-----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, TtQGAPNMKMegGY4rrUeUVsYAmsjY/BqLIxrsvBYFMm/LxYdVhZ98J4wKzLNdKDfE 0Z85/ozgr+eUADjDdQiBfQ== 0000899243-00-000679.txt : 20000331 0000899243-00-000679.hdr.sgml : 20000331 ACCESSION NUMBER: 0000899243-00-000679 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYONDELL CHEMICAL 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-K SEC ACT: SEC FILE NUMBER: 001-10145 FILM NUMBER: 586105 BUSINESS ADDRESS: STREET 1: 1221 MCKINNEY ST STREET 2: STE 700 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7136527200 MAIL ADDRESS: STREET 1: 1221 MCKINNEY ST STREET 2: SUITE 700 CITY: HOUSTON STATE: TX ZIP: 77010 FORMER COMPANY: FORMER CONFORMED NAME: LYONDELL PETROCHEMICAL CO DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K 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, 1999 [_] Transition Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934 Commission File No. 1-10145 LYONDELL CHEMICAL 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 700, 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 ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ Common Stock ($1.00 par value) New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. [_] There were 117,559,003 shares of the registrant's common stock outstanding on March 1, 2000. The aggregate market value of the voting stock held by non- affiliates of the registrant on March 1, 2000 based on the closing price on the New York Stock Exchange composite tape on that date, was $1,039,058,366. 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, 1999 (incorporated by reference under Part III). PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES Lyondell Chemical Company ("Lyondell" or the "Company") is a global chemical company with leading producer positions in all of its major products and low cost operations. Lyondell is vertically integrated into its key raw materials through its equity ownership in Equistar Chemicals, LP, LYONDELL-CITGO Refining LP and Lyondell Methanol Company, L.P. Lyondell manufactures and markets a variety of intermediate and performance chemicals, including propylene oxide ("PO"), polyether polyols, propylene glycol ("PG"), propylene glycol ethers ("PGE"), butanediol ("BDO"), toluene diisocyanate ("TDI"), styrene monomer ("SM"), and tertiary butyl alcohol ("TBA") and its derivative, methyl tertiary butyl ether ("MTBE"), which are collectively known as the Company's intermediate chemicals and derivatives business. The Company owns 41% of Equistar Chemicals, LP, a Delaware limited partnership ("Equistar"), which operates petrochemicals and polymers businesses. Equistar's petrochemicals business manufactures and markets olefins, oxygenated chemicals, aromatics and specialty products. Equistar's olefins are ethylene, propylene and butadiene and its oxygenated chemicals include ethylene oxide ("EO"), ethylene glycol ("EG"), ethanol and MTBE. Equistar's aromatics are benzene and toluene. Equistar's polymers business manufactures and markets polyolefins, including high density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear low density polyethylene ("LLDPE"), polypropylene and performance polymers. Equistar's performance polymers include enhanced grades of polyethylene such as wire and cable resins, and polymeric powders. The Company also owns 58.75% of LYONDELL-CITGO Refining LP, a Delaware limited partnership ("LCR"), which 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"). In addition, the Company owns 75% of Lyondell Methanol Company, L.P., a Texas limited partnership ("LMC"), which produces methanol. DEVELOPMENT OF BUSINESS Lyondell has been a leader in the ongoing restructuring of the chemical industry, taking a series of steps to reposition and strengthen its business portfolio over the past several years. In July 1993, the Company contributed to LCR the Company's refining business, including its Houston, Texas refinery (the "Refinery"), its lube oil blending and packaging plant in Birmingport, Alabama and working capital. The Company retained an approximately 90% interest in LCR, while CITGO held the remaining approximately 10% interest. Following completion of a major upgrade project at the Refinery in the first quarter of 1997, the Company's interest in LCR was reduced to 58.75%. On December 31, 1998, LCR converted from a Texas limited liability company to a Delaware limited partnership. In May 1995, the Company acquired Occidental Chemical Corporation's ("Occidental Chemical") ALATHON(R) HDPE business. Assets involved in this acquisition included resin production facilities in Matagorda and Victoria, Texas, related research and development activities and the rights to the ALATHON(R) trademark. In December 1996, the Company formed LMC 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% interest in the methanol plant. Lyondell retained a 75% interest and serves as managing partner. Since December 1997, Equistar has served as the operator of LMC. 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 to form Equistar. Lyondell contributed substantially all of the assets comprising its petrochemicals and polymers business segments, 2 as well as a $345 million note, in exchange for a 57% interest in Equistar. Equistar also assumed $745 million of Lyondell's debt. Millennium contributed substantially all of the assets composing its olefins, ethyl alcohol, polyethylene, polypropylene and performance polymers businesses, which had been held in Millennium Petrochemicals Inc. ("Millennium Petrochemicals"), a wholly owned subsidiary of Millennium. In exchange, Millennium received a 43% 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. In May 1998, Lyondell and Millennium expanded Equistar with the addition of the ethylene, propylene, EO, EG and other EO derivatives businesses (the "Occidental Contributed Business") of Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation ("Occidental"). This addition included two olefins plants, a plant that produces EO and EO derivatives, including EG, and Occidental's 50% interest in a joint venture with E.I. DuPont de Nemours and Company ("DuPont"), which operates an EO/EG plant. Occidental also contributed more than 950 miles of owned and leased pipelines located on the Gulf Coast of the United States and the lease of a Lake Charles, Louisiana olefins plant. Equistar assumed approximately $205 million of Occidental's debt. Equistar and Occidental also entered into a long-term agreement for Equistar to supply the ethylene requirements for Occidental's chlorovinyls business. In June 1998, Equistar borrowed approximately $500 million of additional debt and distributed cash of approximately $420 million to Occidental and $75 million to Millennium. Following the May 1998 transaction, Lyondell owns 41% of Equistar, and Millennium and Occidental each own 29.5%. Millennium has publicly announced its intention to sell its interest in Equistar and is actively seeking qualified buyers. There can be no assurance that any such sale will be consummated, but the Company does not expect any such sale to affect Equistar's operations or results. In July 1998, Lyondell completed the acquisition (the "ARCO Chemical Acquisition") of all the outstanding shares of ARCO Chemical Company ("ARCO Chemical"), the world's largest producer of PO and a leading worldwide producer of polyether polyols, PG, PGE, TDI, SM, and MTBE. The ARCO Chemical Acquisition was financed through a bank credit agreement providing for aggregate borrowings of up to $7 billion (the "Credit Facility"). The acquired business is referred to as "ARCO Chemical" for actions or events prior to the ARCO Chemical Acquisition. In November 1999, Lyondell reached a definitive agreement to sell its worldwide polyols business to Bayer AG of Germany ("Bayer") for $2.45 billion. Bayer will also receive an ownership interest in certain of Lyondell's U.S. PO operations through formation of a joint venture to produce PO. The Lyondell Board of Directors and the Supervisory Board of Bayer have approved the agreement, and the companies have received regulatory clearance in Europe and the United States. Lyondell expects that the transaction will close on or about April 1, 2000. In addition, as part of the transaction, Lyondell and Bayer agreed to pursue a joint venture for the construction of PO-11, a previously announced worldscale propylene oxide/styrene monomer plant in Europe. Lyondell was incorporated under the laws of Delaware in 1985. Its principal executive offices are located at 1221 McKinney Street, Suite 700, Houston, Texas 77010 (Telephone: (713) 652-7200). STRATEGY Lyondell's goal is to create maximum value for its shareholders. The Company intends to achieve this goal by focusing on three key strategic drivers: optimizing our business operations to attain first quartile profit margin performance; reducing debt to regain the financial flexibility needed to pursue growth and industry restructuring opportunities; and growing those businesses in which we have sustainable competitive advantages. OPTIMIZING BUSINESS OPERATIONS Having accumulated a wide range of assets through acquisitions and partnerships over the past three years, Lyondell is aggressively optimizing the performance of its businesses in terms of cost structure, competitive advantage and service to customers. The Company is taking actions to capture the cost benefits resulting from economies of scale and vertical integration. We are successfully reducing costs by completing the cost reduction programs in place at Lyondell, Equistar and LCR. We are also realizing identified synergies and revenue enhancements across Lyondell's business portfolio by optimizing manufacturing operations, using more efficient 3 purchase and distribution practices and reducing overhead and staffing. These opportunities have been enhanced by the agreement between Lyondell and Equistar to utilize shared services over a broad range of manufacturing and supply chain functions, as well as legal, finance, human resources and other corporate functions. Lyondell's commitment to operational excellence and achievements in meeting environmental, health and safety targets have also reduced costs through improved plant reliability, reduced maintenance requirements and increased employee productivity. Continual cost reduction is a fundamental philosophy that the Company believes is a critical component of its success. The Company's strategy is to invest only in businesses that are, or have the potential to be, in the top quartile of profit margin performance per unit of product sold. Assets that cannot achieve that criterion are candidates for eventual consolidation or rationalization. Four polymer reactors at the La Porte, Texas facility were mothballed in the first quarter of 2000, while a top quartile production line at Matagorda was added in 1999. These actions, along with the 1999 sale of the concentrates and compounds business, are examples of Equistar's long-term asset optimization strategy. With the acquisition of ARCO Chemical, Lyondell became one of the world's largest producers of propylene oxide, with the leading low-cost technology. One of the major markets for PO is the production of polyols. In November 1999, Lyondell announced that it will sell its polyols business, together with an ownership interest in its PO business, to Bayer AG, one of the world's premier urethanes manufacturers. While this business could have met the Company's first quartile profit margin performance criterion, the value that the Company is receiving from Bayer is greater than what Lyondell could have achieved participating separately in that business. Lyondell expects this strategic move will strengthen its global PO position. The combination of Lyondell's polyols business into Bayer's existing polyols business will accelerate the growth of the overall polyols market due to Bayer's complementary businesses, resulting in the optimal utilization of Lyondell's PO assets. Lyondell believes that e-commerce will have an impact on the chemical industry and is in the process of developing an e-commerce strategy that addresses the Company's sales and procurement processes. Lyondell recently announced its selection of an e-business provider to connect 150 of the Company's remote inventory locations and establish online connections with several core motor freight carriers, thus enabling traditional paper-based transactions to be conducted electronically over the Internet. Lyondell expects its proposed advances in this area will lower its costs and enable it to be more responsive to customer needs and servicing. FINANCIAL FLEXIBILITY Lyondell's objective is to return to an investment grade credit rating as soon as practical by continuing to reduce debt and improving the credit position of the Company. The Company believes an investment grade rating will provide the appropriate financial flexibility to timely pursue opportunities to increase shareholder value. The Bayer transaction, expected to close on or about April 1, 2000, represents a significant step toward this goal. This transaction will enable the Company to pay down more than $2 billion in debt and will be accretive to earnings and cash flow in the first year. The Company achieved another key step towards improving the balance sheet in May 1999 with the successful $4.1 billion debt and equity offering. This refinancing raised $736 million in new equity, paid down $690 million in debt, extended remaining loan maturities and fixed interest rates on $2.4 billion of long-term debt, thereby reducing the Company's exposure to rising interest rates. PROFITABLE GROWTH Lyondell's strategy for growth is to invest only in those businesses where we have sustainable competitive advantages based on proprietary technology, leading market positions, leading product positions and cost advantages. PO AND DERIVATIVES. Lyondell intends to maintain its leadership position in PO and its key derivatives, including BDO, PG and PGE, through targeted expansions and the continued development of new products. Construction of a new BDO plant at the site of Lyondell's PO manufacturing facility at Botlek in the Netherlands will begin in 2000 with start up scheduled for early 2002. Utilizing Lyondell's proprietary PO-based technology, the 4 new facility, with expected annual BDO capacity of 280 million pounds, represents an expansion of the use of PO in faster growth markets. Lyondell believes that, integrated with its leading PO technology, this facility will be one of the lowest cost BDO plants in the world. Additionally, Lyondell and Bayer will jointly pursue the construction of PO-11, a worldscale propylene oxide/styrene monomer plant in Europe, using Lyondell's leading, low-cost technology. PETROCHEMICALS. Equistar is one of the world's largest producers of olefins with seven plants located in the U.S. Gulf Coast and Midwest regions and an extensive pipeline distribution network system. Olefins, primarily ethylene and propylene, are the key building block chemicals upon which many plastics and synthetic materials are based. Equistar's strategy is to drive its plants toward first quartile profit margin performance by, among other things, exploiting its superior feedstock flexibility and optimizing co-product recovery. Additionally, new technologies are being evaluated that could improve margins through utilizing alternative feedstocks. Also, Equistar intends to maintain its strong olefins merchant sales position. With its extensive pipeline distribution system, large plant operations base and broad customer base, Equistar intends to grow to meet the increasing market needs. Equistar has been a leader in developing innovative supply options to meet these requirements. POLYMERS. Equistar is one of the largest North American producers of polymer resins, which are used by its customers to make plastic films as well as blow molded and extruded plastics of all kinds. Equistar's strategy is to focus its resources and target expansion in high growth markets for polymer resins where Equistar has a sustainable competitive advantage and leading market and technology positions such as wire and cable resins and polyethylene films and molded products. Equistar also intends to continue to improve its cost position and efficiency by utilizing its large asset base to optimize production and differentially grow in key markets. Equistar is actively pursuing new technologies in its polymers business that would create opportunities for higher margins. With its broad customer base and product line, excellent process technology and product development capability, and emerging catalyst development opportunities, Equistar intends to grow in its targeted areas to meet the growing market needs. REFINING. As a result of Lyondell's recent actions to reposition its business portfolio, the strategic importance of LCR is reduced, although it continues to be a significant source of cash flow. Lyondell's objectives with respect to its interest in LCR are to maximize value from the business while accelerating cash flows. LCR will continue to focus on improving the cost position and reliability of the refinery by implementing further cost reduction and reliability improvement programs. Two projects begun in 1999 - a centralized control room and a cogeneration facility - should produce significant efficiency improvements and cost reductions following their completion, scheduled for 2001. SUMMARY To achieve its strategic objectives, Lyondell has: . Completed acquisitions, such as ARCO Chemical and the ALATHON(R) high density polyethylene business, where the characteristics of the acquired business give us long-term sustainable competitive advantages; . Divested businesses that do not fit our core competencies and have greater value to others, such as the polyols business and Equistar's concentrates and compounds business; and . Built alliances, such as Equistar and the transaction with Bayer, which can effectively reduce costs, leverage scale efficiencies and provide unique growth opportunities to the benefit of the owners. Lyondell intends to continue to use these approaches and others to implement its strategy with the goal of creating value for our shareholders. SUMMARY DESCRIPTION OF BUSINESS SEGMENTS For the year ended December 31, 1997, the Company reported its results of operations in three segments: petrochemicals; polymers; and refining. Following the ARCO Chemical Acquisition in July 1998, the Company added intermediate chemicals and derivatives as a reportable segment, with the operations of the acquired business 5 forming that segment. The Company's petrochemicals and polymers segments are conducted through Equistar, and the Company's refining segment is conducted through LCR. The methanol business conducted through LMC is not a reportable segment for financial disclosure purposes. THE COMPANY'S BUSINESS The following chart shows the organization of Lyondell, as well as 1999 sales revenues for Lyondell and each of its joint ventures. Sales revenue for Lyondell and its subsidiaries represent the sales revenue of the businesses acquired in the ARCO Chemical Acquisition. [Chart Appears here showing: 1999 consolidated pro forma sales revenue (excluding revenues of Equistar, LCR and Lyondell Methanol) of $3.7 billion for Lyondell and Subsidiaries and the primary products of Lyondell's Intermediate Chemicals and Derivatives Business: Lyondell's equity investments in each of Equistar (41 percent), LCR (58.5 percent) and Lyondell Methanol (75 percent); the 1999 sales revenues of each of Equistar, LCR and Lyondell Methanol, which were $5.4 billion, $2.6 billion and $95 million, respectively; and the primary products of each of the petrochemical, polymers, refining and methanol business] Sales revenues shown above include sales to affiliates. For additional segment information for each of the years in the three-year period ended December 31, 1999, see Notes 4, 5 and 22 of Notes to Consolidated Financial Statements. 6 INTERMEDIATE CHEMICALS AND DERIVATIVES OVERVIEW Lyondell is a leading global manufacturer and marketer of intermediate chemicals and performance chemical products used in a broad range of consumer goods. The segment's core product is PO, which is produced through two distinct technologies based on indirect oxidation processes that yield co-products. One process yields TBA as the co-product; the other yields SM as the co-product. The two technologies are mutually exclusive, necessitating that a manufacturing facility be dedicated either to PO/TBA or to PO/SM. The intermediate chemicals and derivatives segment also manufactures numerous derivatives of PO and TBA. Among these are polyols, PG, PGE and BDO, derivatives of PO, and MTBE, a principal derivative of TBA. This segment also manufactures and markets TDI. In North America, the Company produces PO, TBA, PG and PGE at its Bayport, Texas plants; PO, SM, MTBE, polyols and BDO at its Channelview, Texas plants (one of the PO/SM plants, PO/SM II, being held through a joint venture, and the other being wholly owned); polyols at its South Charleston and Institute, West Virginia plants; and isocyanates at its Lake Charles, Louisiana plant. In Europe, the Company produces PO, TBA, PG and MTBE at plants in Rotterdam, The Netherlands, and Fos-sur-Mer, France; PGE at its Rotterdam plant; and polyols at the Fos-sur-Mer plant and at a plant in Rieme, Belgium. In the Asia Pacific region, the Company has a 50% interest in the joint venture Nihon Oxirane Co., Ltd. ("Nihon Oxirane"), which operates a PO/SM plant in Chiba, Japan. The Company produces polyols at majority-owned plants in Kaohsiung, Taiwan and Anyer, West Java, Indonesia. In Europe, the Company also obtains TDI through tolling and market-based supply agreements with Rhodia. In December 1999, the Company negotiated contracts for the construction of a new BDO facility in Rotterdam, with a 280 million pound annual capacity and expected startup in early 2002. The Company estimates, based in part on published data, that worldwide demand for PO was approximately 9.2 billion pounds in 1999. Approximately 90% of that volume was consumed in the manufacture of three families of PO derivative products: polyols, PG and PGE. The remainder is consumed in the manufacture of a growing segment of performance products, including BDO and its derivatives. The Company sells less than one billion pounds of its annual capacity of PO and consumes the rest in the production of derivatives. PO that is not internally consumed is sold in the merchant market. Polyols and TDI are combined in the production of urethanes for products such as automotive seating and home furnishings. Styrene monomer is a commodity chemical produced and traded worldwide for commodity and specialty polymer applications, such as polystyrene and polyester resins, as well as various uses in the rubber industry. Based on published data, worldwide demand in 1999 was approximately 43 billion pounds. PG is principally used to produce unsaturated polyester resins. PG is also used in certain food, cosmetic and pharmaceutical applications and in automotive coolants and aircraft deicers. PGE are used as high performance solvents. BDO and its derivatives are utilized in the production of engineering plastics, pharmaceuticals, personal care products, fibers and high performance coatings. Lyondell converts most of its TBA to isobutylene, which is reacted with methanol to produce MTBE, an oxygenated gasoline blending component that increases octane and reduces automotive emissions. Worldwide demand for MTBE in 1999 was approximately 459,000 barrels per day, based on published data. This demand had increased over the past several years as a result of the Clean Air Act Amendments of 1990 (the "Clean Air Act Amendments"), state and local regulations and the need for incremental octane in gasoline in the United States and other countries. In the United States, the Clean Air Act Amendments set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. However, while studies by federal and state agencies and other organizations have shown that MTBE is safe for use in gasoline and is effective in reducing automotive emissions, the presence of MTBE in some water supplies in California and other states due to gasoline 7 leaking from underground storage tanks and in surface water from recreational water craft has led to public concern that MTBE may contaminate drinking water supplies, and thereby result in a possible environmental risk. Certain federal and state governmental initiatives have sought either to rescind the oxygenate requirement for reformulated gasoline or to restrict or ban the use of MTBE. At the state level, the State of California has initiated action, pursuant to an Executive Order of the Governor and supported by recent legislation, to begin the process of reducing or limiting the use of MTBE by December 31, 2002. Such action, to be effective, would require (i) a waiver of the oxygenate mandate for California, (ii) Congressional action in the form of an amendment to the Clean Air Act or (iii) California refiners to replace MTBE with another oxygenate such as ethanol, a more costly and less widely available additive. At the federal level, a blue ribbon panel appointed by the U.S. Environmental Protection Agency (the "EPA") issued its report on July 27, 1999, which recommended, among other things, reducing the use of MTBE in gasoline. The EPA has recently announced its intent to seek legislative changes from Congress to give EPA authority to ban MTBE over a three-year period. Such action would only be granted through amendments to the Clean Air Act. Additionally, the EPA is seeking a ban of MTBE utilizing rulemaking authority contained in the Toxic Substance Control Act. It would take at least three years for such a rule to issue. These initiatives or other governmental actions could result in a significant reduction in Lyondell's MTBE sales. The Company has developed technologies to convert TBA into alternate gasoline blending components should it be necessary to reduce MTBE production in the future. In addition, the Company has a take-or-pay MTBE sales contract with Atlantic Richfield Company ("ARCO"), which contributes significant pre-tax margin. If such legislative initiatives were enacted, ARCO has indicated that it might attempt to invoke a force majeure provision in the ARCO contract in order to reduce the contract quantities of MTBE it purchases or to terminate the contract. The Company would vigorously dispute such action. The contract has an initial term expiring December 31, 2002 and provides for formula-based prices that are currently significantly above spot market prices for MTBE. A significant reduction in the Company's sales under the ARCO contract could have a negative impact on the Company's results of operations and cash flows. In Europe, MTBE is expected to benefit from new legislation in the 15-nation European Union. The so-called "Auto/Oil Legislation" aimed at reducing air pollution from vehicle emissions was enacted in 1998, and refineries have increased consumption of MTBE to meet the new blending requirements. Several European authorities, most notably in Denmark, have investigated possible MTBE contamination of groundwater and have determined that the primary issue is to control leaking underground storage tanks. While these authorities are continuing to monitor governmental findings and actions in the United States, no restrictive action with respect to MTBE is currently planned. 8 The following table outlines the intermediate chemicals and derivatives segment's primary products, annual processing capacity as of January 1, 2000, and the primary uses for such products. Unless otherwise specified, annual processing capacity was calculated by estimating the number of days in a typical year a production unit of a plant is expected to operate, after allowing downtime for regular maintenance, and multiplying that number by an amount equal to the unit's optimal daily output based on the design raw material mix. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than capacities set forth below. Capacities shown include 100% of the capacity of joint venture facilities.
PRODUCT ANNUAL CAPACITY Primary Uses - ------------------------------------------ ----------------------- ------------------------------------------------------- Propylene Oxide (PO) 3.87 billion pounds PO is a key component of polyols, PG, PGE and BDO. Polyols 1.47 billion pounds(a) Polyols are combined with isocyanates to produce flexible foam for automotive seating and home furnishings, coatings, adhesives, sealants and elastomers. Toluene Diisocyanate (TDI) 514 million pounds(b) TDI is combined with polyols to produce flexible foam for automotive seating and home furnishings. Propylene Glycol (PG) 960 million pounds PG is used to produce unsaturated polyester resins for bathroom fixtures and boat hulls; lower toxicity antifreeze, coolants and aircraft deicers; and cosmetics and cleaners. Propylene Glycol Ethers (PGE) 300 million pounds PGE are used as lower toxicity solvents for paints, coatings and cleaners. Butanediol (BDO) 120 million pounds BDO is used in the manufacture of engineering resins, films, personal care products, pharmaceuticals, coatings, solvents and adhesives. Methyl Tertiary Butyl 897 million gallons MTBE is a gasoline component for reducing emissions in Ether (MTBE) (58,500 barrels/day) reformulated gasolines and enhancing octane value. Styrene Monomer (SM) 3.65 billion pounds SM is used to produce plastics, such as expandable polystyrene for packaging, foam cups and containers, insulation products and durables and engineering resins.
_________________ (a) Lyondell's polyols business will be sold to Bayer on or about April 1, 2000. (b) Includes 264 million pounds processed by Rhodia at its plants in Lille and Pont de Claix, France. Lyondell is entitled to 100% of this output pursuant to the combination of a tolling agreement and a resale agreement with Rhodia. RAW MATERIALS The principal hydrocarbon raw materials purchased by the intermediate chemicals and derivatives segment are propylene, butanes, ethylene, benzene and methanol. The market prices of these raw materials historically have been related to the price of crude oil and its principal refinery derivatives and natural gas liquids. These materials are available in bulk quantities via pipeline or marine vessels. The segment's raw materials requirements are purchased from numerous suppliers in the United States and Europe, with which the Company has established contractual relationships, as well as in the spot market. The Company's raw material suppliers include Equistar, which is a leading producer of propylene, ethylene and benzene and is expected to be the major supplier of these raw materials to Lyondell's U.S. business in 2000. See Note 4 of Notes to Consolidated Financial Statements. The intermediate chemicals and derivatives segment is a large volume consumer of isobutane for chemical production. The Company has invested in facilities, or entered into processing agreements with unrelated third 9 parties, to convert the widely available commodity, normal butane, to isobutane. The Company is also a large consumer of oxygen for its PO/TBA plants at Bayport, Texas, Rotterdam, The Netherlands, and Fos-sur-Mer, France. In order to assure adequate and reliable sources of supply at competitive prices and rates, the Company is a party to long-term agreements and other arrangements with suppliers of raw materials, products, industrial gas and other utilities. MARKETING AND SALES In 1999, most of the segment's revenues were derived from sales to, or processing agreements with, unrelated third parties. Over the past three years, no single unrelated third party customer, nor any related party customer, accounted for more than 10% of total revenues in any one year. The intermediate chemicals and derivatives segment delivers products through sales agreements, processing agreements and spot sales as well as product swaps. It purchases SM and limited amounts of MTBE for resale to the extent that customer demand for these co-products exceeds its production. Production levels for co-products are based upon the demand for PO and the market economics of the co-products. The segment has a number of multi-year PO processing (or tolling) and sales agreements. This reflects an effort to mitigate the adverse impact of competitive factors and economic business cycles on demand for the segment's PO. The segment is also a party to a number of multi-year SM sales and processing agreements and MTBE sales agreements. Lyondell sells most of its SM production into the United States merchant market and to selected export markets through sales or tolling agreements. The SM processing agreements also include long-term processing agreements providing for the delivery of fixed annual quantities of SM. See "Joint Ventures and Other Agreements." As of December 31, 1999, the Company had over 1.1 billion pounds of SM capacity, or 30% of its worldwide capacity, covered by long-term processing arrangements. In addition to the ARCO contract, the Company also sells its MTBE production under market-based sales agreements and in the spot market. The majority of the segment's PO derivatives are sold through market-based sales contracts under annual or multi-year arrangements. The segment's sales are made through Company marketing and sales personnel and through distributors and independent agents located in the Americas, Europe and the Asia Pacific region. Through centralization of certain sales and order fulfillment functions in regional customer service centers located in Houston, Texas, Rotterdam, The Netherlands and Singapore, the Company has reduced its sales office infrastructure for this segment around the world, while maintaining service to its worldwide customer base. Lyondell also has long-term contracts for distribution and logistics to insure reliable supply to its customers. For data relating to foreign operations, see Note 22 of Notes to Consolidated Financial Statements. JOINT VENTURES AND OTHER AGREEMENTS As part of the PO production joint venture with Bayer ("PO Joint Venture"), Lyondell will contribute its Channelview, Texas PO/SM I plant and its Bayport, Texas PO/TBA plant to the PO Joint Venture. Each of Lyondell and Bayer will take its share of the PO produced. Bayer is expected to use its share of PO as feedstock for its polyols business, including that to be acquired from Lyondell in the pending sale. Under the terms of operating and logistics agreements, Lyondell will operate the PO Joint Venture plants and will arrange and coordinate the logistics of PO delivery on a worldwide basis. 10 Lyondell's PO/SM II plant at the Channelview, Texas complex that was completed in 1992 is owned by the Company together with third-party equity investors. The Company retains a majority interest in the PO/SM II plant and is the operator of the plant. A portion of the SM output of the PO/SM II plant is committed to the third-party investors under long-term processing agreements. As of December 31, 1999, 1.1 billion pounds per year of the PO/SM II plant's existing SM capacity was committed under such arrangements. The Company has a 50% equity interest in Nihon Oxirane, a joint venture with Sumitomo Chemical Co., Ltd. and Showa Denko K.K. Since 1976, Nihon Oxirane has operated a PO/SM plant in Chiba, Japan. In January 1995, ARCO Chemical entered into a tolling agreement and a resale agreement with Rhodia covering the entire TDI output of Rhodia's two plants in France, which have a combined annual capacity of approximately 264 million pounds. This TDI is marketed principally in Europe, the Middle East, Africa and Asia. COMPETITION AND INDUSTRY CONDITIONS Competition within the intermediate chemicals and derivatives segment of the chemical industry is significant and is based on a variety of factors, including quality, product price, reliability of supply, technical support, customer service and potential substitute materials. Profitability in this segment is affected by the worldwide level of demand along with vigorous price competition which may intensify due to, among other things, new industry capacity. Demand is a function of economic growth in the United States and elsewhere in the world, which fluctuates. It is not possible to predict accurately the changes in raw material costs, market conditions and other factors that will affect industry margins in the future. Capacity share figures for the segment and its competitors, discussed below, are based on completed production facilities and, where appropriate, include the full capacity of joint-venture facilities and certain long-term supply agreements. The Company's major worldwide PO competitors are Dow Chemical Company ("Dow") and Shell Chemical Company ("Shell"). Dow's operations are based on chlorohydrin technology. Shell utilizes a proprietary PO/SM technology. Based on published data relating to the PO market, the Company believes it has 35%, Dow has 32% and Shell has 6% of the total worldwide capacity for PO. As part of the Bayer transaction, Lyondell and Bayer agreed to pursue a joint venture for the construction of PO-11 in Europe with an expected startup in 2003. Shell and BASF AG ("BASF"), through their joint venture, Basell, commenced operation in October 1999 of a PO/SM plant in the Netherlands, using Shell technology. Shell and BASF, as 50-50 partners, have also broken ground for the construction of a PO/SM plant in Singapore, which is scheduled for start up in the last half of 2002. In addition, Repsol Quimica, S.A. plans to start up a PO/SM plant in Spain in 2000, using technology for the production of PO and SM originally licensed from ARCO Chemical. Expansions by Erdoelchemie, a joint venture between BP Amoco Chemical Company ("BP Amoco") and Bayer, in Europe and SK Oxychemical in South Korea are also planned. As a result of these capacity increases, the Company expects PO capacity in the near term to increase more rapidly than PO demand, especially in Europe. The Company also expects increasing integration to occur as current merchant-market buyers, such as Bayer and BASF, establish their own sources of PO supply. The Company competes with many polyols producers worldwide, including Dow, Bayer, BASF and Shell. Based on published data, Dow is believed to have 25% of worldwide polyols capacity while the Company is believed to have 16%. Lyondell's polyols business will be sold to Bayer. The Company both manufactures and has long-term tolling agreements for TDI. The Company competes with many TDI producers worldwide, including Bayer and BASF. Based on published data, Bayer is believed to have 21% of worldwide TDI capacity while the Company is believed to have 15%. The Company competes with many MTBE producers worldwide, the most significant of which is Saudi Basic Industries Corp. ("SABIC"). Based on published data, SABIC is believed to have 12% of the total worldwide capacity for MTBE. The Company believes it has 10% and that Equistar has an additional 3% of worldwide MTBE capacity. MTBE also faces competition from substitute products such as ethanol as well as other octane components. 11 The Company competes with several SM producers worldwide; among them are Shell, Dow and BASF. Based on published data, Shell and the Company are each believed to have 7% of total worldwide SM capacity. PROPERTIES The Company leases its corporate offices located in Houston, Texas. As part of the ARCO Chemical Acquisition, Lyondell acquired ARCO Chemical's headquarters office and research facility in Newtown Square, Pennsylvania, which is leased from ARCO. The Company's European headquarters are located in leased facilities in Maidenhead, England, and its Asia Pacific headquarters are located in leased facilities in Hong Kong. The non-U.S. regional service centers are located in leased facilities in Rotterdam, The Netherlands and Singapore. Depending on location and market needs, the Company's production facilities can receive primary raw materials by pipeline, railcar, truck, barge or ship and can deliver finished products in drums or by pipeline, railcar, truck, barge, isotank or ship. The Company charters ships, owns and charters barges and leases isotanks and railcars for the dedicated movement of products between plants, products to customers or terminals, or raw materials to plants, as necessary. The Company leases liquid and bulk storage and warehouse facilities at terminals in the Americas, Europe and the Asia Pacific region. In the Rotterdam outer harbor area, the Company owns and operates an on-site butane storage tank, propylene spheres, pipeline connections and a jetty that accommodates deep-draft vessels. The principal manufacturing facilities of the segment are set forth below. All of these facilities are wholly-owned by Lyondell unless otherwise noted. The polyols facilities are being sold to Bayer.
LOCATION PRINCIPAL PRODUCTS - --------------------------------------------------------------- -------------------------------- Bayport (Pasadena), Texas............................... PO, PG, PGE, TBA, isobutylene Channelview, Texas(1)................................... PO, polyols, BDO, SM, MTBE Lake Charles, Louisiana................................. TDI Institute and South Charleston, West Virginia(2)........ polyols Rieme, Belgium.......................................... polyols Fos-sur-Mer, France..................................... PO, PG, polyols, TBA, MTBE Botlek, Rotterdam, The Netherlands...................... PO, PG, PGE, TBA, MTBE, isobutylene Anyer, West Java, Indonesia............................. polyols Chiba, Japan(3)......................................... PO, SM Kaohsiung, Taiwan(4).................................... polyols
________ (1) Third-party investors hold a minority ownership interest in the PO/SM II plant at the Channelview facility. (2) The Company's plants in South Charleston and Institute, West Virginia are situated on leased land. (3) The PO/SM plant located in Chiba, Japan is owned by Nihon Oxirane, a joint venture in which the Company holds a 50% interest through a subsidiary. (4) The Taiwan plant is owned by Lyondell Taiwan Co., Ltd., a Taiwan company in which the Company, through a subsidiary, has a majority interest. RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS The Company possesses a body of patented and unpatented technology and trade secrets relating to its products, processes and the design and operation of its plants, all of which are valuable to the intermediate chemicals and derivatives segment. Lyondell has several patents and patent applications pending for inventions resulting from its research relating to new PO processes for producing propylene oxide without co-products. Lyondell believes that implementation of this technology would reduce the cost of manufacturing PO and eliminate the production of less valuable co-products. The Company does not believe that the loss of any individual patent or trade secret would have a material adverse effect on its intermediate chemicals and derivatives business. The basic patents relating to the Company's PO/SM and PO/TBA co-product technologies have expired. However, the technology is not readily licensable, and Lyondell's experience and know-how in this area provide it with a significant competitive advantage over others trying to replicate the technology. 12 The principal research and development facility for the segment is located in Newtown Square, Pennsylvania, with technical centers in South Charleston, West Virginia, Villers Saint Paul, France, and Singapore. The Company's research and development expenditures on a pro forma basis for the ARCO Chemical Acquisition for 1999, 1998, and 1997 were $58 million, $65 million, and $82 million, respectively. EMPLOYEE RELATIONS On December 31, 1999, Lyondell had approximately 3,700 full-time employees, with approximately 16% of the domestic employees represented by labor unions. Lyondell also uses the services of independent contractors in the routine conduct of its business. In connection with a November 1999 agreement with Equistar to expand the scope of shared administrative services ("Shared Services Agreement"), approximately 460 persons who had been employed by Equistar in the areas of information technology, human resources, materials management and raw material supply, customer supply chain, accounting, facility services, and legal became employees of Lyondell effective January 1, 2000. The Company believes its relations with its employees are good. EQUISTAR CHEMICALS, LP MANAGEMENT OF EQUISTAR Equistar is a limited partnership organized under the laws of the State of Delaware. 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. Occidental owns its interest in Equistar through three wholly owned subsidiaries, one a general partner and two limited partners. Lyondell holds a 41% interest, and Millennium and Occidental each hold a 29.5% interest in Equistar. The Amended and Restated Partnership Agreement of Equistar (the "Equistar Partnership Agreement") governs, among other things, ownership, cash distributions, capital contributions and management of Equistar. Millennium has publicly announced its intention to sell its 29.5% interest in Equistar and is actively seeking qualified buyers. There can be no assurance that any such sale will be consummated, but the Company does not expect any such sale to affect Equistar's operations or results. The Equistar Partnership Agreement provides that Equistar is governed by a Partnership Governance Committee, consisting of nine representatives, three appointed by each general partner. Matters requiring unanimous agreement by the representatives of Lyondell, Millennium and Occidental 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, 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 among Lyondell, Millennium and Occidental 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. 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 for the first time 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 and affiliates of Occidental (the "Occidental Subsidiaries") entered into similar agreements with Equistar with respect to the transfer of their respective assets and Equistar's assumption of liabilities. 13 Also in connection with the formation of Equistar, Lyondell contributed a promissory note for $345 million payable to Equistar, which Lyondell repaid with proceeds of the Credit Facility in July 1998. If Lyondell, Millennium or Occidental or any of their affiliates desire 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 first be offered to Equistar. Equistar has certain options to participate in the 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 its business, Lyondell, Millennium or Occidental, as the case may be, may make such acquisition, provided that the portion within the scope of Equistar's business is offered to Equistar pursuant to the foregoing provisions. During 1998 and 1999, Lyondell had provided certain administrative services to Equistar, including certain legal, risk management and treasury services, tax services and employee benefit plan administration, and Equistar provided services to Lyondell in the areas of health, safety and environmental, human resources, information technology and legal. As a consequence of these services, Equistar made a monthly payment to Lyondell as described in Note 4 of Notes to Consolidated Financial Statements. In November 1999, Lyondell and Equistar announced that they would utilize shared services over a broader range, including information technology, human resources, materials management and raw material supply, customer supply chain, health, safety and environmental, engineering and research and development, facility services, legal, accounting, treasury, internal audit, and tax. Effective January 1, 2000, employee-related and indirect costs will be allocated between the two companies in the manner prescribed in the Shared Services Agreement while direct third party costs, incurred exclusively for either Lyondell or Equistar, would be charged directly to that entity. 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, Texas and Cincinnati, Ohio. Pursuant to a Transition Services Agreement that terminated on June 1, 1999, an affiliate of Occidental also provided services to Equistar, including services related to accounting, payroll, office administration, marketing, transportation, purchasing and procurement, management, human resources, customer service, technical services and others. Equistar is now handling these functions directly or through the Shared Services Agreement with Lyondell. Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries 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, Millennium Petrochemicals and the Occidental Subsidiaries related to the businesses each contributed to Equistar, (ii) certain rights and licenses to Equistar with respect to intellectual property retained by Lyondell, Millennium Petrochemicals or the Occidental Subsidiaries that was not solely related to the business of Equistar but is useful in such business and (iii) certain rights and licenses from Equistar to Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries, respectively, with respect to intellectual property transferred to Equistar that Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries may use with respect to their other businesses. Lyondell, Millennium, Occidental and certain of its affiliates and Equistar are parties to an Amended and Restated Parent Agreement dated as of May 15, 1998, which provides that, among other things, each of Lyondell, Millennium and an Occidental affiliate guarantees the performance by their respective subsidiaries under various agreements entered into in connection with the formation of Equistar, including the Equistar Partnership Agreement and the asset transfer agreements providing for the transfer of assets by Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries, respectively, to Equistar. PETROCHEMICALS OVERVIEW Petrochemicals are fundamental to many segments of the economy, including the production of consumer products, housing components, automotive products and other durable and nondurable goods. Equistar produces a variety of petrochemicals, including olefins, oxygenated chemicals, aromatics and specialty products, at twelve facilities located in six states. Olefins include ethylene, propylene and butadiene. Oxygenated chemicals include EO, 14 EG, ethanol and MTBE. Aromatics produced are benzene and toluene. Equistar's petrochemical products are used to manufacture polymers and intermediate chemicals, which are used in a variety of consumer and industrial products. 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, paper and glass, U.S. ethylene consumption has grown by an average annual rate of approximately 4%. The Chocolate Bayou, Corpus Christi and two Channelview, Texas olefins plants use petroleum liquids, including naphtha, condensates and gas oils (collectively "Petroleum Liquids"), to produce ethylene. Assuming the co-products are recovered and sold, the cost of ethylene production from Petroleum Liquids historically has been less than the cost of producing ethylene from natural gas liquids, including ethane, propane and butane (collectively, "NGLs"). The use of Petroleum Liquids results in the production of a significant amount of co- products such as propylene, butadiene, benzene and toluene, and specialty products, such as dicyclopentadiene ("DCPD"), isoprene, resin oil, piperylenes, hydrogen and alkylate. Based upon independent third-party surveys, management believes that its Channelview facility is the lowest production cost olefins facility in the United States. Equistar's Morris, Illinois, Clinton, Iowa, Lake Charles, Louisiana and LaPorte, Texas plants are designed to use primarily NGLs, which produce primarily ethylene with some co-products such as propylene. A comprehensive pipeline system connects the Gulf Coast plants with major olefins customers. Raw materials are sourced both internationally and domestically and are shipped via vessel and pipeline. Equistar produces EO and its primary derivative, EG, at facilities located at Pasadena, Texas and through a 50/50 joint venture with E.I. DuPont de Nemours and Company in Beaumont, Texas. The Pasadena facility also produces other derivatives of EO, principally ethers and ethanolamines. EG is used in antifreeze and in polyester fibers, resins and films. Ethylene oxide and its derivatives are used in many consumer and industrial end uses, such as detergents and surfactants, brake fluids and polyurethane foams for seating and bedding. 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 in 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 and industrial products as described more fully in the table below. The following table outlines Equistar's primary petrochemical products, annual processing capacity as of January 1, 2000, and the primary uses for such products. Unless otherwise specified, annual processing capacity was 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 raw material mix. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than the capacities set forth below. Capacities shown include 100% of the capacity of Equistar, of which the Company owns 41%. 15
PRODUCT Annual Capacity Primary Uses - --------- --------------- ------------- OLEFINS: - ------- Ethylene 11.5 billion pounds Ethylene is used as a raw material to manufacture polyethylene, EO, ethanol, ethylene dichloride and ethylbenzene. Propylene 5.0 billion pounds (a) Propylene is used to produce polypropylene, acrylonitrile and propylene oxide. Butadiene 1.2 billion 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 engineered plastics. OXYGENATED PRODUCTS: - -------------------- Ethylene Oxide (EO) 1.1 billion pounds ethylene EO is used to produce surfactants, industrial cleaners, oxide; 400 million pounds are cosmetics, emulsifiers, paint, heat transfer fluids and ethylene pure ethylene oxide glycol (polyester fibers and film, polyethylene terephthalate ("PET") resin and antifreeze). Ethylene Glycol (EG) 1 billion pounds EG is used to produce polyester fibers and film, PET resin, heat transfer fluids, paint and automobile antifreeze. Ethylene Oxide 225 million pounds EO derivatives are used to produce paint and coatings, polishes, Derivatives solvents and chemical intermediates. MTBE 284 million gallons MTBE is an octane enhancer and clean fuel additive in (18,500 barrels/day)(b) reformulated gasoline. AROMATICS: - --------- Benzene 300 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 insulation, packaging and drink cups. Toluene 66 million gallons Toluene is used as an octane enhancer in gasoline, as a chemical feedstock for benzene production, and a core ingredient in TDI, a compound in urethane production. SPECIALTY PRODUCTS: - ------------------- Dicyclopentadiene 130 million pounds DCPD is a component of inks, adhesives and polyester resins for (DCPD) molded parts such as tub and shower stalls and boat hulls. Isoprene 145 million pounds Isoprene is a component of premium tires, adhesive sealants and other rubber products. Resin Oil 150 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 44 billion cubic feet Hydrogen is used by refineries to remove sulfur from process gas in heavy crude oil. Alkylate 337 million gallons(c) 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 as well as household, medicinal and personal care products. Diethyl Ether 5 million gallons Diethyl ether is used in laboratory reagents, gasoline and diesel engine starting fluid, liniments, analgesics and smokeless gunpowder.
__________ (a) Does not include refinery-grade material or production from the product flexibility unit at Equistar's Channelview facility, which can convert ethylene and other light petrochemicals into propylene. This facility has a current annual processing capacity of one billion pounds per year of propylene. (b) Includes up to 44 million gallons/year of capacity operated for the benefit of LCR. (c) Includes up to 172 million gallons/year of capacity operated for the benefit of LCR. 16 RAW MATERIALS AND ETHYLENE PURCHASES The raw materials cost for olefins production is generally the largest component of total cost for the petrochemicals business. Olefins plants with the flexibility to consume a wide range of raw materials are able to maintain higher profitability during periods of changing energy and petrochemicals prices than olefins plants that are restricted in their raw material processing capability, assuming the co-products are recovered and sold. The primary raw materials used in the production of olefins are Petroleum Liquids (also referred to as "heavy raw materials") and NGLs (also referred to as "light raw materials"). Petroleum Liquids have had a historical cost advantage over NGLs such as ethane and propane, assuming the co-products are recovered and sold. For example, using Petroleum Liquids typically generates between one and four cents additional margin per pound of ethylene produced compared to using ethane. Equistar has the capability to realize this margin advantage at the Channelview, Corpus Christi and Chocolate Bayou facilities. This cost advantage is expected to continue due to the significantly higher capital cost for plants with the capability to process both heavy raw materials (Petroleum Liquids) and their resulting co- products in contrast to processing light raw materials (NGLs). The Channelview facility is uniquely flexible in that it can process 100% Petroleum Liquids or up to 80% NGLs. The Corpus Christi plant can process up to 70% Petroleum Liquids or up to 70% NGLs, subject to the availability of NGLs. The Chocolate Bayou facility processes 100% Petroleum Liquids. Equistar's four other olefins facilities currently process only NGLs. Equistar's LaPorte facility can process heavier NGLs, such as butane and natural gasoline. The majority of Equistar's Petroleum Liquids requirements are purchased via contractual arrangement from a variety of third-party domestic and foreign sources. Equistar also purchases a minimal amount of Petroleum Liquids on the spot market from third-party domestic and foreign sources. Equistar purchases NGLs from a wide variety of domestic sources. Equistar obtains a portion of its olefins raw material requirements from LCR at market-related prices. In addition to producing its own ethylene, Equistar assumed certain agreements of an affiliate of Millennium for the purchase of ethylene from Gulf Coast producers at market prices. Ethylene purchase obligations under the assumed contracts will decline at the end of 2000, although Equistar currently intends to continue purchasing ethylene from third party sources as needed to meet its requirements. MARKETING AND SALES Ethylene produced by the LaPorte, Morris and Clinton facilities is generally consumed as raw material by the polymers operations at those sites. Ethylene and propylene produced at the Channelview, Corpus Christi, Chocolate Bayou and Lake Charles olefins plants are generally distributed by pipeline or via exchange agreements to Equistar's Gulf Coast polymer and ethylene oxide glycol facilities as well as to Equistar's affiliates and third parties. As of January 1, 2000, approximately 80% of the ethylene produced by Equistar was consumed internally or sold to Equistar's affiliates at market-related prices. With respect to sales to third parties, Equistar sells a majority of its olefins products to customers with whom Lyondell and Occidental have had long- standing relationships. Sales to third parties generally are made under written agreements that typically provide for: monthly negotiation of price; customer purchase of a specified minimum quantity; and three- to six-year terms with automatic one- or two-year term extension provisions. Some contracts may be terminated early if deliveries have been suspended for several months. No single unrelated third party customer accounted for more than 10% of total segment revenues in 1999. Ethylene oxide and ethylene glycol are sold under long-term contracts of three to five years' duration to third-party customers, with pricing negotiated on a quarterly basis to reflect market conditions. Glycol ethers are sold primarily into the solvent and distributor markets under one-year contracts at market prices, as are ethanolamines and brake fluids. Ethanol and ethers are sold to third-party customers under one-year contracts at market prices. 17 Equistar licenses MTBE technology under a license from an affiliate of Lyondell and sells a significant portion of MTBE produced at one of its two Channelview units to Lyondell at market-related prices. The production from the second unit is consumed by LCR for gasoline blending. MTBE produced at Chocolate Bayou is sold to third parties at market-related prices. 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 by LCR, with the exception of benzene, are marketed by Equistar for LCR under contracts with similar terms to Equistar's own. Benzene produced by LCR is sold directly to Equistar at market-related prices. Most of the ethylene and propylene production of the Channelview, Chocolate Bayou, Corpus Christi and Lake Charles facilities is shipped via a 1,430-mile pipeline system which has connections to numerous Gulf Coast ethylene and propylene consumers. This pipeline system, some of which is owned and some of which is leased by Equistar, extends from Corpus Christi to Mont Belvieu to Port Arthur, Texas as well as around the Lake Charles, Louisiana area. In addition, exchange agreements with other olefins producers allow access to customers who are not directly connected to Equistar's pipeline system. Some propylene is shipped by ocean-going vessel. Ethylene oxide is shipped by railcar, and its derivatives are shipped by railcar, truck, isotank or 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 price, product quality, product deliverability and customer service. Equistar competes with other large domestic producers of petrochemicals, including BP Amoco, Chevron Chemical Company ("Chevron"), Dow , Exxon Mobil Chemical Company ("Exxon Mobil"), Huntsman Chemical Company, Phillips Petroleum Company ("Phillips"), Shell and Union Carbide Corporation. Industry consolidation, including the combination of British Petroleum and Amoco, Exxon and Mobil, the pending combination of Union Carbide and Dow and the recently announced petrochemicals combination by Chevron and Phillips, has concentrated the industry in fewer, although larger and stronger, competitors. The combined rated capacity of Equistar's olefins units at January 1, 2000 was approximately 11.5 billion pounds of ethylene per year or approximately 17% of total North American production capacity. Based on published rated production capacities, Equistar believes it is the largest producer of ethylene in North America. North American ethylene rated capacity at January 1, 2000 was approximately 67 billion pounds per year. Of the total ethylene production capacity in the United States, approximately 95% is located along the Gulf Coast. Petrochemicals profitability is affected by the level of demand for petrochemicals and derivatives, along with vigorous price competition among producers which may intensify due to, among other things, the addition of new capacity. In general, demand is a function of economic growth in the United States and elsewhere in the world, which fluctuates. Capacity additions in excess of annual growth also put pressure on margins. It is not possible to predict accurately the changes in raw material costs, market conditions and other factors that will affect petrochemical industry margins in the future. The petrochemicals industry historically has experienced significant volatility in capacity utilization and profitability. Producers of olefins primarily for merchant supply to unaffiliated customers typically experience greater variations in their 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. Equistar currently consumes or sells to its partners' downstream derivatives facilities approximately 80% of its ethylene production, which has the effect of reducing volatility. Equistar's other major commodity chemical products also experience cyclical market conditions similar to, although not necessarily coincident with, those of ethylene. 18 POLYMERS OVERVIEW Through facilities located at ten plant sites in four states, Equistar's polymers segment manufactures a wide variety of polyolefins, including polyethylene, polypropylene and various 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 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. Polyethylene is used in a wide variety of consumer products, packaging materials and industrial applications. Equistar 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 average selling prices and profit margins for higher-volume commodity polyethylenes. Equistar also produces wire and cable resins and compounds at Morris, Illinois, LaPorte, Texas, Tuscola, Illinois and Fairport Harbor, Ohio. Wire and cable resins and compounds are used to insulate copper and fiber optic wiring in power, telecommunication, computer and automobile applications. Equistar's Morris, Illinois and Pasadena, Texas 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 sold its concentrates and compounds business, including its facilities in Crockett, Texas and Heath, Ohio, in April 1999. The following table outlines Equistar's polymers and performance polymers products, annual processing capacity at January 1, 2000, and the primary uses for such products. Unless otherwise specified, annual processing capacity was 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 raw material mix. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than the capacities set forth below. Capacities shown include 100% of the capacity of Equistar, of which the Company owns 41%. 19
PRODUCT Annual Capacity Primary Uses - ------------------------------------------- ----------------------- ------------------------------------------------------------- High density polyethylene (HDPE) 3.6 billion pounds HDPE is used to manufacture grocery, merchandise and trash (a) (b) bags; food containers for items from frozen desserts to margarine; plastic caps and 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; and large (rotomolded) tanks for storing liquids like agricultural and lawn care chemicals. Low density polyethylene (LDPE) 1.7 billion pounds (b) LDPE is used to manufacture food packaging films; plastic bottles for packaging food and personal care items; dry cleaning bags; ice bags; pallet shrink wrap; heavy-duty bags for mulch and potting soil; boil-in-bag bags; coatings on flexible packaging products; and coatings 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 and flexible binders. Linear low density polyethylene (LLDPE) 1.1 billion pounds LLDPE is used to manufacture garbage and lawn-leaf bags; housewares; lids for coffee cans and margarine tubs; and large (rotomolded) toys like outdoor gym sets. Polypropylene 680 million pounds Polypropylene is used to manufacture fibers for carpets, rugs and upholstery; housewares; automotive battery cases; automotive fascia, running boards and bumpers; grid-type flooring for sports facilities; fishing tackle boxes; and bottle caps and closures. Wire and Cable (c) Wire and cable resins and compounds are used to insulate Resins and Compounds copper and fiber optic wiring in power, telecommunication, computer and automobile applications. Polymeric Powders (c) Polymeric powders are component products in structural and bulk molding compounds, parting agents and filters for appliance, automotive and plastics processing industries. Polymers for Adhesives, Sealants and (c) Polymers are components in hot-metal-adhesive formulations Coatings for case, carton and beverage package sealing, glue sticks, automotive sealants, carpet backing and adhesive labels. Reactive Polyolefins (c) Reactive polyolefins are functionalized polymers used to bond non-polar and polar substrates in barrier food packaging, wire and cable insulation and jacketing, automotive gas tanks and metal coating applications. Liquid Polyolefins (c) Liquid polyolefins are a diesel fuel additive to inhibit freezing.
