time as the Participant's benefits commence under the Retirement Plan; provided, however, that the Participant may -------- ------- elect that the Survivor Benefit payable upon his death prior to commencement of benefits under Section 2.4 and 2.5 be paid immediately following his death in the form of a Lamb Sum, rather than being paid on the Participant's earliest retirement eligibility date; and provided, further, that if the Participant -------- ------- elects to take his benefit as a Lump Sum the benefit shall be payable in accordance with the applicable procedures established by the Administrative Committee. (b) Survivor Benefits payable under Sections 2.4(b)(2) and 2.5(b)(2) shall normally be paid in one of the optional forms of payment available under the Retirement Plan, with payments commencing on the earliest date the Participant would have become eligible to begin receiving a retirement allowance under such Retirement Plan; provided, however, that the -------- ------- Beneficiary may elect to receive a Lump Sum payment of the Actuarial Equivalent of the Basic Allowance at the time of the Participant's death, subject to the requirements described in Section 3.1(b)(4). SECTION 4.2 SPECIAL SUPPLEMENTS. Any Special Supplement payable under Section 2.6(b) shall be payable at the time or times determined by the Compensation Committee of the Board of Directors of Lyondell Petrochemical Company and prescribed in such Committee's resolutions conferring such benefit. 20 ARTICLE V BENEFITS ON CHANGE IN CONTROL SECTION 5.1 EVENTS CONSTITUTING A "CHANGE IN CONTROL". ----------------------------------------- For purposes of this Plan, a Change in Control will be deemed to have occurred as of the date that one or more of the following occurs: (a) 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; (b) 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 80 percent or more of (a) the then outstanding common stock or other equity interests of the corporation or other entity surviving or 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; 21 (c) 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 (c); (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 20 percent 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 20 percent 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 (c) 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 (c); or (d) ARCO shall become the owner, directly or indirectly, of securities of the Company representing in the aggregate more than 50 percent 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 beneficially owned by ARCO to more than 50 percent of the Common Shares then outstanding, or (y) the proportionate voting power represented by the Voting Securities beneficially owned by ARCO to more than 50 percent 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 (d), 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 the Plan, no Change in Control shall be deemed to have occurred pursuant to this Subsection (d) 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 result of such subsequent sale or other 22 disposition by ARCO, no Change in Control would otherwise be deemed to have occurred pursuant to the terms (excluding this proviso) of this Subsection (d). 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. SECTION 5.2 AMOUNT OF BENEFIT ON CHANGE IN CONTROL. The amount of Supplementary Benefits of each type payable under Sections 2.4 and 2.5, including Survivor Benefits and the Basic Allowance used in those Sections shall be determined by using the number of years of service credited to the Participant at the time of the Change in Control and the Base Pay in effect immediately prior to the Change in Control. Service and Base Pay following Change in Control shall be disregarded for purposes of calculating the amount of Supplementary Benefits payable under this Plan. SECTION 5.3 FORM OF BENEFIT ON CHANGE IN CONTROL. A Participant's Supplementary Benefits and any Survivor Benefit described in Article II shall be paid in a Lump Sum. SECTION 5.4 TIME OF PAYMENT ON CHANGE IN CONTROL. Supplementary Benefits under Sections 2.4 and 2.5, Change in Control Supplement, and any Special Supplement under 2.6 shall be payable immediately following a Change in Control, unless the Participant has previously elected an alternate payment commencement date, as established under the Administrative Committee procedures. 23 ARTICLE VI ADMINISTRATION SECTION 6.1 ADMINISTRATIVE COMMITTEE. The Benefits Administrative Committee of Lyondell Petrochemical Company shall act as the Administrative Committee of this Plan. SECTION 6.2 RULES OF CONDUCT; ADMINISTRATIVE PROVISIONS. The Administrative Committee shall adopt such rules or the conduct of its business and the administration of this Plan as it considers desirable; provided, however, that such rules shall not conflict with the provisions of - -------- ------- this Plan. Except as otherwise specifically provided in this Plan, all of the administrative provisions (such as the benefit claims procedures) contained in the Lyondell Petrochemical Company 401(k) and Savings Plan shall be applicable to the administration of this Plan. SECTION 6.3 LEGAL, ACCOUNTING, CLERICAL AND OTHER SERVICES. The Administrative Committee may authorize one or more of its members or any agent to act on its behalf and may contract for legal, accounting, clerical and other services to carry out this Plan. All expenses of the Administrative Committee shall be paid by the Company. SECTION 6.4 INTERPRETATION OF PROVISIONS. The Administrative Committee shall have the exclusive right and discretionary authority to interpret the provisions of this Plan and to decide questions arising in its administration. The decisions and interpretations of the Administrative Committee shall be final and binding on the Company, Employees and all other persons. SECTION 6.5 RECORDS OF ADMINISTRATION. The Administrative Committee shall keep records reflecting the administration of this Plan, which shall be subject to audit by the Company. 24 SECTION 6.6 DENIAL OF CLAIM. The Administrative Committee shall provide adequate notice in writing to any Participant or Beneficiary whose claim for benefits under this Plan has been denied, setting forth the specific reasons for such denial. The Participant or Beneficiary will be given an opportunity for a full and fair review by the Administrative Committee of the decision denying the claim. The Participant or Beneficiary shall be given 60 days from the date of the notice denying any such claim within which to request such review. SECTION 6.7 LIABILITY OF COMMITTEE. No member of the Administrative Committee shall be liable for any action taken in good faith or for exercise of any power given the Administrative Committee, or for the actions of other members of said Administrative Committee. 25 ARTICLE VII FACILITY OF PAYMENT AND LAPSE OF BENEFITS SECTION 7.1 PROVISIONS FOR INCAPACITY. If the Administrative Committee deems any person who is entitled to receive any payment under the provisions of this Plan to be incapable of receiving or disbursing the same by reason of minority, illness or infirmity, mental incompetence, or incapacity of any kind, the Administrative Committee may, in its sole discretion, take any one or more of the following actions: it may apply such payment directly for the comfort, support and maintenance of such person; it may reimburse any person for any such support previously supplied to the person entitled to receive any such payment; or it may pay such payment to any other person selected by the Administrative Committee to disburse such payment for the comfort, support and maintenance of the person entitled thereto, including, without limitation, to any relative who has undertaken, wholly or partially, the expense of such person's comfort, care and maintenance, or any institution in whose care or custody the person entitled to the payment may be. The Administrative Committee may, in its sole discretion, deposit any payment due to a minor to the minor's credit in any savings or commercial bank of the Administrative Committee's choice. SECTION 7.2 PAYMENTS OF DEPOSITS. Payments or deposits made pursuant to any provisions of this Article VII shall be a complete discharge, to the extent thereof, of all liability under the provisions of this Plan, or otherwise, of the Administrative Committee, the Company and this Plan, and the receipt by the person or persons receiving any such payment, distribution or deposit shall be a complete acquittance therefor, and there shall be no liability to see to the application of any payments, distributions or deposits so made. 26 ARTICLE VIII MISCELLANEOUS SECTION 8.1 UNFUNDED BENEFIT PLAN. (a) Benefits under Sections 2.4 and 2.6 of this Plan are intended to constitute a plan that is unfunded and maintained primarily for the purpose of providing deferred compensation in the form of additional retirement benefits to a select group of management or highly compensated employees as defined in Sections 201(a)(2), 301(a)(3) and 401(a)(1) of ERISA. (b) Benefits under Section 2.5 of this Plan are intended to constitute an unfunded, "excess benefit plan" within the meaning of Section 3(36) of ERISA. SECTION 8.2 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries shall have no legal or equitable rights, claims or interests in any specific assets or property of the Company, nor shall they be the Beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts, or the proceeds therefrom owned, or which may be acquired by, the Company (the "Policies"). Any such Policies or other assets of the Company shall be, and remain, the general, unpledged, unrestricted assets of the Company. The Company's obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Company to pay money in the future. SECTION 8.3 GRANTOR TRUST. Although the Company is responsible for the payment of all benefits under the Plan, the Company may, in its discretion, contribute funds to a grantor trust for the purpose, as it deems appropriate, of paying benefits under this Plan. Such trust may be irrevocable, but assets of the trust shall be subject to the claims of creditors of Lyondell Petrochemical Company. To the extent any benefits provided under the Plan are actually paid from the trust, the Company shall have no further obligation with respect thereto but to the extent not so paid, such benefits shall remain the obligation of, and shall be paid by, the Company. The Employees shall have the status of unsecured creditors insofar as their legal claim for benefits under the Plan and the Employees shall have no security interest in the grantor trust. SECTION 8.4 PAYMENTS AND BENEFITS NOT ASSIGNABLE. Payments to and benefits under this Plan are not assignable, transferable or subject to alienation since they are primarily for the support and maintenance of the Participants and their joint annuitants or Beneficiaries after retirement. Likewise, such payments shall not be subject to attachments by creditors of, or through legal process against, the Company, the Administrative Committee or any Participant. 27 SECTION 8.5 NO RIGHT OF EMPLOYMENT. The provisions of this Plan shall not give an Employee the right to be retained in the service of the Company nor shall this Plan or any action taken under the Plan be construed as a contract of employment. SECTION 8.6 ADJUSTMENTS. At the request of the Company, the Administrative Committee may, with respect to a Participant, adjust such Participant's benefit under this Plan or make such other adjustments with respect to such Participant as are required to correct administrative errors or provide uniform treatment of Participants in a manner consistent with the intent and purpose of this Plan. SECTION 8.7 OBLIGATION TO COMPANY. If a Participant becomes entitled to a distribution of benefits under the Plan, and if at such time the Participant has outstanding any debt, obligation, or other liability representing an amount owing to the Company, or any benefit plan maintained by the Company, then the Company may offset such amount owed to it or such benefit plan against the amount of benefits otherwise distributable. Such determination shall be made by the Administrative Committee. SECTION 8.8 PROTECTIVE PROVISIONS. Each Participant shall cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Company may deem necessary, and taking such other relevant action as may be requested by the Company. If a Participant refuses to cooperate, the Company shall have no further obligation to the Participant under the Plan. If the Participant makes any material misstatement of information or nondisclosure of medical history, then no benefits will be payable hereunder to such Participant or his Beneficiary; provided, however, that in the Company's sole discretion, benefits -------- ------- may be payable in an amount reduced to compensate the Company for any loss, cost, damage or expense suffered or incurred by the Company as a result in any way of any such action, misstatement or nondisclosure. SECTION 8.9 GENDER, SINGULAR AND PLURAL. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity of the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular. 28 SECTION 8.10 LAW GOVERNING. This Plan shall be construed, regulated and administered under the laws of the State of Texas, except to the extent that such laws are preempted by ERISA. SECTION 8.11 VALIDITY. In the event any provision of this Plan is held invalid, void, or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan. SECTION 8.12 NOTICE. Any notice or filing required or permitted to be given to the Administrative Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of the Company, directed to the attention of the Secretary of the Administrative Committee. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. SECTION 8.13 SUCCESSORS AND ASSIGNS. This Plan shall be binding upon the Company and its successors and assigns. 29 ARTICLE IX AMENDMENT AND DISCONTINUANCE SECTION 9.1 AMENDMENT OF PLAN. This Plan may be amended from time to time by a resolution of the Compensation Committee of the Board of Directors of Lyondell Petrochemical Company. SECTION 9.2 TERMINATION. Lyondell Petrochemical Company intends to continue this Plan indefinitely, but reserves the right to terminate it at any time. SECTION 9.3 EFFECT OF AMENDMENT OR TERMINATION. No amendment or termination of this Plan may adversely affect the benefit payable to any Participant receiving benefits under this Plan prior to the effective date of the amendment or termination, or any Participant who, as of such date, was entitled to receive a benefit under the Retirement Plans; provided, however, that the Company may amend the Plan to eliminate any optional - -------- ------- form of payment and any such amendment will not be deemed to have adversely affected the benefit entitlement of any eligible Participant. 30 EX-10.3A 7 EXECUTIVE RETIREMENT PLAN EXHIBIT 10.3(A) INSTRUMENT AMENDING LYONDELL PETROCHEMICAL COMPANY SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN Lyondell Petrochemical Company hereby amends, effective August 1, 1997, the Lyondell Petrochemical Company Supplementary Executive Retirement Plan, as follows: Section 5.1, EVENTS CONSTITUTING A "CHANGE IN CONTROL", is revised in its entirety to read as follows: SECTION 5.1. Events Constituting a "Change in Control" ----------------------------------------- For purposes of this Plan, a "Change in Control" will be deemed to have occurred as of the date that one or more of the following occurs: (a) 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; (b) 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 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; (c) 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 (c): (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 (C) 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 (c); or (d) 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 2 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 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 (d), 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 (d). 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, (iii) prior to the maturity of the Exchangeable Notes, purchases and sales of the Exchangeable Notes, or (iv) a transaction in which assets of the Company are contributed to an entity pursuant to the creation of a partnership under the terms of certain agreements authorized by the Incumbent Directors on July 25, 1997. (e) For purposes of this Section 5.1: (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. 3 (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. (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) "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. IN WITNESS WHEREOF, the undersigned, being duly authorized on behalf of the Company, has executed this instrument on this __________ day of August, 1997. ATTEST: LYONDELL PETROCHEMICAL COMPANY BY: ________________________ BY:______________________________ Assistant Secretary Richard W. Park Vice President, Human Resources 4 EX-10.5 8 EXECUTIVE DEFERRAL PLAN EXHIBIT 10.5 LYONDELL PETROCHEMICAL COMPANY - -------------------------------------------------------------------------------- EXECUTIVE DEFERRAL PLAN EFFECTIVE JANUARY 1, 1998 LYONDELL PETROCHEMICAL COMPANY EXECUTIVE DEFERRAL PLAN TABLE OF CONTENTS -----------------
Page ARTICLE I.................................................................... 1 Section 1.1 Purpose and Intent of Plan................................... 1 Section 1.2 Effective Date of Plan....................................... 1 Section 1.3 Definitions.................................................. 1 ARTICLE II................................................................... 5 Section 2.1 Eligibility and Participation................................ 5 (a) Eligibility.................................................. 5 (b) Participation................................................ 5 Section 2.2 Forms of Deferral............................................ 5 (a) Basic Deferral............................................... 5 (b) Savings Deferral............................................. 5 Section 2.3 Deferral Elections........................................... 5 Section 2.4 Limitation on Deferral....................................... 6 Section 2.5 Termination of Employment.................................... 6 Section 2.6 Transfers.................................................... 6 Section 2.7 Modification of Deferral Elections........................... 6 (a) Financial Hardship........................................... 6 (b) Accelerated Deferral......................................... 7 ARTICLE III.................................................................. 8 Section 3.1 Accounts..................................................... 8 Section 3.2 Deferral Compensation........................................ 8 Section 3.3 Interest Rate................................................ 8 (a) Interest Rate During Participant's Lifetime.................. 8 (b) Interest Rate After Participant's Death...................... 8 Section 3.4 Determination of Accounts.................................... 9 Section 3.5 Vesting of Accounts.......................................... 9 Section 3.6 Statement of Accounts........................................ 9 ARTICLE IV................................................................... 10 Section 4.1 Basic Plan Benefit........................................... 10 Section 4.2 Form and Time of Retirement Distribution..................... 10 (a) Time of Retirement Distributions............................. 10 (b) Form of Retirement Distributions............................. 10 Section 4.3 Form of Distribution upon Termination of Employment.......... 11 Section 4.4 Survivor Benefits............................................ 11
Section 4.5 Early Distributions.......................................... 14 (a) Timing of Election........................................... 14 (b) Amount of withdrawal......................................... 14 (c) Timing and Form of Early Distribution........................ 14 Section 4.6 Unscheduled Distributions.................................... 14 (a) Distribution on Account of Financial Hardship................ 14 (b) Other Unscheduled Distributions.............................. 14 (c) Review of the Request for Unscheduled Distributions.......... 15 Section 4.7 Disability................................................... 15 Section 4.8 Termination of Employment Due to Special Circumstances....... 15 Section 4.9 Valuation and Settlement..................................... 16 Section 4.10 Small Benefit................................................ 16 Section 4.11 Benefits in the Event of a Change in Control................. 16 Section 4.12 Definitions.................................................. 17 ARTICLE V.................................................................... 20 Section 5.1 Designation of Beneficiary................................... 20 Section 5.2 Failure to Designate Beneficiary............................. 20 ARTICLE VI................................................................... 21 Section 6.1 Administrative Committee..................................... 21 Section 6.2 Rules of Conduct; Administrative Provisions.................. 21 Section 6.3 Legal, Accounting, Clerical and Other Services............... 21 Section 6.4 Interpretation of Provisions................................. 21 Section 6.5 Records of Administration.................................... 21 Section 6.6 Denial of Claim.............................................. 22 Section 6.7 Liability of Committee....................................... 22 ARTICLE VII.................................................................. 23 Section 7.1 Amendment of Plan............................................ 23 Section 7.2 Termination.................................................. 23 Section 7.3 Effect of Amendment or Termination........................... 23 ARTICLE VIII................................................................. 24 Section 8.1 Unfunded Benefit Plan........................................ 24 Section 8.2 Unsecured General Creditor................................... 24 Section 8.3 Grantor Trust................................................ 24 Section 8.4 Payments and Benefits Not Assignable......................... 24 Section 8.5 No Right of Employment....................................... 25 Section 8.6 Adjustments.................................................. 25 Section 8.7 Obligation to Company........................................ 25 Section 8.8 Protective Provisions........................................ 25 Section 8.9 Gender, Singular and Plural.................................. 26 Section 8.10 Law Governing................................................ 26
ii Section 8.11 Notice...................................................... 26 Section 8.12 Successors and Assigns...................................... 26 Section 8.13 Provisions for Incapacity................................... 26
iii ARTICLE I GENERAL PROVISION SECTION 1.1 PURPOSE AND INTENT OF PLAN. This Plan is intended to provide the opportunity for eligible Employees to accumulate supplemental funds through the deferral of portions of their regular salary, Awards and Executive Supplementary Savings Plan benefits for retirement or special needs prior to retirement. This Plan is an amendment and restatement of the deferral provisions of the Lyondell Petrochemical Company Executive Deferral Plan and Lyondell Petrochemical Company Senior Manager Deferral Plan. SECTION 1.2 EFFECTIVE DATE OF PLAN. This amended and restated Plan document shall be generally effective as of January 1, 1998 and shall apply to those Employees who are employed by the Company on or after January 1, 1998, except to the extent that certain provisions hereof specify that they are effective as of a different date. SECTION 1.3 DEFINITIONS. ACCOUNT means a separate bookkeeping account maintained by the Company for each Employee and which measures and determines the amounts to be paid to the Employee under the Plan. Effective October 1, 1996, separate subaccounts for previous deferrals of Salary, Awards or ESSP Benefits were consolidated into a single account balance. Accounts also include any Transferred Accounts that were assumed as obligations of this Plan as of October 1, 1990. ADMINISTRATIVE COMMITTEE means the Benefits Administrative Committee of the Company. AWARDS means immediate cash awards made under the Lyondell Petrochemical Company annual incentive compensation plans for executives and senior managers or awards under any other plan that the Board of Directors of Lyondell Petrochemical Company, or its Compensation Committee, has authorized the Company to adopt and has further authorized awards thereunder to be treated as Awards under this Plan. BENEFICIARY means a person who is entitled to receive an Employee's interest under this Plan in the event of the Employee's death. 1 CHANGE IN CONTROL means a change in the control of Lyondell Petrochemical Company as defined in Section 4.12 of the Plan. CODE means the Internal Revenue Code of 1986, as amended, including any successor provisions thereof and any regulations or other guidance promulgated pursuant thereto by applicable governmental agencies. COMPANY means Lyondell Petrochemical Company, a Delaware corporation, or its successor. DEFERRAL ELECTION means an election made by an Employee to defer Salary, Awards, and/or ESSP Benefits pursuant to Article II, for which the Employee has submitted a Participation Agreement to the Company. DEFERRAL PERIOD means a maximum number of years, established by the Administrative Committee in advance of a particular Deferral Election, over which the Employee elects to defer Salary, Awards and/or ESSP Benefits. A new Deferral Period shall normally start each January 1, except that an Employee who is immediately eligible upon his commencement of employment or who otherwise attains eligibility following the Effective Date, shall have his Deferral Period commence 30 days following the Employee's first day of employment or attainment of eligibility, as applicable. DEFERRED COMPENSATION means the amount of Salary, Awards and/or ESSP Benefits that a Participant elects to defer pursuant to a Deferral Election. DISABILITY means the disability as determined under the provisions of the Company's Executive Long-Term Disability Plan. EARLY DISTRIBUTION means a distribution prior to Termination of Employment pursuant to Section 4.5. EFFECTIVE DATE means January 1, 1998. EMPLOYEE means an individual who is a regular salaried employee of the Company on or after January 1, 1998. ERISA means the Employee Retirement Income Security Act of 1974, as amended, including any successor provisions thereof, and any regulations or other guidance promulgated pursuant thereto by applicable governmental agencies. 2 ESSP BENEFITS means the benefits under the Company's Executive Supplementary Savings Plan. FINANCIAL HARDSHIP means a condition of financial difficulty, determined by the Administrative Committee, upon advice of counsel, based on written information supplied by the Employee in accordance with such standards established by the Administrative Committee from time to time, which condition is sufficient, in counsel's judgment, to justify a change in payment election under the Plan without causing receipt of taxable income by any other Plan Participant before the Participant actually receives his benefit. INTEREST RATE means the interest rate announced by the Company in advance of the election period for a Plan Year which shall be the interest rate applied to that Plan year. PARTICIPANT means any Employee who is participating in this Plan as provided in Article II, and any former Employee who has not received the entire benefit to which he is entitled under this Plan. PARTICIPATION AGREEMENT means the Deferral Election submitted by a Participant to the Company prior to the beginning of the Deferral Period. PLAN means this Executive Deferral Plan. PLAN YEAR means each calendar year beginning on January 1 and ending on December 31. RETIREMENT DISTRIBUTION means a distribution due to Termination of Employment with a right to an immediate allowance under a retirement plan maintained by the Company. SALARY means the Employee's regular, biweekly salary, excluding Awards and any other special or additional compensatory payments made by the Company. SUBSIDIARIES OR AFFILIATES means: (a) All corporations, that are members of a controlled group of corporations within the meaning of Section 1563(a) of the Code (determined without regard to Section 1563(a)(4) and Section 1563(e)(3)(C) of said Code) and of which the Company is then a member, and (b) All trades or businesses, whether or not incorporated, that, under the regulations prescribed by the Secretary of the Treasury pursuant to Section 210(d) of ERISA, are then under common control with the Company. SURVIVOR BENEFIT means the benefit provided by Section 4.4 in the event of the Participant's death. 3 TERMINATION OF EMPLOYMENT means the termination of an Employee's employment with Lyondell Petrochemical Company, LYONDELL-CITGO Refining Company Ltd. and Equistar Chemicals L. P. or any subsidiary or affiliate of any such company. A transfer to any such company, to which a Participant voluntarily consents, shall not be a Termination of Employment for purposes of this Plan. TRANSFERRED ACCOUNT means the portion of any Participant's Account that reflect amounts of deferrals made by the Participant, plus any credited interest, prior to October 1, 1990 under the Company's Annual Incentive Plan and Executive Supplementary Savings Plan. VALUATION DATE means the last day of each month, or such other dates as the Administrative Committee may determine in its discretion, which may be either more or less frequent, for the valuation of Participants' Accounts. 401(K) AND SAVINGS PLAN means the Company's 401(k) and Savings Plan. 4 ARTICLE II PARTICIPATION AND DEFERRAL COMMITMENTS SECTION 2.1 ELIGIBILITY AND PARTICIPATION. (a) ELIGIBILITY. Eligibility to make a Deferral Election shall be limited to Employees (1) who are eligible to receive an Award (2) who are Participants in the Executive Supplementary Savings Plan or (3) who have been designated as eligible by a specific resolution of the Administrative Committee upon recommendation of the Senior Vice President and Chief Administrative Officer of the Company. (b) PARTICIPATION. An eligible Employee may elect to participate in the Plan by submitting a Participation Agreement in accordance with rules, including the time and form of submission, established by the Administrative Committee. SECTION 2.2 FORMS OF DEFERRAL. (a) BASIC DEFERRAL. A Participant may elect to defer Salary, Awards and/or ESSP Benefits in a Participation Agreement subject to any limitations, conditions or restrictions, such as minimum or maximum amounts that may be deferred, as the Administrative Committee prescribes in advance of the Deferral Period. (b) SAVINGS DEFERRAL. Any amount of Salary that the Participant elected to contribute to the 401(k) and Savings Plan during each Deferral period that was not permitted due to legal restrictions precluding such contributions and deferrals to the 401(k) and Savings Plan, other than the limitation on the amount of deferrals under Section 402(g) of the Code, shall be deferred under this Plan to the extent that such contributions would have received a matching Company contribution under the 401(k) and Savings Plan. The Company will contribute an additional amount for amounts deferred during a Deferral Period under this Subsection (b) based upon the matching Company contribution formula then in effect under the 401(k) and Savings Plan. SECTION 2.3 DEFERRAL ELECTIONS. Prior to each Deferral Period, at a time and on a form prescribed by the Administrative Committee, each Employee may execute an election form to defer Salary, Awards, and/or ESSP Benefits. This Deferral Election shall be irrevocable unless modifications are authorized pursuant to Section 2.7. 5 SECTION 2.4 LIMITATION ON DEFERRAL Except as permitted for accelerated deferral in Section 2.7(b), Deferral Elections shall be subject to the following limitations: (a) A Participant may not defer more than 50 percent of his Salary. (b) The minimum amount that may be deferred for the Deferral Period relating to a Deferral Election shall be established by the Administrative Committee in advance of the Deferral Period. SECTION 2.5 TERMINATION OF EMPLOYMENT. A Participant's Deferral Elections shall terminate upon the Participant's Termination of Employment; provided, however, that any Deferral Election -------- ------- relating to Salary, Awards and/or ESSP Benefits granted after Termination of Employment shall remain binding. SECTION 2.6 TRANSFERS. A Participant's Deferral Elections shall be irrevocable regardless of a transfer of employment among Lyondell Petrochemical Company, LYONDELL-CITGO Refining Company Ltd., Equistar Chemicals L. P. or any subsidiary or affiliate of any such company. In the case of such a transfer, other than a transfer to Equistar Chemicals L. P. as a result of the formation of Equistar Chemicals, L. P., the Participant's Deferral Election shall apply to Awards, Salary or ESSP Benefits granted by the transferee company and the applicable Plan of the transferee company shall assume responsibility for the remaining period, if any, of any Deferral Election that the Participant made under the transferor company's plan. SECTION 2.7 MODIFICATION OF DEFERRAL ELECTIONS. Deferral Elections shall be irrevocable except as follows: (a) FINANCIAL HARDSHIP. The Administrative Committee may permit a Participant to either reduce the amount elected under a prior Deferral Election, or waive the remaining deferrals under a prior Deferral Election, upon finding that the Participant has suffered a Financial Hardship. 6 (b) ACCELERATED DEFERRAL. At the Administrative Committee's discretion, prior to the beginning of any Plan Year in any Deferral Period for which two or more Plan Years remain, a Participant may elect to accelerate the amount of previously elected Deferred Compensation for any of the remaining Plan Years in that Deferral Period on a form prescribed by the Administrative Committee; provided, however, that any acceleration in Deferred Compensation for remaining - -------- ------- Plan Years in the Deferral period shall not increase, for any single Plan Year, the total Salary deferrals above 50 percent of Salary, the total deferred Awards above 100 percent of an Award or the total deferred ESSP Benefits above 100 percent of the ESSP Benefits during that Plan Year. 7 ARTICLE III DEFERRED COMPENSATION ACCOUNTS SECTION 3.1 ACCOUNTS. For record-keeping purposes only, Accounts shall be maintained for each Participant. SECTION 3.2 DEFERRED COMPENSATION. A Participant's Deferred Compensation shall be credited to the Participant's Account as of the date when the corresponding non-deferred portion of the compensation is paid or would have been paid but for the Deferral Election. The Company shall have the right to withhold from Salary (or otherwise to cause the Employee or the executor or administrator of his estate, or his Beneficiary) to make payment of any federal, state, local and/or foreign taxes required to be withheld with respect to any Deferred Compensation. SECTION 3.3 INTEREST RATE. The Accounts shall be credited with interest based on the rates specified below. Interest shall be credited monthly as of each Valuation Date from the dates when deferred amounts are credited to Accounts, based on the balance of each Account. (a) INTEREST RATE DURING PARTICIPANT'S LIFETIME. During a Participant's lifetime, the Participant's Account will be credited with interest on a monthly basis during each Plan Year at the Interest Rate previously announced by the Company to apply during the Plan Year. The monthly Interest Rate during the 1998 Plan Year shall be based on the previous monthly average of the Salomon Brothers Corporate BB Bond Yield. (b) INTEREST RATE AFTER PARTICIPANT'S DEATH. Except with respect to payments made pursuant to Article IV, Section 4.4(a)(2)(i) following a Participant's death, the Participant's Account will be credited with interest on a monthly basis during each Plan Year at the Interest Rate previously announced by the Company to apply during the Plan Year. SECTION 3.4 DETERMINATION OF ACCOUNTS. A Participant's Account as of each Valuation Date shall consist of the balance of the Participant's Account as of the immediately preceding Valuation Date, plus the amount of the Participant's Deferred Compensation since Valuation Date, plus interest credited to the Account, and minus any distributions or reductions made from the Account since the immediately preceding Valuation Date. 8 SECTION 3.5 VESTING OF ACCOUNTS. Each Participant shall be 100 percent vested at all times in the amounts credited to the Participant's Account. SECTION 3.6 STATEMENT OF ACCOUNTS. The Company shall provide each Participant with periodic statements setting forth the balance of the Participant's Account. 9 ARTICLE IV PLAN BENEFITS SECTION 4.1 BASIC PLAN BENEFIT. If a Participant has a Termination of Employment for any reason, the Company shall pay a Plan benefit equal to the Participant's Account, as determined below: (a) Accounts of Participants shall be credited with the interest rate previously determined under Section 3.3(a) and communicated in advance of each deferral Period, to apply each Plan Year that the Account has been maintained. (b) Except as provided in Section 4.11, the Interest Rates provided under Section 4.1(a) shall be payable until the Participant's Account is distributed in full. SECTION 4.2 FORM AND TIME OF RETIREMENT DISTRIBUTION. (a) TIME OF RETIREMENT DISTRIBUTIONS. Retirement Distributions shall be paid at the time and in the form of benefit elected by the Participant. If a Participant is an Employee, the Participant may change a distribution election once each year until the year in which the Participant attains age 53. The change must be made during a period established by the Administrative Committee which precedes a Deferral Period and is irrevocable until the next period established by the Administrative Committee. The Participant's distribution election shall be irrevocable as of the year in which a Participant attains age 53, except that a Participant may request, in writing, that the Administrative Committee allow a change in distribution election prior to retirement or commencement of benefits, or in the case of installment payments, following commencement of payments, (i) without any reduction in, or imposition of any penalty on, the Participant's Account, if the Administrative Committee determines that the Participant has experienced a Financial Hardship justifying the request for a change of election, or (ii) if the Administrative Committee, in its sole discretion, determines that it is appropriate to grant the Participant's request. Absent the Participant's election of the form and/or commencement date of the Retirement Distribution, payment will be made in a lump sum immediately following the Participant's date of retirement from the Company. (b) FORM OF RETIREMENT DISTRIBUTIONS. A Participant may elect one or more of the following forms and commencement dates for all or portions of his Deferral Account: 10 (1) LUMP SUM. A single payment of all or a percentage of, or of a specific dollar amount of, the Participant's Deferral Account, payable at retirement. (2) INSTALLMENT PAYMENTS. Monthly installment payments in substantially equal payments of principal and interest over periods prescribed and communicated by the Administrative Committee in advance of the applicable Deferral period. The amount of each of the monthly installments shall be redetermined effective as of January 1 of each year based on the remaining Account balance and the remaining number of installment payments. (3) DEFERRED PAYMENTS. A lump sum or installment payments or combination thereof, commencing subsequent to retirement at one of the optional deferral times prescribed and communicated by the Administrative Committee in advance of the applicable Deferral Period. SECTION 4.3 FORM OF DISTRIBUTION UPON TERMINATION OF EMPLOYMENT. Except as provided in Sections 4.8 and 4.11, termination benefits payable upon a Participant's Termination of Employment other than due to retirement or death shall be paid in a lump sum following Termination of Employment; provided, -------- however, that the Administrative Committee may, in its sole discretion, pay such - ------- termination benefits in monthly installments over a 3-year period. SECTION 4.4 SURVIVOR BENEFITS. (A) AMOUNT AND FORM OF BENEFIT ON AND AFTER JULY 1, 1993: (1) DEATH AFTER AGE 65. If the Participant dies on or after attaining age 65, the amount of the Survivor Benefit shall be equal to the Participant's Account balance, increased by the applicable Interest Rate on the unpaid Account balance during the period in which Survivor Benefit payments are being made to the Participant's Beneficiary, and payable in the form elected by the Participant. (2) DEATH PRIOR TO TERMINATION OF EMPLOYMENT AND PRIOR TO AGE 65. (i) Benefit Determination. If a Participant dies prior to attaining age 65 and prior to Termination of Employment, the Survivor Benefit payable with respect to such Participant shall be the greater of the values determined under (A) or (B) immediately below: 11 (A) The net present value of a stream of annual payments which equals 40 percent of the Participant's Account, and which are payable on the date of the Participant's death and on each anniversary of such date until the date on which the Participant would have attained age 65. For purposes of this calculation (I) the applicable discount rate shall be determined by the Administrative Committee, in its sole discretion, and (II) Deferral Elections that have not been completed prior to the Participant's death shall be determined in accordance with the provisions of Section 4.4(a)(2)(i)(c) below; or (B) The value of the Participant's Account balance at his date of death. (C) For purposes of calculating the deferred amount where a Participant has died before he completes his Deferral Elections, the Participant's Salary (for purposes of determining the amount deferred with respect to either Salary or ESSP Benefits) and Awards for relevant years or other time periods ending after this death shall be deemed to be as follows: (I) Salary for each year or time period shall be the Participant's annual base Salary in effect on the date of his death, increased for each year after his death by the escalation factor for such year, determined in the sole discretion of the Administrative Committee; and (II) Awards for each such year shall be the amount that is the highest annual average of the Participant's Awards paid in any 3 consecutive year period during the last ten years during which the Participant received Awards from the Company or, for years prior to the Effective Date, from a Subsidiary or Affiliate (or if fewer than ten, the total number of years for which the Participant received Awards). (ii) Amount and Form of Payment. (A) The annual Survivor Benefit payable with respect to Section 4.4(a)(2)(i)(A) shall be equal to 40 percent of the value of the Account, as determined in accordance with Section 4.4(a)(2)(i)(A) and, to the extent applicable, with Section 4.4(a)(2)(i)(C). One-twelfth of the annual Survivor Benefit shall be paid monthly from the Participant's date of death until the end of the month in which the Participant would have attained age 65. 