_______________ (a) Includes a 480-million-pound HDPE resin expansion project at the Matagorda facility which commenced operation in October 1999. Also includes the impact of idling a single gas-phase reactor at the Port Arthur facility effective March 31, 1999, which resulted in a decrease in capacity of 300 million pounds in 1999. Additionally, includes the impact of shutting down two slurry reactors at the LaPorte, Texas facility effective April 30, 1999, resulting in a decrease of 100 million pounds in 1999. (b) In the first quarter of 2000, Equistar idled two slurry reactors with a total capacity of 300 million pounds per year of HDPE. Additionally two autoclave reactors with annual capacity of 60 million pounds of LDPE were idled. All of this capacity is at the LaPorte, Texas facility. These actions are part of Equistar's asset optimization strategy. 20 (c) These are enhanced grades of polyethylene and are included in the capacity figures for HDPE, LDPE and LLDPE above, as appropriate. RAW MATERIALS With the exception of the Chocolate Bayou polyethylene plant, Equistar's polyethylene and polypropylene production facilities can receive their ethylene and propylene directly from Equistar's petrochemical facilities via Equistar's olefins pipeline system or from on-site production. The polyethylene plants at Chocolate Bayou, LaPorte, Port Arthur and Pasadena, Texas are pipeline-connected to third parties and can receive ethylene via exchanges or purchases. The polypropylene facility at Morris, Illinois also receives propylene from a third party. MARKETING AND SALES Equistar's polymers products are primarily sold to an extensive base of established customers. Approximately 30% of these customers have 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. No single unrelated third party customer accounted for more than 10% of total segment revenues in 1999. Polymers are primarily distributed via railcar. Equistar owns or leases, pursuant to long-term lease arrangements, approximately 9,500 railcars for use in its polymers business. Equistar sells its polymers products in the United States and Canada 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 price, product performance, product quality, product deliverability and customer service. Equistar competes with other large producers of polymers, including Chevron , Dow , Eastman Chemical Company, Exxon Mobil , Formosa Plastics, Huntsman Chemical Company, Phillips , Solvay Polymers, Total Fina, Union Carbide Corporation and Westlake Polymers. Industry consolidation, including the 1998 combination of British Petroleum and Amoco, the 1999 combinations of Exxon and Mobil and of Total and Fina, and the pending combination of Union Carbide and Dow, has concentrated the industry in fewer, although larger and stronger, competitors. Polymers profitability is affected by the worldwide level of demand for polymers, along with vigorous price competition which may intensify due to, among other things, new domestic and foreign industry capacity. In general, demand is a function of economic growth in the United States and elsewhere in the world, which fluctuates. It is not possible to predict accurately the changes in raw material costs, market conditions and other factors which will affect polymers industry margins in the future. Based on published rated industry capacities, Equistar is the second largest producer of polyethylene in North America and is a leading domestic producer of polyolefins powders, compounds, wire and cable resins, and polymers for adhesives. The combined rated capacity of Equistar's polyethylene units as of January 1, 2000 was approximately 6.45 billion pounds per year or approximately 17% of total industry capacity in North America. There are approximately 19 other North American producers of polyethylene, including Chevron Chemical Company, Dow , Exxon Mobil, Phillips, Solvay Polymers and Union Carbide Corporation. Equistar's polypropylene capacity, 680 million pounds per year as of January 1, 2000, represents approximately 4.5% of the total North American polypropylene capacity. There are approximately 14 other North American competitors in the polypropylene business, including BP Amoco, Exxon Mobil, Montell Polyolefins, BV and Total Fina. 21 PROPERTIES AND EMPLOYEE RELATIONS Equistar's principal manufacturing facilities and principal products are set forth below. All of these facilities are wholly owned by Equistar unless otherwise noted.
LOCATION PRINCIPAL PRODUCTS - ---------------------------------------- ---------------------------------------------------------------- Beaumont, Texas(a)...................... EG Channelview, Texas(b)................... Ethylene, Propylene, Butadiene, Benzene, Toluene, DCPD, Isoprene, Resin Oil, Piperylenes, Alkylate and MTBE Corpus Christi, Texas................... Ethylene, Propylene, Butadiene and Benzene Chocolate Bayou, Texas(c)............... HDPE Chocolate Bayou, Texas(c)(d)............ Ethylene, Propylene, Butadiene, Benzene, Toluene, DCPD, Isoprene, Resin Oil and MTBE LaPorte, Texas (e)...................... Ethylene, Propylene, LDPE, LLDPE, HDPE and Liquid Polyolefins Matagorda, Texas........................ HDPE Pasadena, Texas(f)...................... EO, EG and Other EO Derivatives Pasadena, Texas(f)...................... Polypropylene and LDPE Port Arthur, Texas(e)................... LDPE and HDPE Victoria, Texas(d)...................... HDPE Lake Charles, Louisiana(g).............. Ethylene, and Propylene Morris, Illinois........................ Ethylene, Propylene, LDPE, LLDPE and Polypropylene Tuscola, Illinois....................... Ethyl Alcohol, Diethyl Ether, Wire and Cable Resins and Compounds and Polymeric Powders Clinton, Iowa........................... Ethylene, Propylene, LDPE and HDPE Fairport Harbor, Ohio(g)................ Wire and Cable Resins and Compounds Anaheim, California..................... Denatured Alcohol Newark, New Jersey...................... Denatured Alcohol
_____________ (a) The Beaumont facility is owned by PD Glycol, a partnership owned 50% by Equistar and 50% by E.I. DuPont de Nemours and Company. (b) The Channelview facility has two ethylene processing units. 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. (c) Millennium and Occidental each contributed a facility located in Chocolate Bayou. These facilities are not on contiguous property. (d) The land is leased, and the facility is owned. (e) A substantial portion of the HDPE capacity of the Port Arthur facility was idled on March 31, 1999. Additional HDPE and LDPE capacity at the LaPorte facility was idled in the first quarter of 2000. (f) Occidental and Lyondell each contributed facilities located in Pasadena. These facilities are primarily on contiguous property, and Equistar plans to operate them as one site to the extent practicable. These facilities are operated in conjunction with the LaPorte facility. (g) The facilities and land are leased. Equistar also owns a storage facility, a brine pond and a tract of vacant land in Mont Belvieu, Texas, located approximately 15 miles east of the Channelview facility. Storage capacity for up to approximately 13 million barrels of NGLs, ethylene, propylene and other hydrocarbons is provided in salt domes at the Mont Belvieu facility. There are an additional 3 million barrels of ethylene and propylene storage operated by Equistar on leased property in Markham, Texas. Equistar uses an extensive olefins pipeline system, some of which it owns and some of which it leases, extending from Corpus Christi to Mont Belvieu to Port Arthur and around the Lake Charles area. Equistar owns other pipelines in connection with its Tuscola, Chocolate Bayou, Matagorda, Victoria, Corpus Christi and LaPorte 22 facilities. Equistar owns and leases several pipelines connecting the Channelview facility, the Refinery and the Mont Belvieu storage facility; these pipelines are used to transport feedstocks, butylenes, hydrogen, butane, MTBE and unfinished gasolines. Equistar also owns a barge docking facility near the Channelview facility capable of berthing eight barges and related terminal equipment for loading and unloading raw materials and products. Equistar owns or leases pursuant to long-term lease arrangements approximately 11,400 railcars for use in its business. Equistar sub-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 sales facilities and leases storage facilities, primarily in the Gulf Coast area, from various third parties for the handling of products. As of December 31, 1999, Equistar employed approximately 4,500 full-time employees. Equistar also uses the services of independent contractors in the routine conduct of its business. Approximately 280 hourly workers are covered by collective bargaining agreements. In connection with the Shared Services Agreement, approximately 460 persons who had been employed by Equistar in the areas of information technology, human resources, materials management and raw material supply, customer supply chain, accounting, facility services, and legal became employees of Lyondell effective January 1, 2000. Equistar believes that its relations with its employees are good. RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS Equistar maintains a significant research and development facility in Cincinnati, Ohio. Equistar has additional research facilities in Morris, Illinois, Matagorda, Texas and Plano, Texas. Equistar's research and development expenditures for 1999, 1998, and the period December 1, 1997 (inception) through December 31, 1997 were $42 million, $40 million, and $3 million, respectively. The Channelview facility employs proprietary technology owned by Lyondell to convert ethylene and other light petrochemical streams into propylene. Consistent with its strategy, Equistar is conducting a research project to investigate alternative olefin feedstocks for use at the Channelview, Chocolate Bayou and/or Corpus Christi facilities. These alternative olefin feedstocks could significantly lower costs and provide an additional competitive advantage at these facilities. Recent polymers industry announcements relate to the development of single- site catalysts. Successful development and commercialization of these catalysts are expected to result in enhanced polymer properties and higher margin products. Equistar is conducting research and developing several non- metallocene single-site catalysts (STARTM catalysts) for use in the production of polyolefins resins. Equistar has several patents and patent applications pending in connection with research and development efforts in this area. Equistar does not believe that the loss of any individual patent or trade secret would have a material adverse effect on its petrochemicals or polymers businesses. Equistar uses numerous technologies in its operations, many of which are licensed from third parties. Significant licenses held by Equistar include the BP Amoco fluid bed polyethylene process for the production of both LLDPE and HDPE, the Unipol process for the production of LLDPE, and certain other licenses for the production of EO, EG, polyethylene and polypropylene. Equistar is not dependent on the retention of any particular license, and it believes that the loss of any individual license would not have a material adverse effect on its operations. 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's rights to use these trademarks are perpetual as long as Equistar actively uses the trademarks. 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. 23 LYONDELL-CITGO REFINING LP OVERVIEW Lyondell participates in petroleum refining through an equity interest in LCR. Lyondell holds a 58.75% interest and CITGO holds a 41.25% interest in LCR. LCR owns and operates the Refinery which is located on the Houston Ship Channel in Houston, Texas. The Refinery is a full conversion refinery designed to run extra heavy (17 degree API), high sulfur crude oil which is less expensive than other grades of crude. Processing extra heavy, high sulfur crude oil in significant quantities requires a refinery with extensive coking, catalytic cracking, hydrotreating and desulfurization capabilities, i.e., a "complex refinery." The Refinery's complexity enables it to operate in full conversion mode producing a slate of products that is approximately 95% high value, clean products (most refineries produce 70% or less of high value, clean products such as gasoline and diesel). In addition, the Refinery's complexity allows it to produce most of these clean products as premium grades such as reformulated gasoline, jet fuel, low sulfur diesel and aromatics chemicals. The Refinery's products include conventional and reformulated gasoline, low sulfur diesel, jet fuel, aromatics, lubricants (industrial lubricants, white oils and process oils), carbon black oil, sulfur, residual fuel and petroleum coke. The aromatics chemicals produced by the Refinery are benzene, toluene, orthoxylene and paraxylene. These products are sold to intermediate chemicals and polyester intermediate manufacturers and are ultimately used in clothing, soft drink bottles and drink cups, audio and video tapes, and resins. LCR was formed in 1993 to upgrade the Refinery's ability to process substantial additional volumes of lower cost, extra heavy, higher margin crude oil. An upgrade project completed in 1997 (the "Upgrade Project") increased the extra heavy crude oil processing capability of the Refinery from 130,000 barrels per day of 22 degree API gravity crude oil to approximately 260,000 barrels per day of 17 degree API gravity crude oil. 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. The Upgrade Project also included expansion of the Refinery's reformulated gasoline and low sulfur diesel production capability. The Upgrade Project, which cost approximately $1.1 billion, was funded through a combination of approximately $485 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. 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 effective April 1, 1997, and is currently 41.25%. CITGO has a one-time option expiring September 30, 2000 to increase its participation interest in LCR up to 50% by making an additional equity contribution. The following table outlines LCR's primary products, annual rated capacity as of January 1, 2000, and the primary uses for such products. 24
PRODUCT RATED CAPACITY (A) PRIMARY USES - ------------------------------- ---------------------------- -------------------------------------------------------------- Gasoline (b).................. 120,000 barrels per day Automotive fuel Diesel (#2 Distillate)(b)..... 75,000 barrels per day Fuel for diesel cars and trucks Jet Fuel (b).................. 22,000 barrels per day Aviation fuel Benzene(c).................... 50 million gallons per year Nylon for clothing and consumer items; polystyrene for insulation, packaging and drink cups Toluene (d)................... 37 million gallons per year Gasoline component and chemical feedstock for producing benzene Paraxylene (d)................ 400 million pounds per year Polyester fibers for clothing and fabrics, PET soft drink bottles and films for audio and video tapes Orthoxylene (d)............... 270 million pounds per year Plasticizer in products such as rainwear, shower curtains, toys and auto upholstery and an intermediate in paints and fiberglass Lube Oils (b)................. 4,000 barrels per day Automotive and industrial engine and lube oils, railroad engine additives and white oils for food-grade applications
__________ (a) Unless otherwise specified, represents rated capacity at January 1, 2000. 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 the rated capacity. Capacities shown include 100 percent of the capacity of LCR, of which the Company owns 58.75 percent. (b) Produced by LCR and sold to CITGO. (c) Produced by LCR and sold to Equistar. (d) Produced by LCR and marketed for LCR by Equistar. MANAGEMENT OF LCR LCR is a limited partnership organized under the laws of the state of Delaware, following its conversion from a Texas limited liability company effective December 31, 1998. Lyondell owns its interest in LCR through two wholly owned subsidiaries, one of which serves as a general partner and one of which serves as a limited partner. Similarly, CITGO, which is a wholly owned subsidiary of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company of the Republic of Venezuela, owns its interest in LCR through two wholly owned subsidiaries, a general partner and a limited partner. LCR is governed by a Limited Partnership Agreement (the "LCR Partnership Agreement"), which provides for, among other things, the ownership and cash distribution rights of the partners. The LCR Partnership Agreement also provides that LCR is managed by a Partnership Governance Committee, which is composed of six representatives, three appointed by each general partner. Actions requiring unanimous consent of the representatives include amendment of the LCR Partnership Agreement, borrowing money, delegations of authority to committees, certain purchase commitments and capital expenditures. The day-to-day operations of the Refinery are managed by the executive officers of LCR as appointed by the Partnership Governance Committee. AGREEMENTS BETWEEN LYONDELL OR CITGO AND LCR LCR is a party to a number of agreements with Lyondell and CITGO. 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. Lyondell currently performs administrative services for LCR pursuant to an Administrative Services Agreement, which is renegotiated annually. Under the terms of sales agreements, CITGO purchases all of the lubricant products manufactured by LCR. In conjunction therewith, CITGO operates LCR's Birmingport, Alabama lubricants plant. 25 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 synergies between the Refinery and the Channelview petrochemicals facility. Such agreements 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 raw materials 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. In accordance with a marketing service agreement, Equistar currently serves as LCR's sole agent to market aromatics products produced by LCR. In addition, under a long-term agreement, Equistar and LCR perform certain manufacturing services for one another. RAW MATERIALS In 1993, LCR entered into a long-term crude supply agreement ("Crude Supply Agreement") with Lagoven, S.A., now known as PDVSA Petroleo y Gas S.A. ("PDVSA Oil"), an affiliate of CITGO. A substantial amount of the crude oil used by LCR as a raw material for the Refinery is purchased under the Crude Supply Agreement. Both PDVSA Oil and CITGO are direct or indirect wholly owned subsidiaries of PDVSA. Under the Crude Supply Agreement, PDVSA Oil is required to sell, and LCR is required to purchase, 230,000 barrels per day of extra heavy crude oil, which constitutes approximately 88% of the Refinery's refining capacity of 260,000 barrels per day of crude oil. In late April 1998, LCR received notification from PDVSA Oil that it would reduce allocations of crude oil on the grounds of announced OPEC production cuts. LCR began receiving reduced allocations of crude oil from PDVSA Oil in August 1998, amounting to 195,000 barrels per day in that month. LCR was advised by PDVSA Oil in May 1999 of a further reduction in the allocations of crude oil supplied under the Crude Supply Agreement to 184,000 barrels per day, effective May 1999. On several occasions since then, PDVSA Oil has further reduced crude oil deliveries, although it has made payments in partial compensation for such reductions. The Crude Supply Agreement incorporates formula prices to be paid by LCR for the crude oil supplied 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; and (iii) a deemed margin, which varies according to the grade of crude oil or other feedstock delivered. Although the Company believes that the Crude Supply Agreement reduces the volatility of LCR's earnings and cash flows, the Crude Supply Agreement also limits LCR's ability to enjoy higher margins during periods when the market price of crude oil is low relative to then current market prices for refined products. In addition, if the actual yields, costs or volumes of the LCR refinery differ substantially from those contemplated by the Crude Supply Agreement, the benefits of this agreement to LCR could be substantially different, and could result in lower earnings and cash flow for LCR. Furthermore, there may be periods during which LCR's costs for crude oil under the Crude Supply Agreement may be higher than might otherwise be available to LCR from other sources. A disparate increase in the price of crude oil relative to the prices for its products, such as was experienced in 1999, has the tendency to make continued performance of its obligations under the Crude Supply Agreement less attractive to PDVSA Oil. The Crude Supply Agreement, which expires on December 31, 2017, provides that Lyondell controls all of LCR's decisions and enforcement rights in connection with the Crude Supply Agreement so long as PDVSA has a direct or indirect ownership interest in LCR. There are risks associated with enforcing the provisions of contracts with companies such as PDVSA Oil that are affiliates of a foreign sovereign nation. All of the crude oil supplied by PDVSA Oil under the Crude Supply Agreement is produced in the Republic of Venezuela, which has experienced economic difficulties and attendant social and political changes in recent years. It is impossible to predict how governmental policies may change under the current or any subsequent Venezuelan government. In addition, there are risks associated with enforcing 26 judgments of United States courts against entities whose assets are located largely outside of the United States and whose management does not reside in the United States. Although the parties have negotiated alternative arrangements in the event of certain force majeure conditions, including Venezuelan 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 to LCR as the Crude Supply Agreement. PDVSA has announced that it intends to renegotiate the crude supply agreements that it has with all third parties, including LCR. In light of PDVSA's announced intent, there can be no assurance that PDVSA Oil will continue to perform its obligations under the Crude Supply Agreement. However, they have confirmed that they expect to honor their commitments if a mutually acceptable restructuring of the Crude Supply Agreement is not achieved. The Company and PDVSA have had discussions covering both a restructuring of the Crude Supply Agreement and a broader restructuring of the LCR partnership. These discussions are continuing, although no assurance can be given that changes in either arrangement will occur. If the Crude Supply Agreement is modified or terminated or this source of crude is otherwise interrupted, LCR could experience significantly lower earnings and cash flows. Depending on then current market conditions, any breach or termination of the Crude Supply Agreement could adversely affect LCR, since LCR would have to purchase all of its crude oil feedstocks in the merchant market, which could subject LCR to significant price fluctuations. There can be no assurance that alternative crude oils with similar margins would be available for purchase by LCR. 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. Under the Products Agreement, CITGO is obligated to purchase and LCR is required to sell 100% of the gasoline, jet fuel, heating oil, diesel fuel, coke and sulfur produced by the Refinery. CITGO purchases these products at prices based on industry benchmark indexes. For example, the price for gasoline is based on prices published by Platts Oilgram, an industry trade publication. The Products Agreement provides that Lyondell controls all of LCR's material decisions and enforcement rights in connection with the Products Agreement so long as CITGO has a direct or indirect ownership interest in LCR. The Products Agreement expires on December 31, 2017. COMPETITION AND INDUSTRY CONDITIONS All of LCR's gasoline, low sulfur diesel, jet fuel, and lube oils are sold to CITGO. 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 Agreement and the Products Agreement has the effect of stabilizing earnings and cash flows and reducing the market-driven aspects of such volatility. With a capacity of approximately 260,000 barrels per day, the Company believes that the Refinery is North America's largest full conversion (i.e., non-asphalt producing) refinery capable of processing 100% 17 API crude oil. 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, 2000, there were 153 crude oil refineries in operation in the United States, and total domestic refinery capacity was approximately 16.5 million barrels per day. During 1999, LCR processed an average of 239,000 barrels per day of crude oil or over 1% of domestic capacity. 27 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 a lube oil manufacturing plant 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. EMPLOYEE RELATIONS At December 31, 1999, LCR employed approximately 1,100 full-time employees. LCR also uses the services of independent contractors in the routine conduct of its business. Approximately 650 hourly workers are covered by a collective bargaining agreement between LCR and the Paper, Allied-Industrial, Chemical and Energy Workers International Union (formerly the Oil, Chemical and Atomic Workers Union), which expires in January 2002. LCR believes that relations with its employees are good. LYONDELL METHANOL COMPANY, L.P. OVERVIEW Lyondell produces methanol through its 75% interest in LMC, of which Lyondell serves as the managing partner. The remaining 25% interest in LMC is held by MCNIC. Effective December 1, 1997, Equistar began serving as the operator of LMC pursuant to an operating agreement with LMC. LMC 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 fuel 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. LMC is advantageously located near its Gulf Coast customer base. MANAGEMENT OF LYONDELL METHANOL LMC is a limited partnership organized under the laws of the State of Texas. Lyondell owns its interest in LMC through two wholly owned subsidiaries, one of which serves as a general partner and the managing partner of LMC and one of which serves as a limited partner. Similarly, MCNIC owns its interest in LMC through two wholly owned subsidiaries, one a general partner and one a limited partner. AGREEMENTS BETWEEN EQUISTAR AND LYONDELL METHANOL Certain agreements entered into by Lyondell and LMC were assigned to Equistar effective December 1, 1997. Equistar acts as operator of LMC pursuant to an operating agreement with LMC. In addition, Equistar sells natural gas to LMC and markets LMC's product pursuant to agreements with LMC. LMC also leases from Equistar the real property on which its methanol plant is located. RAW MATERIALS LMC's plant processes natural gas as its primary raw material. 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 LMC as a raw material for the methanol plant. 28 MARKETING AND SALES LMC sells all of its methanol output to Equistar, which then sells most of it to third parties and Lyondell. The agreement between LMC and Equistar concerning sales provides that LMC bears the market risk associated with Equistar's re-sales to third parties. Equistar's sales agreements with third parties for the methanol have initial terms ranging from two to three years and 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. COMPETITION AND INDUSTRY CONDITIONS The basis for competition in the methanol business is product deliverability, product quality and price. LMC competes with other large producers of methanol, including Methanex, Borden Chemicals and Plastics and Terra Industries. The rated capacity of LMC's processing unit at January 1, 2000 was 248 million gallons. Based on published rated production capacities, the Company believes that LMC 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 gasoline and housing markets, respectively. Methanol profitability is also affected by the price of its feedstock, natural gas. PROPERTIES LMC's only property is the methanol plant it owns, which is located within Equistar's Channelview complex on property leased from Equistar. EMPLOYEE RELATIONS LMC has no employees. Equistar serves as its operator and marketing agent. INDUSTRY CYCLICALITY AND OVERCAPACITY Lyondell's historical operating results reflect the cyclical nature of both the chemical and refining industries. Both industries are mature and capital intensive, and industry margins are sensitive to supply and demand balances, which have historically been cyclical. The chemical industry has experienced alternating periods of tight supply, causing prices and profit margins to increase, followed by periods of substantial capacity additions, resulting in oversupply and declining prices and profit margins. Due to the commodity nature of most of the products of Lyondell and its joint ventures, Lyondell is not necessarily able to protect market position by product differentiation or to pass on cost increases to customers. Accordingly, increases in raw material and other costs do not necessarily correlate with changes in product prices, either in the direction of the price change or in magnitude. Moreover, a number of participants in various segments of the chemical industry have announced plans for expansion of plant capacity. There can be no assurance that future growth in product demand will be sufficient to utilize this additional, or even current, capacity. Excess industry capacity, to the extent it occurs, may depress Lyondell's or its joint ventures' volumes and margins. As a result, Lyondell's earnings may be subject to significant fluctuations. External factors beyond Lyondell's control, such as general economic conditions, competitor action, international events and circumstances and governmental regulation in the United States and abroad, can cause volatility in feedstock prices, as well as fluctuations in demand for products, product prices, volumes and margins, and can magnify the impact of economic cycles on Lyondell's business. A number of products of Lyondell and its joint ventures are highly dependent on durable goods markets, such as housing and automotive, that are particularly cyclical. With respect to Lyondell's refining business, management believes that the combination of the Crude Supply Agreement and the Products Agreement tends to stabilize earnings and to reduce market driven volatility. 29 FOREIGN OPERATIONS AND COUNTRY RISKS International operations and exports to foreign markets are subject to a number of risks, including currency exchange rate fluctuations, trade barriers, exchange controls, national and regional labor strikes, political risks and risks of increases in duties and taxes, as well as changes in laws and policies governing operations of foreign-based companies. In addition, earnings of foreign subsidiaries and intercompany payments may be subject to foreign income tax rules that may reduce cash flow available to meet required debt service and other obligations of Lyondell. As earlier discussed, LCR is party to a long-term crude supply agreement with a wholly owned subsidiary of PDVSA. There are risks associated with enforcing the provisions of contracts with companies that are affiliates of a foreign sovereign nation, such as PDVSA. Additionally, all of the crude oil supplied under the Crude Supply Agreement is produced in the Republic of Venezuela, which has experienced economic difficulties and attendant social and political changes in recent years. JOINT VENTURE RISKS With the exception of the businesses acquired in the ARCO Chemical Acquisition, the Company's operations are conducted through joint ventures. The Company shares control of these joint ventures with unaffiliated third parties. The Company's forecasts and plans with respect to these joint ventures assume that its joint venture partners will observe their obligations with respect to the joint ventures. In the event that any of the Company's joint venture partners do not observe their commitments, it is possible that the affected joint venture would not be able to operate in accordance with its business plans or that the Company would be required to increase its level of commitment in order to give effect to such plans. As with any such joint venture arrangements, differences in views among the joint venture participants may result in delayed decisions or in failures to agree on major matters, potentially adversely affecting the business and operations of the joint ventures and in turn the business and operations of the Company. The other owners of the joint ventures may transfer control of their joint venture interests, subject to the requirement in many instances to first offer the other owners an opportunity to purchase the interest. Millennium has publicly announced its intention to sell its 29.5% interest in Equistar and is actively seeking qualified buyers. Lyondell cannot predict how the sale of Millennium's interest in Equistar to a third party or the sale by any other joint venture owner of its interest would ultimately affect the governance, operations or business of the venture. However, the partnership agreement and key agreements between Equistar and its partners would remain in place, and may not be modified without the consent of all of the partners. Equistar's credit facility provides that an event of default occurs if Lyondell, Millennium and Occidental cease to collectively hold at least a majority interest. LCR's credit facility provides that an event of default occurs if Lyondell and CITGO cease to collectively hold at least a 35% interest. OPERATING HAZARDS The occurrence of material operating problems, including, but not limited to, the events described below, may have a material adverse effect on the productivity and profitability of a particular manufacturing facility, or on the Company as a whole, during and after the period of such operational difficulties. The Company's revenues are dependent on the continued operation of its various production facilities (including the ability to complete construction projects on schedule). The Company's operations are subject to the usual hazards associated with chemical manufacturing and refining and the related storage and transportation of raw materials, products and wastes, including pipeline leaks and ruptures, explosions, fires, inclement weather and natural disasters, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, remediation complications, chemical spills, discharges or releases of toxic or hazardous substances or gases, storage tank leaks and other environmental risks. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. Furthermore, the Company is also subject to present and future claims with respect to workplace 30 exposure, workers' compensation and other matters. The Company maintains property, business interruption and casualty insurance which it believes is in accordance with customary industry practices, but it is not fully insured against all potential hazards incident to its business. ENVIRONMENTAL MATTERS The production facilities of Lyondell, Equistar, LCR and LMC are generally required to have permits and licenses regulating air emissions, discharges to water and 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 it and 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 Lyondell, Equistar, LCR and LMC is to be in compliance with all applicable environmental laws. Lyondell and Equistar also are each committed to Responsible Care(R), a U.S. chemical industry initiative to enhance the industry's responsible management of chemicals. The Company's subsidiaries and joint ventures (together with the industries in which they operate) are subject to extensive national, 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. Many of these laws and regulations provide for substantial fines and potential criminal sanctions for violations. 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, and 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. Some risk of environmental costs and liabilities is inherent in particular operations and products of the Company, and its 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 it or its joint ventures will be affected differentially from the rest of the chemicals and refining industry. Environmental laws may have a significant effect on the nature and scope of cleanup of contamination at current and former operating facilities, the costs of transportation and storage of raw materials and finished products and the costs of the storage and disposal of water. Also, U.S. "Superfund" statutes may impose joint and several liability for the costs of remedial investigations and actions on the entities that generated waste, arranged for disposal of the wastes, transported to or selected the disposal sites and the past and present owners and operators of such sites. All such responsible parties (or any one of them, including the Company) may be required to bear all of such costs regardless of fault, legality of the original disposal or ownership of the disposed site. 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, 1999 and 1998, the Company, its subsidiaries and its joint ventures spent, in the aggregate, approximately $21 million and $22 million, respectively, for environmentally related capital expenditures at existing facilities. In 2000, the Company currently estimates that environmentally related capital expenditures at existing subsidiary and joint venture facilities will be approximately $15 million and that the level of such expenditures in 2001 will not be materially different than in 2000. The timing and amount of these expenditures are subject to regulatory and other uncertainties described above as well as obtaining the necessary permits and approvals. For periods beyond 2001, 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. The Company is also subject to certain assessment and remedial actions at the Refinery under RCRA. 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 31 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, its subsidiaries and its joint ventures, to the extent appropriate, have accrued 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 accruals, and the status of discussions with regulatory agencies described in this paragraph, 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." The eight-county Houston/Galveston region has been designated a severe non- attainment area for ozone by the EPA. As a result, a plan must be developed by the TNRCC to reach and demonstrate compliance with the ozone standard by the year 2007. Ozone is a product of the reaction between volatile organic compounds (VOCs) and nitrogen oxides (NOx) in the presence of sunlight, and is a principal component of smog. Because much has already been done to limit VOC emissions, the basis of the proposed plans for meeting the ozone standard will now focus on significant reductions in NOx emissions. It is expected that drastic cuts in industrial sources of NOx will be required. These emission reduction controls must be installed during the next several years, well in advance of the 2007 deadline. This could result in increased capital investment and higher operating costs for Equistar, Lyondell, and LCR. Lyondell is actively involved with a number of organizations that are working with the TNRCC to help solve the ozone problem in the most cost-effective manner. The Clean Air Act specified certain emissions standards for vehicles beginning in the 1994 model year and required the EPA to study whether further emissions reductions from vehicles were necessary starting no earlier than the 2004 model year. In 1998, the EPA concluded that more stringent vehicle emission standards were needed and that additional controls on gasoline were necessary to meet these emission standards. These new standards were finalized in 1999 and will require refiners to produce a low sulfur gasoline by 2004 with some allowances for a conditional phase-in period that could extend final compliance until 2006. This rule could result in increased capital investment and higher operating costs for LCR. Equistar's olefins fuel business may also be impacted. ITEM 3. LEGAL PROCEEDINGS LITIGATION MATTERS The Company and its joint ventures are, from time to time, defendants in lawsuits, some of which are not covered by insurance. Many of these 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 18 of Notes to Consolidated Financial Statements. Although Lyondell, and its joint ventures are involved in numerous and varied legal proceedings, a significant portion of its outstanding litigation arose in four contexts: (1) claims for personal injury or death allegedly arising out of exposure to the products produced by the respective entities; (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; (3) claims for personal injury and/or property damage and air, noise and water pollution allegedly arising out of operations; and (4) employment related claims. 32 ENVIRONMENTAL PROCEEDINGS 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 connection with the transfer of assets and liabilities from ARCO to the Company prior to its initial public offering in 1988, the Company agreed to assume certain liabilities arising out of the operation of the Company's integrated petrochemicals and refining business prior to July 1, 1988. The Company and ARCO entered into an agreement, updated in 1997 (the "Revised 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 that may arise out of pending and future lawsuits. 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 that allocates responsibility based on years of ownership during the relevant time period. Under the Revised Cross-Indemnity Agreement, the Company assumed responsibility for its proportionate share of future costs for waste site matters not covered by ARCO insurance. In connection with the ARCO Chemical Acquisition, the Company is successor to a cross-indemnity agreement between ARCO and ARCO Chemical relating to claims or liabilities that ARCO may incur relating to its former ownership and operation of the oxygenates and polystyrenics businesses of ARCO Chemical for periods after July 1, 1987. Subject to the uncertainty inherent in all litigation, management believes the resolution of the matters pursuant to these indemnity agreements will not have a material adverse effect upon the Consolidated Financial Statements of the Company. Lyondell's environmental liability totaled $37 million at December 31, 1999 based on the Company's latest assessment of potential future remediation costs. This amount comprises liability for remediation responsibility retained by ARCO Chemical in connection with the sale of a plant in 1996 and liability related to several owned plant facilities, including the Channelview facility, and federal Superfund sites for amounts ranging from less than $1 million to $13 million per site. Lyondell is involved in administrative proceedings or lawsuits relating to a minimal number of other Superfund sites. However, the Company estimates, based on currently available information, that potential loss contingencies associated with these sites, individually and in the aggregate, are not significant. Substantially all amounts accrued are expected to be paid out over the next two to seven years. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." 33 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the executive officers of Registrant as of February 1, 2000. 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.
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S) - ------------------------------------------ -------------------------------------------------------------------- Dan F. Smith, 53......................... Mr. Smith was named Chief Executive Officer and President in Director, President and December 1996. Mr. Smith has been a Director since 1988. Mr. Smith Chief Executive Officer 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. Mr. Smith is a Director of Cooper Industries and ChemFirst, Inc. Eugene R. Allspach, 53.................. Mr. Allspach was appointed Executive Vice President of Lyondell on Executive Vice President and December 2, 1999, and has served as President and Chief Operating President Officer of Equistar since December 1997. Mr. Allspach served as And Chief Operating Officer of Group Vice President, Manufacturing and Technology for Millennium Equistar Petrochemicals from 1993 to 1997. Before 1993, Mr. Allspach held various senior executive positions with Millennium, including Group Vice President, Manufacturing and Manufacturing Services and Vice President, Specialty Polymers and Business Development. Mr. Allspach is not an employee of Lyondell. Robert T. Blakely, 58.................... Mr. Blakely was appointed to his present position effective Executive Vice President and Chief November 1, 1999. Prior thereto, he served as Executive Vice Financial Officer President and Chief Financial Officer of Tenneco, Inc. from 1981 to 1999. Morris Gelb, 53.......................... Mr. Gelb was appointed to his current position in December 1998. Executive Vice President and Previous to this appointment, he served as Senior Vice President, Chief Operating Officer Manufacturing, Process Development and Engineering of Lyondell from July 1998. He was named Vice President for Research and Engineering of ARCO Chemical in 1986 and Senior Vice President of ARCO Chemical in July 1997. Jeffrey R. Pendergraft, 51............... Mr. Pendergraft was named Executive Vice President and Chief Executive Vice President and Administrative Officer in July 1998. Prior to this appointment, he Chief Administrative Officer served as Senior Vice President of the Company since May 1993 and as Vice President, General Counsel and Secretary of the Company beginning in 1988. Edward J. Dineen, 45..................... Mr. Dineen was appointed Senior Vice President, Urethanes and Senior Vice President, Urethanes and Performance Chemicals in July 1998. Prior to this position, he Performance Chemicals served as Vice President, Performance Products and Development for ARCO Chemical beginning in June 1997. He served as Vice President, Planning and Control for ARCO Chemical European Operations from 1993 until his appointment as Vice President, Worldwide CoProducts and Raw Materials in 1995.
34
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S) - ------------------------------------------ -------------------------------------------------------------------- Debra L. Starnes, 47..................... Ms. Starnes has served in various engineering and managerial Senior Vice President, positions with the Company since 1975. Before her most recent Intermediate Chemicals appointment in July 1998, she served as Senior Vice President, Polymers for Equistar since December 1997. Ms. Starnes served as Lyondell's Vice President, Petrochemical Business Management and Marketing from 1992 to 1994, Senior Vice President of the Company from 1994 to 1995, and Senior Vice President, Polymers from 1995 until 1997. T. Kevin DeNicola, 45.................... Mr. DeNicola has been Vice President Corporate Development since Vice President, Corporate Development April 1998, overseeing strategic planning. From 1996 until April 1998, Mr. DeNicola was Director of Investor Relations of Lyondell. Mr. DeNicola served as Ethylene Products Manager of Lyondell from 1993 until 1996. Mr. DeNicola also serves as a member of the partners committees of both Equistar and LCR.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 35 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock, $1.00 par value ("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, 1998 through December 31, 1999, inclusive, were as set forth below. PERIOD High Low - ----------------------------------------------- ------------- ------------ 1998: First Quarter.......................... 36 1/8 23 1/4 Second Quarter......................... 38 3/8 26 1/2 Third Quarter.......................... 30 15/16 19 1/2 Fourth Quarter......................... 22 7/16 15 1999: First Quarter.......................... 18 1/4 12 11/16 Second Quarter......................... 22 3/8 11 7/8 Third Quarter.......................... 21 9/16 12 1/8 Fourth Quarter......................... 17 11 1/4 On March 24, 2000, the closing sale price of the Common Stock was $13 11/16, and there were approximately 1,970 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 payout 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, contractual restrictions 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 1999, the Company paid $97 million in dividends. Certain debt instruments which were assumed by Equistar, but as to which Lyondell remains an obligor 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, which 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. Lyondell's credit facilities and indentures also could limit the Company's ability to pay dividends under certain circumstances, including if the Company's consolidated net worth falls below certain specified minimum levels. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." 36 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Consolidated Financial Statements, including the related notes, and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
For the year ended December 31 --------------------------------------------------------- Millions of dollars, except per share data 1999 1998(a) 1997(B) 1996 1995 - ------------------------------------------------------- -------- ---------- ---------- ------- ------- Results of Operations Data: Sales and other operating revenues $3,693 $1,447 $2,878 $5,052 $4,936 Income from equity investments 76 235 108 - - - - Net income (loss) (c) (115) 52 286 126 389 Basic and diluted earnings (loss) per share (c) (1.10) .67 3.58 1.58 4.86 Dividends per share .90 .90 .90 .90 .90 Balance Sheet Data: Total assets 9,498 9,156 1,559 3,276 2,606 Long-term debt, less current maturities 6,046 5,391 345 1,194 807
_________ (a) The financial information for 1998 includes five months of operating results for ARCO Chemical, acquired as of July 28, 1998 and accounted for using the purchase method of accounting. It also includes twelve months of Equistar, LCR and LMC; each accounted for as an equity investment. (b) The financial information for 1997 includes twelve months of consolidated operating results of Lyondell and LMC. It also includes twelve months of LCR and one month of Equistar, each accounted for as an equity investment. (c) The 1999 net loss included an extraordinary loss on early extinguishment of debt, net of income taxes, of $35 million or $.33 per basic and diluted share. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the information contained in the Consolidated Financial Statements and the notes thereto. OVERVIEW GENERAL--Lyondell's 1999 and 1998 operating income includes the intermediate chemicals and derivatives business segment, consisting of the business acquired from ARCO Chemical, prospectively from August 1, 1998. Lyondell's activity in the petrochemicals, polymers and refining business segments is conducted through its interests in Equistar and LCR. The methanol business conducted through LMC is not a reportable segment for financial disclosure purposes. Lyondell accounts for its investments in Equistar, LCR and LMC using the equity method of accounting. Lyondell's 1997 operating income includes eleven months of the petrochemicals and polymers business segments contributed to Equistar on December 1, 1997. NET INCOME--The 1999 net loss of $115 million compares to net income of $52 million in 1998 and $286 million in 1997. All three years were affected by unusual items at Lyondell as well as Lyondell's share of unusual items at Equistar and LCR as follows: IN MILLIONS 1999 1998 1997 - ----------- ---------- -------- -------- Net income (loss) $ (115) $ 52 $ 286 Add (deduct): Extraordinary loss 35 - - - - Unusual items 42 42 25 Gain on asset sale (10) - - - - ---------- -------- -------- Adjusted net income (loss) $ (48) $ 94 $ 311 ========== ======== ======== 37 The net loss for 1999 included a $35 million extraordinary loss on early extinguishment of debt, an after-tax, LIFO-related charge of $10 million, Lyondell's $32 million after-tax share of Equistar restructuring and LCR renegotiated labor agreement charges, and Lyondell's $10 million after-tax share of an Equistar gain on asset sale. Earnings for 1998 included unusual charges of $42 million after tax, related to the ARCO Chemical Acquisition, the renegotiated labor agreement at LCR and the formation of Equistar, while net income for 1997 included unusual charges of $25 million after tax, related to the formation of Equistar. The $142 million decrease from adjusted net income of $94 million in 1998 to the adjusted net loss of $48 million in 1999 was primarily due to higher interest expense and lower equity income from LCR and, to a lesser extent, Equistar. The increase in interest expense reflected a full year of interest on debt related to the acquisition of ARCO Chemical on July 28, 1998. This was only partly offset by the inclusion of a full year of operating income of the acquired business, which was included prospectively from August 1, 1998. LCR equity income decreased due to reduced allocations and a less favorable mix of extra heavy crude oil from PDVSA Oil, lower margins on crude oil purchased on the spot market and production unit outages in 1999. Equistar equity income decreased primarily due to lower polymers margins, which reflected higher raw material costs in 1999. The $217 million decrease in adjusted net income to $94 million in 1998 from $311 million in 1997 was primarily due to lower income from the petrochemicals and polymers segments, due to lower product margins in 1998, and higher interest expense on debt related to the ARCO Chemical Acquisition. These factors more than offset increases in 1998 in operating income, resulting from the ARCO Chemical Acquisition, and in equity income from LCR. RESULTS OF OPERATIONS LYONDELL CHEMICAL COMPANY REVENUES, OPERATING COSTS AND EXPENSES--Lyondell's operating results for 1999 and 1998 include twelve months and five months, respectively, of the operating results of the intermediate chemicals and derivatives business segment. This segment consists of the business acquired from ARCO Chemical and is included prospectively from August 1, 1998. Lyondell's operating income for 1997 includes eleven months of operating results of Lyondell's petrochemicals and polymers segments, which were contributed to Equistar on December 1, 1997, and the operating results of LMC, which was consolidated in 1997. UNUSUAL CHARGES--Unusual charges, before tax, of $61 million in 1998 increased versus $16 million in 1997 primarily due to the write-off of $57 million of costs assigned to in-process research and development in connection with the ARCO Chemical Acquisition. INCOME FROM EQUITY INVESTMENT IN EQUISTAR--Lyondell's income from its equity investment in Equistar was $52 million in 1999 compared to $119 million in 1998 and $6 million in 1997. The decrease of $67 million from 1998 to 1999 reflected Lyondell's pretax share of Equistar's restructuring and other unusual charges, which were $39 million in 1999 compared to $6 million in 1998, as well as lower polymers margins, higher general and administrative expenses, and higher interest expense. These were only partly offset by higher petrochemicals sales volumes and gains on asset sales. Equity income of $6 million in 1997 represented one month of Equistar activity. INCOME FROM EQUITY INVESTMENT IN LCR--Lyondell's income from its equity investment in LCR was $23 million in 1999, $110 million in 1998 and $102 million in 1997. The decrease of $87 million from 1998 to 1999 was primarily due to reduced allocations and a less favorable mix of extra heavy Venezuelan crude oil under the Crude Supply Agreement, lower 1999 margins on the sale of products refined from crude oil purchased in the spot market, and costs associated with production unit outages in the second quarter 1999. The increase in 1998 compared to 1997 reflected the benefits of the Upgrade Project at LCR, which resulted in higher average margins as greater volumes of extra heavy crude oil were processed in the coking mode. The 1999 and 1998 periods included Lyondell's share of pretax charges of $4 million and $6 million, respectively, associated with LCR's renegotiated labor agreement. 38 INTEREST EXPENSE--Interest expense was $616 million in 1999, $287 million in 1998 and $75 million in 1997. The increase in interest expense in 1999 and 1998 compared to 1997 was primarily due to interest on debt related to the ARCO Chemical Acquisition on July 28, 1998. INCOME TAX--The effective tax rate for 1999, including the extraordinary item, was a benefit of 27.0% compared to provisions of 41.5% in 1998 and 37.3% in 1997. Lyondell's effective tax rate changed from 1998 to 1999 as a result of the federal income tax benefit from a domestic loss incurred in 1999, which was partially offset by tax provisions in foreign jurisdictions. The effective tax rate increased in 1998 compared to 1997 due to Lyondell's inability, in 1998, to claim foreign tax credits and limitations on the use of net operating losses for state tax purposes. EXTRAORDINARY ITEM--The 1999 extraordinary loss on early extinguishment of debt consisted of the write off of $54 million, or $35 million after tax, of unamortized debt issuance costs and amendment fees related to debt that was refinanced in May 1999. FOURTH QUARTER 1999 VERSUS THIRD QUARTER 1999 For the fourth quarter 1999, Lyondell reported a net loss of $58 million, which included unusual after-tax items of $42 million as noted above. The third quarter 1999 net loss of $17 million included a $15 million unfavorable adjustment of the 1999 income tax benefit. Excluding the unusual charges and the tax adjustment, Lyondell's fourth quarter net loss of $16 million compared to a net loss of $2 million in the third quarter 1999. The decrease in profitability was primarily due to lower operating income and higher net interest expense, partly offset by higher equity income from Equistar and LCR versus the third quarter. The intermediate chemicals and derivatives segment had lower operating income as rising raw material costs reduced product margins for PO and PO derivatives. This was partially offset by strong sales volumes for PO-based products. Higher equity income from Equistar primarily reflected improved ethylene margins and increased sales volumes in the petrochemicals segment. This was partially offset by a decline in polymers segment results as raw material prices rose more than product sales prices. Higher LCR equity income reflected LCR's $12 million insurance recovery related to production unit outages in the second quarter of the year. The increase in net interest expense compared to the third quarter is due to a combination of lower interest income, higher amortization of debt issuance costs as well as higher interest rates on variable rate debt. INTERMEDIATE CHEMICALS AND DERIVATIVES SEGMENT The following is a discussion of historical operating results for the year ended December 31, 1999 and of the operating results for the years ended December 31, 1998 and 1997 included in the unaudited pro forma combined historical results of Lyondell and ARCO Chemical (see Note 3 of Notes to Consolidated Financial Statements). The unaudited pro forma combined historical results give effect to the acquisition of ARCO Chemical.
VOLUMES, IN MILLIONS 1999 1998(A) 1997(A) - -------------------- ---------------- ---------------- ---------------- PO, PO derivatives, isocyanates (pounds) 4,464 4,159 4,135 Co-products: Styrene monomer (pounds) 3,129 2,912 2,577 TBA and derivatives (gallons) 1,071 995 1,054 MILLIONS OF DOLLARS - ------------------- Sales and other operating revenues $3,693 $3,553 $3,995 Unusual charges -- 41 191 Operating income 404 396 161
_________ (a) Volumes and financial data are pro forma for the years ended December 31, 1998 and 1997. 39 REVENUES--Actual 1999 revenues increased 4% compared to pro forma 1998 revenues on higher volumes partly offset by lower average sales prices. PO, PO derivatives and isocyanates volumes increased 7% compared to 1998 driven by U.S. economic growth, particularly in the automotive, housing and construction sectors, and continued improvements in Asian economies. Asia accounts for about 10% of Lyondell's total PO sales volumes. Styrene monomer volumes increased 7% primarily due to higher exports to Europe and Asia as well as higher contractual amounts under long-term SM processing arrangements. TBA and derivatives volumes increased 8% due to higher global demand for MTBE. Average sales prices decreased in 1999 for PO, PO derivatives and isocyanates, despite higher average raw material costs. The decrease reflects heightened competition in the PO industry as a result of significant new PO capacity coming on stream in late 1999 and early 2000. European sales prices were also negatively affected by the foreign exchange effect of a stronger U.S. dollar. Pro forma 1998 revenues decreased 11% compared to pro forma 1997 revenues. The decrease was primarily due to lower average sales prices in 1998, reflecting a combination of downward pressure from lower feedstock costs, ongoing competition in PO derivatives and isocyanates markets, the negative effects of a stronger U.S. dollar on foreign sales, and the effects of weaker Asian markets. PO, PO derivatives and isocyanates volumes were essentially flat versus 1997 as stronger demand for certain PO derivatives in the U.S. and Europe was offset by lower volumes in Asian markets. Increased SM volumes in 1998 primarily reflect higher contractual amounts under long-term SM processing arrangements. TBA and derivatives volumes decreased 6% in 1998, mainly due to lower MTBE demand. UNUSUAL CHARGES--The 1998 period included pro forma net unusual charges of $41 million, consisting of $57 million related to the write-off of in-process research and development projects in connection with the ARCO Chemical Acquisition, $4 million of Lyondell severance costs, and a $20 million reversal by ARCO Chemical of its 1997 restructuring accrual. The 1997 period included pro forma unusual charges of $191 million, consisting of $175 million of ARCO Chemical restructuring and other costs and $16 million of Lyondell severance costs. OPERATING INCOME--Excluding unusual charges, actual 1999 operating income of $404 million decreased $33 million or 8% compared to pro forma operating income of $437 million in 1998. Operating income in 1999 was negatively affected by a $15 million LIFO-related charge due to a reduction of inventory levels as part of Lyondell's efforts to reduce working capital. The LIFO inventory valuation reflects the fair market value assigned to inventory as part of the ARCO Chemical Acquisition. Additionally, product margins decreased on lower sales prices and higher raw material costs. The decrease in product margins was partly offset by a $43 million decrease in selling, general and administrative expenses, reflecting benefits of cost reduction efforts and a $13 million reduction of estimated liabilities related to the ARCO Chemical Acquisition. Excluding unusual charges, pro forma operating income of $437 million in 1998 increased $85 million compared to $352 million in 1997. The improved operating income was primarily due to higher product margins and lower fixed costs. Product margins for PO, PO derivatives and isocyanates, as a group, improved as raw material costs decreased more than sales prices. The fixed cost decrease reflected the benefits of the cost reduction program and lower maintenance expense. FOURTH QUARTER 1999 VERSUS THIRD QUARTER 1999 Operating income in the fourth quarter 1999 decreased 25% to $75 million from $100 million in the third quarter 1999. The decrease primarily reflected the $15 million LIFO-related charge and lower overall product margins. The benefit from 6% higher volumes for PO, PO derivatives and isocyanates was offset by lower co-product volumes. A rapid rise in raw material costs, primarily propylene, put pressure on margins for many PO derivatives. Price increase initiatives were generally unsuccessful in keeping pace with rising propylene costs. The margin decreases for PO-based products were partly offset by higher co-product margins. MTBE margins increased as prices rose strongly during the quarter with rises in crude oil and gasoline prices, partially offset by higher butane costs, a key MTBE raw material. SM margins increased about 50% compared to the third quarter as prices rose more than raw material costs on stronger global demand. Overall PO, PO derivatives and isocyanates volumes increased 6% in the fourth quarter 1999 compared to the third quarter, as higher propylene glycol sales, driven by seasonally higher sales of aircraft deicers, and higher 40 polyols sales more than offset lower merchant PO sales volumes. PO merchant volumes were adversely affected by the start-up of new industry PO capacity in Europe. The fourth quarter saw a seasonal decline of 7% in MTBE sales volumes compared to the third quarter. Styrene monomer volumes decreased primarily due to the timing of December shipments and lower volumes of sales to equity partners as a result of an unplanned production unit outage. EQUISTAR CHEMICALS, LP SELECTED PRICING INFORMATION--The following graphs present selected industry pricing information for the periods shown. Chart 1 - Month-end average spot price WTS low prices for Crude Oil as reported by Platts Oilgram Price Report from January 1997 through December 1999. Chart indicates decreasing prices in 1997 with an annual average of the month-end prices of $19.35 per barrel. Prices declined steadily in 1998 with a low point of $10.02 per barrel in December 1998 and an annual average of the month-end prices of $12.94 per barrel. Prices rose rapidly in 1999, peaking at $24.82 per barrel in December 1999 with an annual average of $17.04 per barrel. Selected month-end prices are as follows: January 1997--$23.90 per barrel, December 1997--$17.13 per barrel, December 1998--$10.02 per barrel, December 1999--$24.82 per barrel. Chart 2 - Month-end average net transaction contract prices for Ethlylene as reported by CMAI Monomers Market Report from January 1997 through December 1999. Chart indicates 1997 prices were relatively flat for the first six months and slightly decreasing in the latter half of the year with an annual average of the month-end prices of 24.70 cents per pound. 1998 prices declined steadily with an annual average of the month-end prices of 17.81 cents per pound. Prices rose rapidly in 1999, peaking at 27.00 cents per pound in December 1999 with an annual average of the month-end prices of 22.03 cents per pound. Selected month-end prices are as follows: January 1997--25.71 cents per pound, December 1997--22.67 cents per pound, December 1998--15.95 cents per pound, December 1999-27.00 cents per pound. OVERVIEW The following tables present selected financial and operating information for Equistar for the years ended December 31, 1999 and 1998, and for the combined businesses for the year ended December 31, 1997. The combined businesses consist of the Lyondell contributed business and the Millennium contributed business for the eleven months ended November 30, 1997 and Equistar for the one month ended December 31, 1997. For comparative purposes, income taxes are excluded from the combined 1997 data, since Equistar, as a partnership, is not subject to federal income tax. These combined results for the year ended December 31, 1997 are not intended to, and do not, represent pro forma results of Equistar. The combined data in these tables do not necessarily reflect the results of operations of Equistar that would have resulted had the businesses been combined as of January 1, 1997. The operating results of the business contributed by Occidental Chemical Corporation are included prospectively from May 15, 1998.