12 (B) The Survivor Benefit payable with respect to Section 4.4(a)(2)(i)(B) shall be the value of the Participant's Account balance at his date of death, increased by the applicable Interest Rate on the unpaid Account balance during the period in which Survivor Benefit payments are being made to the Participant's Beneficiary, and shall be paid in monthly installments over the greater of: (I) the period described in Section 4.4(a)(2)(ii)(A); or (II) the period over which the Participant had elected to have installment payments made after his retirement. (C) Notwithstanding any other provision of this Plan, if the Survivor Benefit payable is the amount determined under Section 4.4(a)(2)(ii)(A), and if the Participant completed (or, pursuant to Section 4.4(a)(2)(i)(C), is deemed to have completed) a portion of a Deferral Election while an employee at LYONDELL-CITGO Refining Company Ltd. and a portion of such Deferral Election while a Participant in this Plan, then the annual amount of the Survivor Benefit determined pursuant to Section 4.4(a)(2)(ii)(A) shall be equal to the product of (I) the amount of the Survivor Benefit determined pursuant to Section 4.4(a)(2)(ii)(A), multiplied by (II) a fraction, the numerator of which is equal to the portion of the Deferral Elections that the Participant completed (or, pursuant to Section 4.4(a)(2)(i)(C), is deemed to have completed) under this Plan and the denominator of which is equal to the sum of the Deferral Election that the Participant completed (or, pursuant to Section 4.4(a)(2)(i)(C) is deemed to have completed) under this Plan and under the LYONDELL-CITGO Refining Company Ltd. Executive Deferral Plan. An example of the determination of the Survivor Benefit and the proration of that Benefit between the Company and LYONDELL-CITGO Refining Company Ltd. is attached hereto as Appendix A. (B) DEATH AFTER TERMINATION OF EMPLOYMENT AND PRIOR TO AGE 65. If the Participant dies after Termination of Employment and prior to age 65, the Participant's Account balance shall be paid by continuation of the form of benefit that was payable to the Participant for the remaining payments that would have been made to the Participant if the Participant had lived, increased by the applicable Interest Rate credited on unpaid Account balances of deceased Participants during each year of the payment period to the Beneficiary. (C) DEATH FOLLOWING CHANGE IN CONTROL. If a Participant is entitled to a payment under Section 4.11 and dies prior to receiving his entire Account, the balance of the Participant's Account shall be paid to Participant's Beneficiary in a lump sum or on an installment basis, according the Participant's election of form of payment on Change in Control. 13 SECTION 4.5 EARLY DISTRIBUTIONS. A Participant may elect to receive an Early Distribution from his Account subject to the following restrictions: (A) TIMING OF ELECTION. The election to take an Early Distribution from an Account for a particular Deferral Election must be made at the same time the Participant makes the particular Deferral Election. (B) AMOUNT OF WITHDRAWAL. The amount which a Participant can elect to receive as an Early Distribution with respect to an Account shall be such portions of the Participant's Account balance for the amounts deferred under a particular Deferral Election, as prescribed by the Administrative Committee in advance of the Deferral Period. If a previously elected amount exceeds the Account balance when an Early Distribution is to be made, only the Account balance will be paid. (C) TIMING AND FORM OF EARLY DISTRIBUTION. The Early Distribution shall commence at a time prescribed by the Administrative Committee and in the form elected by the Participant on the Participation Agreement at the time of the Deferral Election; provided, however, that if the Participant terminates -------- ------- employment without a right to commence a retirement allowance under the Retirement Plan, the Early Distribution election will be canceled and distribution will be made pursuant to Section 4.3; and provided, further, that -------- ------- if the Participant terminates employment with a right to commence a retirement allowance, the Early Distribution election will be canceled and distribution will be made pursuant to Section 4.2. (D) Amounts paid to a Participant pursuant to this section shall be treated as distributions from the Participant's Account. SECTION 4.6 UNSCHEDULED DISTRIBUTIONS. (A) DISTRIBUTIONS ON ACCOUNT OF FINANCIAL HARDSHIP. Upon a finding that a Participant has suffered a Financial Hardship, following the Participant's written application, the Administrative Committee shall make a distribution of all or a portion of the Participant's Account, consistent with the finding of Financial Hardship but not to exceed the amount of the Participant's request, without any reduction in, or imposition of any penalty on, the Participant's Account. The distribution shall be paid in a lump sum as soon as administratively practical following the finding of Financial Hardship. (B) OTHER UNSCHEDULED DISTRIBUTIONS. A Participant, by a written application to the Administrative Committee, may apply for a distribution of all or part of his/her Account, without regard to any condition of Financial Hardship. Any distribution so requested shall be 14 made as soon as practical following the Participant's application and shall be subject to whatever penalty, in the form of a forfeiture of a percentage of the amount requested and/or a suspension of participation, as may be determined by the Administrative Committee, upon the advice of Counsel for the Plan, to be necessary to preclude the constructive receipt of taxable income by any Participant in the Plan. (c) REVIEW OF THE REQUEST FOR UNSCHEDULED DISTRIBUTIONS. Counsel for the Plan, on an ongoing basis, shall review legal and tax developments to assure continuous compliance with the relevant authorities governing plan design to prevent constructive receipt of taxable income by any Participant, and shall advise the Administrative Committee in writing in advance of any change in its most recent written advice on the penalty that is to be imposed with respect to unscheduled distributions. The Company shall notify Participants in writing of the provisions of this Section 4.6 and of the specific, currently effective penalty as described under Section 4.6(b), and shall update this written notification periodically and in advance of any subsequent change of which it is notified under Section 4.6(c), unless in the opinion of the Company it is administratively impractical to do so, in which case such notification shall be provided no later than30 days following the effective date of the change. SECTION 4.7 DISABILITY. If a Participant suffers a Disability under the provisions of the Company's Executive or regular Long-Term Disability Plan, the Participant's Deferral Elections will cease except for any awards that may be payable thereafter. Distribution of the Participant's Account will not be made due to the Disability. The Participant's Account will be distributed in accordance with the method that the Participant had elected for payment of retirement benefits if and when the Participant retires following his Disability. Absent the Participant's retirement election, payment will be made in a lump sum upon Termination of Employment. SECTION 4.8 TERMINATION OF EMPLOYMENT DUE TO SPECIAL CIRCUMSTANCES. If, other than as provided in Section 4.11, a Participant has an ----- ---- involuntary Termination of Employment in conjunction with a sale of assets or a reorganization (including termination due to a specific job elimination), the Participant's Account will be distributed in accordance with the method which the Participant had elected for payment of retirement benefits under this Plan, with payment commencing on the earliest date the Participant would have become eligible to commence receiving the retirement benefit hereunder. During the period between the Participant's Termination of Employment and the commencement of payments under this 15 Plan, interest will be credited to the Participant's Account each year at the applicable rate of interest for Accounts of living Participants. Absent the Participant's election with respect to the form of benefit to be paid by this Plan at or after his retirement, payment will be made in a lump sum upon Termination of Employment. SECTION 4.9 VALUATION AND SETTLEMENT. The Settlement Date shall be the earlier of the date on which a lump sum is paid or on which installment payments commence. The Settlement Date for an Account shall be no more than 30 days after the last day of the month in which the Participant or his Beneficiary becomes entitled to payments on account of retirement, other Termination of Employment or death, unless the Participant has elected to defer commencement of payments following retirement to a later date. The Settlement Date for an Early Distribution or delayed payments following retirement shall be the month that the Participant has elected for commencement of such payments. The amount of a lump sum and the initial amount of installment payments for a Participant's Account shall be based on the value of the Participant's Account as of the valuation Date at the end of the immediately preceding month before the Settlement Date. For example, the Valuation Date at the end of December shall be used to determine a lump sum and/or the initial amount of installment payments that will be made in the following January. SECTION 4.10 SMALL BENEFIT. Notwithstanding any election made by the Participant, the Administrative Committee, in its sole discretion, may pay any benefit in the form of a lump sum payment to the Participant or any Beneficiary, if the lump sum amount of the Account balance that remains in the Account following a distribution for any reason, or which is payable to the Participant or Beneficiary when payments to such Participant or Beneficiary would otherwise commence is less than $6,000. SECTION 4.11 BENEFITS IN THE EVENT OF A CHANGE IN CONTROL. Notwithstanding the contrary provisions of Section 4.8, the provisions of this Section 4.11 shall control in the event of Change in Control of the Company. In the event of a Change in Control, as defined in Section 4.12, the full amount of contributions and earnings accrued or credited to the Participant's Account (as of the date immediately preceding the Change in Control) shall be distributed to the Participant or the Participant's Beneficiary, if a Survivor Benefit is being paid at the time of the Change in Control. Payment shall be made in a form previously approved by the Administrative Committee and previously elected by the Participant. 16 SECTION 4.12 DEFINITIONS. (a) EVENTS CONSTITUTING A "CHANGE IN CONTROL". For purposes of this Plan, a Change in Control will be deemed to have occurred as of the date that one or more of the following occurs: (1) 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; (2) 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 80 percent (80%) or more of (a) the then outstanding common stock or other equity interests of the corporation or other entity surviving or resulting from such merger, consolidation or recapitalization or acquiring such assets of the Company, as the case may be (the "Surviving Entity") (or of 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; (3) Any Person 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 (3): 17 (i) 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 20 percent 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 20 percent of the Combined Voting Power of all then outstanding Voting Securities; or (ii) 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 the - -------- ------- Subsection (3) 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 (3). Notwithstanding any of the foregoing, no Change in Control shall be deemed to have occurred as a result solely of a transaction in which assets of the Company are contributed to an entity pursuant to the creation of a partnership under the terms of certain agreements authorized by the Incumbent Directors on July 25, 1997. (b) For purposes of this Section 4.12: (1) "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. (2) "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. (3) "Equistar" shall mean Equistar Chemicals, LP, a Limited Partnership organized under the laws of the State of Delaware (4) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (5) "LCR" shall mean LYONDELL-CITGO Refining Company Ltd., a Limited Liability Company organized under the laws of the State of Texas. 18 (6) "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, Equistar or LCR, any of their subsidiaries, any employee benefit plan of the Company, Equistar or LCR or any of their majority-owned subsidiaries or any entity organized, appointed or established by the Company, Equistar, LCR or such subsidiaries for or pursuant to the terms of any such plan. (7) "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. 19 ARTICLE V DESIGNATION OF BENEFICIARY SECTION 5.1 DESIGNATION OF BENEFICIARY. Each Participant shall have the right to designate a Beneficiary or Beneficiaries to receive his interest in his Account upon his death. Such designation shall be made on a form prescribed by and delivered to the Company. The Participant shall have the right to change or revoke any such designation from time to time by filing a new designation or notice of revocation with the Company, and no notice to any Beneficiary nor consent by any Beneficiary shall be required to effect any such change or revocation. SECTION 5.2 FAILURE TO DESIGNATE BENEFICIARY. If a Participant fails to designate a Beneficiary before his death, or if no designated Beneficiary survives the Participant, the Administrative Committee shall direct the Company to pay the balance in his Account in a lump sum to the executor or administrator for his estate. 20 ARTICLE VI ADMINISTRATION Section 6.1 ADMINISTRATIVE COMMITTEE. The Benefits Administrative Committee for the Company shall act as this Plan's Administrative Committee. SECTION 6.2 RULES OF CONDUCT; ADMINISTRATIVE PROVISIONS. The Administrative Committee shall adopt such rules for the conduct of its business and the administration of this Plan as it considers desirable; provided, however, that such rules shall not conflict with the provisions of - -------- ------- this Plan. Except as otherwise specifically provided in this Plan, all of the administrative provisions (such as the benefit claims procedures) contained in the 401(k) and Savings Plan shall apply to the administration of this Plan. SECTION 6.3 LEGAL, ACCOUNTING, CLERICAL AND OTHER SERVICES. The Administrative Committee may authorize one or more of its members or any agent to act on its behalf and may contract for legal, accounting, clerical and other services to carry out this Plan. All expenses of the Administrative Committee shall be paid by the Company. SECTION 6.4 INTERPRETATION OF PROVISIONS. The Administrative Committee shall have the exclusive right and discretionary authority to interpret the provisions of this Plan and to decide questions arising in its administration. The decisions and interpretations of the Administrative Committee shall be final and binding on the Company, Employees and all other persons. SECTION 6.5 RECORDS OF ADMINISTRATION. The Administrative Committee shall keep records reflecting the administration of this Plan which shall be subject to audit by the Company. 21 SECTION 6.6 DENIAL OF CLAIM. The Administrative Committee shall provide adequate notice in writing to any Employee or Beneficiary whose claim for benefits under this Plan has been denied, setting forth the specific reasons for such denial. The Employee or Beneficiary will be given an opportunity for a full and fair review by the Administrative Committee of the decision denying the claim. The Employee or Beneficiary shall be given 60 days from the date of the notice denying any such claim within which to request such review. SECTION 6.7 LIABILITY OF COMMITTEE. No member of the Administrative Committee shall be liable for any action taken in good faith or for exercise of any power given the Administrative Committee, or for the actions of other members of said Committee. 22 ARTICLE VII AMENDMENT AND DISCONTINUANCE Section 7.1 AMENDMENT OF PLAN. This Plan may be amended from time to time by the Compensation Committee of the Board of Directors of the Company. SECTION 7.2 TERMINATION. The Company intends to continue this Plan indefinitely, but reserves the right to terminate it at any time for any reason. SECTION 7.3 EFFECT OF AMENDMENT OR TERMINATION. No amendment or termination of this Plan may adversely affect the benefit payable to any former Employee receiving benefits under this Plan prior to the effective date of the amendment or termination, or any Employee who, as of such date, was eligible to receive a benefit under this Plan. 23 ARTICLE VIII MISCELLANEOUS SECTION 8.1 UNFUNDED BENEFIT PLAN. This Plan is intended to constitute a plan which is unfunded and maintained primarily for the purpose of providing deferred compensation in the form of additional retirement benefits to a select group of management or highly compensated employees, as defined in Section 201(a)(2), 301(a)(3) and 401(a)(1) of ERISA. SECTION 8.2 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries shall have no legal or equitable rights, claims or interests in any specific assets or property of the Company, nor shall they be the Beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts, or the proceeds therefrom owned, or which may be acquired by, the Company (the "Policies"). Any such Policies or other assets of the Company shall be, and remain, the general, unpledged, unrestricted assets of the Company. The Company's obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Company to pay money in the future. SECTION 8.3 GRANTOR TRUST. Although the Company is responsible for the payment of all benefits under the Plan, the Company may, in its discretion, contribute funds to a grantor trust for the purpose, as it deems appropriate, of paying benefits under this Plan. Such trust may be irrevocable, but assets of the trust shall be subject to the claims of creditors of Lyondell Petrochemical Company. To the extent any benefits provided under the Plan are actually paid from the trust, the Company shall have no further obligation with respect thereto but to the extent not so paid, such benefits shall remain the obligation of, and shall be paid by, the Company. The Employees shall have the status of unsecured creditors insofar as their legal claim for benefits under the Plan and the Employees shall have no security interest in the grantor trust. SECTION 8.4 PAYMENTS AND BENEFITS NOT ASSIGNABLE. Payments to and benefits under this Plan are not assignable, transferable or subject to alienation since they are primarily for the support and maintenance of the Participants and their joint annuitants or Beneficiaries after retirement. Likewise, such payments shall not be subject 24 to attachments by creditors of, or through legal process against, the Company, the Administrative Committee or Participant. SECTION 8.5 NO RIGHT OF EMPLOYMENT. The provisions of this Plan shall not give an Employee the right to be retained in the service of the Company nor shall this Plan or any action taken under the Plan be construed as a contract of employment. SECTION 8.6 ADJUSTMENTS. At the Company's request, the Administrative Committee may, with respect to a Participant, adjust such Participant's benefit under this Plan or make such other adjustments with respect to such Participant as are required to correct administrative errors or provide uniform treatment of Participants in a manner consistent with the intent and purpose of this Plan. SECTION 8.7 OBLIGATION TO COMPANY. If a Participant becomes entitled to a distribution of benefits under the Plan, and if at such time the Participant has outstanding any debt, obligation, or other liability representing an amount owing to the Company, or any benefit plan maintained by the Company, then the Company may offset such amount owed to it or such benefit plan against the amount of benefits otherwise distributable. Such determination shall be made by the Administrative Committee. SECTION 8.8 PROTECTIVE PROVISIONS. Each Participant shall cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Company may deem necessary and taking such other relevant action as may be requested by the Company. If a Participant refuses to cooperate, the Company shall have no further obligation to the Participant under the Plan. If the Participant makes any material misstatement of information or nondisclosure of medical history, then no benefits will be payable hereunder to such Participant or his Beneficiary, provided, that in the Company's sole discretion, benefits may be payable in an amount reduced to compensate the Company for any loss, cost, damage or expense suffered or incurred by the Company as a result in any way of any such action, misstatement or nondisclosure. 25 SECTION 8.9 GENDER, SINGULAR AND PLURAL. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity of the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular. SECTION 8.10 LAW GOVERNING. This Plan shall be construed, regulated and administered under the laws of the State of Texas, except to the extent that such laws are preempted by ERISA. SECTION 8.11 NOTICE. Any notice or filing required or permitted to be given to the Administrative Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of the Company, directed to the attention of the Secretary of the Administrative Committee. Such notice shall be deemed given as to the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. SECTION 8.12 SUCCESSORS AND ASSIGNS. This Plan shall be binding upon the Company and its successors and assigns. SECTION 8.13 PROVISIONS FOR INCAPACITY. If the Administrative Committee deems any person entitled to receive any payment under the provisions of this Plan incapable of receiving or disbursing the same by reason of minority, illness or infirmity, mental incompetency, or incapacity of any kind, the Administrative Committee may, in its sole discretion, take any one or more of the following actions: it may apply such payment directly for the comfort, support and maintenance of such person; it may reimburse any person for any such support theretofore supplied to the person entitled to receive any such payment; or it may pay such payment to any other person selected by the Administrative Committee to disburse such payment for the comfort, support and maintenance of the person entitled thereto, including, without limitations, to any relative who has undertaken, wholly or partially, the expense of such person's comfort, care and maintenance, or any institution in whose care or custody the person entitled to the payment may be. The Administrative Committee may, in its sole discretion, deposit any payment due to a minor to the minor's credit in any savings or commercial bank of the Administrative Committee's choice. 26 APPENDIX A EXAMPLE OF SURVIVOR BENEFIT DETERMINATION AND PRORATION John Doe: Current Age - 49 Presumed to die on July 1, 1998
-------------------------------------------------------------------------- Award % Deferred Amount -------------------------------------------------------------------------- 1996 $39,000 100% $39,000 -------------------------------------------------------------------------- 1997 -0- 10% -0- -------------------------------------------------------------------------- 1998 $60,000 10% $ 6,000 -------------------------------------------------------------------------- 1999 $60,000 10% $ 7,000 -------------------------------------------------------------------------- 2000 $70,000 10% $ 7,000 -------------------------------------------------------------------------- Total $58,000 --------------------------------------------------------------------------
-------------------------------------------------------------------------- Base Salary % Deferred Amount -------------------------------------------------------------------------- 1995 $140,000 20% $28,000 -------------------------------------------------------------------------- 1996 $164,000 0% -0- -------------------------------------------------------------------------- 1997 $170,000 10% $17,000 -------------------------------------------------------------------------- 1998 180,000 10% $18,000 -------------------------------------------------------------------------- 1999 190,000 10% $19,000 -------------------------------------------------------------------------- Total $82,000 --------------------------------------------------------------------------
CALCULATION OF SURVIVOR BENEFIT -- GREATER OF: (a) 40 percent of Deferral Election $58,000 + $82,000 = $140,000*40% = $56,000 per year for 15 years. The present value of this benefit would be determined by multiplying the annual benefit ($56,000) by the number of years the payment is to be made (15) and then applying a discount rate. If the discount rate is 7.8%, the present value of this benefit would be approximately $500,000. (b) Actual Account Balance Amounts deferred: $39,000 + $6,000 + $28,000 + $17,000 + $9,000 = $ 99,000 Interest (est.) $ 21,000 -------- Total $120,000 $120,000 paid out over 15 years The annual Survivor Benefit would be $56,000 for 15 years as (a) is greater than (b). PRORATION OF THE ANNUAL SURVIVOR BENEFIT BETWEEN COMPANY AND LYONDELL-CITGO: Company's Share: $56,000*75.5/140 = $30,200 LYONDELL-CITGO's Share: $56,000*64.5/140 = $25,800 27 EX-10.8 9 EXECUTIVE BENEFITS PLAN EXHIBIT 10.8 LYONDELL PETROCHEMICAL COMPANY SUPPLEMENTAL EXECUTIVE BENEFIT PLANS TRUST AGREEMENT (AS AMENDED AND RESTATED EFFECTIVE AS OF FEBRUARY 1, 1997) TABLE OF CONTENTS
PAGE Recitals................................................................... 1 Section 1. Creation of the Trust.......................................... 2 Section 2. Limitation on Use of Funds..................................... 3 Section 3. Change in Control.............................................. 3 Section 4. Independent Plan Administrator................................. 8 Section 5. Excess Revision................................................ 9 Section 6. Authority of Investment Officer................................ 10 Section 7. Duties and Powers of Trustee with Respect to Investments....................................... 10 Section 8. Additional Powers and Duties of the Trustee.................... 13 Section 9. Insurance Policies and Contracts............................... 14 Section 10. Participating Plan Records..................................... 15 Section 11. Valuation...................................................... 15 Section 12. Participant Records Prior to and Following a Change in Control................................ 15 Section 13. Trustee Accounts............................................... 16 Section 14. Investment of Cash............................................. 17 Section 15. Payments by the Trustee........................................ 18 Section 16. Determination of Change in Control............................. 19 Section 17. Trustee Compensation and Trust Expenses........................ 19 Section 18. Payment of Taxes By Trustee.................................... 20 Section 19. Custodians and Agents.......................................... 20 Section 20. Liability for Benefit Payments................................. 20 Section 21. Company Insolvency............................................. 20 Section 22. Trustee Responsibility for Plan Administration and Trust Record Keeping After Change in Control............................................ 22 Section 23. Trustee Standards of Performance and Indemnification.......................................... 23 Section 24. Removal and Resignation of Trustee............................. 24 Section 25. Termination of Participating Plan or Plans..................... 24 Section 26. Rights of Company to Trust Assets.............................. 25 Section 27. Amendment of Trust............................................. 25 Section 28. Termination of Trust........................................... 26 Section 29. Successors..................................................... 27 Section 30. Communications................................................. 27 Section 31. Unclaimed Distributions........................................ 27 Section 32. Prohibition of Assignments..................................... 28 Section 33. Governing Law.................................................. 28 Section 34. Execution...................................................... 28 Appendix A................................................................. 30
i LYONDELL PETROCHEMICAL COMPANY SUPPLEMENTAL EXECUTIVE BENEFIT PLANS TRUST AGREEMENT THIS AGREEMENT, as amended and restated as of February 1, 1997, between LYONDELL PETROCHEMICAL COMPANY (the "Company"), and STATE STREET BANK AND TRUST COMPANY, a banking corporation having its principal place of business at 225 Franklin Street, Boston, Massachusetts, 01201 (the "Trustee"); R E C I T A L S A. Effective July 1, 1994, the Company and the Trustee entered into this Agreement to create a Trust (defined under Section 1 of this Trust Agreement) for purposes of the Lyondell Petrochemical Company Supplementary Executive Retirement Plan and the Lyondell Petrochemical Company Executive Deferral Plan and any benefit plans that may be established and maintained by the Company for executive employees of the Company after the effective date of this Trust, that permit funding by this Trust, and that are established and maintained to provide deferred compensation for a select group of management or highly compensated employees. The benefit plans that may be funded by this Trust are listed in Appendix A attached hereto and shall hereinafter be referred to as the "Participating Plans". B. The amount and timing of benefit payments (the "Supplemental Benefits") to which the participants of the Participating Plans (the "Trust Beneficiaries") are or may become entitled under each of the Participating Plans are set forth in the Participating Plans. C. The Company established this trust fund to assist it in accumulating the amounts necessary to satisfy its contractual liability to pay Supplemental Benefits under the Participating Plans. D. The Company is obligated to pay all Supplemental Benefits from its general assets to the extent not paid by this Trust and the amendment and restatement of this Trust Agreement shall not reduce or otherwise affect the Company's continuing liability to pay Supplemental Benefits from such assets, except that the Company's liability shall be offset by actual benefit payments made from this Trust. E. The trust continued by this amended and restated Trust Agreement is intended to be a "grantor trust" with the result that the corpus and income of the Trust shall be treated as assets and income of the Company pursuant to Sections 671 through 679 of the Internal Revenue Code of 1986, as amended (the "Code"). F. The Company intends that the Trust shall at all times be subject to the claims of the Company's creditors as herein provided and that the Participating Plans shall not be deemed funded within the meaning of the Employee Retirement Income Security Act of 1974, as amended, ("ERISA") solely by virtue of the existence of this Trust Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: SECTION 1 CREATION OF THE TRUST There is hereby established and continued with the Trustee a trust consisting of all sums paid to it for purposes of the Participating Plans, investments thereof and any earnings, appreciations or losses thereon, which, less disbursements made by Trustee, and amounts paid to the Company as provided in Section 2 of this Trust Agreement, are referred to herein as the "Trust" and shall be dealt with as provided in this Trust Agreement. The Trust shall be held for the exclusive purpose of providing payments to Trust Beneficiaries in accordance with the provisions of the Participating Plans, and defraying reasonable expenses of administration in accordance with the provisions of this Trust Agreement until all such payments required by this Trust Agreement have been made, subject to the provisions on the use of Funds under Section 2 of this Trust Agreement, and to the requirement that the Trust shall at all times be subject to the claims of the general creditors of the Company as set forth in Sections 21.1 and 21.2 of this Trust Agreement. The Trustee shall have no duty or authority to inquire into the correctness of amounts tendered to it or to enforce the collection of any contribution by the Company. The Company shall direct the Trustee to establish a separate subtrust ("Subtrust") for each Plan to which the Trustee shall credit contributions it receives which are earmarked for that Plan and Subtrust. Each Subtrust shall reflect an undivided interest in assets of the trust fund and shall not require any segregation of particular assets. When Subtrusts are established, all 2 contributions shall be designated by the Company for a particular Subtrust. However, any contribution received by the Trustee which is not designated by the Company for a particular Subtrust before a Change in Control shall be allocated among the Subtrusts in proportion to each Participating Plan's pro rata interest in the Trust, as calculated during the last Valuation. When a Subtrust is established at a date subsequent to execution of this Agreement, the Trustee shall allocate the Trust assets among the separate Subtrusts as directed by the Company prior to a Change in Control. The Company may direct the Trustee, or the Independent Plan Administrator may determine on its own initiative after a Change in Control, to maintain a separate sub-account within each Subtrust for a Plan for each Participant who is covered by the Subtrust. If so directed, each sub-account in a Subtrust shall reflect an individual interest in assets of the Subtrust and, as much as possible, shall operate in the same manner as if it were a separate Subtrust. The Trustee shall allocate investment earnings and losses and expenses of the trust fund as of a valuation date among the Subtrusts in proportion to their balances. Payments to creditors as directed by a court of competent jurisdiction in the event of the Company's insolvency shall be charged against the Subtrusts in proportion to their balances, except that payment of Plan benefits to a Participant as a general creditor shall be charged against the Subtrust for that Plan. Assets allocated to a Subtrust for one Plan may not be used to provide benefits under any other Plans until all benefits under such Plan have been paid in full, except that excess assets of a Subtrust may be transferred to other Subtrusts. SECTION 2 LIMITATION ON USE OF FUNDS No part of the corpus of the Trust shall be recoverable by the Company, borrowed by or against for the benefit of the Company or used for any purpose other than for the exclusive purpose of providing payments to Trust Beneficiaries in accordance with the provisions of the Participating Plans and defraying reasonable expenses of administration in accordance with the provisions of this Trust Agreement until all such payments required by this Trust Agreement have been made; provided, however, that (i) nothing in this Section 2 shall be deemed to limit or otherwise 3 prevent the payment from the Trust of (a) amounts described in Section 5 of this Trust Agreement, (b) expenses and other charges as provided in Section 17 and 18 of this Trust Agreement, or (c) the application of the Trust as provided in Sections 15.5 or 28 of this Trust Agreement, and (ii) the Trust shall at all times be subject to the claims of the general creditors of the Company as set forth in Section 21.1 and 21.2 of this Trust Agreement. SECTION 3 CHANGE IN CONTROL Section 3.1. General. Various provisions of this Trust Agreement provide ------------ for certain rights and obligations upon and following a Change in Control of the Company. Section 3.2. Definition of "Change in Control". For purposes of this Trust ------------ Agreement, a "Change in Control" shall be deemed to have occurred as of the date that one or more of the following occurs: A. 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; B. The stockholders of the Company shall approve (1) any merger, consolidation or recapitalization of the Company (or, if the capital stock of the Company is affected, any 4 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 (i) 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 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 (ii) 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 (2) any plan or proposal for the liquidation or dissolution of the Company; C. 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 (1) the then outstanding shares of common stock of the Company ("Common Shares") or (2) 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 (C): (i) 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 5 (ii) 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, Proided further, that if any Person referred to in paragraph (i) or (ii) of ------- ------- this Subsection (C) 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 (C); or D. ARCO shall become the owner, directly or indirectly, of securities of the Company representing in the aggregate more than fifty percent (50%) of either (1) the then outstanding Common Shares or (2) 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 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 (D), 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 -------- ------- Trust Agreement, no Change in Control shall be deemed to have occurred pursuant to this Subsection (D) 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 6 (excluding this proviso) of this Subsection (D). Notwithstanding any of the foregoing, no Change in Control shall be deemed to have occurred as a result solely of (1) the registration by ARCO of the Exchangeable Notes pursuant to the Registration Statement, (2) the issuance and sale by ARCO of the Exchangeable Notes to the underwriters in accordance with the Registration Statement, or (3) prior to the maturity of the Exchangeable Notes, purchases and sales of the Exchangeable Notes. Section 3.3. Funding on Change in Control. The Company, within 30 days ------------ following a Change in Control, shall be required to irrevocably deposit additional cash or other property, acceptable to the Trustee, to this Trust in an amount equal to the Certified Benefit Values, as described in Section 5, plus an amount equal to 100% of the actuarial present value of any additional benefits, payments or supplements, as certified by an Enrolled Actuary unaffiliated with the Company, which may become payable as a result of a Change in Control, less the present value of Trust assets determined as of the date of the Change in Control. Section 3.4. For purposes of Section 3.1 of this Trust Agreement: ------------ A. "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. B. "ARCO" shall mean Atlantic Richfield Company and any of its Affiliates, excluding the Company. C. "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. D. "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. E. "LCR" shall mean LYONDELL-CITGO Refining Company Ltd., a Limited Liability Company organized under the laws of the State of Texas. 