Equistar -------------------------------------- Combined 1999 1998 1997 ---------------- --------------- ----------------- Millions of dollars - ------------------ Sales and other operating revenues $5,436 $4,363 $4,866 Cost of sales 4,844 3,767 3,781 Other operating expenses 334 300 323 Restructuring and other unusual charges 96 14 42 ---------------- ---------------- ---------------- Operating income 162 282 720 Interest expense, net (176) (139) (124) Other income, net 46 -- -- ---------------- ---------------- ---------------- Net income $ 32 $ 143 $ 596 ================ ================ ================
41 NET INCOME--Equistar's net income of $32 million in 1999 decreased $111 million from net income of $143 million in 1998. The decrease was attributable to restructuring and other unusual charges, which were $96 million in 1999 compared to $14 million in 1998, as well as lower polymers margins, higher general and administrative expenses, and higher interest expense in 1999 compared with 1998. These were only partly offset by higher petrochemicals sales volumes and gains on asset sales. Equistar's net income of $143 million in 1998 decreased $453 million from combined net income of $596 million in 1997. The decrease was primarily due to lower prices and margins in both the petrochemicals and polymers segments. The decline in prices and margins began in the fourth quarter 1997 and continued throughout 1998. The decline was partially offset by increased sales volumes, primarily as a result of the addition of the Occidental Contributed Business in mid-May 1998. FOURTH QUARTER 1999 COMPARED TO THIRD QUARTER 1999 Equistar reported a net loss of $51 million in the fourth quarter 1999. Excluding $96 million of restructuring and other unusual charges, Equistar had net income of $45 million compared to net income of $35 million in the third quarter 1999. Operating results improved compared to the third quarter as higher petrochemicals margins were only partly offset by lower polymers margins and higher general and administrative expenses. Compared to the third quarter, petrochemicals margins increased as higher selling prices for ethylene, propylene and other co-products more than offset higher raw material costs. Polymers margins decreased as increases in polymers sales prices did not keep pace with increases in the cost of raw materials, primarily ethylene and propylene. The $96 million of restructuring and other unusual charges in the fourth quarter related to decisions to shut down polymer reactors at two sites and to consolidate administrative functions between Lyondell and Equistar, resulting in the write down of the related asset values and the incurrence of employee severance costs. 42 SEGMENT DATA The following tables reflect selected actual and combined sales volume data, including intersegment sales volumes, and summarized financial information for Equistar's business segments. The addition of the Occidental Contributed Business is reflected prospectively from May 15, 1998. EQUISTAR --------------------- COMBINED IN MILLIONS 1999 1998 1997 - ----------- --------- --------- --------- SELECTED PETROCHEMICALS PRODUCTS: Olefins (pounds) 18,574 16,716 9,429 Aromatics (gallons) 367 271 193 POLYMERS PRODUCTS (pounds) 6,388 6,488 6,132 MILLIONS OF DOLLARS - ------------------- SALES AND OTHER OPERATING REVENUES: Petrochemicals segment $ 4,736 $ 3,463 $ 3,866 Polymers segment 2,024 2,058 2,513 Intersegment eliminations (1,324) (1,158) (1,513) ------- -------- ------- Total $ 5,436 $ 4,363 $ 4,866 ======= ======= ======= COST OF SALES: Petrochemicals segment $ 4,275 $ 3,132 $ 3,151 Polymers segment 1,893 1,793 2,143 Intersegment eliminations (1,324) (1,158) (1,513) ------- -------- ------- Total $ 4,844 $ 3,767 $ 3,781 ======= ======= ======= OTHER OPERATING EXPENSES: Petrochemicals segment $ 14 $ 12 $ 31 Polymers segment 80 88 137 Unallocated 240 200 155 ------- ------- ------- Total $ 334 $ 300 $ 323 ======= ======= ======= OPERATING INCOME: Petrochemicals segment $ 447 $ 319 $ 684 Polymers segment 51 177 233 Unallocated (336) (214) (197) ------- ------- ------- Total $ 162 $ 282 $ 720 ======= ======= ======= PETROCHEMICALS SEGMENT REVENUES--Revenues of $4.7 billion in 1999 increased 37% from $3.5 billion in 1998. The increase was due to both higher average sales prices and higher sales volumes during 1999. As a result of rapidly rising prices throughout 1999, which reflected stronger demand as well as increases in the underlying cost of raw materials, average sales prices for 1999 were about 20% higher than average sales prices for 1998. Sales volumes increased about 13% during 1999, reflecting a full year of the Occidental Contributed Business. Revenues of $3.5 billion in 1998 decreased 10% from combined sales revenues of $3.9 billion in 1997. The decrease was due to significantly lower sales prices, partly offset by higher sales volumes. Average sales prices in 1998 were approximately 50% lower than average 1997 sales prices primarily due to increased industry capacity and downward pressure on sales prices as a result of the lower cost of raw materials. Sales volumes increased about 73% primarily as a result of the addition of the Occidental Contributed Business in mid-May 1998. OPERATING INCOME--Operating income of $447 million in 1999 increased 40% compared to $319 million in 1998, while gross margin as a percent of sales was flat. The benefit from increased sales volumes was only partly offset by the effects of production unit outages in 1999. During 1999, one of Equistar's two Channelview olefins units, 43 with an annual ethylene capacity of 1.9 billion pounds, was shut down from April 1, 1999 to May 23, 1999 to repair a compressor. Gross margin percentages were flat as higher sales prices kept pace with higher raw material costs. The 1999 increase in sales volumes was primarily due to inclusion of a full year of operations of the Occidental Contributed Business, which was added in mid-May 1998. Operating income of $319 million in 1998 decreased 53% from a combined $684 million in 1997, while gross margin as a % of sales decreased to 10% in 1998 from 18% in 1997. The decrease in operating income primarily reflected lower margins partly offset by higher sales volumes. The lower margins were due to lower sales prices, which decreased more than raw material costs, and slightly higher fixed costs. The increased sales volumes primarily resulted from the addition of the Occidental Contributed Business. POLYMERS SEGMENT REVENUES--Revenues of $2.0 billion in 1999 decreased slightly compared to revenues of $2.1 billion in 1998 primarily due to lower sales volumes. Sales volumes declined due to the shut down of less efficient HDPE and other polymer product capacity, plant maintenance and the sale of the concentrates and compounds business in 1999. Industry sales prices began decreasing during the fourth quarter 1997, continued in a downward trend throughout 1998, and increased rapidly during 1999 as raw material costs increased. Revenues of $2.1 billion in 1998 decreased 18% from a combined $2.5 billion in 1997. The decrease was primarily the result of decreases in industry sales prices due to excess industry supply and lower raw material costs, partly offset by higher sales volumes. OPERATING INCOME--Operating income of $51 million for 1999 decreased 71% compared to $177 million in 1998. The decrease was primarily due to substantially lower margins in 1999 compared to 1998 as raw material cost increases outpaced sales price increases. Gross margin as a percent of sales decreased to 6% in 1999 from 13% in 1998, reflecting the lower product margins. Operating income of $177 million in 1998 decreased 24% from a combined $233 million in 1997. The decrease was a result of lower product margins in 1998. Polymer sales prices decreased throughout 1998, but were partially offset by lower raw material costs. Gross margin as a percent of sales decreased to 13% in 1998 from 15% in 1997. UNALLOCATED The following discusses expenses that were not allocated to the petrochemicals and polymers segments. OTHER OPERATING EXPENSES--This caption includes selling, general and administrative expenses, research and development expense, and amortization of goodwill and other intangibles. Unallocated expenses were $240 million in 1999, $200 million in 1998 and a combined $155 million in 1997. The increase from 1997 to 1998 is offset by decreases in the expenses allocated to the segments. The increase from 1998 to 1999 was primarily due to higher compensation and employee benefit expenses and costs associated with Year 2000 preventive measures. RESTRUCTURING AND OTHER UNUSUAL CHARGES--Restructuring and other unusual charges were $96 million in 1999, $14 million in 1998, and a combined $42 million in 1997. During the fourth quarter 1999, Equistar recorded a pretax charge of $96 million associated with a decision to shut down certain polymer reactors and severance costs related to these shutdowns and consolidation of certain administrative functions between Lyondell and Equistar. In line with the Company's strategy to invest only in businesses that have the potential to be in the top quartile of profit margin performance, the decision to shut down the polymer reactors was based on their high production cost, current market conditions in the polyethylene industry and Equistar's flexibility to utilize more efficient reactors to meet customer requirements. Approximately $72 million of the total charge is an adjustment of the asset carrying values of the reactors. The remaining $24 million represents severance and other employee- related costs for approximately 500 employee positions that are being eliminated. Equistar expects that the severance payments will be made in 2000. The eliminated positions, primarily administrative functions, resulted from opportunities to share such services between Lyondell and Equistar and, to a lesser extent, positions associated with the shut down polymer reactors. Equistar incurred restructuring charges related to the initial merger and integration of the businesses contributed by Lyondell and Millennium upon the formation of Equistar and with the 44 addition of the Occidental Contributed Business. Equistar recorded $42 million of restructuring charges in December 1997 and $14 million in 1998. INTEREST EXPENSE, NET AND OTHER INCOME, NET--Net interest expense was $176 million in 1999, $139 million in 1998 and a combined $124 million in 1997. Interest expense increased from 1997 to 1998 and 1999 due to higher levels of debt as a result of the addition of the Occidental Contributed Business in mid- May 1998. Interest expense also increased from 1998 to 1999 due to the February 1999 refinancing of $900 million of bank debt with senior unsecured notes, which carried a higher fixed rate of interest. Other income of $46 million in 1999 primarily consisted of net gains on asset sales, including the sale of the concentrates and compounds business in April 1999. LYONDELL-CITGO REFINING LP REFINING SEGMENT The following table sets forth, in thousands of barrels per day, sales volumes for LCR's refined products and processing rates at the Refinery for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31 ------------------------------------------------------------------ 1999 1998 1997 ------------------ ------------------ ------------------ REFINED PRODUCTS SALES VOLUMES: Gasoline 118 121 111 Diesel and heating oil 68 79 68 Jet fuel 18 17 17 Aromatics 10 10 11 Other refined products 104 103 93 ------------------ ------------------ ------------------ Total refined products volumes 318 330 300 ================== ================== ================== Crude processing rates: Crude Supply Agreement - coked 182 223 203 Other heavy crude oil - coked 14 19 7 Other crude oil 43 18 14 ------------------ ------------------ ------------------ Total crude processing rates 239 260 224 ================== ================== ==================
REVENUES--Revenues for LCR, including intersegment sales, were $2.6 billion in 1999, $2.1 billion in 1998 and $2.7 billion in 1997. The increase in 1999 compared to 1998 is due to higher prices partly offset by lower volumes. Prices of refined products increased in 1999 as crude oil prices escalated. The lower sales volumes and processing rates in 1999 primarily reflect lower allocations and deliveries of extra heavy Venezuelan crude oil by PDVSA Oil and, to a lesser extent, the effect of second quarter 1999 production unit outages. The decrease in revenues in 1998 versus 1997 primarily resulted from lower refined products prices, which declined as a result of lower crude oil prices. These decreases were partially offset by higher sales volumes as production levels increased, reflecting a full year's benefit from the Upgrade Project. OPERATING INCOME--LCR's operating income was $67 million in 1999, $213 million in 1998 and $181 million in 1997. The decrease in 1999 from 1998 primarily reflected reduced processing of extra heavy crude oil as a result of lower allocations and deliveries and a less favorable mix of extra heavy Venezuelan crude oil received from PDVSA Oil, partially offset by increased processing of spot crude. Margins on the crude oil purchased in the spot market were also lower compared to 1998. The 1999 operating results were also negatively affected by costs and lower operating rates related to outages of a coker unit and a fluid catalytic cracker unit during the second quarter 1999. The 1999 and 1998 periods included pretax charges of $6 million and $10 million, respectively, associated with LCR's renegotiated labor agreement. The increase in 1998 versus 1997 reflected the benefits of the Upgrade Project, which resulted in higher average margins as higher volumes of extra heavy crude oil were processed in the coking mode. The Upgrade Project was completed in the first quarter 1997 and, initially, higher costs were incurred due to normal operational start-up activities, during which the Refinery did not operate at peak rates. Cost savings 45 resulting from improved operational efficiency in 1998 were partly offset by higher depreciation expense attributable to the Upgrade Project. INTEREST EXPENSE--LCR's net interest expense was $44 million in 1999, $43 million in 1998, and $35 million in 1997. Interest expense on debt related to the Upgrade Project was capitalized through its completion, including the first quarter of 1997. FOURTH QUARTER 1999 VERSUS THIRD QUARTER 1999 LCR had pretax income of $26 million in the fourth quarter 1999 compared to $21 million in the third quarter 1999. The increase in earnings was due to a $12 million insurance recovery partly offset by a $6 million unusual charge related to the renegotiated labor agreement. The insurance recovery related to the second quarter 1999 production unit outages. Improvement in lubes and aromatics margins was offset by lower processing rates of extra heavy crude oil under the Crude Supply Agreement with PDVSA Oil. LCR's total crude oil processing rates averaged 259,000 barrels per day in the fourth quarter 1999, compared to 241,000 barrels per day in the third quarter 1999. The increase in total rates was due to higher volumes of crude oil purchased in the spot market. FINANCIAL CONDITION OPERATING ACTIVITIES--Lyondell's cash provided by operating activities totaled $300 million in 1999 compared to $263 million in 1998. Operating cash flow was negatively affected in both 1999 and 1998 by an increase in working capital. The 1999 increase was primarily due to a $124 million increase in receivables. Receivables increased due to an $84 million decrease in the amount of receivables sold in 1999 versus 1998 under a 1998 receivables purchase agreement and a 14% increase in fourth quarter 1999 sales over fourth quarter 1998. The fourth quarter 1999 sales increase reflected higher volumes as well as higher co-product prices. Operating cash flow in 1999 benefited from customer advances and tax refunds received. Higher working capital in the 1998 period reflected the payment of accounts payable retained by Lyondell after the December 1997 formation of Equistar. INVESTING ACTIVITIES--Lyondell's capital expenditures were $131 million in 1999, while joint venture capital expenditures were $157 million for Equistar, $56 million for LCR and $16 million for LMC. Lyondell's pro rata share of the joint ventures' capital expenditures was $109 million for a total of $240 million. This compares to $196 million in 1998, which included only five months of the intermediate chemicals and derivatives business. The 2000 capital budget is $207 million, consisting of $106 million for Lyondell and $101 million for Lyondell's pro rata share of the joint ventures' budgeted capital expenditures. Distributions from affiliates in excess of their earnings for 1999 were $134 million, including $52 million from Equistar and $78 million from LCR. Lyondell loaned $35 million to LCR for capital, maintenance and environmental projects in 1999 and contributed $17 million to LMC to fund first quarter 1999 turnaround expenditures and working capital requirements. Additionally, Lyondell converted $46 million of its note receivable from LCR to an equity investment in LCR effective December 31, 1999. FINANCING ACTIVITIES--In May 1999, Lyondell amended its $7 billion Credit Facility, which was put in place in July 1998 primarily to fund the ARCO Chemical Acquisition. The Credit Facility amendments provided the lenders with additional collateral, re-priced the existing loans to reflect then market rates and revised certain financial covenants. Also in May 1999, Lyondell issued 40.25 million shares of common stock, receiving net proceeds of $736 million. Lyondell also issued $500 million of 10.875% senior subordinated notes due 2009, $1.0 billion of 9.875% senior secured notes due 2007, and $900 million of 9.625% senior secured notes due 2007. Lyondell borrowed additional amounts under the amended Credit Facility through its new $850 million, seven-year Term Loan E and new $150 million Term Loan F, maturing December 31, 2003. Term Loan E bears interest at LIBOR plus 3.875%, and Term Loan F bears interest at LIBOR plus 3.5%. Lyondell used the proceeds to retire the $1.25 billion principal amount of Term Loan C, maturing June 30, 1999, and the $2 billion principal amount of Term Loan D, maturing June 30, 2000, and to partially repay principal amounts outstanding under Term Loans A and B under the Credit Facility maturing June 30, 2003 and June 30, 2005, respectively. Unamortized debt issuance costs and 46 amendment fees of $35 million after tax were written off and reported as an extraordinary loss on early extinguishment of debt in 1999. Lyondell paid regular quarterly dividends of $.225 per share of common stock in 1999 for a total of $97 million. In February 1999, Equistar completed an offering of senior unsecured notes in the principal amount of $900 million. The proceeds were primarily used to refinance existing indebtedness of Equistar. LIQUIDITY AND CAPITAL RESOURCES--At December 31, 1999, Lyondell had cash on hand of $307 million and $500 million available under its revolving Credit Facility that extends until July 2003. Current maturities of long-term debt were $225 million. Lyondell expects that net proceeds of approximately $2 billion from the sale of assets to Bayer will be used to reduce Lyondell's variable-rate bank debt of $3.2 billion outstanding at December 31, 1999. This reduction in debt will strengthen Lyondell's balance sheet and reduce interest expense. Aggregate maturities of long-term debt, without giving effect to the proposed asset sale and debt retirement, are $225 million in 2000; $455 million in 2001; $455 million in 2002; $583 million in 2003; and $461 million in 2004 and $4.1 billion thereafter. The amended Credit Facility and the indentures under which the senior secured notes and the senior subordinated notes were issued contain covenants relating to liens, sale and leaseback transactions, debt incurrence, leverage and interest coverage ratios, dividends and investments, sales of assets and mergers and consolidations. Lyondell was in compliance with all such covenants as of December 31, 1999, however, given the poor current business environment in the petrochemicals industry, Lyondell secured an amendment to certain financial covenants in February 2000 that will increase its financial and operating flexibility in the near term. Additionally, the amendment eliminated a cross-default provision in the Credit Facility that could have been triggered by a default on LCR's $450 million Construction Facility, which is discussed below. LCR has $450 million outstanding under a five-year Construction Facility, which expires in May 2000. Lyondell and CITGO, as partners of LCR, have agreed to pursue a refinancing of the indebtedness, although the final terms have not been determined. Because a bank commitment has not yet been received, the independent accountants of LCR have stated in their audit report that the lack of such a commitment or new agreement raises substantial doubts concerning LCR's ability to continue as a going concern. However, management expects that LCR will be able to refinance or repay the indebtedness. In addition, as an interim measure, LCR may seek to extend the maturity date of the existing indebtedness. Equistar had outstanding debt of $2.3 billion at December 31, 1999. Lyondell remains liable on approximately $563 million of Equistar debt for which Equistar assumed primary responsibility in connection with its formation. At December 31, 1999, Equistar, LCR and LMC had combined outstanding debt of $2.75 billion and combined equity of approximately $4.3 billion. The ability of the joint ventures to distribute cash to Lyondell is reduced by their respective debt service obligations. Furthermore, a default under Equistar's debt instruments involving more than $50 million of indebtedness would constitute a cross-default under Lyondell's Credit Facility. Lyondell believes that conditions will be such that cash balances, cash generated from operating activities and the Bayer transaction (discussed below), and funds from lines of credit will be adequate to meet anticipated future cash requirements for scheduled debt repayments, necessary capital expenditures and dividends. RECENT DEVELOPMENTS In November 1999, Lyondell reached a definitive agreement to sell its worldwide polyols business to Bayer for $2.45 billion. Bayer will also receive an ownership interest in certain of Lyondell's U.S. PO operations through formation of a joint venture to produce PO. The Lyondell Board of Directors and the Supervisory Board of Bayer have approved the agreement, and the companies have received regulatory clearance in Europe and the United States. Lyondell expects that the transaction will close on or about April 1, 2000. In addition, as part of the transaction, Lyondell and Bayer agreed to pursue a joint venture for the construction of PO-11, a previously announced worldscale propylene oxide/styrene monomer plant in Europe. The following summary balance sheet and income statement present the unaudited pro forma consolidated financial position of Lyondell as of December 31, 1999 and the pro forma consolidated operating results for the year then ended as if the Bayer transaction had occurred on December 31, 1999 for balance sheet purposes and as of 47 January 1, 1999 for income statement purposes. The pro forma financial statements assume that net proceeds of $2 billion were used to retire debt in accordance with the provisions of Lyondell's credit facility and debt covenants. PRO FORMA MILLIONS OF DOLLARS 1999 - ------------------- ---------- BALANCE SHEET Total current assets $ 1,726 Property, plant and equipment, net 2,507 Investments and long-term receivables 1,746 Goodwill, net 1,195 Deferred charges and other assets 640 ---------- Total assets $ 7,814 ========== Current maturities of long-term debt $ 211 Other current liabilities 1,134 Long-term debt, less current maturities 4,010 Other liabilities and deferred credits 393 Deferred income taxes 573 Minority interest 191 Stockholders' equity 1,302 ---------- Total liabilities and stockholders' equity $ 7,814 ========== STATEMENT OF INCOME Sales and other operating revenues $ 2,864 Operating income 308 Income from equity investments 76 Interest expense, net 394 Net loss from continuing operations (8) Basic and diluted loss per share from continuing operations $ (.08) The unaudited pro forma data presented above are not necessarily indicative of the results of operations of Lyondell that would have occurred had such transactions actually been consummated as of the indicated dates nor are they necessarily indicative of future results. The pro forma financial statements also make certain assumptions regarding the final agreements related to the transaction, some of which have not been concluded to date. The final agreements could yield data that differ from the financial information presented above. However, such changes are not expected to be material. CURRENT BUSINESS OUTLOOK In the near term, Lyondell expects continued stable volume growth for the intermediate chemicals and derivatives segment, as demand growth, aided by a strong recovery in Asia, absorbs new industry PO capacity. However, the new capacity will continue to put pressure on prices and margins. Strong demand for products in the petrochemicals and polymers segments continues to benefit Equistar's operations. A resurgence of raw material cost increases early in 2000 has negatively affected product margins in all three business segments. Meanwhile, both Lyondell and Equistar are taking aggressive actions to further reduce costs and increase cash flow. Reduced allocations of extra heavy Venezuelan crude oil to LCR are ongoing and are expected to continue to negatively impact LCR's operating results. However, some relief is anticipated in the second quarter 2000 when OPEC is expected to increase production quotas. Over the longer term, Lyondell expects continued consolidation in the chemical industry, creating fewer but stronger competitors. Industry forecasts project a continuing difficult business environment due to industry capacity additions, primarily in the petrochemicals and polymers segments. This new capacity is expected to put pressure on product margins beginning in late 2000 until demand growth absorbs the new capacity. 48 Lyondell has participated in the consolidation trend in the industry with the formation of Equistar and the subsequent acquisition of ARCO Chemical. Management's current priority is to pay down the acquisition-related debt, and thus improve Lyondell's financial flexibility. To accomplish this, it will focus on actively managing its current portfolio of assets and maximizing earnings and cash flow. While Lyondell does not control raw material costs or general market conditions, management plans to maximize earnings and cash flow by focusing on the things that it can directly influence such as continuing to reduce working capital, achieving cost reductions and employing a disciplined capital program. YEAR 2000 Lyondell did not experience any disruptions of its operations as a result of either internal or third party Year 2000 problems. Year 2000 spending by Lyondell, Equistar and LCR for the replacement of both business and manufacturing systems is summarized as follows: MILLIONS OF DOLLARS LYONDELL EQUISTAR LCR - ------------------- -------- -------- -------- Total spending $ 12 $ 8 $ 3 ======== ======== ======== Lyondell share of spending $ 12 $ 3 $ 2 ======== ======== ======== Spending for all three organizations totaled $23 million, of which Lyondell's share was $17 million. Spending was funded by cash generated from operations. Approximately 13% of the total spending by all three organizations qualified for capitalization. EUROPEAN MONETARY UNION On January 1, 1999, the euro became the official currency for the eleven member countries of the European Union (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain) that are participating in monetary union. On that date, the national currencies of the participating countries ceased to exist as independent currencies and continued only as denominations of the euro. The euro conversion rates for each of the former national currencies were irrevocably fixed on January 1, 1999. Euro banknotes and coins will be introduced on January 1, 2002 and the former national currency banknotes and coins will be withdrawn by July 1, 2002 at the latest. While Lyondell converted its systems to invoice customers in euros beginning January 1, 1999, due to Year 2000 and other priorities, the conversion of other business and financial systems did not begin until the first quarter of 2000. It is anticipated that the conversion of most of these other business and financial systems to the euro will be completed by January 1, 2002, the deadline for system conversion. Based upon the assessments completed to date, European monetary union has not had, and is not expected to have, a material impact on Lyondell's consolidated financial statements. Lyondell's European-based revenues are approximately $1.0 billion on an annual basis. ENVIRONMENTAL MATTERS Various environmental laws and regulations impose substantial requirements upon the operations of Lyondell. Lyondell's policy is to be in compliance with such laws and regulations, which include, among others, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as amended, RCRA and the Clean Air Act Amendments. Lyondell does not specifically track all recurring costs associated with managing hazardous substances and pollution in ongoing operations. Such costs are included in cost of sales. Lyondell, its subsidiaries and its joint ventures also make capital expenditures to comply with environmental regulations. Such capital expenditures totaled, in the aggregate, approximately $21 million, $22 million and $13 million for 1999, 1998 and 1997, respectively. Lyondell estimates that such capital expenditures will total approximately $15 million in 2000. All such expenditures are funded by cash generated from operations. 49 The eight-county Houston/Galveston region has been designated a severe non- attainment area for ozone by the EPA. This could result in increased capital investment and higher operating costs for Equistar, Lyondell, and LCR during the next several years. Additionally, the Clean Air Act specified certain emissions standards for vehicles beginning in the 1994 model year and required the EPA to study whether further emissions reduction standards for vehicles were necessary. These new standards were finalized in 1999 and will require refiners to produce a low sulfur gasoline by 2004 with some allowances for a conditional phase-in period that could extend final compliance until 2006. This rule could result in increased capital investment and higher operating costs for LCR. Equistar's olefins fuel business may also be impacted. Lyondell is also subject to certain assessment and remedial actions at its own plant sites under RCRA and at CERCLA sites. The liability under RCRA and various state and foreign government regulations primarily relates to the LCR Refinery, six current Lyondell plant sites and two former plant sites. Under CERCLA, the liability primarily relates to three federal sites. Lyondell is also involved in administrative proceedings or lawsuits relating to a minimal number of other CERCLA sites. Lyondell estimates, based upon currently available information, that potential loss contingencies associated with the latter CERCLA sites, individually and in the aggregate, are not significant. In addition, Lyondell has negotiated an order with the TNRCC for assessment and remediation of groundwater and soil contamination at the LCR Refinery. As of December 31, 1999, Lyondell's environmental liability for future assessment and remediation costs at the above-mentioned sites totaled $37 million. The liabilities per site range from less than $1 million to $13 million and are expected to be incurred over the next two to seven years. Lyondell spent $8 million, $8 million and $1 million in 1999, 1998 and 1997, respectively, relating to environmental remediation matters. Lyondell estimates that expenditures will total approximately $8 million in 2000. In the opinion of management, there is currently no material range of loss in excess of the amount recorded for these sites. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in other CERCLA, RCRA, TNRCC or other comparable state or foreign law investigations, could require Lyondell to reassess its potential exposure related to environmental matters. ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. Subsequently, the FASB delayed the effective date by one year. The statement is effective for the Company's calendar year 2001 with early adoption permitted. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending upon whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are impacted by the hedged item. The ineffective portion of all hedges will be recognized in current-period earnings. Lyondell, Equistar and LCR are currently evaluating the effect SFAS No. 133 implementation will have on their financial statements. FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report, including those set forth in "Item 1. Business and Properties", this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations as well as those set forth in "Item 7a. Disclosure of Market Risk," are "forward-looking statements" within the meaning of the federal securities laws. Although Lyondell believes the expectations reflected in such forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and Lyondell can give no assurance that such expectations will prove to have been correct. Lyondell's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the cyclical nature of the chemical and refining industries, uncertainties associated with the United States and worldwide economies, current and potential governmental regulatory actions in the United States and in other countries, substantial chemical and refinery capacity additions resulting in oversupply and declining prices and margins, raw material costs or supply arrangements, Lyondell's ability to implement cost reductions, and operating interruptions (including leaks, 50 explosions, fires, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, spills and releases and other environmental risks). Many of such factors are beyond Lyondell's or its joint ventures' ability to control or predict. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. All forward-looking statements in this Form 10-K are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report. ITEM 7A. DISCLOSURE OF MARKET RISK COMMODITY PRICE RISK A substantial portion of Lyondell's products and feedstocks, as well as those of Equistar, LCR and Lyondell Methanol, are commodities whose prices fluctuate as market supply/demand fundamentals change. Accordingly, product margins and the level of Lyondell's profitability tend to fluctuate with changes in the business cycle. Lyondell tries to protect against such instability through various business strategies. These include increasing the olefins plants' feedstock flexibility, entering into multi-year processing and sales agreements, moving downstream into derivatives products whose pricing is more stable, and the use of the "deemed margin" contract at LCR. Lyondell has not used derivative instruments for commodity price hedging purposes. During 1999, Equistar entered into over-the-counter "derivatives" and price collar agreements for crude oil to help manage its exposure to commodity price risk with respect to crude-oil related raw material purchases. As of December 31, 1999, the outstanding over-the-counter "derivatives" and collar agreements covered 2.4 million and 1.5 million barrels, respectively, matured in January 2000, and covered approximately half of Equistar's crude-oil related raw material requirements for that period. Equistar does not engage in any derivatives trading activities. Assuming a hypothetical 15% decrease in crude oil prices from those in effect at year end, the loss in earnings for the combined derivatives contracts would not be significant. Sensitivity analysis was used for this purpose. The quantitative information about market risk is necessarily limited because it does not take into account the effects of the underlying operating transactions. FOREIGN EXCHANGE RISK Foreign exchange exposures result from cash flows between U.S. and foreign operations and transactions denominated in currencies other than the local currency of a foreign operating entity. Lyondell uses foreign currency swap and forward contracts to minimize the exposure related to net monetary exposures on the balance sheet and anticipatory cash flows. Although Lyondell uses these types of contracts to reduce foreign exchange exposures with respect to revenues, capital commitments and other expenses denominated in foreign currencies, there can be no assurance that such hedging techniques will protect Lyondell's reported results against exchange rate fluctuations or that Lyondell will not incur material losses on such contracts. At December 31, 1998, Lyondell had foreign currency contracts outstanding in the notional amount of $205 million, principally swap contracts hedging the Netherlands guilder. At December 31, 1999, Lyondell had one forward contract outstanding in the notional amount of $3 million, hedging the euro. Assuming a hypothetical 10% unfavorable change in the euro exchange rate from that in effect at year end, the increase in foreign exchange loss on this contract was not material. Sensitivity analysis was used for this purpose. The quantitative information about market risk is necessarily limited because it does not take into account the effects of the underlying operating transactions. INTEREST RATE RISK Lyondell is exposed to interest rate risk with respect to variable-rate debt. In May 1999, Lyondell issued 40.25 million shares of common stock, receiving net proceeds of $736 million. Lyondell also issued $2.4 billion of fixed-rate debt. Lyondell used the proceeds to reduce variable-rate debt from $6.5 billion outstanding at December 31, 1998 to $3.2 billion outstanding at December 31, 1999, thereby reducing its exposure to interest rate risk. Assuming a hypothetical 10% increase in interest rates from those in effect at year end, the increase in annual interest expense 51 on the variable-rate debt would be approximately $32 million. Sensitivity analysis was used for the purpose of this analysis. Lyondell expects to receive net proceeds of $2 billion from the sale of assets to Bayer in the first half of 2000, which will be used to further reduce its variable-rate bank debt. At December 31, 1998, Lyondell had treasury-rate lock contracts outstanding in the notional amount of $1 billion. These were entered into during 1998 to mitigate interest rate exposure on Lyondell's anticipated future public debt issuance. As a result of the May 1999 refinancing, Lyondell settled the treasury-rate locks during the second quarter 1999 in the amount of $4 million. This amount is being amortized to interest expense over the life of the related debt. At December 31,1999, Equistar and LCR had variable rate debt of $800 million and $478 million, respectively, excluding the note payable by LCR to Lyondell. Assuming a hypothetical 10% increase in interest rates from those in effect at year end, Lyondell's share of the increase in annual interest expense on the variable-rate debt would not be material. REGULATORY RISK Certain federal and state governmental initiatives in the U.S. have sought either to rescind the oxygenate requirement for reformulated gasoline or to restrict or ban the use of MTBE. Lyondell does not expect the recent proposals to have a significant impact on MTBE margins and volumes in the near term. In Europe, MTBE demand is benefiting from new legislation in the 15-nation European Union, which may offset any potential decline in the U.S. Should it become necessary to reduce MTBE production over the longer term, Lyondell would need to make capital expenditures to convert its MTBE plants to production of alternate gasoline blending components. The profit margins on such alternate gasoline blending components could differ from those historically realized on MTBE. 52 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page ---- LYONDELL CHEMICAL COMPANY Report of Independent Accountants............................. 54 Consolidated Financial Statements: Consolidated Statements of Income.......................... 55 Consolidated Balance Sheets................................ 56 Consolidated Statements of Cash Flows...................... 57 Consolidated Statements of Stockholders' Equity............ 58 Notes to Consolidated Financial Statements................. 59 EQUISTAR CHEMICALS, LP Report of Independent Accountants.............................. 89 Consolidated Financial Statements: Consolidated Statements of Income........................... 90 Consolidated Balance Sheets................................. 91 Consolidated Statements of Cash Flows....................... 92 Consolidated Statements of Partners' Capital................ 93 Notes to Consolidated Financial Statements.................. 94 LYONDELL-CITGO REFINING LP Report of Independent Accountants.............................. 112 Independent Auditors' Report................................... 113 Financial Statements: Statements of Income........................................ 114 Balance Sheets.............................................. 115 Statements of Cash Flows.................................... 116 Statements of Partners' Capital............................. 117 Notes to Financial Statements............................... 118 53 LYONDELL CHEMICAL COMPANY REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Lyondell Chemical Company In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Lyondell Chemical Company and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Houston, Texas February 18, 2000 54 LYONDELL CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31 -------------------------------------------------------------------- MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA 1999 1998 1997 - ----------------------------------------- ------------------ ------------------ ------------------ SALES AND OTHER OPERATING REVENUES: Unrelated parties $3,693 $1,447 $2,346 Related parties -- -- 532 ------------------ ------------------ ------------------ 3,693 1,447 2,878 ------------------ ------------------ ------------------ OPERATING COSTS AND EXPENSES: Cost of sales: Unrelated parties 2,891 1,089 1,827 Related parties -- -- 423 Selling, general and administrative expenses 240 126 186 Research and development expense 58 26 -- Amortization of goodwill and other intangibles 100 41 -- Unusual charges -- 61 16 ------------------ ------------------ ------------------ 3,289 1,343 2,452 ------------------ ------------------ ------------------ Operating income 404 104 426 Interest expense (616) (287) (75) Interest income 27 25 14 Other income (expense), net 5 12 (17) ------------------ ------------------ ------------------ Income (loss) before equity investments, income taxes and extraordinary item (180) (146) 348 ------------------ ------------------ ------------------ INCOME FROM EQUITY INVESTMENTS: Equistar Chemicals, LP 52 119 6 LYONDELL-CITGO Refining LP 23 110 102 Other 1 6 -- ------------------ ------------------ ------------------ 76 235 108 ------------------ ------------------ ------------------ Income (loss) before income taxes and extraordinary item (104) 89 456 Provision for (benefit from) income taxes (24) 37 170 ------------------ ------------------ ------------------ Income (loss) before extraordinary item (80) 52 286 Extraordinary loss on extinguishment of debt, net of income taxes of $19 (35) - - - - ------------------ ------------------ ------------------ NET INCOME (LOSS) $ (115) $ 52 $ 286 ================== ================== ================== BASIC AND DILUTED EARNINGS PER SHARE: Income (loss) before extraordinary item $(.77) $.67 $3.58 Extraordinary loss (.33) - - - - ------------------ ------------------ ------------------ Net income (loss) $(1.10) $.67 $3.58 ================== ================== ==================
See Notes to Consolidated Financial Statements. 55 LYONDELL CHEMICAL COMPANY CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ------------------------------------------- MILLIONS, EXCEPT SHARES AND PAR VALUE DATA 1999 1998 - ------------------------------------------ ------------------ ------------------ ASSETS Current assets: Cash and cash equivalents $ 307 $ 233 Accounts receivable: Trade, net 554 473 Related parties 12 6 Inventories 519 550 Prepaid expenses and other current assets 114 64 Deferred tax assets 380 7 ------------------ ------------------ Total current assets 1,886 1,333 Property, plant and equipment, net 4,291 4,511 Investments and long-term receivables: Investment in Equistar Chemicals, LP 607 660 Receivable from LYONDELL-CITGO Refining LP 219 231 Investment in LYONDELL-CITGO Refining LP 52 84 Other investments and long-term receivables 137 103 Goodwill, net 1,545 1,430 Deferred charges and other assets 761 804 ------------------ ------------------ Total assets $9,498 $9,156 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable: Trade $ 339 $ 309 Related parties 11 1 Current maturities of long-term debt 225 1,603 Other accrued liabilities 446 429 ------------------ ------------------ Total current liabilities 1,021 2,342 Long-term debt, less current maturities 6,046 5,391 Other liabilities and deferred credits 331 294 Deferred income taxes 891 339 Commitments and contingencies Minority interest 202 216 Stockholders' equity: Preferred stock, $.01 par value, 80,000,000 shares authorized, none outstanding -- -- Common stock, $1.00 par value, 250,000,000 shares authorized, 120,250,000 and 80,000,000 issued, respectively 120 80 Additional paid-in capital 854 158 Retained earnings 172 387 Accumulated other comprehensive income (loss) (64) 32 Treasury stock, at cost, 2,678,976 and 2,978,203 shares, respectively (75) (83) ------------------ ------------------ Total stockholders' equity 1,007 574 ------------------ ------------------ Total liabilities and stockholders' equity $9,498 $9,156 ================== ==================
See Notes to Consolidated Financial Statements. 56 LYONDELL CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31 ---------------------------------------------------------------------- MILLIONS OF DOLLARS 1999 1998 1997 - ------------------- ------------------ ------------------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (115) $ 52 $ 286 Adjustments to reconcile net income (loss) to net cash provided by operating activities, net of the effects of purchase accounting and deconsolidation of affiliates: Depreciation and amortization 330 138 84 Unusual charges -- 61 -- Extraordinary item 35 -- -- Deferred income taxes 36 76 43 (Increase) decrease in accounts receivable (124) 93 (64) Decrease (increase) in inventories 15 (15) (37) Increase (decrease) in accounts payable 52 (148) (44) Net change in other working capital accounts (11) 24 (2) Other, net 82 (18) 3 ------------------ ------------------- ------------------- Net cash provided by operating activities 300 263 269 ------------------ ------------------- ------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of ARCO Chemical Company, net of cash acquired -- (5,869) -- Expenditures for property, plant and equipment (131) (64) (49) Contributions and advances to affiliates (52) (35) (86) Distributions from affiliates in excess of earnings 134 435 72 Deconsolidation of affiliates -- (11) (12) Other 4 -- -- ------------------ ------------------- ------------------- Net cash used in investing activities (45) (5,544) (75) ------------------ ------------------- ------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 3,400 6,500 -- Payment of debt issuance costs (107) (130) -- Repayments of long-term debt (4,122) (715) (112) Issuance of common stock 736 -- -- Net (decrease) increase in short-term debt -- (100) 50 Minority owners' distributions -- -- (16) Repurchase of common stock -- (59) (26) Dividends paid (97) (70) (72) Other 8 -- -- ------------------ ------------------- ------------------- Net cash (used in) provided by financing activities (182) 5,426 (176) ------------------ ------------------- ------------------- Effect of exchange rate changes on cash 1 2 -- ------------------ ------------------- ------------------- INCREASE IN CASH AND CASH EQUIVALENTS 74 147 18 Cash and cash equivalents at beginning of period 233 86 68 ------------------ ------------------- ------------------- Cash and cash equivalents at end of period $ 307 $ 233 $ 86 ================== =================== ===================
See Notes to Consolidated Financial Statements. 57 LYONDELL CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED COMMON STOCK ADDITIONAL OTHER MILLIONS, EXCEPT SHARES AND --------------------- PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE PER SHARE DATA ISSUED TREASURY CAPITAL EARNINGS INCOME (LOSS) INCOME (LOSS) - --------------------------- ------- -------- ------- -------- ------------- ------------- BALANCE, JANUARY 1, 1997 (80,000,000 SHARES ISSUED) $ 80 $ -- $158 $ 193 $ -- $ -- Net income -- -- -- 286 -- 286 Cash dividends ($.90 per share) -- -- -- (72) -- -- Purchase of 1,015,512 treasury shares -- (26) -- -- -- -- ------- ------ ------ ------- ------ ------ Comprehensive income $ 286 ====== BALANCE, DECEMBER 31, 1997 (80,000,000 SHARES ISSUED; 1,015,512 TREASURY SHARES) 80 (26) 158 407 -- $ -- Net income -- -- -- 52 -- 52 Cash dividends ($.90 per share) -- -- -- (70) -- -- Purchase of 2,051,539 -- (59) -- -- -- -- treasury shares Reissuance of 88,848 treasury shares under restricted stock plan -- 2 -- -- -- -- Foreign currency translation, net of tax of $25 -- -- -- -- 32 32 Other -- -- -- (2) -- -- ------- -------- ------ ------- ------ ----- Comprehensive income $ 84 ===== BALANCE, DECEMBER 31, 1998 (80,000,000 SHARES ISSUED; 2,978,203 TREASURY SHARES) 80 (83) 158 387 32 $ -- Net loss -- -- -- (115) -- (115) Cash dividends ($.90 per share) -- -- -- (97) -- -- Issuance of common stock 40 -- 696 -- -- -- Reissuance of 299,227 treasury shares under restricted stock plan -- 8 -- -- -- -- Foreign currency translation, net of tax of $31 -- -- -- -- (96) (96) Other -- -- -- (3) -- -- ------- -------- ------ ------- ------ ----- Comprehensive loss $(211) ===== BALANCE, DECEMBER 31, 1999 (120,250,000 SHARES ISSUED; 2,678,976 TREASURY SHARES) $120 $(75) $854 $ 172 $(64) ======= ======== ====== ======= ======
See Notes to Consolidated Financial Statements. 58 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of the Company and Operations Lyondell Chemical Company ("Lyondell") operates in the (i) intermediate chemicals and derivatives, (ii) petrochemicals, (iii) polymers, (iv) refining and (v) methanol businesses through the operations of the former ARCO Chemical Company ("ARCO Chemical") acquired by Lyondell as of July 28, 1998 (see Note 3), and through Lyondell's joint venture ownership interests in Equistar Chemicals, LP ("Equistar"), LYONDELL-CITGO Refining LP ("LCR") and Lyondell Methanol Company, L.P. ("LMC"). Lyondell is the world's largest producer of propylene oxide ("PO") and a leading worldwide producer and marketer of polyether polyols, propylene glycol, propylene glycol ethers, toluene diisocyanate ("TDI"), styrene monomer ("SM") and methyl tertiary butyl ether ("MTBE"). These operations are reported as the intermediate chemicals and derivatives segment. Lyondell's operations in the petrochemicals and polymers segments are conducted through its joint venture ownership interest in Equistar (see Note 4). Lyondell accounts for its investment in Equistar using the equity method of accounting. Prior to the formation of Equistar on December 1, 1997, Lyondell's assets and operations of the petrochemicals and polymers businesses were fully consolidated in the Lyondell Consolidated Financial Statements. Equistar's petrochemicals segment produces olefins, including ethylene, propylene, butadiene and specialty products; aromatics, including benzene and toluene; oxygenated chemicals, including ethylene oxide and derivatives, MTBE, ethyl alcohol and diethyl ether; and specialty chemicals, including refinery blending stocks. Equistar's polymers segment produces polyolefins, including high density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear-low density polyethylene ("LLDPE") and polypropylene; and performance polymers products, including wire and cable resins and compounds, adhesive resins, and fine powders. Equistar's color concentrates and compounds business, which was part of performance polymers products, was sold effective April 30, 1999. Lyondell's refining segment operations are conducted through its joint venture ownership interest in LCR (see Note 5). LCR's full-conversion Houston, Texas refinery ("Refinery") produces refined petroleum products, include-ing conventional and reformulated gasoline, low sulfur diesel and jet fuel; aromatics, including benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial lubricants, white oils, process oils and base oils; carbon black oil; sulfur; residual oil; petroleum coke fuel; olefins feedstocks; and crude oil resales. LCR sells its principal refined products to Lyondell's joint venture partner in LCR, CITGO Petroleum Corporation ("CITGO"). Lyondell has additional operations conducted through its joint venture ownership interest in LMC, which produces methanol. Effective January 1, 1998, Lyondell began to account for its investment in LMC using the equity method of accounting. Prior to 1998, LMC's assets and operations were fully consolidated in the consolidated financial statements. 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 (subsequently renamed Lyondell Chemical Company in 1998), a Delaware corporation. In January 1989, ARCO completed an initial public offering of approximately 50.1% of Lyondell'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. Lyondell purchased the remaining 383,312 shares of com- 59 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) mon stock held by ARCO after the conversion. As of December 31, 1999 and 1998, ARCO owned no shares of Lyondell common stock. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation--The consolidated financial statements include the accounts of Lyondell and its subsidiaries, including the results of the operations of the business acquired from ARCO Chemical prospectively from August 1, 1998. All significant intercompany transactions have been eliminated in consolidation. Lyondell's joint venture ownership interests in Equistar for 1999, 1998 and December 1997, in LCR for 1999, 1998 and 1997, and in LMC for 1999 and 1998 are accounted for using the equity method of accounting. Additionally, Lyondell's investment in Nihon Oxirane, of which it owns 50%, is accounted for using the equity method of accounting. LMC was fully consolidated in 1997. Equity Method of Accounting--Investments in joint ventures where Lyondell exerts a certain minimum level of management control, but lacks full decision making ability over all major issues, are accounted for using the equity method of accounting. Under those circumstances, this accounting treatment is used even though Lyondell's ownership percentage may exceed 50%. Revenue Recognition--Revenue from product sales is 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. Lyondell's policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution. Lyondell performs periodic evaluations of the relative credit standing of these financial institutions, which are considered in Lyondell's investment strategy. Lyondell has no requirements for compensating balances in a specific amount at a specific point in time. Lyondell does maintain compensating balances for some of its banking services and products. Such balances are maintained on an average basis and are solely at Lyondell's discretion. As a result, none of Lyondell's cash is restricted. Accounts Receivable--Lyondell sells its products primarily to other industrial concerns in the petrochemicals and refining industries. Lyondell performs ongoing credit evaluations of its customers' financial condition, and, in certain circumstances, requires letters of credit from them. Lyondell's allowance for doubtful accounts receivable, which is reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, totaled $9 million and $11 million at December 31, 1999 and 1998, respectively. Property, Plant and Equipment--Property, plant and equipment are recorded at cost. Depreciation of manufacturing facilities and equipment is computed using the straight-line method over the estimated useful lives of the related assets ranging from 5 to 30 years. Upon retirement or sale, Lyondell removes the cost of the asset and the related accumulated depreciation from the accounts and reflects any resulting gain or loss in the Consolidated Statements of Income. Lyondell'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 Lyondell's manufacturing facilities exceeding $5 million are deferred and amortized using the straight-line method, until the next planned turnaround, generally four to six years. 60 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) These costs are maintenance, repair and replacement costs that are necessary to maintain, extend and improve the operating capacity and efficiency rates of the production units. Lyondell amortized $7 million of deferred turnaround maintenance and repair costs for the year ended December 31, 1999. None were amortized in 1998. Goodwill--Goodwill represents the excess of purchase price paid over the value assigned to the net tangible and identifiable intangible assets of a business acquired. Goodwill is amortized over 40 years, the estimated useful life, using the straight-line method. Deferred Charges--Deferred charges are carried at cost and consist primarily of the value assigned to patents and licensed technology, capacity reservation fees and other long-term processing rights and costs and deferred debt issuance costs. These assets are amortized using the straight-line method over their estimated useful lives or the term of the related agreement, if shorter. 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. Minority Interest--Minority interest in 1999 and 1998 primarily represents the interest of third-party investors in a partnership that owns one of Lyondell's two domestic PO/SM plants. Lyondell retains a majority interest in the partnership. The minority interest share of the partnership's income and loss is reported in "Other income (expense), net" in the Consolidated Statements of Income. Exchanges--Inventory exchange transactions, which involve homogeneous 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. 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. Valuation allowances are provided against deferred tax assets which are not likely to be realized in full. Foreign Currency Translation--Where the local currency is the functional currency, the financial statements of international operations are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the average exchange rate for each period for revenues, expenses, gains and losses. Translation adjustments are recorded as a separate component of "Accumulated other comprehensive income (loss)" in the stockholders' equity section of the Consolidated Balance Sheets. Where the U.S. dollar is the functional currency, remeasurement adjustments are recorded as foreign exchange gains and losses in the Consolidated Statements of Income. 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, the 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. Long-Lived Asset Impairment--In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, Lyondell reviews its long-lived assets, including goodwill, for impairment on an exception basis whenever events or changes in circumstances indicate a potential loss in utility. Impairment losses are recognized in the Consolidated Statements of Income. 61 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) Derivatives--Lyondell is currently evaluating the effect that implementing SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, will have on the Consolidated Financial Statements. The statement is effective for Lyondell's calendar year 2001. Reclassifications--Certain previously reported amounts have been restated to conform to classifications adopted in 1999. 3. PURCHASE OF ARCO CHEMICAL COMPANY As of July 28, 1998, Lyondell completed its acquisition of ARCO Chemical. The transaction was financed through a $7 billion Credit Facility (see Note 16). This acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations of the acquired business are included in Lyondell's Consolidated Statements of Income prospectively from August 1, 1998. The acquisition cost of approximately $5.9 billion has been allocated to the assets acquired and liabilities assumed based upon the estimated fair value of such assets and liabilities at the date of acquisition. In connection with the acquisition, Lyondell accrued liabilities for costs associated with the delay of construction of the PO-11 plant, vesting of certain key manager benefits pursuant to change of control provisions, severance costs for the involuntary termination of certain headquarters employees, and relocation costs for moving personnel to Lyondell's Houston headquarters. The liability totaled $255 million at the date of acquisition. During the fourth quarter 1999, Lyondell reduced the liability by $13 million due to an elimination of estimated costs to settle certain obligations related to the PO-11 plant. These costs will not be incurred as a result of the Bayer transaction (see Note 23), and therefore the related liability was reversed and recorded as a reduction of "Selling, general and administrative expenses." Through December 31, 1999, Lyondell had paid and charged approximately $200 million against the liability. Approximately $57 million, or less than 1% of the purchase price, was allocated to purchased in-process research and development. This included three projects valued at $29 million, $18 million and $10 million, respectively, representing two new product applications and one new process technology. Lyondell will continue the activities represented by these projects and the values assigned represent intangibles with no alternative future use. Accordingly, Lyondell wrote off the in-process research and development, recording a nonrecurring charge of $57 million in the third quarter 1998 (see Note 6). The excess of purchase price paid over the estimated fair value of net assets acquired was allocated to goodwill. The amount allocated to goodwill was approximately $1.4 billion. The fair value of the assets acquired and liabilities assumed, net of cash acquired, was as follows: MILLIONS OF DOLLARS - ------------------- Current assets, net of cash acquired $1,133 Property, plant and equipment 4,454 Purchased in-process research and development 57 Goodwill 1,445 Deferred charges and other assets 1,124 Current liabilities (599) Long-term debt (952) Other liabilities and deferred credits (793) ----------- Purchase price, net of cash acquired $5,869 ========== During 1999, Lyondell obtained the additional information needed to complete its review of the deferred tax effects of purchase accounting. This additional information resulted in an increase in goodwill by $188 million, primarily due to an increase in the long-term deferred income tax liability and a reduction of long-term deferred tax assets. 62 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) The unaudited pro forma combined historical results of Lyondell and ARCO Chemical, giving effect to the acquisition, the Credit Facility drawdown, the formation of Equistar, and the deconsolidation of LMC as of the beginning of 1998 and 1997, respectively, are as follows:
FOR THE YEAR ENDED DECEMBER 31 ------------------------------------------- MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA 1998 1997 - ------------------------------------------ ------------------ ------------------ Sales and other operating revenues $3,553 $3,995 Unusual charges 41 191 Operating income 396 161 Income from equity investments 235 502 Net income 42 27 Basic and diluted earnings per share $.54 $.34
The unaudited pro forma data presented above are not necessarily indicative of the results of operations of Lyondell that would have occurred had such transactions actually been consummated as of the beginning of 1998 and 1997, respectively, nor are they necessarily indicative of future results. 4. EQUITY INTEREST IN EQUISTAR CHEMICALS, LP Equistar was formed on December 1, 1997 as a joint venture between Lyondell and Millennium Chemicals Inc. ("Millennium"), to own and operate the businesses contributed by the partners. Lyondell contributed substantially all of the assets comprising its petrochemicals and polymers business segments, while 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. On May 15, 1998, the ethylene, propylene and ethylene oxide and derivatives businesses of Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation ("Occidental"), were contributed to Equistar ("Occidental Contributed Business"). Equistar is operated as a Delaware limited partnership owned by subsidiaries of Lyondell, Millennium and Occidental ("Partners"). Lyondell currently has a 41% joint venture ownership interest, while Millennium and Occidental each have 29.5%. Prior to the addition of Occidental as a partner on May 15, 1998, Lyondell had a 57% joint venture ownership interest, while Millennium had 43%. Summarized financial information for Equistar is as follows:
DECEMBER 31 --------------------------------------------------- MILLIONS OF DOLLARS 1999 1998 - ------------------ ------------------------ ------------------- BALANCE SHEETS Total current assets $ 1,360 $ 1,127 Property, plant and equipment, net 3,926 4,075 Goodwill, net 1,119 1,151 Deferred charges and other assets 331 312 -------- ------- Total assets $ 6,736 $ 6,665 ======== ======= Current maturities of long-term debt $ 92 $ 150 Other current liabilities 692 485 Capital lease obligations - - 205 Long-term debt, less current maturities 2,169 1,865 Other liabilities and deferred credits 121 75 Partners' capital 3,662 3,885 -------- ------- Total liabilities and partners' capital $ 6,736 $ 6,665 ======== =======
63 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE ONE FOR THE YEAR ENDED DECEMBER 31 MONTH ENDED -------------------------------------------- DECEMBER 31 1999 1998 1997 ------------------ ------------------ ------------------- STATEMENTS OF INCOME Sales and other operating revenues $5,436 $4,363 $ 365 Cost of sales 4,844 3,767 286 Other operating costs and expenses 334 300 22 Restructuring and other unusual charges 96 14 42 ------ ------ ------ Operating income 162 282 15 Interest expense, net 176 139 8 Other income, net (46) -- -- ------ ------ ------ Net income $ 32 $ 143 $ 7 ====== ====== ====== SELECTED CASH FLOW INFORMATION - ------------------------------ Depreciation and amortization $ 300 $ 268 $ 19 Expenditures for property, plant and equipment 157 200 12
Lyondell's "Income from equity investments" in Equistar as presented in the Consolidated Statements of Income consists of Lyondell's share of Equistar's net income and the accretion of the difference between Lyondell's investment and its underlying equity in Equistar's net assets. At the formation of Equistar and adjusted for the addition of the Occidental Contributed Business on May 15, 1998, the difference between Lyondell's investment in Equistar and its underlying equity in Equistar's net assets was approximately $900 million. This difference is being accreted into Lyondell's income over 25 years using the straight-line method. Included in "Sales and other operating revenues" above are $242 million and $89 million in sales to Lyondell for the year ended December 31, 1999 and the five months ended December 31, 1998, respectively. Sales to LCR included above were $263 million, $238 million and $27 million for the years ended December 31, 1999 and 1998 and for the month of December 1997, respectively. In addition, Equistar purchased $6 million and $2 million from Lyondell for the year ended December 31, 1999 and for the five months ended December 31, 1998, respectively, which are included in Equistar's "Cost of sales" above. Purchases from LCR during the years ended December 31, 1999 and 1998 and for the month of December 1997, included in Equistar's "Cost of sales" totaled $190 million, $131 million and $10 million, respectively. Lyondell has various service and cost sharing arrangements with Equistar. Billings by Lyondell to Equistar were approximately $9 million and $3 million for the years ended December 31, 1999 and 1998, respectively. Billings from Equistar to Lyondell were approximately $8 million and $1 million for the years ended December 31, 1999 and 1998, respectively. 5. EQUITY INTEREST IN LYONDELL-CITGO REFINING LP In July 1993, LCR was formed to own and operate Lyondell's refining business. LCR is structured as a Delaware limited partnership owned by subsidiaries of Lyondell and CITGO. LCR completed a major upgrade project at the Refinery during the first quarter of 1997, which enabled the facility to process substantial additional volumes of extra heavy crude oil. As a result of the completion of the upgrade project, effective April 1, 1997, the participation interests changed to reflect CITGO's equity contribution to the upgrade project. The participation interests changed from approximately 86% and 14% for Lyondell and CITGO, respectively, and are currently 58.75% and 41.25% for Lyondell and CITGO, respectively. Net income before depreciation expense for the period is allocated to LCR's owners based upon participation interests. Depreciation expense is allocated to the partners based upon contributed assets. 64 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) Summarized financial information for LCR is as follows:
DECEMBER 31 ------------------------------------------ Millions of dollars 1999 1998 - ------------------ ------------------ ------------------ BALANCE SHEETS Total current assets $ 219 $ 197 Property, plant and equipment, net 1,350 1,370 Deferred charges and other assets 60 70 ------ ------ Total assets $1,629 $1,637 ====== ====== Current maturities of long-term debt $ 450 $ -- Other current liabilities 307 203 Long-term debt, less current maturities 247 717 Other liabilities and deferred credits 69 68 Partners' capital 556 649 ------ ------ Total liabilities and partners' capital $1,629 $1,637 ====== ======
FOR THE YEAR ENDED DECEMBER 31 ------------------------------------------------------------------- 1999 1998 1997 ------------------ ------------------ ------------------ STATEMENTS OF INCOME Sales and other operating revenues $2,571 $2,055 $2,695 Cost of sales 2,432 1,754 2,442 Selling, general and administrative expenses 66 78 72 Unusual charges 6 10 - - ------ ------ ------ Operating income 67 213 181 Interest expense, net 44 43 35 State income taxes (benefit) (1) 1 1 ------ ------ ------ Net income $ 24 $ 169 $ 145 ====== ====== ====== SELECTED CASH FLOW INFORMATION Depreciation and amortization $ 103 $ 100 $ 91 Expenditures for property, plant and equipment 56 61 85
Included in "Sales and other operating revenues" above are $181 million in sales to Lyondell for the eleven months ended November 30, 1997 and sales to Equistar of $190 million, $131 million and $10 million for the years ended December 31, 1999 and 1998 and for the month of December 1997, respectively. In addition, LCR purchased $325 million, primarily product purchases, from Lyondell for the eleven months ended November 30, 1997 which are included in LCR's cost of sales. Purchases from Equistar during the years ended December 31, 1999 and 1998 and for the month of December 1997, included in LCR's cost of sales, totaled $263 million, $238 million and $27 million, respectively. Lyondell has various service and cost sharing arrangements with LCR. Billings by Lyondell to LCR were approximately $3 million, $4 million and $7 million for the years ended December 31, 1999, 1998 and 1997, respectively. Billings from LCR to Lyondell were approximately $1 million, $4 million and $5 million for the years ended December 31, 1999, 1998 and 1997, respectively. In addition, during 1999, 1998 and 1997, LCR made interest payments to Lyondell of approximately $9 million, $9 million and $13 million, respectively, for interest on loans related to the funding of a portion of the upgrade project and certain other capital expenditures at the Refinery. 65 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) LCR has a long-term crude supply agreement ("Crude Supply Agreement") with Lagoven, S.A., now known as PDVSA Petroleo y Gas, S.A. ("PDVSA Oil"), an affiliate of CITGO (see Note 18, Commitments and Contingencies -Crude Supply Agreement). The Crude Supply Agreement incorporates formula prices to be paid by LCR for the crude oil supplied 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; and (iii) a deemed margin, which varies according to the grade of crude oil or other feedstock delivered. Although the Company believes that the Crude Supply Agreement reduces the volatility of LCR's earnings and cash flows, the Crude Supply Agreement also limits LCR's ability to enjoy higher margins during periods when the market price of crude oil is low relative to then current market prices for refined products. In addition, if the actual yields, costs or volumes of the LCR refinery differ substantially from those contemplated by the Crude Supply Agreement, the benefits of this agreement to LCR could be substantially different, and could result in lower earnings and cash flow for LCR. Furthermore, there may be periods during which LCR's costs for crude oil under the Crude Supply Agreement may be higher than might otherwise be available to LCR from other sources. A disparate increase in the price of crude oil relative to the prices for its products, such as was experienced in 1999, has the tendency to make continued performance of its obligations under the Crude Supply Agreement less attractive to PDVSA Oil. 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 Petroleo de Venezuela, S.A., the national oil company of the Republic of Venezuela. Under the terms of the limited partnership agreement of LYONDELL-CITGO Refining LP, CITGO has a one-time option to increase its participation interest in LCR up to 50% by making an additional capital contribution after January 1, 2000, but not later than September 30, 2000. 6. UNUSUAL CHARGES During 1998, Lyondell wrote off $57 million of costs assigned to purchased in- process research and development in connection with the ARCO Chemical acquisition. Additionally, related to the formation of Equistar, Lyondell incurred unusual charges in 1998 and 1997 related to the early termination of incentive compensation plans and executive severance. The unusual charges consisted of the following items for the years ended December 31:
MILLIONS OF DOLLARS 1998 1997 - ------------------- ------------------- ------------------ Purchased in-process research and development $ 57 $ -- Lyondell incentive compensation and executive severance 4 16 ------------------- ----------------- Total unusual charges $ 61 $ 16 =================== =================
66 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) 7. INCOME TAXES The significant components of the provision for (benefit from) income taxes were as follows for the years ended December 31:
MILLIONS OF DOLLARS 1999 1998 1997 - ------------------- ------------------ ------------------ ------------------ Current Federal $ (71) $ (44) $ 114 Foreign 6 6 - - State 5 (1) 13 ------------------ ------------------ ------------------ Total current (60) (39) 127 ------------------ ------------------ ------------------ Deferred Federal 38 69 43 Foreign 10 (1) - - State (12) 8 - - ------------------ ------------------ ------------------ Total deferred 36 76 43 ------------------ ------------------ ------------------ Total provision for (benefit from) income taxes $ (24) $ 37 $ 170 ================== ================== ==================
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 Lyondell's deferred tax liabilities and assets were as follows as of December 31:
MILLIONS OF DOLLARS 1999 1998 - ------------------- ------------------ ------------------ Deferred tax liabilities: Tax over book depreciation and amortization $1,039 $ 452 Investments in partnerships 283 251 Other 55 30 ------------------ ------------------ Total deferred tax liabilities 1,377 733 ------------------ ------------------ Deferred tax assets: Net operating loss carryforwards 419 - - Provisions for benefit plans and estimated expenses 122 236 Federal benefit attributable to foreign taxes 65 100 Federal tax credit carryforwards 26 57 Other 263 30 ------------------ ------------------ Total deferred tax assets 895 423 Deferred tax asset valuation allowance (29) (27) ------------------ ------------------ Net deferred tax assets 866 396 ------------------ ------------------ Net deferred tax liabilities 511 337 Less current portion of: Deferred tax asset (380) (7) Deferred tax liability - - 5 ------------------ ------------------ Long-term deferred income taxes $ 891 $ 339 ================== ==================
Under Internal Revenue Code Sections 338 (g) and (h) (10), Lyondell and ARCO elected to step up the U.S. tax basis of the ARCO Chemical net assets purchased. This has resulted in significantly increased depreciation and amortization deductions for U.S. tax purposes. The domestic and foreign components of income (loss) before income taxes and extraordinary item and a reconciliation of income tax computed at the U.S. federal statutory tax rate to Lyondell's effective tax rate on income (loss) before extraordinary item are as follows: 67 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
MILLIONS OF DOLLARS 1999 1998 1997 - ------------------- ------------------- ------------------ ------------------ Income (loss) before income taxes: Domestic $ (137) $ 103 $ 456 Foreign 33 (14) - - ------------------- ------------------ ------------------ Total $ (104) $ 89 $ 456 =================== ================== ================== PERCENTAGES - ----------- U.S. statutory income tax rate (35.0)% 35.0% 35.0% Increase (reduction) in taxes resulting from: Foreign and U.S. tax effects of foreign operations 7.4 6.9 - - Goodwill and other permanent differences 4.4 State income taxes, net of federal (2.4) 4.9 1.8 Settlement of tax issues - - (5.1) - - Officer compensation - - - - .9 Other, net 2.3 (.2) (.4) ------------------- ------------------ ------------------ Effective income tax rate (23.2)% 41.5% 37.3% =================== ================== ==================
At December 31, 1999, Lyondell had state tax loss carryforwards of $1.3 billion, federal tax loss carryforwards of $776 million and foreign tax loss carryforwards of $307 million. These carryforwards begin expiring in 2003. 8. EXTRAORDINARY ITEM During 1999, Lyondell retired debt in the principal amount of $4.1 billion prior to maturity (see Note 16). Unamortized debt issuance costs and amendment fees of $54 million, less a tax benefit of $19 million, were written off and reported as an extraordinary loss on extinguishment of debt. Previously, these costs and fees had been deferred and were being amortized to interest expense. 9. RELATED PARTY TRANSACTIONS Atlantic Richfield Company--Lyondell purchased 383,312 shares of its common stock held by ARCO after the conversion of the Exchangeable Notes on September 15, 1997 at a price of $25.66 per share. After that transaction, ARCO ceased to be a related party. Sales by Lyondell to ARCO Chemical, an ARCO affiliate and therefore a related party until September 1997, consisting of propylene, MTBE, benzene, ethylene, methanol and other products and services, were $206 million during 1997. 10. ACCOUNTS RECEIVABLE In December 1998, Lyondell entered into a three-year receivables purchase agreement with an independent issuer of receivables-backed commercial paper. Under the terms of the agreement, Lyondell agreed to sell on an ongoing basis and without recourse, designated accounts receivable through December 2001. To maintain the balance of the accounts receivable sold, Lyondell is obligated to sell new receivables as existing receivables are collected. The agreement currently permits the sale of up to $100 million of accounts receivable. The amount of receivables permitted to be sold and actually sold is determined by a formula, which takes into account, among other factors, Lyondell's credit rating. 68 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) As of December 31, 1999 and 1998, Lyondell's gross accounts receivable that had been sold to the purchasers aggregated $76 million and $160 million, respectively. Increases and decreases in the amount sold have been reported as operating cash flows in the Consolidated Statements of Cash Flows. Costs related to the sale are included in "Other income (expense), net" in the Consolidated Statements of Income. 11. INVENTORIES Inventories are stated at the lower of cost or market. In 1999 and 1998, approximately 93% and 94%, respectively, of inventories, excluding materials and supplies, were determined by the last-in, first-out ("LIFO") method. Materials and supplies and other non-LIFO inventories are valued using either the first- in, first-out ("FIFO") or the average cost methods. Inventories were as follows at December 31:
MILLIONS OF DOLLARS 1999 1998 - ------------------- ------------------ ------------------ Finished goods $ 405 $ 459 Work-in-process 31 18 Raw materials 44 34 Materials and supplies 39 39 ------------------ ------------------ Total inventories $ 519 $ 550 ================== ==================
12. PROPERTY, PLANT AND EQUIPMENT, NET The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows at December 31:
MILLIONS OF DOLLARS 1999 1998 - ------------------- ------------------ ------------------ Land $ 35 $ 19 Manufacturing facilities and equipment 4,406 4,470 Construction projects in progress 114 98 ------------------ ------------------ Total property, plant and equipment 4,555 4,587 Less accumulated depreciation 264 76 ------------------ ------------------ Property, plant and equipment, net $4,291 $4,511 ================== ==================
No interest was capitalized during 1999 and 1998. Depreciation expense for 1999, 1998 and 1997 was $199 million, $75 million and $71 million, respectively. 13. DEFERRED CHARGES AND OTHER ASSETS Deferred charges and other assets, net of accumulated amortization, were as follows at December 31:
MILLIONS OF DOLLARS 1999 1998 - ------------------- ------------------ ------------------ Patents and licensed technology $ 204 $ 236 Company owned life insurance 130 184 Contractual rights 123 138 Debt issuance costs, net 132 109 Other 172 137 ------------------ ------------------ Total deferred charges and other assets $ 761 $ 804 ================== ==================
Accumulated amortization was $145 million at December 31, 1999 and $48 million at December 31, 1998. 69 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) 14. OTHER ACCRUED LIABILITIES Other accrued liabilities were as follows at December 31:
MILLIONS OF DOLLARS 1999 1998 - ------------------- ------------------ ------------------ Accrued taxes other than income $ 134 $ 49 Accrued payroll and benefits 115 148 Accrued interest 101 55 Accrued contractual obligations 70 139 Other 26 38 ------------------ ------------------ Total other accrued liabilities $ 446 $ 429 ================== ==================
15. PENSION AND OTHER POSTRETIREMENT BENEFITS Lyondell provides defined pension and postretirement benefit plans to employees. The following table provides a reconciliation of benefit obligations, plan assets and the funded status of the plans:
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS --------------------------------------- --------------------------------------- MILLIONS OF DOLLARS 1999 1998 1999 1998 - ------------------- ---------------- ---------------- ---------------- ---------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation, January 1 $ 487 $ 136 $ 73 $ 5 Service cost 18 7 2 1 Interest cost 32 18 6 2 Actuarial (gain) loss (80) 42 (5) 5 Effect of settlement - - 10 - - - - Purchase of ARCO Chemical - - 303 - - 61 Benefits paid (47) (29) (4) (1) Foreign exchange effects (11) - - - - - - ---------------- ---------------- ---------------- ---------------- Benefit obligation, December 31 399 487 72 73 ---------------- ---------------- ---------------- ---------------- CHANGE IN PLAN ASSETS: Fair value of plan assets, January 1 448 103 - - - - Actual return of plan assets 56 11 - - - - Company contributions 11 12 4 1 Purchase of ARCO Chemical - - 351 - - - - Benefits paid (47) (29) (4) (1) Foreign exchange effects (12) - - - - - - ---------------- ---------------- ---------------- ---------------- Fair value of plan assets, December 31 456 448 - - - - ---------------- ---------------- ---------------- ---------------- Funded status 57 (39) (72) (73) Unrecognized actuarial (gain) loss (27) 70 19 8 Unrecognized prior service cost 6 6 (33) (18) Unrecognized transition obligation 4 5 - - - - ---------------- ---------------- ---------------- ---------------- Net amount recognized $ 40 $ 42 $ (86) $ (83) ================ ================ ================ ================ AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF: Prepaid benefit cost $ 53 $ 54 $ - - $ - - Accrued benefit liability (13) (12) (86) (83) ---------------- ---------------- ---------------- ---------------- Net amount recognized $ 40 $ 42 $ (86) $ (83) ================ ================ ================ ================
70 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) The above table for pension benefits includes foreign pension plans of ARCO Chemical. These plans constituted approximately 25% of the benefit obligation and 21% of the plan assets at December 31, 1999 and 20% of the benefit obligation and 23% of the plan assets at December 31, 1998. The assumptions used in determining the net periodic pension cost and pension obligation for foreign pension plans were based on the economic environment of each applicable country. The benefit obligation and fair value of assets for pension plans with benefit obligations in excess of plan assets were $154 million and $122 million, respectively, as of December 31, 1999 and $180 million and $120 million, respectively, as of December 31, 1998. The accumulated benefit obligation and fair value of assets for pension plans with accumulated benefit obligations in excess of plan assets were $16 million and $4 million, respectively, as of December 31, 1999 and $12 million and $2 million, respectively, as of December 31, 1998. In connection with the formation of Equistar, pension obligations and assets were not contributed by Lyondell to Equistar. The employees transferred to Equistar became fully vested in the Lyondell pension plan effective December 1, 1997 and no longer accrue pension service with Lyondell. However, an accrued postretirement benefit obligation of $12 million associated with Lyondell employees transferred to Equistar was contributed to Equistar by Lyondell. Net periodic pension and other postretirement benefit costs included the following components:
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS -------------------------- ------------------------- MILLIONS OF DOLLARS 1999 1998 1997 1999 1998 1997 - ------------------- -------- ------ ------ ------- ------- ----- Components of net periodic benefit cost: Service cost $ 18 $ 7 $ 6 $ 2 $ 1 $ 3 Interest cost 32 19 10 5 2 2 Expected return of plan assets (40) (24) (8) -- -- -- Prior service cost amortization 1 -- -- (3) (1) -- Actuarial loss amortization 2 1 1 2 -- -- --------------------------- ------------------------- Net periodic benefit cost before settlement 13 3 9 6 2 5 Effect of settlement -- 2 -- -- -- -- --------------------------- ------------------------- Net periodic benefit cost after settlement $ 13 $ 5 $ 9 $ 6 $ 2 $ 5 =========================== =========================
The above net periodic benefit costs included twelve months and five months of expense in 1999 and 1998, respectively, of the business acquired from ARCO Chemical and eleven months of 1997 costs of the business contributed to Equistar on December 1, 1997. Foreign pension plans comprised $2 million and $1 million of net periodic pension cost for 1999 and 1998, respectively. The assumptions used as of December 31, 1999, 1998, and 1997 in determining the domestic net pension cost and net pension liability were as follows:
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS ---------------------------------------------------------- 1999 1998 1997 1999 1998 1997 ----- ----- ----- ------- ------- ------ Weighted-average assumptions as of DECEMBER 31: Discount rate 8.00% 6.75% 7.25% 8.00% 6.75% 7.25% Expected return on plan assets 9.50% 9.50% 9.50% -- -- -- Rate of compensation increase 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%
71 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) For measurement purposes, the assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 1999 was 7.0% for 2000-2001 and 5.0% thereafter. A one-percentage-point increase in assumed health care cost trend rates would increase the postretirement benefit obligation by $1 million, while a one-percentage-point decrease would reduce the obligation by less than $1 million. The effect of a one-percentage-point change would be less than $1 million on the total of the service and interest cost components. Lyondell also maintains voluntary defined contribution savings plans for eligible employees. Contributions to the plans by Lyondell were $10 million, $4 million and $5 million for the years ended December 31, 1999, 1998 and 1997, respectively. 16. LONG-TERM DEBT AND FINANCING ARRANGEMENTS In connection with the ARCO Chemical acquisition, Lyondell executed a bank credit agreement providing for aggregate borrowing of up to $7 billion. As part of the acquisition, Lyondell assumed approximately $870 million of ARCO Chemical debt. Borrowing under the $7 billion Credit Facility of $6.5 billion was used for: (i) the purchase of approximately 97.4 million shares of ARCO Chemical common stock; (ii) repayment of debt, including the $345 million term note payable to Equistar, short-term borrowings of Lyondell and ARCO Chemical and other long-term borrowing of ARCO Chemical; and (iii) payment of certain debt issuance costs. The $7 billion Credit Facility was originally comprised of a five-year, $500 million revolving credit facility and four separate term loans as follows: (a) Term Loan A - $2.0 billion to be amortized over five years; (b) Term Loan B - $1.25 billion to be amortized over seven years; (c) Term Loan C - $1.25 billion with principal maturing on June 30, 1999; and (d) Term Loan D - $2.0 billion with principal maturing on June 30, 2000. All of the term loans were funded on July 28, 1998. No amounts have been funded to date under the revolving credit facility. The Credit Facility was initially collateralized by cash flow streams from Lyondell's three joint ventures and Lyondell's common stock ownership in its subsidiaries. During May 1999, Lyondell amended the $7 billion Credit Facility. The Credit Facility amendments provided the lenders with additional collateral, re-priced the existing loans to reflect then market interest rates and revised certain financial covenants. Also in May 1999, Lyondell issued 40.25 million shares of common stock, receiving net proceeds of $736 million. Lyondell also issued $500 million of senior subordinated notes and $1.9 billion of senior secured notes. Lyondell borrowed additional amounts under the amended Credit Facility through the Credit Facility's new $850 million Term Loan E, maturing June 30, 2006 and the Credit Facility's new $150 million Term Loan F, maturing December 31, 2003. Lyondell used the proceeds to retire the $1.25 billion principal amount of Term Loan C, maturing June 30, 1999, and the $2 billion principal amount of Term Loan D, maturing June 30, 2000, and to partially repay principal amounts outstanding under Term Loans A and B under the Credit Facility. The amended Credit Facility requires Lyondell to issue $470 million of subordinated notes, or more junior securities, by June 2002. The requirement to issue $470 million of subordinated notes will be reduced by $2 for each $1 of equity securities issued by Lyondell, and will be eliminated if Lyondell achieves either (1) a specified total debt to adjusted EBITDA ratio, as defined, or (2) a specified credit rating for its senior unsecured debt. Under the covenant provisions of the amended Credit Facility, Lyondell has agreed to, among other things, (i) maintain certain specified financial ratios and consolidated net worth (as defined in the Credit Facility), (ii) refrain from making certain distributions with respect to Lyondell's capital stock, (iii) refrain from making certain investments, as defined, (iv) refrain from allowing its subsidiaries to incur certain types and amounts of debt, and 72 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (v) use its best efforts to maintain certain ownership interests in its joint ventures and to ensure that the joint ventures maintain certain capital expenditure and debt levels and cash distribution policies. The indentures under which the senior secured notes and the senior subordinated notes were issued contain covenants that restrict the ability of Lyondell and its subsidiaries to (i) incur additional debt or issue subsidiary preferred stock, (ii) increase dividends on Lyondell capital stock, (iii) redeem or repurchase capital stock or repurchase subordinated debt, (iv) engage in transactions with affiliates, except on an arms-length basis, (v) create liens or engage in sale and leaseback transactions, (vi) make some types of investments and sell assets, and (vii) consolidate or merge with, or sell substantially all of its assets to, another person. Some of the covenants will no longer apply if the notes achieve specified credit ratings. The notes are unconditionally guaranteed by a Lyondell subsidiary (see Note 25). Lyondell was in compliance with all such covenants as of December 31, 1999, however, given the poor current business environment in the petrochemicals industry, Lyondell secured an amendment to certain financial covenants in February 2000 that will increase its financial and operating flexibility in the near term. Additionally, the amendment eliminated a cross-default provision in the Credit Facility that could have been triggered by a default on LCR's $450 million Construction Facility, which expires in May 2000. Long-term debt consisted of the following at December 31:
MILLIONS OF DOLLARS 1999 1998 - ------------------- ------------------ ------------------ Term Loan A $1,095 $1,852 Term Loan B 1,156 1,248 Term Loan C -- 1,250 Term Loan D -- 2,000 Term Loan E 844 -- Term Loan F 149 -- Senior Secured Notes, Series A due 2007, 9.625% 900 -- Senior Secured Notes, Series B due 2007, 9.875% 1,000 -- Senior Subordinated Notes due 2009, 10.875% 500 -- Debentures - due 2000, 9.9% 200 200 Debentures - due 2005, 9.375% 100 100 Debentures - due 2010, 10.25% 100 100 Debentures - due 2020, 9.8% 224 224 Other 3 20 ------------------ ------------------ Total long-term debt 6,271 6,994 Less current maturities 225 1,603 ------------------ ------------------ Long-term debt, net $6,046 $5,391 ================== ==================
The term loans currently bear interest at the following variable rates: (i) Term Loan A - LIBOR plus 3.25%; (ii) Term Loan B - LIBOR plus 3.75%; (iii) Term Loan E - LIBOR plus 3.875%; and (iv) Term Loan F - LIBOR plus 3.5%. Lyondell transferred $745 million of long-term debt to Equistar on December 1, 1997 of which $563 million was outstanding at December 31, 1999. Lyondell remains an obligor on the debt. Under certain limited circumstances the debt holders have the right to require repurchase of up to $163 million of the debt. Aggregate maturities of all long-term debt during the next five years are $225 million in 2000, $455 million in 2001, $455 million in 2002, $583 million in 2003, $461 million in 2004, and $4.1 billion thereafter. 73 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) 17. FINANCIAL INSTRUMENTS Lyondell does not buy or sell, or hold or issue financial instruments for speculative trading purposes. Foreign currency swap and forward contracts are used to minimize foreign exchange exposures. Foreign exchange exposures result from cash flows between U.S. and international operations and transactions denominated in currencies other than the local currency of an operating entity. Swap contracts and forward contracts are used to hedge foreign exchange exposures. At December 31, 1999 Lyondell had one forward contract outstanding in the notional amount of $3 million, hedging the euro, maturing in January 2000. The notional amounts of foreign currency contracts outstanding, principally involving the Netherlands guilder, were $205 million at December 31, 1998 with various maturity dates in 1999. Gains and losses, realized and unrealized, on foreign currency forward and swap contracts as well as realized and unrealized gains and losses on the underlying exposures are recognized currently in "Other income (expense), net" in the Consolidated Statements of Income. For the years ended December 31, 1999 and 1998, the results of foreign exchange transactions, including foreign currency derivative instruments, were not significant. During 1998, to mitigate interest rate exposure on its anticipated future public debt issuance, Lyondell entered into treasury-rate lock transactions in the notional amount of $1 billion. As a result of the refinancing, Lyondell settled the treasury locks during the second quarter 1999 in the amount of $4 million. This amount is being amortized to interest expense over the life of the related debt. The carrying value and the estimated fair value of Lyondell's financial instruments as of December 31, 1999 and 1998 are shown as assets (liabilities) in the table below:
1999 1998 ---------------------------------------- ----------------------------------------- CARRYING FAIR CARRYING FAIR Millions of dollars VALUE VALUE VALUE VALUE - ------------------- ------------------ ----------------- ------------------ ----------------- Nonderivatives: Investments and long-term receivables $1,015 $1,015 $1,078 $1,078 Long-term debt (including current maturities) 6,271 6,334 6,994 7,027 Derivatives: Treasury locks -- -- -- (53) Foreign currency forwards -- -- (10) (11) Foreign currency swaps -- -- (1) (1)
All derivative instruments are off-balance-sheet instruments, however net receivable or payable positions related to derivative instruments are carried on the balance sheet. The fair value of all nonderivative 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. Investments and long-term receivables, which consist primarily of equity investments in affiliated companies, were valued using current financial and other available information. Long-term debt, including amounts due within one year, was valued based upon the borrowing rates currently available to Lyondell for debt with terms and average maturities similar to Lyondell's debt portfolio. The fair value of derivative financial instruments represents the amount to be exchanged if the existing contracts were settled at yearend and are based on market quotes. Lyondell is exposed to credit risk related to its financial instruments in the event of nonperformance by the counterparties. Lyondell does not generally require collateral or other security to support these financial 74 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) instruments. The counterparties to these transactions are major institutions deemed creditworthy by Lyondell. Lyondell does not anticipate nonperformance by the counterparties. 18. COMMITMENTS AND CONTINGENCIES Lyondell has commitments, including those related to capital expenditures, all made in the normal course of business. During August 1998, as contemplated at the time of the ARCO Chemical Acquisition, Lyondell announced the delay of construction of a PO plant, known as PO-11, that ARCO Chemical had previously scheduled for startup in late 2001. As part of the delay, Lyondell is negotiating the cancellation of the related lump-sum contract for the engineering, procurement and construction of the PO-11 plant. Lyondell recorded estimated liabilities for penalties and cancellation charges related to the cancellation of the lump-sum contract and related commitments at the time of the acquisition of ARCO Chemical. Based on changes in circumstances, it subsequently revised these estimates and the recorded liability by $13 million (see Note 3). Lyondell is party to a resale agreement and a tolling agreement for toluene diisocyanate ("TDI"). Under these agreements, Lyondell is entitled to all of the TDI output of the supplier's two plants in France, which have a combined rated capacity of approximately 264 million pounds per year. Lyondell is required to purchase a minimum of 216 million pounds of TDI per year for up to 15 years, beginning January 1, 1995. The aggregate purchase price is a combination of plant cost and market price. Lyondell is further obligated to pay additional capacity reservation fees based upon plant output factors. Prior to the formation of Equistar on December 1, 1997, Lyondell was party to various unconditional purchase obligation contracts as a purchaser of product and services. Lyondell's total purchases under those agreements, were $27 million in 1997. Crude Supply Agreement--Under the Crude Supply Agreement, PDVSA Oil is required to sell, and LCR is required to purchase, 230,000 barrels per day of extra heavy crude oil, which constitutes approximately 88% of the Refinery's refining capacity of 260,000 barrels per day of crude oil (see Note 5). In late April 1998, LCR received notification from PDVSA Oil that it would reduce allocations of crude oil on the grounds of announced OPEC production cuts. LCR began receiving reduced allocations of crude oil from PDVSA Oil in August 1998, amounting to 195,000 barrels per day in that month. LCR was advised by PDVSA Oil in May 1999 of a further reduction in the allocations of crude oil supplied under the Crude Supply Agreement to 184,000 barrels per day, effective May 1999. On several occasions since then, PDVSA Oil has further reduced certain crude oil deliveries, although it has made payments in partial compensation for such reductions. PDVSA has announced that it intends to renegotiate the crude supply agreements that it has with all third parties, including LCR. However, they have confirmed that they expect to honor their commitments if a mutually acceptable restructuring of the Crude Supply Agreement is not achieved. The breach or termination of the Crude Supply Agreement would require LCR to purchase all or a portion of its crude oil feedstocks in the merchant market, would subject LCR to significant volatility and price fluctuations and could adversely affect LCR and, therefore, Lyondell. LCR Debt--LCR has $450 million outstanding under a five-year Construction Facility, which expires in May 2000. Lyondell and CITGO, as partners of LCR, have agreed to pursue a refinancing of the indebtedness, although the final terms have not been determined. Because a bank commitment has not yet been received, the independent accountants of LCR have stated in their audit report that the lack of such a commitment or new agreement raises substantial doubt concerning LCR's ability to continue as a going concern. However, management expects that LCR will be able to refinance or repay the indebtedness. In addition, as an interim measure, LCR may seek to extend the maturity date of the existing loan. 75 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) Cross Indemnity Agreement--In connection with the transfer of assets and liabilities from ARCO to Lyondell in 1988, Lyondell agreed to assume certain liabilities arising out of the operation of Lyondell's integrated petrochemicals and refining business prior to July 1, 1988. In connection with the transfer of such liabilities, Lyondell and ARCO entered into an agreement, updated in 1997 ("Revised Cross-Indemnity Agreement"), whereby Lyondell agreed to defend and indemnify ARCO against certain uninsured claims and liabilities which ARCO may incur relating to the operation of Lyondell prior to July 1, 1988, including certain liabilities which may arise out of pending and future lawsuits. For current and future cases related to Lyondell's products and operations, ARCO and Lyondell bear a proportionate share of judgment and settlement costs according to a formula that allocates responsibility based upon years of ownership during the relevant time period. Under the Revised Cross-Indemnity Agreement, Lyondell will assume responsibility for its proportionate share of future costs for waste site matters not covered by ARCO insurance. In connection with the acquisition of ARCO Chemical, Lyondell succeeded, indirectly, to a cross indemnity agreement with ARCO whereby ARCO Chemical indemnified ARCO against certain claims or liabilities that ARCO may incur relating to ARCO's former ownership and operation of the businesses of ARCO Chemical ("Former ARCO Businesses"), including liabilities under laws relating to the protection of the environment and the workplace, and liabilities arising out of certain litigation. As part of the agreement, ARCO indemnified ARCO Chemical with respect to claims or liabilities and other matters of litigation not related to the ARCO Chemical business. Indemnification Arrangements Relating to Equistar--Lyondell, Millennium and Occidental have each agreed to provide certain indemnifications to Equistar with respect to the petrochemicals and polymers businesses contributed by the Partners. In addition, Equistar agreed to assume third party claims that are related to certain pre-closing contingent liabilities that are asserted prior to December 1, 2004 for Lyondell and Millennium, and May 15, 2005 for Occidental, to the extent the aggregate thereof does not exceed $7 million to each Partner, subject to certain terms of the respective asset contribution agreements. As of December 31, 1999 Equistar had expensed approximately $4 million under the $7 million indemnification basket with respect to the business contributed by Lyondell. Environmental--Lyondell's policy is to be in compliance with all applicable environmental laws. Lyondell is subject to extensive environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, Lyondell cannot accurately predict future developments, such as increasingly strict environmental laws and inspection and enforcement policies, as well as higher compliance costs arising therefrom, which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. Lyondell is currently contributing funds to the clean up of one waste site located near Houston, Texas under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as amended and the Superfund Amendments and Reauthorization Act of 1986. Lyondell has also been named, along with several other companies, as a potentially responsible party for another CERCLA site near Houston, Texas. Lyondell is also subject to certain assessment and remedial actions at the Refinery under the Resource Conservation and Recovery Act ("RCRA"). In addition, Lyondell has negotiated an order with the Texas Natural Resource Conservation Commission ("TNRCC") for assessment and remediation of groundwater and soil contamination at the Refinery. As part of the acquisition of ARCO Chemical, Lyondell assumed ARCO Chemical's environmental liability related to potential future remediation costs for known ARCO Chemical sites. The liability under RCRA and various state and foreign government regulations primarily relates to six current plant sites and two former plant sites. Under CERCLA, the liability primarily relates to one federal site. Further, as a result of the acquisition, Lyondell is involved in administrative proceedings or lawsuits relating to a minimal number of other CERCLA sites. Lyondell 76 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) estimates, based upon currently available information, that potential loss contingencies associated with these CERCLA sites, individually and in the aggregate, are not significant. As of December 31, 1999, Lyondell's environmental liability for future assessment and remediation costs at the above-mentioned sites totaled $37 million. The liabilities per site range from less than $1 million to $13 million and are expected to be incurred over the next two to seven years. In the opinion of management, there is currently no material range of loss in excess of the amount recorded for these sites. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in other CERCLA, RCRA, TNRCC or other comparable state or foreign law investigations, could require Lyondell to reassess its potential exposure related to environmental matters. MTBE--Certain federal and state governmental initiatives have sought either to rescind the oxygenate requirement for reformulated gasoline or to restrict or ban the use of MTBE. At the state level, the State of California has initiated action, pursuant to an Executive Order of the Governor and supported by recent legislation, to begin the process of reducing or limiting the use of MTBE by December 31, 2002. Such action, to be effective, would require (i) a waiver of the oxygenate mandate for California, (ii) Congressional action in the form of an amendment to the Clean Air Act or (iii) California refiners to replace MTBE with another oxygenate such as ethanol, a more costly and less widely available additive. At the federal level, a blue ribbon panel appointed by the Environmental Protection Agency issued its report on July 27, 1999. That report recommended, among other things, reducing the use of MTBE in gasoline. The EPA has recently announced its intent to seek legislative changes from Congress to give EPA authority to ban MTBE over a three-year period. Such action would only be granted through amendments to the Clean Air Act. Additionally, the EPA is seeking a ban of MTBE utilizing rulemaking authority contained in the Toxic Substance Control Act. It would take at least three years for such a rule to issue. These initiatives or other governmental actions could result in a significant reduction in Lyondell's MTBE sales. The Company has developed technologies to convert TBA into alternate gasoline blending components should it be necessary to reduce MTBE production in the future. In addition, Lyondell has a take-or-pay contract with ARCO, which contributes significant pretax margin. If legislation is enacted or other governmental action taken, ARCO has indicated that it might attempt to invoke a force majeure provision in the contract in order to reduce the quantities of MTBE it purchases under, or to terminate the contract. Lyondell would vigorously dispute such action. General--Lyondell is involved in various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material adverse effect upon the Lyondell Consolidated Financial Statements. In the opinion of management, any liability arising from the matters discussed in this Note is not expected to have a material adverse effect on the Lyondell Consolidated Financial Statements. However, the adverse resolution in any reporting period of one or more of these matters discussed in this Note could have a material impact on Lyondell's results of operations for that period without giving effect to contribution or indemnification obligations of co- defendants or others, or to the effect of any insurance coverage that may be available to offset the effects of any such award. 19. LEASE COMMITMENTS Lyondell leases various facilities and equipment under noncancelable lease arrangements for varying periods. As of December 31, 1999, future minimum lease payments for years ending December 31, relating to all noncancelable operating leases with lease terms in excess of one year were as follows: 77 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) MILLIONS OF DOLLARS ------------------- 2000 $ 64 2001 54 2002 42 2003 32 2004 31 Thereafter 168 -------- Total minimum lease payments $391 ======== Operating lease net rental expenses for 1999, 1998 and 1997 were $106 million, $39 million and $43 million, respectively. 20. STOCKHOLDERS' EQUITY Common Stock--In May 1999, Lyondell issued 40.25 million shares of common stock at $19 per share. The net proceeds of $736 million were credited to "Common stock" and "Additional paid in capital" in the Consolidated Balance Sheet. Common stock outstanding increased from 77.0 million shares at December 31, 1998 to 117.6 million shares at December 31, 1999. Basic and Diluted Earnings per Share--Basic earnings per share for income (loss) before extraordinary item for the periods presented are computed based upon the weighted average number of shares outstanding for the periods. Diluted earnings per share for income (loss) before extraordinary item include the effect of outstanding stock options issued under the Executive Long-Term Incentive Plan and the Incentive Stock Option Plan. These stock options were antidilutive in 1999. The following earnings (loss) per share ("EPS") data is presented for the years ended December 31:
1999 1998 1997 ------------------------------ ----------------------------- ---------------------- Thousands of shares Shares EPS SHARES EPS SHARES EPS - ------------------ ------------- ----------- ------------- ----------- ------------- ----- Basic 103,115 $(.77) 77,669 $.67 79,796 $3.58 Dilutive effect of options -- -- 30 -- 17 -- Diluted 103,115 $(.77) 77,699 $.67 79,813 $3.58 ============= =========== ============= =========== ============= =====
Treasury Stock--From time to time Lyondell purchases its shares in the open market to issue under its employee compensation and benefits plans, including stock option and restricted stock plans. During 1998, Lyondell purchased 500,000 shares for approximately $10 million to be used for such plans. In addition during 1998, Lyondell completed the stock repurchase program authorized by Lyondell's Board of Directors in September 1997. A total of 2,567,051 shares were purchased for $75 million under this stock repurchase program. For the years ended December 31, 1999 and 1998, respectively, Lyondell reissued, under the Restricted Stock Plan, 299,227 shares and 88,848 shares previously purchased. 1999 Incentive Plan--The 1999 Long-Term Incentive Plan ("1999 LTIP") provides for the grant of awards to employees of Lyondell and its subsidiaries. Awards to employees may be in the form of (i) stock options, (ii) stock appreciation rights, payable in cash or common stock, (iii) restricted grants of common stock or units denominated in common stock, (iv) performance grants denominated in common stock or units denominated in common stock that are subject to the attainment of one or more goals, (v) grants of rights to receive the value of a specified number of shares of common stock (phantom stock), and (vi) a cash payment. Awards of common stock under the 1999 LTIP are generally limited to the lesser of ten million shares or 10% of the number of shares of common stock outstanding at the time of granting of the award. During 1999, Lyondell awarded stock option grants for 1,741,380 shares and grants for 463,123 performance shares under this plan. The weighted-average grant-date fair value of the performance share grants was $17.625 per share. 78 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) Restricted Stock Plan--Under the 1995 Restricted Stock Plan, one million shares of common stock are available for grants and awards to officers and other key management employees. Lyondell grants fixed awards of common stock that are forfeitable and subject to restrictions on transfer. Vesting is contingent on the participant's continuing employment at Lyondell for a period specified in the award. During 1999, Lyondell granted and issued 353,943 shares of restricted stock to officers and employees. During 1998 Lyondell granted and issued 241,223 shares of restricted stock to former employees of ARCO Chemical. The shares vest on various dates through December 15, 2001, depending upon the terms of the individual grants. Employees are entitled to receive dividends on the restricted shares. 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 Lyondell'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% 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% or more of the outstanding shares of common stock, 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 Lyondell as described in the Rights Agreement dated as of December 8, 1995. Stock Options--The following table summarizes activity relating to stock options under the 1999 LTIP. As of December 31, 1999, options covering 1,654,480 shares with a weighted average remaining life of 9 years were outstanding at prices ranging from $11.8125 to $18.125 per share. None were exercisable. AVERAGE NUMBER OPTION PRICE OF SHARES PER SHARE -------------- --------------- Balance, January 1, 1999 -- $ -- Granted 1,741,380 17.78 Cancelled (86,900) 18.13 ------------- Balance, December 31, 1999 1,654,480 17.76 ============= Lyondell'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 this plan. As of December 31, 1999, options covering 610,007 shares were outstanding under the LTI Plan with a weighted average remaining life of 3 years, all of which were exercisable at prices ranging from $18.25 to $26.00 per share. The following summarizes stock option activity for the LTI Plan: AVERAGE NUMBER OPTION PRICE OF SHARES PER SHARE -------------- --------------- Balance, January 1, 1997 743,802 $23.43 Exercised (11,642) 19.15 -------------- Balance, December 31, 1997 732,160 23.50 Exercised (110,325) 22.84 -------------- Balance, December 31, 1998 621,835 23.62 Cancelled (11,828) 24.79 -------------- Balance, December 31, 1999 610,007 23.60 ============== 79 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) Lyondell'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. As of December 31, 1998, options covering 145,191 shares were outstanding at $30.00 per share. These options expired in January 1999. At December 31, 1999, no stock options were outstanding. The following summarizes stock option activity for the ISO Plan: AVERAGE NUMBER OPTION PRICE OF SHARES PER SHARE -------------- --------------- Balance, January 1, 1997 175,804 $29.91 Canceled/forfeited (18,250) 29.68 Exercised (803) 19.44 -------------- Balance, December 31, 1997 156,751 29.99 Canceled/forfeited (11,408) 30.00 Exercised (152) 19.44 -------------- Balance, December 31, 1998 145,191 30.00 -------------- Canceled/forfeited/expired (145,191) 30.00 -------------- Balance, December 31, 1999 -- ============== Employee stock options are accounted for under the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation cost has been recognized in connection with stock option grants under the plans. The pro forma impact on both net income and earnings per share from calculating compensation expense consistent with SFAS No. 123, Accounting for Stock-Based Compensation, in 1999 was not more than $6 million, or $.06 per share. There were no grants in the years ended December 31, 1998 and 1997. The fair value per share of options granted was estimated as of the date of grant using the Black-Scholes option- pricing model and the following assumptions. 1999 -------- Fair value per share of options granted $4.67 Fair value assumptions: Dividend yield 5% Expected volatility 35% Risk-free interest rate 5% Maturity, in years 10 21. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information is summarized as follows for the years ended December 31:
MILLIONS OF DOLLARS 1999 1998 1997 - ------------------ ------------------ ------------------ ------------------ Interest paid $ 570 $ 230 $ 66 ================== ================== ================== Net income taxes (received) paid $ (91) $ 63 $ 125 ================== ================== ==================
Effective December 31, 1999, Lyondell made a noncash capital contribution to LCR by converting $46 million of its note receivable from LCR to a capital investment in LCR. The petrochemicals and polymers businesses contributed by Lyondell 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 80 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) equipment and $745 million of long-term debt, including the current maturities. In addition, Lyondell contributed a $345 million term note payable to Equistar, which was repaid in July 1998. 22. SEGMENT AND RELATED INFORMATION Using the guidelines set forth in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, Lyondell has identified four reportable segments: (i) intermediate chemicals and derivatives; (ii) petrochemicals; (iii) polymers; and (iv) refining. The accounting policies of the segments are the same as those described in "Summary of Significant Accounting Policies" (see Note 2). The methanol segment is not a reportable segment. The reportable segments are described further below: Intermediate Chemicals and Derivatives--This segment consists of the production and marketing of propylene oxide, polyether polyols, propylene glycol, propylene glycol ethers, toluene diisocyanate, styrene monomer and methyl tertiary butyl ether. Petrochemicals--This segment consists of operations in: olefins, including ethylene, propylene, butadiene, butylenes and specialty products; aromatics, including benzene and toluene; methanol; oxygenated chemicals, including ethylene oxide and derivatives, MTBE, ethyl alcohol and diethyl ether; and specialty chemicals, including refinery blending stocks. The petrochemicals business of Equistar for 1999, 1998 and December 1997 is included in this segment. Polymers--This segment consists of operations in: polyolefins, including high density polyethylene, low density polyethylene, linear low density polyethylene and polypropylene; and performance polymers products, including wire and cable resins and compounds, adhesive resins, and fine powders. The polymers business of Equistar for 1999, 1998 and December 1997 is included in this segment. Equistar's color concentrates and compounds business, which was part of performance polymers products, was sold effective April 30, 1999. Refining--This segment, which is comprised of LCR operations, consists of: refined petroleum products, including conventional and reformulated gasoline, low sulfur diesel and jet fuel; aromatics produced at the Refinery, including benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial lubricants, white oils, process oils and base oils; carbon black oil; sulfur; residual oil; petroleum coke fuel; olefins feedstocks; and crude oil resales. No customer accounted for 10% or more of consolidated sales during the years ended December 31, 1999, 1998 or 1997. However, under the terms of the LCR Products Agreement (see Note 5), CITGO purchases substantially all of the refined products of the Refining segment. 81 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) Summarized financial information for Lyondell's reportable segments is shown in the following table. Intersegment sales from the petrochemicals segment to the polymers segment in 1997 include ethylene and propylene produced at Equistar's Channelview facility. Intersegment sales between the petrochemicals and refining segments in 1997 include olefins feedstocks and benzene produced at the Refinery, and gasoline blending stocks and hydrogen produced at Equistar's Channelview facility. Intersegment sales were made at prices based on current market values.
INTERMEDIATE CHEMICALS AND Millions of dollars DERIVATIVES PETROCHEMICALS Polymers Refining Other Total - ------------------ ----------------- ---------------- ----------- ----------- ----------- ----------- 1999 - ---- Sales and other operating revenues $3,693 $3,693 Operating income 404 404 Income from equity investments -- $ 183 $ 21 $ 23 $(151) 76 Total assets 8,557 314 140 271 216 9,498 Capital expenditures 131 -- -- -- -- 131 Depreciation and amortization expense 330 -- -- -- -- 330 1998 - ---- Sales and other operating revenues $1,447 $1,447 Unusual charges 57 $ 4 61 Operating income 108 (4) 104 Income from equity investments -- $ 159 $ 89 $110 (123) 235 Total assets 8,131 297 201 315 212 9,156 Capital expenditures 64 -- -- -- -- 64 Depreciation and amortization expense 138 -- -- -- -- 138 1997 - ---- Sales and other operating revenues: Customers $2,108 $770 $2,878 Intersegment 424 -- $(424) -- Unusual charges -- -- 16 16 Operating income 444 82 (100) 426 Income from equity investments 28 13 $102 (35) 108 Total assets 447 349 300 463 1,559 Capital expenditures 27 13 -- 9 49 Depreciation and amortization expense 50 29 -- 5 84
The following table presents the details of "Income from equity investments" as presented above in the "Other" column for the years ended December 31: 82 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
MILLIONS OF DOLLARS 1999 1998 1997 - ------------------- ------------------ ------------------ ------------------ Equistar items not allocated to petrochemicals and polymers segments: Principally general and administrative expenses and interest expense, net $ (171) $ (129) $ (35) Other income, net 19 -- -- Income from other equity investments 1 6 -- ------------------ ------------------ ------------------ Total--Other $ (151) $ (123) $ (35) ================== ================== ==================
The following "Revenues" by country data is for the year ended December 31, 1999 and for the five months ended December 31, 1998, based upon the location of the use of the product. The "Long-lived assets" by country data is based upon the location of the assets.