7 F. "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. G. "Registration Statement" shall mean ARCO's registration statement on Form S-3 (Registration No. 33-53481) with respect to the Exchangeable Notes. H. "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 4 INDEPENDENT PLAN ADMINISTRATOR Various provisions of this Trust Agreement refer to the term "Independent Plan Administrator" which shall mean, unless stated otherwise in a specific provision of this Trust Agreement, and, except as provided below, an entity which is unrelated to, and unaffiliated with, the Company, and which, prior to a Change in Control has accepted in writing the position of Independent Plan Administrator under this Trust Agreement. The Independent Plan Administrator shall not be considered to be related to or affiliated with the Company solely as a result of an agreement between the Independent Plan Administrator and the Company to provide individual financial counseling services to specified Company executives. The Independent Plan Administrator shall be appointed by the Company and shall have its duties specified in an agreement executed by the Company and the 8 Independent Plan Administrator prior to a Change in Control. The Trustee shall be given advance written notification of such appointment by the Company. Following a Change in Control, if the Company had failed to designate an Independent Plan Administrator prior to a Change in Control, the Independent Plan Administrator shall be appointed by the Trustee following a Change in Control and shall have its duties specified in an agreement executed by the Trustee and the Independent Plan Administrator. In the event the Independent Plan Administrator fails to act, provides services to the Company other than in its capacity as Independent Plan Administrator other than as provided above, or resigns, the Company prior to a Change in Control, or the Trustee after a Change in Control, shall retain a successor Independent Plan Administrator. Notwithstanding any other provision of this Trust Agreement, the Trustee shall be responsible only for the prudent selection of an Independent Plan Administrator after a Change in Control (i) following notice by the Company or the Independent Plan Administrator of disqualification of the Independent Plan Administrator through the provision of services to the Company other than in its capacity as Independent Plan Administrator, (ii) upon resignation or failure to act by the Company-appointed Independent Plan Administrator, or (iii) in the event the Company failed to appoint an Independent Plan Administrator prior to a Change in Control. The Trustee shall be entitled to conclusively rely on the determinations of a qualified Independent Plan Administrator. SECTION 5 EXCESS REVERSION Prior to a Change in Control, upon a determination that the assets of the Trust have a value exceeding one hundred twenty-five percent (125%) of the actuarial present value of accrued but unpaid benefits of the Participating Plans, considered on the basis of assets being allocated to each Participating Plan, all or a portion of the amount of such assets which constitute the "Excess Reversion" (as defined below) may be repaid to the Company upon direction of the Company. However, prior to any such repayment, the Company must deliver to the Trustee a certified statement by an actuary who is an Enrolled Actuary under ERISA and who is not affiliated with the Company of (i) the amount equal to one hundred (100%) percent of the actuarial present value of the accrued but unpaid benefits under the Participating Plans, calculated on an individual plan basis, as described above, (the "Certified Benefit Values"), (ii) the value of the Trust assets, allocated to each Participating Plan, as described above, and (iii) the amount, if any, by which the value of the Trust assets under (ii) exceeds the Certified Benefit Values under (i), and (iv) the amount, if any, by which the value of the Trust assets under (ii) exceeds one hundred twenty-five (125%) percent of the Certified Benefit Values (the "Excess Reversion"). The actuary shall make each determination required to prepare the certified statement based on reasonable factors, assumptions and tables (as determined solely by such actuary). The Trustee shall repay assets of the Trust to the Company as directed by the Company and in an 9 amount up to but not greater than the Excess Reversion. Any repayment of assets of the Trust to the Company may be made only prior to a Change in Control and shall be made within thirty (30) days (or as soon as practicable) after the later of the Trustee's receipt of the certified statement by the actuary and the Company's direction to make such a payment. Any separate allocations of assets pursuant to this Section 5 shall be solely for the purpose of completing the valuation tests described in this Section and shall not reflect any legal commitment of assets to any Participating Plan or to any Trust Beneficiary. SECTION 6 AUTHORITY OF INVESTMENT OFFICER Prior to a Change in Control, the Trustee shall be subject to the direction of the Investment Officer (as defined below) of the Company with respect to the investment of the assets of the Trust. Unless the Company and the Trustee have mutually agreed in a separate writing that the Trustee shall have and exercise investment discretion with respect to all or a portion of the assets of the Trust, the Company shall have complete discretion with respect to the investment of such assets at all times prior to a Change in Control, and shall direct the Trustee accordingly. From time to time, the Trustee shall be notified in a writing signed by an officer of the Company of the person or persons constituting the "Investment Officer" for purposes of this Section and the Trust. In each such notice, the Company shall warrant that all directions given by the Investment Officer are proper. The Trustee shall have no responsibility to review, or to consider the propriety of holding or selling any life insurance, retirement income or annuity policies or contracts. Notwithstanding the Company's discretion to invest the Trust assets, the Company shall not exercise this discretion to reacquire part or all of the assets held in the Trust by substitution of or exchange for any other property held by the Company directly or indirectly through any third party, related or unrelated, and whether or not the property is equivalent, marketable, liquid, or secured. SECTION 7 DUTIES AND POWERS OF TRUSTEE WITH RESPECT TO INVESTMENTS After a Change in Control, the Trustee shall have sole discretion to invest and reinvest the assets of, and to invest any 10 additions to, the Trust in personal property consisting of equity securities, debt instruments at the time of purchase rated not less than BBB- by Standard & Poor's Corporation and its successors ("S&P") or Baa3 by Moody's Investor Service, Inc. and its successors ("Moody's) or the equivalent of such ratings by S&P or Moody's for the types of investments specified in Section 14 of this Trust Agreement ("Investment Grade Securities") with the power to appoint any independent investment manager to fulfill such obligation; provided, however, that (i) the Trustee shall be subject to any prior directions and instructions of the Company prior to a Change in Control regarding insurance, retirement income or annuity policies or contracts unless the Independent Plan Administrator otherwise directs the Trustee, (ii) the Independent Plan Administrator shall have sole power on and after a Change in Control regarding the management, including the purchase, sale or retention (including all powers of the Company under Sections 7(C) and 9 of this Trust Agreement) of any insurance, retirement income or annuity policies or contracts, (iii) any such powers of the Trustee or Independent Plan Administrator described above may not be delegated, in whole or in part, after a Change in Control to the Company or any affiliate of the Company, and (iv) the Trustee shall not be required to liquidate any investments that were made pursuant to the directions of the Investment Officer that are not Investment Grade Securities. Subject to the foregoing provisions of Sections 6 and 7 of this Trust Agreement, the Trustee shall have the following powers: A. To invest and reinvest the Trust, without distinction between principal and income, in any form of domestic or foreign real or personal property, whether or not productive of income or consisting of wasting assets, provided that investments of the Plan shall be diversified so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; B. To sell, convey, redeem, exchange, grant options for the purchase or exchange of, or otherwise dispose of, any real or personal property, other than an exchange of Trust assets to the Company as described in Section 6, at public or private sale, for cash or upon credit, with or without security, without obligation on the part of any person dealing with the Trustee to see to the application of the proceeds of, or to inquire into the propriety of, any such disposition; C. To purchase and maintain, as owner, life insurance policies as provided in Section 9 of this Trust Agreement and only as directed by the Investment Officer of the Company 11 prior to a Change in Control and the Independent Plan Administrator after a Change in Control; D. To exercise, personally or by general or limited proxy or power of attorney, all voting and other rights appurtenant to any investment held in the Trust and to delegate discretionary power to exercise all or any such rights to trustees of a voting trust for any period of time; E. To join in or oppose any reorganization, recapitalization, consolidation, merger or liquidation or any plan therefor, or any lease, mortgage or sale of the property of any organization the securities of which are held in the Trust; to pay from the Trust any assessments, charges or compensation specified in any plan of reorganization, recapitalization, consolidation, merger or liquidation; to deposit any property with any committee or depository; and to retain any property allotted to the Trust in any reorganization, recapitalization, consolidation, merger or liquidation; F. To exercise or sell, personally or by general or limited power of attorney, any conversion, subscription or other rights, including the right to vote, appurtenant to any investment held in the Trust; G. To borrow money for purposes of this Trust Agreement in any amount and upon any reasonable terms and conditions from any lender (other than the Trustee in its individual capacity), and to pledge or mortgage any property held in the Trust to secure the repayment of any such loan; H. To compromise, settle or arbitrate any claim, debt, or obligation of or against the Trust; to enforce or abstain from enforcing any rights, claim, debt or obligation; and to abandon any property determined by it to be worthless; I. To commence or defend suits or legal proceedings and to represent the Trust in all suits or legal proceedings; to settle, compromise or submit to arbitration any claims, debts or damages, due to or owing from the Trust; J. To engage any legal counsel, including counsel to the Company, any enrolled actuary, or any other suitable agents; to consult with such counsel, enrolled actuary, or agents with respect to the construction of this Trust Agreement, the duties of the Trustee hereunder, the transactions contemplated by this Trust Agreement or any act which the Trustee proposes to take or omit; to rely upon the advice of 12 such counsel, enrolled actuary or agents and to pay all reasonable fees, expenses and compensations of such counsel, actuary or agents; and K. To organize and incorporate under the laws of any state one or more corporations (and to acquire an interest in any corporation that it may have organized and incorporated) for the purpose of acquiring and holding title to any property, interest or rights that the Trustee is authorized to acquire. SECTION 8 ADDITIONAL POWERS AND DUTIES OF THE TRUSTEE Following a Change in Control should the Company attempt to enjoin any benefit payment (other than for reasons of manifest error) that the Trustee has been directed to make under the terms of this Trust Agreement, the Trustee shall commence legal action to allow such payment. The Trustee may withdraw from the Trust assets any amounts it deems necessary to pay legal expenses, including attorneys' fees, incurred in the course of such legal action. Under no circumstances shall the Trustee be required to make such payments for benefits or expenses from any source other than the Trust. Except as otherwise limited by Section 6, the Trustee shall also have the following powers: A. To cause any asset, real or personal, to be held in a corporate depository or federal book entry account system or registered in the Trustee's name or in the name of a nominee or in such other form as the Trustee deems best without disclosing the trust relationship; provided, however, that nothing contained in this Section shall be deemed to relieve the Trustee of any custodial responsibility allocated to it under this Trust Agreement; B. To employ agents in the management of the Trust, including employees of the Company and its subsidiaries and affiliates prior to a Change in Control, provided, that the Trustee shall be responsible for the acts of such agents (other than acts of the United States Postal Service) as much as if they were acts of the Trustee; C. To make, execute and deliver, as the Trustee, any deeds, leases, notes, bonds, guarantees, mortgages, conveyances, contracts, waivers, releases or other instruments in writing that the Trustee may deem necessary or desirable in the exercise of its powers under this Trust Agreement; 13 D. To transfer assets of the Trust to a successor Trustee as provided in Section 24 of this Trust Agreement; E. To hold any portion of the Trust in cash pending investment, or for the payment of expenses or Supplemental Benefits; and F. To exercise, generally, any of the powers which an individual owner might exercise in connection with property, either real, personal or mixed held by the Trust and to do all other acts that the Trustee may deem necessary or proper to carry out any of the powers set forth in this Trust Agreement or otherwise in the best interests of the Trust. SECTION 9 INSURANCE POLICIES AND CONTRACTS Prior to a Change in Control, the Company reserves the right to transfer life insurance, retirement income or annuity policies or contracts, to the Trust, regardless of the nature or type of such contract and regardless of the Company's interest in, or power to direct the investments under, such policies or contracts, or prior to a Change in Control, to direct the Trustee to purchase any such policies or contracts, and following a Change in Control the Independent Plan Administrator shall have the same powers regarding such insurance policies and contracts. Any such policy or contract shall be an asset of the Trust subject to the claims of the Company's creditors in the event of insolvency, as specified in Sections 21.1 and 21.2 of this Trust Agreement. The proceeds of any life insurance policy shall, upon the death of the insured, be paid to the Trust. The Trustee shall be under no duty to question any direction of the Company or the Independent Plan Administrator, to review the form of any such policies or contracts or the selection of the issuer thereof, or to make suggestions to the Company, the Independent Plan Administrator or to the issuer thereof with respect to the form of such policies or contracts prior to a Change in Control, or to question any such directions, to review such policies, forms or selections or to make such suggestions to the Independent Plan Administrator following a Change in Control. Prior to a Change in Control, the Company may direct the Trustee to exercise the powers of the contract holder under any such policies or contracts, and the Trustee shall exercise such powers only upon the direction of the Company. Following a Change in Control, the Independent Plan Administrator may direct the Trustee to exercise the powers of the contract holder under any such policies or contracts and the 14 Trustee shall exercise such powers only upon direction of the Independent Plan Administrator. Notwithstanding anything to the contrary contained in any Participating Plan, the Trustee (i) shall be fully protected in acting in accordance with written directions of the Company prior to a Change in Control and with the written directions of the Independent Plan Administrator following a Change in Control, and (ii) shall be under no liability for any loss of any kind that may result by reason of any action taken or omitted by it in accordance with such direction of the Company or the Independent Plan Administrator, or by reason of inaction in the absence of such written directions from the Company or the Independent Plan Administrator. No insurance carrier shall for any purpose be deemed a party to this Trust Agreement or be responsible for the validity or sufficiency hereof. Notwithstanding the fact that it may have knowledge of the terms of this Trust, the obligations of such insurance carrier shall be measured and determined solely by the terms and conditions of the policies or contracts issued by it. Any such insurance carrier shall not be under any obligation to any person, partnership, corporation, trust or association other than as stated in such policies or contracts. SECTION 10 PARTICIPATING PLAN RECORDS A separate written record of the accrued and vested benefit, as applicable, for each Trust Beneficiary of each Participating Plan, based on a certified listing provided by the Company prior to a Change in Control and by the Independent Plan Administrator following a Change in Control, shall be maintained. The Company or the Independent Plan Administrator, as applicable, shall provide such certified listing at least once each calendar year to the Trustee. SECTION 11 VALUATION The Trust shall be revalued by the Trustee at current values, as determined by the Trustee, as of the last business day of each calendar year and as of such additional dates as the Trustee and Company shall determine to be appropriate ("Valuation"). The Company prior to a Change in Control and the Independent Plan Administrator following a Change in Control annually shall provide a certification of value for each life insurance, retirement income or annuity policy or contract held as an asset of the 15 Trust. The Trustee may rely upon the certification of value received from the Company prior to a Change in Control or the Independent Plan Administrator following a Change in Control for each such policy or contract held as an asset of the Trust. SECTION 12 PARTICIPANT RECORDS PRIOR TO AND FOLLOWING A CHANGE IN CONTROL Section 12.1. In addition to the records maintained under Section 10, the ------------- Company shall maintain a separate written record that reflects for each Trust Beneficiary, the Trust Beneficiary's vested benefits under each Participating Plan and the portion of the Trust or Subtrust allocated to such Trust Beneficiary (a "Participant Record"). Prior to a Change in Control, the Trustee shall certify to the Company the results of each Valuation. Following receipt of a Valuation, each Participant Record shall be equitably adjusted by the Company to reflect its share of the income, expense, appreciation and depreciation since the preceding Valuation date. Such Participant Records shall be maintained solely for record keeping purposes prior to a Change in Control, without any legal entitlement of a Trust Beneficiary to amounts allocated to his or her Participant Record. Section 12.2. On and after a Change in Control, the Independent Plan ------------- Administrator (i) shall continue to maintain the Participant Records and the records described in Section 10 of this Trust Agreement, (ii) shall thereafter be solely responsible for the updating of such Participant Records and for requesting the Trustee to make any additional Valuations the Trustee and Independent Plan Administrator deem appropriate, and (iii) shall be entitled to rely on the most recent certified listing delivered by the Company to the Trustee prior to a Change in Control in the maintenance and updating of such Participant Records following a Change in Control. No new Participant Records may be established following a Change in Control. The Independent Plan Administrator may, but is not required to, rely on any certified listing provided by the Company pursuant to Section 10 following a Change in Control. Following a Change in Control, the sole source of Trust assets from which the Independent Plan Administrator may direct that a Trust Beneficiary's Supplemental Benefits be paid to the extent the Trustee, rather than the Company, pays the Supplemental Benefits shall be that portion of the assets of the Trust or Subtrust allocated to the Participant Record of such Trust Beneficiary. 16 SECTION 13 TRUSTEE ACCOUNTS Within 120 days after the close of each fiscal year of the Trust and any other period agreed upon by the Trustee and the Company, and within ninety (90) days of the date of the removal or resignation of the Trustee, the Trustee shall file with the Company a written account ("Trustee Account") setting forth all investments, receipts, disbursements, withdrawals and other transactions effected by it during the period from the date of its last such Trustee Account and a list of the assets of the Trust at the close of such period. Such Trustee Account may be in the form of monthly or quarterly statements which taken together reflect the matters set forth in the preceding sentence. As between the Company and the Trustee, the Trustee shall be forever released and discharged from all liability with respect to the propriety of acts and transactions shown in such Trustee Account following a Change in Control, and shall be forever released and discharged from all liability with respect to the propriety of acts and transactions shown in such Trustee Account prior to a Change in Control except with respect to any such act or transaction as to which the Company shall, within a 90-day period of receipt of the Trust Account, file written objections with the Trustee and except that no such accounting shall foreclose any liability of the Trustee to the Company arising under Section 23.3 of this Trust Agreement. SECTION 14 INVESTMENT OF CASH Prior to a Change in Control, the Trustee shall keep any cash held hereunder from time to time on deposit in its own banking department or elsewhere as the Trustee elects, consistent with instructions provided by the Investment Officer of the Company regarding specific types of permissible investments and permissible depositories. Prior to a Change in Control, in the absence of contrary instructions from the Investment Officer, and following a Change in Control, in the absence of contrary instructions from the Independent Plan Administrator regarding insurance, retirement income or annuity policies or contracts, and anything herein to the contrary notwithstanding, the Trustee, without obtaining any prior approvals, may at its discretion invest cash balances held by the Trustee from time to time in deposits in its own banking department, in short-term cash 17 equivalents having ready marketability, including but not limited to U.S. Treasury bills, commercial paper rated not less than A1/P1 (including such forms thereof as may be available through the Trustee's own trust department), certificates of deposit, and similar type securities, having a maturity of 18 months or less, including participation in common or collective funds composed thereof. Prior to a Change in Control, the Trustee may sell any such short-term investments as may be necessary to carry out the instructions of the Investment Officer of the Company regarding more permanent type investments or to permit any distributions or transfers directed hereunder. The Trustee may make any such sales it deems appropriate following a Change in Control, including sales necessary to carry out the instructions of the Independent Plan Administrator. SECTION 15 PAYMENTS BY THE TRUSTEE Section 15.1. The establishment of the Trust and the payment or delivery ------------ to the Trustee of money or other property acceptable to the Trustee shall not vest in any Trust Beneficiary any right, title or interest in or to any assets of the Trust. Section 15.2. The Trustee shall be directed as to the amount, timing, and ------------ form of benefits to be paid to any Trust Beneficiary. Prior to a Change in Control, the Company shall so direct the Trustee and by giving such directions shall be deemed to warrant their propriety. Following a Change in Control, the Independent Plan Administrator shall so direct the Trustee and by giving such directions, shall be deemed to warrant their propriety. Section 15.3. The Trustee shall withhold all or any part of any payment ------------ for the payment of any tax liability and the Trustee shall discharge such liability as and when directed by the Company prior to a Change in Control and by the Independent Plan Administrator following a Change in Control. All withholding, related filings and reports are the responsibility of the Company. Section 15.4. The Company intends to make benefit payments from its asset ------------ as it deems appropriate, in its sole discretion, provided, that, notwithstanding this intent, if the Trust is not sufficient, before or after a Change in Control, to make one or more payments of Supplemental Benefits to the Trust Beneficiaries under the relevant Participating Plan, the Company shall make the balance of each such payment as it falls due. 18 Section 15.5. Except as otherwise provided herein, in the event of any ------------ final determination by the Internal Revenue Service or a court of competent jurisdiction which determination is not appealable or the time for appeal or protest of which has expired, or the receipt by the Trustee of an unqualified opinion of tax counsel selected by the Trustee or Company, which determination determines, or which opinion concludes, that any Trust Beneficiary is subject to federal income taxation on amounts held in trust to pay Supplemental Benefits hereunder prior to the distribution to the Trust Beneficiary of such Supplemental Benefits, the Trustee shall, on receipt by the Trustee of such opinion or actual notice of such determination, pay to such Trust Beneficiary the portion of the Trust corpus includible in such Trust Beneficiary's federal gross income, and the Trust Beneficiary's Supplemental Benefits shall be canceled to the extent of such payment, provided that the amount, form and timing of such payments and the amount and method of such cancellation shall be as directed by the Company prior to a Change in Control and by the Independent Plan Administrator following a Change in Control. SECTION 16 DETERMINATION OF CHANGE IN CONTROL The Company shall immediately notify the Trustee in writing of the occurrence of a Change in Control as the result of any event specified in Section 3.1 of this Trust Agreement. If the Trust Department of the Trustee receives written notice from a third party (including the Company's outside auditors) of the alleged occurrence of a Change in Control as the result of any event specified in Section 3.1 of this Trust Agreement, the Trustee shall request the Company to confirm or deny such occurrence and the Company shall make such confirmation or denial within forty-five (45) days following receipt of the Trustee's request. In order to deny that a Change in Control as the result of any event specified in Section 3.1 of this Trust Agreement has occurred, the Company shall provide with its notice a certificate, in a form reasonably satisfactory to the Trustee, from an independent accounting firm, which firm may be the accounting firm engaged by the Company to be its outside auditors, certifying that a Change in Control as the result of an event specified in Section 3.1 of this Trust Agreement has not occurred. Pending the Company's response, the Trustee shall not repay, pursuant to Section 5 of this Trust Agreement, any assets of the Trust to the Company and no new Trust Beneficiaries may be added to the Trust. The Trustee shall be entitled to conclusively rely upon such confirmation or denial. 19 SECTION 17 TRUSTEE COMPENSATION AND TRUST EXPENSES The Trustee shall be paid such reasonable compensation for its service as Trustee as shall from time to time be agreed upon by Company and Trustee. This compensation and all expenses incurred by the Trustee in the management and protection of the Trust, including administration, accounting and legal fees, shall be reimbursed by the Company within 30 days after the Company's receipt of a bill from the Trustee for any fees and expenses paid from the Trust assets. To the extent the Company fails to reimburse the Trustee, this compensation and extraordinary and non-recurring expenses shall be charged by the Trustee against the Trust. SECTION 18 PAYMENT OF TAXES BY TRUSTEE Prior to a Change in Control, to the extent that any taxes levied or assessed upon the Trust are not paid by the Company, the Trustee shall pay such taxes out of the Trust as directed by the Company. The Trustee shall, if requested by the Company prior to a Change in Control, and solely in its discretion following a Change in Control, contest the validity or amount of any tax assessment, claim or demand respecting the Trust or any part thereof. The Company itself may contest the validity of any such taxes prior to a Change in Control. SECTION 19 CUSTODIANS AND AGENTS When so instructed by the Company prior to a Change in Control with respect to Trust assets for which the Company has investment responsibility, and at the Trustee's sole discretion with respect to assets for which the Trustee has investment responsibility, the Trustee shall deposit any assets held by it with a custodian, which may not include the Company or an affiliate of the Company, and the Company shall hold harmless and defend the Trustee against any liability arising or asserted to arise out of the Trustee's compliance with directions under this Section 19 of this Trust Agreement. 20 SECTION 20 LIABILITY FOR BENEFIT PAYMENTS The Company shall remain primarily liable to pay Supplemental Benefits under the Participating Plans. However, the Company's liability under the Participating Plans shall be reduced or offset to the extent Supplemental Benefit payments are made from the Trust. SECTION 21 COMPANY INSOLVENCY Section 21.1. The Company shall have the duty to inform the Trustee in ------------ writing if the Company becomes insolvent, as hereinafter defined. When so informed, the Trustee shall immediately discontinue payments of Supplemental Benefits to Trust Beneficiaries, and shall hold the assets of the Trust for the benefit of the Company's general creditors. The Company shall be considered "insolvent" for purposes of this Trust Agreement in the event of the following: A. the Company's inability to pay debts as they mature; B. a general assignment for the benefit of the Company's creditors; C. the voluntary commencement by the Company of any proceeding under Title 11 of the United States Code or any other law of any jurisdiction for the relief, liquidation or rehabilitation of debtors (all of which proceedings are hereinafter collectively referred to as "Insolvency Proceedings"); D. the making of an admission by the Company of any of the material allegations of, or consenting to, or acquiescing in, a petition, application, motion or complaint commencing an Insolvency Proceeding or the seeking by the Company of the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or similar official of or for it or for a substantial part of its assets; E. the involuntary commencement of an Insolvency Proceeding against the Company which is not fully stayed, timely controverted or dismissed within one hundred twenty (120) days after the filing thereof; or 21 F. the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or similar official of or for the Company or of or for all or substantially all of its assets. If the Trust Department of the Trustee receives a written allegation from a third party that the Company has become insolvent, the Trustee shall appoint an independent accounting firm to determine within sixty (60) days whether the Company is insolvent under the terms of this Trust Agreement and, pending such determination, the Trustee shall discontinue payments of Supplemental Benefits to Trust Beneficiaries, shall hold the Trust assets for the benefit of the Company's general creditors, and shall resume payments of Supplemental Benefits to Trust Beneficiaries only after such independent accounting firm, has determined that the Company is not insolvent (or is no longer insolvent, assuming the independent accounting firm initially determined the Company to be insolvent) or after receipt of an order of a court of competent jurisdiction. In making its determination, such independent accounting firm, may rely on a letter from the Company's Controller, or its Independent Auditors, or on relevant information concerning the Company's solvency which has been furnished to the Trustee by any other person. Notwithstanding any other provision of this Trust Agreement, the Trustee shall be responsible only for the prudent selection of the independent accounting firm, and shall conclusively rely on such firm's determination. Nothing in this Trust Agreement shall in any way enlarge or diminish the rights of the Trust Beneficiaries in the event the Company is insolvent to pursue their rights as general creditors of the Company with respect to their Supplemental Benefits or otherwise. Section 21.2. In the case of the Company's notification of insolvency or ------------ the determination of insolvency by an independent accounting firm as provided in Section 21.1 of this Trust Agreement, the Trustee shall deliver any undistributed principal and income in the Trust to satisfy claims of the Company's general creditors as directed by a court of competent jurisdiction. Section 21.3. If the Trustee discontinues payments of Supplemental ------------ Benefits from the Trust pursuant to Section 21.1 of this Trust Agreement and subsequently resumes such payments, the first payment to each Trust Beneficiary following such discontinuance shall include the aggregate amount of all payments which would have been made to such Trust Beneficiary in accordance with the relevant Participating Plan during the period of such discontinuance, less the aggregate amount of payments of Supplemental Benefits made to such Trust Beneficiary by the 22 Company during any such period of discontinuance. Prior to a Change in Control, the Trustee shall be directed as to the amount, timing, form and payee of all such payments by the Company. Following a Change in Control, the Trustee shall be so directed by the Independent Plan Administrator. SECTION 22 TRUSTEE RESPONSIBILITY FOR PLAN ADMINISTRATION AND TRUST RECORD KEEPING AFTER CHANGE IN CONTROL Section 22.1. Following a Change in Control, the Independent Plan ------------ Administrator shall assume full responsibility for the interpretation and application of the Participating Plans' provisions and authorization for the payment of benefits as such provisions relate to payments to be made from the Trust. The Independent Plan Administrator shall have full discretion with respect to the performance of such duties and shall not be required to follow any direction of the Company, any successor thereto, or any other entity in performing such duties. Section 22.2. Following a Change in Control, the Trustee shall maintain ------------ all records dealing with the Trust and its investments; provided, however, that the responsibility for the maintenance of Plan records relating to Trust Beneficiaries, Participant Records and all other plan administration shall be the sole responsibility of the Independent Plan Administrator. The Trustee shall have no responsibility for the maintenance of the Participating Plan. SECTION 23 TRUSTEE STANDARDS OF PERFORMANCE AND INDEMNIFICATIONS Section 23.1. Trustee shall perform all of its functions hereunder (i) ------------ with the care, skill, prudence, and diligence which under the circumstances then prevailing a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, or (ii) in accordance with such other standard as may be required from time to time by law, and shall not be liable for any conduct on its part (including reliance on advice of counsel) which conforms to that standard. Section 23.2. The Company (which has the authority to do so under the laws ------------ of its state of incorporation) shall indemnify the Trustee and defend it and hold it harmless from and against any 23 and all direct liabilities, losses, claims, suits or expenses (including attorney's fees) of whatsoever kind and nature which may be imposed upon, asserted against or incurred by the Trustee at any time by reason of its carrying out its responsibilities or providing services hereunder or by reason of any act or failure to act under this Trust Agreement, except to the extent that any such liability, loss, claim, suit or expense arises directly from the Trustee's gross negligence or willful misconduct in the performance of responsibilities specifically allocated to it under this Trust Agreement. The provisions of this Section 23.2 shall survive the termination of this Trust Agreement. Section 23.3. The Trustee (which has the authority to do so under the laws ------------ of its state of incorporation) shall indemnify the Company and defend it and hold it harmless from and against any and all direct liabilities, losses, claims, suits or expenses (including attorney's fees) of whatsoever kind and nature which may be imposed upon, asserted against or incurred by the Company at any time directly by reason of the Trustee's gross negligence or willful misconduct in the performance of responsibilities specifically allocated to it under this Trust Agreement. The provisions of this Section 23.3 shall survive the termination of this Trust Agreement. SECTION 24 REMOVAL AND RESIGNATION OF TRUSTEE Prior to a Change in Control, Trustee may be removed by the Company at any time upon not less than thirty (30) days' written notice. The Trustee may resign at any time prior to or following a Change in Control, upon not less than ninety (90) days' written notice. In either case, such notice may be wholly or partially waived by the party to whom it is due. Upon Trustee's removal or resignation prior to a Change in Control, the Company shall appoint a successor Trustee, who shall have no responsibility for the acts or omissions of any predecessor trustee, and upon the Trustee's resignation following a Change in Control the Trustee shall petition a court of competent jurisdiction to name a successor trustee which in no event may be the Company or an affiliate of the Company or a successor thereto; provided, however, that the successor trustee in either case shall have the same powers and duties as those conferred upon the Trustee hereunder, and upon acceptance of such appointment by the successor Trustee, the Trustee shall assign, transfer and pay over to such successor Trustee the Trusts and properties then constituting the Trust. If the Company fails within a reasonable time to name a successor Trustee or otherwise direct proper 24 disbursement of the Trust prior to a Change in Control, the Trustee may apply to any court of competent jurisdiction for appropriate relief. The Trustee may in any event reserve such reasonable sum of money as it may deem advisable, to provide for any charges against the Trust for which it may be liable, and for payment of its fees and expenses in connection with the settlement of its account or otherwise. Any balance of such reserve remaining after the payment of such fees and expenses shall be paid over as aforesaid. SECTION 25 TERMINATION OF PARTICIPATING PLAN OR PLANS If a Participating Plan is wholly or partially terminated prior to a Change in Control, the Trustee shall disburse the portion of the Trust affected by the termination as directed by the Company. If a Participating Plan is wholly or partially terminated following a Change in Control, Trustee shall disburse the portion of the Trust affected by the termination as directed by the Independent Plan Administrator. SECTION 26 RIGHTS OF COMPANY TO TRUST ASSETS Section 26.1. Prior to a Change in Control, the Company shall have no ------------ right, title or interest in the Trust, nor shall any part of the Trust revert to or be repaid to the Company, until all benefits due under all Participating Plans have been paid pursuant to Section 25 of this Trust Agreement, unless, at any time, there is a determination that the assets of the Trust have a value exceeding one hundred twenty-five percent (125%) of the lump sum actuarial equivalent value of accrued but unpaid benefits under the Participating Plans pursuant to Section 5 of this Trust Agreement. The amount of such excess may be repaid to the Company, upon direction of the Company pursuant to the provisions of Section 5. Section 26.2. On and after the occurrence of a Change in Control, the ------------ Company shall have no right, title or interest in the Trust, nor shall any part of the Trust revert to or be repaid to the Company. 25 SECTION 27 AMENDMENTS OF TRUST Section 27.1. Prior to a Change in Control, the Company may amend this ------------ Trust Agreement by an instrument in writing signed by an authorized officer of the Company provided that no such amendment shall make this Trust revocable or divert any part of the Trust to purposes other than payment of Supplemental Benefits, payments under Sections 2 or 5 of this Trust Agreement, or defrayal of reasonable expenses of administering the Participating Plans. The Trustee's consent shall be required for any amendment affecting its duties, responsibilities or rights. No amendment affecting the duties, responsibilities or rights of the Trustee shall take effect until thirty (30) days after a copy of said amendment is furnished to the Trustee or, if the Trustee gives notice of resignation within such 30 day period, until the resignation becomes effective, provided, that the Trustee may, in writing, waive the 30 day requirement. Section 27.2. Following a Change in Control, this Trust Agreement may not ------------ be amended. SECTION 28 TERMINATION OF TRUST Section 28.1. Prior to a Change in Control, the Company may not terminate this Trust for reasons other than those provided in (A) and (B) below. Otherwise, this Trust shall be irrevocable. Removal or resignation of a Trustee pursuant to Section 24 shall not be deemed a termination of this Trust Agreement. A. This Trust will terminate if a federal court determines, after exhaustion of all appeals, that the Trust causes any of the Participating Plans to cease to be "unfunded" under the provisions of ERISA. B. The Company may terminate this Trust if the Company determines, based on advice of legal counsel satisfactory to the Trustee, that there is a significant risk that the Trust would cause any of the Participating Plans to be cease to be unfunded under ERISA prior to actual payment of any Supplemental Benefits. For purposes of this section, "significant risk" shall be based on (i) judicial authority or opinion of the U.S. Department of Labor, Treasury Department or Internal Revenue Service or (ii) a required 26 amendment under ERISA or the Internal Revenue Code, which failure to amend could result in significant penalty to the Company. If this Trust Agreement is terminated under (A) or (B), the Trust assets shall be distributed, in accordance with the Company's written direction, as follows: (i) If the Company determines it is possible to create a new trust which does not result in a Trust Beneficiary's constructive receipt of Supplemental Benefits under any Participating Plan or which will retain the Participating Plan's status as "unfunded" under ERISA, Trust assets shall be transferred to the new trust. The terms of the new trust shall be similar in all other respects to this Trust. (ii) If the Company determines that it is not possible to create a new trust, then the assets shall be distributed according to the allocation to the Trust Beneficiaries under Section 12.1. When all payments which have or may become payable pursuant to the terms of this Trust have been made or the Trust has been exhausted pursuant to a termination of this Trust Agreement under (A) or (B) above prior to a Change in Control, the Trustee shall pay all remaining assets to the Company upon the Company's certification of payments, subject to the Trustee's right to reserve such amounts it reasonably determines to be necessary to pay outstanding and accrued charges against the Trust. Section 28.2. On and after the occurrence of a Change in Control, the ------------ Independent Plan Administrator may in its discretion direct the Trustee to terminate this Trust Agreement and in conjunction therewith the Independent Plan Administrator shall direct the Trustee as to the names of the Trust Beneficiaries who are to receive payments and the time, amount and form of payment of Supplemental Benefits and any remaining assets of the Trust, subject to the Trustee's right to reserve such amounts the Trustee determines necessary for outstanding and accrued charges against the Trust. SECTION 29 SUCCESSORS Any successor in interest to the Trustee shall automatically become Trustee under this Trust Agreement. 27 SECTION 30 COMMUNICATIONS Any communications (including notices, instructions, or directions) required or permitted hereunder to be given by the Company shall be given in writing addressed to the Trustee and signed by an officer of the Company or other person or persons whom the Company notifies the Trustee are from time to time authorized to sign such communications, and the Company warrants that all communications given pursuant to this Section 30 may be relied upon by the Trustee. The Company shall furnish the Trustee specimen signatures of all persons authorized to sign communications to the Trustee. SECTION 31 UNCLAIMED DISTRIBUTIONS If any benefit payment mailed by regular U.S. Mail to the last address of the payee furnished by the Company is returned unclaimed, the Trustee shall so notify the Company and shall discontinue further payments to such payee until it receives further instructions of the Company. SECTION 32 PROHIBITION OF ASSIGNMENTS Except insofar as applicable law may otherwise require and subject to Sections 1, 2, 21.1 and 21.2 of this Trust Agreement, (i) no amount payable to or in respect of any Trust Beneficiary at any time under the Trust shall be subject in any manner to direction by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, or charge of any kind, and any attempt to so alienate, sell, transfer, assign, pledge, attach, change or otherwise encumber any such amount, whether presently or thereafter payable, shall be void and (ii) the Trust shall in no manner be liable for or subject to the debts or liabilities of any Trust Beneficiary. No amount held under this Trust Agreement shall be subject to voluntary or involuntary alienation. 28 SECTION 33 GOVERNING LAW This Trust Agreement shall be governed by and construed under the laws of the State of Massachusetts in all respects. SECTION 34 EXECUTION This Trust Agreement may be executed in counterparts, each of which shall be an original although the others are not produced. IN WITNESS WHEREOF, the parties have caused this Trust Agreement to be executed as of the date first written above. ATTEST: LYONDELL PETROCHEMICAL COMPANY ____________________________ By:____________________________________ Assistant Secretary Richard W. Park Vice President, Human Resources ATTEST: STATE STREET BANK AND TRUST COMPANY ____________________________ By:____________________________________ 29 APPENDIX A TO LYONDELL PETROCHEMICAL COMPANY SUPPLEMENTAL EXECUTIVE BENEFIT PLANS TRUST AGREEMENT Lyondell Petrochemical Company Supplementary Executive Retirement Plan Lyondell Petrochemical Company Executive Deferral Plan 30 EX-10.8A 10 EXECUTIVE BENEFITS PLAN EXHIBIT 10.8(a) INSTRUMENT AMENDING LYONDELL PETROCHEMICAL COMPANY SUPPLEMENTAL EXECUTIVE BENEFIT PLANS TRUST AGREEMENT Lyondell Petrochemical Company hereby amends, effective August 1, 1997, the Lyondell Petrochemical Company Supplemental Executive Benefit Plans Trust Agreement, as follows: Section 3, CHANGE IN CONTROL, Section 3.2., "Definition of Change in Control" is revised in its entirety to read as follows: SECTION 3.2. Definition of "Change in Control". A "Change in Control" ----------- shall be deemed to have occurred as of the date that one or more of the following occurs: A. 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; B. The stockholders of the Company shall approve (I) 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 (i) 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 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 (ii) 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 (2) any plan or proposal for the liquidation or dissolution of the Company; C. 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 (C): (i) 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 (ii) 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 (i) or (ii) -------- ------- of this Subsection (C) 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 (C); or D. ARCO shall become the owner, directly or indirectly, of securities of the Company representing in the aggregate more than fifty percent (50%) of either (1) the then outstanding Common Shares or (2) 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 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 (D), 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 (D) 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 (D). Notwithstanding any of the foregoing, no Change in Control shall be deemed to have occurred as a result solely of (1) the registration by ARCO of the Exchangeable Notes pursuant to the Registration Statement, (2) the issuance 3 and sale by ARCO of the Exchangeable Notes to the underwriters in accordance with the Registration Statement, (3) prior to the maturity of the Exchangeable Notes, purchases and sales of the Exchangeable Notes, or (4) a transaction in which assets of the Company are contributed to an entity pursuant to the creation of a partnership under the terms of certain agreements authorized by the Incumbent Directors on July 25, 1997. IN WITNESS WHEREOF, the undersigned, being duly authorized on behalf of the Company, has executed this instrument on this __________ day of August, 1997. ATTEST: LYONDELL PETROCHEMICAL COMPANY BY: ________________________ BY:___________________________ Assistant Secretary Richard W. Park Vice President, Human Resources 4 EX-10.9B 11 RESTRICTED STOCK PLAN EXHIBIT 10.9 (B) INSTRUMENT AMENDING RESTRICTED STOCK PLAN OF LYONDELL PETROCHEMICAL COMPANY LYONDELL PETROCHEMICAL COMPANY hereby amends the Restricted Stock Plan of Lyondell Petrochemical Company, effective August 1, 1997, as follows: Section 5, Terms and Conditions of Restricted Shares, subsection (e)(iii), ----------------------------------------- Change of Control, is amended to read as follows: Section 5 Terms and Conditions of Restricted Shares ----------------------------------------- (e) (iii) "Change in Control means a change in control as defined in the Company's Supplemental Executive Benefit Plans Trust Agreement. IN WITNESS WHEREOF, LYONDELL PETROCHEMICAL COMPANY, acting by and through its duly authorized officer, has caused this Instrument to be executed on August ___,1997. ATTEST: LYONDELL PETROCHEMICAL COMPANY By:__________________________ By:________________________________ Assistant Secretary Richard W. Park Vice President, Human Resources EX-10.11(B) 12 DEFERRAL PLAN Exhibit 10.11(b) INSTRUMENT AMENDING LYONDELL PETROCHEMICAL COMPANY ELECTIVE DEFERRAL PLAN FOR NON-EMPLOYEE DIRECTORS LYONDELL PETROCHEMICAL COMPANY hereby amends the Lyondell Petrochemical Company Elective Deferral Plan for Non-Employee Directors, effective August 1, 1997, to read as follows: SECTION 1.3. DEFINITIONS, Subsection (f), Change in Control, is amended to read as follows: (f) 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 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 2 (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 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, (iii) prior to the maturity of the Exchangeable Notes, purchases and sales of the Exchangeable Notes, or (iv) a transaction in which assets of the Company are contributed to an entity pursuant to the creation of a partnership under the terms of certain agreements authorized by the Incumbent Directors on July 25, 1997. (v) For purposes of this Section 1.3: (1) "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 3 terms as used in Rule 405 under the Securities Act of 1933, as amended, or any successor rule. (2) "ARCO" shall mean Atlantic Richfield Company and any of its Affiliates, excluding the Company. (3) "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. (4) "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. (5) "LCR" shall mean LYONDELL-CITGO Refining Company Ltd., a Limited Liability Company organized under the laws of the State of Texas. (6) "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. (7) "Registration Statement" shall mean ARCO's registration statement on Form S-3 (Registration No. 33-53481) with respect to the Exchangeable Notes. 4 (8) "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. IN WITNESS WHEREOF, LYONDELL PETROCHEMICAL COMPANY, acting by and through its duly authorized officer, has caused this Instrument to be executed on this ____ day of August, 1997. ATTEST: LYONDELL PETROCHEMICAL COMPANY By:________________________ By:_____________________________________ Assistant Secretary Jeffrey R. Pendergraft Senior Vice President and Secretary 5 EX-10.12 13 RETIREMENT PLAN EXHIBIT 10.12 INSTRUMENT AMENDING AND RESTATING LYONDELL PETROCHEMICAL COMPANY RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS Lyondell Petrochemical Company hereby amends and restates the Retirement Plan for Non-Employee Directors, effective as of November 1, 1996, to read in its entirety as the document entitled "Lyondell Petrochemical Company Retirement Plan for Non-Employee Directors" that is attached hereto. IN WITNESS WHEREOF, the undersigned, being duly authorized on behalf of the Company, has executed this Instrument on this ____ day of June, 1997. ATTEST: LYONDELL PETROCHEMICAL COMPANY BY:_______________________ BY:___________________________________ Assistant Secretary Jeffrey R. Pendergraft Senior Vice President and Secretary LYONDELL PETROCHEMICAL COMPANY ________________________________________________________________________________ RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS AS AMENDED AND RESTATED EFFECTIVE NOVEMBER 1, 1996 ARTICLE I DEFINITIONS 1.1 Actuarial Equivalent means, in comparing benefits payable in different forms or at different times or in different circumstances, a value under one such set of circumstances which is the same as the value under a different set of circumstances. Such value shall be computed and determined with reference to mortality assumptions, interest rates and other actuarial factors and assumptions then in effect under the Lyondell Petrochemical Company Retirement Plan for Non-Represented Employees for the purpose of calculating actuarial equivalents under that Plan. 1.2 Administrative Committee means the Directors Benefit Committee. 1.3 Beneficiary means a person or persons designated by the Non-Employee Director or Retiree to receive the Death Benefit under Article IV. 1.4 Board means the Board of Directors of Lyondell Petrochemical Company. 1.5 Company means Lyondell Petrochemical Company. 1.6 Death Benefits means the benefit described under and determined in accordance with Article IV of the Plan. 1.7 Director means a Director of the Board. 1.8 Effective Date means November 28, 1988. 1.9 Financial Hardship means a condition of financial difficulty, relating to a Non-Employee Director, Retiree or Beneficiary, as the case may be, determined by the Administrative Committee, upon advice of counsel, to be sufficient to justify a change of election in the form of benefit under either Article III or IV, as applicable, without causing the receipt of taxable income by any other participant in the Plan in advance of the payment to him of Plan benefits. 1.10 Lump Sum Payment means a single cash payment which shall be the Actuarial Equivalent of the sum of the monthly payments otherwise payable (or the remainder payable in the case of an election under Section 3.3(b) or 4.3(b)) during the Payment Period in the case of a Non-Employee Director with less than 180 months of completed Service on the Board and which shall be the Actuarial Equivalent of a life annuity with a term certain of 180 months otherwise payable (or the remainder payable in the case of an election under Section 3.3(b) or 4.3(b)) during the Payment Period in the case of a Non-Employee Director with 180 or more months of completed Service on the Board. 1.11 Non-Employee Director means (i) a Director of the Company that is not a current employee of the Company, Atlantic Richfield Company, ARCO Chemical Company or a subsidiary or affiliate of any of these entities and who has not been an employee of any of these entities within three years prior to the date the person became a Director or (ii) a Director who for at least three (3) years has not been an employee of any of the entities described in clause (i) above. 1.12 Pay for purposes of the Plan means an amount equal to one-twelfth of the annual retainer paid to a Non-Employee Director immediately preceding the earlier of termination of Service on the Board or death. In the event of a Change in Control, as determined under Section 5.3, Pay means an amount equal to one-twelfth of the annual retainer paid to a Non-Employee Director immediately preceding the Change in Control, but if the annual retainer has been reduced in anticipation of the Change in Control, the amount shall equal one-twelfth the annual retainer paid to a Non-Employee Director immediately prior to its reduction. Pay does not include fees paid for committee chairmanships, Board and committee meeting fees or any other special director compensation. 1.13 Payment Period means the period the Retiree and/or Beneficiary receives benefits in the form of a monthly allowance from this Plan. The Payment Period will be that number of months equal to the Non-Employee Director's Service on the Board expressed in months; provided, however, that if a Retiree completed 180 months or more of Service on the Board as a Non-Employee Director, the Payment Period shall be the greater of 180 months or for the remaining life of the Retiree. 1.14 Plan is the Retirement Plan for Non-Employee Directors of Lyondell Petrochemical Company. 1.15 Retiree means a former Non-Employee Director with a vested benefit under the Plan. 1.16 Retirement Benefit means the benefits described under and determined in accordance with Section 3.1. 1.17 Service on the Board means (i) for a Non-Employee Director described in Section 1.11(i) all service on the Board as a Non-Employee Director and (ii) for a Non-Employee Director described in Section 1.11(ii), service on the Board from the later of the date the Non-Employee Director became a Director or the Non- Employee Director's termination of employment with the Company, Atlantic Richfield Company, ARCO Chemical Company or a subsidiary or affiliate of any of these entities, as applicable. Service on the Board shall also include service as a director of a company merged into the Company provided the Non-Employee Director was a director of the acquired company immediately prior to the merger. 2 1.18 Trust Agreement means the Trust Agreement between Lyondell Petrochemical Company and State Street Bank & Trust Company and any amendments or successor agreements thereto. ARTICLE II ELIGIBILITY AND VESTING 2.1 Any Non-Employee Director will be a participant in this Plan. 2.2 Any Non-Employee Director who has completed three (3) years of Service on the Board will be vested in the benefits provided under Article III of the Plan. ARTICLE III RETIREMENT BENEFIT 3.1 A Retiree shall be paid a monthly retirement allowance equal to Pay unless an optional form of benefit was elected pursuant to Section 3.3. The allowance will be paid to the Retiree until the earlier of (i) the end of the applicable Payment Period or (ii) the death of the Retiree. 3.2 The Retirement Benefit will commence in the month following retirement from the Board provided the Retiree is at least age 65 at the time of retirement from the Board. The Retirement Benefit for a Retiree who left the Board prior to age 65 will commence in the month following attainment of age 65. 3.3 In lieu of a monthly retirement allowance, a Retiree may receive payment of his Retirement Benefit in the form of a Lump Sum Payment upon termination of Service on the Board and satisfaction of the following conditions: (a) A Non-Employee Director must elect that the Retirement Benefit be paid in the form of a Lump Sum Payment prior to the attainment of age 64 or at least one year prior to termination of Service on the Board, if earlier. A Non- Employee Director who is age 64 or older when he becomes eligible to participate in the Plan must elect to have the Retirement Benefit paid in the form of a Lump Sum Payment within 30 days of becoming eligible to participate in the Plan. (b) A Non-Employee Director who fails to timely elect a Lump Sum Payment under subparagraph (a) or a Retiree currently receiving a monthly retirement 3 allowance who wishes to receive his remaining monthly benefits in the form of a Lump Sum Payment may request the Administrative Committee to change the form of payment previously elected. The Administrative Committee, in its sole discretion, may allow such request provided that (i) the Administrative Committee determines that the Non-Employee Director or Retiree has experienced a Financial Hardship justifying the request for a change of election, or (ii) the Non-Employee Director or Retiree, as applicable, agrees to accept a reduction in amount of his Retirement Benefit, as determined to be necessary to preclude constructive receipt of taxable income by any Non-Employee Director participating in the Plan in advance of the payment to him of the Retirement Benefit. The amount by which the Retirement Benefit is reduced under the preceding sentence will be forfeited to the Company. (c) The Lump Sum Payment option described in this Section may be discontinued by the Company in its sole discretion at any time. Any elections made pursuant to this Section prior to the time when the Company discontinues the Lump Sum Payment option shall be disregarded and Retirement Benefits shall be paid in accordance with Section 3.1. ARTICLE IV DEATH BENEFITS 4.1 The Beneficiary of a Non-Employee Director who dies while a member of the Board or a Retiree who dies prior to the attainment of age 65 will receive as a Death Benefit an allowance equal to 50% of Pay unless an optional form of benefit was elected pursuant to Section 4.3. This allowance shall be payable monthly commencing in the month following the Non-Employee Director's or Retiree's death and shall continue until the end of the Payment Period or until the death of the Beneficiary, whichever occurs first. If the Non-Employee Director or Retiree dies without designating a Beneficiary, then this allowance shall be payable in the form of a Lump Sum Payment to the Director's estate. 4.2 The monthly retirement allowance paid a Retiree will be continued and paid as a Death Benefit to the Beneficiary of a Retiree who dies on or after attainment of age 65 unless the Retiree elected an optional form of benefit pursuant to Section 4.3. This allowance shall be payable monthly commencing in the month following the Retiree's death and shall continue until the end of the Payment Period or until the death of the Beneficiary, whichever occurs first. If the Beneficiary dies prior to the end of such Payment Period, the remaining payments will be paid in the form of a Lump Sum Payment to the Beneficiary's estate. If the Retiree dies without designating a Beneficiary, then such allowance shall be payable in a Lump Sum Payment to the Retiree's estate. 4 4.3 (a) In lieu of payment of the Death Benefit as a monthly allowance, a Non- Employee Director may elect prior to commencement of his Retirement Benefit to have the Death Benefit, if any, paid in the form of a Lump Sum Payment to his Beneficiary. (b) A Beneficiary of a deceased Non-Employee Director or Retiree may request the Administrative Committee to change the Non-Employee Director's prior election. The Administrative Committee, in its sole discretion, may allow such request provided that (i) the Administrative Committee determines that the Beneficiary has experienced a Financial Hardship, justifying the request for a change of election, or (ii) the Beneficiary agrees to accept a reduction in the amount of the Death Benefit, as determined to be necessary, upon advice of counsel, to preclude constructive receipt of taxable income by any Non-Employee Director in advance of the payment to him of the Retirement Benefit. The amount by which the Death Benefit is reduced under the preceding sentence will be forfeited to the Company. (c) The Lump Sum Payment option described in this Section may be discontinued by the Company in its sole discretion at any time. Any elections made pursuant to this Section prior to the time when the Company discontinues the Lump Sum Payment option shall be disregarded and the Death Benefit shall be paid in accordance with Section 4.1 or 4.2, as applicable. 4.4 No Death Benefit will be paid to any Beneficiary if the Retiree elected and received a Lump Sum Payment of the Retirement Benefit described in Section 3.1. ARTICLE V CHANGE IN CONTROL 5.1 Upon a Change in Control as defined in Section 5.3, the amount of benefits for all then remaining Non-Employee Directors shall be determined based on the Non-Employee Director's Pay, as defined under Section 1.12 and Service on the Board as of the date of Change in Control. Service on the Board and Pay following a Change in Control shall be disregarded for purposes of determining the amount of benefits payable under this Plan. 5.2 Notwithstanding any other provision of the Plan, on a Change in Control, a Non-Employee Director, a Retiree or a Beneficiary of a deceased Non- Employee Director or Retiree will receive a Lump Sum Payment of vested benefits under the Plan, in lieu of payments in accordance with any form previously selected by the Non-Employee Director or Retiree. This Lump Sum Payment shall be made immediately to a Retiree and Beneficiary. It shall also be paid immediately to a Non-Employee Director, 5 unless the Non-Employee Director previously elected an alternate payment commencement date, as established under Administrative Committee procedures. 5.3 For purposes of this Plan, a Change in Control will be deemed to have occurred as of the date that one or more of the following occurs: 6 (a) 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; (b) 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 80 percent or more of (a) the then outstanding common stock or other equity interests of the corporation or other entity surviving or 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; (c) 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 in Control" shall not be deemed to have occurred for purposes of this Subsection (iii) 7 (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 20 percent 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 20 percent 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 in Control" shall be deemed to have occurred for purposes of this Subsection (iii) (d) ARCO shall become the owner, directly or indirectly, of securities of the Company representing in the aggregate more than 50 percent 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 beneficially owned by ARCO to more than 50 percent of the Common Shares then outstanding, or (y) the proportionate voting power represented by the Voting Securities beneficially owned by ARCO to more than 50 percent 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 the Plan, 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). 8 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. For purposes of this Section V: 1. "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. 2. "ARCO" shall mean Atlantic Richfield Company and any of its Affiliates, excluding the Company. 3. "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. 4. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 5. "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. 6. "LCR" shall mean LYONDELL-CITGO Refining Company Ltd., a Limited Liability Company organized under the laws of the State of Texas. 7. "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. 8. "Registration Statement" shall mean ARCO's registration statement on Form S-3 (Registration No. 33-53481) with respect to the Exchangeable Notes. 9 9. "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. 10 ARTICLE VI SOURCE OF BENEFITS AND FUNDING 6.1 Non-Employee Directors, Retirees and their Beneficiaries shall have no legal or equitable rights, claims or interests in any specific assets or property of the Company, nor shall they be the beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts, or the proceeds therefrom owned, or which may be acquired, by the Company ("Policies"). Any such Policies or other assets of the Company shall be, and remain, the general, unpledged, unrestricted assets of the Company. The Company's obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Company to pay money in the future. 6.2 Although the Company is responsible for the payment of all benefits under the Plan, the Company may, in its discretion, contribute funds to a grantor trust for the purpose, as it deems appropriate, of paying benefits under this Plan. Such trust, including the Trust Agreement, may be irrevocable, but assets of trust shall be subject to the claims of creditors of Company. To the extent any benefits provided under the Plan are actually paid from the trust, the Company shall have no further obligation with respect thereto but to the extent not so paid, such benefits shall remain the obligation of, and shall be paid, by the Company. The Directors shall have the status of unsecured creditors insofar as their legal claim for benefits under the Plan and the Non-Employee Directors or Retirees shall have no security interest in the grantor trust. ARTICLE VII MISCELLANEOUS 7.1 The Company may, in its sole discretion, terminate, suspend or amend the Plan at any time or from time to time, in whole or in part. However, no amendment, suspension, or termination of the Plan may reduce the benefit of a Non-Employee Director, Retiree or Beneficiary accrued through the date of such amendment, suspension or termination or adversely affect the right or ability of a Non-Employee Director, Retiree or Beneficiary to receive such benefit in accordance with the terms of the Plan as in effect on the date before such amendment, suspension or termination. 7.2 Nothing contained herein will confer upon any Non-Employee Director the right to be retained in the Service of the Company as a Director. 7.3 To the maximum extent permitted by law, no benefit under the Plan or assets of the trust shall be assignable or subject in any manner to alienation, sale, transfer, claims 11 or creditors, pledge, attachment or encumbrances of any kind except as provided in the applicable trust document. 7.4 The Administrative Committee may adopt rules and regulations to assist it in the administration of the Plan. The Administrative Committee shall in its sole discretion have the right to appoint such agents as it may deem necessary to carry out is duties pursuant to the provisions of the Plan. 7.5 (a) The Administrative Committee shall be charged with the administration of the Plan and shall decide all questions arising in the administration, interpretation and application of the Plan, including all questions of benefit payments. The decision of the Administrative Committee shall be conclusive and binding on all parties, provided that the Administrative Committee has acted in good faith and in accordance with the provisions of the Plan. (b) Except as hereinbefore provided, any determination by a majority of the Administrative Committee at a meeting thereof, whether in person or by telephone, or without a meeting by a resolution or memorandum signed by all the members, shall be final and conclusive on the Company, on all Directors, Retirees and Beneficiaries claiming any right hereunder, and on all third parties dealing with the Company. (c) Any member of the Administrative Committee may resign at any time by giving written notice to the other members and to the Company, effective as therein stated, or otherwise upon receipt. 7.6 Each Non-Employee Director shall receive a copy of the Plan and the Administrative Committee will make available for inspection by any Non-Employee Director a copy of the rules and regulations used by the Administrative Committee in administering the Plan. 7.7 Each Non-Employee Director shall cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Company may deem necessary and taking such other relevant action as may be requested by the Company. If a Non-Employee Director refuses to cooperate, the Company shall have no further obligation to the Non-Employee Director under the Plan. If a Non-Employee Director makes any material misstatement of information or nondisclosure of medical history, then no benefits will be payable hereunder to such Non-Employee Director or his Beneficiary, provided, that in the Company's sole discretion, benefits may be payable in an amount reduced to compensate the Company for any loss, cost, damage or expense suffered or incurred by the Company as a result in any way of any action, misstatement or nondisclosure. 12 7.8 The Plan is established under and will be construed according to the laws of the State of Texas. 13 EX-10.12(A) 14 RETIREMENT PLAN EXHIBIT 10.12(a) INSTRUMENT AMENDING LYONDELL PETROCHEMICAL COMPANY RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS LYONDELL PETROCHEMICAL COMPANY hereby amends the Lyondell Petrochemical Company Retirement Plan for Non-Employee Directors, effective August 1, 1997, to read as follows: ARTICLE V, CHANGE IN CONTROL, Section 5.3, is amended to read as follows: 5.3 For purposes of this Plan, a Change in Control will be deemed to have occurred as of the date that one or more of the following occurs: (a) 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; (b) 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 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; (c) 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 (i) the then outstanding shares of common stock of the Company ("Common Shares") or (ii) 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 (c). (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 (c) 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 (c); or (d) 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 beneficially owned by ARCO to more than fifty percent (50%) of the Common Shares then outstanding, or (y) 2 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 (d), 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 (d) 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 (d). 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, (iii) prior to the maturity of the Exchangeable Notes, purchases and sales of the Exchangeable Notes, or (iv) a transaction in which assets of the Company are contributed to an entity pursuant to the creation of a partnership under the terms of certain agreements authorized by the Incumbent Directors on July 25, 1997. (e) For purposes of this Section 5.3: (1) "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. (2) "ARCO" shall mean Atlantic Richfield Company and any of its Affiliates, excluding the Company. (3) "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. 3 (4) "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. (5) "LCR" shall mean LYONDELL-CITGO Refining Company Ltd., a Limited Liability Company organized under the laws of the State of Texas. (6) "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. (7) "Registration Statement" shall mean ARCO's registration statement on Form S-3 (Registration No. 33-53481) with respect to the Exchangeable Notes. (8) "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. IN WITNESS WHEREOF, LYONDELL PETROCHEMICAL COMPANY, acting by and through its duly authorized officer, has caused this Instrument to be executed on this ____ day of August, 1997. ATTEST: LYONDELL PETROCHEMICAL COMPANY By:______________________ By:_____________________________________ Assistant Secretary Jeffrey R. Pendergraft Senior Vice President and Secretary 4 EX-10.13(A) 15 RESTRICTED STOCK PLAN EXHIBIT 10.13(a) INSTRUMENT AMENDING LYONDELL PETROCHEMICAL COMPANY RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS LYONDELL PETROCHEMICAL COMPANY hereby amends the Lyondell Petrochemical Company Restricted Stock Plan for Non-Employee Directors, effective August 1, 1997, as follows: Section 5. Terms and Conditions of Restricted Shares, subsection (d)(iii), ----------------------------------------- Change of Control, is amended to read as follows: Section 5 Terms and Conditions of Restricted Shares ----------------------------------------- (d) (iii) "Change in Control" shall mean a change in control as defined in the Company's Non-Employee Director Benefit Plans Trust Agreement. IN WITNESS WHEREOF, LYONDELL PETROCHEMICAL COMPANY, acting by and through its duly authorized officer, has caused this Instrument to be executed on August ___,1997. ATTEST: LYONDELL PETROCHEMICAL COMPANY By:____________________ By:________________________________ Assistant Secretary Jeffrey R. Pendergraft Senior Vice President and Secretary EX-10.14 16 TRUST AGREEMENT EXHIBIT 10.14 LYONDELL PETROCHEMICAL COMPANY NON-EMPLOYEE DIRECTORS BENEFIT PLANS TRUST AGREEMENT (EFFECTIVE AS OF FEBRUARY 1, 1997) TABLE OF CONTENTS
PAGE Recitals.................................................... 1 Section 1. Creation of the Trust........................... 2 Section 2. Limitation on Use of Funds...................... 3 Section 3. Change in Control............................... 4 Section 4. Independent Plan Administrator.................. 8 Section 5. Excess Revision................................. 9 Section 6. Authority of Investment Officer................. 10 Section 7. Duties and Powers of Trustee with Respect to Investments................................... 10 Section 8. Additional Powers and Duties of the Trustee..... 13 Section 9. Insurance Policies and Contracts................ 14 Section 10. Participating Plan Records...................... 15 Section 11. Valuation....................................... 15 Section 12. Participant Records Prior to and Following a Change in Control............................. 16 Section 13. Trustee Accounts................................ 16 Section 14. Investment of Cash.............................. 17 Section 15. Payments by the Trustee......................... 18 Section 16. Determination of Change in Control.............. 19 Section 17. Trustee Compensation and Trust Expenses......... 19 Section 18. Payment of Taxes By Trustee..................... 20 Section 19. Custodians and Agents........................... 20 Section 20. Liability for Benefit Payments.................. 20 Section 21. Company Insolvency.............................. 21 Section 22. Trustee Responsibility for Plan Administration and Trust Record Keeping After Change in Control....................................... 22 Section 23. Trustee Standards of Performance and Indemnification ........................... 23 Section 24. Removal and Resignation of Trustee.............. 24 Section 25. Termination of Participating Plan or Plans...... 25 Section 26. Rights of Company to Trust Assets............... 25 Section 27. Amendment of Trust.............................. 25 Section 28. Termination of Trust............................ 26 Section 29. Successors...................................... 27 Section 30. Communications.................................. 27 Section 31. Unclaimed Distributions......................... 28 Section 32. Prohibition of Assignments...................... 28 Section 33. Governing Law................................... 28 Section 34. Execution....................................... 28 Appendix A.................................................. 30