REVENUES LONG-LIVED ASSETS ---------------------------------------- ---------------------------------------- MILLIONS OF DOLLARS 1999 1998 1999 1998 - ------------------- ------------------ ----------------- ------------------ ----------------- United States $1,826 $ 724 $2,944 $3,046 Foreign 1,867 723 1,347 1,465 ------------------ ----------------- ------------------ ----------------- Total $3,693 $1,447 $4,291 $4,511 ================== ================= ================== =================
Foreign long-lived assets primarily consist of the net property, plant and equipment of two plants, located in Rotterdam, The Netherlands, and Fos-sur-Mer, France, both of which are part of the intermediate chemicals and derivatives segment. Prior to the purchase of ARCO Chemical as of July 28, 1998, Lyondell had no operations outside the United States and no significant export sales. 23. PENDING ASSET SALE In November 1999, Lyondell reached a definitive agreement to sell its worldwide polyols business to Bayer AG of Germany ("Bayer") for $2.45 billion. Bayer will also receive an ownership interest in certain of Lyondell's U.S. PO operations through formation of a joint venture to produce PO. The Lyondell Board of Directors and the Supervisory Board of Bayer have approved the agreement, and the companies have received regulatory clearance in Europe and the United States. Lyondell expects that the transaction will close on or about April 1, 2000. In addition, as part of the transaction, Lyondell and Bayer agreed to pursue a joint venture for the construction of PO-11, a previously announced worldscale propylene oxide/styrene monomer plant in Europe. Included in the proposed sale to Bayer are Lyondell polyols manufacturing facilities located in South Charleston and Institute, West Virginia; Channelview, Texas; Rieme, Belgium; Fos-sur-Mer, France; Anyer, Indonesia; and Kaohsiung, Taiwan. Also included in the transaction are Lyondell polyols technology operations in Newtown Square, Pennsylvania; South Charleston, West Virginia; Villers St. Paul, France; and Singapore. Lyondell will continue to operate all of the existing Lyondell propylene oxide facilities and will serve as operator of the polyols facilities at Channelview, Texas and Fos-sur-Mer, France. 83 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) 24. UNAUDITED QUARTERLY RESULTS
For the quarter ended ------------------------------------------------------------------------------- Millions of dollars, except per share data March 31 JUNE 30 September 30 December 31 - ------------------------------------------ ------------------ ------------------ ------------------ ------------------ 1999 - ---- Sales and other operating revenues $855 $ 854 $ 976 $1,008 Operating income 129 100 100 75 Income from equity investments 21 8 40 7 Net income (loss) (a) 2 (42) (17) (58) Basic and diluted earnings (loss) per share before extraordinary item (a) (b) .02 (.11) (.11) (.50) 1998 - ---- Sales and other operating revenues $ -- $ -- $ 566 $ 881 Operating income (loss) (10) (5) 30 89 Income from equity investments 117 50 57 11 Net income (loss) 65 29 (15) (27) Basic and diluted earnings (loss) per share (b) .82 .38 (.20) (.35)
(a) The second and third quarters of 1999 included an extraordinary loss on early extinguishment of debt of $31 million, $.32 per share, and $4 million, $.03 per share, respectively. (b) Earnings per common share calculations for each of the quarters are based upon the weighted average number of shares outstanding for each period (basic earnings per share). The sum of the quarters may not necessarily be equal to the full year earnings per share amount. 25. SUPPLEMENTAL GUARANTOR INFORMATION Lyondell Chemical Worldwide, Inc. ("LCWI") and Lyondell Chemical Nederland, Ltd. ("LCNL" or "Guarantor") unconditionally guaranteed the $500 million of senior subordinated notes and $1.9 billion of senior secured notes issued by Lyondell in May 1999 (see Note 16). LCWI was a wholly owned subsidiary of Lyondell that operated Lyondell's intermediate chemicals and derivatives business. Effective at the end of business on December 31, 1999, LCWI was merged into Lyondell. LCNL, a Delaware corporation and the remaining guarantor, is a wholly owned subsidiary of Lyondell that operates a chemical production facility in Rotterdam, the Netherlands. Separate financial statements of the Guarantor are not considered to be material to the holders of the senior subordinated notes and senior secured notes. The following condensed consolidating financial information present supplemental information for the Guarantor as of and for the years ended December 31, 1999 and 1998: 84 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENT-(CONTINUED) CONDENSED CONSOLIDATING FINANCIAL INFORMATION As of and for the year ended December 31, 1999
NON- CONSOLIDATED Millions of dollars Lyondell GUARANTOR GUARANTORS ELIMINATIONS LYONDELL - ------------------ ------------ ------------- -------------- ---------------- ------------- BALANCE SHEET Total current assets $ 1,569 $ 310 $ 7 $ -- $1,886 Property, plant and equipment, net 3,650 641 -- -- 4,291 Other investments and long-term receivables 684 9 935 (613) 1,015 Goodwill, net 1,230 315 -- -- 1,545 Deferred charges and other assets 517 (1) -- 245 761 ------------ ------------- -------------- ---------------- ------------- Total assets $ 7,650 $ 1,274 $ 942 $ (368) $9,498 ============ ============= ============== ================ ============= Current maturities of long-term debt $ 225 $ -- $ -- $ -- $ 225 Other current liabilities 615 181 -- -- 796 Long-term debt, less current maturities 6,046 -- -- -- 6,046 Other liabilities and deferred credits 331 -- -- -- 331 Deferred income taxes 494 145 252 -- 891 Intercompany liabilities (assets) (1,046) 980 62 4 -- Minority interest 202 -- -- -- 202 Stockholders' equity 783 (32) 628 (372) 1,007 ------------ ------------- -------------- ---------------- ------------- Total liabilities and stockholders' equity $ 7,650 $ 1,274 $ 942 $ (368) $9,498 ============ ============= ============== ================ ============= STATEMENT OF INCOME Sales and other operating revenues $ 3,226 $ 797 $ -- $ (330) $3,693 Cost of sales 2,666 553 -- (328) 2,891 Selling, general and administrative expenses 240 -- -- -- 240 Research and development expense 58 -- -- -- 58 Amortization of goodwill and other intangibles 93 7 -- -- 100 ------------ ------------- -------------- ---------------- ------------- Operating income 169 237 -- (2) 404 Interest income (expense), net (606) 3 14 -- (589) Other income (expense), net 156 (151) -- -- 5 Income from equity investments 4 -- 72 -- 76 Intercompany income (expense) 66 (67) (14) 15 -- Provision (benefit) for income taxes (53) 6 19 4 (24) ------------ ------------- -------------- ---------------- ------------- Income (loss) before extraordinary item (158) 16 53 9 (80) Extraordinary item, net of taxes (35) -- -- -- (35) ------------ ------------- -------------- ---------------- ------------- Net income (loss) $ (193) $ 16 $ 53 $ 9 $ (115) ============ ============= ============== ================ =============
85 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENT-(CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1999
NON- CONSOLIDATED Millions of dollars Lyondell GUARANTOR GUARANTORS ELIMINATIONS LYONDELL - ------------------ ------------ ------------- -------------- ---------------- ------------- STATEMENT OF CASH FLOWS Net (loss) income $ (193) $ 16 $ 53 $ 9 $ (115) Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization 297 33 -- -- 330 Extraordinary item 35 -- -- -- 35 Deferred income taxes (73) 107 2 -- 36 Net changes in working capital and other 346 (169) (154) (9) 14 ------------ ------------- -------------- ---------------- ------------- Net cash (used in) provided By operating activities 412 (13) (99) -- 300 ------------ ------------- -------------- ---------------- ------------- Expenditures for property, plant and equipment (131) -- -- -- (131) Contributions and advances to affiliates (17) -- (35) -- (52) Distributions from affiliates in excess of earnings -- -- 134 -- 134 Other 4 -- -- -- 4 ------------ ------------- -------------- ---------------- ------------- Net cash (used in) provided by investing activities (144) -- 99 -- (45) ------------ ------------- -------------- ---------------- ------------- Proceeds from issuance of long-term debt 3,400 -- -- -- 3,400 Payment of debt issuance costs (107) -- -- -- (107) Repayments of long-term debt (4,122) -- -- -- (4,122) Issuance of common stock 736 -- -- -- 736 Dividends paid (97) -- -- -- (97) Other 8 -- -- -- 8 ------------ ------------- -------------- ---------------- ------------- Net cash used in financing activities (182) -- -- -- (182) ------------ ------------- -------------- ---------------- ------------- Effect of exchange rate changes on cash (13) 14 -- -- 1 ------------ ------------- -------------- ---------------- ------------- Increase in cash and cash equivalents 73 1 -- -- 74 Cash and cash equivalents: Beginning of year 202 31 -- -- 233 ------------ ------------- -------------- ---------------- ------------- End of year $ 275 $ 32 $ -- $ -- $ 307 ============ ============= ============== ================ =============
86 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENT-(CONTINUED) AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
NON- CONSOLIDATED Millions of dollars Lyondell GUARANTOR GUARANTORS ELIMINATIONS LYONDELL - ------------------ ------------ ------------- -------------- ---------------- ------------- BALANCE SHEET Total current assets $ 964 $ 359 $ 10 $ -- $ 1,333 Property, plant and equipment, net 3,837 674 -- -- 4,511 Other investments and long-term receivables 653 1 1,018 (594) 1,078 Goodwill, net 1,119 311 -- -- 1,430 Deferred charges and other assets 554 (1) -- 251 804 ------------ ------------- -------------- ---------------- ------------- Total assets $ 7,127 $ 1,344 $ 1,028 $ (343) $ 9,156 ============ ============= ============== ================ ============= Current maturities of long-term debt $ 1,603 $ -- $ -- $ -- $ 1,603 Other current liabilities 522 217 -- -- 739 Long-term debt, less current maturities 5,391 -- -- -- 5,391 Other liabilities and deferred credits 294 -- -- -- 294 Deferred income taxes 51 38 250 -- 339 Intercompany liabilities (assets) (1,309) 1,076 232 1 -- Minority interest 216 -- -- -- 216 Stockholders' equity 359 13 546 (344) 574 ------------ ------------- -------------- ---------------- ------------- Total liabilities and stockholders' equity $ 7,127 $ 1,344 $ 1,028 $ (343) $ 9,156 ============ ============= ============== ================ ============= STATEMENT OF INCOME Sales and other operating revenues $ 1,271 $ 308 $ -- $ (132) $ 1,447 Cost of sales 1,017 201 -- (129) 1,089 Selling, general and administrative expenses 114 12 -- -- 126 Research and development expense 26 -- -- -- 26 Amortization of goodwill and other intangibles 38 3 -- -- 41 Unusual charges 60 -- -- -- 61 ------------ ------------- -------------- ---------------- ------------- Operating income 16 92 -- (3) 104 Interest expense, net (262) -- -- -- (262) Other income (expense), net 267 (67) -- (188) 12 Income from equity investments -- -- 234 -- 235 Intercompany income (expense) 12 -- (13) 1 -- Provision (benefit) for income taxes (58) 18 77 -- 37 ------------ ------------- -------------- ---------------- ------------- Net income $ 91 $ 7 $ 144 $ (190) $ 52 ============ ============= ============== ================ =============
87 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENT-(CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1998
NON- CONSOLIDATED MILLIONS OF DOLLARS LYONDELL GUARANTOR GUARANTORS ELIMINATIONS LYONDELL - ------------------ ------------ ------------- -------------- ---------------- ------------- STATEMENT OF CASH FLOWS Net income $ 91 $ 7 $ 144 $ (190) $ 52 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 129 9 -- -- 138 Unusual charges 60 -- -- -- 61 Deferred income taxes 55 8 13 -- 76 Net changes in working capital and other (160) 5 97 (5) (64) -------- ------- ------- -------- ------- Net cash provided by operating activities 175 29 254 (195) 263 -------- ------- ------- -------- ------- Purchase of ARCO Chemical Company, net of cash acquired (5,869) -- -- -- (5,869) Expenditures for property, plant and equipment (59) (5) -- -- (64) Contributions and advances to affiliates 114 -- (44) (105) (35) Distributions from affiliates in excess of earnings -- -- 435 -- 435 Deconsolidation of affiliate -- -- (11) -- (11) -------- ------- ------- -------- ------- Net cash (used in) provided by investing activities (5,814) (5) 380 (105) (5,544) -------- ------- ------- -------- ------- Proceeds from issuance of long-term debt 6,500 -- -- -- 6,500 Payment of debt issuance costs (130) -- -- -- (130) Repayments of long-term debt (370) -- (345) -- (715) Net decrease in short-term debt (100) -- -- -- (100) Repurchase of common stock (59) -- -- -- (59) Dividends paid (70) -- (300) 300 (70) -------- ------- ------- -------- ------- Net cash (used in) provided by financing activities 5,771 -- (645) 300 5,426 -------- ------- ------- -------- ------- Effect of exchange rate changes on cash (5) 7 -- -- 2 -------- ------- ------- -------- ------- Increase (decrease) in cash and cash equivalents 127 31 (11) -- 147 Cash and cash equivalents: Beginning of year 75 -- 11 -- 86 -------- ------- ------- -------- ------- End of year $ 202 $ 31 $ -- $ -- $ 233 ======== ======= ======= ======== =======
88 EQUISTAR CHEMICALS, LP REPORT OF INDEPENDENT ACCOUNTANTS To the Partnership Governance Committee of Equistar Chemicals, LP In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of partners' capital and of cash flows present fairly, in all material respects, the financial position of Equistar Chemicals, LP (the "Partnership") and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1999 and for the period from December 1, 1997 (inception) to December 31, 1997, in conformity with accounting principles generally accepted in the United States. 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 audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Houston, Texas February 18, 2000 89 EQUISTAR CHEMICALS, LP CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIOD FROM DECEMBER 1, FOR THE YEAR ENDED 1997 DECEMBER 31 (INCEPTION) TO ------------------------------------------- DECEMBER 31, MILLIONS OF DOLLARS 1999 1998 1997 - ------------------- ------------------ ------------------ ------------------ SALES AND OTHER OPERATING REVENUES: Unrelated parties $4,352 $3,826 $ 334 Related parties 1,084 537 31 ------------------ ------------------ ------------------ 5,436 4,363 365 ------------------ ------------------ ------------------ OPERATING COSTS AND EXPENSES: Cost of sales: Unrelated parties 3,915 3,276 256 Related parties 929 491 30 Selling, general and administrative expenses 259 229 16 Research and development expense 42 40 3 Amortization of goodwill and other intangibles 33 31 3 Restructuring and other unusual charges 96 14 42 ------------------ ------------------ ------------------ 5,274 4,081 350 ------------------ ------------------ ------------------ Operating income 162 282 15 Interest expense (182) (156) (10) Interest income 6 17 2 Other income, net 46 - - - - ------------------ ------------------ ------------------ NET INCOME AND COMPREHENSIVE INCOME $ 32 $ 143 $ 7 ================== ================== ==================
See Notes to Consolidated Financial Statements. 90 EQUISTAR CHEMICALS, LP CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ---------------------------------------------- MILLIONS OF DOLLARS 1999 1998 - ------------------- -------------------- -------------------- ASSETS Current assets: Cash and cash equivalents $ 108 $ 66 Accounts receivable: Trade, net 491 345 Related parties 209 142 Inventories 520 549 Prepaid expenses and other current assets 32 25 -------------------- -------------------- Total current assets 1,360 1,127 Property, plant and equipment, net 3,926 4,075 Investment in PD Glycol 52 55 Goodwill, net 1,119 1,151 Deferred charges and other assets 279 257 -------------------- -------------------- Total assets $6,736 $6,665 ==================== ==================== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable: Trade $ 457 $ 311 Related parties 35 26 Payables to partners - - 6 Current maturities of long-term debt 92 150 Other accrued liabilities 200 142 -------------------- -------------------- Total current liabilities 784 635 Obligations under capital leases - - 205 Long-term debt, less current maturities 2,169 1,865 Other liabilities and deferred credits 121 75 Commitments and contingencies Partners' capital 3,662 3,885 -------------------- -------------------- Total liabilities and partners' capital $6,736 $6,665 ==================== ====================
See Notes to Consolidated Financial Statements. 91 EQUISTAR CHEMICALS, LP CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 1, FOR THE YEAR ENDED 1997 DECEMBER 31 (INCEPTION) TO -------------------------------------------- DECEMBER 31, MILLIONS OF DOLLARS 1999 1998 1997 - ------------------ ------------------ ------------------- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 32 $ 143 $ 7 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 300 268 19 Equity in losses of investment in PD Glycol 4 3 - - Net loss on disposition of assets 35 8 - - (Increase) decrease in accounts receivable (213) 105 (100) Decrease (increase) in receivables from partners - - 150 (101) Decrease (increase) in inventories 41 133 (5) Increase in accounts payable 152 98 188 (Decrease) increase in payables to partners (6) (66) 54 Increase in other accrued liabilities 49 64 48 Net change in other working capital accounts (5) 2 (15) Other (21) (62) 7 ------------------ ------------------- ------------------ Net cash provided by operating activities 368 846 102 ------------------ ------------------- ------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property, plant and equipment (157) (200) (12) Proceeds from sales of assets 75 3 - - Contributions and advances to affiliates (24) (15) - - ------------------ ------------------- ------------------ Net cash used in investing activities (106) (212) (12) ------------------ ------------------- ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 993 757 50 Payment of debt issuance costs (6) - - - - Repayments of long-term debt (747) (290) - - Repayments of obligations under capital leases (205) - - - - Distributions to partners (255) (1,421) (100) Proceeds from Lyondell note repayment - - 345 - - Cash contributions from partners - - - - 1 ------------------ ------------------- ------------------ Net cash used in financing activities (220) (609) (49) ------------------ ------------------- ------------------ INCREASE IN CASH AND CASH EQUIVALENTS 42 25 41 Cash and cash equivalents at beginning of period 66 41 - - ------------------ ------------------- ------------------ Cash and cash equivalents at end of period $ 108 $ 66 $ 41 ================== =================== ==================
See Notes to Consolidated Financial Statements. 92 EQUISTAR CHEMICALS, LP CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
MILLIONS OF DOLLARS LYONDELL MILLENNIUM OCCIDENTAL TOTAL - ------------------ ------------------ ------------------ ------------------ ------------------ BALANCE AT DECEMBER 1, 1997 (INCEPTION) $ - - $ - - $ - - $ - - Capital contributions at inception: Net assets 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 Capital contributions: Net assets - - - - 2,097 2,097 Other (14) 9 8 3 Net income (loss) 84 64 (5) 143 Distributions to partners (512) (460) (449) (1,421) ------------------ ------------------ ------------------ ------------------ BALANCE AT DECEMBER 31, 1998 613 1,621 1,651 3,885 Net income 14 9 9 32 Distributions to partners (105) (75) (75) (255) ------------------ ------------------ ------------------ ------------------ BALANCE AT DECEMBER 31, 1999 $ 522 $1,555 $1,585 $ 3,662 ================== ================== ================== ==================
See Notes to Consolidated Financial Statements. 93 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. FORMATION OF THE PARTNERSHIP AND OPERATIONS Pursuant to a partnership agreement ("Partnership Agreement"), Lyondell Chemical Company ("Lyondell") and Millennium Chemicals Inc. ("Millennium") formed Equistar Chemicals, LP ("Equistar" or "Partnership"), a Delaware limited partnership, which commenced operations on December 1, 1997. From December 1, 1997 to May 15, 1998, Equistar was owned 57% by Lyondell and 43% by Millennium. Lyondell owns its interest in Equistar through two wholly owned subsidiaries, Lyondell Petrochemical G.P. Inc. and Lyondell Petrochemical L.P. Inc. ("Lyondell LP"). Millennium also owns its interest in Equistar through two wholly owned subsidiaries, Millennium Petrochemicals GP LLC and Millennium Petrochemicals LP LLC ("Millennium LP"). On May 15, 1998, Equistar was expanded with the contribution of certain assets from Occidental Petroleum Corporation ("Occidental") (see Note 3). These assets included the ethylene, propylene and ethylene oxide ("EO") and EO derivatives businesses and certain pipeline assets held by Oxy Petrochemicals Inc. ("Oxy Petrochemicals"), a former subsidiary of Occidental, a 50% interest in a joint venture ("PD Glycol") between PDG Chemical Inc. and E.I. DuPont de Nemours and Company, and a lease to Equistar of the Lake Charles, Louisiana olefins plant and related pipelines held by Occidental Chemical Corporation ("Occidental Chemical") (collectively, "Occidental Contributed Business"). Occidental Chemical and PDG Chemical Inc. are both wholly owned, indirect subsidiaries of Occidental. The Occidental Contributed Business included olefins plants at Corpus Christi and Chocolate Bayou, Texas, EO/ethylene glycol ("EG") and EG derivatives businesses located at Bayport, Texas, Occidental's 50% ownership of PD Glycol which operates EO/EG plants at Beaumont, Texas, 950 miles of owned and leased ethylene/propylene pipelines, and the lease to Equistar of the Lake Charles, Louisiana olefins plant and related pipelines. In exchange for the Occidental Contributed Business, two subsidiaries of Occidental were admitted as limited partners and a third subsidiary was admitted as a general partner in Equistar for an aggregate partnership interest of 29.5%. In addition, Equistar assumed approximately $205 million of Occidental indebtedness and Equistar issued a promissory note to an Occidental subsidiary in the amount of $420 million, which was subsequently paid in cash in June 1998. In connection with the contribution of the Occidental Contributed Business and the reduction of Millennium's and Lyondell's ownership interests in the Partnership, Equistar also issued a promissory note to Millennium LP in the amount of $75 million, which was subsequently paid in June 1998. These payments are included in "Distributions to partners" in the accompanying Statements of Partners' Capital and of Cash Flows. The consideration paid for the Occidental Contributed Business was determined based upon arms-length negotiations between Lyondell, Millennium and Occidental. In connection with the transaction, Equistar and Occidental also entered into a long-term agreement for Equistar to supply the ethylene requirements for Occidental Chemical's U.S. manufacturing plants. Upon completion of this transaction, Equistar is now owned 41% by Lyondell, 29.5% by Millennium and 29.5% by Occidental, all through wholly owned subsidiaries. Equistar owns and operates the petrochemicals and polymers businesses contributed by Lyondell, Millennium and Occidental ("Contributed Businesses"), which consist of 17 manufacturing facilities on the U.S. Gulf Coast and in the U.S. Midwest. The petrochemicals segment manufactures and markets olefins, oxygenated chemicals, aromatics and specialty chemicals. Olefins include ethylene, propylene and butadiene, and oxygenated chemicals include ethylene oxide, ethylene glycol, ethanol and methyl tertiary butyl ether ("MTBE"). The petrochemicals segment also includes the production and sale of aromatics, including benzene and toluene. The polymers segment manufactures and markets 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. The performance polymers include 94 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) enhanced grades of polyethylene, including wire and cable resins, and polymeric powders. The concentrates and compounds business, which was part of performance polymers products, was sold effective April 30, 1999 (see Note 18). The Partnership Agreement provides that Equistar is governed by a Partnership Governance Committee consisting of nine 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 upon their percentage ownership of Equistar. Distributions are made to the partners based upon their percentage ownership of Equistar. Additional cash contributions required by the Partnership will also be based upon the partners' percentage ownership of Equistar. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation--The consolidated financial statements include the accounts of Equistar and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition--Revenue from product sales is 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. Equistar's policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution. Equistar performs periodic evaluations of the relative credit standing of these financial institutions which are considered in Equistar's investment strategy. Equistar 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 Equistar's discretion. As a result, none of Equistar's cash is restricted. Accounts Receivable--Equistar sells its products primarily to companies in the petrochemicals and polymers industries. Equistar performs ongoing credit evaluations of its customers' financial condition and, in certain circumstances, requires letters of credit from them. The Partnership's allowance for doubtful accounts, which is reflected in the accompanying Consolidated Balance Sheets as a reduction of accounts receivable, totaled $6 million and $3 million at December 31, 1999 and 1998, 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 property, plant and equipment is computed using the straight-line method over the estimated useful lives of the related assets, ranging from 5 to 30 years. Upon retirement or sale, Equistar removes the cost of the assets and the related accumulated depreciation from the accounts and reflects any resulting gains or losses in the Consolidated Statements of Income. Equistar's policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year. 95 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Turnaround Maintenance and Repair Expenses--Cost of major repairs and maintenance incurred in connection with substantial overhauls or maintenance turnarounds of production units at Equistar's manufacturing facilities are deferred and amortized on a straight-line basis until the next planned turnaround, generally five to seven years. These costs are maintenance, repair and replacement costs that are necessary to maintain, extend and improve the operating capacity and efficiency rates of the production units. Equistar amortized $25 million, $20 million and $2 million of deferred turnaround maintenance and repair costs for the years ended December 31, 1999 and 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. Deferred Software Costs--Costs to purchase and develop software for internal use are deferred and amortized on a straight-line basis over a range of 3 to 10 years. Equistar amortized $12 million, $6 million and less than $1 million of deferred software costs for the years ended December 31, 1999 and 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. Goodwill--Goodwill includes goodwill contributed by Millennium and goodwill recorded in connection with the contribution of Occidental's assets. Goodwill is being amortized using the straight-line method over forty years. Accumulated amortization of goodwill was $199 million and $166 million at December 31, 1999 and 1998, respectively. Investment in PD Glycol--Equistar holds a 50% interest in a joint venture with E.I. DuPont de Nemours and Company that owns an ethylene glycol facility in Beaumont, Texas. This investment was contributed by Occidental in 1998. The investment in PD Glycol is accounted for using the equity method of accounting. At December 31, 1999 and 1998, Equistar's underlying equity in the net assets of PD Glycol exceeded the cost of the investment by $8 million. The excess is being accreted into income on a straight-line basis over a period of 25 years. 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. Exchanges--Inventory exchange transactions, which involve homogeneous 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. 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. 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. Comprehensive Income--Equistar had no items of other comprehensive income during the years ended December 31, 1999 and 1998 and during the period from December 1, 1997 (inception) to December 31, 1997. Long-Lived Asset Impairment--In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, Equistar reviews its long-lived assets, including goodwill, for impairment on an exception basis whenever events or changes in circumstances indicate a potential loss in utility. Impairment losses are recognized in "Restructuring and other unusual charges" in the Consolidated Statements of Income. 96 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Derivatives--Equistar is currently evaluating the effect that implementing SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, will have on the Consolidated Financial Statements. The statement is effective for Equistar's calendar year 2001. Reclassifications--Certain previously reported amounts have been restated to conform to classifications adopted in 1999. 3. OCCIDENTAL CONTRIBUTED BUSINESS On May 15, 1998, Equistar was expanded with the contribution of certain assets from Occidental. The acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations for these assets are included in the accompanying Consolidated Statements of Income prospectively from May 15, 1998. Occidental contributed assets and liabilities to Equistar with a net fair value of $2.1 billion in exchange for a 29.5% interest in the Partnership. Equistar also issued a promissory note to an Occidental subsidiary in the amount of $420 million, which was subsequently paid in cash in June 1998. The fair value was allocated to the assets contributed and liabilities assumed based upon the estimated fair values of such assets and liabilities at the date of the contribution. The fair value was determined based upon a combination of internal valuations performed by Lyondell, Millennium and Occidental using the income approach. The fair value of the assets contributed and liabilities assumed by the Partnership on May 15, 1998 is as follows:
MILLIONS OF DOLLARS - ------------------- Total current assets $ 281 Property, plant and equipment 1,964 Investment in PD Glycol 58 Goodwill 43 Deferred charges and other assets 49 --------- Total assets $2,395 ========= Other current liabilities $ 79 Long-term debt 205 Other liabilities and deferred credits 14 Partners' capital 2,097 --------- Total liabilities and partners' capital $2,395 =========
The unaudited pro forma combined historical results of Equistar as if the Occidental Contributed Business had been contributed on January 1, 1998 is as follows:
FOR THE YEAR ENDED DECEMBER 31 MILLIONS OF DOLLARS 1998 - ------------------- ------------------ Sales and other operating revenues $4,869 Restructuring and other unusual charges 14 Operating income 320 Net income 154
The unaudited pro forma data presented above are not necessarily indicative of the results of operations of Equistar that would have occurred had such transaction actually been consummated as of January 1, 1998, nor are they necessarily indicative of future results. 97 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Supplemental cash flow information is summarized as follows for the periods presented:
FOR THE PERIOD FROM DECEMBER 1, FOR THE YEAR ENDED 1997 DECEMBER 31 (INCEPTION) TO ------------------------------------------- DECEMBER 31, MILLIONS OF DOLLARS 1999 1998 1997 - ------------------- ------------------ ------------------- ------------------- Cash paid for interest $ 146 $ 154 $ - - Noncash investing and financing activities: Inventory transfer from PD Glycol $ 24 $ 15 $ - - Noncash adjustments to contributed capital - - 3 - - Other 2 - - - -
Historical cost of assets contributed and liabilities assumed by the Partnership in December 1997 (inception):
MILLIONS OF DOLLARS - ------------------- 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 =======
5. FINANCIAL INSTRUMENTS Equistar does not buy or sell, or hold or issue financial instruments for speculative trading purposes. Beginning October 1999, Equistar entered into over-the-counter "derivatives" and price collar agreements for crude oil with Occidental Energy Marketing, Inc., a subsidiary of Occidental, to help manage its exposure to commodity price risk with respect to crude-oil related raw materials purchases. At December 31, 1999, "derivatives" and collar agreements covering 2.4 million and 1.5 million barrels, respectively, and maturing in January 2000, were outstanding. Both the carrying value and fair market value of these derivative instruments at December 31, 1999 represented an asset of $7 million and was based on quoted market prices. Unrealized gains and losses on 98 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) "derivatives" and price collars are deferred until realized at which time they are reflected in the cost of the purchased raw material. The fair value of all financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximated their carrying value due to their short maturity. Based on the borrowing rates currently available to Equistar for debt with terms and average maturities similar to Equistar's debt portfolio, the fair value of Equistar's long-term debt, including amounts due within one year, was approximately $2.2 billion and $2.3 billion at December 31, 1999 and 1998, respectively. Equistar had issued letters of credit totaling $6 million and $3 million at December 31, 1999 and 1998, respectively. 6. RELATED PARTY TRANSACTIONS Product Transactions with Occidental Chemical--Equistar and Occidental Chemical entered into a Sales Agreement, dated May 15, 1998 ("Ethylene Sales Agreement"). Under the terms of the Ethylene Sales Agreement, Occidental Chemical agreed to purchase an annual minimum amount of ethylene from Equistar equal to 100% of the ethylene feedstock requirements of Occidental Chemical's United States plants (estimated to be 2 billion pounds per year at the time of the signing of the agreement) less any quantities up to 250 million pounds tolled in accordance with the provisions of such agreement. Equistar's maximum supply obligation in any calendar year under the Ethylene Sales Agreement is 2.55 billion pounds. Upon three years notice from either party to the other, Equistar's maximum supply obligation in any calendar year under the Ethylene Sales Agreement may be "phased down" as set forth in the agreement, provided that no phase down may occur prior to January 1, 2009. In accordance with the phase down provisions of the agreement, the annual minimum requirements set forth in the agreement must be phased down over at least a five year period so that the annual required minimum cannot decline to zero prior to December 31, 2013 unless certain specified force majeure events occur. The Ethylene Sales Agreement provides for an ethylene sales price based on market prices. In addition to ethylene, Equistar sells methanol, ethers, and glycols to Occidental Chemical. During the year ended December 31, 1999 and the period from May 15, 1998 to December 31, 1998, Equistar sold Occidental Chemical $435 million and $171 million, respectively, of product, primarily under the Ethylene Sales Agreement. Equistar also purchases various products from Occidental Chemical. During the year ended December 31, 1999 and the period from May 15, 1998 to December 31, 1998, purchases from Occidental Chemical totaled $2 million and $4 million, respectively. Product Transactions with Oxy Vinyls, LP--Occidental Chemical owns 76% of Oxy Vinyls, LP ("Oxy Vinyls"), a joint venture company formed with an unrelated party effective May 1, 1999. Ethylene sales to Oxy Vinyls totaled $93 million for the period from May 1, 1999 to December 31, 1999 and were based upon market prices. Product Transactions with Millennium--Equistar sells ethylene to Millennium at market-related prices pursuant to an agreement entered into in connection with the formation of Equistar. Under this agreement, Millennium is required to purchase 100% of its ethylene requirements for its LaPorte, Texas facility (estimated to be 300 million pounds per year), up to a maximum of 330 million pounds per year. Millennium has the option to increase the amount purchased to up to 400 million pounds per year beginning January 1, 2001. The initial term of the contract expires December 1, 2000 and thereafter, renews annually. Either party may terminate on one year's notice, except that if Millennium elects to increase its purchases under the contract, a party must provide two year's notice of termination. The pricing terms of this agreement are similar to the Ethylene Sales Agreement with Occidental Chemical. Equistar sold Millennium $54 million, $41 million and $4 million of ethylene in 1999, 1998 and December 1997, respectively. 99 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Equistar purchases vinyl acetate monomer ("VAM") feedstock from Millennium at formula-based market prices pursuant to an agreement entered into in connection with the formation of Equistar. Under this agreement, Equistar is required to purchase 100% of its VAM feedstock requirements for its LaPorte, Texas, Clinton, Illinois, and Morris, Illinois plants (estimated to be 48 to 55 million pounds per year), up to a maximum of 60 million pounds per year ("Annual Maximum") for the production of ethylene vinyl acetate products at those locations. If Equistar fails to purchase at least 42 million pounds of VAM in any calendar year, Millennium has the right to reduce the Annual Maximum quantity by as much as the total purchase deficiency for one or more successive years. In order to reduce the Annual Maximum quantity, Millennium must notify Equistar within at least 30 days prior to restricting the VAM purchases provided that the notice is not later than 45 days after the year of the purchase deficiency. The initial term of the contract expires December 31, 2000 and thereafter, renews annually. Either party may terminate on one year's notice of termination. The initial term will extend until December 31, 2002 if Millennium elects to increase the amount of ethylene purchased under the Ethylene Sales Agreement. During the years ending December 31, 1999 and 1998 and for the period December 1, 1997 (inception) to December 31, 1997, purchases from Millennium, primarily for vinyl acetate monomer, were $12 million, $14 million, and $2 million, respectively. Transactions with LCR--Lyondell's rights and obligations under the terms of its product sales and feedstock purchase agreements with LYONDELL-CITGO Refining LP ("LCR"), a joint venture investment of Lyondell, were assigned to Equistar. Accordingly, certain refinery products are sold to Equistar as feedstocks, and certain olefins by-products are sold to LCR for processing into gasoline. Sales of product to LCR were $250 million, $223 million and $26 million and purchases from LCR were $190 million, $131 million and $10 million for the years ended December 31, 1999 and 1998 and for the period from December 1, 1997 (inception) to December 31, 1997, respectively. Equistar also assumed certain processing arrangements as well as storage obligations between Lyondell and LCR and provides certain marketing and information processing services for LCR. Aggregate charges under these various service agreements of $13 million, $15 million and $1 million were made to LCR by Equistar for the years ended December 31, 1999 and 1998 and for the period from December 1, 1997 (inception) to December 31, 1997, respectively. All of the agreements between LCR and Equistar are on terms generally representative of prevailing market prices. Product Transactions with Lyondell--Lyondell acquired its intermediate chemicals and derivatives business through the acquisition of ARCO Chemical Company effective August 1, 1998. Sales to Lyondell, primarily for ethylene, propylene, MTBE, benzene and alkylate, totaled $242 million and $89 million for the year ended December 31, 1999 and for the period from August 1, 1998 to December 31, 1998, respectively. Purchases from Lyondell, primarily for normal butane, totaled $6 million and $2 million for the year ended December 31, 1999 and for the period from August 1, 1998 to December 31, 1998, respectively. Product transactions between Equistar and Lyondell are based upon market prices. Transactions with LMC--Lyondell Methanol Company, L.P. ("LMC") sells all of its products to Equistar. For the years ending December 31, 1999 and 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, purchases from LMC were $95 million, $103 million and $15 million, respectively. Equistar sells natural gas to LMC at prices generally representative of its cost. Purchases by LMC of natural gas feedstock from Equistar totaled $46 million, $44 million and $4 million for the years ended December 31, 1999 and 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. Equistar provides operating and other services for LMC under the terms of existing agreements that were assumed by Equistar from Lyondell, including the lease to LMC by Equistar of the real property on which its methanol plant is located. Pursuant to the terms of those agreements, LMC pays Equistar a management fee and reimburses certain expenses of Equistar at cost. Management fees charged by Equistar to LMC totaled $6 million during each of the years ending December 31, 1999 and 1998 and less than $1 million during the period from December 1, 1997 (inception) to December 31, 1997. Shared Services Agreement with Lyondell--Lyondell provides certain corporate, general and administrative services to Equistar, including tax, treasury, risk management and other services pursuant to a shared services agreement. 100 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) During the years ended December 31, 1999 and 1998, Lyondell charged Equistar $9 million and $3 million for these services. During the period December 1, 1997 (inception) to December 31, 1997, charges from Lyondell were less than $1 million. As part of the shared services agreement, Equistar provides certain general and administrative services to Lyondell, such as health, safety and environmental services, materials management services, human resource services, information services and legal services. During the year ended December 31, 1999, Equistar charged Lyondell $8 million for these services. During the year ended December 31, 1998 and for the period December 1, 1997 (inception) to December 31, 1997, Equistar charged Lyondell less than $1 million for these services. Shared Services and Shared-Site Agreements with Millennium--Equistar and Millennium have entered into a variety of operating, manufacturing and technical service agreements related to the business of Equistar and the businesses retained by Millennium Petrochemicals. These agreements include the provision by Equistar to Millennium Petrochemicals of materials management, certain utilities, administrative office space, and health and safety services. During the years ended December 31, 1999 and 1998, Equistar charged Millennium Petrochemicals $3 million and $5 million for these services. During the period from December 1, 1997 (inception) to December 31, 1997, charges to Millennium Petrochemicals were less than $1 million. These agreements also include the provision by Millennium Petrochemicals to Equistar of certain operational services, including barge dock access. During each of the years ended December 31, 1999 and 1998 and during the period December 1, 1997 (inception) to December 31, 1997, Millennium Petrochemicals charged Equistar less than $1 million for these services. Operating Agreement with Occidental Chemical--On May 15, 1998, Occidental Chemical and Equistar entered into an Operating Agreement ("Operating Agreement") whereby Occidental Chemical agreed to operate and maintain the Occidental Contributed Business and to cause third-parties to continue to provide equipment, products and commodities to those businesses upon substantially the same terms and conditions as provided prior to the transfer. The Operating Agreement terminated on June 1, 1998. During the term of the Operating Agreement, Equistar paid Occidental Chemical an administrative fee of $1 million. Transition Services Agreement with Occidental Chemical--On June 1, 1998, Occidental Chemical and Equistar entered into a Transition Services Agreement. Under the terms of the Transition Services Agreement, Occidental Chemical agreed to provide Equistar certain services in connection with the Occidental Contributed Business, including services related to accounting, payroll, office administration, marketing, transportation, purchasing and procurement, management, human resources, customer service, technical services and others. Predominantly all services under the Transition Services Agreement ceased in June 1999 in accordance with the terms of the agreement. Health, safety, and environmental services were extended until December 31, 1999 as permitted by the Transition Services Agreement. During the year ended December 31, 1999 and the period from June 1, 1998 to December 31, 1998, Equistar expensed $2 million and $6 million, respectively, in connection with services provided pursuant to the Transition Service Agreement. Loans to Millennium and Occidental--In connection with Occidental's admission into Equistar in May 1998, Equistar executed promissory notes to Millennium and Occidental in the principal amounts of $75 million and $420 million, respectively. Each of the notes provided for the annual accrual of interest at a rate equal to LIBOR plus 0.6%. These notes were paid in full in June 1998. Interest expense incurred on these notes during 1998 was $3 million. Note Receivable from Lyondell LP--Upon formation of the Partnership, Lyondell LP contributed capital to Equistar in the form of a $345 million promissory note ("Lyondell Note"). The Lyondell Note bore interest at LIBOR plus a market spread. The note was repaid in full by Lyondell in July 1998. Interest income on the Lyondell Note totaled $13 million and $2 million during 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. 101 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 7. ACCOUNTS RECEIVABLE In December 1998, Equistar entered into a purchase agreement with an independent issuer of receivables-backed commercial paper. Under the terms of the agreement, Equistar agreed to sell on an ongoing basis and without recourse, designated accounts receivable. To maintain the balance of the accounts receivable sold, Equistar is obligated to sell new receivables as existing receivables are collected. The agreement was renewed through December 2000 on predominantly the same terms. At December 31, 1998 and 1999, Equistar's gross accounts receivable that had been sold to the purchasers aggregated $130 million. Increases and decreases in the amount have been reported as operating cash flows in the Consolidated Statements of Cash Flows. Costs related to the sale are included in "Selling, general and administrative expenses" in the Consolidated Statements of Income. 8. INVENTORIES Inventories at December 31, 1999 and 1998 consisted of the following:
MILLIONS OF DOLLARS 1999 1998 - ------------------- ------------------- ------------------- Finished goods $ 278 $ 301 Work-in-process 10 11 Raw materials 137 149 Materials and supplies 95 88 ----------------- ----------------- Total inventories $ 520 $ 549 ================= =================
The excess of the current cost of inventories over book value was approximately $109 million at December 31, 1999. 9. PROPERTY, PLANT AND EQUIPMENT, NET The components of property, plant and equipment, at cost, and the related accumulated depreciation at December 31, 1999 and 1998 were as follows:
MILLIONS OF DOLLARS 1999 1998 - ------------------- ------------------- ------------------- Land $ 78 $ 78 Manufacturing facilities and equipment 5,656 5,349 Manufacturing equipment acquired under capital leases - - 236 Construction in progress 134 189 --------------- --------------- Total property, plant and equipment 5,868 5,852 Less accumulated depreciation 1,942 1,777 --------------- --------------- Property, plant and equipment, net $3,926 $4,075 =============== ===============
Depreciation expense for the years ending December 31, 1999 and 1998 and for the period from December 1, 1997 (inception) to December 31, 1997 was $221 million, $200 million and $15 million, respectively. At December 31, 1998, $10 million of the accumulated depreciation reported in the accompanying Consolidated Balance Sheet related to the manufacturing equipment acquired under capital leases that was contributed by Occidental in 1998. In July 1998, the depreciable lives of certain assets, primarily manufacturing facilities and equipment, were increased from a range of 5 to 25 years to a range of 5 to 30 years. The change was made to more accurately reflect 102 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) estimated periods during which such assets will remain in service, based upon Equistar's actual experience with those assets. This change was accounted for as a change in accounting estimate and resulted in a $33 million decrease in depreciation expense for 1998. 10. DEFERRED CHARGES AND OTHER ASSETS Deferred charges and other assets at December 31, 1999 and 1998 were as follows:
MILLIONS OF DOLLARS 1999 1998 - ------------------- ------------------- ------------------- Deferred turnaround costs, net $ 74 $ 84 Deferred software costs, net 76 70 Deferred pension asset 32 30 Other 97 73 ------------------- ------------------- Total deferred charges and other assets $ 279 $ 257 =================== ===================
11. OTHER ACCRUED LIABILITIES Other accrued liabilities at December 31, 1999 and 1998 were as follows:
MILLIONS OF DOLLARS 1999 1998 - ------------------- ------------------- ------------------- Accrued property taxes $ 68 $ 76 Accrued payroll costs 68 44 Accrued interest 50 18 Other 14 4 ------------------- ------------------- Total other accrued liabilities $ 200 $ 142 =================== ===================
12. LONG-TERM DEBT AND FINANCING ARRANGEMENTS In February 1999, Equistar and Equistar Funding Corporation ("Equistar Funding") co-issued $900 million of debt securities. Equistar Funding, a wholly owned subsidiary of Equistar, is a Delaware corporation formed for the sole purpose of facilitating the financing activities of Equistar. Equistar is jointly and severally liable with Equistar Funding on the outstanding notes and new notes. The debt securities include $300 million of 8.50% Notes, which will mature on February 15, 2004, and $600 million of 8.75% Notes, which will mature on February 15, 2009. Equistar used the net proceeds from this offering (i) to repay the $205 million outstanding under a capitalized lease obligation relating to Equistar's Corpus Christi facility, (ii) to repay the outstanding balance under the $500 million credit agreement, after which the $500 million credit agreement was terminated, (iii) to repay the outstanding $150 million, 10.00% Notes due in June 1999, and (iv) to the extent of the remaining net proceeds, to reduce outstanding borrowing under the five-year credit facility and for Partnership working capital purposes. Equistar has a five-year, $1.25 billion credit facility with a group of banks expiring November 2002. Borrowing under the facility bears interest at either the Federal Funds rate plus 1/2 of 1%, LIBOR plus 1/2 of 1%, a fixed rate offered by one of the sponsoring banks or interest 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 upon the type of borrowing made under the facility. Borrowing under the facility had a weighted average interest rate of 6.0% and 5.8% at December 31, 1999 and 1998, respectively. Millennium America Inc., a subsidiary of Millennium, provided limited guarantees with respect to the payment of principal and interest on a total of $750 million principal amount of indebtedness under the $1.25 billion revolving credit facility. However, the lenders may not proceed against Millennium America Inc. until they have exhausted their remedies against Equistar. The guarantee will remain in 103 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) effect indefinitely, but at any time after December 31, 2004, Millennium America Inc. may elect to terminate the guarantee if certain conditions are met including financial ratios and covenants. In addition, Millennium America Inc. may elect to terminate the guarantee if Millennium Petrochemicals Inc. sells its interests in Millennium GP and Millennium LP or if those entities sell their interests in Equistar, provided certain conditions are met including financial ratios and convenants. The terminated $500 million credit agreement was entered into on June 12, 1998. Borrowing under the agreement bore interest at either the Federal Funds rate plus 1/2 of 1%, LIBOR plus 0.625%, a fixed rate, offered by one of the sponsoring banks or interest rates that were based on a competitive auction feature. At December 31, 1998, the weighted average interest rate for borrowing under the subsequently terminated $500 million credit agreement was 6.1%. The credit facility is available for working capital and general Partnership purposes as needed and contain covenants relating to liens, sale and leaseback transactions, debt incurrence, leverage and interest coverage ratios, sales of assets and mergers and consolidations. Long-term debt at December 31, 1999 and 1998 consisted of the following:
MILLIONS OF DOLLARS 1999 1998 - ------------------- ------------------- ------------------- Bank credit facilities: 5-year term credit facility $ 800 $1,150 $500 million credit agreement -- 152 Other debt obligations: Medium-term notes (due 2000-2005) 163 163 10.00% Notes due 1999 -- 150 9.125% Notes due 2002 100 100 8.50% Notes due 2004 300 -- 6.50% Notes due 2006 150 150 8.75% Notes due 2009 598 -- 7.55% Debentures due 2026 150 150 ------ ------ Total long-term debt 2,261 2,015 Less current maturities 92 150 ------ ------ Long-term debt, net 2,169 1,865 Capital lease obligations (5.89% due 2000) -- 205 ------ ------ Total long-term debt and lease obligations $2,169 $2,070 ====== ======
Aggregate maturities of long-term debt during the five years subsequent to December 31, 1999 are as follows: 2000-$92 million; 2001-$90 million; 2002-$851 million; 2003-$29 million; 2004-$300 million. A subsidiary of Millennium has guaranteed $750 million of the credit facility. Lyondell remains an obligor on the medium-term notes, the 9.125% Notes, the 6.5% Notes and the 7.55% Debentures, all of which total $563 million. Occidental and Equistar are parties to an agreement with respect to the 8.75% Notes due 2009 pursuant to which Occidental has agreed, under certain limited circumstances, to contribute to Equistar up to $420 million. The 8.75% Notes have a face amount of $600 million and are shown net of unamortized discount. The medium-term notes mature at various dates from 2000 to 2005 and had a weighted average interest rate of 10.0% and 9.9% at December 31, 1999 and 1998, respectively. 13. RESTRUCTURING AND OTHER UNUSUAL CHARGES During the fourth quarter 1999, Equistar recorded a charge of $96 million associated with decisions to shut down polymer reactors at two Equistar sites and to consolidate certain administrative functions between Lyondell and 104 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Equistar. The decision to shut down the reactors was based on their high production cost, current market conditions in the polyethylene industry and the flexibility to utilize more efficient reactors to meet customer requirements. Accordingly, Equistar recorded a charge of $72 million to adjust the asset carrying values. The remaining $24 million of the total charge represents severance and other employee-related costs for approximately 500 employee positions that are being eliminated. The eliminated positions, primarily administrative functions, resulted from opportunities to share such services between Lyondell and Equistar and, to a lesser extent, positions associated with the shut down polymer reactors. Through December 31, 1999, no employees had been terminated nor were any payments made. Equistar expects that severance payments will take place in the first quarter of 2000. During 1997 and 1998, Equistar incurred restructuring charges related to the initial merger and integration of the businesses contributed by Lyondell and Millennium upon formation of the Partnership. Equistar recorded $42 million of these costs in December 1997. These charges included severance and other employee related termination costs of $21 million related to a workforce reduction, which were substantially paid in 1998. The workforce reduction included approximately 430 employees, primarily in duplicate corporate overhead functions. All of these 430 employees were terminated in 1998. Additionally, these restructuring charges included employee relocation costs of $6 million and various other charges of $7 million, all of which were recorded and paid as incurred during 1997. In 1997, Equistar also recorded and paid as incurred $8 million of transaction closing costs. In 1998, Equistar recorded and paid, as incurred, an additional $12 million in restructuring charges related to the initial merger and integration of Equistar. These costs included costs associated with the consolidation of operations and facilities of $11 million and other miscellaneous charges of $1 million. The restructuring actions related to the initial merger and integration were substantially completed in 1998 and there were no other significant changes to Equistar's original estimate of costs that were accrued as of December 31, 1997. Equistar also incurred restructuring charges of $2 million related to the merger and integration of the Occidental Contributed Business into the Partnership. These charges were recorded and paid as incurred during 1998. There were no amounts accrued as of December 31, 1998 related to the initial merger and integration of Equistar or the merger and integration of the Occidental Contributed Business. The restructuring actions related to the merger and integration of the Occidental Contributed Business into Equistar were substantially completed as of December 31, 1998. All restructuring charges were included in the Unallocated segment. (See Note 17) 14. LEASE COMMITMENTS At December 31, 1999, future minimum lease payments relating to noncancelable operating leases with lease terms in excess of one year were as follows:
MILLIONS OF DOLLARS - ------------------- 2000 $ 94 2001 72 2002 58 2003 50 2004 44 Thereafter 482 ------------------ Total minimum lease payments $800 ==================
Operating lease net rental expense was $112 million and $110 million for the years ending December 31, 1999 and 1998, respectively, and $11 million for the period from December 1, 1997 (inception) to December 31, 1997. 105 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Equistar is party to various unconditional purchase obligation contracts as a purchaser for product and services. At December 31, 1999, future minimum payments under these contracts with noncancelable contract terms in excess of one year were as follows:
MILLIONS OF DOLLARS - ------------------- 2000 $ 33 2001 31 2002 28 2003 27 2004 25 Thereafter 147 ---- Total minimum contract payments $291 ====
Equistar's total purchases under these agreements were $39 million and $35 million for the years ending December 31, 1999 and 1998, respectively, and $3 million during the period from December 1, 1997 (inception) to December 31, 1997. 15. PENSION AND OTHER POSTRETIREMENT BENEFITS All full-time regular employees of the Partnership are covered by defined benefit pension plans sponsored by Equistar. The plans became effective January 1, 1998, except for union represented employees formerly employed by Millennium, whose plans were contributed to Equistar on December 1, 1997, and union represented employees formerly employed by Occidental, whose plans were contributed to Equistar on May 15, 1998. In connection with the formation of Equistar, there were no pension assets or obligations contributed to Equistar, except for the union represented plans described above. Retirement benefits are based upon years of service and the employee's highest three consecutive years of compensation during the last ten years of service. Equistar accrues pension costs based upon an actuarial valuation and funds the plans through periodic contributions to pension trust funds as required by applicable law. Equistar also has unfunded supplemental nonqualified retirement plans, which provide pension benefits for certain employees in excess of the tax qualified plans' limits. In addition, Equistar sponsors unfunded postretirement benefit plans other than pensions ("OPEB") for both salaried and non-salaried employees, which provide medical and life insurance benefits. These postretirement health care plans are contributory while the life insurance plans are noncontributory. Currently, Equistar pays approximately 80% of the cost of the health care plans, but reserves the right to modify the cost-sharing provisions at any time. 106 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table provides a reconciliation of benefit obligations, plan assets and the funded status of these plans:
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS --------------------------------------- --------------------------------------- MILLIONS OF DOLLARS 1999 1998 1999 1998 - ------------------- ---------------- ---------------- ---------------- ---------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation, January 1 $ 88 $ 21 $ 69 $ 50 Benefit obligation contributed by Occidental -- 46 -- 14 Service cost 22 16 4 3 Interest cost 7 5 6 4 Actuarial (gain) loss (8) 5 (2) (2) Benefits paid (10) (5) -- -- ----- ----- ----- ----- Benefit obligation, December 31 99 88 77 69 ----- ----- ----- ----- CHANGE IN PLAN ASSETS: Fair value of plan assets, January 1 88 40 -- -- Fair value of plan assets contributed by Occidental -- 51 -- -- Actual return of plan assets 7 1 -- -- Partnership contributions 16 1 -- -- Benefits paid (10) (5) -- -- ----- ----- ----- ----- Fair value of plan assets, December 31 101 88 -- -- ----- ----- ----- ----- Funded status 2 -- (77) (69) Unrecognized actuarial loss 5 13 13 16 ----- ----- ----- ----- Net amount recognized $ 7 $ 13 $ (64) $ (53) ===== ===== ===== ===== AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF: Prepaid benefit cost $ 33 $ 30 $ -- $ -- Accrued benefit liability (26) (17) (64) (53) ----- ----- ----- ----- Net amount recognized $ 7 $ 13 $ (64) $ (53) ===== ===== ===== =====
The benefit obligation, accumulated benefit obligation and fair value of assets for pension plans with benefit obligations in excess of plan assets were $40 million, $26 million and $13 million, respectively, as of December 31, 1999 and $24 million, $17 million and $5 million, respectively, as of December 31, 1998. Net periodic pension and other postretirement benefit costs included the following components:
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------------------------- ------------------------------------ MILLIONS OF DOLLARS 1999 1998 1999 1998 - ------------------- --------------- --------------- --------------- --------------- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 22 $ 16 $ 4 $ 3 Interest cost 7 5 6 4 Amortization of actuarial loss 1 -- 1 -- Expected return of plan assets (8) (6) -- -- --------------- --------------- --------------- --------------- Net periodic benefit cost after settlement $ 22 $ 15 $ 11 $ 7 =============== =============== =============== ===============
107 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------------------------- ------------------------------------- 1999 1998 1999 1998 --------------- --------------- --------------- --------------- WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31: Discount rate 8.00% 6.75% 8.00% 6.75% Expected return on plan assets 9.50% 9.50% - - - - Rate of compensation increase 4.75% 4.75% 4.75% 4.75%
The non-union plans became effective January 1, 1998; therefore, Equistar did not recognize any net periodic pension cost during the period from December 1, 1997 (inception) to December 31, 1997. The accrued postretirement benefit liabilities at December 31, 1997 were calculated and contributed as of December 31, 1997; therefore, there were 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, 1999 was 7.0% for 2000- 2001 and 5.0% thereafter. The health care cost trend rate assumption does not have a significant effect on the amounts reported. To illustrate, increasing or decreasing the assumed health care cost trend rates by one percentage point in each year would change the accumulated postretirement benefit liability as of December 31, 1999 by less than $2 million and would not have a material effect on the aggregate service and interest cost components of the net periodic postretirement benefit cost for the year then ended. Equistar also maintains voluntary defined contribution savings plans for eligible employees. Contributions to the plans by Equistar were $20 million, $15 million and less than $1 million for the years ended December 31, 1999 and 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. 16. COMMITMENTS AND CONTINGENCIES Equistar 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. See also Note 6, describing related party commitments. 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 Equistar. 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. Equistar has also agreed to indemnify Occidental up to $7 million on a similar basis relating to the operation of the Occidental Contributed Business prior to May 15, 1998. During the years ended December 31, 1999 and 1998, Equistar incurred $11 million and $5 million, respectively, for these uninsured claims and liabilities. No expenses were incurred for these uninsured claims and liabilities during the period December 1, 1997 (inception) to December 31, 1997. Equistar's policy is to be in compliance with all applicable environmental laws. Equistar 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, Equistar cannot accurately predict 108 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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. Equistar had no reserves for environmental matters as of December 31, 1999 and 1998. 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 Equistar. 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 Equistar'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 AND RELATED INFORMATION Using the guidelines set forth in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, Equistar has identified two segments in which it operates. The reportable segments are petrochemicals and polymers. The petrochemicals segment includes olefins, oxygenated chemicals, aromatics and specialty chemicals. Olefins include ethylene, propylene and butadiene, and the oxygenated chemicals include ethylene oxide, ethylene glycol, ethanol and MTBE. Aromatics include benzene and toluene. The polymers segment consists of polyolefins, including high-density polyethylene, low-density polyethylene, linear low-density polyethylene, polypropylene, and performance polymers. The performance polymers include enhanced grades of polyethylene, including wire and cable resins, and polymeric powders. The concentrates and compounds business, which was part of performance polymers products, was sold effective April 30, 1999 (see Note 18). No customer accounted for 10% or more of sales during the years ended December 31, 1999 and 1998 or the one-month ended December 31, 1997. The accounting policies of the segments are the same as those described in "Summary of Significant Accounting Policies" (see Note 2). 109 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Summarized financial information concerning Equistar's reportable segments is shown in the following table. Intersegment sales between the petrochemicals and polymers segments were made at prices based on current market values.