LYONDELL PETROCHEMICAL COMPANY NON-EMPLOYEE DIRECTORS BENEFIT PLANS TRUST AGREEMENT THIS AGREEMENT, as adopted as of February 1, 1997, between LYONDELL PETROCHEMICAL COMPANY (the "Company"), and STATE STREET BANK AND TRUST COMPANY, a banking corporation having its principal place of business at 225 Franklin Street, Boston, Massachusetts, 01201 (the "Trustee"); R E C I T A L S A. Effective February 1,1997, the Company and the Trustee enter into this Agreement to create a Trust (defined under Section 1 of this Trust Agreement) for purposes of the Lyondell Petrochemical Company Retirement Plan for Non- Employee Directors, the Lyondell Petrochemical Company Elective Deferral Plan for Non-Employee Directors and any benefit plans that may be established and maintained by the Company for its non-employee directors after the effective date of this Trust and that permit funding by this Trust. The benefit plans that may be funded by this Trust are listed in Appendix A attached hereto and shall hereinafter be referred to as the "Participating Plans". B. The amount and timing of benefit payments ("Benefits") to which the participants of the Participating Plans (the "Trust Beneficiaries") are or may become entitled under each of the Participating Plans are set forth in the Participating Plans. C. The Company established this trust fund to assist it in accumulating the amounts necessary to satisfy its contractual liability to pay Benefits under the Participating Plans. D. The Company is obligated to pay all Benefits from its general assets to the extent not paid by this Trust and this Trust Agreement shall not reduce or otherwise affect the Company's continuing liability to pay Benefits from such assets, except that the Company's liability shall be offset by actual benefit payments made from this Trust. E. This trust is intended to be a "grantor trust" with the result that the corpus and income of the Trust shall be treated as assets and income of the Company pursuant to Sections 671 through 679 of the Internal Revenue Code of 1986, as amended (the "Code"). 1 F. The Company intends that the Trust shall at all times be subject to the claims of the Company's creditors as herein provided and that the Participating Plans shall not be deemed funded within the meaning of the Employee Retirement Income Security Act of 1974, as amended, ("ERISA") solely by virtue of the existence of this Trust Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: SECTION 1 CREATION OF THE TRUST There is hereby established and continued with the Trustee a trust consisting of all sums paid to it for purposes of the Participating Plans, investments thereof and any earnings, appreciations or losses thereon, which, less disbursements made by Trustee, and amounts paid to the Company as provided in Section 2 of this Trust Agreement, are referred to herein as the "Trust" and shall be dealt with as provided in this Trust Agreement. The Trust shall be held for the exclusive purpose of providing payments to Trust Beneficiaries in accordance with the provisions of the Participating Plans, and defraying reasonable expenses of administration in accordance with the provisions of this Trust Agreement until all such payments required by this Trust Agreement have been made, subject to the provisions on the use of Funds under Section 2 of this Trust Agreement, and to the requirement that the Trust shall at all times be subject to the claims of the general creditors of the Company as set forth in Sections 21.1 and 21.2 of this Trust Agreement. The Trustee shall have no duty or authority to inquire into the correctness of amounts tendered to it or to enforce the collection of any contribution by the Company. The Company shall direct the Trustee to establish a separate subtrust ("Subtrust") for each Plan to which the Trustee shall credit contributions it receives which are earmarked for that Plan and Subtrust. Each Subtrust shall reflect an undivided interest in assets of the trust fund and shall not require any segregation of particular assets. When Subtrusts are established, all contributions shall be designated by the Company for a particular Subtrust. However, any contribution received by the Trustee which is not designated by the Company for a particular Subtrust before a Change in Control shall be allocated among the Subtrusts in proportion to each Participating Plan's pro rata interest in the Trust, as calculated during the last Valuation. When a Subtrust 2 is established at a date subsequent to execution of this Agreement, the Trustee shall allocate the Trust assets among the separate Subtrusts as directed by the Company prior to a Change in Control. The Company may direct the Trustee, or the Independent Plan Administrator may determine on its own initiative after a Change in Control, to maintain a separate sub-account within each Subtrust for a Plan for each Participant who is covered by the Subtrust. If so directed, each sub-account in a Subtrust shall reflect an individual interest in assets of the Subtrust and, as much as possible, shall operate in the same manner as if it were a separate Subtrust. The Trustee shall allocate investment earnings and losses and expenses of the trust fund as of a valuation date among the Subtrusts in proportion to their balances. Payments to creditors as directed by a court of competent jurisdiction in the event of the Company's insolvency shall be charged against the Subtrusts in proportion to their balances, except that payment of Plan benefits to a Participant as a general creditor shall be charged against the Subtrust for that Plan. Assets allocated to a Subtrust for one Plan may not be used to provide benefits under any other Plans until all benefits under such Plan have been paid in full, except that excess assets of a Subtrust may be transferred to other Subtrusts. SECTION 2 LIMITATION ON USE OF FUNDS No part of the corpus of the Trust shall be recoverable by the Company, borrowed by or against for the benefit of the Company or used for any purpose other than for the exclusive purpose of providing payments to Trust Beneficiaries in accordance with the provisions of the Participating Plans and defraying reasonable expenses of administration in accordance with the provisions of this Trust Agreement until all such payments required by this Trust Agreement have been made; provided, however, that (i) nothing in this Section 2 shall be deemed to limit or otherwise prevent the payment from the Trust of (a) amounts described in Section 5 of this Trust Agreement, (b) expenses and other charges as provided in Section 17 and 18 of this Trust Agreement, or (c) the application of the Trust as provided in Sections 15.5 or 28 of this Trust Agreement, and (ii) the Trust shall at all times be subject to the claims of the general creditors of the Company as set forth in Section 21.1 and 21.2 of this Trust Agreement. 3 SECTION 3 CHANGE IN CONTROL Section 3.1. General. Various provisions of this Trust Agreement provide ------------ for certain rights and obligations upon and following a Change in Control of the Company. Section 3.2. Definition of "Change in Control". For purposes of this ------------ Trust Agreement, a "Change in Control" shall be deemed to have occurred as of the date that one or more of the following occurs: A. 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; B. The stockholders of the Company shall approve (1) 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 (i) 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 4 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 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 (ii) 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 (2) any plan or proposal for the liquidation or dissolution of the Company; C. 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 (1) the then outstanding shares of common stock of the Company ("Common Shares") or (2) 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 (C): (i) 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 (ii) 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 (i) or (ii) -------- ------- of this Subsection (C) shall thereafter become the beneficial owner of any additional Common Shares or other Voting Securities of the Company (other than 5 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 (C); or D. ARCO shall become the owner, directly or indirectly, of securities of the Company representing in the aggregate more than fifty percent (50%) of either (1) the then outstanding Common Shares or (2) 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 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 (D), 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 -------- ------- Trust Agreement, no Change in Control shall be deemed to have occurred pursuant to this Subsection (D) 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 (D). Notwithstanding any of the foregoing, no Change in Control shall be deemed to have occurred as a result solely of (1) the registration by ARCO of the Exchangeable Notes pursuant to the Registration Statement, (2) the issuance and sale by ARCO of the Exchangeable Notes to the underwriters in accordance with the Registration Statement, or (3) prior to the maturity of the Exchangeable Notes, purchases and sales 6 of the Exchangeable Notes. Section 3.3. Funding on Change in Control. The Company, within 30 days ------------ following a Change in Control, shall be required to irrevocably deposit additional cash or other property, acceptable to the Trustee, to this Trust in an amount equal to the Certified Benefit Values, as described in Section 5, as certified by an Enrolled Actuary unaffiliated with the Company, which may become payable as a result of a Change in Control, less the present value of Trust assets determined as of the date of the Change in Control. Section 3.4. For purposes of Section 3.1 of this Trust Agreement: ------------ A. "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. B. "ARCO" shall mean Atlantic Richfield Company and any of its Affiliates, excluding the Company. C. "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. D. "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. E. "LCR" shall mean LYONDELL-CITGO Refining Company Ltd., a Limited Liability Company organized under the laws of the State of Texas. F. "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, 7 LCR or such subsidiaries for or pursuant to the terms of any such plan. G. "Registration Statement" shall mean ARCO's registration statement on Form S-3 (Registration No. 33-53481) with respect to the Exchangeable Notes. H. "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 4 INDEPENDENT PLAN ADMINISTRATOR Various provisions of this Trust Agreement refer to the term "Independent Plan Administrator" which shall mean, unless stated otherwise in a specific provision of this Trust Agreement, and, except as provided below, an entity which is unrelated to, and unaffiliated with, the Company, and which, prior to a Change in Control has accepted in writing the position of Independent Plan Administrator under this Trust Agreement. The Independent Plan Administrator shall not be considered to be related to or affiliated with the Company solely as a result of an agreement between the Independent Plan Administrator and the Company to provide individual financial counseling services to specified Company executives. The Independent Plan Administrator shall be appointed by the Company and shall have its duties specified in an agreement executed by the Company and the Independent Plan Administrator prior to a Change in Control. The Trustee shall be given advance written notification of such appointment by the Company. Following a Change in Control, if the Company had failed to designate an Independent Plan Administrator prior to a Change in Control, the Independent Plan Administrator shall be appointed by the Trustee following a Change in Control and shall have its duties specified in an agreement executed by the Trustee and the Independent Plan Administrator. In the event the Independent Plan Administrator fails to act, provides services to the Company other than in its capacity as Independent Plan Administrator other than as provided above, or resigns, the Company prior to a Change in Control, or the Trustee after a Change in Control, shall retain a successor Independent Plan Administrator. Notwithstanding any other provision of this Trust Agreement, the Trustee shall be responsible only for the prudent selection of an Independent Plan Administrator after a Change in Control (i) following notice by the Company or the Independent Plan Administrator of 8 disqualification of the Independent Plan Administrator through the provision of services to the Company other than in its capacity as Independent Plan Administrator, (ii) upon resignation or failure to act by the Company-appointed Independent Plan Administrator, or (iii) in the event the Company failed to appoint an Independent Plan Administrator prior to a Change in Control. The Trustee shall be entitled to conclusively rely on the determinations of a qualified Independent Plan Administrator. SECTION 5 EXCESS REVERSION Prior to a Change in Control, upon a determination that the assets of the Trust have a value exceeding one hundred twenty-five percent (125%) of the actuarial present value of accrued but unpaid benefits of the Participating Plans, considered on the basis of assets being allocated to Participating Plans, all or a portion of the amount of such assets which constitute the "Excess Reversion" (as defined below) may be repaid to the Company upon direction of the Company. However, prior to any such repayment, the Company must deliver to the Trustee a certified statement by an actuary who is an Enrolled Actuary under ERISA and who is not affiliated with the Company of (i) the amount equal to one hundred (100%) percent of the actuarial present value of the accrued but unpaid benefits under the Participating Plans, calculated on an individual plan basis, as described above, (the "Certified Benefit Values"), (ii) the value of the Trust assets, allocated to each Participating Plan, as described above, and (iii) the amount, if any, by which the value of the Trust assets under (ii) exceeds the Certified Benefit Values under (i), and (iv) the amount, if any, by which the value of the Trust assets under (ii) exceeds one hundred twenty-five (125%) percent of the Certified Benefit Values (the "Excess Reversion"). The actuary shall make each determination required to prepare the certified statement based on reasonable factors, assumptions and tables (as determined solely by such actuary). The Trustee shall repay assets of the Trust to the Company as directed by the Company and in an amount up to but not greater than the Excess Reversion. Any repayment of assets of the Trust to the Company may be made only prior to a Change in Control and shall be made within thirty (30) days (or as soon as practicable) after the later of the Trustee's receipt of the certified statement by the actuary and the Company's direction to make such a payment. Any separate allocations of assets pursuant to this Section 5 shall be solely for the purpose of completing the valuation tests described in this Section and shall not reflect any legal commitment of assets to any Trust Beneficiary under a particular Participating Plan. 9 SECTION 6 AUTHORITY OF INVESTMENT OFFICER Prior to a Change in Control, the Trustee shall be subject to the direction of the Investment Officer (as defined below) of the Company with respect to the investment of the assets of the Trust. Unless the Company and the Trustee have mutually agreed in a separate writing that the Trustee shall have and exercise investment discretion with respect to all or a portion of the assets of the Trust, the Company shall have complete discretion with respect to the investment of such assets at all times prior to a Change in Control, and shall direct the Trustee accordingly. From time to time, the Trustee shall be notified in a writing signed by an officer of the Company of the person or persons constituting the "Investment Officer" for purposes of this Section and the Trust. In each such notice, the Company shall warrant that all directions given by the Investment Officer are proper. The Trustee shall have no responsibility to review, or to consider the propriety of holding or selling any life insurance, retirement income or annuity policies or contracts. Notwithstanding the Company's discretion to invest the Trust assets, the Company shall not exercise this discretion to reacquire part or all of the assets held in the Trust by substitution of or exchange for any other property held by the Company directly or indirectly through any third party, related or unrelated, and whether or not the property is equivalent, marketable, liquid, or secured. SECTION 7 DUTIES AND POWERS OF TRUSTEE WITH RESPECT TO INVESTMENTS After a Change in Control, the Trustee shall have sole discretion to invest and reinvest the assets of, and to invest any additions to, the Trust in personal property consisting of equity securities, debt instruments at the time of purchase rated not less than BBB- by Standard & Poor's Corporation and its successors ("S&P") or Baa3 by Moody's Investor Service, Inc. and its successors ("Moody's) or the equivalent of such ratings by S&P or Moody's for the types of investments specified in Section 14 of this Trust Agreement ("Investment Grade Securities") with the power to appoint any independent investment manager to fulfill 10 such obligation; provided, however, that (i) the Trustee shall be subject to any prior directions and instructions of the Company prior to a Change in Control regarding insurance, retirement income or annuity policies or contracts unless the Independent Plan Administrator otherwise directs the Trustee, (ii) the Independent Plan Administrator shall have sole power on and after a Change in Control regarding the management, including the purchase, sale or retention (including all powers of the Company under Sections 7(C) and 9 of this Trust Agreement) of any insurance, retirement income or annuity policies or contracts, (iii) any such powers of the Trustee or Independent Plan Administrator described above may not be delegated, in whole or in part, after a Change in Control to the Company or any affiliate of the Company, and (iv) the Trustee shall not be required to liquidate any investments that were made pursuant to the directions of the Investment Officer that are not Investment Grade Securities. Subject to the foregoing provisions of Sections 6 and 7 of this Trust Agreement, the Trustee shall have the following powers: A. To invest and reinvest the Trust, without distinction between principal and income, in any form of domestic or foreign real or personal property, whether or not productive of income or consisting of wasting assets, provided that investments of the Plan shall be diversified so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; B. To sell, convey, redeem, exchange, grant options for the purchase or exchange of, or otherwise dispose of, any real or personal property, other than an exchange of Trust assets to the Company as described in Section 6, at public or private sale, for cash or upon credit, with or without security, without obligation on the part of any person dealing with the Trustee to see to the application of the proceeds of, or to inquire into the propriety of, any such disposition; C. To purchase and maintain, as owner, life insurance policies as provided in Section 9 of this Trust Agreement and only as directed by the Investment Officer of the Company prior to a Change in Control and the Independent Plan Administrator after a Change in Control; D. To exercise, personally or by general or limited proxy or power of attorney, all voting and other rights appurtenant to any investment held in the Trust and to delegate discretionary power to exercise all or any such rights to trustees of a voting trust for any period of time; 11 E. To join in or oppose any reorganization, recapitalization, consolidation, merger or liquidation or any plan therefor, or any lease, mortgage or sale of the property of any organization the securities of which are held in the Trust; to pay from the Trust any assessments, charges or compensation specified in any plan of reorganization, recapitalization, consolidation, merger or liquidation; to deposit any property with any committee or depository; and to retain any property allotted to the Trust in any reorganization, recapitalization, consolidation, merger or liquidation; F. To exercise or sell, personally or by general or limited power of attorney, any conversion, subscription or other rights, including the right to vote, appurtenant to any investment held in the Trust; G. To borrow money for purposes of this Trust Agreement in any amount and upon any reasonable terms and conditions from any lender (other than the Trustee in its individual capacity), and to pledge or mortgage any property held in the Trust to secure the repayment of any such loan; H. To compromise, settle or arbitrate any claim, debt, or obligation of or against the Trust; to enforce or abstain from enforcing any rights, claim, debt or obligation; and to abandon any property determined by it to be worthless; I. To commence or defend suits or legal proceedings and to represent the Trust in all suits or legal proceedings; to settle, compromise or submit to arbitration any claims, debts or damages, due to or owing from the Trust; J. To engage any legal counsel, including counsel to the Company, any enrolled actuary, or any other suitable agents; to consult with such counsel, enrolled actuary, or agents with respect to the construction of this Trust Agreement, the duties of the Trustee hereunder, the transactions contemplated by this Trust Agreement or any act which the Trustee proposes to take or omit; to rely upon the advice of such counsel, enrolled actuary or agents and to pay all reasonable fees, expenses and compensations of such counsel, actuary or agents; and K. To organize and incorporate under the laws of any state one or more corporations (and to acquire an interest in any such corporation that it may have organized and incorporated) for the purpose of acquiring and holding title to any 12 property, interest or rights that the Trustee is authorized to acquire. 13 SECTION 8 ADDITIONAL POWERS AND DUTIES OF THE TRUSTEE Following a Change in Control, should the Company attempt to enjoin any benefit payment (other than for reasons of manifest error) that the Trustee has been directed to make under the terms of this Trust Agreement, the Trustee shall commence legal action to allow such payment. The Trustee may withdraw from the Trust assets any amounts it deems necessary to pay legal expenses, including attorneys' fees, incurred in the course of such legal action. Under no circumstances shall the Trustee be required to make such payments for benefits or expenses from any source other than the Trust. Except as otherwise limited by Section 6, the Trustee shall also have the following powers: A. To cause any asset, real or personal, to be held in a corporate depository or federal book entry account system or registered in the Trustee's name or in the name of a nominee or in such other form as the Trustee deems best without disclosing the trust relationship; provided, however, that nothing contained in this Section shall be deemed to relieve the Trustee of any custodial responsibility allocated to it under this Trust Agreement; B. To employ agents in the management of the Trust, including employees of the Company and its subsidiaries and affiliates prior to a Change in Control, provided, that the Trustee shall be responsible for the acts of such agents (other than acts of the United States Postal Service) as much as if they were acts of the Trustee; C. To make, execute and deliver, as the Trustee, any deeds, leases, notes, bonds, guarantees, mortgages, conveyances, contracts, waivers, releases or other instruments in writing that the Trustee may deem necessary or desirable in the exercise of its powers under this Trust Agreement; D. To transfer assets of the Trust to a successor Trustee as provided in Section 24 of this Trust Agreement; E. To hold any portion of the Trust in cash pending investment, or for the payment of expenses or Benefits; and F. To exercise, generally, any of the powers which an individual owner might exercise in connection with property, either real, personal or mixed held by the Trust and to do all 14 other acts that the Trustee may deem necessary or proper to carry out any of the powers set forth in this Trust Agreement or otherwise in the best interests of the Trust. SECTION 9 INSURANCE POLICIES AND CONTRACTS Prior to a Change in Control, the Company reserves the right to transfer life insurance, retirement income or annuity policies or contracts, to the Trust, regardless of the nature or type of such contract and regardless of the Company's interest in, or power to direct the investments under, such policies or contracts, or prior to a Change in Control, to direct the Trustee to purchase any such policies or contracts, and following a Change in Control the Independent Plan Administrator shall have the same powers regarding such insurance policies and contracts. Any such policy or contract shall be an asset of the Trust subject to the claims of the Company's creditors in the event of insolvency, as specified in Sections 21.1 and 21.2 of this Trust Agreement. The proceeds of any life insurance policy shall, upon the death of the insured, be paid to the Trust. The Trustee shall be under no duty to question any direction of the Company or the Independent Plan Administrator, to review the form of any such policies or contracts or the selection of the issuer thereof, or to make suggestions to the Company, the Independent Plan Administrator or to the issuer thereof with respect to the form of such policies or contracts prior to a Change in Control, or to question any such directions, to review such policies, forms or selections or to make such suggestions to the Independent Plan Administrator following a Change in Control. Prior to a Change in Control, the Company may direct the Trustee to exercise the powers of the contract holder under any such policies or contracts, and the Trustee shall exercise such powers only upon the direction of the Company. Following a Change in Control, the Independent Plan Administrator may direct the Trustee to exercise the powers of the contract holder under any such policies or contracts and the Trustee shall exercise such powers only upon direction of the Independent Plan Administrator. Notwithstanding anything to the contrary contained in any Participating Plan, the Trustee (i) shall be fully protected in acting in accordance with written directions of the Company prior to a Change in Control and with the written directions of the Independent Plan Administrator following a Change in Control, and (ii) shall be under no liability for any loss of any kind that may result by reason of any action taken or omitted by it in accordance with such direction of the Company or the Independent Plan Administrator, or 15 by reason of inaction in the absence of such written directions from the Company or the Independent Plan Administrator. No insurance carrier shall for any purpose be deemed a party to this Trust Agreement or be responsible for the validity or sufficiency hereof. Notwithstanding the fact that it may have knowledge of the terms of this Trust, the obligations of such insurance carrier shall be measured and determined solely by the terms and conditions of the policies or contracts issued by it. Any such insurance carrier shall not be under any obligation to any person, partnership, corporation, trust or association other than as stated in such policies or contracts. SECTION 10 PARTICIPATING PLAN RECORDS A separate written record of the accrued and vested benefit, as applicable, for each Trust Beneficiary of each Participating Plan, based on a certified listing provided by the Company prior to a Change in Control and by the Independent Plan Administrator following a Change in Control, shall be maintained. The Company or the Independent Plan Administrator, as applicable, shall provide such certified listing at least once each calendar year to the Trustee. SECTION 11 VALUATION The Trust shall be revalued by the Trustee at current values, as determined by the Trustee, as of the last business day of each calendar year and as of such additional dates as the Trustee and Company shall determine to be appropriate ("Valuation"). The Company prior to a Change in Control and the Independent Plan Administrator following a Change in Control annually shall provide a certification of value for each life insurance, retirement income or annuity policy or contract held as an asset of the Trust. The Trustee may rely upon the certification of value received from the Company prior to a Change in Control or the Independent Plan Administrator following a Change in Control for each such policy or contract held as an asset of the Trust. 16 SECTION 12 PARTICIPANT RECORDS PRIOR TO AND FOLLOWING A CHANGE IN CONTROL Section 12.1. In addition to the records maintained under Section 10, the ------------- Company shall maintain a separate written record that reflects for each Trust Beneficiary, the Trust Beneficiary's vested benefits under each Participating Plan and the portion of the Trust or Subtrust allocated to such Trust Beneficiary (a "Participant Record"). Prior to a Change in Control, the Trustee shall certify to the Company the results of each Valuation. Following receipt of a Valuation, each Participant Record shall be equitably adjusted by the Company to reflect its share of the income, expense, appreciation and depreciation since the preceding Valuation date. Such Participant Records shall be maintained solely for record keeping purposes prior to a Change in Control, without any legal entitlement of a Trust Beneficiary to amounts allocated to his or her Participant Record. Section 12.2. On and after a Change in Control, the Independent Plan ------------- Administrator (i) shall continue to maintain the Participant Records and the records described in Section 10 of this Trust Agreement, (ii) shall thereafter be solely responsible for the updating of such Participant Records and for requesting the Trustee to make any additional Valuations the Trustee and Independent Plan Administrator deem appropriate, and (iii) shall be entitled to rely on the most recent certified listing delivered by the Company to the Trustee prior to a Change in Control in the maintenance and updating of such Participant Records following a Change in Control. No new Participant Records may be established following a Change in Control. The Independent Plan Administrator may, but is not required to, rely on any certified listing provided by the Company pursuant to Section 10 following a Change in Control. Following a Change in Control, the sole source of Trust assets from which the Independent Plan Administrator may direct that a Trust Beneficiary's Benefits be paid to the extent the Trustee, rather than the Company, pays the Benefits shall be that portion of the assets of the Trust or Subtrust allocated to the Participant Record of such Trust Beneficiary. SECTION 13 TRUSTEE ACCOUNTS Within 120 days after the close of each fiscal year of the Trust and any other period agreed upon by the Trustee and the Company, and within ninety (90) days of the date of the removal or 17 resignation of the Trustee, the Trustee shall file with the Company a written account ("Trustee Account") setting forth all investments, receipts, disbursements, withdrawals and other transactions effected by it during the period from the date of its last such Trustee Account and a list of the assets of the Trust at the close of such period. Such Trustee Account may be in the form of monthly or quarterly statements which taken together reflect the matters set forth in the preceding sentence. As between the Company and the Trustee, the Trustee shall be forever released and discharged from all liability with respect to the propriety of acts and transactions shown in such Trustee Account following a Change in Control, and shall be forever released and discharged from all liability with respect to the propriety of acts and transactions shown in such Trustee Account prior to a Change in Control except with respect to any such act or transaction as to which the Company shall, within a 90-day period of receipt of the Trust Account, file written objections with the Trustee and except that no such accounting shall foreclose any liability of the Trustee to the Company arising under Section 23.3 of this Trust Agreement. SECTION 14 INVESTMENT OF CASH Prior to a Change in Control, the Trustee shall keep any cash held hereunder from time to time on deposit in its own banking department or elsewhere as the Trustee elects, consistent with instructions provided by the Investment Officer of the Company regarding specific types of permissible investments and permissible depositories. Prior to a Change in Control, in the absence of contrary instructions from the Investment Officer, and following a Change in Control, in the absence of contrary instructions from the Independent Plan Administrator regarding insurance, retirement income or annuity policies or contracts, and anything herein to the contrary notwithstanding, the Trustee, without obtaining any prior approvals, may at its discretion invest cash balances held by the Trustee from time to time in deposits in its own banking department, in short-term cash equivalents having ready marketability, including but not limited to U.S. Treasury bills, commercial paper rated not less than A1/P1 (including such forms thereof as may be available through the Trustee's own trust department), certificates of deposit, and similar type securities, having a maturity of 18 months or less, including participation in common or collective funds composed thereof. Prior to a Change in Control, the Trustee may sell any such short-term investments as may be necessary to carry out the instructions of the Investment Officer of the Company regarding 18 more permanent type investments or to permit any distributions or transfers directed hereunder. The Trustee may make any such sales it deems appropriate following a Change in Control, including sales necessary to carry out the instructions of the Independent Plan Administrator. SECTION 15 PAYMENTS BY THE TRUSTEE Section 15.1. The establishment of the Trust and the payment or delivery ------------- to the Trustee of money or other property acceptable to the Trustee shall not vest in any Trust Beneficiary any right, title or interest in or to any assets of the Trust. Section 15.2. The Trustee shall be directed as to the amount, timing, and ------------- form of benefits to be paid to any Trust Beneficiary. Prior to a Change in Control, the Company shall so direct the Trustee and by giving such directions shall be deemed to warrant their propriety. Following a Change in Control, the Independent Plan Administrator shall so direct the Trustee and by giving such directions, shall be deemed to warrant their propriety. Section 15.3. The Trustee shall withhold all or any part of any payment ------------- for the payment of any tax liability and the Trustee shall discharge such liability as and when directed by the Company prior to a Change in Control and by the Independent Plan Administrator following a Change in Control. All withholding, related filings and reports are the responsibility of the Company. Section 15.4. The Company intends to make benefit payments from its assets ------------- as it deems appropriate, in its sole discretion, provided, that, notwithstanding this intent, if the Trust is not sufficient, before or after a Change in Control, to make one or more payments of Benefits to the Trust Beneficiaries under the relevant Participating Plan, the Company shall make the balance of each such payment as it falls due. Section 15.5. Except as otherwise provided herein, in the event of any ------------- final determination by the Internal Revenue Service or a court of competent jurisdiction which determination is not appealable or the time for appeal or protest of which has expired, or the receipt by the Trustee of an unqualified opinion of tax counsel selected by the Trustee or Company, which determination determines, or which opinion concludes, that any Trust Beneficiary is subject to federal income taxation on amounts held in trust to pay Benefits hereunder prior to the distribution to the Trust Beneficiary of such Benefits, the Trustee shall, on receipt by the 19 Trustee of such opinion or actual notice of such determination, pay to such Trust Beneficiary the portion of the Trust corpus includible in such Trust Beneficiary's federal gross income, and the Trust Beneficiary's Benefits shall be canceled to the extent of such payment, provided that the amount, form and timing of such payments and the amount and method of such cancellation shall be as directed by the Company prior to a Change in Control and by the Independent Plan Administrator following a Change in Control. SECTION 16 DETERMINATION OF CHANGE IN CONTROL The Company shall immediately notify the Trustee in writing of the occurrence of a Change in Control as the result of any event specified in Section 3.1 of this Trust Agreement. If the Trust Department of the Trustee receives written notice from a third party (including the Company's outside auditors) of the alleged occurrence of a Change in Control as the result of any event specified in Section 3.1 of this Trust Agreement, the Trustee shall request the Company to confirm or deny such occurrence and the Company shall make such confirmation or denial within forty-five (45) days following receipt of the Trustee's request. In order to deny that a Change in Control as the result of any event specified in Section 3.1 of this Trust Agreement has occurred, the Company shall provide with its notice a certificate, in a form reasonably satisfactory to the Trustee, from an independent accounting firm, which firm may be the accounting firm engaged by the Company to be its outside auditors, certifying that a Change in Control as the result of an event specified in Section 3.1 of this Trust Agreement has not occurred. Pending the Company's response, the Trustee shall not repay, pursuant to Section 5 of this Trust Agreement, any assets of the Trust to the Company and no new Trust Beneficiaries may be added to the Trust. The Trustee shall be entitled to conclusively rely upon such confirmation or denial. SECTION 17 TRUSTEE COMPENSATION AND TRUST EXPENSES The Trustee shall be paid such reasonable compensation for its service as Trustee as shall from time to time be agreed upon by Company and Trustee. This compensation and all expenses incurred by the Trustee in the management and protection of the Trust, including administration, accounting and legal fees, shall 20 be reimbursed by the Company within 30 days after the Company's receipt of a bill from the Trustee for any fees and expenses paid from the Trust assets. To the extent the Company fails to 21 reimburse the Trustee, this compensation and extraordinary and non-recurring expenses shall be charged by the Trustee against the Trust. SECTION 18 PAYMENT OF TAXES BY TRUSTEE Prior to a Change in Control, to the extent that any taxes levied or assessed upon the Trust are not paid by the Company, the Trustee shall pay such taxes out of the Trust as directed by the Company. The Trustee shall, if requested by the Company prior to a Change in Control, and solely in its discretion following a Change in Control, contest the validity or amount of any tax assessment, claim or demand respecting the Trust or any part thereof. The Company itself may contest the validity of any such taxes prior to a Change in Control. SECTION 19 CUSTODIANS AND AGENTS When so instructed by the Company prior to a Change in Control with respect to Trust assets for which the Company has investment responsibility, and at the Trustee's sole discretion with respect to assets for which the Trustee has investment responsibility, the Trustee shall deposit any assets held by it with a custodian, which may not include the Company or an affiliate of the Company, and the Company shall hold harmless and defend the Trustee against any liability arising or asserted to arise out of the Trustee's compliance with directions under this Section 19 of this Trust Agreement. SECTION 20 LIABILITY FOR BENEFIT PAYMENTS The Company shall remain primarily liable to pay Benefits under the Participating Plans. However, the Company's liability under the Participating Plans shall be reduced or offset to the extent Benefit payments are made from the Trust. 22 SECTION 21 COMPANY INSOLVENCY Section 21.1. The Company shall have the duty to inform the Trustee in ------------- writing if the Company becomes insolvent, as hereinafter defined. When so informed, the Trustee shall immediately discontinue payments of Benefits to Trust Beneficiaries, and shall hold the assets of the Trust for the benefit of the Company's general creditors. The Company shall be considered "insolvent" for purposes of this Trust Agreement in the event of the following: A. the Company's inability to pay debts as they mature; B. a general assignment for the benefit of the Company's creditors; C. the voluntary commencement by the Company of any proceeding under Title 11 of the United States Code or any other law of any jurisdiction for the relief, liquidation or rehabilitation of debtors (all of which proceedings are hereinafter collectively referred to as "Insolvency Proceedings"); D. the making of an admission by the Company of any of the material allegations of, or consenting to, or acquiescing in, a petition, application, motion or complaint commencing an Insolvency Proceeding or the seeking by the Company of the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or similar official of or for it or for a substantial part of its assets; E. the involuntary commencement of an Insolvency Proceeding against the Company which is not fully stayed, timely controverted or dismissed within one hundred twenty (120) days after the filing thereof; or F. the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or similar official of or for the Company or of or for all or substantially all of its assets. If the Trust Department of the Trustee receives a written allegation from a third party that the Company has become insolvent, the Trustee shall appoint an independent accounting firm to determine within sixty (60) days whether the Company is insolvent under the terms of this Trust Agreement and, pending such determination, the Trustee shall discontinue payments of 23 Benefits to Trust Beneficiaries, shall hold the Trust assets for the benefit of the Company's general creditors, and shall resume payments of Benefits to Trust Beneficiaries only after such independent accounting firm, has determined that the Company is not insolvent (or is no longer insolvent, assuming the independent accounting firm initially determined the Company to be insolvent) or after receipt of an order of a court of competent jurisdiction. In making its determination, such independent accounting firm, may rely on a letter from the Company's Controller, or its Independent Auditors, or on relevant information concerning the Company's solvency which has been furnished to the Trustee by any other person. Notwithstanding any other provision of this Trust Agreement, the Trustee shall be responsible only for the prudent selection of the independent accounting firm, and shall conclusively rely on such firm's determination. Nothing in this Trust Agreement shall in any way enlarge or diminish the rights of the Trust Beneficiaries in the event the Company is insolvent to pursue their rights as general creditors of the Company with respect to their Benefits or otherwise. Section 21.2. In the case of the Company's notification of insolvency or ------------- the determination of insolvency by an independent accounting firm as provided in Section 21.1 of this Trust Agreement, the Trustee shall deliver any undistributed principal and income in the Trust to satisfy claims of the Company's general creditors as directed by a court of competent jurisdiction. Section 21.3. If the Trustee discontinues payments of Benefits from the ------------- Trust pursuant to Section 21.1 of this Trust Agreement and subsequently resumes such payments, the first payment to each Trust Beneficiary following such discontinuance shall include the aggregate amount of all payments which would have been made to such Trust Beneficiary in accordance with the relevant Participating Plan during the period of such discontinuance, less the aggregate amount of payments of Benefits made to such Trust Beneficiary by the Company during any such period of discontinuance. Prior to a Change in Control, the Trustee shall be directed as to the amount, timing, form and payee of all such payments by the Company. Following a Change in Control, the Trustee shall be so directed by the Independent Plan Administrator. SECTION 22 TRUSTEE RESPONSIBILITY FOR PLAN ADMINISTRATION AND TRUST RECORD KEEPING AFTER CHANGE IN CONTROL Section 22.1. Following a Change in Control, the Independent ------------- 24 Plan Administrator shall assume full responsibility for the interpretation and application of the Participating Plans' provisions and authorization for the payment of benefits as such provisions relate to payments to be made from the Trust. The Independent Plan Administrator shall have full discretion with respect to the performance of such duties and shall not be required to follow any direction of the Company, any successor thereto, or any other entity in performing such duties. Section 22.2. Following a Change in Control, the Trustee shall maintain all records dealing with the Trust and its investments; provided, however, that the responsibility for the maintenance of Plan records relating to Trust Beneficiaries, Participant Records and all other plan administration shall be the sole responsibility of the Independent Plan Administrator. The Trustee shall have no responsibility for the maintenance of the Participating Plan. SECTION 23 TRUSTEE STANDARDS OF PERFORMANCE AND INDEMNIFICATIONS Section 23.1. Trustee shall perform all of its functions hereunder (i) ------------- with the care, skill, prudence, and diligence which under the circumstances then prevailing a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, or (ii) in accordance with such other standard as may be required from time to time by law, and shall not be liable for any conduct on its part (including reliance on advice of counsel) which conforms to that standard. Section 23.2. The Company (which has the authority to do so under the laws ------------- of its state of incorporation) shall indemnify the Trustee and defend it and hold it harmless from and against any and all direct liabilities, losses, claims, suits or expenses (including attorney's fees) of whatsoever kind and nature which may be imposed upon, asserted against or incurred by the Trustee at any time by reason of its carrying out its responsibilities or providing services hereunder or by reason of any act or failure to act under this Trust Agreement, except to the extent that any such liability, loss, claim, suit or expense arises directly from the Trustee's gross negligence or willful misconduct in the performance of responsibilities specifically allocated to it under this Trust Agreement. The provisions of this Section 23.2 shall survive the termination of this Trust Agreement. 25 Section 23.3. The Trustee (which has the authority to do so under the laws ------------- of its state of incorporation) shall indemnify the Company and defend it and hold it harmless from and against any and all direct liabilities, losses, claims, suits or expenses (including attorney's fees) of whatsoever kind and nature which may be imposed upon, asserted against or incurred by the Company at any time directly by reason of the Trustee's gross negligence or willful misconduct in the performance of responsibilities specifically allocated to it under this Trust Agreement. The provisions of this Section 23.3 shall survive the termination of this Trust Agreement. SECTION 24 REMOVAL AND RESIGNATION OF TRUSTEE Prior to a Change in Control, Trustee may be removed by the Company at any time upon not less than thirty (30) days' written notice. The Trustee may resign at any time prior to or following a Change in Control, upon not less than ninety (90) days' written notice. In either case, such notice may be wholly or partially waived by the party to whom it is due. Upon Trustee's removal or resignation prior to a Change in Control, the Company shall appoint a successor Trustee, who shall have no responsibility for the acts or omissions of any predecessor trustee, and upon the Trustee's resignation following a Change in Control the Trustee shall petition a court of competent jurisdiction to name a successor trustee which in no event may be the Company or an affiliate of the Company or a successor thereto; provided, however, that the successor trustee in either case shall have the same powers and duties as those conferred upon the Trustee hereunder, and upon acceptance of such appointment by the successor Trustee, the Trustee shall assign, transfer and pay over to such successor Trustee the Trusts and properties then constituting the Trust. If the Company fails within a reasonable time to name a successor Trustee or otherwise direct proper disbursement of the Trust prior to a Change in Control, the Trustee may apply to any court of competent jurisdiction for appropriate relief. The Trustee may in any event reserve such reasonable sum of money as it may deem advisable, to provide for any charges against the Trust for which it may be liable, and for payment of its fees and expenses in connection with the settlement of its account or otherwise. Any balance of such reserve remaining after the payment of such fees and expenses shall be paid over as aforesaid. 26 SECTION 25 TERMINATION OF PARTICIPATING PLAN OR PLANS If a Participating Plan is wholly or partially terminated prior to a Change in Control, the Trustee shall disburse the portion of the Trust affected by the termination as directed by the Company. If a Participating Plan is wholly or partially terminated following a Change in Control, Trustee shall disburse the portion of the Trust affected by the termination as directed by the Independent Plan Administrator. SECTION 26 RIGHTS OF COMPANY TO TRUST ASSETS Section 26.1. Prior to a Change in Control, the Company shall have no ------------- right, title or interest in the Trust, nor shall any part of the Trust revert to or be repaid to the Company, until all benefits due under all Participating Plans have been paid pursuant to Section 25 of this Trust Agreement, unless, at any time, there is a determination that the assets of the Trust have a value exceeding one hundred twenty-five percent (125%) of the lump sum actuarial equivalent value of accrued but unpaid benefits under one or more of the Participating Plans pursuant to Section 5 of this Trust Agreement. The amount of such excess in the particular Plan may be repaid to the Company, upon direction of the Company pursuant to the provisions of Section 5. Section 26.2. On and after the occurrence of a Change in Control, the ------------- Company shall have no right, title or interest in the Trust, nor shall any part of the Trust revert to or be repaid to the Company. SECTION 27 AMENDMENTS OF TRUST Section 27.1. Prior to a Change in Control, the Company may amend this ------------- Trust Agreement by an instrument in writing signed by an authorized officer of the Company provided that no such amendment shall make this Trust revocable or divert any part of the Trust to purposes other than payment of Benefits, payments under Sections 2 or 5 of this Trust Agreement, or defrayal of reasonable expenses of administering the Participating Plans. The Trustee's consent shall be required for any amendment affecting 27 its duties, responsibilities or rights. No amendment affecting the duties, responsibilities or rights of the Trustee shall take effect until thirty (30) days after a copy of said amendment is furnished to the Trustee or, if the Trustee gives notice of resignation within such 30 day period, until the resignation becomes effective, provided, that the Trustee may, in writing, waive the 30 day requirement. Section 27.2. Following a Change in Control, this Trust Agreement may not ------------- be amended. SECTION 28 TERMINATION OF TRUST Section 28.1. Prior to a Change in Control, the Company may not terminate this Trust for reasons other than those provided in (A) and (B) below. Otherwise, this Trust shall be irrevocable. Removal or resignation of a Trustee pursuant to Section 24 shall not be deemed a termination of this Trust Agreement. A. This Trust will terminate if a federal court determines, after exhaustion of all appeals, that the Trust causes any of the Participating Plans to cease to be "unfunded" under the provisions of ERISA. B. The Company may terminate this Trust if the Company determines, based on advice of legal counsel satisfactory to the Trustee, that there is a significant risk that the Trust would cause any of the Participating Plans to be cease to be unfunded under ERISA prior to actual payment of any Benefits. For purposes of this section, "significant risk" shall be based on (i) judicial authority or opinion of the U.S. Department of Labor, Treasury Department or Internal Revenue Service or (ii) a required amendment under ERISA or the Internal Revenue Code, which failure to amend could result in significant penalty to the Company. If this Trust Agreement is terminated under (A) or (B), the Trust assets shall be distributed, in accordance with the Company's written direction, as follows: (i) If the Company determines it is possible to create a new trust which does not result in a Trust Beneficiary's constructive receipt of Benefits under any Participating Plan or which will retain the Participating Plan's status as "unfunded" under ERISA, Trust assets shall be transferred to the new trust. The terms of the new trust shall be similar 28 in all other respects to this Trust. (ii) If the Company determines that it is not possible to create a new trust, then the assets shall be distributed according to the allocation to the Trust Beneficiaries under Section 12.1. When all payments which have or may become payable pursuant to the terms of this Trust have been made or the Trust has been exhausted pursuant to a termination of this Trust Agreement under (A) or (B) above prior to a Change in Control, the Trustee shall pay all remaining assets to the Company upon the Company's certification of payments, subject to the Trustee's right to reserve such amounts it reasonably determines to be necessary to pay outstanding and accrued charges against the Trust. Section 28.2. On and after the occurrence of a Change in Control, the ------------- Independent Plan Administrator may in its discretion direct the Trustee to terminate this Trust Agreement and in conjunction therewith the Independent Plan Administrator shall direct the Trustee as to the names of the Trust Beneficiaries who are to receive payments and the time, amount and form of payment of Benefits and any remaining assets of the Trust, subject to the Trustee's right to reserve such amounts the Trustee determines necessary for outstanding and accrued charges against the Trust. SECTION 29 SUCCESSORS Any successor in interest to the Trustee shall automatically become Trustee under this Trust Agreement. SECTION 30 COMMUNICATIONS Any communications (including notices, instructions, or directions) required or permitted hereunder to be given by the Company shall be given in writing addressed to the Trustee and signed by an officer of the Company or other person or persons whom the Company notifies the Trustee are from time to time authorized to sign such communications, and the Company warrants that all communications given pursuant to this Section 30 may be relied upon by the Trustee. The Company shall furnish the Trustee specimen signatures of all persons authorized to sign 29 communications to the Trustee. SECTION 31 UNCLAIMED DISTRIBUTIONS If any benefit payment mailed by regular U.S. Mail to the last address of the payee furnished by the Company is returned unclaimed, the Trustee shall so notify the Company and shall discontinue further payments to such payee until it receives further instructions of the Company. SECTION 32 PROHIBITION OF ASSIGNMENTS Except insofar as applicable law may otherwise require and subject to Sections 1, 2, 21.1 and 21.2 of this Trust Agreement, (i) no amount payable to or in respect of any Trust Beneficiary at any time under the Trust shall be subject in any manner to direction by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, or charge of any kind, and any attempt to so alienate, sell, transfer, assign, pledge, attach, change or otherwise encumber any such amount, whether presently or thereafter payable, shall be void and (ii) the Trust shall in no manner be liable for or subject to the debts or liabilities of any Trust Beneficiary. No amount held under this Trust Agreement shall be subject to voluntary or involuntary alienation. SECTION 33 GOVERNING LAW This Trust Agreement shall be governed by and construed under the laws of the State of Massachusetts in all respects. SECTION 34 EXECUTION This Trust Agreement may be executed in counterparts, each of which shall be an original although the others are not produced. 30 IN WITNESS WHEREOF, the parties have caused this Trust Agreement to be executed as of the date first written above. ATTEST: LYONDELL PETROCHEMICAL COMPANY _________________________________ By:_____________________________________ Assistant Secretary Richard W. Park Vice President, Human Resources ATTEST: STATE STREET BANK AND TRUST COMPANY _________________________________ By:_____________________________________ 31 APPENDIX A TO LYONDELL PETROCHEMICAL COMPANY NON-EMPLOYEE DIRECTORS BENEFIT PLANS TRUST AGREEMENT Lyondell Petrochemical Company Retirement Plan for Non-Employee Directors Lyondell Petrochemical Company Elective Deferral Plan for Non-Employee Directors 32 EX-10.14(A) 17 TRUST AGREEMENT EXHIBIT 10.14(a) INSTRUMENT AMENDING LYONDELL PETROCHEMICAL COMPANY NON-EMPLOYEE DIRECTORS BENEFIT PLANS TRUST AGREEMENT Lyondell Petrochemical Company hereby amends, effective August 1, 1997, the Lyondell Petrochemical Company Non-Employee Directors Benefit Plans Trust Agreement, as follows: Section 3, CHANGE IN CONTROL, Section 3.2., "Definition of Change in Control" is revised in its entirety to read as follows: SECTION 3.2. Definition of "Change in Control". For purposes of this Trust Agreement, a "Change in Control" shall be deemed to have occurred as of the date that one or more of the following occurs: A. 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; B. The stockholders of the Company shall approve (1) 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 (i) 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 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 (ii) 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 (2) any plan or proposal for the liquidation or dissolution of the Company; C. 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 (1) the then outstanding shares of common stock of the Company ("Common Shares") or (2) 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 (C): (i) 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 2 the Combined Voting Power of all then outstanding Voting Securities; or (ii) 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 (i) or (ii) -------- ------- of this Subsection (C) 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 (C); or D. ARCO shall become the owner, directly or indirectly, of securities of the Company representing in the aggregate more than fifty percent (50%) of either (1) the then outstanding Common Shares or (2) 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 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 (D), 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 (D) 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 (D). Notwithstanding any of the foregoing, no Change in Control shall be deemed to have occurred as a result solely of (1) the registration by ARCO of the 3 Exchangeable Notes pursuant to the Registration Statement, (2) the issuance and sale by ARCO of the Exchangeable Notes to the underwriters in accordance with the Registration Statement, (3) prior to the maturity of the Exchangeable Notes, purchases and sales of the Exchangeable Notes, or (4) a transaction in which assets of the Company are contributed to an entity pursuant to the creation of a partnership under the terms of certain agreements authorized by the Incumbent Directors on July 25, 1997. IN WITNESS WHEREOF, the undersigned, being duly authorized on behalf of the Company, has executed this instrument on this __________ day of August, 1997. ATTEST: LYONDELL PETROCHEMICAL COMPANY BY: ________________________ BY:___________________________ Assistant Secretary Jeffrey R. Pendergraft Senior Vice President, Secretary 4 EX-10.17(B) 18 AMENDMENT #2 EXHIBIT 10.17(b) AMENDMENT NO. 2 TO AMENDED AND RESTATED LIMITED LIABILITY COMPANY REGULATIONS OF LYONDELL-CITGO REFINING COMPANY LTD. (THE "COMPANY") Amendment No. 2 (the "Amendment") to the Amended and Restated Limited Liability Company Regulations (the "Regulations") of LYONDELL-CITGO Refining Company Ltd. (the "Company") is effective, August 28, 1995. All terms defined in the Regulations are used herein with the meanings provided in the Regulations. 1. Section 9.3(A) of the Regulations is hereby amended to read hereafter in its entirety as follows: 9.3 Approval of Budgets. (A) Each budget shall be approved by Owners Committee Action. The budgets for the Company's first fiscal year ending December 31, 1993 shall be approved by Owners committee Action effective as of the date of these Regulations. Prior to November 15 of each fiscal year, the CEO shall prepare and submit to the Owners Committee for approval each of the budgets for the ensuing fiscal year (and, as appropriate, for subsequent periods), and on or before December 1, the Owners Committee shall by Owners Committee Action approve, with such modifications as it considers appropriate, each such budget. 2. Except as set forth above the Regulations remain unmodified, and, as amended above, the Regulations remain in full force and effect. EX-10.17(C) 19 AMENDMENT #3 EXHIBIT 10.17(c) AMENDMENT NO. 3 TO AMENDED AND RESTATED LIMITED LIABILITY COMPANY REGULATIONS OF LYONDELL-CITGO REFINING COMPANY LTD. Amendment No. 3 (the "Amendment") to the Amended and Restated Limited Liability Company Regulations (the "Regulations") of LYONDELL-CITFGO Refining Company Ltd. (the "Company") is effective, by unanimous written consent of the Representatives of the Owners Committee in accordance with Section 3.4(E) of the Regulations, as of January 27, 1997. All terms defined in the Regulations are used herein with the meanings provided in the Regulations. 1. Section 6.3 of the Regulations is hereby amended to read hereafter in its entirety as follows: 6.3 Additional Refinery Expansion Project Funding. In the event that additional funds are required under Section 10 for the Refinery Expansion Project, then in any such event such funds shall be provided equally by the Owners unless otherwise mutually agreed. Except as provided herein below, the amounts to be funded by COwner shall be funded with capital contributions and the amounts to be funded by LOwner shall be funded by LOwner loans, as provided in Section 6.4.(D). The amounts in excess of the Cost Ceiling to be funded by COwner shall be funded (i) with capital contributions up to $25,000,000 and (ii) for any amounts required beyond $25,000,000, at COwner's option, either capital contributions or COwner loans (the terms of which shall be, subject to Section 13.11, as set forth on Exhibit 6.4.(D). 2. Except as set forth above, the Regulations remain unmodified, and as amended above, the Regulations remain in full force and effect. EX-10.25 20 MASTER TRANSACTION AGREEMENT EXHIBIT 10.25 MASTER TRANSACTION AGREEMENT BETWEEN EQUISTAR CHEMICALS, LP, OCCIDENTAL PETROLEUM CORPORATION, LYONDELL PETROCHEMICAL COMPANY AND ----------------------------------------------------------------------------- MILLENNIUM CHEMICALS INC. TABLE OF CONTENTS
PAGE SECTION 1 RELATED AGREEMENTS AND CLOSING...................................... 2 1.1 Tier 1 Related Agreements........................................... 2 1.2 Tier 2 Related Agreements........................................... 2 1.3 Closing Date........................................................ 2 1.4 Partnership Long-term Debt.......................................... 2 1.5 Closing Transactions................................................ 2 1.6 Merger Agreements................................................... 3 1.7 Repayment of the Lyondell Note...................................... 3 SECTION 2 REPRESENTATIONS AND WARRANTIES...................................... 3 2.1 Representations and Warranties of the Partnership................... 3 2.2 Representations and Warranties of Occidental........................ 8 2.3 Representations and Warranties of Lyondell.......................... 11 2.4 Representations and Warranties of Millennium........................ 13 SECTION 3 ADDITIONAL AGREEMENTS............................................... 15 3.1 Access to Information............................................... 15 3.2 Conduct of the Occidental Subject Business Pending the Closing Date. 15 3.3 Conduct of the Partnership Subject Business Pending the Closing Date 16 3.4 Further Actions..................................................... 18 3.5 Notifications....................................................... 20 3.6 Employee Matters.................................................... 20 3.7 Partnership Unanimous Consent Items................................. 20 3.8 Closing Amendments Certificate...................................... 20 SECTION 4 CONDITIONS TO CLOSING............................................... 21 4.1 Conditions Precedent to Obligations of All Parties.................. 21 (a) No Injunction, etc............................................. 21 (b) Tier 2 Related Agreements...................................... 21 (c) Government Licenses and Consents............................... 21 (d) HSR Act........................................................ 21 (e) Amended Bank Credit Facility................................... 22 4.2 Conditions Precedent to Obligations of the Partnership.............. 22 (a) Closing Amendments Certificate................................. 22 (b) Accuracy of Representations and Warranties..................... 22 (c) Performance of Agreements...................................... 22 (d) No Material Adverse Change..................................... 22 (e) Officer's Certificates......................................... 23 4.3 Conditions Precedent to Obligations of Occidental................... 23 (a) Closing Amendments Certificate................................. 23 (b) Accuracy of Representations and Warranties..................... 23
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PAGE (c) Performance of Agreements....................................... 23 (d) No Material Adverse Change...................................... 23 (e) Board of Directors Approval..................................... 24 (f) Officer's Certificates.......................................... 24 (g) Third Party Consents............................................ 24 SECTION 5 TERMINATION AND WAIVER............................................... 24 4.3 Conditions Precedent to Obligations of Occidental.................... 23 5.1 General.............................................................. 24 5.2 Effect of Termination................................................ 25 SECTION 6 MISCELLANEOUS........................................................ 25 6.1 Successors and Assigns............................................... 25 6.2 Benefits of Agreement Restricted to Parties.......................... 25 6.3 Notices.............................................................. 25 6.4 Severability......................................................... 26 6.5 Press Releases....................................................... 26 6.6 Confidentiality Agreement............................................ 26 6.7 Construction......................................................... 27 6.8 Counterparts......................................................... 27 6.9 Governing Law........................................................ 27 6.10 Transaction Costs.................................................... 27 6.11 Amendment............................................................ 27 6.12 Jurisdiction; Consent to Service of Process; Waiver.................. 28 6.13 Waiver of Jury Trial................................................. 28 6.14 Action by the Partnership............................................ 28
-ii- APPENDICES Appendix A Definitions Appendix B List of Related Agreements SCHEDULES Schedule 2.1 Exceptions to Representations and Warranties of the Partnership Schedule 2.2 Exceptions to Representations and Warranties of Occidental Schedule 2.3 Exceptions to Representations and Warranties of Lyondell Schedule 2.4 Exceptions to Representations and Warranties of Millennium Schedule 3.3 Selected Capital Expenditures Schedule 4.3(g) Occidental Consents Schedule 6.10 Certain Expenses -iii- EXHIBITS Exhibit A Form of Amended and Restated Agreement of Limited Partnership Exhibit B Form of Occidental Asset Contribution Agreement Exhibit C Form of Amended and Restated Parent Agreement Exhibit D Form of Transition Services Agreement Exhibit E Form of Ethylene Purchase Agreement -iv- MASTER TRANSACTION AGREEMENT This Master Transaction Agreement (this "Agreement") dated March 19, 1998 is entered into by and between Equistar Chemicals, LP, a Delaware limited partnership (the "Partnership"), Occidental Petroleum Corporation, a Delaware corporation ("Occidental"), Lyondell Petrochemical Company, a Delaware corporation ("Lyondell"), and Millennium Chemicals Inc., a Delaware corporation ("Millennium"). The definitions of capitalized terms used in this Agreement, including the appendices hereto, are set forth in Appendix A hereto. WHEREAS, Lyondell and Millennium entered into the Master Transaction Agreement dated July 25, 1997, as amended, which contemplated, among other things, the formation of the Partnership; WHEREAS, the Initial Partners entered into the Limited Partnership Agreement of the Partnership dated October 10, 1997 and the Certificate of Limited Partnership with respect to the Partnership became effective October 17, 1997; WHEREAS, the Partnership commenced operations December 1, 1997 upon its acquisition of the Subject Businesses of Lyondell and Millennium Petrochemicals Inc., a Virginia corporation and an indirect wholly owned subsidiary of Millennium ("Millennium Petrochemicals"); WHEREAS, Lyondell and Millennium, the respective ultimate parent entities of the Initial Partners, desire to admit to the Partnership (i) PDG Chemical Inc., a Delaware corporation and an indirect, wholly owned subsidiary of Occidental ("PDG Chemical"), as a general partner, and (ii) a wholly owned Subsidiary and a Delaware corporation (to be organized before Closing) ("OCC Sub") of Occidental Chemical Corporation, a New York corporation ("OCC"), and Oxy Petrochemicals Inc., a Delaware corporation and an indirect, wholly owned subsidiary of Occidental ("Oxy Petrochemicals"), as limited partners, upon the transfer to the Partnership of the Subject Business to be contributed by the Occidental Partners, each a wholly owned Subsidiary of Occidental; WHEREAS, upon the terms and subject to the conditions set forth herein, the Occidental Partners will contribute their Subject Business to the Partnership, the Partnership will issue Units to the Occidental Partners and the Occidental Partners will become partners in the Partnership, and certain other agreements will be entered into as provided for herein; and WHEREAS, the parties who have executed this Agreement (the "Parties") wish to make certain representations and warranties to one another and provide for the coordination of the closing of all the transactions contemplated by this Agreement (the "Closing"); NOW, THEREFORE, in consideration of the premises and the mutual covenants of the Parties set forth herein, it is hereby agreed as follows: SECTION 1 RELATED AGREEMENTS AND CLOSING 1.1 Tier 1 Related Agreements. The Tier 1 Related Agreements are designated as such on Appendix B. Forms of each of the Tier 1 Related Agreements (including forms of certain of the exhibits and versions of certain of the schedules thereto current as of the dates indicated therein) are attached as Exhibits to this Agreement. On the terms and subject to the conditions set forth herein, the Parties shall cause each such agreement to be executed and delivered by the appropriate parties thereto at the Closing in substantially the form attached hereto with such changes as may be effected pursuant to Section 3.8 or otherwise agreed to by the Parties in good faith. 1.2 Tier 2 Related Agreements. The Tier 2 Related Agreements are designated as such on Appendix B. The forms of each of the Tier 2 Related Agreements shall be negotiated by the Parties prior to the Closing in good faith. On the terms and subject to the conditions set forth herein, the Parties shall cause such agreements to be executed and delivered in such forms by the appropriate parties thereto at the Closing. 1.3 Closing Date. Provided that the conditions precedent set forth in Section 4 of this Agreement shall have been satisfied or waived, the Closing shall be held at a mutually agreeable location on the first day of the first calendar month after the date hereof when all such conditions have been so satisfied or waived or on such other date as may be agreed to in writing by the Parties (the "Closing Date"). The Closing shall be deemed to occur at 4:01 a.m. Houston, Texas time on the Closing Date. 1.4 Partnership Long-term Debt. At or immediately subsequent to the Closing Date, the Partnership's long-term debt shall consist of: (i) borrowings under a bank credit agreement or agreements providing for maximum borrowings in the amount of $1.5 billion (exclusive of any amounts to be used for working capital purposes); (ii) Lyondell Assumed Debt (as defined in the Initial Master Transaction Agreement) in the amount of $745 million and (iii) Occidental Assumed Debt in the amount of $205 million; provided, however, that the amount of the credit agreement or agreements described in (i) above may be adjusted to such greater amount as may be reasonably satisfactory to the Partnership and Occidental. 1.5 Closing Transactions. As contemplated by the Occidental Asset Contribution Agreement, on the Closing Date the Occidental Partners shall make or cause to be made the contributions of assets contemplated thereby, subject to the assumption of liabilities contemplated thereby (including the Occidental Assumed Debt). As contemplated by the Amended and Restated Partnership Agreement, on the Closing Date the Partnership shall (i) issue Units to the Occidental Partners and the Occidental Partners will be admitted as partners of the Partnership and (ii) issue Units to Lyondell LP, Lyondell GP, Millennium LP and Millennium GP. As contemplated by the Occidental Asset Contribution Agreement, on the Closing Date a payment of $420 million in cash, in the aggregate, shall be made by the Partnership to the Occidental Partners. On the Closing Date, OCC shall guarantee (with the form and terms thereof to be substantially similar to the form of the guarantee by an Affiliate of Millennium referenced in Section 8.6(c) of the Partnership Agreement and reasonably satisfactory to Occidental and the Partnership) $420 million of indebtedness -2- of the Partnership. On the Closing Date, the Partnership will distribute $75 million in cash to Millennium LP. 1.6 Merger Agreements. It is understood that after the date hereof, the Parties will consider whether it is more efficient (and consistent with their respective business objectives) to structure some or all of the asset transfers contemplated by the Occidental Asset Contribution Agreement as statutory mergers or as a transfer of the stock of Oxy Petrochemicals (immediately after the manufacturing facilities owned thereby have been transferred to the Partnership). If all the Parties so determine, the Parties will seek to agree upon (a) an appropriate form of merger agreement that, among other things, contains provisions economically equivalent to the form of Occidental Asset Contribution Agreement contemplated hereby or (b) changes to the Occidental Asset Contribution Agreement to reflect such stock transfer, as applicable. 1.7 Repayment of the Lyondell Note. If the Lyondell Note is repaid prior to Closing, distributions shall be made to the Initial Partners pro rata, in an aggregate amount equal to the aggregate amount of such payment of principal and interest. If the Lyondell Note is not repaid prior to Closing, the Parties agree to cause the Amended and Restated Partnership Agreement entered into at Closing to provide for, or as of the Closing to otherwise cause to be approved: (i) special distributions to the Initial Partners, equal in amount, in the aggregate, to such payment of principal and interest, to be allocated to the Initial Partners in accordance with their relative interests in the Partnership prior to Closing and (ii) the allocation of interest income accrued with respect to the Lyondell Note subsequent to Closing and prior to its repayment, to the Initial Partners in accordance with their relative interests in the Partnership prior to Closing. SECTION 2 REPRESENTATIONS AND WARRANTIES 2.1 Representations and Warranties of the Partnership. Except as set forth on Schedule 2.1, the Partnership represents and warrants to each other Party as follows: (a) Organization, Good Standing and Power. The Partnership (i) is a limited partnership duly organized, validly existing and in good standing under the laws of the state of Delaware and has the power and authority under its constituent documents to own, lease and operate its assets and to conduct its Subject Business now being conducted by it, (ii) is duly authorized, qualified or licensed to do business as a foreign limited partnership in, and is in good standing in, each of the jurisdictions in which its right, title or interest in or to any of the assets held by it requires such authorization, qualification or licensing, except where the failure to be so authorized, qualified, licensed or in good standing would not be reasonably likely to have a Material Adverse Effect with respect to its Subject Business, and (iii) has, and in the case of the Related Agreements to be executed by it at or prior to the Closing, will have, all requisite corporate power and authority, or power and authority under its constituent documents, to enter into this Agreement and, as applicable, the Related Agreements to which it is or will be a party and to perform its obligations hereunder and thereunder. -3- (b) Authorization and Validity of Agreements. (i) The execution, delivery and performance by the Partnership of this Agreement and the consummation by it of the transactions contemplated hereby have been duly authorized and approved by all necessary corporate or similar action on its part. This Agreement has been duly and validly executed and delivered by the Partnership and is its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws related to or affecting creditors' rights generally and by general equity principles. (ii) The execution, delivery and performance by the Partnership of the Related Agreements to which it will be a party and the consummation by it of the transactions contemplated thereby will be, as of the Closing, duly authorized and approved by all necessary action on its part. At the Closing, each of the Related Agreements to which the Partnership will be a party will be duly and validly executed and delivered by the Partnership and will be upon execution and delivery a legal, valid and binding obligation, enforceable against it in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws related to or affecting creditors' rights generally and by general equity principles. (c) Lack of Conflicts. Except with respect to the HSR Act as set forth in Section 4.1(d), each of the execution, delivery and performance by the Partnership of this Agreement and the Related Agreements to which it is or will be a party and the consummation by it of the transactions contemplated hereby and thereby does not and, as of the Closing, will not (i) violate (with or without the giving of notice or the lapse of time or both) any Legal Requirement applicable to it or its Subsidiaries, other than those that would not be reasonably likely to have a Material Adverse Effect with respect to its Subject Business, (ii) conflict with, or result in the breach of, any provision of the charter or by-laws or similar governing or organizational documents of it or its Subsidiaries, (iii) result in the creation of any Encumbrance upon any of their assets, other than those contemplated by this Agreement or any of the Related Agreements, or those that would not be reasonably likely to have a Material Adverse Effect with respect to its Subject Business, or (iv) violate, conflict with or result in the breach or termination of or otherwise give any other Person the right to terminate, or constitute a default, event of default or an event which with notice, lapse of time or both, would constitute a default or event of default under the terms of, any contract, indenture, lease, mortgage, Government License or other agreement or instrument to which it or any of its Subsidiaries is a party or by which the properties or businesses of it or any of its Subsidiaries are bound, except for violations, conflicts, breaches, terminations and defaults that would not be reasonably likely to have a Material Adverse Effect with respect to its Subject Business. -4- (d) Certain Fees. Neither the Partnership nor any of its Affiliates nor any of its officers, directors or employees, on behalf of it or such Affiliates, has employed any broker or finder or incurred any other liability for any financial advisory fees, brokerage fees, commissions or finders' fees in connection with the transactions contemplated hereby. (e) Financial Statements. The Partnership's audited financial statements as of and for the year ended December 31, 1997 and any unaudited quarterly financial statements prepared pursuant to Section 5.4 of the Partnership Agreement since December 31, 1997 (in each case including any notes thereto), were prepared in accordance with United States generally accepted accounting principles applied on a consistent basis ("GAAP") throughout the periods indicated (except as may be indicated in the notes thereto and except that unaudited or quarterly financial statements do not contain all GAAP notes to such financial statements) and each fairly presents the consolidated (or combined, as applicable) financial position, results of operations and changes in partners' equity and cash flows of the Partnership and its subsidiaries as at the respective dates thereof and for the respective periods indicated therein (subject, in the case of unaudited statements, to normal and recurring year-end adjustments). (f) Absence of Certain Changes. Since December 31, 1997, (i) the Partnership and its Affiliates have not incurred any material liabilities or obligations, fixed, contingent, accrued or otherwise, (A) that relate to or are allocable to its Subject Business and that have had or are reasonably likely to have a Material Adverse Effect with respect to its Subject Business, or (B) that would cause the long-term debt of the Partnership immediately prior to the Closing to exceed the aggregate of $1.745 billion and any amounts borrowed under the Partnership's bank credit facility for working capital, (ii) the Partnership and its Affiliates have conducted its Subject Business in all material respects in the ordinary course, and (iii) no event, occurrence or other matter has occurred that is reasonably likely to have a Material Adverse Effect with respect to its Subject Business, provided that this determination shall be made without regard to any change in general economic or political conditions or any change in raw materials prices, product prices, industry capacity or other matter of industry-wide application that affects its Subject Business and Occidental's Subject Business in a substantially similar way. (g) Partnership Documents. The Partnership has provided to Occidental a true and correct copy of the Partnership Agreement, as amended to date. The Partnership has provided to Occidental true and correct copies of (i) all minutes of meetings of the Partnership Governance Committee held to date and such minutes accurately reflect all actions, approvals and authorizations (including with respect to the Strategic Plan) by or of the Partnership Governance Committee, (ii) the Strategic Plan and (iii) the current annual budget of the Partnership. (h) Partnership Interests. Without giving effect to this Agreement or the transactions contemplated hereby, Lyondell LP, Lyondell GP, Millennium LP and Millennium GP are the only Partners in the Partnership and the only holders of Units, in the denominations set forth in the Partnership Agreement. Without giving effect to this -5- Agreement or the transactions contemplated hereby, there are no outstanding subscriptions, options, convertible securities, warrants or calls of any kind issued or granted by, or binding upon, the Partnership to purchase or otherwise acquire or to sell or otherwise dispose of any security of or equity interest in the Partnership. (i) Conduct of the Partnership Subject Business since December 1, 1997. Except as required or contemplated by approvals or authorizations (including the Strategic Plan) by or of the Partnership Governance Committee, since the contribution of their Subject Assets to the Partnership by Lyondell and Millennium on December 1, 1997, the Partnership has: (i) maintained its books, accounts and records relating to its Subject Business in the usual, regular and ordinary manner, complied in all material respects with all Legal Requirements and contractual obligations applicable to its Subject Business or to the conduct of its Subject Business and performed all of its material obligations relating to its Subject Business; (ii) not (A) modified or changed in any material respect any of its assets or disposed of any material asset except for (1) inventory, equipment, supplies and other assets sold or otherwise disposed of in the ordinary course of business and (2) any assets that in the ordinary course of business were replaced with substantially similar assets, (B) except in the ordinary course of business, (x) entered into any contract, commitment or agreement material to the operation of its Subject Business or use of its assets or, except as expressly contemplated by or required pursuant to their respective terms, modified or changed in any material respect any obligation under any such contract, commitment or agreement, (y) modified or changed in any material respect any obligation under its Government Licenses, (z) modified or changed in any material respect the manner in which the products produced by its Subject Business are marketed and sold, or (C) entered into interest rate protection or other hedging agreements (except for hydrocarbon hedging agreements entered into in the ordinary course and expiring prior to December 31, 1998) relating to its Subject Business; provided, that, for purposes of (A) and (B), "material" shall mean a change or modification that was subject to the unanimous voting requirement of Section 6.7 of the Partnership Agreement; and (iii) not waived any material claims or rights relating to its Subject Business. -6- (j) Employee Benefits. (i) Each of the Partnership's Defined Benefit and Defined Contribution Pension Plans covering employees ("Employee Plan") is in substantial compliance with applicable requirements prescribed by any and all Legal Requirements, including, but not limited to the Code, except for violations the occurrence of which would not in the aggregate reasonably be expected to have a Material Adverse Effect with respect to its Subject Business; (ii) The Partnership has in all material respects performed all obligations required to be performed by it under ERISA, the Code and any other applicable Legal Requirements and under the terms of each Employee Plan, except such failures to perform which would not in the aggregate reasonably be expected to have a Material Adverse Effect with respect to its Subject Business. The Partnership has received no written notice of the existence of any material default or violation by any other party of any of such Legal Requirements, terms or requirements applicable to any of the Employee Plans; (iii) Other than routine claims for benefits, the Partnership has not received any written notice of any pending material claims or lawsuits which have been asserted or instituted against any of the Employee Plans, the assets of the trust or funds under the Employee Plans, the sponsor or administrator of any of the Employee Plans, or against any fiduciary of any of the Employee Plans with respect to the operation of such Plan; (iv) The Partnership has not received any written notice of any pending investigation or pending enforcement action by the Pension Benefit Guaranty Corporation, the Department of Labor, the Internal Revenue Service or any other Authority with respect to any of the Employee Plans; (v) All contributions required to be made under the terms of the Partnership's Employee Plans have been timely made. No Employee Plan has an "accumulated funding deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA); (vi) All of the Partnership's "group health plans" (within the meaning of Code Section 5000(b)(1)) have been operated in substantial compliance with the group health plan continuation coverage requirements of Section 4980B of the Code and Sections 601 through 608 of ERISA, Title XXII of the Public Health Service Act and the provisions of the Social Security Act; (vii) There has been no act or omission by the Partnership that has given rise to or may give rise to material fines, penalties, taxes, or related charges under Section 502(c), (i) or (l) or Section 4071 of ERISA or Chapter 43 of the Code -7- or the imposition of a lien pursuant to Sections 401(a)(29) or 412(n) of the Code or pursuant to ERISA; (viii) Except with respect to the transactions contemplated by this Agreement, no "reportable event" within the meaning of Section 4043 of ERISA, or prohibited transaction within the meaning of Section 406 of ERISA, has occurred with respect to any Employee Plan which would reasonably be expected to have a Material Adverse Effect; and (ix) No Employee Plan is a "multiemployer plan" as such term is defined in section 3(37) of ERISA. No Employee Plan is a plan maintained by more than one employer (a so-called "multiple employer plan") for purposes of section 413(c) of the Code or otherwise. (k) Conduct of Business in Compliance with Regulatory and Contractual Requirements. The Partnership and each Affiliate thereof is operating and conducting its Subject Business in compliance with all applicable Legal Requirements, rights of concession, licenses, know-how or other proprietary rights of others, the failure to comply with which would reasonably be expected to have a Material Adverse Effect with respect to its Subject Business. (l) Legal Proceedings. There is no litigation, proceeding, claim, grievance, arbitration, investigation or other action to which the Partnership or any Affiliate thereof is a party (including proceedings or claims by or before the National Labor Relations Board, the Equal Employment Opportunity Commission, the Department of Labor or any other Authority) (i) that is pending or, to the Knowledge of the Partnership, threatened, (ii) that relates in any way to the operation or conduct of its Subject Business, or to the transactions contemplated by this Agreement, and (iii) that upon resolution adverse to Partnership or any Affiliate, could reasonably be expected to have a Material Adverse Effect with respect to its Subject Business. (m) Initial Asset Contributions. To the Partnership's Knowledge, there is no basis for a claim by the Partnership against Lyondell or Millennium Petrochemicals for breach of representation or warranty of any of their respective representations and warranties set forth in the Lyondell Asset Contribution Agreement or the Millennium Asset Contribution Agreement. 