MILLIONS OF DOLLARS PETROCHEMICALS POLYMERS UNALLOCATED ELIMINATIONS CONSOLIDATED - ------------------- -------------- -------- ----------- ------------ ------------ For the year ended December 31, 1999: Sales and other operating operating revenues: Customers $3,412 $2,024 $ - - $ - - $ 5,436 Intersegment 1,324 - - $ - - (1,324) - - ------------------ ---------------- --------------- ---------------- ---------- $4,736 $2,024 $ - - $(1,324) $ 5,436 ================== ================ =============== ================ ========== Restructuring and other unusual charges $ - - $ - - $ 96 $ - - $ 96 ================== ================ =============== ================ ========== Operating income $ 447 $ 51 $ (336) $ - - $ 162 ================== ================ =============== ================ ========== Total assets $3,671 $1,551 $1,514 $ - - $ 6,736 ================== ================ =============== ================ ========== Capital expenditures $ 61 $ 83 $ 13 $ - - $ 157 ================== ================ =============== ================ ========== Depreciation and amortization expense $ 194 $ 53 $ 53 $ - - $ 300 ================== ================ =============== ================ ========== For the year ended December 31, 1998: Sales and other operating operating revenues: Customers $2,351 $2,012 $ - - $ - - $ 4,363 Intersegment 1,112 46 - - (1,158) - - ------------------ ---------------- --------------- ---------------- ---------- $3,463 $2,058 $ - - $(1,158) $ 4,363 ================== ================ =============== ================ ========== Restructuring and other unusual charges $ - - $ - - $ 14 $ - - $ 14 ================== ================ =============== ================ ========== Operating income $ 319 $ 177 $ (214) $ - - $ 282 ================== ================ =============== ================ ========== Total assets $3,625 $1,563 $1,477 $ - - $ 6,665 ================== ================ =============== ================ ========== Capital expenditures $ 71 $ 116 $ 13 $ - - $ 200 ================== ================ =============== ================ ========== Depreciation and amortization expense $ 152 $ 65 $ 51 $ - - $ 268 ================== ================ =============== ================ ========== For the period from December 1, 1997 (inception) to December 31, 1997: Sales and other operating revenues: Customers $ 179 $ 186 $ - - $ - - $ 365 Intersegment 105 - - - - (105) - - ------------------ ---------------- --------------- ---------------- ---------- $ 284 $ 186 $ - - $ (105) $ 365 ================== ================ =============== ================ ========== Restructuring and other unusual charges $ - - $ - - $ 42 $ - - $ 42 ================== ================ =============== ================ ========== Operating income $ 47 $ 22 $ (54) $ - - $ 15 ================== ================ =============== ================ ========== Total assets $1,668 $1,504 $1,428 $ - - $ 4,600 ================== ================ =============== ================ ========== Capital expenditures $ 7 $ 4 $ 1 $ - - $ 12 ================== ================ =============== ================ ========== Depreciation and amortization expense $ 7 $ 7 $ 5 $ - - $ 19 ================== ================ =============== ================ ==========
110 EQUISTAR CHEMICALS, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table presents the details of "Operating income" as presented above in the "Unallocated" column for the years ended December 31, 1999 and 1998 and for the period from December 1, 1997 (inception) to December 31, 1997:
MILLIONS OF DOLLARS 1999 1998 1997 - ------------------- ------------- ------------- ------------- Expenses not allocated to petrochemicals and polymers: Principally general and administrative expenses $(240) $(200) $ (12) Restructuring and other unusual charges (96) (14) (42) ------------- ------------- ------------- Total--Unallocated $(336) $(214) $ (54) ============= ============= =============
The following table presents the details of "Total assets" as presented above in the "Unallocated" column as of December 31, for the years indicated:
MILLIONS OF DOLLARS 1999 1998 1997 - ------------------- ------------- ------------- ------------- Cash $ 108 $ 66 $ 41 Accounts receivable--trade and related parties 18 14 - - Receivable with partners - - - - 150 Prepaids and other current assets 22 25 24 Property, plant and equipment, net 58 48 16 Goodwill, net 1,119 1,151 1,139 Deferred charges and other assets 189 173 58 ------------- ------------- ------------- $1,514 $1,477 $1,428 ============= ============= =============
18. SALE OF CONCENTRATES AND COMPOUNDS BUSINESS Effective April 30, 1999, Equistar completed the sale of its concentrates and compounds business. The transaction included two manufacturing facilities, located in Heath, Ohio and Crockett, Texas, and related inventories. Equistar recorded a net gain on the sale of approximately $42 million reported in "Other income, net" in the Consolidated Statements of Income. 111 LYONDELL-CITGO REFINING LP REPORT OF INDEPENDENT ACCOUNTANTS To the Partnership Governance Committee of LYONDELL-CITGO Refining LP In our opinion, the accompanying balance sheet as of December 31, 1999, the related statements of income, partners' capital and cash flows for the year then ended, and the statements of income, partners' capital and cash flows for the year ended December 31, 1997 present fairly, in all material respects, the financial position of LYONDELL-CITGO Refining LP (the Partnership) at December 31, 1999, and the results of its operations and its cash flows for the year ended December 31, 1999 and the year ended December 31, 1997 in conformity with accounting principles generally accepted in the United States. 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 of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 2 to the financial statements, the Partnership does not currently have the ability to repay its $450 million note payable that is due May 5, 2000, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRICEWATERHOUSECOOPERS LLP Houston, Texas February 25, 2000 112 LYONDELL-CITGO REFINING LP INDEPENDENT AUDITORS' REPORT To the Partnership Governance Committee of LYONDELL-CITGO Refining LP We have audited the accompanying balance sheet of LYONDELL-CITGO Refining LP (a Limited Partnership) as of December 31, 1998 and the related statements of income, partners' capital, and cash flows for the year then ended. 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, such financial statements present fairly, in all material respects, the financial position of LYONDELL-CITGO Refining LP as of December 31, 1998 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas February 11, 1999 113 LYONDELL-CITGO REFINING LP STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31 -------------------------------------------------------------------- MILLIONS OF DOLLARS 1999 1998 1997 - ------------------- ------------------ ------------------ ------------------ SALES AND OTHER OPERATING REVENUES $2,571 $2,055 $2,697 OPERATING COSTS AND EXPENSES: Cost of sales: Crude oil and feedstock 1,959 1,264 1,960 Operating and other expenses 473 490 482 Selling, general and administrative expenses 66 78 72 Unusual charges 6 10 - - ------------------ ------------------ ------------------ 2,504 1,842 2,514 ------------------ ------------------ ------------------ Operating income 67 213 183 Interest expense (45) (44) (37) Interest income 1 1 2 ------------------ ------------------ ------------------ Income before state income taxes 23 170 148 Provision for (benefit from) state income taxes (1) 1 1 ------------------ ------------------ ------------------ NET INCOME $ 24 $ 169 $ 147 ================== ================== ==================
See Notes to Financial Statements. 114 LYONDELL-CITGO REFINING LP BALANCE SHEETS
DECEMBER 31 -------------------------------------------- MILLIONS OF DOLLARS 1999 1998 - ------------------- ------------------ ------------------ ASSETS Current assets: Cash and cash equivalents $ 16 $ 24 Accounts receivable: Trade, net 43 39 Related parties and affiliates 101 26 Inventories 47 106 Prepaid expenses and other current assets 12 2 ------------------ ------------------ Total current assets 219 197 ------------------ ------------------ Property, plant and equipment 2,255 2,234 Construction projects in progress 112 80 Accumulated depreciation and amortization (1,017) (944) ------------------ ------------------ 1,350 1,370 Deferred charges and other assets 60 70 ------------------ ------------------ Total assets $ 1,629 $1,637 ================== ================== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable: Trade $ 75 $ 71 Related parties and affiliates 129 42 Distribution payable to Lyondell Partners 33 19 Distribution payable to CITGO Partners 23 13 Loan payable to bank - - 20 Current maturities of long-term debt 450 - - Taxes, payroll and other liabilities 47 38 ------------------ ------------------ Total current liabilities 757 203 ------------------ ------------------ Long-term debt, less current maturities - - 450 Loans payable to Lyondell Partners 219 231 Loans payable to CITGO Partners 28 36 Pension, postretirement benefit and other liabilities 69 68 ------------------ ------------------ Total long-term liabilities 316 785 Commitments and contingencies Partners' capital 556 649 ------------------ ------------------ Total liabilities and partners' capital $ 1,629 $1,637 ================== ==================
See Notes to Financial Statements. 115 LYONDELL-CITGO REFINING LP STATEMENTS OF CASH FLOWS
For the year ended December 31 --------------------------------------------------------------------- MILLIONS OF DOLLARS 1999 1998 1997 - ------------------- ------------------ ------------------ ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 24 $ 169 $ 147 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 103 100 91 (Increase) decrease in accounts receivable - trade, net (4) (2) 72 (Increase) decrease in accounts receivable - related parties (75) 16 9 Decrease (increase) in inventories 59 (9) - - Increase in prepaid expenses and other current assets (10) (1) (1) Increase (decrease) in accounts payable - trade 4 4 (89) Increase (decrease) in accounts payable - related parties 87 (83) (27) Increase in taxes, payroll and other liabilities 9 3 5 (Increase) in deferred charges and other assets and change in pension, postretirement benefit and other liabilities (16) (28) 5 ------------------ ------------------ ------------------- Net cash provided by operating activities 181 169 212 ------------------ ------------------ ------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property, plant and equipment: Maintenance capital expenditures (13) (19) (12) Environmental capital expenditures (19) (12) (11) Capital enhancement expenditures (24) (27) (17) Refinery upgrade expenditures - - (3) (45) ------------------ ------------------ ------------------- Total capital expenditures (56) (61) (85) Other (1) (1) (1) ------------------ ------------------ ------------------- Net cash used in investing activities (57) (62) (86) ------------------ ------------------ ------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (repayment of) bank loan (20) 20 (10) Contributions from Lyondell Partners - - - - 66 Contributions from CITGO Partners - - - - 63 Proceeds from Lyondell Partners' loans 35 35 20 Proceeds from CITGO Partners' loans 25 19 16 Distributions to Lyondell Partners (101) (130) (147) Distributions to CITGO Partners (71) (92) (91) Reimbursements from CITGO Partners - - - - 10 ------------------ ------------------ ------------------- Net cash used in financing activities (132) (148) (73) ------------------ ------------------ ------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8) (41) 53 Cash and cash equivalents at beginning of period 24 65 12 ------------------ ------------------ ------------------- Cash and cash equivalents at end of period $ 16 $ 24 $ 65 ================== ================== ===================
See Notes to Financial Statements. 116 LYONDELL-CITGO REFINING LP STATEMENTS OF PARTNERS' CAPITAL
LYONDELL CITGO MILLIONS OF DOLLARS PARTNERS PARTNERS TOTAL - ------------------- ------------------ ------------------ ------------------ BALANCE, JANUARY 1, 1997 $ 57 $ 606 $ 663 Cash contributions 66 73 139 Distributions (158) (118) (276) Net income 103 44 147 ------------------ ------------------ ------------------ BALANCE, DECEMBER 31, 1997 68 605 673 Distributions (113) (80) (193) Net income 110 59 169 ------------------ ------------------ ------------------ BALANCE, DECEMBER 31, 1998 65 584 649 Other contributions 47 32 79 Distributions (115) (81) (196) Net income 23 1 24 ------------------ ------------------ ------------------ BALANCE, DECEMBER 31, 1999 $ 20 $ 536 $ 556 ================== ================== ==================
See Notes to Financial Statements. 117 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS 1. THE PARTNERSHIP On July 1, 1993, Lyondell Chemical Company ("Lyondell") and CITGO Petroleum Corporation ("CITGO") announced the commencement of operations of LYONDELL-CITGO Refining LP ("LCR" or "Partnership") (formerly LYONDELL-CITGO Refining Company Ltd.), 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 Partnership through wholly owned subsidiaries, Lyondell Refining LP, LLC ("Lyondell LP") and Lyondell Refining Company ("Lyondell GP") (formerly LOwner). Lyondell LP and Lyondell GP together are known as Lyondell Partners. CITGO holds its interest through CITGO Refining Investment Company ("CITGO LP") (formerly COwner) and CITGO Gulf Coast Refining, Inc. ("CITGO GP"), both wholly owned subsidiaries of CITGO. CITGO LP and CITGO GP together are known as CITGO Partners. Lyondell Partners and CITGO Partners together are known as the Partners. During 1998, LCR converted from a Texas limited liability company to a Delaware limited partnership. Accordingly, the name was changed from LYONDELL-CITGO Refining Company Ltd. to LYONDELL-CITGO Refining LP. LCR will continue in existence until it is dissolved under the terms of the Limited Partnership Agreement ("Agreement"). The Partners 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 capital account balances. Based upon these contributions and other factors, Lyondell Partners and CITGO Partners had ownership interests of approximately 59 percent and 41 percent, respectively, as of December 31, 1999. CITGO Partners have a one-time option, expiring September 30, 2000, to increase their participation interest in LCR up to 50 percent by making an additional capital contribution. At December 31, 1999, the Partnership employed approximately 1,100 full-time employees. Of these, approximately 650 were covered by collective bargaining agreements between LCR and the Paper, Allied-Industrial, Chemical and Energy Workers International Union ("PACE"), formerly the Oil, Chemical and Atomic Workers International Union ("OCAW"). LCR also uses the services of independent contractors in the routine conduct of its business. 2. LIQUIDITY LCR has $450 million outstanding under a five-year term credit facility, which expires in May 2000. Lyondell and CITGO expect that LCR will be able to extend or refinance this debt before it is due. However, because there is presently no definitive agreement in place, the debt is classified as a current liability. The inability to extend or refinance the debt would raise substantial doubt about LCR's ability to continue as a going concern in its present form. No effect has been given to this uncertainty in these financial statements. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition--Revenue from product sales is 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 118 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) 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. Accounts Receivable--The Partnership sells its products primarily to companies in the petrochemical and refining industries. The Partnership performs ongoing credit evaluations of its customers' financial condition and in certain circumstances requires letters of credit from them. The Partnership's allowance for doubtful accounts receivable, which is reflected in the Balance Sheets as a reduction of accounts receivable-trade, totaled approximately $50,000 and $179,000 at December 31, 1999 and 1998, 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. The primary components of property, plant and equipment are manufacturing facilities and equipment. Depreciation of property, plant and equipment 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 Partnership removes the cost of the assets and the related accumulated depreciation from the accounts and reflects any resulting gains or losses in income. Interest incurred on debt during the construction of major projects is capitalized. Effective January 1, 1998, the depreciable life of assets related to an upgrade project completed in February 1997 was increased from twenty to twenty-four years. These changes were accounted for as a change in accounting estimate. The gross value of these assets when the depreciable life changed was approximately $1 billion with accumulated depreciation of approximately $52 million. The increase in the depreciable life of these assets decreased depreciation expense by approximately $9 million for each of the years ended December 31, 1999 and 1998. Turnaround Maintenance and Repair Expenses--Cost of repairs and maintenance incurred in connection with turnarounds of major units at the Refinery exceeding $5 million are deferred and amortized using the straight-line method, until the next planned turnaround, generally four to six years. These costs consist of maintenance, repair and replacement costs that are necessary to maintain, extend and improve the operating capacity and efficiency rates of the production units. Amortization of deferred turnaround costs for 1999, 1998 and 1997 was approximately $13 million, $12 million and $10 million, respectively. 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. Exchanges--Inventory exchange transactions, which involve homogeneous 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 or receipt of cash are accounted for as purchases or 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 119 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) Balance Sheets in accordance with Statement of Financial Accounting Standards ("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, the disclosure of contingent 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. Long-Lived Assets Impairment--LCR periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review. The carrying value of long-lived assets is considered impaired when the separately identifiable anticipated net undiscounted cash flow from such asset is less than its carrying value. Comprehensive Income--Effective January 1, 1998, LCR adopted SFAS No. 130, Reporting Comprehensive Income. LCR had no items of other comprehensive income during the three years ended December 31, 1999. Derivatives--In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Subsequently, the FASB delayed the effective date by one year. The statement is effective for the Partnership's calendar year 2001. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending upon whether a derivative instrument is designed as part of a hedge transaction and, if it is, the type of hedge transaction. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are impacted by the hedged item. The ineffective portion of all derivatives designated as hedges will be recognized in current-period earnings. LCR is currently evaluating the effect that SFAS No. 133 implementation will have on LCR's Balance Sheets and Statements of Income. Reclassifications--Certain previously reported amounts have been restated to conform to classifications adopted in 1999. 4. RELATED PARTY TRANSACTIONS LCR is party to agreements with the following related parties: . PDVSA . PDVSA Oil . CITGO . CITGO Partners . Lyondell . Lyondell Partners . Equistar Chemicals, LP ("Equistar") a 41% owned investment of Lyondell . Atlantic Richfield Company ("ARCO"), former parent of Lyondell . ARCO PipeLine Company, a former affiliate of Lyondell LCR buys a substantial majority of its crude oil supply at market-based prices, adjusted for certain indexed items (see Note 13), from PDVSA Oil under the terms of a long-term crude oil supply agreement ("Crude Supply Agreement"). Under the terms of a long-term product sales agreement, CITGO buys all of the gasoline, low sulfur diesel and jet fuel produced at the Refinery at market-based prices. 120 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) LCR is party to a number of feedstock, product sales and administrative service agreements with Lyondell and Equistar. In addition, a tolling agreement provides for the production of alkylate and methyl tertiary butyl ether for the Partnership at Equistar's Channelview, Texas petrochemical complex. Effective January 1, 1999, the Partnership entered into a lubricant facility operating agreement and lubricant sales agreements with CITGO. The lubricant facility operating agreement allows CITGO to operate the lubricant facility in Birmingport, Alabama while the Partnership retains ownership. Under the terms of the lubricant sales agreements, CITGO buys paraffinic lubricants base oil, naphthenic lubricants, white mineral oils and specialty oils from the Partnership. During 1999, 1998 and 1997, LCR paid Lyondell Partners approximately $9 million, $9 million and $13 million, respectively, for interest on loans related to funding a portion of the upgrade project at the Refinery and other capital expenditures. Also, during 1999, 1998 and 1997, LCR paid CITGO Partners approximately $1 million, $2 million and $1 million, respectively, for interest on loans related to funding a portion of the upgrade project at the Refinery and other capital expenditures. Related party transactions are summarized as follows:
FOR THE YEAR ENDED DECEMBER 31 ------------------------------------------------------------------ MILLIONS OF DOLLARS 1999 1998 1997 - ------------------- ------------------ ------------------ ------------------ LCR billed related parties for the following: - --------------------------------------------- Sales of products: Equistar (a) $ 190 $ 131 $ 188 CITGO 1,755 1,424 1,791 PDVSA - - - - 7 ARCO - - - - 1 Services and cost sharing arrangements: Lyondell 3 4 5 CITGO 2 - - - - Financing costs in connection with upgrade project: CITGO Partners - - - - 7 Delivery shortfalls under Crude Supply Agreement: PDVSA Oil 12 - - - - Related parties billed LCR for the following: - --------------------------------------------- Purchase of products: Equistar (a) 263 238 351 CITGO 46 31 42 PDVSA 764 547 1,019 Transportation charges: CITGO 1 1 2 PDVSA 4 9 7 ARCO PipeLine Company - - - - 4 Services and cost sharing arrangements: Lyondell 4 4 7 CITGO 1 - - - -
(a) These transactions were with Lyondell prior to December 1, 1997. 121 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) 5. SUPPLEMENTAL CASH FLOW INFORMATION At December 31, 1999, 1998 and 1997, property, plant and equipment included approximately $7 million, $9 million and $13 million, respectively, of non-cash additions which related to accounts payable accruals. During 1999, 1998 and 1997, LCR paid interest of approximately $37 million, $43 million and $42 million, respectively. Of the interest paid during 1997, approximately $9 million was capitalized. No interest costs were capitalized during 1999 or 1998. During 1998 and 1997, LCR paid approximately $1 million each year for state income and franchise taxes. 6. 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 loans payable to bank, approximated their carrying value due to their short maturity. The fair value of long-term loans payable approximated their carrying value because they bear interest at variable rates. At December 31, 1999, LCR had issued letters of credit totaling approximately $9 million. The Partnership is party to take-or-pay contracts for hydrogen and electricity. At December 31, 1999, future minimum payments under these contracts with noncancelable contract terms in excess of one year were as follows:
MILLIONS OF DOLLARS - ------------------- 2000 $ 40 2001 40 2002 29 2003 29 2004 29 Thereafter 357 ------------------ Total minimum lease payments $524 ==================
Total LCR purchases under these agreements were approximately $87 million, $81 million and $90 million during 1999, 1998 and 1997, respectively. 7. INVENTORIES Inventories were as follows at December 31:
MILLIONS OF DOLLARS 1999 1998 - ------------------- ------------------- ------------------ Crude oil $ 14 $ 47 Refined products 20 45 Materials and supplies 13 14 ------------------- ------------------ Total inventories $ 47 $ 106 =================== ==================
During the year ended December 31, 1999, inventories were reduced, which resulted in a liquidation of LIFO inventory layers carried at costs which prevailed in prior years. The effect of the liquidation was to decrease cost of 122 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) sales and increase net income by approximately $1 million. There were no significant liquidations of LIFO inventories in 1998 or 1997. The excess of replacement cost of inventories over the carrying value was approximately $115 million and $40 million at December 31, 1999 and 1998, 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 most recently renewed in April 1999, and is being utilized for general business purposes and for letters of credit. At December 31, 1999, no amounts were outstanding under this credit facility. At December 31, 1998, $20 million was outstanding under this credit facility with a weighted average interest rate of 5.3 percent. Interest for this credit facility is based on either prime, 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 LCR'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. This second facility is due in May of 2000 and accordingly in 1999 the $450 million was reclassified from a long-term liability to a current liability (see Note 2). At both December 31, 1999 and 1998, $450 million was outstanding under this credit facility with a weighted average interest rate of 5.8 percent and 6.2 percent, respectively. Interest for this facility is based on prime or eurodollar rates at the Partnership's option. Both facilities contain covenants that required LCR to maintain a minimum net worth which increased each year until 1998 and maintain certain financial ratios defined in the agreements. The facilities also contain other customary covenants which limit the Partnership'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 August 1999 both facilities were amended to change the covenant calculations of certain financial ratios. In consideration for these changes the Partners agreed that LCR would defer payment of interest accrued on loans payable to the Partners (see next two paragraphs) from July 1, 1999 through the termination date of the two facilities. In October 1995 LCR began borrowing funds from Lyondell Partners 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, 1999 and 1998, these subordinated loans totaled approximately $219 million and $231 million, respectively, and had a weighted average interest rate of 5.5 percent and 5.8 percent, respectively. Interest on these loans is based on eurodollar rates. Interest was payable at the end of each calendar quarter through June 30, 1999, but is now deferred, due to the amendment of the two bank credit facilities noted above. In January 1997 LCR began borrowing funds from CITGO Partners 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, 1999 and 1998, these subordinated loans totaled approximately $28 million and $36 million, respectively, and had a weighted average interest rate of 5.5 percent and 5.8 percent, respectively. Interest on these loans is based on eurodollar rates. Interest was payable at the end of each calendar quarter through June 30, 1999, but is now deferred, due to the amendment of the two bank credit facilities noted above. In December 1999 the Partners agreed to reclassify part of the outstanding balance of their respective loans to their respective partners' capital accounts in relation to their ownership interests of approximately 59 percent for Lyondell Partners and 41 percent for CITGO Partners. Approximately $47 million and $32 million of Lyondell Partners' and CITGO Partners' loans, respectively, were reclassified to the respective partners' capital accounts. 123 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) During 1999, 1998 and 1997, LCR incurred approximately $45 million, $44 million and $45 million of interest cost, respectively. Of the interest cost incurred in 1997, the Partnership capitalized approximately $9 million. No interest costs were capitalized in 1999 or 1998. 9. LEASE COMMITMENTS LCR leases crude oil storage facilities, a fleet of railroad tank cars, computers, office equipment and other items. At December 31, 1999, future minimum lease payments for operating leases with noncancelable lease terms in excess of one year were as follows:
MILLIONS OF DOLLARS - ------------------- 2000 $13 2001 13 2002 9 2003 1 2004 1 Thereafter 6 ------------------ Total minimum lease payments $43 ==================
Operating lease net rental expenses for the years ended December 31, 1999, 1998 and 1997 were approximately $27 million, $26 million and $22 million, respectively. 10. EMPLOYEE BENEFIT PLANS Employee Savings--LCR sponsors qualified defined contribution retirement and savings plans covering substantially all eligible salaried and hourly employees. Participants make voluntary contributions to the plans and the Partnership makes contributions, including matching employee contributions, based on plan provisions. LCR expensed $5 million related to its contributions to these plans in each of the three years ended December 31, 1999. Pension Benefits--LCR sponsors one qualified noncontributory defined benefit pension plan covering eligible hourly employees and one covering eligible salaried employees. The Partnership also sponsors one nonqualified defined benefit plan for certain eligible employees. The qualified plans' assets include primarily stocks and bonds. The nonqualified plan is not funded. LCR's policy is to fund the qualified pension plans in accordance with applicable laws and regulations and not to exceed the tax deductible limits. The nonqualified plans are funded as necessary to pay retiree benefits. The plan benefits for each of the qualified pension plans are primarily based on an employee's years of plan service and compensation as defined by each plan. Postretirement Benefits Other Than Pensions--In addition to pension benefits, the Partnership also provides certain health care and life insurance benefits for eligible salaried and hourly employees at retirement. These benefits are subject to deductibles, co-payment provisions and other limitations and are primarily funded on a pay as you go basis. The Partnership reserves the right to change or to terminate the benefits at any time. 124 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) The following table sets forth the changes in benefit obligations and plan assets for the pension and postretirement plans for the years ended December 31, 1999 and 1998 and the funded status of such plans reconciled with amounts reported in the Partnership's Balance Sheets.
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS --------------------------------------- --------------------------------------- MILLIONS OF DOLLARS 1999 1998 1999 1998 - ------------------- ---------------- ---------------- ---------------- ---------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation, January 1 $ 88 $ 64 $ 46 $ 42 Service cost 5 5 1 2 Interest cost 6 5 2 2 Actuarial loss (gain) 6 9 (18) (2) Liability transfer -- -- -- 2 Special termination benefits (17) 7 1 -- Benefits paid (22) (2) (1) -- ---------------- ---------------- ---------------- ---------------- Benefit obligation, December 31 66 88 31 46 ---------------- ---------------- ---------------- ---------------- CHANGE IN PLAN ASSETS: Fair value of plan assets, January 1 43 37 -- -- Actual return on plan assets 2 3 -- -- Partnership contributions 16 5 1 -- Benefits paid (22) (2) (1) -- ---------------- ---------------- ---------------- ---------------- Fair value of plan assets, December 31 39 43 -- -- ---------------- ---------------- ---------------- ---------------- Funded status (27) (45) (31) (46) Unrecognized actuarial loss 2 18 -- 6 Unrecognized prior service cost 2 2 (28) (2) Unrecognized transition (asset) obligation -- (1) 16 -- ---------------- ---------------- ---------------- ---------------- Accrued benefit cost $ (23) $ (26) $ (43) $ (42) ================ ================ ================ ================ Accumulated benefit obligation $ 48 $ 53 N/A N/A ================ ================ ================ ================
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS -------------------------------------- ------------------------------- MILLIONS OF DOLLARS 1999 1998 1997 1999 1998 1997 - ------------------- ----------- ----------- ---------- ---------- --------- ------ Components of net periodic benefit cost: Service cost $ 5 $ 5 $ 4 $ 1 $ 2 $ 2 Interest cost 6 5 5 2 2 3 Expected return on plan assets (4) (3) (3) -- -- -- Amortization of: Prior service costs -- -- -- (3) -- -- Actuarial (gain) loss 1 -- -- 1 -- -- ---------------------------------------- ---------------------------------- Net periodic benefit cost before FAS 88 cost 8 7 6 1 4 5 Effect of curtailments, settlements and special termination benefits 5 -- -- 1 2 -- ---------------------------------------- ---------------------------------- Net periodic benefit cost $ 13 $ 7 $ 6 $ 2 $ 6 $ 5 ======================================== ================================== Special termination benefit charge $ 3 $ 7 $ -- $ 1 $ -- $ -- ======================================== ==================================
125 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued)
OTHER -------------------------- PENSION BENEFITS POSTRETIREMENT BENEFITS --------------------- -------------------------- 1999 1998 1997 1999 1998 1997 ----- ----- ----- ------- ------- ------ Weighted-average assumptions as of December 31: Discount rate 8.00% 6.75% 7.25% 8.00% 6.75% 7.25% Expected return on plan assets 9.50% 9.50% 9.50% N/A N/A N/A Rate of compensation increase 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%
For measurement purposes, the assumed annual rate of increase in the per capita costs of health care benefits as of December 31, 1999 was 7 percent for 2000- 2001 and 5 percent thereafter. The benefit obligation, accumulated benefit obligation and the fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $52 million, $38 million and $27 million, respectively, as of December 31, 1999 and $73 million, $53 million and $33 million, respectively, as of December 31, 1998. Assumed health care cost trend rates have an effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-PERCENTAGE- 1-PERCENTAGE- MILLIONS OF DOLLARS POINT INCREASE POINT DECREASE - ------------------- -------------- -------------- Effect on total of service and interest cost components $ - - $ - - Effect on postretirement benefit obligation 1 - -
During 1998, LCR and PACE ratified a new, three-year labor contract. That contract called for a Reduction In Force ("RIF") program, which will result in certain personnel reductions. LCR expensed approximately $6 million and $10 million in 1999 and 1998, respectively, relating to the two phases of the RIF (RIF I and RIF II) which are reflected as "Unusual charges" on the Statements of Income. In RIF I, approximately 80 employees in 1998 made an irrevocable voluntary election to terminate employment and retire. In RIF II, approximately 45 employees are eligible to make an irrevocable voluntary election to terminate employment and retire. The election period for RIF II was open from November 15, 1999 to January 31, 2000. At December 31, 1999, 37 employees had made the election. Employees that have made the election or will make the election will receive certain special termination benefits in the form of enhanced retirement benefits. LCR expects additional amounts for RIF II to be expensed in 2000. 11. INCOME TAXES LCR is treated as a partnership for federal income tax purposes; consequently, no provision for federal income taxes is required. LCR is however, subject to state income taxes, and therefore a provision for or benefit from state income taxes has been recorded. Pretax income was taxed by domestic jurisdictions only. The benefit from state income tax was approximately $1 million in 1999. The provision for state income tax was approximately $1 million in both 1998 and 1997. In addition, there was no deferred provision for state income tax in 1999, 1998 and 1997. 12. PRODUCTION UNITS On May 3, 1999 LCR shut down a fluid catalytic cracking unit as a result of a malfunction that damaged the main air blower. Repairs were completed and the unit was placed back in service in late May 1999. On May 7, 1999 126 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) LCR shut down one of two coker units following a fire. Repairs were completed and this unit was placed back in service in early July 1999. As a result of these two incidents, crude oil processing rates were reduced. Both of these incidents are covered by business interruption insurance, subject to deductibles of $10 million per incident. LCR is pursuing recoveries under its insurance policies and claims against third parties with respect to the production unit outages. LCR recorded approximately $12 million of business interruption insurance recoveries related to these incidents in the year ended December 31, 1999. Additional amounts are expected to be recovered in 2000. 13. COMMITMENTS AND CONTINGENCIES LCR is subject to various lawsuits and proceedings. With respect to liabilities associated with LCR, Lyondell generally has retained liability for events that occurred prior to July 1, 1993 and certain ongoing environmental projects at the Refinery under the Contribution Agreement, retained liability section. LCR generally is responsible for liabilities associated with events occurring after June 30, 1993 and ongoing environmental compliance inherent to the operation of the Refinery. LCR's policy is to be in compliance with all applicable environmental laws. LCR 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. LCR estimates that it has a liability of approximately $4 million at December 31, 1999 related to future Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), Resource Conservation and Recovery Act ("RCRA"), and the Texas Natural Resource Conservation Commission ("TNRCC") assessment and remediation costs. Lyondell has a contractual obligation to reimburse LCR for a portion of this liability, which is currently estimated to be approximately $3 million. Accordingly, LCR has recorded a current liability of approximately $1 million for the portion of this liability that will not be reimbursed by Lyondell. In the opinion of management, there is currently no material range of probable 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 LCR to reassess its potential exposure related to environmental matters. Under the Crude Supply Agreement, LCR is required to purchase, and PDVSA Oil is required to sell 230,000 barrels per day of extra heavy Venezuelan crude oil. Depending on market conditions, a breach or termination of the Crude Supply Agreement could adversely affect LCR. In the event of certain force majeure conditions, including governmental, OPEC or other actions restricting or otherwise limiting PDVSA Oil's ability to perform its obligations, LCR may seek alternative crude supply arrangements. Any such alternative arrangements may not be as beneficial as the Crude Supply Agreement. Currently, alternative crude oils with similar margins are not available for purchase by LCR. Furthermore, the breach or termination of the Crude Supply Agreement would require LCR to purchase all or a portion of its crude oil feedstocks in the merchant market and would subject LCR to significant volatility and price fluctuations. In late April 1998, LCR received notification from PDVSA Oil of reduced allocations of crude oil related to OPEC production cuts. LCR began receiving reduced allocations of crude oil from PDVSA Oil in August 1998. Following the March 1999 OPEC agreement to limit production, LCR was advised by PDVSA Oil in May 1999 of a 127 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) further reduction in the allocation of crude oil supplied under the Crude Supply Agreement. In addition, PDVSA Oil reduced crude oil deliveries on several occasions in 1999 for economic reasons unrelated to the OPEC production cuts. PDVSA Oil has made payments in accordance with the Crude Supply Agreement for these reduced crude oil deliveries that are not related to OPEC production cuts and therefore are not subject to the force majeure provisions of the Crude Supply Agreement. LCR 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 position of LCR. 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 LCR's results of operations for that period. 14. SUBSEQUENT EVENT In January 2000, LCR and Calpine Construction Finance Company, L.P. ("Calpine") entered into an agreement under which Calpine will construct, own and operate a "Qualifying Cogeneration Facility" ("Cogen Facility") as defined under the provisions of the Public Utilities Regulatory Policies Act of 1978, as amended. The Cogen Facility will be built at the Refinery and will supply electricity and steam to LCR. LCR is scheduled to first receive services from the Cogen Facility in mid-2001. 128 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 12, 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 4, 2000, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999, and which is incorporated herein by reference. 129 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. 3.1 --Amended and Restated Certificate of Incorporation of the Registrant(15) 3.1(a) --Certificate of Ownership and Merger dated July 31, 1998. 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(18) 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(18) 4.3 --Indenture, as supplemented by a First Supplemental Indenture, between the Registrant and Texas Commerce Bank, as Trustee(11) 4.3(a) --Second Supplemental Indenture between the Registrant, Equistar and Texas Commerce Bank National Association(18) 4.4 --Specimen certificate(1) 4.5 --LCR $70,000,000 Credit Agreement(7) 4.5(a) --Amendment No. 1 to the LCR $70,000,000 Credit Agreement(12) 4.5(b) --Amendment No. 2 to the LCR $70,000,000 Credit Agreement(14) 4.5(c) --Amendment No. 3 to the LCR $70,000,000 Credit Agreement(20) 4.5(d) --Amendment No. 4 to the LCR $70,000,000 Credit Agreement(20) 4.6 --LCR $450,000,000 Credit Agreement(7) 4.6(a) --Amendment No. 1 to the LCR $450,000,000 Credit Agreement(12) 4.6(b) --Amendment No. 2 to the LCR $450,000,000 Credit Agreement(14) 4.6(c) --Amendment No. 3 to the LCR $450,000,000 Credit Agreement(20) 4.6(d) --Amendment No. 4 to the LCR $450,000,000 Credit Agreement(20) 4.7 --Rights Agreement between the Registrant and the Bank of New York, as Rights Agent(10) 4.8 --Credit Agreement dated as of November 25, 1997 among Equistar as Borrower, Millennium America Inc., as Guarantor, and the lenders party thereto(20) 4.8(a) --Amendment to the Credit Agreement dated as of November 25, 1997 among Equistar as Borrower, Millennium America Inc., as Guarantor, and the lenders party thereto(20) 4.9 --Lyondell Petrochemical Company $7,000,000,000 Credit Agreement dated as of July 23, 1998, as amended and restated as of April 16, 1999(21) 4.9(a) --Amendment No. 3, dated as of February 3, 2000, to Lyondell Petrochemical Company $7,000,000,000 Credit Agreement dated as of July 23, 1998 4.10 --Indenture dated as of January 15, 1999, as supplemented by a First Supplemental Indenture between Equistar and The Bank of New York (20) 4.10(a) --Second Supplemental Indenture dated October 4, 1999, between Equistar and The Bank of New York 4.11 --Indenture, dated as of June 15, 1988, between ARCO Chemical Company and Bank of New York as Trustee(20) 4.11(a) --First Supplemental Indenture dated as of January 5, 1999, between the Registrant and Bank of New York as Trustee 4.11(b) --Form of 9 3/8% Debenture Due 2005 issuable under the Indenture referred to in Exhibit 4.11(20) 4.11(c) --Form of 9.80% Debenture Due 2020 issuable under the Indenture referred to in Exhibit 4.11(20) 4.11(d) --Form of 9.90% Debenture Due 2000 issuable under the Indenture referred to in Exhibit 4.11(20) 4.11(e) --Form of 10.25% Debenture Due 2010 issuable under the Indenture referred to in Exhibit 4.11(20) 130 4.12 --Indenture among the Registrant, the Subsidiary Guarantors party thereto and The Bank of New York, as Trustee, dated as of May 17, 1999, for 9 5/8% Senior Secured Notes, Series A, due 2007(22) 4.13 --Indenture among the Registrant, the Subsidiary Guarantors party thereto and The Bank of New York, as Trustee, dated as of May 17, 1999, for 9 7/8% Senior Secured Notes, Series B, due 2007(22) 4.14 --Indenture among the Registrant, the Subsidiary Guarantors party thereto and The Bank of New York, as Trustee, dated as of May 17, 1999, for 10 7/8% Senior Subordinated Notes due 2009(22) 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(18) 10.3(a) --Amendment to the Amended and Restated Supplementary Executive Retirement Plan(18) 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(18) 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(18) 10.8(a) --Amendment to the Amended and Restated Supplemental Executive Benefit Plans Trust Agreement(18) 10.9 --Restricted Stock Plan(6) 10.9(a) --Amendment No. 1 to the Restricted Stock Plan(9) 10.9(b) --Amendment No. 2 to the Restricted Stock Plan(18) 10.10 --Form of Registrant's Indemnity Agreement with Officers and Directors 10.11 --Amended and Restated Elective Deferral Plan for Non-Employee Directors as of October 16, 1998, as amended by Amendment No. 1 thereto dated January 3, 2000, effective as of December 2, 1999 10.12 --Amended and Restated Retirement Plan for Non-Employee Directors(18) 10.12(a) --Amendment to the Amended and Restated Retirement Plan for Non- Employee Directors(18) 10.13 --Restricted Stock Plan for Non-Employee Directors(13) 10.13(a) --Amendment to the Restricted Stock Plan for Non-Employee Directors(18) 10.14 --Non-Employee Directors Benefit Plans Trust Agreement(18) 10.14(a) --Amendment to the Non-Employee Directors Benefit Plans Trust Agreement(18) 10.15 --1999 Long-Term Incentive Plan(20) 10.16 --Lyondell Chemical Company Executive Severance Pay Plan(20) 10.17 --ARCO Chemical Company Change of Control Plan(20) 10.18 --Description of 1998 Executive Incentive Plan(20) OTHER MATERIAL CONTRACTS: 10.19 --Conveyance (conformed without exhibits) between the Registrant and ARCO(1) 10.20 --Asset Purchase Agreement (conformed without exhibits) between the Registrant and Rexene Products Company(2) 10.21 --Limited Partnership Agreement of LCR (20) 10.22 --Contribution Agreement between the Registrant and LYONDELL-CITGO Refining Company Ltd.(5) 10.23 --Crude Oil Supply Agreement between LYONDELL-CITGO Refining Company Ltd. and Lagoven, S.A.(5) 10.24 --Asset Purchase Agreement between the Registrant and Occidental Chemical Company(8) 131 10.25 --Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP(19) 10.25(a) --First Amendment to Amended and Restated Limited Partnership Agreement of Equistar(20) 10.25(b) --Second Amendment to Amended and Restated Limited Partnership Agreement of Equistar 10.26 --Asset Contribution Agreement among the Registrant, Lyondell Petrochemical LP and Equistar Chemicals, LP(17) 10.26(a) --First Amendment to Asset Contribution Agreement among the Registrant, Lyondell Petrochemical LP and Equistar Chemicals, LP (20) 10.27 --Asset Contribution Agreement among Millennium Petrochemicals Inc., Millennium LP and Equistar Chemicals, LP(17) 10.27(a) --First Amendment to Asset Contribution Agreement among Millennium Petrochemicals Inc., Millennium LP and Equistar Chemicals, LP(20) 10.28 --Amended and Restated Parent Agreement dated May 15, 1998 among Occidental Chemical, Oxy CH Corporation, Occidental, the Registrant, Millennium and the Partnership(19) 10.28(a) --First Amendment to the Amended and Restated Parent Agreement(20) 10.28(b) --Assignment and Assumption Agreement with Respect to the Amended and Restated Parent Agreement(20) 10.29 --Agreement and Plan of Merger and Asset Contribution dated May 15, 1998 among Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner 2, Inc., Oxy Petrochemicals, PDG Chemical and the Partnership(19) 10.30 --Master Transaction Agreement dated November 16, 1999, among the Registrant, Bayer AG and Bayer Corporation(23) 12 --Statement Setting Forth Detail for Computation of Ratio of Earnings to Fixed Charges 21 --Subsidiaries of the Registrant 23.1 --Consent of PricewaterhouseCoopers LLP 23.2 --Consent of Deloitte & Touche LLP 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. (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, 1994 and incorporated herein by reference. (7) 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. (8) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of May 1, 1995 and incorporated herein by reference. (9) 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. (10) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated December 8, 1995 and incorporated herein by reference. (11) Filed as an exhibit to Registrant's Registration Statement on Form S-3 dated as of January 31, 1996 and incorporated herein by reference. (12) 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. (13) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 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. 132 (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 October 17, 1997 and incorporated herein by reference. (18) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. (19) Filed as an exhibit to the Registrant's Interim Report on Form 8-K dated as of May 15, 1998 and incorporated herein by reference. (20) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. (21) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated April 19, 1999 and incorporated herein by reference. (22) Filed as an exhibit to Registrant's Registration Statement on Form S-4 (No. 333-81831) incorporated herein by reference. (23) Filed as an exhibit to Registrant's Current Report on Form 8-K dated November 16, 1999 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 53. (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 only Current Report on Form 8-K filed during the quarter ended December 31, 1999, was a Report dated November 16, 1999, to report, under Item 5, the execution of a definitive agreement to sell Registrant's polyols business to Bayer AG. 133 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 CHEMICAL COMPANY BY: /s/ 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 /s/ William T. Butler* Chairman of the Board March 27, 2000 - ------------------------- (William T. Butler) /s/ Dan F. Smith* President, Chief Executive March 27, 2000 - ------------------------- Officer and Director (Dan F. Smith) /s/ Carol A. Anderson* Director March 27, 2000 - ------------------------- (Carol A. Anderson) /s/ Travis Engen* Director March 27, 2000 - ------------------------- (Travis Engen) /s/ Stephen F. Hinchliffe, Jr.* Director March 27, 2000 - ------------------------------- (Stephen F. Hinchliffe, Jr.) /s/ Dudley C. Mecum II* Director March 27, 2000 - ------------------------- (Dudley C. Mecum II) /s/ Frank Savage* Director March 27, 2000 - ------------------------- (Frank Savage) /s/ Paul R. Staley* Director March 27, 2000 - ------------------------- (Paul R. Staley) /s/ Robert T. Blakely Executive Vice President March 27, 2000 - ------------------------- and Chief Financial Officer (Robert T. Blakely) /s/ Kelvin Collard Vice President and March 27, 2000 - ------------------------- Controller (Kelvin Collard, Principal Accounting Officer) *By: /s/ Jeffrey R. Pendergraft March 27, 2000 ----------------------------------- (Jeffrey R. Pendergraft, as Attorney-in-fact) 134 EX-3.1A 2 CERTIFICATE Exhibit 3.1(a) CERTIFICATE OF OWNERSHIP AND MERGER MERGING LYONDELL MERGER COMPANY INTO LYONDELL PETROCHEMICAL COMPANY Pursuant to Section 253 of the General Corporation Law of the State of Delaware ------------------------------------------------ LYONDELL PETROCHEMICAL COMPANY, a corporation organized and existing under the laws of Delaware (the "Company"), DOES HEREBY CERTIFY: FIRST: That the Company was incorporated on November 15, 1985, pursuant to the General Corporation Law of the State of Delaware; SECOND: That the Company is the legal and beneficial owner of all of the outstanding shares of Common Stock, par value $.01 per share, of Lyondell Merger Company, a Delaware corporation, and that said common stock is the only issued and outstanding class of stock of Lyondell Merger Company; THIRD: That the Company desires to merge into itself Lyondell Merger Company and thereby to change its corporate name to "Lyondell Chemical Company" pursuant to the provisions of Section 253 of the Delaware General Corporation Law; FOURTH: That the Company, by the following resolutions of its Board of Directors, duly adopted on July 24, 1998, determined to merge into itself Lyondell Merger Company and thereby assume all of the liabilities and obligations of Lyondell Merger Company, and to change its corporate name to "Lyondell Chemical Company": Merger of Merger Sub into Company - --------------------------------- WHEREAS, the Company is the legal and beneficial owner of all of the outstanding shares of Common Stock, par value $.01 per share ("Merger Sub Common Stock"), of Lyondell Merger Company, a Delaware corporation ("Merger Sub"); WHEREAS, said Merger Sub Common Stock is the only issued and outstanding class of stock of Merger Sub; WHEREAS, the Company desires to merge into itself Merger Sub pursuant to the provisions of Section 253 of the Delaware General Corporation Law (the "DGCL"); -1- NOW, THEREFORE, LET IT BE RESOLVED, that, pursuant to the provisions of Section 253 of the DGCL, the Company merge (the "Merger") into itself Merger Sub, and assume all of the liabilities and obligations of Merger Sub; and further RESOLVED, that, pursuant to the provisions of Section 253(b) of the DGCL, at the effective time of the Merger, the name of the Company be changed to "Lyondell Chemical Company"; and further RESOLVED, that the Merger shall become effective upon the filing of the Certificate of Ownership and Merger with the Secretary of State of the State of Delaware (the "Certificate of Ownership and Merger"), or at such later time as may be set forth in the Certificate of Ownership and Merger; and further RESOLVED, that, at any time prior to the time that the filing of the Certificate of Ownership and Merger becomes effective, the Board of Directors of the Company may terminate the Certificate of Ownership and Merger; and further RESOLVED, that the President and Chief Executive Officer or any Vice President of the Company is authorized to make and execute a Certificate of Ownership and Merger setting forth a copy of these resolutions, and the date of adoption thereof, and to cause the same to be filed with the Secretary of State of Delaware; and further RESOLVED, that the officers of the Company are authorized to execute, deliver, file and record such documents, deeds, certificates and other instruments, in the name and on behalf of the Company, and to take all such further action to carry out and effect the Merger and the changes of ownership effected thereby as they shall consider necessary, desirable or appropriate. FIFTH: That the merger of Lyondell Merger Company into the Company and the name change of the Company effected thereby shall be effective at 7:00 p.m., Eastern Standard Time on Friday, July 31, 1998. I, THE UNDERSIGNED, being an authorized officer of the Company, do make this Certificate, hereby declaring and certifying that this is my act and deed and the facts herein stated are true, and accordingly have hereunto set my hand this 31st day of July, 1998. LYONDELL PETROCHEMICAL COMPANY By: /s/ Kerry Galvin --------------------------- Name: Kerry Galvin Title: Corporate Secretary -2- EX-4.9A 3 CREDIT AGREEMENT AMENDMENT Exhibit 4.9(a) AMENDMENT NO. 3 TO CREDIT AGREEMENT AMENDMENT No. 3 dated as of February 3, 2000 to the Credit Agreement dated as of July 23, 1998 (as heretofore amended, the "Credit Agreement") among LYONDELL CHEMICAL COMPANY, the LENDERS party thereto, the DOCUMENTATION AGENTS party thereto, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent and DLJ CAPITAL FUNDING, INC. as Syndication Agent. The parties hereto agree as follows: Section 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall, after this Amendment becomes effective, refer to the Credit Agreement as amended hereby. Section 2. Amendment of Section 1.01. (a) The definition of Material Debt is amended to read in its entirety as follows: "Material Debt" means Debt (other than the Loans and Reimbursement Obligations) of the Borrower and/or one or more of its Subsidiaries (including for this purpose the Borrower Joint Ventures, but excluding LCR so long as LCR is not at the time a "Significant Subsidiary" for purposes of the instruments governing the New Senior Notes or the New Senior Subordinated Notes), arising in one or more related or unrelated transactions, in an aggregate principal amount exceeding $50,000,000. (b) The definition of New Senior Notes is amended by changing the figure "$2,900,000,000" to "$4,000,000,000". (c) The definition of Net Cash Proceeds is amended by (i) substituting a comma for the word "and" immediately preceding "(b)" and (ii) adding the following new clause (c) at the end thereof: and (c) if such Reduction Event is an Equity Issuance, up to $300,000,000 of such cash proceeds so long as the same are invested in LCR, directly or indirectly, substantially simultaneously with the receipt thereof. Section 3. Amendment of Section 5.08. The following sentence is added at the end of Section 5.08: None of the proceeds of the Revolving Loans will be used to repay Debt of LCR. Section 4. Amendment of Section 5.10. Clause (d) of Section 5.10 is amended to read as follows: (d) intercompany Debt of an Obligor owing to an Obligor, or of any Subsidiary which is not an Obligor owing to the Borrower or any other Subsidiary, or of any Obligor owing to any Subsidiary which is not an Obligor if such Debt is expressly subordinated to the prior payment in full in cash of all amounts payable by such Obligor under the Loan Documents; Section 5. Amendment of Section 5.11. The table in Section 5.11 is amended to read in its entirety as follows: Period Ratio ------ ----- On or before June 30, 2000 7.75 July 1, 2000 - September 30, 2000 6.50 October 1, 2000 - December 31, 2000 6.00 January 1, 2001 - December 31, 2001 4.95 January 1, 2002 - December 31, 2002 3.00 At all times thereafter 2.50 Section 6. Amendment of Section 5.12. The table in Section 5.12 is amended to read in its entirety as follows: Period Ratio ------ ----- On or before June 30, 2000 1.20 July 1, 2000 - September 30, 2000 1.30 October 1, 2000 - December 31, 2000 1.50 January 1, 2001 - December 31, 2001 1.75 January 1, 2002 - December 31, 2002 2.40 Thereafter 2.60 Section 7. Amendment of Section 5.13. The figure "$475,000,000" in Section 5.13 is changed to "$375,000,000". 2 Section 8. Amendment to Section 5.15(b). Section 5.15(b) is amended by (1) substituting a comma for the word "and" immediately preceding "(v)" and (2) adding the following new clause (vi) at the end thereof: "and (vi) intercompany Debt." Section 9. Amendment to Section 6.01. Clauses (h) and (i) of Section 6.01 are amended to read as follows: (h) (i) the Borrower or any Significant Subsidiary (including for this purpose the Borrower Joint Ventures, but excluding LCR so long as LCR is not at the time a "Significant Subsidiary" for purposes of the instruments governing the New Senior Notes or the New Senior Subordinated Notes), 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 fail generally to pay its debts as they become due, or (ii) shall take any corporate action to authorize any of the foregoing; (i) an involuntary case or other proceeding shall be commenced against the Borrower or any Significant Subsidiary (including for this purpose the Borrower Joint Ventures, but excluding LCR so long as LCR is not at the time a "Significant Subsidiary" for purposes of the instruments governing the New Senior Notes or the New Senior Subordinated Notes), 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 or any Significant Subsidiary (including for this purpose the Borrower Joint Ventures, but excluding LCR so long as LCR is not at the time a "Significant Subsidiary" for purposes of the instruments governing the New Senior Notes or the New Senior Subordinated Notes), under the federal bankruptcy laws as now or hereafter in effect; Section 10. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. 3 Section 11. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Section 12. Effectiveness. This Amendment shall become effective on the first date (the "Amendment 3 Effective Date") on which all the following conditions have been satisfied: (a) receipt by the Administrative Agent of counterparts hereof signed by each of the Required Lenders and the Borrower (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 satisfactory to it of telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party); (b) receipt by the Administrative Agent of payment of an amendment fee for the account of each Lender which shall have executed and delivered a counterpart hereof (including delivery by facsimile transmission) not later than the date hereof in an amount equal to 0.25% of the Credit Exposure of such Lender at such date; and (c) receipt by each of the Agents, the Arranger and the Co- Arrangers of payment of all other costs, fees and expenses (including, without limitation, reasonable legal fees and expenses for which invoices shall have been submitted to the Borrower) and other compensation payable to any of the foregoing on or prior to the Amendment 3 Effective Date in connection with the Loan Documents. Promptly after the Amendment 3 Effective Date occurs, the Administrative Agent shall notify the Borrower, the other Agents and the Lenders thereof, and such notice shall be conclusive and binding on all parties hereto. 