2.2 Representations and Warranties of Occidental . Except as set forth on Schedule 2.2, Occidental represents and warrants to each other Party as follows: (a) Organization, Good Standing and Power. Occidental and each member of its Group (i) is (or, if not yet formed, at the Closing will be) a corporation, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has (or, if not yet formed, at the Closing will have) the corporate power and authority to own, lease and operate its assets and, if applicable, to conduct the Subject Business now -8- being conducted by it and to be conducted by it as of the Closing, (ii) is (or, if not yet formed, at the Closing will be) duly authorized, qualified or licensed to do business as a foreign corporation in, and is (or, if not yet formed, at the Closing will be) in good standing in, each of the jurisdictions in which its right, title or interest in or to any of the assets held by it or the Subject Business conducted by it, if applicable (or, if not yet formed, the assets or business to be held or conducted by it as of the Closing), requires such authorization, qualification or licensing, except where the failure to be so authorized, qualified, licensed or in good standing would not be reasonably likely to have a Material Adverse Effect with respect to its Subject Business, and (iii) has, and in the case of the Related Agreements to be executed by it at or prior to the Closing, will have, all requisite corporate power and authority to enter into this Agreement and, as applicable, the Related Agreements to which it is or will be a party and to perform its obligations hereunder and thereunder. (b) Authorization and Validity of Agreements. Assuming the approval of Occidental's board of directors referred to in Section 4.3(e): (i) The execution, delivery and performance by Occidental of this Agreement and the consummation by it of the transactions contemplated hereby have been duly authorized and approved by all necessary corporate or similar action on its part. This Agreement has been duly and validly executed and delivered by Occidental and is its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws related to or affecting creditors' rights generally and by general equity principles. (ii) The execution, delivery and performance by Occidental and each member of its Group of the Related Agreements to which it or any member of its Group will be a party and the consummation by it and its Group of the transactions contemplated thereby will be, as of the Closing, duly authorized and approved by all necessary corporate or similar action on its or their part. At the Closing, each of the Related Agreements to which Occidental or any member of its Group will be a party will be duly and validly executed and delivered by Occidental or member and will be upon execution and delivery a legal, valid and binding obligation, enforceable against it or such member in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws related to or affecting creditors' rights generally and by general equity principles. (c) Lack of Conflicts. Assuming satisfaction of the condition in Section 4.1(c) and receipt of the Consents contemplated by Schedule 4.3(g), and except with respect to the HSR Act as set forth in Section 4.1(d), each of the execution, delivery and performance by Occidental and each member of its Group of this Agreement and the Related Agreements to which any of them is or will be a party and the consummation by them of the transactions contemplated hereby and thereby does not and, as of the Closing, will not (i) violate (with or without the giving of notice or the lapse of time or both) any Legal Requirement -9- applicable to any of them or any of their Subsidiaries, other than those that would not be reasonably likely to have a Material Adverse Effect with respect to its Subject Business, (ii) conflict with, or result in the breach of, any provision of the charter or by-laws or similar governing or organizational documents of any of them or any of their Subsidiaries, (iii) result in the creation of any Encumbrance upon any of their assets, other than those contemplated by this Agreement or any of the Related Agreements, or those that would not be reasonably likely to have a Material Adverse Effect with respect to its Subject Business, or (iv) violate, conflict with or result in the breach or termination of or otherwise give any other Person the right to terminate, or constitute a default, event of default or an event which with notice, lapse of time or both, would constitute a default or event of default under the terms of, any contract, indenture, lease, mortgage, Government License or other agreement or instrument to which any of them or any of their Subsidiaries is a party or by which the properties or businesses of any of them or any of their Subsidiaries are bound, except for violations, conflicts, breaches, terminations and defaults that would not be reasonably likely to have a Material Adverse Effect with respect to its Subject Business. (d) Certain Fees. Neither Occidental nor any of its Affiliates nor any of its officers, directors or employees, on behalf of it or such Affiliates, has employed any broker or finder or incurred any other liability for any financial advisory fees, brokerage fees, commissions or finders' fees in connection with the transactions contemplated hereby. (e) SEC Reports; Financial Statements. (i) Occidental has filed all material forms, reports and documents required to be filed by it with the SEC since December 31, 1996 (its "SEC Reports"). Occidental's SEC Reports were prepared in all material respects in accordance with the requirements of the Securities Act, or the Exchange Act, as the case may be, and the rules and regulations thereunder, and none of Occidental's SEC Reports, as of the date they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (ii) The financial statements (including any notes thereto) contained in Occidental's SEC Reports were prepared in accordance with GAAP throughout the periods indicated (except as may be indicated in the notes thereto and except that financial statements included with quarterly reports on Form 10-Q do not contain all GAAP notes to such financial statements) and each fairly presents the consolidated (or combined, as applicable) financial position, results of operations and changes in stockholders' equity and cash flows of Occidental and its subsidiaries as at the respective dates thereof and for the respective periods indicated therein (subject, in the case of unaudited statements, to normal and recurring year-end adjustments). -10- (f) Absence of Certain Changes. Since December 31, 1996, (i) Occidental and its Affiliates have not incurred any material liabilities or obligations, fixed, contingent, accrued or otherwise, that relate to or are allocable to its Subject Business and that have had or are reasonably likely to have a Material Adverse Effect with respect to its Subject Business, (ii) Occidental and its Affiliates have conducted its Subject Business in all material respects in the ordinary course, consistent with past practice, and (iii) no event, occurrence or other matter has occurred that is reasonably likely to have a Material Adverse Effect with respect to the Subject Business of Occidental, provided that this determination shall be made without regard to any change in general economic or political conditions or any change in raw materials prices, product prices, industry capacity or other matter of industry-wide application that affects the Partnership's Subject Business and Occidental's Subject Business in a substantially similar way. 2.3 Representations and Warranties of Lyondell. Except as set forth on Schedule 2.3, Lyondell represents and warrants to each other Party as follows: (a) Organization, Good Standing and Power. Lyondell and each member of its Group (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority to own, lease and operate its assets, (ii) is duly authorized, qualified or licensed to do business as a foreign corporation or other organization in, and is in good standing in, each of the jurisdictions in which its right, title or interest in or to any of the assets held by it requires such authorization, qualification or licensing, except where the failure to be so authorized, qualified, licensed or in good standing would not be reasonably likely to have a Material Adverse Effect with respect to the Partnership's Subject Business, and (iii) has, and in the case of the Related Agreements to be executed by it at or prior to the Closing, will have, all requisite corporate power and authority, or power and authority under its constituent documents, to enter into this Agreement and, as applicable, the Related Agreements to which it is or will be a party and to perform its obligations hereunder and thereunder. (b) Authorization and Validity of Agreements. (i) The execution, delivery and performance by Lyondell of this Agreement and the consummation by it of the transactions contemplated hereby have been duly authorized and approved by all necessary corporate or similar action on its part. This Agreement has been duly and validly executed and delivered by Lyondell and is its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws related to or affecting creditors' rights generally and by general equity principles. (ii) The execution, delivery and performance by Lyondell and each member of its Group of the Related Agreements to which it or any member of its Group will be a party and the consummation by it and its Group of the transactions contemplated thereby will be, as of the Closing, duly authorized and approved by -11- all necessary corporate or similar action on its or their part. At the Closing, each of the Related Agreements to which Lyondell or any member of its Group will be a party will be duly and validly executed and delivered by Lyondell or member and will be upon execution and delivery a legal, valid and binding obligation, enforceable against it or such member in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws related to or affecting creditors' rights generally and by general equity principles. (c) Lack of Conflicts. Except with respect to the HSR Act as set forth in Section 4.1(d), each of the execution, delivery and performance by Lyondell and each member of its Group of this Agreement and the Related Agreements to which any of them is or will be a party and the consummation by them of the transactions contemplated hereby and thereby does not and, as of the Closing, will not (i) violate (with or without the giving of notice or the lapse of time or both) any Legal Requirement applicable to any of them or any of their Subsidiaries, other than those that would not be reasonably likely to have a Material Adverse Effect with respect to Lyondell, (ii) conflict with, or result in the breach of, any provision of the charter or by-laws or similar governing or organizational documents of any of them or any of their Subsidiaries, (iii) result in the creation of any Encumbrance upon any of their assets, other than those contemplated by this Agreement or any of the Related Agreements, or those that would not be reasonably likely to have a Material Adverse Effect with respect to Lyondell, or (iv) violate, conflict with or result in the breach or termination of or otherwise give any other Person the right to terminate, or constitute a default, event of default or an event which with notice, lapse of time or both, would constitute a default or event of default under the terms of, any contract, indenture, lease, mortgage, Government License or other agreement or instrument to which any of them or any of their Subsidiaries is a party or by which the properties or businesses of any of them or any of their Subsidiaries are bound, except for violations, conflicts, breaches, terminations and defaults that would not be reasonably likely to have a Material Adverse Effect with respect to Lyondell. (d) Certain Fees. Neither Lyondell nor any of its Affiliates nor any of its officers, directors or employees, on behalf of it or such Affiliates, has employed any broker or finder or incurred any other liability for any financial advisory fees, brokerage fees, commissions or finders' fees in connection with the transactions contemplated hereby. (e) Joint Proxy Statement. The Joint Proxy Statement was prepared in all material respects in accordance with the requirements of the Securities Act, or the Exchange Act, as the case may be, and the rules and regulations thereunder, and, as of the date of the Stockholders' Meetings and insofar as it relates to the Subject Business of Lyondell, did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. -12- (f) Title to Lyondell Units. Without giving effect to this Agreement or the transactions contemplated hereby, Lyondell LP and Lyondell GP each owns the number of Units set forth in Section 2.1 of the Partnership Agreement opposite its name. Except as contemplated by this Agreement, there are no outstanding subscriptions, options, convertible securities, warrants or calls of any kind issued or granted by, or binding upon, the Partnership or any member of the Lyondell Group to purchase or otherwise acquire or to sell or otherwise dispose of any security of or equity interest in the Partnership. 2.4 Representations and Warranties of Millennium. Except as set forth on Schedule 2.4, Millennium represents and warrants to each other Party as follows: (a) Organization, Good Standing and Power. Millennium and each member of its Group (i) is a corporation or a limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has the corporate power and authority or power under its constituent documents to own, lease and operate its assets, (ii) is duly authorized, qualified or licensed to do business as a foreign corporation or other organization in, and is in good standing in, each of the jurisdictions in which its right, title or interest in or to any of the assets held by it requires such authorization, qualification or licensing, except where the failure to be so authorized, qualified, licensed or in good standing would not be reasonably likely to have a Material Adverse Effect with respect to the Partnership's Subject Business, and (iii) has, and in the case of the Related Agreements to be executed by it at or prior to the Closing, will have, all requisite corporate power and authority, or power and authority under its constituent documents, to enter into this Agreement and, as applicable, the Related Agreements to which it is or will be a party and to perform its obligations hereunder and thereunder. (b) Authorization and Validity of Agreements. (i) The execution, delivery and performance by Millennium of this Agreement and the consummation by it of the transactions contemplated hereby have been duly authorized and approved by all necessary corporate or similar action on its part. This Agreement has been duly and validly executed and delivered by Millennium and is its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws related to or affecting creditors' rights generally and by general equity principles. (ii) The execution, delivery and performance by Millennium and each member of its Group of the Related Agreements to which it or any member of its Group will be a party and the consummation by it and its Group of the transactions contemplated thereby will be, as of the Closing, duly authorized and approved by all necessary corporate or similar action on its or their part. At the Closing, each of the Related Agreements to which Millennium or any member of its Group will be a party will be duly and validly executed and delivered by Millennium or member and will be upon execution and delivery a legal, valid and binding obligation, -13- enforceable against it or such member in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws related to or affecting creditors' rights generally and by general equity principles. (c) Lack of Conflicts. Except with respect to the HSR Act as set forth in Section 4.1(d), each of the execution, delivery and performance by Millennium and each member of its Group of this Agreement and the Related Agreements to which any of them is or will be a party and the consummation by them of the transactions contemplated hereby and thereby does not and, as of the Closing, will not (i) violate (with or without the giving of notice or the lapse of time or both) any Legal Requirement applicable to any of them or any of their Subsidiaries, other than those that would not be reasonably likely to have a Material Adverse Effect with respect to Millennium, (ii) conflict with, or result in the breach of, any provision of the charter or by-laws of any of them or any of their Subsidiaries, (iii) result in the creation of any Encumbrance upon any of their assets, other than those contemplated by this Agreement or any of the Related Agreements, or those that would not be reasonably likely to have a Material Adverse Effect with respect to Millennium, or (iv) violate, conflict with or result in the breach or termination of or otherwise give any other Person the right to terminate, or constitute a default, event of default or an event which with notice, lapse of time or both, would constitute a default or event of default under the terms of, any contract, indenture, lease, mortgage, Government License or other agreement or instrument to which any of them or any of their Subsidiaries is a party or by which the properties or businesses of any of them or any of their Subsidiaries are bound, except for violations, conflicts, breaches, terminations and defaults that would not be reasonably likely to have a Material Adverse Effect with respect to Millennium. (d) Certain Fees. Neither Millennium nor any of its Affiliates nor any of its officers, directors or employees, on behalf of it or such Affiliates, has employed any broker or finder or incurred any other liability for any financial advisory fees, brokerage fees, commissions or finders' fees in connection with the transactions contemplated hereby. (e) Joint Proxy Statement. The Joint Proxy Statement was prepared in all material respects in accordance with the requirements of the Securities Act, or the Exchange Act, as the case may be, and the rules and regulations thereunder, and, as of the date of the Stockholders' Meetings and insofar as it relates to the Subject Business of Millennium, did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (f) Title to Millennium Units. Without giving effect to this Agreement or the transactions contemplated hereby, Millennium LP and Millennium GP each owns the number of Units set forth in Section 2.1 of the Partnership Agreement opposite its name. Except as contemplated by this Agreement, there are no outstanding subscriptions, options, convertible securities, warrants or calls of any kind issued or granted by, or binding upon, -14- the Partnership or any member of the Millennium Group to purchase or otherwise acquire or to sell or otherwise dispose of any security of or equity interest in the Partnership. SECTION 3 ADDITIONAL AGREEMENTS 3.1 Access to Information. Each of Occidental and the Partnership agrees that, during the period commencing on the date hereof and ending at the Closing, (i) it will give or cause to be given to any other Party and its representatives reasonable access during normal business hours to the offices, plants, properties, books and records relating to its Subject Business as such other Party may reasonably request, (ii) it will furnish or cause to be furnished to any other Party, such financial and operating data and any other information with respect to the business and properties of its Subject Business as such other Party may reasonably request (provided such data and information need only be furnished to the extent it was prepared in the ordinary course) and (iii) any other Party and its representatives shall be entitled to reasonable access during normal business hours to the representatives, officers, employees and contractors of such Party who are involved in its Subject Business as such other Party may reasonably request; provided, that Lyondell and Millennium also agree to the foregoing provisions to the extent that any of the foregoing remain in their possession and have not been transferred to the Partnership; provided, further that, after consultation, to the extent permissible, with such other Party, such Party may restrict access and provision of information to the extent it reasonably believes necessary to (w) comply with existing confidentiality agreements with third parties (provided that, upon such other Party's reasonable request, it shall use its commercially reasonable efforts to secure waivers of any such confidentiality agreements), (x) ensure compliance with antitrust laws, (y) preserve the secrecy of confidential information to the extent not related to its Subject Business and (z) preserve legal privilege; and provided, further that any access or information obtained by any Party and its representatives in accordance with this Section 3.1 and otherwise in connection with the consummation of the transactions contemplated by this Agreement and the Related Agreements shall be subject to the terms and conditions of the Confidentiality Agreement. 3.2 Conduct of the Occidental Subject Business Pending the Closing Date. Occidental agrees that, except as required or contemplated by this Agreement or otherwise consented to or approved in writing by the Partnership, during the period commencing on the date hereof and ending on the Closing Date, it will and will cause its Affiliates to: (a) use its commercially reasonable efforts to operate and maintain its Subject Business in all material respects only in the usual, regular and ordinary manner consistent with past practice (including undertaking scheduled or necessary "turnarounds" or other maintenance work and including offsite storage, treatment and disposal of chemical substances generated prior to the Closing) and, to the extent consistent with such operation and maintenance, use commercially reasonable efforts to preserve the present business organization of its Subject Business intact, keep available the services of, and good relations with, the present employees and preserve present relationships with all persons having business dealings with its Subject Business, except in each case for such matters that, -15- individually and in the aggregate, do not and are not reasonably likely to have a Material Adverse Effect on its Subject Business; (b) maintain its books, accounts and records relating to its Subject Business in the usual, regular and ordinary manner, on a basis consistent with past practice, comply in all material respects with all Legal Requirements and contractual obligations applicable to its Subject Business or to the conduct of its Subject Business and perform all of its material obligations relating to its Subject Business; (c) not (i) modify or change in any material respect any of its Contributed Assets or dispose of any material Contributed Asset except for (A) inventory, equipment, supplies and other Contributed Assets sold or otherwise disposed of in the ordinary course of business and (B) any Contributed Assets that in the ordinary course of business are replaced with substantially similar Contributed Assets, (ii) except in the ordinary course of business after consultation with the Partnership, (x) enter into any contract, commitment or agreement that would be material to the operation of its Subject Business or use of the Contributed Assets or, except as expressly contemplated by this Agreement or expressly contemplated by or required pursuant to their respective terms, modify or change in any material respect any obligation under any such contract, commitment or agreement, (y) modify or change in any material respect any obligation under its Government Licenses, (z) modify or change in any material respect the manner in which the products produced by its Subject Business are marketed and sold, or (iii) enter into interest rate protection or other hedging agreements (except for hydrocarbon hedging agreements entered into in the ordinary course and expiring prior to December 31, 1998) relating to its Subject Business; (d) not waive any material claims or rights relating to its Subject Business; (e) after obtaining Knowledge thereof, give notice to the Partnership of any claim or litigation (threatened or instituted) or any other event or occurrence which could reasonably be expected to have a Material Adverse Effect on its Contributed Assets or Subject Business, other than the types of events, occurrences or other matters referred to in the proviso set forth in Section 2.2(f)(iii); (f) not take any action that is reasonably likely to result in its representations and warranties in Section 2 hereof, or in the form of Occidental Asset Contribution Agreement, not being true in all material respects as of the Closing Date; and (g) not agree, whether in writing or otherwise, to take any action it has agreed pursuant to this Section 3.2 not to take; provided, however, that notwithstanding anything to the contrary contained in this Section 3.2, prior to the Closing Date the Occidental Group and the Partnership will act independently of each other in making decisions as to the research and development, raw materials, manufacturing, pricing, marketing and distribution of their products. -16- 3.3 Conduct of the Partnership Subject Business Pending the Closing Date. The Partnership agrees that, except as required or contemplated by approvals or authorizations (including the Strategic Plan) by or of the Partnership Governance Committee prior to the date hereof or by this Agreement (including, without limitation, Schedule 3.3 hereto) or otherwise consented to or approved in writing by Occidental, during the period commencing on the date hereof and ending on the Closing Date, it will and will cause its Affiliates to: (a) use its commercially reasonable efforts to operate and maintain its Subject Business in all material respects only in a usual, regular and ordinary manner consistent with the Strategic Plan (including undertaking scheduled or necessary "turnarounds" or other maintenance work and including offsite storage, treatment and disposal of chemical substances generated prior to the Closing) and, to the extent consistent with such operation and maintenance, use commercially reasonable efforts to preserve the present business organization of its Subject Business intact, keep available the services of, and good relations with, the present employees and preserve present relationships with all persons having business dealings with its Subject Business, except in each case for such matters that, individually and in the aggregate, do not and are not reasonably likely to have a Material Adverse Effect on its Subject Business; (b) maintain its books, accounts and records relating to its Subject Business in the usual, regular and ordinary manner, comply in all material respects with all Legal Requirements and contractual obligations applicable to its Subject Business or to the conduct of its Subject Business and perform all of its material obligations relating to its Subject Business; (c) not (i) modify or change in any material respect any of its assets or dispose of any material asset except for (A) inventory, equipment, supplies and other assets sold or otherwise disposed of in the ordinary course of business and (B) any assets that in the ordinary course of business are replaced with substantially similar assets, (ii) except in the ordinary course of business after consultation with Occidental, (x) enter into any contract, commitment or agreement that would be material to the operation of its Subject Business or use of its assets or, except as expressly contemplated by this Agreement or expressly contemplated by or required pursuant to their respective terms, modify or change in any material respect any obligation under any such contract, commitment or agreement, (y) modify or change in any material respect any obligation under its Government Licenses, (z) modify or change in any material respect the manner in which the products produced by its Subject Business are marketed and sold, or (iii) enter into interest rate protection or other hedging agreements (except for hydrocarbon hedging agreements entered into in the ordinary course and expiring prior to December 31, 1998) relating to its Subject Business; provided, that, for purposes of (i) and (ii), "material" shall mean a change or modification that is subject to the unanimous voting requirement of Section 6.7 of the Partnership Agreement; (d) not waive any material claims or rights relating to its Subject Business; -17- (e) after obtaining Knowledge thereof, give notice to Occidental of any claim or litigation (threatened or instituted) or any other event or occurrence which could reasonably be expected to have a Material Adverse Effect on its assets or Subject Business, other than the types of events, occurrences or other matters referred to in the proviso set forth in Section 2.1(f)(iii); (f) not take any action that is reasonably likely to result in its representations and warranties in Section 2 hereof not being true in all material respects as of the Closing Date; (g) not to make any distributions that are not in compliance with Section 3.1 of the Partnership Agreement and Sections 1.5 and 1.7 of this Agreement; and (h) not agree, whether in writing or otherwise, to take any action it has agreed pursuant to this Section 3.3 not to take; provided, however, that notwithstanding anything to the contrary contained in this Section 3.3, prior to the Closing Date the Occidental Group and the Partnership will act independently of each other in making decisions as to the research and development, raw materials, manufacturing, pricing, marketing and distribution of their products. 3.4 Further Actions. (a) Each Party shall, if applicable, following execution of this Agreement, promptly make its filings under the HSR Act with respect to the transactions contemplated hereby; will cooperate with all other Parties in attempting to secure a waiver of the applicable waiting periods under such Act, and, upon the request of either the Federal Trade Commission or the United States Department of Justice, will supply such agency with any additional requested information as expeditiously as possible; and will use its commercially reasonable efforts to take, or cause to be taken, all other action and do, or cause to be done, all other things necessary, proper or appropriate to resolve the objections, if any, as may be asserted by any Authority with respect to the transactions contemplated hereby under any antitrust laws or regulations; provided that no Party shall be required to take any action that could have any material adverse effect on its or its Affiliates' business, operations, prospects, assets, condition (financial or otherwise) or results of operations or that would, or would be reasonably likely to, materially frustrate the financial or other business benefits reasonably expected to be derived by any Party from the transactions contemplated by this Agreement. (b) Subject to the terms and conditions hereof, each Party agrees to act in good faith and to use its commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement and under the Related Agreements to be entered into by such Party or its Affiliates at Closing, and to confirm that such transactions have been accomplished, including without limitation, using all commercially reasonable efforts: (i) to obtain and effect prior to the Closing Date all necessary Consents and Filings; and (ii) to, in the case of Occidental, obtain prior to the Closing Date all Government Licenses or consents to the transfer of any Government -18- Licenses that are transferable by it or its Affiliates necessary to consummate the transactions contemplated hereby and by the Related Agreements and to allow for the prudent and uninterrupted operation of the Subject Business by the Partnership after the Closing. Each Party shall furnish to the other Party and its Affiliates such necessary information and assistance as the other may reasonably request in connection with its preparation of any such Filings or other materials required in connection with the foregoing. (c) Occidental shall use its commercially reasonable efforts to procure all Consents that are necessary to transfer its Subject Business to the Partnership. Notwithstanding any other provision of this Agreement to the contrary, the Parties hereto acknowledge and agree that at the Closing Occidental or any Occidental Partner, as applicable, will not assign to the Partnership any Contract or warranties which by their terms require Consent from any other contracting party thereto unless any such Consent has been obtained prior to the Closing Date. Before the Closing, the other Parties and the Partnership will use their commercially reasonable efforts and cooperate with Occidental and the Occidental Partners (together, the "Contracting Party") in obtaining any necessary Consents to the assignment of the Contracts, including, without limitation, by furnishing to the Contracting Party or other parties to any Contract summary financial information and other information with respect to the Partnership reasonably requested by the Contracting Party or such other parties and taking any such other actions (which, subject to any provisions to the contrary included in any Related Agreement, shall not include the incurrence of any expense not otherwise required to be incurred) as the Contracting Party or such other parties may reasonably request for the purpose of obtaining any releases, waivers or terminations as the Contracting Party may reasonably request on behalf of itself or any Affiliate. No representation is made by the Contracting Party with respect to whether any Consent to assign a Contract will be obtainable, and in no event shall the initial capital contributions be subject to reduction as a result of any Contract not being assigned to the Partnership at the Closing by virtue of the necessary Consent not being obtained. Following the Closing, the Partnership, Occidental and the Occidental Partners shall cooperate with each other and use commercially reasonable efforts to obtain those Consents that were not obtained prior to the Closing and (i) if such Consents are obtained following the Closing, Occidental and the Occidental Partners shall execute and deliver any other and further instruments of assignment, assumption, transfer and conveyance and take such other and further action as the Partnership may request in order to assign to the Partnership any Contract or warranties to which such Consents relate and (ii) pending such transfer or issuance to the Partnership, shall provide, to the extent it may lawfully do so, the Partnership with the benefits of any such Contracts, in which case, as provided for in the Occidental Asset Contribution Agreement, the Partnership shall promptly assume and discharge (or reimburse Occidental or its Affiliate for) all obligations and liabilities associated with the benefits of such Contracts so made available to the Partnership. (d) Occidental shall keep each other Party fully informed from time to time as any other Party shall reasonably request as to the status of all Consents being sought by Occidental or a Occidental Partner pursuant to Section 3.4(c). -19- (e) Each Party shall furnish to the other Party such information, cooperation and assistance as reasonably may be requested in connection with the foregoing. (f) Each Party shall negotiate and otherwise act in good faith to complete, execute and deliver the Related Agreements at the Closing and to effect the Closing at the earliest practicable date. 3.5 Notifications. Each Party shall notify the other Parties and keep them advised as to (i) any litigation or administrative proceeding that is either pending or, to its Knowledge, threatened against such Party which challenges the transactions contemplated hereby; (ii) in the case of the Partnership or Occidental, any material damage to or destruction of its Subject Business and (iii) any fact of which such Party has Knowledge that indicates that any condition to Closing is reasonably likely not to be satisfied in a timely fashion. 3.6 Employee Matters. (a) Substantially all employees of Occidental, OCC or one of the Occidental Partners who are associated primarily with Occidental's Subject Business shall be offered employment with the Partnership pursuant to the terms of the Occidental Asset Contribution Agreement. (b) The Partnership shall provide benefits to such employees who become employees of the Partnership under the benefit plans and programs of the Partnership upon employment with the Partnership, subject to the more specific provisions of the Occidental Asset Contribution Agreement. (c) No provision of this Agreement shall require OCC or any of the Occidental Partners to fail to comply with the terms of any current collective bargaining agreement. 