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. LYONDELL CHEMICAL COMPANY By: /s/ Robert T. Blakely ------------------------------------- Title: Executive Vice President & Chief Financial Officer MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent and as Lender By: /s/ Robert Bottamedi ----------------------------- Title: Vice President DLJ CAPITAL FUNDING, INC., as Syndication Agent and as Lender By: /s/ Eric Swanson ----------------------------- Title: Managing Director BANK OF AMERICA, N.A., as Documentation Agent and as Lender By: /s/ Michael J. Dillon ----------------------------- Title: Managing Director THE CHASE MANHATTAN BANK, as Documentation Agent By: /s/ Lawrence Palumbo, Jr. ----------------------------- Title: Vice President CITIBANK, N.A., as Documentation Agent and as Lender By: /s/ Melissa Moy ---------------------------- Title: Vice President CHASE BANK OF TEXAS NATIONAL ASSOCIATION By: /s/ D.G. Mills ---------------------------------- Title: Senior Vice President ABN AMRO BANK N.V. By: /s/ Collis G. Sanders ---------------------------------- Title: Senior Vice President & Managing Director By: /s/ Elizabeth H. Hurst ---------------------------------- Title: Group Vice President AERIES-II FINANCE LTD. By: INVESCO Senior Secured Management, Inc. as Sub-Managing Agent By: /s/ Joseph Rotondo ---------------------------------- Title: Authorized Signatory AG CAPITAL FUNDING PARTNERS, L.P. By: Angelo, Gordon & Co., L.P., as Investment Advisor By: /s/ Fred Berger ------------------------------------ Title: Chief Financial Officer ALLSTATE INSURANCE COMPANY By: /s/ Jerry D. Zinkula ------------------------------------- Title: Authorized Signatory By: /s/ Patricia W. Wilson ------------------------------------ Title: Authorized Signatory ALLSTATE LIFE INSURANCE COMPANY By: /s/ Jerry D. Zinkula ------------------------------------ Title: Authorized Signatory By: /s/ Patricia W. Wilson ------------------------------------ Title: Authorized Signatory AMARA-1 FINANCE, LTD. By: INVESCO Senior Secured Management, Inc., as Sub-Advisor By: /s/ Joseph Rotondo ---------------------------------- Title: Authorized Signatory AMMC CDO I, LIMITED By: /s/ Chester M. Eng ---------------------------------- Title: Attorney-in-Fact ARAB AMERICAN BANK By: /s/ Carmelo L. Foti/Rami El-Rifai ---------------------------------- Title: Vice President/Assistant Vice President ARAB BANK PLC By: /s/ Nofal S. Barbar ---------------------------------- Title: Executive Vice President & Regional Manager ARCHIMEDES FUNDING, L.L.C. By: ING Capital Advisors, LLC as Collateral Manager By: /s/ Michael J. Campbell ---------------------------------- Title: Senior V.P. & Portfolio Manager ARCHIMEDES FUNDING II, LTD By: ING Capital Advisors, LLC as Collateral Manager By: /s/ Michael J. Campbell ------------------------------------ Title: Senior V.P. & Portfolio Manager ARCHIMEDES FUNDING III, LTD. By: ING Capital Advisors LLC as Collateral Manager By: /s/ Michael J. Campbell -------------------------------- Title: Senior V.P. and Portfolio Manager ARES III CLO LTD. By: Ares CLO Management LLC By: /s/ David A. Sachs ------------------------------------ Title: Vice President ARES LEVERAGED INVESTMENT FUND, L.P. By: Ares Management, L.P., its General Partner By: /s/ David A. Sachs ------------------------------------ Title: Vice President ARES LEVERAGED INVESTMENT FUND II, L.P. By: Ares Management II, L.P., its General Partner By: /s/ David A. Sachs ------------------------------------ Title: Vice President ATHENA CDO, LIMITED By: Pacific Investment Management Company as its Investment Advisor By: /s/ Raymond G. Kennedy ------------------------------------ Title: Senior Vice President AVALON CAPITAL LTD. By: INVESCO Senior Secured Management, Inc. as Portfolio Advisor By: /s/ Joseph Rotondo ------------------------------------ Title: Authorized Signatory BALANCED HIGH YIELD FUND II LTD. By: BHF (USA) Capital Corporation acting as Attorney-In-Fact By: /s/ Perry Forman ------------------------------------ Title: Vice President By: /s/ Chris Yu ------------------------------------ Title: Associate BANCO ESPIRITO SANTO S.A., NASSAU BRANCH By: /s/ Andrew M. Orsen ------------------------------------ Title: Vice President By: /s/ Terry R. Hull ------------------------------------ Title: Senior Vice President BANK LEUMI USA By: /s/ Joung Hee Hong ---------------------------------------- Title: Vice President BANK OF MONTREAL By: /s/ Peter Konigsmann ---------------------------------------- Title: Director THE BANK OF NEW YORK By: /s/ Raymond J. Palmer ---------------------------------------- Title: Vice President THE BANK OF NOVA SCOTIA By: /s/ F.C.H. Ashby ---------------------------------------- Title: Senior Manager, Loan Operations THE BANK OF TOKYO-MITSUBISHI LTD., HOUSTON AGENCY By: /s/ Ichiro Otani ------------------------------- Title: Deputy General Manager BANK POLSKA KASA OPIEKI S.A. NEW YORK BRANCH By: /s/ Hussein B. El-Tawil ------------------------------- Title: Vice President BANKERS TRUST COMPANY By: /s/ Anthony LoGrippo ------------------------------- Title: Director BANKBOSTON, N.A. By: /s/ Terrence Ronan ------------------------------- Title: Director BANQUE NATIONALE DE PARIS By: /s/ Stephanie Rogers -------------------------------------------------- Title: Vice President By: /s/ Serge Desrayaud -------------------------------------------------- Title: Vice President & Team Leader BARCLAYS BANK PLC By: /s/ Salvatore Esposito -------------------------------------------------- Title: Director BATTERSON PARK, CBO I By: General Re-New England Asset Management Inc., as Collateral Manager By: /s/ Theodore M. Haag -------------------------------------------------- Title: Vice President BATTERY PARK CDO, LTD By: Nomura Corporate Research and Asset Management Inc. as Investment Advisor By: /s/ Rick Stewart -------------------------------------------------- Title: Director BAYERISCHE HYPO-UND VEREINSBANK AG NEW YORK BRANCH By: /s/ Sylvia K. Cheng ---------------------------------------------------- Title: Director By: /s/ Carlo Lamberti ---------------------------------------------------- Title: Associate Director BEAR STEARNS INVESTMENT PRODUCTS INC. By: /s/ Keith C. Barnish ---------------------------------------------------- Title: Senior Managing Director BEDFORD CDO, LIMITED By: Pacific Investment Management Company, as its Investment Advisor By: /s/ Raymond G. Kennedy ---------------------------------------------------- Title: Senior Vice President BELLSOUTH DOMESTIC BOND (ACCT 26) By: Pacific Investment Management Company, as its Investment Advisor, acting through State Street Bank & Trust Co. in the nominee name of Marine Crew & Co. By: /s/ Raymond G. Kennedy ---------------------------------------------------- Title: Senior Vice President BELLSOUTH GLOBAL BOND (ACCT 826) By: Pacific Investment Management Company, as its Investment Advisor, acting through State Street Bank & Trust Co. in the nominee name of Marine Crew & Co. By: /s/ Raymond G. Kennedy ---------------------------------------------------- Title: Senior Vice President BHF (USA) CAPITAL CORPORATION By: /s/ Perry Forman/Chris Yu ---------------------------------------------------- Title: Vice President/Associate CAPTIVA FINANCE LTD. By: /s/ John H. Cullinane ---------------------------------------------------- Title: Director CAPTIVA II FINANCE LTD. By: /s/ John H. Cullinane ----------------------------------------------- Title: Director CAPTIVA III FINANCE, LTD., as advised by Pacific Investment Management Company By: /s/ John H. Cullinane ----------------------------------------------- Title: Director CAPTIVA IV FINANCE, LTD. By: Pacific Investment Management Company, as its Investment Advisor By: /s/ John H. Cullinane ----------------------------------------------- Title: Director CARILLON HOLDING, LIMITED By: /s/ Steven R. Sutermeister ----------------------------------------------- Title: Director CARLYLE HIGH YIELD FUND, L.P. By: /s/ Linda Pace ----------------------------------------------- Title: Vice President CARLYLE HIGH YIELD PARTNER II, LTD. By: /s/ Linda Pace ---------------------------------------------------- Title: Vice President CERES FINANCE LTD. By: INVESCO Senior Secured Management, Inc., as Sub- Managing Agent By: /s/ Joseph Rotondo ---------------------------------------------------- Title: Authorized Signatory CHANCELLOR/TRITON CBO, LIMITED By: INVESCO Senior Secured Management, Inc., as Collateral Manager By: /s/ Joseph Rotondo ---------------------------------------------------- Title: Authorized Signatory CHANG HWA COMMERCIAL BANK, LTD., NEW YORK BRANCH By: /s/ Wan-Tu Yeh ---------------------------------------------------- Title: Vice President & General Manager CHIAO TUNG BANK CO., LTD. NEW YORK AGENCY By: /s/ Kuang Si Shiu -------------------------------------------------- Title: Senior Vice President & General Manager CIBC INC. By: /s/ Lindsay Gordon -------------------------------------------------- Title: Executive Director CIBC World Markets Corp. as Agent CITIBANK N.A. as additional Investment Manager for and on behalf of Five Finance Corporation By: /s/ Martin Davey -------------------------------------------------- Title: Vice President By: /s/ Mike Regan -------------------------------------------------- Title: Vice President CLYDESDALE CBO I, LTD. By: Nomura Corporate Research and Asset Management Inc. as Investment Advisor By: /s/ Rick Stewart -------------------------------------- Title: Director CREDIT INDUSTRIEL ET COMMERCIAL By: /s/ Sean Mounier ------------------------------ Title: First Vice President By: /s/ Brian O'Leary ------------------------------ Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Philippe Soustra ------------------------------ Title: Senior Vice President CREDIT SUISSE FIRST BOSTON By: /s/ James P. Moran ------------------------------ Title: Director By: /s/ Douglas E. Maher ------------------------------ Title: Vice President CRESCENT / MACH I PARTNERS LP By: TCW Asset Management Company, its Investment Manager By: /s/ Jonathan R. Insull ----------------------------------------------------- Title: Vice President CYPRESSTREE INSTITUTIONAL FUND, LLC By: CypressTree Investment Management Company, Inc. its Managing Member By: /s/ Philip C. Robbins ----------------------------------------------------- Title: Principal CYPRESSTREE INVESTMENT FUND, LLC By: CypressTree Investment Management Company, Inc. its Managing Member By: /s/ Philip C. Robbins ----------------------------------------------------- Title: Principal CYPRESSTREE INVESTMENT MANAGEMENT COMPANY, INC. as attorney-in-fact and on behalf of First Allmerica Financial Life Insurance Company as Portfolio Manager By: /s/ Philip C. Robbins ----------------------------------------------------- Title: Principal CYPRESSTREE INVESTMENT PARTNERS I, LTD. By: CypressTree Investment Management Company, Inc. its Managing Member By: /s/ Philip C. Robbins ---------------------------------------------------- Title: Principal CYPRESSTREE SENIOR FLOATING RATE FUND By: CypressTree Investment Management Company, Inc. as Portfolio Manager By: /s/ Philip C. Robbins ---------------------------------------------------- Title: Principal THE DAI-ICHI KANGYO BANK LIMITED By: /s/ Takayuki Kumagai ---------------------------------------------------- Title: Vice President DEBT STRATEGIES FUND, INC. By: /s/ Colleen M. Cunniffe ---------------------------------------------------- Title: Authorized Signatory DEBT STRATEGIES FUND II By: /s/ Colleen M. Cunniffe ------------------------------------------------- Title: Authorized Signatory DEBT STRATEGIES FUND III By: /s/ Colleen M. Cunniffe ------------------------------------------------- Title: Authorized Signatory DELANO COMPANY By: Pacific Investment Management Company, as its Investment Advisor By: /s/ Raymond G. Kennedy ------------------------------------------------- Title: Senior Vice President DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By: /s/ Deborah Slusarczyk ------------------------------------------------- Title: Vice President By: /s/ Joanna M. Solowski ------------------------------------------------- Title: Vice President DEBT STRATEGIES FUND II By: /s/ Colleen M. Cunniffe ------------------------------------------------- Title: Authorized Signatory DEBT STRATEGIES FUND III By: /s/ Colleen M. Cunniffe ------------------------------------------------- Title: Authorized Signatory DELANO COMPANY By: Pacific Investment Management Company, as its Investment Advisor By: /s/ Raymond G. Kennedy ------------------------------------------------- Title: Senior Vice President DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By: /s/ Deborah Slusarczyk ------------------------------------------------- Title: Vice President By: /s/ Joanna M. Solowski ------------------------------------------------- Title: Vice President EATON VANCE INSTITUTIONAL SENIOR LOAN FUND By: Eaton Vance Management, as Investment Advisor By: /s/ Payson F. Swaffield ---------------------------------------------- Title: Vice President EATON VANCE SENIOR INCOME TRUST By: Eaton Vance Management, as Investment Advisor By: /s/ Payson F. Swaffield ---------------------------------------------- Title: Vice President ELC (CAYMAN) LTD. By: /s/ Amos N. Beason ---------------------------------------------- Title: Vice President ELC (CAYMAN) LTD. 1999-III By: /s/ Amos N. Beason ------------------------------------------------ Title: Vice President ELC (CAYMAN) LTD. CDO SERIES 1999-1 By: /s/ Amos N. Beason ------------------------------------------------ Title: Vice President ELF FUNDING TRUST 1 By: Highland Capital Management, L.P. as Collateral Manager By: /s/ Mark K. Okada CFA ------------------------------------------------ Title: Executive Vice President ELT LTD. By: /s/ Kelly C. Walker ------------------------------------------------ Title: Authorized Agent FC CBO LIMITED By: /s/ Mike McCarthy ------------------------------------------------ Title: Manager FC CBO II LIMITED By: /s/ Mike McCarthy ------------------------------------------------ Title: Manager FIDELITY FIXED INCOME TRUST: FIDELITY HIGH INCOME FUND By:____________________________________________________ Title: FIDELITY SUMMER STREET TRUST: FIDELITY CAPITAL & INCOME FUND By: /s/ David Glancy ---------------------------------------------------- Title: Vice President FIRST COMMERCIAL BANK By: /s/ Vincent T. C. Chen ---------------------------------------------------- Title: Senior Vice President and General Manager FIRST DOMINION FUNDING I By: /s/ Andrew H. Marshak ---------------------------------------------------- Title: Authorized Signatory FIRST UNION NATIONAL BANK By: /s/ Steven J. Haas ---------------------------------------------------- Title: Senior Vice President FLOATING RATE PORTFOLIO By: INVESCO Senior Secured Management, Inc., as attorney-in-fact By: /s/ Joseph Rotondo -------------------------------------------------- Title: Authorized Signatory FORD MOTOR COMPANY (ACCT 303) By: Pacific Investment Management Company, as Investment Advisor, acting through Northern Trust Company in the nominee name of Booth & Co. By: /s/ Raymond G. Kennedy -------------------------------------------------- Title: Senior Vice President FRANKLIN FLOATING RATE TRUST By: /s/ Chauncey Lufkin -------------------------------------------------- Title: Vice President FREMONT INVESTMENT & LOAN By: /s/ Maria Chachere -------------------------------------------------- Title: Vice President THE FUJI BANK, LIMITED, NEW YORK BRANCH By: /s/ Hiroshi Nagamine ---------------------------------------------- Title: Vice President GALAXY CLO 1999-1, LTD. By: SAI Investment Adviser, Inc., its Collateral Manager By: /s/ Lynn A. Hopton ---------------------------------------------- Title: Authorized Signatory GOLDMAN SACHS CREDIT PARTNERS L.P. By:______________________________________________ Title: GREAT POINT CLO 1999-1 LTD., as Term Lender By: Sankaty Advisors, Inc. as Collateral Manager By: /s/ Diane J. Exter ---------------------------------------------- Title: Executive V.P., Portfolio Manager GUARANTY FEDERAL BANK, F.S.B. By: /s/ Jim R. Hamilton ---------------------------------------------- Title: Vice President GULF INTERNATIONAL BANK B.S.C. By: /s/ Mireille Khalidi/Abdel-Fattah Tahoun ------------------------------------------------- Title: Assistant Vice President/Senior Vice President HAMILTON BANK By: /s/ Hector F. Ramirez/Mohamed A. Yasin ------------------------------------------------- Title: Senior Vice President/Vice President HARBOURVIEW CBO I, LTD. By: /s/ David Foxhoven ------------------------------------------------- Title: Assistant Vice President HIGHLAND LEGACY LIMITED By: Highland Capital Management, L.P. as Collateral Manager By: /s/ Mark K. Okada CFA ------------------------------------------------- Title: Executive Vice President IKB DEUTSCHE INDUSTRIEBANK AG LUXEMBOURG BRANCH By: /s/ Edwin Brecht/Manfred Ziwey ------------------------------------------------- Title: Executive Director/Director ILLINOIS TEACHERS RETIREMENT SYSTEM (ACCT 59) By: Pacific Investment Management Company as Investment Advisor, acting through Northern Trust Company in the nominee name of How & Co. By: /s/ Raymond G. Kennedy -------------------------------------------------- Title: Senior Vice President IMPERIAL BANK By:__________________________________________________ Title: INDOSUEZ CAPITAL FUNDING IIA, LIMITED By: Indosuez Capital as Portfolio Advisor By: /s/ Melissa Marano -------------------------------------------------- Title: Vice President INDOSUEZ CAPITAL FUNDING IV, L.P. By: Indosuez Capital as Portfolio Advisor By: /s/ Melissa Marano -------------------------------------------------- Title: Vice President THE ING CAPITAL SENIOR SECURED HIGH INCOME FUND, L.P. By: ING Capital Advisors LLC as Investment Advisor By: /s/ Michael J. Campbell -------------------------------------------------- Title: Senior V.P. & Portfolio Manager ING HIGH INCOME PRINCIPAL PRESERVATION FUND HOLDINGS, LDC., By: ING Capital Advisors LLC as Investment Advisor By: /s/ Michael J. Campbell -------------------------------------------------- Title: Senior V.P. & Portfolio Manager INTEGRITY LIFE INSURANCE By:__________________________________________________ Title: JHW CASH FLOW FUND I, L.P. By:__________________________________________________ Title: J.H. WHITNEY MARKET VALUE FUND, L.P. By:_________________________________ Title: J.H. WHITNEY MEZZANINE FUND, LP By:_________________________________ Title: KBC BANK By: /s/ Robert Snauffer --------------------------------- Title: First Vice President By: /s/ Patrick A. Janssens --------------------------------- Title: Vice President KEMPER FLOATING RATE FUND By: /s/ Mark E. Wittnebel --------------------------------- Title: Senior Vice President KZH III LLC By: /s/ Peter Chin ------------------------------ Title: Authorized Agent KZH CNC LLC By: /s/ Peter Chin ------------------------------ Title: Authorized Agent KZH CRESCENT LLC By: /s/ Peter Chin ------------------------------ Title: Authorized Agent KZH CRESCENT-2 LLC By: /s/ Peter Chin ------------------------------ Title: Authorized Agent KZH CRESCENT-3 LLC By: /s/ Peter Chin ------------------------------ Title: Authorized Agent KZH-CYPRESSTREE-1 LLC By: /s/ Peter Chin ----------------------------------- Title: Authorized Agent KZH HIGHLAND-2 LLC By: /s/ Peter Chin ----------------------------------- Title: Authorized Agent KZH ING-1 LLC By: /s/ Peter Chin ----------------------------------- Title: Authorized Agent KZH ING-2 LLC By: /s/ Peter Chin ----------------------------------- Title: Authorized Agent KZH ING-3 LLC By: /s/ Peter Chin ----------------------------------- Title: Authorized Agent KZH LANGDALE LLC By: /s/ Peter Chin --------------------------------- Title: Authorized Agent KZH PAMCO LLC By: /s/ Peter Chin --------------------------------- Title: Authorized Agent KZH PONDVIEW LLC By: /s/ Peter Chin --------------------------------- Title: Authorized Agent KZH RIVERSIDE LLC By: /s/ Peter Chin --------------------------------- Title: Authorized Agent KZH SHOSHONE LLC By: /s/ Peter Chin --------------------------------- Title: Authorized Agent KZH SOLEIL LLC By: /s/ Peter Chin ---------------------------------------------------- Title: Authorized Agent KZH SOLEIL-2 LLC By:/s/ Peter Chin ---------------------------------------------------- Title: Authorized Agent KZH WATERSIDE LLC By: /s/ Peter Chin ---------------------------------------------------- Title: Authorized Agent LEHMAN COMMERCIAL PAPER, INC. By: /s/ Michele Swanson ---------------------------------------------------- Title: Authorized Signatory LONGLANE MASTER TRUST IV By: BankBoston, N.A. as Trust Administrator By: /s/ Renee Naller ---------------------------------------------------- Title: Managing Director MAGNETITE ASSET INVESTORS L.L.C. By: Blackrock Financial Management, Inc. As Managing Member By: /s/ Dennis M. Schaney ------------------------------- Title: Managing Director MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: David L. Babson and Company Incorporated, as Investment Advisor By: /s/ John B. Wheeler -------------------------- Title: Managing Director MEDICAL LIABILITY MUTUAL INSURANCE COMPANY By: INVESCO Senior Secured Management, Inc., as Investment Manager By: /s/ Joseph Rotondo -------------------------- Title: Authorized Signatory MERRILL LYNCH DEBT STRATEGIES PORTFOLIO By: Merrill Lynch Asset Management, L.P., as Investment Advisor By: /s/ Colleen M. Cunniffe -------------------------------- Title: Authorized Signatory MERRILL LYNCH GLOBAL INVESTMENT SERIES: INCOME STRATEGIES PORTFOLIO By: Merrill Lynch Asset Management, L.P., as Investment Advisor By: /s/ Colleen M. Cunniffe ---------------------------------------------------- Title: Authorized Signatory MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By: /s/ Colleen M. Cunniffe ---------------------------------------------------- Title: Authorized Signatory MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. By: /s/ Colleen M. Cunniffe ---------------------------------------------------- Title: Authorized Signatory MERRILL LYNCH PRIME RATE PORTFOLIO By: Merrill Lynch Asset Management, L.P., as Investment Advisor By: /s/ Colleen M. Cunniffe ---------------------------------------------------- Title: Authorized Signatory METROPOLITAN LIFE INSURANCE COMPANY By: /s/ James R. Dingler ---------------------------------------------------- Title: Director MFS MERIDIAN U.S. HIGH YIELD FUND whose nominee is Auriga & Co. By:____________________________________________________ Title: MFS SERIES TRUST III MFS HIGH YIELD FUND By:____________________________________________________ Title: ML CBO IV (CAYMAN) LTD. By: Highland Capital Management, L.P. as Collateral Manager By: /s/ Mark K. Okada CFA ---------------------------------------------------- Title: Executive Vice President ML CLO XII PILGRIM AMERICA (CAYMAN) LTD. By: Pilgrim Investments, Inc. as its Investment Manager By: /s/ Charles E. LeMieux, CFA ---------------------------------------------------- Title: Assistant Vice President ML CLO XV PILGRIM AMERICA (CAYMAN) LTD. By: Pilgrim Investments, Inc., as its Investment Advisor By: /s/ Charles E. LeMieux, CFA ---------------------------------------------------- Title: Assistant Vice President ML CLO XX PILGRIM AMERICA (CAYMAN) LTD. By: Pilgrim Investments, Inc., as its Investment Advisor By: /s/ Charles E. LeMieux, CFA ---------------------------------------------------- Title: Assistant Vice President MONUMENTAL LIFE INSURANCE COMPANY, successor by merger to Commonwealth Life Insurance Co. By: /s/ John Bailey ---------------------------------------------------- Title: Vice President MONY LIFE INSURANCE COMPANY, as successor by operation of law to The Mutual Life Insurance Company of New York By: /s/ Suzanne E. Walton ---------------------------------------------------- Title: Managing Director MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Investment Manager for the Global Strategic Income Portfolio (Special Situation Portfolio) State Street Bank & Trust By: /s/ E. Clifford Cole ---------------------------------------------------- Title: Vice President MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Trustee for the MGT High Yield Bond Fund By: /s/ E. Clifford Cole ---------------------------------------------------- Title: Vice President MORGAN STANLEY SENIOR FUNDING, INC. By: /s/ Christopher A. Pucillo ---------------------------------------------------- Title: Vice President MOUNTAIN CAPITAL CLO I, LTD. By: /s/ Darren P. Riley ---------------------------------------------------- Title: Director NATIONAL WESTMINSTER BANK PLC By: NatWest Capital Markets Limited, its agent By: Greenwich Capital Markets, Inc., its agent By: /s/ Richard J. Jacoby ---------------------------------------------------- Title: Assistant Vice President NOMURA BOND & LOAN FUND By: Nomura Corporate Research and Asset Management Inc. as Investment Advisor By: /s/ Rick Stewart ---------------------------------------------------- Title: Director NORSE CBO, LTD. By: Regiment Capital Management, LLC as its Investment Advisor By: Regiment Capital Advisors, LLC its Manager and pursuant to delegated authority By: /s/ Timothy S. Peterson ---------------------------------------------------- Title: President NORTH AMERICAN SENIOR FLOATING RATE FUND By: CypressTree Investment Management Company, Inc. as Portfolio Manager By: /s/ Philip C. Robbins ---------------------------------------------------- Title: Principal NORTHWOODS CAPITAL, LIMITED By: Angelo, Gordon & Co., L.P., as Collateral Manager By: /s/ Fred Berger ---------------------------------------------------- Title: Chief Financial Officer NUVEEN SENIOR INCOME FUND By: Nuveen Senior Loan Asset Management, Inc. By: /s/ Lisa M. Mincheski ---------------------------------------------------- Title: Managing Director OASIS COLLATERALIZED HIGH INCOME PORTFOLIOS-1, LTD. By: INVESCO Senior Secured Management, Inc., as Sub-Advisor By: /s/ Joseph Rotondo ---------------------------------------------------- Title: Authorized Signatory OCTAGON INVESTMENT PARTNERS II, LLC By: Octagon Credit Investors, LLC as sub-investment manager By: /s/ Michael B. Nechamkin ---------------------------------------------------- Title: Portfolio Manager OLYMPIC FUNDING TRUST, SERIES 1999-1 By: /s/ Kelly C. Walker ---------------------------------------------------- Title: Authorized Agent OPPENHEIMER SENIOR FLOATING RATE FUND By: /s/ David Foxhoven ---------------------------------------------------- Title: Assistant Vice President ORIX USA CORPORATION By: /s/ Hiroyuki Miyauchi ---------------------------------------------------- Title: Executive Vice President OSPREY INVESTMENTS PORTFOLIO By: Citibank, N.A., as Manager By: /s/ Daniel Slotkin ---------------------------------------------------- Title: Vice President PACIFICA PARTNERS 1, L.P., By: Imperial Credit Asset Management, as its Investment Manager By: /s/ Thomas R. Colwell ---------------------------------------------------- Title: Vice President PAM CAPITAL FUNDING L.P. By: Highland Capital Management, L.P. as Collateral Manager By: /s/ Mark K. Okada CFA ---------------------------------------------------- Title: Executive Vice President PAMCO CAYMAN LTD. By: Highland Capital Management, L.P. as Collateral Manager By: /s/ Mark K. Okada CFA ---------------------------------------------------- Title: Executive Vice President PILGRIM AMERICA HIGH INCOME INVESTMENTS LTD. By: Pilgrim Investments, Inc. as its Investment Manager By: /s/ Charles E. LeMieux, CFA ---------------------------------------------------- Title: Assistant Vice President PILGRIM CLO 1999-1 LTD. By: Pilgrim Investments, Inc. as its Investment Manager By: /s/ Charles E. LeMieux, CFA ---------------------------------------------------- Title: Assistant Vice President PILGRIM PRIME RATE TRUST By: Pilgrim Investments Inc., as its Investment Manager By: /s/ Charles E. LeMieux, CFA ---------------------------------------------------- Title: Assistant Vice President PIMCO HIGH YIELD FUND (ACCT 705) By: Pacific Investment Management Company, as its Investment Advisor acting through investors fiduciary trust company in the nominee name of IFTCO By: /s/ Raymond G. Kennedy ---------------------------------------------------- Title: Senior Vice President PIMCO LOW DURATION MORTGAGE FUND (ACCT 720) By: Pacific Investment Management Company, as its Investment Advisor, acting through Investors Fiduciary Trust Company in the Nominee Name of IFTCO By:____________________________________________________ Title: PINEHURST TRADING, INC. By: /s/ Kelly C. Walker ---------------------------------------------------- Title: Vice President MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST By: /s/ Sheila Finnerty ---------------------------------------------------- Senior Vice President PROVIDENT CBO I, LIMITED By: Provident Investment Management, LLC By: /s/ Ben S. Miller ---------------------------------------------------- Title: Vice President HSBC BANK USA (F/K/A REPUBLIC NATIONAL BANK OF NEW YORK) By: /s/ Gary Weiss/Theodore R. Koerner ---------------------------------------------------- Title: First Vice President/First Vice President ROYAL BANK OF CANADA By: /s/ John M. Crawford ---------------------------------------------------- Title: Vice President THE ROYAL BANK OF SCOTLAND PLC By: /s/ Derek Bonnar ---------------------------------------------------- Title: Vice President ROYALTON COMPANY By: Pacific Investment Management Company, as its Investment Advisor By: /s/ Raymond G. Kennedy ---------------------------------------------------- Title: Senior Vice President S.A.C. GENESIS FUND, LLC By: S.A.C. Capital Advisors, LLC its agent and attorney-in-fact By: /s/ David A. Barnett ---------------------------------------------------- Title: Counsel SANKATY HIGH YIELD ASSET PARTNERS, L.P. By: /s/ Diane J. Exter ---------------------------------------------------- Title: Executive V.P., Portfolio Manager SANKATY HIGH YIELD ASSET PARTNERS II, L.P. By: /s/ Diane J. Exter ---------------------------------------------------- Title: Executive V.P., Portfolio Manager SANWA BANK, LTD. By: /s/ Ikuya Hirabayashi ---------------------------------------------------- Title: Assistant Vice President SENECA CBO II, L.P. By: /s/ Evan Dreyfuss --------------------------------------------------- Title: Senior Analyst SENIOR DEBT PORTFOLIO By: Boston Management and Research, as Investment Advisor By: /s/ Payson F. Swaffield ---------------------------------------------------- Title: Vice President SENIOR HIGH INCOME PORTFOLIO INC. By: /s/ Colleen M. Cunniffe ---------------------------------------------------- Title: Authorized Signatory SEQUILS I, LTD By: TCW Advisors, Inc. as its Collateral Manager By: /s/ Mark L. Gold/Jonathan R. Insull ---------------------------------------------------- Title: Managing Director/Vice President OXFORD STRATEGIC INCOME FUND By: Eaton Vance Management as Investment Advisor By: /s/ Payson F. Swaffield ---------------------------------------------------- Title: Vice President SEQUILS-ING I (HBDGM), LTD. By: ING Capital Advisors LLC., as Collateral Manager By: /s/ Michael J. Campbell ---------------------------------------------------- Title: Senior V.P. & Portfolio Manager SEQUILS - PILGRIM I, LTD. By: Pilgrim Investments, Inc. as its Investment Manager By: /s/ Charles E. LeMieux, CFA --------------------------------------------------- Title: Assistant Vice President SKM-LIBERTYVIEW CBO I LIMITED By: /s/ Kenneth C. Klegar ---------------------------------------------------- Title: Authorized Signatory SOCIETE GENERALE, SOUTHWEST AGENCY By: /s/ Elizabeth W. Hunter ---------------------------------------------------- Title: Director SOMERS CDO, LIMITED By: David L. Babson and Company Incorporated under delegated authority from Massachusetts Mutual Life Insurance Company as Collateral Manager By: /s/ John B. Wheeler ---------------------------------------------------- Title: Managing Director SOUTHERN PACIFIC BANK By: /s/ Cheryl A. Wasilewski ---------------------------------------------------- Title: Senior Vice President SRF TRADING, INC. By: /s/ Kelly C. Walker ---------------------------------------------------- Title: Vice President SRV-HIGHLAND, INC. By: /s/ Kelly C. Walker ---------------------------------------------------- Title: Vice President STANFIELD CLO, LTD. By: Stanfield Capital Partners LLC as its Collateral Manager By: /s/ Christopher A. Bondy ---------------------------------------------------- Title: Partner STEIN ROE & FARNHAM CLO1 LTD., by Stein Roe & Farnham Incorporated, As Portfolio Manager By: /s/ James R. Fellows ---------------------------------------------------- Title: Vice President STEIN ROE & FARNHAM INCORPORATED, as agent for Keyport Life Insurance Company By: /s/ James R. Fellows ---------------------------------------------------- Title: Vice President STEIN ROE FLOATING RATE LIMITED LIABILITY COMPANY By: /s/ James R. Fellows ---------------------------------------------------- Title: Vice President Stein Roe & Farnham Incorporated, as Advisor to the Stein Roe Floating Rate Limited Liability Company STOCKSPLUS LP SUBFUND A (ACCT 401), By: Pacific Investment Management Company as Investment Advisor, acting through Investors Fiduciary Trust Company in the nominee name of IFTCO By: /s/ Raymond G. Kennedy ---------------------------------------------------- Title: Senior Vice President STRATA FUNDING LTD. By: INVESCO Senior Secured Management Inc., as Sub-Managing Agent By: /s/ Joseph Rotondo ---------------------------------------------------- Title: Authorized Signatory STRATEGIC MANAGED LOAN PORTFOLIO By: Citibank, N.A., as Manager By: /s/ Mike Regan ---------------------------------------------------- Title: Vice President STRONG ADVANTAGE FUND, INC. By: /s/ Jeffrey A. Koch ---------------------------------------------------- Title: Portfolio Manager THE SUMITOMO BANK, LIMITED By: /s/ Suresh S. Tata ---------------------------------------------------- Title: Senior Vice President SUN TRUST BANK, ATLANTA By: /s/ John A. Fields, Jr. ---------------------------------------------------- Title: Managing Director TAIPEI BANK, NEW YORK AGENCY By: /s/ Sophia Jing --------------------------------------------------- Title: Vice President & Acting General Manager TENET HEALTHCARE CORPORATION By: TCW Asset Management Company, its Investment Advisor By: /s/ Mark L. Gold/Jonathan R. Insull ---------------------------------------------------- Title: Managing Director/Vice President TEXTRON FINANCIAL CORPORATION By: /s/ Jane M. Lavoie ---------------------------------------------------- Title: Assistant Vice President THE TOKAI BANK, LIMITED, NEW YORK BRANCH By: /s/ Shinichi Nakatani ---------------------------------------------------- Title: Assistant General Manager TORONTO DOMINION (TEXAS), INC. By: /s/ Carolyn R. Faeth ---------------------------------------------------- Title: Vice President THE TOYO TRUST & BANKING CO., LTD. By: /s/ Shinya Kameda ---------------------------------------------------- Title: Assistant General Manager International Department TRAVELERS CORPORATE LOAN FUND, INC. By: Travelers Asset Management International Corporation By: /s/ Allen R. Cantrell ---------------------------------------------------- Title: Investment Officer THE TRAVELERS INSURANCE COMPANY By: /s/ Allen R. Cantrell ---------------------------------------------------- Title: Investment Officer TRITON CBO III, LIMITED By: INVESCO Senior Secured Management, Inc., as Investment Advisor By: /s/ Joseph Rotondo ---------------------------------------------------- Title: Authorized Signatory UNITED OF OMAHA LIFE INSURANCE COMPANY By: INVESCO Senior Secured Management, Inc., as Portfolio Advisor By: /s/ Joseph Rotondo ---------------------------------------------------- Title: Authorized Signatory VAN KAMPEN SENIOR FLOATING RATE FUND By: Van Kampen Investment Advisory Corp. By: /s/ Darvin D. Pierce ---------------------------------------------------- Title: Vice President VAN KAMPEN CLO I, LIMITED By: Van Kampen Management, Inc., as Collateral Manager By: /s/ Darvin D. Pierce ---------------------------------------------------- Title: Vice President VAN KAMPEN PRIME RATE INCOME TRUST By: Van Kampen Investment Advisory Corp. By: /s/ Darvin D. Pierce ---------------------------------------------------- Title: Vice President VAN KAMPEN SENIOR INCOME TRUST By: Van Kampen Investment Advisory Corp. By: /s/ Darvin D. Pierce ---------------------------------------------------- Title: Vice President VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO By: /s/ Barry Coffman ---------------------------------------------------- Title: Vice President WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH By: /s/ Felicia La Forgia --------------------------------------------------- Title: Vice President By: /s/ Thomas Lee --------------------------------------------------- Title: Associate WINGED FOOT FUNDING TRUST By: /s/ Kelly C. Walker --------------------------------------------------- Title: Authorized Agent BANK ONE, NA (formerly known as The First National Bank of Chicago) By: /s/ Dixon P. Schultz ---------------------------------------------------- Title: First Vice President FIDELITY ADVISOR SERIES II: Fidelity Advisor High Yield Fund By: /s/ Margaret Eagle ---------------------------------------------------- Title: Vice President ILLINOIS MUNICIPAL RETIREMENT FUND MASTER TRUST By: /s/ Margaret Eagle ---------------------------------------------------- Title: Vice President FIRST DOMINION FUNDING II By: /s/ Andrew H. Marshak ---------------------------------------------------- Title: Authorized Signatory FIRST DOMINION FUNDING III By: /s/ Andrew H. Marshak ---------------------------------------------------- Title: Authorized Signatory GLENEAGLES TRADING LLC By: /s/ Kelly C. Walker ---------------------------------------------------- Title: Vice President THE MITSUBISHI TRUST AND BANKING CORPORATION By: /s/ Toshihiro Hayashi ---------------------------------------------------- Title: Senior Vice President OCTAGON INVESTMENT PARTNERS III, LTD. By: Octagon Credit Investors, LLC as Portfolio Manager By: /s/ Michael B. Nechamkin ---------------------------------------------------- Title: Portfolio Manager PIMCO TOTAL RETURN FUND By: Pacific Investment Management Company, as its investment advisor, acting through Investors Fiduciary Trust Company in the Nominee Name of IFTCO By: PIMCO Management Inc., a general partner By: /s/ Raymond G. Kennedy ---------------------------------------------------- Title: Senior Vice President EX-4.10(A) 4 SECOND SUPPLEMENTAL INDENTURE EXHIBIT 4.10(a) EQUISTAR CHEMICALS, LP EQUISTAR FUNDING CORPORATION 8 1/2% Notes due 2004 8 3/4% Notes due 2009 ______________ SECOND SUPPLEMENTAL INDENTURE Dated as of October 4, 1999 _____________ The Bank of New York TRUSTEE EXHIBIT 4.10(a) SECOND SUPPLEMENTAL INDENTURE dated as of October 4, 1999 among Equistar Chemicals, LP, a Delaware limited partnership ("Equistar"), Equistar Funding Corporation, a Delaware corporation ("Equistar Funding" and, together with Equistar, the "Issuers"), and The Bank of New York, a New York banking corporation, as trustee (the "Trustee"). W I T N E S S E T H: WHEREAS, the Issuers have heretofore entered into an Indenture, dated as of January 15, 1999 (the "Original Indenture"), with the Trustee; WHEREAS, the Issuers have heretofore entered into a First Supplemental Indenture dated as of February 16, 1999 (the "First Supplemental Indenture"), with the Trustee; WHEREAS, the Original Indenture is incorporated herein by this reference and the Original Indenture, as supplemented by this Second Supplemental Indenture, is herein called the "Indenture;" WHEREAS, the Issuers issued two series of Initial Securities under the First Supplemental Indenture, consisting of $300,000,000 aggregate principal amount of 8 1/2% Notes due 2004 (the "Outstanding 8 1/2% Notes") and $600,000,000 aggregate principal amount of 8 3/4% Notes due 2004 (the "Outstanding 8 3/4% Notes" and, together with the Outstanding 8 1/2% Notes, the "Outstanding Notes"); WHEREAS, the Outstanding Notes are Rule 144A Securities; WHEREAS, the Issuers completed the private placement of the Outstanding Notes on February 16, 1999; WHEREAS, in connection with the private placement of the Outstanding Notes, the Issuers entered into the Exchange and Registration Rights Agreement pursuant to which the Issuers agreed, under certain circumstances, to offer to exchange the Outstanding 8 1/2% Notes for Exchange Securities registered under the Securities Act of 1933, as amended, which are otherwise substantially identical to the Outstanding 8 1/2% Notes (the "8 1/2% Exchange Offer"), and to offer to exchange the Outstanding 8 3/4% Notes for Exchange Securities registered under the Securities Act of 1933, as amended, which are otherwise substantially identical to the Outstanding 8 3/4% Notes (the "8 3/4% Exchange Offer"); WHEREAS, all conditions necessary to authorize the execution and delivery of this Second Supplemental Indenture and to make it a valid and binding obligation of each of the Issuers have been done or performed. 1 NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I SECTION 1.01 Establishment and Terms. (a) There is hereby established a new series of Exchange Securities under the Indenture to be exchanged for up to all of the Outstanding 8 1/2% Notes to be designated as the Issuers' 8 1/2% Notes due 2004 (the "New 8 1/2% Notes" and, together with the Outstanding 8 1/2% Notes, the "8 1/2% Notes"). There are to be authenticated and delivered up to $300,000,000 principal amount of New 8 1/2% Notes. The New 8 1/2% Notes shall be issued in definitive fully registered form. The New 8 1/2% Notes shall be issued in the form of one or more Global Securities in substantially the form set out in Exhibit A hereto and as further provided in Section 1.03. The initial Depositary with respect to the New 8 1/2% Notes shall be The Depository Trust Company ("DTC"). There shall be no limit upon the aggregate principal amount of New 8 1/2% Notes that may be authenticated and delivered under this Indenture. The Issuers will exchange up to $300,000,000 aggregate principal amount of New 8 1/2% Notes authenticated and delivered under this Indenture for a like principal amount of Outstanding 8 1/2% Notes. The New 8 1/2% Notes will mature on February 15, 2004. The New 8 1/2% Notes will bear interest at the rate of 8 1/2% per annum. Interest Payment Dates will be February 15 and August 15 of each year. Holders of New 8 1/2% Notes on the relevant record date for the first interest payment date following the consummation of the 8 1/2% Exchange Offer will receive interest accruing from the most recent date to which interest has been paid on the Outstanding 8 1/2% Notes. Outstanding 8 1/2% Notes accepted for exchange will cease to accrue interest from and after the date of consummation of the 8 1/2% Exchange Offer. Holders whose Outstanding 8 1/2% Notes are accepted for exchange will not receive any payment in respect of accrued interest on such Outstanding 8 1/2% Notes otherwise payable on any interest payment date the record date for which occurs on or after the consummation of the 8 1/2% Exchange Offer. Interest shall be paid to the Person in whose name the applicable New 8 1/2% Note is registered at the close of business on February 1, in the case of the February 15 Interest Payment Date, and August 1, in the case of the August 15 Interest Payment Date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. No Additional Amounts will be payable on the New 8 1/2% Notes. 2 The New 8 1/2% Notes will be redeemable as provided in Section 1.02. The New 8 1/2% Notes will not be subject to a sinking fund. The New 8 1/2% Notes shall, together with any Outstanding 8 1/2% Notes which are not exchanged pursuant to the 8 1/2% Exchange Offer, constitute a single series of Securities under the Indenture. All payments of principal, premium (if any) and interest on the New 8 1/2% Notes shall be made in accordance with Section 4.02 of the Original Indenture. (b) There is hereby established a new series of Exchange Securities under the Indenture to be exchanged for up to all of the Outstanding 8 3/4% Notes to be designated as the Issuers' 8 3/4% Notes due 2009 (the "New 8 3/4% Notes" and, together with the Outstanding 8 3/4% Notes, the "8 3/4% Notes"). There are to be authenticated and delivered up to $600,000,000 principal amount of New 8 3/4% Notes. The New 8 3/4% Notes shall be issued in definitive fully registered form. The New 8 3/4% Notes shall be issued in the form of one or more Global Securities in substantially the form set out in Exhibit A hereto and as further provided in Section 1.03. The initial Depositary with respect to the New 8 3/4% Notes shall be DTC. There shall be no limit upon the aggregate principal amount of New 8 3/4% Notes that may be authenticated and delivered under this Indenture. The Issuers will exchange up to $600,000,000 aggregate principal amount of New 8 3/4% Notes authenticated and delivered under this Indenture for a like principal amount of Outstanding 8 3/4% Notes. The New 8 3/4% Notes will mature on February 15, 2009. The New 8 3/4% Notes will bear interest at the rate of 8 3/4% per annum. Interest Payment Dates will be February 15 and August 15 of each year. Holders of New 8 3/4% Notes on the relevant record date for the first interest payment date following the consummation of the 8 3/4% Exchange Offer will receive interest accruing from the most recent date to which interest has been paid on the Outstanding 8 3/4% Notes. Outstanding 8 3/4% Notes accepted for exchange will cease to accrue interest from and after the date of consummation of the 8 3/4% Exchange Offer. Holders whose Outstanding 8 3/4% Notes are accepted for exchange will not receive any payment in respect of accrued interest on such Outstanding 8 3/4% Notes otherwise payable on any interest payment date the record date for which occurs on or after the consummation of the 8 3/4% Exchange Offer. Interest shall be paid to the Person in whose name the applicable New 8 3/4% Note is registered at the close of business on February 1, in the case of the February 15 Interest Payment Date, and August 1, in 3 the case of the August 15 Interest Payment Date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. No Additional Amounts will be payable on the New 8 3/4% Notes. The New 8 3/4% Notes will be redeemable as provided in Section 1.02. The New 8 3/4% Notes will not be subject to a sinking fund. The New 8 3/4% Notes shall, together with any Outstanding 8 3/4% Notes which are not exchanged pursuant to the 8 3/4% Exchange Offer, constitute a single series of Securities under the Indenture. All payments of principal, premium (if any) and interest on the New 8 3/4% Notes shall be made in accordance with Section 4.02 of the Original Indenture. SECTION 1.02 Optional Redemption. The New 8 1/2% Notes and the New 8 3/4% Notes (together the "New Notes") will be redeemable only in accordance with this Section 1.02. Each of the New 8 1/2% Notes and the New 8 3/4% Notes will be redeemable, in whole or in part, at any time at the option of the Issuers at a redemption price (the "Redemption Price") equal to the greater of (i) 100% of the principal amount of the New Notes to be redeemed, or (ii) as determined by a Quotation Agent, the sum of the present values of the remaining scheduled payments of principal and interest of the New Notes to be redeemed discounted to the date of redemption (the "Redemption Date") on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate, plus, in each case, accrued but unpaid interest to the Redemption Date. Notice of any redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each holder of the New Notes to be redeemed. Unless the Issuers default in payment of the Redemption Price, interest will cease to accrue on the New Notes to be redeemed, or portions thereof called for redemption on and after the Redemption Date. CERTAIN DEFINITIONS "Adjusted Treasury Rate" means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date, plus 0.25%. "Comparable Treasury Issue" means the United States Treasury security selected by a Quotation Agent as having a maturity comparable to the remaining term of the New 8 1/2% Notes 4 or the New 8 3/4% Notes, as applicable, to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such New 8 1/2% Notes or the New 8 3/4% Notes, as applicable. "Comparable Treasury Price" means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such Redemption Date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such Business Day, (a) the average of the Reference Treasury Dealer Quotations for such Redemption Date or (b) if the Issuers obtain only one Reference Treasury Dealer Quotation, the Reference Treasury Dealer Quotation. "Quotation Agent" means one of the Reference Treasury Dealers appointed by the Issuers and certified to the Trustee by the Issuers. "Reference Treasury Dealer" means each of Chase Securities Inc., NationsBanc Montgomery Securities LLC, ABN AMRO Incorporated, BNY Capital Markets, Inc., First Chicago Capital Markets, Inc. and J.P. Morgan Securities Inc. and their respective successors; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government Securities dealer in New York City (a "Primary Treasury Dealer"), the Issuers shall substitute therefor another Primary Treasury Dealer and certify same to the Trustee. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Issuers and certified to the Trustee by the Issuers, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Issuers by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding such Redemption Date. 5 ARTICLE II SECTION 2.01. All moneys paid by the Issuers to the Trustee or a Paying Agent for the payment of principal of (or premium, if any) or interest, if any, on any New Note that remains unclaimed for two years after such principal, premium or interest becomes due and payable will be repaid to the Issuers, and the holders of such New Notes will (subject to applicable abandoned property or similar laws) thereafter, as unsecured general creditors, look only to the Issuers. SECTION 2.02. The recitals in this Second Supplemental Indenture are made by the Issuers only and not by the Trustee, and all of the provisions contained in the Original Indenture in respect of the rights, privileges, immunities, powers and duties of the Trustee shall be applicable in respect of the New 8 1/2% Notes or the New 8 3/4% Notes, as applicable, and of this Second Supplemental Indenture as fully and with like effect as if set forth herein in full. SECTION 2.03. The Original Indenture and the First Supplemental Indenture are in all respects ratified and confirmed, and the Original Indenture and this Second Supplemental Indenture shall be read, taken and construed as one and the same instrument; provided that, in case of conflict between this Second Supplemental Indenture and the Original Indenture, this Second Supplemental Indenture shall control. SECTION 2.04. This Second Supplemental Indenture may be simultaneously executed in several counterparts, each of which shall be deemed to be an original, and such counterparts shall together constitute one and the same instrument. SECTION 2.05. Nothing in the Indenture expressed or implied is intended or shall be construed to confer upon, or to give or grant to, any person or entity, other than the Issuers, the Trustee, the Paying Agent and the registered owners of the New Notes, any right, remedy or claim under or by reason of the Indenture or any covenant, condition or stipulation hereof, and all covenants, stipulations, promises and agreements in the Indenture contained by and on behalf of the Issuers shall be for the sole and exclusive benefit of the Issuers, the Trustee, the Paying Agent and the registered owners of the New Notes. SECTION 2.06. Neither the Issuers nor the Trustee will have any responsibility for the performance of DTC, Euroclear or Cedel, or any of their participants, direct or indirect, of their respective obligations under the rules and procedures governing their operations. 6 IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed as of the day and year first above written. EQUISTAR CHEMICALS, LP By: /s/ Gerald A. O'Brien ------------------------------------- Name: Gerald A. O'Brien Title: Vice President, General Counsel and Secretary EQUISTAR FUNDING CORPORATION By: /s/ Gerald A. O'Brien ------------------------------------- Name: Gerald A. O'Brien Title: Vice President, General Counsel and Secretary THE BANK OF NEW YORK, AS TRUSTEE By: /s/ Van K. Brown ------------------------------------- Name: Van K. Brown Title: Assistant Vice President 7 EXHIBIT A FORM OF NEW NOTE 8 [REVERSE OF SECURITY] EQUISTAR CHEMICALS, LP EQUISTAR FUNDING CORPORATION ____% NOTE DUE ______ No. ___ CUSIP No. _________ $ Equistar Chemicals, LP, a Delaware limited partnership (the "Partnership," which term includes any successor Person under the Indenture hereinafter referred to), and Equistar Funding Corporation, a Delaware corporation (the "Corporation," which term includes any successor person under the Indenture hereinafter referred to, and, together with the Partnership, the "Issuers"), for value received promises to pay to _________ or registered assigns, the principal sum of_______________ Dollars[, or such greater or lesser amount as indicated on the Schedule of Exchanges of Securities hereto,]/2/ on February 15, ___________. Interest Payment Dates: February 15 and August 15 Record Dates: February 1 and August 1 Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, each of the Partnership and the Corporation has caused this Security to be signed manually or by facsimile by their respective duly authorized officers. Dated:__________________________, 1999 EQUISTAR CHEMICALS, LP By: ------------------------------- Name: Title: By: ------------------------------- Name: Title: - ---------------- /2/ To be included in any Global Note. EQUISTAR FUNDING CORPORATION By: ------------------------------ Name: Title: By: ----------------------------- Name: Title: Certificate of Authentication: This is one of the Securities of the series designated therein referred to in the within- mentioned Indenture. THE BANK OF NEW YORK By:______________________________ Dated:___________________, 1999 Authorized Signatory [REVERSE OF SECURITY] EQUISTAR CHEMICALS, LP EQUISTAR FUNDING CORPORATION ____% NOTE DUE _____ This Security is one of a duly authorized issue of ____% Notes due _____ (the "Securities") of Equistar Chemicals, LP, a Delaware limited partnership (the "Partnership") and Equistar Funding Corporation, a Delaware corporation (the "Corporation" and together referred to as the "Issuers"). 1. Interest. The Issuers promise to pay interest on the principal amount of this Security at ____% per annum from __________________ until maturity. The Issuers will pay interest semiannually on February 15 and August 15 of each year (each an "Interest Payment Date"), or if any such day is not a Business Day, on the next succeeding Business Day. Interest on the Securities will accrue from the most recent Interest Payment Date on which interest has been paid or, if no interest has been paid, from ____________; provided that if there is no existing Default in the payment of interest, and if this Security is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date; provided, further, that the first Interest Payment Date shall be _______. The Issuers shall pay interest on overdue principal from time to time on demand at a rate equal to the interest rate then in effect; they shall pay interest on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment. The Issuers will pay interest on the Securities (except defaulted interest) to the Persons who are registered Holders of Securities at the close of business on the record date next preceding the Interest Payment Date, even if such Securities are canceled after such record date and on or before such Interest Payment Date. The Holder must surrender this Security to a Paying Agent to collect principal payments. The Issuers will pay the principal of and interest on the Securities in money of the United States of America that at the time of payment is legal tender for payment of public and private debts. The Issuers, however, may pay such amounts by check payable in such money. The Issuers may make payments in respect of the Securities evidenced by a Global Security (including principal, premium, if any, and interest) by wire transfer of immediately available funds to the accounts specified by the Holder of the Global Security. In all other cases, payment of interest may be made at the option of the Issuers by check to a Holder's registered address. 3. Paying Agent and Registrar. Initially, The Bank of New York (the "Trustee"), the Trustee under the Indenture, will act as Paying Agent and Registrar. The Issuers may change any Paying Agent, Registrar, co-registrar or additional paying agent without notice to any Holder. The Partnership, the Corporation, or any of the Partnership's subsidiaries may act in any such capacity. 4. Indenture. The Issuers issued the Securities under an Indenture dated as of January 15, 1999 among the Partnership, the Corporation and the Trustee, as supplemented by the Second Supplemental Indenture dated as of ______, 1999 (the "Indenture"). The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code (S)(S) 77aaa-77bbbb) (the "TIA"), as in effect on the date of execution of the Indenture. The Securities are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The Securities are unsecured general obligations of the Issuers and are unlimited in aggregate principal amount. The Indenture provides for the issuance of other series of debt securities (including the Securities, the "Debt Securities") thereunder. 5. Denominations, Transfer, Exchange. The Securities are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Securities may be registered and Securities may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Securities during the period between a record date and the corresponding Interest Payment Date or of any Security selected for redemption, except the unredeemed portion of any Security being redeemed in part. 6. Persons Deemed Owners. The registered Holder of a Security shall be treated as its owner for all purposes. 7. Redemption. The Securities will be redeemable, in whole or in part, at any time at the option of the Issuers, upon not less than 30 nor more than 60 days' prior notice as provided in the Indenture, at a redemption price (the "Redemption Price") equal to the greater of (i) 100% of the principal amount of the Securities to be redeemed or (ii) as determined by a Quotation Agent, the sum of the present values of the remaining scheduled payments of principal and interest on the Securities to be redeemed discounted to the date of redemption (the "Redemption Date") on a semiannual basis (assuming 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as hereafter defined), plus, in each case, accrued but unpaid interest to the Redemption Date. The Adjusted Treasury rate means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue (as hereafter defined), assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price (as hereafter defined) for such Redemption Date, plus 0.25%. Comparable Treasury Issue means the United States Treasury security selected by a Quotation Agent (as hereafter defined) as having a maturity comparable to the remaining term of the Securities to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Securities. Comparable Treasury Price means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such Redemption Date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such Business Day, (a) the average of the Reference Treasury Dealer Quotations (as hereafter defined) for such Redemption Date or (b) if the Issuers obtain only one Reference Treasury Dealer Quotation, the Reference Treasury Dealer Quotation. Quotation Agent means one of the Reference Treasury Dealers appointed by the Issuers and certified to the Trustee by the Issuers. Reference Treasury Dealer means each of Chase Securities Inc., NationsBanc Montgomery Securities LLC, ABN AMRO Incorporated, BNY Capital Markets, Inc., First Chicago Capital Markets, Inc. and J.P. Morgan Securities Inc. and their respective successors; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government Securities dealer in New York City (a "Primary Treasury Dealer"), the Issuers shall substitute therefor another Primary Treasury Dealer and certify same to the Trustee. Reference Treasury Dealer Quotations means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Issuers and certified to the Trustee by the Issuers, of the bid and asked priced for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Issuers by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding such Redemption Date. 8. Amendments and Waivers. Subject to certain exceptions and limitations, the Indenture or the Securities may be amended or supplemented with the consent of the Holders of at least a majority in aggregate principal amount of the then outstanding Debt Securities of all series of Debt Securities affected by such amendment or supplement (acting as one class), and any existing or past Default or Event of Default under, or compliance with any provision of, the Indenture may be waived (other than any continuing Default or Event of Default in the payment of the principal of or premium, if any, or interest on the Securities) by the Holders of at least a majority in principal amount of the then outstanding Debt Securities of any series or of all series (acting as one class) in accordance with the terms of the Indenture. Without the consent of any Holder, the Partnership, the Corporation and the Trustee may amend or supplement the Indenture or the Securities or waive any provision of either, to cure any ambiguity, omission, defect or inconsistency (provided such action does not adversely affect in any material respect the interests of the Holders); to comply with the provisions of the Indenture relating to merger, consolidation and certain other transactions; to provide for uncertificated Securities in addition to or in place of certificated Securities or to provide for the issuance of bearer securities; to provide any security for the Securities or to add guarantees of the Securities; to comply with any requirement in order to effect or maintain the qualification of the Indenture under the TIA; to add to the covenants of the Issuers for the benefit of the Holders of the Securities, or to surrender any right or power conferred by the Indenture upon the Issuers; to add any additional Events of Default with respect to all or any series of the Debt Securities; to change or eliminate any of the provisions of the Indenture, provided that any such change or elimination shall become effective only when there is no outstanding Debt Security of any series created prior to the execution of such amendment or supplemental indenture that is adversely affected in any material respect by such changes in or elimination of such provisions; to establish the form or terms of Debt Securities of any series; to supplement any of the provisions of the Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge of the Securities pursuant to the Indenture, provided that any such action shall not adversely affect the interest of the Holders of the Securities or any other series of Debt Securities in any material respect; to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts thereunder by more than one Trustee, pursuant to the requirements of the Indenture; or to make any other change that does not adversely affect the rights of any Holder. The right of any Holder to participate in any consent required or sought pursuant to any provision of the Indenture (and the obligation of the Issuers to obtain any such consent otherwise required from such Holder) may be subject to the requirement that such Holder shall have been the Holder of record of any Securities with respect to which such consent is required or sought as of a date fixed in accordance with the terms of the Indenture. Without the consent of each Holder affected, the Issuers may not (i) change the Stated Maturity of the principal of (or premium, if any, on) or any installment of interest on any Security, or reduce the principal amount thereof (or any premium, if any, thereon) or the rate of interest, if any, thereon, or adversely affect the right of repayment, if any, at the option of the Holder, or change any Place of Payment where any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or on or after any Redemption Date or Repayment Date); (ii) reduce the aforesaid percentage in aggregate principal amount of Debt Securities, the consent of the Holders of which is necessary to execute any supplemental indenture; or (iii) reduce the percentage in principal amount of outstanding Debt Securities, the consent of the Holders of which is necessary to modify or waive any Default under the Indenture. A supplemental indenture that changes or eliminates any covenant or other provision of the Indenture which has expressly been included solely for the benefit of one or more particular series of Debt Securities under the Indenture, or which modifies the rights of the Holders of Debt Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under the Indenture of the Holders of Debt Securities of any other series. 9. Defaults and Remedies. Events of Default are defined in the Indenture and generally include: (i) default by the Issuers for 30 days in payment of any interest on the Securities; (ii) default by the Issuers in any payment of principal of (or premium, if any, on) the Securities; (iii) default by the Issuers in observing or performing any of their other covenants or agreements in, or provisions of, the Securities or in the Indenture which shall not have been remedied within 60 days after written notice to the Issuers by the Trustee or to the Issuers and Trustee by the holders of at least 25% in aggregate principal amount of the Debt Securities then outstanding affected by such default; or (iv) certain events involving bankruptcy, insolvency or reorganization affecting the Issuers. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of the outstanding Securities of the series affected by such default (or, in the case of an Event of Default described in clause (iii) above, if outstanding Debt Securities of other series are affected by such Default, then at least 25% in principal amount of the then outstanding Debt Securities so affected), may declare the principal of and interest on all the Securities to be immediately due and payable, except that in the case of an Event of Default arising from certain events of bankruptcy, insolvency or reorganization affecting the Issuers, all outstanding Securities become due and payable immediately without further action or notice. The amount due and payable upon the acceleration of any Security is equal to 100% of the principal amount thereof plus accrued interest to the date of payment. Holders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of a majority in aggregate principal amount of the then outstanding Securities (or affected Debt Securities) may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or may direct the Trustee in its exercise of any trust or power conferred on the Trustee. The Trustee may withhold from Holders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Issuers must furnish an annual compliance certificate to the Trustee. 10. Discharge Prior to Maturity. The Indenture with respect to the Securities shall be discharged and canceled upon the payment of all of the Securities and shall be discharged except for certain obligations upon the irrevocable deposit with the Trustee of funds or U.S. Government Obligations sufficient for such payment. 11. Trustee Dealings with the Issuers. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Issuers or their Affiliates, and may otherwise deal with the Issuers or their Affiliates, as if it were not Trustee. 12. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Issuers shall not have any liability for any obligations of the Issuers under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. 13. Authentication. This Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 14. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Issuers have caused CUSIP numbers to be printed on the Securities as a convenience to the Holders of the Securities. No representation is made as to the accuracy of such numbers as printed on the Securities and reliance may be placed only on the other identification numbers printed thereon. 15. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 16. Restrictions on Transfer; Additional Rights of Holders of Transfer Restricted Securities. By its acceptance of any Security bearing a legend restricting transfer, each Holder of such a Security acknowledges the restrictions on transfer of such Security set forth in the Indenture and in this form of note in respect of the Securities and such legend and agrees that it will transfer such Security only as provided in such Indenture. THE ISSUERS WILL FURNISH TO ANY HOLDER UPON WRITTEN REQUEST AND WITHOUT CHARGE A COPY OF THE INDENTURE. REQUEST MAY BE MADE TO: Equistar Chemicals, LP 1221 McKinney Houston, Texas 77010 Telephone: (713) 652-7200 Attention: General Counsel SCHEDULE OF EXCHANGES OF SECURITIES The following exchanges of a part of this Global Note for Definitive Notes have been made:
Principal Amount Amount of Amount of of this Global Signature of decrease in increase in Note following authorized officer Date of Principal Amount Principal Amount such decrease of Trustee or Exchange of this Global Note of this Global Note (or increase) Security Custodian - -------------- -------------------- -------------------- --------------------- -------------------