3.7 Partnership Unanimous Consent Items. No action that requires the consent of Representatives of both Lyondell and Millennium pursuant to Section 6.7 of the Partnership Agreement shall be taken prior to the Closing without the consent of Occidental (other than actions regarding this Agreement and the transactions contemplated hereby). 3.8 Closing Amendments Certificate. At or immediately prior to the Closing, each of the Partnership and the Occidental Group shall complete and deliver to the other an executed statement, signed by a duly authorized officer of the Partnership or Occidental (as the representative of the Occidental Group) setting forth all amendments and additions to this Agreement or the Related Agreements or to the schedules and exhibits hereto and thereto (if any) that the Partnership or the Occidental Group, respectively, believes in good faith to be necessary (i) to make the representations and warranties of all of its members contained in this Agreement or the Related Agreements true and correct in all respects (other than such matters as are, individually and in the aggregate, immaterial to its Subject Business) or (ii) to make such schedules and exhibits accurate and complete as of the Closing (each a "Closing Amendments Certificate"). Each of the Partnership and Occidental Group shall examine any such Closing Amendments Certificate presented to it by -20- the other, and if it is acceptable to it (or if it is willing to waive the condition that such Closing Amendments Certificate be acceptable to it), the Partnership or Occidental (as the Occidental Group's representative) shall also execute it, whereupon the amendments and additions set forth therein with respect to this Agreement and the Schedules and Exhibits hereto shall become effective for all purposes and the amendments and additions set forth therein with respect to the Related Agreements and the schedules and exhibits thereto shall be effected prior to the execution and delivery thereof so as to be effective for all purposes from and after the Closing. SECTION 4 CONDITIONS TO CLOSING 4.1 Conditions Precedent to Obligations of All Parties. The respective obligations of the Parties to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction on or prior to the Closing Date of each of the following conditions: (a) No Injunction, etc. No preliminary or permanent injunction or other order issued by any federal or state court of competent jurisdiction in the United States or by any United States federal or state governmental or regulatory body or any statute, rule, regulation or executive order promulgated or enacted by any United States federal or state governmental authority shall be in effect which materially restrains, enjoins or otherwise prohibits (i) the transactions contemplated hereby; (ii) the ownership by the Partnership (including enjoyment of any rights relating thereto) of its Subject Business or Occidental's Subject Business at and after the Closing; or (iii) the operation by the Partnership of its Subject Business or Occidental's Subject Business at and after the Closing; and no Proceeding seeking any such injunction or order shall be pending; provided, that before any determination is made to the effect that this condition has not been satisfied, each Party shall each use commercially reasonable efforts to have such order or injunction lifted, vacated or dismissed. (b) Tier 2 Related Agreements. The Parties shall have reached agreement with respect to definitive execution forms of the Tier 2 Related Agreements in accordance with Section 1.2. (c) Government Licenses and Consents. Occidental shall have obtained and effected all Government Licenses and Consents required from any Authority for the consummation of the transactions contemplated hereunder and under the Related Agreements to be entered into at the Closing and required to allow for the prudent and uninterrupted operation of its Subject Business by the Partnership after the Closing in a manner consistent with past practices, except for those Government Licenses and Consents, the absence of which is not, in the aggregate, reasonably likely to have a Material Adverse Effect with respect to Occidental's Subject Business. (d) HSR Act. The waiting period applicable to the Closing under the HSR Act shall have expired or been terminated, and no consent, approval, permit or authorization in connection therewith shall impose terms or conditions that would have, or would be reasonably likely to have, a material adverse effect on any Party (assuming the Closing has -21- taken place) or that would, or would be reasonably likely to, materially frustrate the financial or other business benefits reasonably expected to be derived by any Party from the transactions contemplated by this Agreement. (e) Amended Bank Credit Facility. The Partnership shall have entered into the bank credit agreement contemplated by Section 1.4 and the conditions precedent to the availability of funds thereunder shall have been satisfied (subject only to the Closing of the transactions contemplated by this Agreement). 4.2 Conditions Precedent to Obligations of the Partnership. The obligations of the Partnership under this Agreement are subject to the satisfaction (or waiver by the Partnership) on or prior to the Closing Date of each of the following conditions: (a) Closing Amendments Certificate. The Closing Amendments Certificate (if any) of the Occidental Group shall have been acceptable to the Partnership (or the Partnership shall have determined to waive the condition that such Closing Amendments Certificate be acceptable), and the Partnership shall have executed such certificate. (b) Accuracy of Representations and Warranties. Notwithstanding any investigation, inspection or evaluation conducted or notice or Knowledge obtained by any member of the Equistar Group (including any Knowledge obtained as a result of receipt of the Occidental Group's Closing Amendments Certificate), all representations and warranties (as amended pursuant to the Occidental Group's Closing Amendments Certificate, if applicable) of members of the Occidental Group contained in this Agreement and the Related Agreements that contain qualifications and exceptions relating to materiality or Material Adverse Effect shall be true and correct on and as of the Closing Date, and all other representations and warranties of the members of such Group contained in such agreements shall be true and correct in all material respects as of the Closing Date, in each case with the same force and effect as though such representations and warranties had been made on and as of the Closing Date (and such representations and warranties shall be deemed to have been made on and as of the Closing Date). (c) Performance of Agreements. Occidental and its Affiliates shall in all material respects have performed and complied with all obligations and agreements contained in this Agreement, and executed all agreements and documents (including the Tier 1 Related Agreements and the Tier 2 Related Agreements) to be performed, complied with or executed by it or them on or prior to the Closing Date. (d) No Material Adverse Change. After the date of this Agreement, no event, occurrence or other matter shall have occurred that is reasonably likely to have a Material Adverse Effect with respect to Occidental's Subject Business, provided that this determination shall be made without regard to any change in general economic or political conditions or any change in raw materials prices, product prices, industry capacity or other matter of industry-wide application that affects the Partnership's Subject Business and Occidental's Subject Business in a substantially similar way. -22- (e) Officer's Certificates. The Partnership shall have received a certificate, dated the Closing Date, signed by the President or a Vice President of Occidental to the effect that, to the Knowledge of Occidental, the conditions specified in the above paragraphs have been fulfilled. 4.3 Conditions Precedent to Obligations of Occidental. The obligations of Occidental under this Agreement are subject to the satisfaction (or waiver by Occidental) on or prior to the Closing Date of each of the following conditions: (a) Closing Amendments Certificate. The Closing Amendments Certificate (if any) of the Partnership shall have been acceptable to the Occidental Group (or the Occidental Group shall have determined to waive the condition that such Closing Amendments Certificate be acceptable), and Occidental shall have executed it as the Occidental Group's representative. (b) Accuracy of Representations and Warranties. Notwithstanding any investigation, inspection or evaluation conducted or notice or Knowledge obtained by any member of the Occidental Group (including any Knowledge obtained as a result of receipt of a Closing Amendments Certificate), all representations and warranties (as amended pursuant to the Partnership's Closing Amendments Certificate, if applicable) of members of the Equistar Group, the Lyondell Group and the Millennium Group contained in this Agreement and the Related Agreements that contain qualifications and exceptions relating to materiality or Material Adverse Effect shall be true and correct on and as of the Closing Date, and all other representations and warranties of such Persons contained in such agreements shall be true and correct in all material respects as of the Closing Date, in each case with the same force and effect as though such representations and warranties had been made on and as of the Closing Date (and such representations and warranties shall be deemed to have been made on and as of the Closing Date). (c) Performance of Agreements. Each of the Partnership, Lyondell and its Affiliates and Millennium and its Affiliates shall in all material respects have performed and complied with all obligations and agreements contained in this Agreement, and executed all agreements and documents (including the Tier 1 Related Agreements and the Tier 2 Related Agreements) to be performed, complied with or executed by it or them on or prior to the Closing Date. (d) No Material Adverse Change. After the date of this Agreement, no event, occurrence or other matter shall have occurred that is reasonably likely to have a Material Adverse Effect with respect to the Partnership's Subject Business, provided that this determination shall be made without regard to any change in general economic or political conditions or any change in raw materials prices, product prices, industry capacity or other matter of industry-wide application that affects the Partnership's Subject Business and Occidental's Subject Business in a substantially similar way. -23- (e) Board of Directors Approval. This Agreement and the Tier 1 Related Agreements, and the transactions contemplated by such agreements, shall have been duly authorized and approved by Occidental's board of directors. (f) Officer's Certificates. Occidental shall have received certificates, dated the Closing Date, signed by the President or a Vice President of each of the Partnership, Lyondell and Millennium to the effect that, to the Knowledge of such Party, the conditions specified in the above paragraphs have been fulfilled; provided, that, with respect to the conditions set forth in Sections 4.3(b) and 4.3(c), such certificates shall only concern the accuracy of representations and warranties and performance of agreements of the Partnership, the Lyondell Group and the Millennium Group, respectively. (g) Third Party Consents. All Consents of any third party listed on Schedule 4.3(g) shall have been obtained. SECTION 5 TERMINATION AND WAIVER 5.1 General. This Agreement may be terminated and the transactions contemplated herein and in the Related Agreements may be abandoned at any time prior to the Closing: (a) by the written consent of the Parties; (b) by the Partnership, by notice to Occidental, if there has been a material misrepresentation or a breach of an agreement by Occidental in this Agreement that (i) if such misrepresentation or breach existed on the Closing Date, would constitute a failure to satisfy the conditions to Closing set forth in Section 4.2(b) and (ii) has not been cured and cannot reasonably be cured within 30 days after all other conditions to Closing have been satisfied; (c) by Occidental, by notice to the Partnership, if there has been a material misrepresentation or a breach of an agreement by any of the Partnership, Lyondell or Millennium in this Agreement that (i) if such misrepresentation or breach existed on the Closing Date, would constitute a failure to satisfy the conditions to Closing set forth in Section 4.3(b) and (ii) has not been cured and cannot reasonably be cured within 30 days after all other conditions to Closing have been satisfied; (d) by any Party, by notice to each other Party, if (i) after the date hereof and prior to the Closing any final, non-appealable order or injunction shall be issued by any federal or state court of competent jurisdiction in the United States or by any United States Authority, or any Legal Requirement shall be promulgated or enacted by any United States Authority, that would have the effect of prohibiting or making unlawful the performance of this Agreement, the execution, delivery or performance of any Related Agreement or the consummation of the Closing or (ii) the condition set forth in Section 4.3(e) shall not have been satisfied on or prior to May 2, 1998; and -24- (e) by any Party, by notice to each other Party, in the event that, for any reason, the Closing does not occur on or before December 31, 1998; provided, however, that if the Closing does not occur due to the act or omission of one of the Parties, that Party may not terminate this Agreement pursuant to the provisions of this Section 5.1(e). 5.2 Effect of Termination. In the event of any termination of this Agreement as provided above, this Agreement shall forthwith become wholly void and of no further force and effect and there shall be no liability on the part of any Party, its Subsidiaries or their respective officers or directors; provided, however, that upon any such termination the obligations of the Parties with respect to this Section 5, expenses under Section 6.10 and confidentiality under Section 6.6 shall remain in full force and effect; and provided, further, that nothing herein will relieve any party from liability for damages for any breach of this Agreement. SECTION 6 MISCELLANEOUS 6.1 Successors and Assigns. Except as may be expressly provided herein, this Agreement shall be binding upon and inure to the benefit of the successors of all of the Parties. No Party may otherwise assign or delegate any of its rights or obligations under this Agreement without the prior written consent of all of the other Parties, which consent shall be in the sole and absolute discretion of each such Party. Any purported assignment or delegation without such consent shall be void and ineffective. 6.2 Benefits of Agreement Restricted to Parties. This Agreement is made solely for the benefit of the Parties, and no other Person (including employees) shall have any right, claim or cause of action under or by virtue of this Agreement. 6.3 Notices. All notices, requests and other communications that are required or may be given under this Agreement shall, unless otherwise provided for elsewhere in this Agreement, be in writing and shall be deemed to have been duly given if and when (i) transmitted by telecopier facsimile with proof of confirmation from the transmitting machine or (ii) delivered by commercial courier or other hand delivery, as follows: Equistar Chemicals, LP: Occidental Petroleum Corporation: Gerald A. O'Brien 10889 Wilshire Boulevard Vice President and Secretary Los Angeles, California 90024 Equistar Chemicals, LP Attention: President 1221 McKinney Street Telecopy Number: (310) 443-6977 Houston, Texas 77010 Telecopy Number: (713) 309-4718 -25- with a copy to: with a copy to: Baker & Botts, L.L.P. Occidental Petroleum Corporation 910 Louisiana Street 10889 Wilshire Boulevard Houston, Texas 77002 Los Angeles, California 90024 Attention: Stephen A. Massad Attention: General Counsel Telecopy Number: (713) 229-1522 Telecopy Number: (310) 443-6333 Lyondell Petrochemical Company: Millennium Chemicals Inc.: Kerry A. Galvin George H. Hempstead, III Chief Corporate Counsel and Senior Vice President, Corporate Secretary Law and Administration and Secretary Lyondell Petrochemical Company Millennium Chemicals Inc. 1221 McKinney Street 99 Wood Avenue South Houston, Texas 77010 Iselin, New Jersey 08830 Telecopy Number: (713) 309-4718 Telecopy Number: 908-603-6857 6.4 Severability. In the event that any provision of this Agreement shall finally be determined to be unlawful, such provision shall, so long as the economic and legal substance of the transactions contemplated hereby is not affected in any materially adverse manner as to any of the Parties, be deemed severed from this Agreement and every other provision of this Agreement shall remain in full force and effect. 6.5 Press Releases. Unless otherwise mutually agreed, no Party shall make or authorize any public release of information regarding the matters contemplated by, or any provisions or terms of, this Agreement or the Related Agreements, and Occidental shall not make or authorize any public release of information regarding the Partnership, except (i) that a press release or press releases in mutually agreed upon form or forms shall be issued by the Parties as promptly as is practicable following the execution of this Agreement, (ii) that the Parties may, after consultation with each other, communicate with employees, customers, suppliers, stockholders, lenders, lessors, and other particular groups as may be necessary or appropriate and not inconsistent with the prompt consummation of the transactions contemplated by this Agreement and (iii) after consultation with each other, as required by law or stock exchange rule or as necessary for the assertion or enforcement of contractual rights. 6.6 Confidentiality Agreement. Lyondell, on behalf of the Partnership, and Occidental have heretofore entered into the Confidentiality Agreement relating to the exchange between Lyondell and the Partnership, on the one hand, and Occidental and the Occidental Partners, on the other hand, of certain confidential information related or otherwise pertinent to the transactions contemplated by this Agreement. Nothing in this Agreement shall be construed as impairing or otherwise limiting the obligations assumed pursuant to the Confidentiality Agreement by the parties thereto. The Confidentiality Agreement shall remain in full force and effect in accordance with its terms until the earlier of Closing or its expiration date. The Partnership and Millennium shall be bound by, and shall be entitled to the benefits of, such Confidentiality Agreement to the same extent as if they were parties thereto. -26- 6.7 Construction. In construing this Agreement, the following principles shall be followed: (i) no consideration shall be given to the captions of the articles, sections, subsections or clauses, which are inserted for convenience in locating the provisions of this Agreement and not as an aid in construction; (ii) no consideration shall be given to the fact or presumption that any of the Parties had a greater or lesser hand in drafting this Agreement; (iii) examples shall not be construed to limit, expressly or by implication, the matter they illustrate; (iv) the word "includes" and its syntactic variants mean "includes, but is not limited to" and corresponding syntactic variant expressions; (v) the plural shall be deemed to include the singular, and vice versa; (vi) each gender shall be deemed to include the other genders; and (vii) each exhibit, appendix, attachment and schedule to this Agreement is a part of this Agreement. 6.8 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original, and all of which when taken together shall constitute one and the same original document. 6.9 Governing Law. The laws of the State of Delaware shall govern the construction, interpretation and effect of this Agreement without giving effect to any conflicts of law principles. 6.10 Transaction Costs. (a0 Subject to subsection (b) and Section 2.8 of the Occidental Asset Contribution Agreement, and except as provided on Schedule 6.10, all reasonable out-of-pocket costs, fees and expenses incurred at any time by any Party in connection with the negotiation, execution and delivery of this Agreement, the satisfaction of the conditions to Closing under this Agreement and the consummation of the transactions contemplated hereby shall be reimbursed by the Partnership (if the cost, fee or expense was incurred by a Party other than the Partnership) and if incurred or reimbursed by the Partnership shall be shared by Lyondell, Millennium and Occidental pro rata in accordance with the relative interests to be held by their Subsidiaries in the Partnership after Closing; provided, however, that if any one expense item or series of directly related expenses exceeds $5 million, all of such expense or expenses in excess of such $5 million shall be paid by the Party incurring such expense. (b0 Notwithstanding the foregoing, each Party shall be solely responsible for and bear all of its own respective costs, fees and expenses if this Agreement is terminated and the Closing does not occur. 6.11 Amendment . All waivers, modifications, amendments or alterations of this Agreement shall require the written approval of each of the Parties. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including any investigation by or on behalf of any Party, shall be deemed to constitute a waiver by the Party taking such action of compliance with any representations, warranties, covenants or agreements contained herein and in any documents delivered or to be delivered pursuant to this Agreement and in connection with the -27- Closing hereunder. The waiver by any Party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. 6.12 Jurisdiction; Consent to Service of Process; Waiver. ANY JUDICIAL PROCEEDING BROUGHT AGAINST ANY PARTY TO THIS AGREEMENT OR ANY DISPUTE UNDER OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER RELATED HERETO SHALL BE BROUGHT IN THE FEDERAL OR STATE COURTS OF THE STATE OF DELAWARE, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES TO THIS AGREEMENT ACCEPTS THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT (AS FINALLY ADJUDICATED) RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. EACH OF THE PARTIES TO THIS AGREEMENT SHALL APPOINT THE CORPORATION TRUST COMPANY, THE PRENTICE-HALL CORPORATION SYSTEM, INC. OR A SIMILAR ENTITY (THE "AGENT") AS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF PROCESS IN ANY PROCEEDING IN ANY SUCH COURT IN THE STATE OF DELAWARE, AND EACH OF THE PARTIES TO THIS AGREEMENT SHALL MAINTAIN THE APPOINTMENT OF SUCH AGENT (OR A SUBSTITUTE AGENT) FROM THE DATE HEREOF UNTIL THE EARLIER OF THE CLOSING DATE OR THE TERMINATION OF THIS AGREEMENT AND SATISFACTION OF ALL OBLIGATIONS HEREUNDER. THE FOREGOING CONSENTS TO JURISDICTION AND APPOINTMENTS OF AGENT TO RECEIVE SERVICE OF PROCESS SHALL NOT CONSTITUTE GENERAL CONSENTS TO SERVICE OF PROCESS IN THE STATE OF DELAWARE FOR ANY PURPOSE EXCEPT AS PROVIDED ABOVE AND SHALL NOT BE DEEMED TO CONFER RIGHTS ON ANY PERSON OTHER THAN THE PARTIES HERETO. EACH PARTY HEREBY WAIVES ANY OBJECTION IT MAY HAVE BASED ON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON-CONVENIENS. 6.13 Waiver of Jury Trial. EACH PARTY HEREBY KNOWINGLY AND INTENTIONALLY, IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. 6.14 Action by the Partnership. Any determination (including as to the satisfaction of any and all conditions precedent to the obligations of the Partnership set forth in Section 4.2 of this Agreement), consent, approval, waiver, other action or right to be made, given, taken or exercised by the Partnership pursuant to or as contemplated by this Agreement shall be subject to the Partnership Governance Committee unanimous voting requirements set forth in Section 6.7 of the Partnership Agreement; provided, however, that the Partnership's exercise of its right of termination set forth in Section 5.1(b) of this Agreement shall only require the approval of either two or more Representatives of Lyondell or two or more Representatives of Millennium, acting separately. [SIGNATURE PAGES FOLLOW] -28- IN WITNESS WHEREOF, this Master Transaction Agreement has been executed on behalf of each of the Parties, by their respective officers thereunto duly authorized, effective as of the date first written above. EQUISTAR CHEMICALS, LP By: /s/ Dan F. Smith ------------------------------------- Name: Dan F. Smith Title: Chief Executive Officer OCCIDENTAL PETROLEUM CORPORATION By: /s/ Stephen I. Chazen -------------------------------------- Name: Stephen I. Chazen Title: Executive Vice President LYONDELL PETROCHEMICAL COMPANY By: /s/ Jeffrey R. Pendergraft ---------------------------------------- Name: Jeffrey R. Pendergraft Title: Senior Vice President and Chief Administrative Officer MILLENNIUM CHEMICALS INC. By: /s/ William M. Landuyt ---------------------------------------- Name: William M. Landuyt Title: Chairman and Chief Executive Officer -29- APPENDIX A TO MASTER TRANSACTION AGREEMENT DEFINITIONS "Affiliate" shall mean any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Person specified; provided, however, that for purposes of this Agreement (i) Canadian Occidental Petroleum Ltd. and any entities controlled by it shall not be considered an Affiliate of the Occidental Group, (ii) Suburban Propane Partners, L.P. and any entities controlled by it shall not be considered an Affiliate of the Millennium Group, (iii) neither the Partnership nor any entity controlled by it shall be considered an Affiliate of the Occidental Group, the Lyondell Group or the Millennium Group, (iv) no member of the Occidental Group, the Lyondell Group or the Millennium Group shall be considered an Affiliate of the Partnership and (v) the Partnership shall not be considered an Affiliate of any member of the Occidental Group, the Lyondell Group or the Millennium Group. For purposes of this definition, the term "control" shall have the meaning set forth in 17 CFR 230.405, as in effect on the date hereof. "Agreement" shall mean this Master Transaction Agreement entered into between the Parties as of the date hereof. "Amended and Restated Partnership Agreement" shall mean that certain Amended and Restated Partnership Agreement of the Partnership to be executed and delivered at the Closing in substantially the form attached hereto as Exhibit A. "Assumed Liabilities" shall have the meaning assigned to such term in the Occidental Asset Contribution Agreement. "Authority" shall mean any government or governmental or regulatory body thereof, or political subdivision thereof, whether federal, state, local or foreign, or any agency, department or instrumentality thereof, or any court or arbitrator (public or private). "Business Day" shall mean any day other than a Saturday, Sunday or other day on which banks are closed in New York City, New York. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Closing" shall have the meaning set forth in the sixth WHEREAS clause of this Agreement. "Closing Amendments Certificate" shall have the meaning set forth in Section 3.8. "Closing Date" shall have the meaning set forth in Section 1.4. A-1 "Confidentiality Agreement" shall mean that certain Confidentiality Agreement dated December 11, 1997 between Lyondell and Occidental. "Consent" shall mean any consent, waiver, approval, authorization, exemption, registration, license or declaration of or by any other Person or any Authority, or any expiration or termination of any applicable waiting period under any Legal Requirement, required with respect to any Party or any party to the Related Agreements in connection with (i) the execution and delivery of this Agreement or any of the Related Agreements or (ii) the consummation of any of the transactions provided for hereby or thereby. "Contracts" shall have the meaning assigned to such term in the Asset Contribution Agreement. "Contributed Assets" shall have the meaning assigned to the term "Assets" in the Occidental Asset Contribution Agreement. "Encumbrance" shall mean any lien, charge, encumbrance, security interest, title defect, option or any other restriction or third-party right. "ERISA" shall mean the Employee Retirement Income Security Act, as amended. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Equistar Group" shall mean the Partnership, the Initial Partners, Lyondell, Millennium and Millennium Petrochemicals. "Filing" shall mean any filing with any Person or any Authority required with respect to any Party in connection with (i) the execution and delivery of this Agreement or any of the Related Agreements or (ii) the consummation of any of the transactions provided for hereby or thereby. "GAAP" shall have the meaning set forth in Section 2.1(e). "Government License" shall have the meaning assigned to such term in the Occidental Asset Contribution Agreement. "Group" shall mean the Equistar Group, the Occidental Group, the Lyondell Group or the Millennium Group, as appropriate. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Initial Master Transaction Agreement" shall mean the Master Transaction Agreement dated July 25, 1997, between Lyondell and Millennium, as amended. "Initial Partners" shall mean Lyondell LP, Lyondell GP, Millennium LP and Millennium GP. A-2 "Joint Proxy Statement" shall mean the Joint Proxy Statement of Lyondell and Millennium dated October 17, 1997. "Knowledge" shall mean with respect to any Party the actual knowledge of (i) any current plant manager, (ii) any current officer of such Party having responsibilities with respect to an applicable Subject Business or the transactions contemplated in this Agreement, (iii) in the case of Occidental, any current officer of a Occidental Partner having responsibilities with respect to Occidental's Subject Business or the transactions contemplated in this Agreement, and (iv) any current employee reporting directly to an officer described in clause (ii) or (iii). "Legal Requirement" shall mean any law, statute, rule, ordinance, decree, regulation, requirement, order or judgment of any Authority including the terms of any Government License. "Lyondell" shall have the meaning set forth in the first paragraph of this Agreement. "Lyondell Asset Contribution Agreement" shall mean that certain Asset Contribution Agreement dated December 1, 1997, to which Lyondell and the Partnership are parties. "Lyondell GP" shall mean Lyondell Petrochemical G.P. Inc., a Delaware corporation and a wholly owned Subsidiary of Lyondell. "Lyondell Group" shall mean Lyondell, Lyondell LP and Lyondell GP. "Lyondell LP" shall mean Lyondell Petrochemical L.P. Inc., a Delaware corporation and a wholly owned Subsidiary of Lyondell. "Lyondell Note" shall mean that certain promissory note in the aggregate principal amount of $345 million dated December 1, 1997 payable to Equistar by Lyondell LP. "Material Adverse Effect" shall mean any adverse circumstance or consequence that, individually or in the aggregate, has an effect that is material to the financial condition, results of operations, assets or business of the applicable Party or Subject Business (taken as a whole), as the case may be. "Millennium" shall have the meaning set forth in the first paragraph of this Agreement. "Millennium Asset Contribution Agreement" shall mean that certain Asset Contribution Agreement dated December 1, 1997, to which Millennium Petrochemicals and the Partnership are parties. "Millennium GP" shall mean Millennium GP LLC, a Delaware limited liability company and an indirect, wholly owned Subsidiary of Millennium. "Millennium Group" shall mean Millennium, Millennium Petrochemicals, Millennium LP and Millennium GP. A-3 "Millennium LP" shall mean Millennium LP LLC, a Delaware limited liability company and an indirect, wholly owned Subsidiary of Millennium. "Millennium Petrochemicals" shall have the meaning set forth in the third WHEREAS clause of this Agreement. "Occidental" shall have the meaning set forth in the first paragraph of this Agreement. "Occidental Asset Contribution Agreement" shall mean that certain Asset Contribution Agreement between the Occidental Partners and the Partnership to be executed and delivered at the Closing in substantially the form attached hereto as Exhibit B. "Occidental Assumed Debt" shall mean the Lease intended for Security, dated December 18, 1991, among OCC, the institutions listed on Schedule I thereto, Norwest Bank Minnesota, National Association, as Agent and Chemical Bank and the Bank of Nova Scotia, as Information Agents, and having an amount outstanding as of the date of this Agreement of $205 million. "Occidental Group" shall mean Occidental, OCC and Oxy CH Corporation, a California corporation, and the Occidental Partners. "Occidental Partners" shall mean PDG Chemical, OCC Sub and Oxy Petrochemicals. "OCC" shave have the meaning set forth in the fourth WHEREAS clause of this Agreement. "OCC Sub" shall mean a wholly owned Subsidiary of OCC, to be organized prior to Closing. "Oxy Petrochemicals" shall have the meaning set forth in the third WHEREAS clause of this Agreement. "Parties" shall have the meaning set forth in the sixth WHEREAS clause of this Agreement. "Partnership" shall have the meaning set forth in the first paragraph of this Agreement. "Partnership Agreement" shall mean the Agreement of Limited Partnership of the Partnership dated October 10, 1997. "Partnership Governance Committee" shall mean the "Partnership Governance Committee" as defined in the Partnership Agreement. "PDG Chemical" shall have the meaning set forth in the fourth WHEREAS clause of this Agreement. "Person" shall mean any natural person, corporation, partnership, limited liability company, joint venture, association, trust or other entity or organization. A-4 "Proceeding" shall mean any action, suit, claim or legal, administrative or arbitration proceeding or governmental investigation to which any Party or an Affiliate is a party. "Related Agreements" shall mean the Tier 1 Related Agreements and the Tier 2 Related Agreements. "Representatives" shall mean the "Representatives," as defined in the Partnership Agreement. "SEC" shall mean the Securities and Exchange Commission. "SEC Reports" shall have the meaning set forth in Section 2.2.(e). "Securities Act" shall mean the Securities Act of 1933, as amended. "Stockholders' Meetings" shall mean the special stockholders meetings of each of Lyondell and Millennium held November 20, 1997. "Strategic Plan" shall mean the Five-Year Strategic Plan adopted by the Partnership Governance Committee, as amended and modified prior to the date hereof pursuant to action of the Partnership Governance Committee, as set forth in minutes of their meetings. "Subject Business" shall mean (i) in the case of Occidental, the "Contributed Business" as defined in the Occidental Asset Contribution Agreement, including the Contributed Assets and the Assumed Liabilities related thereto; (ii) in the case of each of Lyondell and Millennium, their respective "Contributed Businesses" as defined in their respective Asset Contribution Agreements dated December 1, 1997; and (iii) in the case of the Partnership, the business of the Partnership, which consists substantially of the Subject Business of Lyondell and Millennium. "Subsidiary" shall mean, with respect to any Party, any Person of which such Party, either directly or indirectly, owns 50% or more of the equity or voting interests, except, in the case of Lyondell, Lyondell-CITGO Refining Company Ltd. and Equistar Chemicals, LP. "Tier 1 Related Agreements" shall mean those agreements so designated on Appendix B, forms of each of which (including forms of the exhibits and certain of the schedules thereto current as of the dates indicated therein), are attached hereto as Exhibits. "Tier 2 Related Agreements" shall mean those agreements so designated on Appendix B (including Appendix B-2), descriptions of certain terms of which are included thereon. "Transition Services Agreement" shall mean that certain agreement to be executed and delivered at the Closing in substantially the form attached hereto as Exhibit D. "Unit" shall mean a unit representing a partnership interest in the Partnership. A-5 APPENDIX B TO MASTER TRANSACTION AGREEMENT LIST OF RELATED AGREEMENTS Tier 1 Related Agreements 1. Amended and Restated Agreement of Limited Partnership 2. Asset Contribution Agreement from Occidental Partners to the Partnership 3. Amended and Restated Parent Agreement 4. Transition Services Agreement 5. Sales Agreement (Ethylene) Tier 2 Related Agreements 1. Agreements listed as exhibits in the table of contents of the Occidental Asset Contribution Agreement. 2. EO/EG Ashtabula Tolling Agreement. 3. [EO/EG Export Sales Service Agreement] 4. Amended and Restated Indemnity Agreement among OCC, PDG Chemical, Oxy Petrochemicals, OCC Sub, Lyondell GP, Lyondell LP, Millennium GP, Millennium LP and Millennium America Inc. amending and restating the Indemnity Agreement, dated December 1, 1997, in order to provide for (i) comparable treatment for OCC with respect to the $420 million of OCC guaranteed debt as was provided for with respect to the Millennium America Guaranteed Debt referred to in said Indemnity Agreement, and (ii) rights of contribution between Millennium America Inc. and OCC in order to have pro rata treatment if one or both make payment under their respective guarantees. 5. Agreement between OCC and the Partnership obligating OCC to provide a guarantee for 7 years and 30 days after the Closing Date for the collection of $420 million of Partnership debt and obligating the Partnership to extend or refinance such debt for a term at least equivalent to the term of such guarantee. B-1 6. Agreement between OCC and the Partnership obligating the Partnership to prepay or restructure the Occidental Assumed Debt within an agreed period of time in a manner so that OCC and its Affiliates have no liability with respect thereto. B-2 EX-21 21 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES Lyondell FSC, Inc. Lyondell General Methanol Company Lyondell Limited Methanol Company Lyondell Refining Company Lyondell Petrochemical L.P. Inc. Lyondell Petrochemical G.P. Inc. EX-23.(A) 22 CONSENT EXHIBIT 23(a) CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following registration statements of Lyondell Petrochemical Company, Post-Effective Amendment No. 4 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), Registration Statement on Form S-8 (No. 33-60785) and Registration Statement on Form S-8 (No. 333-05399) of our report dated February 16, 1998, except as to the information presented in Note 23, for which the date is March 20, 1998, on our audits of the consolidated financial statements of Lyondell Petrochemical Company as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, and of our report dated February 6, 1998 on our audits of the financial statements of LYONDELL-CITGO Refining Company, Ltd. as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, which reports are included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Houston, Texas March 25, 1998 Lyondell Petrochemical Company 401(k) and Savings Plan Lyondell Restricted Stock Plan - VSP/MVSP 333-05399 Lyondell Restricted Stock Plan for Non-Employee Directors LTIP Incentive Stock Option Plan for Employees EX-23.(B) 23 CONSENT EXHIBIT 23(b) CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following registration statements of Lyondell Petrochemical Company, Post-Effective Amendment No. 4 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), Registration Statement on Form S-8 (No. 33-60785) and Registration Statement on Form S-8 (No. 333-05399) of our report dated February 16, 1998, except as to the information presented in Note 18, for which the date is March 20, 1998, on our audit of the financial statements of Equistar Chemicals, LP as of December 31, 1997 and for the period from December 1, 1997 (inception) to December 31, 1997, which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Price Waterhouse LLP Houston, Texas Morristown, New Jersey March 25, 1998 March 25, 1998 Lyondell Petrochemical Company 401(k) and Savings Plan Lyondell Restricted Stock Plan - VSP/MVSP 333-05399 Lyondell Restricted Stock Plan for Non-Employee Directors LTIP Incentive Stock Option Plan for Employees EX-24 24 POWER OF ATTORNEY EXHIBIT 24 LYONDELL PETROCHEMICAL COMPANY POWER OF ATTORNEY ----------------- Each person whose signature appears below hereby constitutes and appoints Dan F. Smith, Jeffrey R. Pendergraft and Edward W. Rich, 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, 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 Page 2 of 3 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 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 13, 1998 SIGNATURE TITLE --------- ----- DAN F. SMITH President, Chief Executive Officer and Director - ------------------------------- Dan F. Smith (Principal Executive Officer) JEFFREY R. PENDERGRAFT Senior Vice President and - ------------------------------- Chief Administrative Officer Jeffrey R. Pendergraft (Principal Financial Officer) EDWARD W. RICH Vice President and Treasurer - ------------------------------- Edward W. Rich (Principal Accounting Officer) SIGNATURE TITLE --------- ----- WILLIAM T. BUTLER Chairman and Director - ---------------------------- Dr. William T. Butler CURTIS J. CRAWFORD Director - ---------------------------- Curtis J. Crawford TRAVIS ENGEN Director - ---------------------------- Travis Engen STEPHEN F. HINCHLIFFE, JR. Director - ---------------------------- Stephen F. Hinchliffe, Jr. DUDLEY C. MECUM Director - ---------------------------- Dudley C. Mecum II PAUL R. STALEY Director - ---------------------------- Paul R. Staley EX-27 25 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 86 0 5 0 0 103 138 92 1,559 308 345 0 0 80 539 1,559 2,878 3,010 2,250 2,250 226 0 75 456 170 286 0 0 0 286 3.58 3.58
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