ASSIGNMENT FORM To assign this Security, fill in the form below: (I) or (we) assign and transfer this Security to________________________________________ (Insert assignee's social security or tax I.D. number) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ (Print or type assignee's name, address and zip code) and irrevocably appoint_______________________________________________________ as agent to transfer this Security on the books of the Issuers. The agent may substitute another to act for him. - ------------------------------------------------------------------------------ Date:_________________________ Your Signature:_____________________________ (Sign exactly as your name appears on the face of this Security) Signature Guarantee:_________________________________________________________ (Participant in a Recognized Signature Guaranty Medallion Program) This assignment relates to $_____ principal amount of ___% Notes held in*______ book-entry or* ______ definitive form by _____________________ (the "Transferor"). The Transferor has requested the Trustee by written order to exchange or register the transfer of a Note or Notes. - -------------------------------------- *Fill in blank or check appropriate box, as applicable. EX-4.11A 5 SUPPLEMENTAL INDENTURE Exhibit 4.11(a) FIRST SUPPLEMENTAL INDENTURE FIRST SUPPLEMENTAL INDENTURE (this "Supplement"), dated and effective as of January 5, 2000, is entered into by and among Lyondell Chemical Company, a Delaware corporation ("Lyondell") and the successor by merger to Lyondell Chemical Worldwide, Inc. (formerly known as ARCO Chemical Company), a Delaware corporation (the "Company"), and The Bank of New York, a New York banking corporation, as Trustee (the "Trustee"). WITNESSETH: WHEREAS, the Company and the Trustee have executed and delivered an Indenture dated as of June 15, 1988, between the Company and the Trustee (the "Indenture"), providing for the issuance by the Company from time to time of its unsecured debentures, notes or other evidences of indebtedness (the "Securities") to be issued in one or more series as provided in the Indenture; WHEREAS, on December 31, 1999, the Company merged with and into Lyondell, and Lyondell, as successor to the Company, is required under Article Twelve of the Indenture to assume the observance and performance by the Company of every covenant contained in the Indenture to be observed and performed by the Company; WHEREAS, pursuant to Section 11.01 of the Indenture, Lyondell and the Trustee may enter into this Supplement without the consent of any Holder; and WHEREAS, the execution and delivery of this Supplement have been duly authorized by of the Board of Directors of Lyondell in connection with the approval of the merger; NOW, THEREFORE, in consideration of the above premises, each of the parties hereto agrees, for the benefit of the other and for the equal and proportionate benefit of the Holders of the Securities, as follows: ARTICLE ONE ASSUMPTION Section 1.1. For value received, Lyondell hereby assumes the due and punctual payment of the principal of and any premium and interest on all the Securities and the performance or observance of every other covenant of the Indenture on the part of the Company to be performed or observed. Section 1.2. Effective as of the date hereof, Lyondell shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture with the same effect as if Lyondell had been named as the Company therein. ARTICLE TWO MISCELLANEOUS Section 2.1. Except as otherwise expressly provided, all terms used herein which are defined in the Indenture shall have the meanings assigned to them in the Indenture. Except as supplemented hereby, the Indenture and the Securities are in all respects ratified and confirmed and all the terms and provisions thereof shall remain in full force and effect. Section 2.2. This Supplement shall be effective as of the date above written. Section 2.3. This Supplement shall be governed by and construed in accordance with the laws of the jurisdiction which govern the Indenture and its construction. Section 2.4. This Supplement may be executed in any number of counterparts each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Supplement to be duly executed as of the day and year first above written. LYONDELL CHEMICAL COMPANY By: /s/ Robert T. Blakely ------------------------------- Robert T. Blakely Executive Vice President and CFO BANK OF NEW YORK By: _______________________________ Name: Title: EX-10.10 6 INDEMNITY AGREEMENT Exhibit 10.10 INDEMNITY AGREEMENT This Indemnity Agreement is made this ____ day of ________, ____, by and between LYONDELL CHEMICAL COMPANY, a Delaware corporation ("Lyondell"), and ____________________ ("Indemnitee"). R E C I T A L S Section 5.1 of Lyondell's By-Laws provides that Lyondell shall indemnify the Indemnitee with respect to all matters to which Section 145 of the General Corporation Law of the State of Delaware (the "DGCL") may in any way relate, to the fullest extent permitted or allowed by the laws of the State of Delaware, whether or not specifically required, permitted or allowed by said Section 145. The By-Laws (Section 5.1(d)) also provide that Lyondell may from time to time enter into indemnity agreements with the persons who are members of its Board of Directors, its elected officers and such other persons as the Board may designate, such indemnity agreements to be approved by a majority of the Board then in office. Section 145(f) of the DGCL also provides that the indemnification authorized by the other subsections of Section 145 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement or otherwise, and Lyondell's By-Laws (Section 5.1(b)) likewise provide that the right to indemnification and the payment of expenses conferred by Section 5.1 of the By- Laws shall not be exclusive of any other right which any person may have or thereafter acquire under any agreement or otherwise. In exercising its discretion to authorize this Agreement, the Board of Directors has considered the following, among other factors: (a) It is essential to Lyondell to attract and retain as directors and officers the most capable persons available. (b) The substantial increase in corporate litigation that may subject directors and officers to litigation costs and risks and the limitations on the availability of directors' and officers' liability insurance have made and will make it increasingly difficult for Lyondell to attract and retain such persons. (c) When obtainable, insurance policies relating to indemnification are often subject to retentions by the insured, co-insurance requirements, exclusions and other limitations on coverage. In view of the foregoing and in recognition of the Indemnitee's need for substantial protection against personal liability in order to assure the Indemnitee's continued service to Lyondell in an effective manner and the Indemnitee's reliance on the provisions of Lyondell's By-Laws, and in part to provide the Indemnitee with specific contractual assurance that the protection promised by the By-Laws will be available to the Indemnitee (regardless of, among other things, any amendment to or revocation of such By-Laws or any change in the composition of Lyondell's Board of Directors or any acquisition transaction relating to Lyondell), Lyondell wishes to provide in this Agreement for the indemnification of and the advancing of expenses to the Indemnitee to the fullest extent (whether partial or complete) permitted by law and as set forth in this Agreement, and, to the extent insurance is maintained, for the continued coverage of the Indemnitee under Lyondell's directors' and officers' liability insurance policies. A G R E E M E N T In consideration of Indemnitee's continued service to Lyondell, Lyondell hereby agrees with the Indemnitee as follows: Section 1. Definitions. a. Corporate Status: the status of a person who (i) is or was a director, officer or employee of Lyondell, or is or was serving at the request of Lyondell as a director (or in a position analogous to a director), officer or employee of another corporation, partnership, joint venture, trust or other enterprise, in each case which is controlled by Lyondell, (ii) is or was serving (1) on the Partnership Governance Committee of Equistar Chemicals, LP ("Equistar"), the Partnership Governance Committee of LYONDELL-CITGO Refining LP ("LCR") (or the Owners Committee of the predecessor of LCR), or the Management Committee of Lyondell Methanol Company, L.P. ("LMC"), as a representative of a subsidiary of Lyondell that holds an ownership interest in Equistar, LCR or LMC, or (2) as an officer of Equistar, LCR or LMC, provided that during a portion of such service such person also served as an officer of Lyondell, or (iii) is or was serving, at the written request of Lyondell or pursuant to an agreement in writing with Lyondell, which request or agreement provides for indemnification under this Agreement, as a director, officer, employee, fiduciary or agent of another corporation, partnership, joint venture, trust or other enterprise not controlled by Lyondell, provided that if such written request or agreement referred to in this clause (iii) provides for a lesser degree of indemnification by Lyondell than that provided pursuant to this Agreement, the provisions contained in or made pursuant to such written request or agreement shall govern. References above to "other enterprises" shall include employee benefit plans, and references to "serving at the written request of Lyondell" shall include any service as a director, officer, employee, fiduciary or agent which imposes duties on, or involves services by, such director, officer, employee, fiduciary or agent (including as a member of the Lyondell Benefits Administration Committee) with respect to an employee benefit plan or its participants or beneficiaries. b. Change in Control: shall be deemed to have occurred if (i) any Person becomes the beneficial owner, directly or indirectly, of securities of Lyondell representing 25% or more of the total voting power represented by Lyondell's then outstanding Voting Securities, (ii) the stockholders of Lyondell approve a merger or consolidation of Lyondell with any other corporation, other than a merger or consolidation which would result in the Voting Securities of Lyondell outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of Lyondell or such surviving entity outstanding immediately after such merger or consolidation, (iii) the stockholders of Lyondell approve a plan of complete liquidation of Lyondell or an agreement for the sale or disposition by Lyondell (in one transaction or -2- a series of transactions) of all or substantially all of Lyondell's assets, (iv) there shall have occurred an event required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Exchange Act, whether or not Lyondell is then subject to such reporting requirement, (v) during any period of two consecutive years, individuals who at the beginning of such period constituted Lyondell's Board of Directors (including for this purpose any new director whose election or nomination for election by Lyondell's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of Lyondell's Board of Directors, or (vi) Lyondell is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter. c. Claim: any threatened, pending or completed action, suit or proceeding, or any inquiry or investigation that the Indemnitee in good faith believes might lead to the institution of any such action, suit or proceeding, whether civil, criminal, administrative, investigative or other, except one initiated by an Indemnitee pursuant to Section 4a of this Agreement or by Lyondell to recover payments by Lyondell of expenses incurred by Indemnitee in connection with a Claim in advance of its final disposition. d. Court: the Court of Chancery of the State of Delaware or any other court of competent jurisdiction. e. Exchange Act: the Securities Exchange Act of 1934, as amended. f. Independent Counsel: means a law firm, or a member of a law firm, that has not otherwise performed services within the last five years for Lyondell or an Affiliate of Lyondell as defined under the Exchange Act, the Indemnitee, any Person referred to in clause (i) of Section 1b hereof, or any "other corporation" referred to in clause (ii) of Section 1b hereof. g. Person: any person as defined in Section 3(a)(9) and 13(d)(3) of the Exchange Act. h. Potential Change in Control: shall be deemed to have occurred if (i) Lyondell enters into an agreement or arrangement, the consummation of which would result in the occurrence of a Change in Control; (ii) any Person publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control; (iii) any Person (other than a trustee or other fiduciary, holding securities under an employee benefit plan of Lyondell, acting in such capacity) who is or becomes the beneficial owner, directly or indirectly, of securities of Lyondell representing 10% or more of the combined voting power of Lyondell's then outstanding Voting Securities, increases such Person's beneficial ownership of such securities by 5% or more over the percentage so owned by such Person on the date hereof; or (iv) the Board of Directors adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. -3- i. Reviewing Party: any person or body (i) permitted to determine entitlement to indemnification under Section 145(d) of the DGCL, (ii) designated as the Reviewing Party by Lyondell's Board of Directors, and (iii) who is not a party to the particular Claim for which the Indemnitee is seeking indemnification; provided, however, that if there has been a Change in Control, the Reviewing Party shall be the Independent Counsel selected pursuant to Section 3e of this Agreement. j. Voting Securities: any securities of Lyondell having the right under ordinary circumstances to vote at an election of the Board of Directors. Section 2. General Right to Indemnification. Subject to Sections 3 and 4g, Lyondell shall indemnify the Indemnitee in the event that Indemnitee was or is a party or is threatened to be made a party to or is involved or is threatened to be involved (as a witness or otherwise) in or otherwise requires representation by counsel in connection with any Claim by reason of the fact that Indemnitee is or was serving in a Corporate Status or by reason of Indemnitee's alleged action or inaction in such capacity, and Indemnitee shall be indemnified and held harmless by Lyondell to the fullest extent permitted by the DGCL, as the same exists or may hereafter be amended (but, in the case of any such amendment with reference to events occurring prior to the effective date thereof, only to the extent that such amendment permits Lyondell to provide broader indemnification rights than such law permitted Lyondell to provide prior to such amendment), against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) actually and reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to the Indemnitee when the Indemnitee has ceased to be a director or officer (or to serve another entity at the request of Lyondell) and shall inure to the benefit of the Indemnitee's heirs, personal representatives and estate. Notwithstanding the foregoing, if the Indemnitee's Corporate Status arises by virtue of clause (ii) of the definition of Corporate Status, Lyondell's obligation to indemnify under this Agreement shall be subject to the obligation of Equistar, LCR or LMC, as the case may be, to indemnify the Indemnitee as set forth by law or under their respective organizational agreements, governance or partnership committee resolutions or other agreements, and the Indemnitee shall proceed first against Equistar, LCR or LMC, as the case may be, for indemnification of any costs, charges, expenses, liabilities and losses; provided that, Lyondell shall advance any such amounts incurred by the Indemnitee in the event of a Claim that would give rise to a right indemnification hereunder (were it not for this sentence), and, in the event the Indemnitee is not indemnified by Equistar, LCR or LMC, as the case may be, to the fullest extent as he or she would be entitled under this Agreement (were it not for this sentence), Lyondell shall satisfy any deficiency subject to the terms, conditions and procedures of this Agreement, it being the intent of Lyondell that the Indemnitee shall receive the full benefit intended by this Agreement, whether such indemnification is funded by Equistar, LCR, LMC or Lyondell. Section 3. Determination of Entitlement to Indemnification. a. The obligations of Lyondell under Section 2 of this Agreement shall be subject to the condition that the Reviewing Party shall have determined (in a written opinion, in any case in which Independent Counsel is the Reviewing Party) or have been deemed to determine that the Indemnitee is permitted to be indemnified under applicable law. -4- b. In making a determination as to indemnification, the Reviewing Party shall use the presumptions and conventions described in Sections 4c and 4e of this Agreement. c. After the final disposition of any Claim covered by this Agreement, the Indemnitee shall send to Lyondell a written request for any indemnification sought under this Agreement. Such written request shall contain sufficient information to reasonably inform Lyondell about the nature and extent of the indemnification sought by Indemnitee. d. If there has not been a Change of Control, no later than 15 days following receipt by Lyondell of a request for indemnification, Lyondell shall deliver such request to the Reviewing Party for its review pursuant to this Agreement. Except in the event that the determination of entitlement to indemnification is required by applicable law to be made in a written opinion, if such Reviewing Party shall not have made and furnished to Indemnitee in writing a determination as to the Indemnitee's entitlement to indemnification within 60 days after receipt by Lyondell of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made, and Indemnitee shall be entitled to such indemnification unless Indemnitee knowingly misrepresented a material fact in connection with the request for indemnification or such indemnification is prohibited by applicable law. e. If there has been a Change in Control, then with respect to all matters thereafter arising concerning the rights of the Indemnitee to indemnity payments and advances under this Agreement, the Reviewing Party shall be an Independent Counsel selected in the following manner. Indemnitee shall give Lyondell written notice advising of the identity and address of the Independent Counsel selected by Indemnitee. Unless Lyondell objects within seven days after receipt of such written notice of selection, the Independent Counsel selected by Indemnitee shall be the Reviewing Party. Any such objection by Lyondell may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of Independent Counsel, and the objection shall set forth with particularity the factual basis of such assertion. If Lyondell so objects, Indemnitee may petition the Court for a determination that Lyondell's objection to the selection of an Independent Counsel is without a reasonable basis and/or for the appointment as Reviewing Party of an Independent Counsel selected by the Court. f. The Indemnitee and Indemnitee's counsel shall be given an opportunity to be heard and to present evidence on the Indemnitee's behalf in connection with consideration by the Reviewing Party. g. An Independent Counsel who serves as a Reviewing Party, among other things, shall render its written opinion to Lyondell and the Indemnitee as to whether and to what extent the Indemnitee would be permitted to be indemnified under applicable law. Lyondell agrees to provide full cooperation to and to pay the reasonable fees of such Independent Counsel and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages actually and reasonably incurred, arising out of or relating to this Agreement or its engagement pursuant hereto. -5- Section 4. Right of Indemnitee to Bring Suit and Related Matters. a. If (i) the Reviewing Party determines that the Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law; (ii) a Reviewing Party who is an Independent Counsel selected pursuant to Section 3d has not rendered its written opinion determining the request for indemnification within 90 days after receipt by Lyondell of the request therefor; (iii) a Reviewing Party who is an Independent Counsel selected pursuant to Section 3e has not rendered its written opinion determining the request for indemnification (a) within 90 days after the time for Lyondell to object to such Reviewing Party's selection, or (b) within 90 days after objections to such Reviewing Party's selection have been overruled by the Court, or (c) within 90 days after being appointed by the Court; (iv) payment of indemnification is not made to Indemnitee by Lyondell within 15 days after a determination of entitlement to indemnification has been made or deemed to have been made pursuant to this Agreement; or (v) a claim for advances under Section 6 is not paid in full by Lyondell within 15 days after a written claim satisfying the requirements of Section 6 (together with the undertaking referenced in Section 6, if applicable) has been received by Lyondell: the Indemnitee shall have the right to bring suit in the Court seeking a determination by the Court of Indemnitee's entitlement to indemnification or advances or challenging any such determination by the Reviewing Party or any aspect thereof, and Lyondell hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party that the Indemnitee is entitled to indemnification shall be conclusive and binding on Lyondell and the Indemnitee, unless Indemnitee knowingly misrepresented a material fact in connection with such request for indemnification, or such indemnification is prohibited by law. If successful in whole or in part, the Indemnitee shall be entitled to be paid also the expenses actually and reasonably incurred by Indemnitee in prosecuting its claim. b. The provisions of Sections 4(c) through 4(f) shall also apply in any action brought by Lyondell to recover payments by Lyondell of expenses incurred by the Indemnitee in connection with a Claim in advance of its final disposition. c. In any judicial proceeding commenced pursuant to Section 4a, the Indemnitee shall be presumed to be entitled to indemnification or advancement, and the burden of proving that the Indemnitee is not entitled to be indemnified or to obtain advances under this Agreement or otherwise shall be on Lyondell. d. In any judicial proceeding commenced pursuant to Section 4a, neither the failure of Lyondell (including its Board of Directors, independent legal counsel, or its stockholders) or the Reviewing Party to have made a determination (prior to the commencement by Indemnitee of an action pursuant to Section 4a) that indemnification of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable standard of conduct set forth in the DGCL, nor an actual determination by the Company (including its Board of Directors, independent legal counsel, or its stockholders) or the Reviewing Party that the Indemnitee has not met such applicable standard of conduct, shall create a presumption that the Indemnitee has not met the applicable standard of conduct or, in the case of such an action, brought by the Indemnitee, be a defense to the action and if there is such a failure to make a determination or an adverse determination, any judicial proceeding -6- commenced pursuant to Section 4a shall be conducted in all respects as a de novo trial on the merits, and Indemnitee shall not be prejudiced by reason thereof. e. In any judicial proceeding commenced pursuant to Section 4a, the termination of any Claim or of any matter in a Claim, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of Lyondell, or with respect to any criminal proceeding, that Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. A person who acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan of Lyondell shall be deemed to have acted in a manner not opposed to the best interests of Lyondell. For purposes of any determination hereunder, a person shall be deemed to have acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of Lyondell, or, with respect to any criminal action or Claim, to have had no reasonable cause to believe Indemnitee's conduct was unlawful, if Indemnitee's action is based on the records or books of account of Lyondell or another enterprise or on information supplied to him by the officers of Lyondell or another enterprise in the course of their duties or on the advice of legal counsel for Lyondell or another enterprise or on information or records given or reports made to Lyondell or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by Lyondell or another enterprise. The term "another enterprise" as used in this Section shall mean any other corporation, joint venture, trust or other enterprise as to which the Indemnitee is or was serving in a Corporate Status. The provisions of this paragraph shall not be deemed to be exclusive or to limit in any way the circumstances in which an Indemnitee may be deemed to have met the applicable standards of conduct for determining entitlement to rights under this Agreement. f. Lyondell shall be precluded from asserting in any judicial proceeding commenced pursuant to Section 4a that the procedures and presumptions of this Agreement are not valid, binding and enforceable, and shall stipulate in any such proceeding that Lyondell is bound by all provisions of this Agreement. g. Notwithstanding any other provisions of this Agreement to the contrary and except as provided in Section 4a and Section 5, Lyondell shall indemnify the Indemnitee in connection with a proceeding (or part thereof) initiated by the Indemnitee against Lyondell only if such proceeding (or part thereof) was authorized prior to its initiation by a majority of the disinterested members of the Board of Directors of Lyondell. If such authorization is obtained, the rights to indemnification confirmed by this paragraph shall include the right to be paid by Lyondell any expenses incurred in defending such proceeding in advance of its final disposition. Section 5. Indemnification for Costs, Charges and Expenses of Successful Party. Notwithstanding the other provisions of this Agreement, to the extent that the Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action with or without prejudice, in defense of any Claim covered by this Agreement, or in defense of any claim, issue or matter therein, the Indemnitee shall be indemnified against all costs, charges and expenses, -7- including attorneys' fees, actually and reasonably incurred by the Indemnitee or on Indemnitee's behalf in connection therewith. Section 6. Advances. a. In the event of a Claim in which Indemnitee is a party or is involved and that may give rise to a right of indemnification under this Agreement, following written request by Indemnitee to Lyondell (which written request includes reasonably satisfactory evidence as to the amount of such expenses), expenses reasonably incurred by the Indemnitee in connection with such Claim, including attorneys' fees, judgments, fines and amounts paid in settlements, shall be paid by Lyondell in advance of the final disposition of the Claim; provided, however, that if the DGCL requires or if Lyondell so requests, payment shall be made to or on behalf of the Indemnitee only upon delivery to Lyondell of an undertaking, by or on behalf of the Indemnitee, to repay all amounts so advanced if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by Lyondell under Section 145 of the DGCL. b. Indemnitee agrees that Indemnitee shall reimburse Lyondell for all expenses paid by Lyondell in defending any Claim against Indemnitee in the event and only to the extent that it shall be determined pursuant to the provisions of this Agreement or by final judgment or other final adjudication under the provisions of any applicable law that Indemnitee is not entitled to be indemnified by Lyondell for such expenses. Section 7. Establishment of Trust. In the event of a Potential Change in Control, Lyondell shall, upon written request by the Indemnitee, create a trust for the benefit of the Indemnitee and from time to time upon written request of the Indemnitee shall fund such trust in an amount sufficient to satisfy any and all expenses reasonably anticipated at the time of each such request to be incurred in connection with investigating, preparing for and defending any Claim, and any and all judgments, fines, penalties and settlement amounts of any and all Claims covered by this Agreement, from time to time actually paid or claimed, reasonably anticipated or proposed to be paid. The terms of the trust shall provide that upon a Change in Control, (a) the trust shall not be revoked or the principal thereof invaded, without the written consent of the Indemnitee, (b) the trustee shall advance within two business days of a request by the Indemnitee any and all expenses reasonably incurred by the Indemnitee (and the Indemnitee hereby agrees to reimburse the trust under the circumstances under which the Indemnitee would be required to reimburse Lyondell under this Agreement), (c) the trust shall continue to be funded by Lyondell in accordance with the funding obligation set forth above, (d) the trustee shall promptly pay to the Indemnitee all amounts for which the Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (e) all unexpended funds in such trust shall revert to Lyondell upon a final determination by the Court that the Indemnitee has been fully indemnified under the terms of this Agreement. The trustee shall be chosen by the Indemnitee. Nothing in this Section 7 shall relieve Lyondell of any of its obligations under this Agreement. Section 8. Insurance. To the extent Lyondell maintains an insurance policy or policies providing directors' and officers' liability insurance, the Indemnitee shall be covered by such policy -8- or policies, in accordance with its or their terms, to the maximum extent of the coverage available for Lyondell's directors or officers. Section 9. Notice to Lyondell. The Indemnitee must provide prompt written notice to Lyondell of any Claim in connection with which the Indemnitee may assert a right to be indemnified hereunder; however, failure to provide such notice shall not be construed as a waiver of any right of the Indemnitee to an advance or indemnification hereunder. Any communication required or permitted to Lyondell under this Agreement shall be addressed to the Secretary of Lyondell, and any such communication to Indemnitee shall be addressed to the Indemnitee's address as shown on Lyondell's records unless the Indemnitee specifies otherwise. Any communication on behalf of either Lyondell or the Indemnitee shall be in writing, and any notice shall be effective upon receipt. Section 10. Other Rights; Continuation of Right to Indemnification. The indemnification and advances provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee seeking indemnification may be entitled under any law (common or statutory), provision of Lyondell's Certificate of Incorporation or By-Laws, vote of stockholders or disinterested directors, or otherwise, both as to action in the Indemnitee's official capacity and as to action in another capacity while holding office or while employed by or acting as agent for Lyondell, and shall continue as to a person who has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administrators of the Indemnitee; provided, however, that notwithstanding the foregoing, this Agreement supersedes all other prior indemnity agreements, indemnification agreements or other agreements of a similar nature heretofore entered into between Lyondell and the Indemnitee, as well as any prior oral agreements or oral understandings with respect to the subject matter of this indemnity agreement; provided, however, that, notwithstanding the foregoing proviso, and in light of the fact that this Agreement is generally intended to provide for indemnification to the fullest extent permitted by the DGCL, this Agreement shall not be construed to deprive the Indemnitee of any indemnification by Lyondell permitted by applicable law with respect to an act or omission occurring prior to the date hereof that Indemnitee would otherwise have been entitled to under any such prior agreement. Section 11. Subrogation. In the event of payment under this Agreement, Lyondell shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Lyondell effectively to bring suit to enforce such rights. Section 12. No Duplication of Payments. Lyondell shall not be liable under this Agreement to make any payment in connection with any claim made against the Indemnitee to the extent the Indemnitee has otherwise actually received payment (under any insurance policy or otherwise) of the amounts otherwise indemnifiable hereunder. Section 13. Amendments. This Agreement may not be amended without the agreement in writing of Lyondell and the Indemnitee. -9- Section 14. Savings Clause. If this Agreement or any portion hereof shall be deemed invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby, and Lyondell shall nevertheless indemnify the Indemnitee as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any Claim to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated and to the full extent permitted by applicable law. Section 15. Survival Clause. Lyondell acknowledges that in continuing to provide services to Lyondell, the Indemnitee is relying on this Agreement. Accordingly, Lyondell agrees that its obligations hereunder will survive (a) any actual or purported termination of this Agreement by Lyondell or its successors or assigns whether by operation of law or otherwise, and (b) termination of the Indemnitee's services to Lyondell, whether such services were terminated by Lyondell or the Indemnitee, with respect to any Claim, whether or not such Claim is made, threatened or commenced before or after the actual purported termination of this Agreement or the termination of the Indemnitee's services to Lyondell. Section 16. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of Lyondell and spouses, heirs, and personal and legal representatives of Indemnitee. Lyondell shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Lyondell, by written agreement in form and substance satisfactory to the Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that Lyondell would be required to perform if no such succession had taken place. Section 17. Governing Law. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of Delaware (without giving effect to the provisions thereof relating to conflicts of law). -10- IN WITNESS WHEREOF, this Agreement has been executed by the parties thereto, and in the case of Lyondell, by a duly authorized officer thereof on its behalf. Attest: LYONDELL CHEMICAL COMPANY By: _______________________ By: _________________________________ Name: Name: Title: Title: INDEMNITEE By: __________________________________ Name: Title: -11- Officers and Directors with whom the Registrant has --------------------------------------------------- entered into Indemnity Agreements: --------------------------------- Eugene R. Allspach Carol A. Anderson Jim Bayer Robert T. Blakely Dr. William T. Butler Kelvin R. Collard T. Kevin DeNicola Edward J. Dineen Travis Engen Morris Gelb Len Halpern Jeff Hemmer Stephen F. Hinchliffe John A. Hollinshead Allen C. Holmes Dudley C. Mecum III Gerald A. O'Brien Jeffrey R. Pendergraft Dan F. Smith Paul R. Staley Lyn Stanton Debra L. Starnes Robert E. Tolbert -12- EX-10.11 7 DEFERRAL PLAN Exhibit 10.11 Lyondell Chemical Company _________________________________________________________________ ELECTIVE DEFERRAL PLAN FOR NON-EMPLOYEE DIRECTORS As Amended and Restated Effective October 16, 1998 ARTICLE I GENERAL PROVISIONS Section 1.1. Purpose and Intent of Plan. This Plan is intended to provide an opportunity for Directors who are not employees of the Company to accumulate supplemental funds for retirement or special needs prior to retirement through the deferral of portions of their Board and Committee Retainers and Meeting Fees. Section 1.2. Effective Date of Plan. This amended and restated Plan document shall be effective as of October 16, 1998. Section 1.3. Definitions. (a) Account means a separate bookkeeping account maintained by the Company for each Participant and which measures and determines the amounts to be paid to the Participant under the Plan. Effective October 1, 1996, separate subaccounts within the Account for previous deferrals of Retainer and Meeting Fees, will be consolidated into a single account balance. (b) Administrative Committee means the Directors Benefit Committee. (c) Beneficiary means a person who is entitled to receive a Participant's interest under this Plan in the event of the Participant's death. (d) Board means the Board of Directors of Lyondell Chemical Company. (e) Board Committee means any committee established by the Board which consists of Directors and which reports to the Board. (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 Securities Exchange Act of 1934, as amended or other actual or threatened solicitation of proxies or consents by or on behalf of any Person (as defined below) other than the Board; -1- (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; or (iii) Any Person shall be or become the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as amended), 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): (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 in Control shall be deemed to have occurred for purposes of this Subsection (iii). (iv) For purposes of this Section 1.3(f): -2- (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) "LCR" shall mean LYONDELL-CITGO Refining Company Ltd. (from and after January 1, 1999, LYONDELL-CITGO Refining LP), a Limited Liability Company organized under the laws of the State of Texas. (4) "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. (5) "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. (g) Citibank Base Rate means for any Plan Year the average of the prime rates at Citibank, N. A., in effect on the first day of the current calendar quarter and each of the three prior quarters provided, however, that if for any quarter the first day of the calendar quarter is not a business day, the prime rate in effect on the first business day of such quarter shall be deemed the prime rate for the first day of such quarter. (h) Code means the Internal Revenue Code of 1986, as amended. (i) Company means Lyondell Chemical Company and any of its subsidiaries or affiliates. (j) Deferral Election means an election made by a Director to defer Retainer and/or Meeting Fees, for which the Director has submitted a Participation Agreement. (k) Deferral Period means a maximum number of years established by the Administrative Committee in advance of a particular Deferral Election, over which the Director elects to defer Retainer or Meeting Fees. A new Deferral Period shall normally start each January 1, except that with respect to a new Director, the Deferral Period shall commence 30 days after the Director's election to the Board. -3- (l) Deferred Compensation means the amount of Retainer or Meeting Fees that a Director elects to defer pursuant to a Deferral Election. If applicable, Deferred Compensation also includes the present value as of December 31, 1998 of the accrued retirement benefit earned under the Company's Retirement Plan for Non-Employee Directors which a Director has elected to defer under this Plan effective January 1, 1999. (m) Director means a Director of the Board who is not a current employee of the Company. (n) Effective Date means October 16, 1998. (o) Financial Hardship means a condition of financial difficulty, determined by the Administrative Committee, upon advice of counsel, based on written information supplied by the Participant or Beneficiary, as the case may be, in accordance with such standards established, from time to time, by the Administrative Committee, which condition is sufficient to justify a change in payment election under the Plan without causing receipt of taxable income by any other Plan Participant before the Participant or Beneficiary, as the case may be, actually receives his benefit. (p) In-Service Distribution means a distribution to a Participant prior to Termination of Service pursuant to Section 4.4. (q) Interest Rate means (i) for any Plan Year commencing prior to a Change in Control, the interest rate adopted by the Administrative Committee in advance of the election period for a Plan Year, which shall constitute the interest rate applicable to that Plan Year; or (ii) for each Plan Year commencing after a Change in Control, the interest rate which is equal to the greater of (a) the Prime Rate or (b) 125 percent of the rolling average Ten-Year Treasury Note Rate, as of October 1 prior to the commencement of the applicable Plan Year. (r) Meeting Fee means the amount paid in cash to a Director as compensation for each Board and/or Board Committee meeting attended by the Director. (s) Participant means any Director who is participating in this Plan as provided in Article II, or any former Director who has not received the entire benefit to which he or she is entitled under this Plan. (t) Participation Agreement means the Deferral Election submitted by a Participant to the Company prior to the beginning of the Deferral Period. (u) Plan means this Elective Deferral Plan for Non-Employee Directors. (v) Plan Year means each calendar year beginning on January 1 and ending on December 31, except that the first Plan Year shall be the period commencing on August 1, 1990 and ending on December 31, 1990. -4- (w) Prime Rate means the prime commercial lending rate of Citibank, N.A. as publicly announced to be in effect at the close of business on October 1 of the year immediately prior to the commencement of the applicable Plan Year. The Prime Rate is not necessarily the lowest rate of interest of Citibank, N.A. (x) Retainer Fee means the annual amount paid in cash to an Director as compensation for serving in such capacity and any additional annual amount paid in cash to an Director for serving in the capacity of a Board Committee Chairman. (y) Retirement means the Director's termination of employment with a right to an immediate retirement allowance from the Director's regular, full-time employer. (z) Survivor Benefit means the benefits described in Section 4.3 of the Plan. (aa) Ten-Year Treasury Note Rate means the rate periodically published by the U.S. Department of Treasury under the heading "10 year Treasury Note Rate". (bb) Termination of Service means the Director ceasing to be a member of the Board. (cc) Trust Agreement means the Trust Agreement between Lyondell Chemical Company and State Street Bank & Trust Company, and any amendments or successor agreements thereto. (dd) Unscheduled Distribution means a distribution to a Participant pursuant to Section 4.5. (ee) 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. ARTICLE II PARTICIPATION AND DEFERRAL ELECTIONS Section 2.1. Participation. A Director may elect to participate, or continue participation, in the Plan by submitting a Participation Agreement for a Deferral Period to the Company no later than thirty (30) days prior to the commencement of the Deferral Period. Section 2.3. Deferral Elections. Prior to each Deferral Period, through completion of a form provided by Company, each Director may make a Deferral Election which shall be irrevocable except as authorized pursuant to Section 2.6. Section 2.4. Limitation on Deferral. Deferral Elections shall be subject to any limitation established by the Administrative Committee in advance of a Deferral Period, including a -5- minimum deferral amount reasonably anticipated to be in excess of Eight Thousand Dollars ($8,000) per Deferral Period and a minimum deferral amount reasonably anticipated to be in excess of at least Two Thousand Dollars ($2,000) per Plan Year in the Deferral Period. The maximum Deferral Election for any Plan Year within a Deferral Period is an amount equal to one hundred (100%) of the Participant's Retainer and Meeting Fees payable in cash for such Plan Year. Section 2.5. Termination of Service. A Participant's Deferral Elections shall terminate upon the Participant's Termination of Service. Section 2.6. Modification of Deferral Elections. Deferral Elections shall be irrevocable except as follows: (a) Financial Hardship. The Administrative Committee may permit a Participant to reduce the amount elected under a prior Deferral Election, or to waive the remaining deferrals under a prior Deferral Election, upon a finding that the Participant has suffered a Financial Hardship. (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 Deferred Compensation previously elected for any of the remaining Plan Years in that Deferral Period; provided, however, that any acceleration of Deferred Compensation for remaining Plan Years in the Deferral Period shall not increase, for any single Plan Year, the total Retainer or Meeting Fee deferrals above one hundred percent (100%) of the Participant's Retainer and Meeting Fees payable in cash during the Plan Year. ARTICLE III DEFERRED COMPENSATION ELECTIONS 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 his or her 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. Any Deferred Compensation attributable to the accrued benefit earned by the Participant as of December 31, 1998 under the Company's Retirement Plan for Non-Employee Directors shall be credited to the Participant's Account effective January 1, 1999. The Company shall have the right to withhold from any Retainer or Meeting Fees or Plan benefits (or otherwise to cause the Director, his Beneficiary or the executor or administrator of his estate to make payment of) any federal, state, local or foreign taxes required to be withheld with respect to any Deferred Compensation or benefits paid pursuant to the Plan. -6- Section 3.3. Interest Rate. Except as provided in Section 4.8, the Accounts shall be credited as of each Valuation Date with interest based on the rates specified below, compounded annually. Interest shall be credited as of each Valuation Date from the date when Deferred Compensation is 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 at the greater of the Interest Rate previously announced by the Company to be applicable for the Plan Year or the current Citibank Base Rate. The Interest Rate for the first Plan Year shall be 125% of the rolling average Ten-Year Treasury Note Rate. (b) Interest Rate After Participant's Death. Following a Participant's death, the Participant's Account will be credited with interest at an interest rate equal to the Citibank Base Rate. With respect to payments made pursuant to Section 4.3(a), no interest shall be credited on that portion of the benefit representing a Participant's unfulfilled Deferral Commitment for each Deferral Unit. 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 that Valuation Date, plus interest credited to the Account and minus any distributions or reductions made from the Account since the immediately preceding Valuation Date. Section 3.5. Vesting of Accounts. Each Participant shall be one hundred percent (100%) vested at all times in the amounts credited to his or her Account. Section 3.6. Statement of Accounts. At least annually, the Company shall provide each Participant with a statement setting forth the balance of his or her Account. ARTICLE IV PLAN BENEFITS Section 4.1. Plan Benefit. A Participant's benefit under the Plan shall equal the amount of his or her Account as determined in accordance with Sections 3.4 and 4.6. Section 4.2. Distribution upon Termination of Service. (a) Lump Sum. Benefits payable on account of a Participant's Termination of Service, other than due to the death of the Participant, shall be paid in a lump sum unless the Participant has otherwise elected to have all or a portion of the benefits distributed in accordance with Section 4.2(b) and/or Section 4.2(c) hereof. (b) Deferred Commencement of Benefits. A Participant may elect to have payment of all or any portion of the Participant's Account commence on (i) January of any year following the Participant's Termination of Service or (ii) the later of the month following Retirement or -7- completion of all the Participant Deferrals under the Plan, provided that payment of benefits must commence no later than January of the year in which the Participant will reach age seventy-two (72). (c) Installment Payments. A Participant may elect to have payment of all or any portion of the Participant's Account benefits made in substantially equal monthly installment payments of five (5) years, ten (10) years or fifteen (15) years. 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. (d) Change of Election. A Participant, other than a former Director, may change a distribution election once each year until the year in which the Participant attains age 70. 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 become irrevocable as of the year in which the Participant attains age 70, except that a Participant may request in writing, that the Administrative Committee approve a change of an election made pursuant to Subsection (b) or (c) at any time prior to commencement of the payment of benefits, or in the case of installment payments, following commencement of payments, if (i) the Administrative Committee determines that the Participant has experienced a Financial Hardship justifying the request for a change of election, or (ii) the Participant agrees to accept a reduction in the value of the benefit, as determined by the Administrative Committee, upon advice of counsel, to be necessary to preclude the receipt of taxable income by any Participant in the Plan before the Participant actually receives his or her benefit. If a Participant has a voluntary Termination of Service prior to the year in which the Participant attains age 72, the Administrative Committee shall not honor any change in distribution elections made within the two calendar years immediately preceding the year in which the Termination of Service occurred. The Participant's distribution election which had been made before that period shall be considered the controlling distribution election, unless the Participant requests and the Committee grants, a change of election for the reasons provided in (i) or (ii) above. (e) Transition Election. A Participant, other than a former Director, may submit a distribution election which supersedes all existing distributions elections for all previous deferrals under this Plan during a period established by the Administrative Committee prior to the 1997 deferral period, notwithstanding the Participant's age or prior distribution elections. (f) Payment of Benefits Upon Death of Participant. Upon a Participant's death, any of the Participant's vested and unpaid benefits shall be paid in accordance with the applicable provisions of Section 4.3. Section 4.3. Survivor Benefits. (a) Death Prior to Termination of Service. If the Participant dies prior to Termination of Service, the Survivor Benefit shall be equal to the sum of the Participant's Account as determined in accordance with Section 3.4 and 4.6 plus an amount equal to the Participant's unfulfilled Deferral Elections for unexpired Deferral Periods, if any. The -8- Survivor Benefit shall be paid in a lump sum unless the Participant has elected to have all or a portion of the benefits distributed in accordance with Subsection (b) hereof. (b) Installment Payments. A Participant may elect to have payment of the Survivor Benefit made to the Participant's Beneficiary in substantially equal monthly payments of five (5) years, ten (10) years or fifteen (15) years if the Participant's Termination of Service is due to the death of the Participant. 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 amount, if any, attributable to the Participant's unfulfilled Deferral Elections and the remaining number of installment payments. (c) Death After Termination of Service. If the Participant dies after Termination of Service and all benefits have not been paid in a lump sum under Section 4.2(a), the Survivor Benefit shall be equal to the Participant's Account as determined in accordance with Sections 3.4 and 4.6 and payable in the form and at the time elected by the Participant. (d) Change of Election. A Beneficiary may request the Administrative Committee to approve a change in the form of payment from installments to a lump sum provided that (i) the Administrative Committee determines, upon application of the Beneficiary, 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 value of the benefit, as determined by the Administrative Committee, upon advice of counsel, to be necessary to preclude the receipt of taxable income by any Participant in the Plan in advance of the time the Participant actually receives his or her benefit. (e) Death Following Change in Control. If a Participant is entitled to a payment under Section 4.8 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 payment or on an installment basis, according to the Participant's existing election of form of payment on Change in Control. Section 4.4. In-Service Distributions. A Participant may elect to receive an In-Service Distribution from his or her Account subject to the following restrictions: (a) Timing of Election. The election to take an In-Service Distribution from the Account for a particular Deferral Election must be made at the same time the Participant makes the particular Deferral Election. (b) Amount of Distribution. The amount which a Participant can elect to receive as an In-Service 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 In-Service Distribution is to be made, only the Account balance will be paid. (c) Timing and Form of In-Service Distribution. The In-Service Distribution shall commence at the time and in the form elected by the Participant in the Participation Agreement -9- entered into with respect to the Deferral Election; provided, however, that if the Participant has a Termination of Service, the In-Service Distribution election will be canceled and distribution will be made pursuant to Section 4.2 and provided, further, that if the Participant commences Retirement and has elected payment upon Retirement, the In-Service Distribution election will be canceled and distribution will be made pursuant to Section 4.2. In no event shall an In-Service Distribution be made prior to two (2) years following the initial effective date of the particular Deferral Election. (d) Treatment of Distribution. Amounts paid to a Participant pursuant to this Section 4.4 shall be treated as distributions from the Participant's Account. (e) Transition Election. During a period to be established by the Administrative Committee prior to the 1997 Deferral Period, a participant may elect to maintain or revoke any existing In-Service Distribution Election. No other changes are permitted in any existing In-Service Distribution Election. A Participant who fails to make an election regarding existing In-Service Distributions shall be considered to have elected to maintain those existing In- Service Distribution Elections. Section 4.5. Unscheduled Distributions. Upon a finding that a Participant has suffered a Financial Hardship or upon the Participant agreeing to accept a reduction of his or her benefit in an amount determined necessary by the Administrative Committee, upon advice of counsel, to avoid constructive receipt of taxable income by any Participant, the Administrative Committee may, in its sole discretion, make distributions from an Account prior to the time specified for payment of the Account. Any unscheduled withdrawal will be paid in lump sum and will be subject to a minimum amount of $10,000 and any additional conditions prescribed by the Administrative Committee. Applications for unscheduled distributions and determinations thereon by the Administrative Committee shall be in writing, and a Participant may be required to furnish proof of the Financial Hardship in a formal manner as deemed appropriate by the Administrative Committee, upon advice of counsel. Section 4.6. Valuation and Settlement. The date on which a lump sum is paid or the date on which installment payments commence shall be the "Settlement Date". The Settlement Date shall be no more than thirty (30) days after the last day of the month in which the Participant or his Beneficiary becomes entitled to payments on account of Retirement, Termination of Service or death, unless the Participant elected to defer commencement of payments pursuant to Section 4.2(b). The Settlement Date for an In-Service Distribution or delayed payments shall be the month which the Participant elects to have such payments commence in the election form for designation of form of payment. The amount of a lump sum and the initial amount of installment payments shall be based on the value of the Participant's Account as of the Valuation Date immediately preceding the Settlement Date. Section 4.7. Small Benefit. Notwithstanding any election made by the Participant, the Company may pay any benefit in the form of a lump sum payment to the Participant or any Beneficiary, if the value of the Plan benefits remaining following a distribution for any reason, or the benefit payable to the Participant or Beneficiary when payments to such Participant or Beneficiary would otherwise commence, is less than $2,000. -10- Section 4.8. Change in Control. Notwithstanding any contrary provisions of this Article IV, in the event that a Change in Control, as defined in the Trust Agreement and incorporated herein by reference, occurs while this Plan is in effect, the provisions of this Section 4.8 shall control. In the event of a Change in Control, 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 to a Beneficiary at the time of Change in Control. Payment shall be made on a lump sum or installment basis, according to the Participant's election of the form of payment on Change in Control. Section 4.9. Combined Gross-up Payment; Tax Defense. (a) Combined Gross-up Payment. If a Participant becomes entitled to one or more payments (with a "payment" including, without limitation, an increase in pension benefits and the vesting of an option or other non-cash benefit or property) pursuant to the terms of any plan, arrangement or agreement with the Company (the "Total Payments"), which are or become subject to the tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that may hereafter be imposed) (the "Excise Tax"), the Company shall pay to the Participant an additional cash amount (the "Combined Gross-up Payment") such that the net amount retained by the participant after reduction for (i) any Excise Tax on the Total Payments and (ii) any federal, state and local income or employment tax and Excise Tax payable with respect to the Combined Gross-up Payment, shall equal the Total Payments. For purposes of determining the amount of the Combined Gross-up Payment, a Participant shall be deemed (i) to pay federal income taxes at the highest stated rate of federal income taxation (including surtaxes, if any) for the calendar year in which the Combined Gross up Payment is to be made; and (ii) to pay any applicable state and local income taxes at the highest stated rate of taxation (including surtaxes, if any) for the calendar year in which the Combined Gross-up Payment is to be made. Any Combined Gross-up Payment required hereunder shall be made to the Participant at the same time any Total Payment subject to the Excise Tax is paid or deemed received by the Participant. The Combined Gross-up Payment shall not be paid under this Plan if a Combined Gross-up Payment which is identical to or greater than the amount calculated under this Section 4.9 is paid under any other plan, arrangement or agreement with the Company. (b) Tax Defense. If, in connection with the examination of a Participant's tax return, the Internal Revenue Service asserts that any amount payable or benefit provided hereunder is a "parachute payment" as defined in the Code and such amount or benefit was not treated as a parachute payment in determining a Combined Gross-up Payment, Company at its cost shall assume the defense of any controversy involving such issue and shall indemnify and hold the Participant harmless for all liabilities, costs, taxes, interest and penalties attributable to such issue and shall to the extent necessary (without duplication) increase the Combined Gross-up Payment to give effect to any additional amount or benefit determined to be a parachute payments. The Participant shall cooperate with Company so that Company will be able to challenge any adverse determination by the Internal Revenue Service through administrative proceedings and, if determined by Company, through litigation. -11- 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 as determined in accordance with Section 4.3. Such designation shall be made on a form provided 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. No notice to or 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 or her death, or if no designated Beneficiary survives the Participant, the balance in the Participant's Account shall be paid in a lump sum to the executor or administrator for his or her estate. ARTICLE VI ADMINISTRATION Section 6.1. Administrative Committee. The Administrative Committee shall be responsible for the administration of the Elective Deferral Plan for Non- Employee Directors. Section 6.2. Rules of Conduct. The Administrative Committee shall adopt such rules for the conduct of its business and administration of this Plan as it considers desirable, provided they do not conflict with the provisions 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, Participants, Directors, Beneficiaries and all other persons. Section 6.5. Records of Administration. Records reflecting the administration of this Plan shall be kept. -12- Section 6.6. Denial of Claim. The Administrative Committee shall provide adequate notice in writing to any Participant, Director or Beneficiary whose claim for benefits under this Plan has been denied, setting forth the specific reasons for such denial. The Participant, Director or Beneficiary will be given an opportunity review by the Administrative Committee of the decision denying the claim. The Participant, Director or Beneficiary shall be given sixty (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. ARTICLE VII AMENDMENT AND DISCONTINUANCE Section 7.1. Amendment of Plan. This Plan may be amended from time to time by 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. In the event of a Change in Control, this Plan shall be terminated following distribution of assets to Participants or to the Independent Plan Administrator under the Non- Employee Directors Benefit Plans Trust Agreement. Section 7.3. Effect of Amendment or Termination. No amendment or termination of this Plan may adversely affect the benefit payable to any former Participant or Beneficiary receiving benefits under this Plan prior to the effective date of the amendment or termination, or any Participant or Beneficiary of a deceased Participant who, as of such effective date, was vested in or eligible to receive a benefit under this Plan, except as follows. Payment of a Participant's Account to the Participant or a Beneficiary in a previously elected form of distribution payable on Change in Control shall not be considered an amendment which adversely affects benefits under this Plan. No amendment or termination of this Plan due to a Change in Control shall adversely affect the amount of contributions and earnings accrued or credited to any former or current Participant's Account under this Plan immediately prior to the Change in Control. -13- ARTICLE VIII MISCELLANEOUS Section 8.1. 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 ("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 8.2. Grantor Trust. Although the Company is responsible for the payment of all benefits under the Plan, the Company may, in its sole 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 the 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 Participants or Beneficiaries of deceased Participants shall have the status of unsecured creditors insofar as their legal claim for benefits under the Plan and shall have no security interest in the grantor trust. Section 8.3. 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 Beneficiaries. Likewise, such payments shall not be subject to attachment by creditors of, or through legal process against, the Company, the Administrative Committee or the Participants. Section 8.4. No Right To Service On The Board. The provisions of this Plan shall not give a Director 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 for service on the Board. Section 8.5. 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 8.6. 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 -14- against the amount of benefits otherwise distributable. Such determination shall be made by the Administrative Committee. Section 8.7. 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. Section 8.8. 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 8.9. 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 8.10. Notice. Any notice or filing required or permitted to be given to the Administrative Committee or the Company 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 Company. 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 8.11. Successors and Assigns. This Plan shall be binding upon the Company and its successors and assigns. Section 8.12. 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 -15- payment due to a minor to the minor's credit in any savings or commercial bank of the Administrative Committee's choice. IN WITNESS WHEREOF, LYONDELL CHEMICAL COMPANY, acting by and through its duly authorized officer, has caused this Instrument to be executed on this 10th day of March, 1999. ATTEST: LYONDELL CHEMICAL COMPANY By: JoAnn L. Beck By: Robert J. Millstone -------------- -------------------------- Assistant Secretary Secretary -16- AMENDMENT TO LYONDELL CHEMCIAL COMPANY ELECTIVE DEFERRAL PLAN FOR NON-EMPLOYEE DIRECTORS This Amendment to Lyondell Chemical Company Elective Deferral Plan for Non- Employee Directors ("Amendment") is entered into by Lyondell Chemical Company on January 3, 2000, effective as of December 2, 1999. RECITALS: --------- WHEREAS, Section 3.3 of the Lyondell Chemical Company Elective Deferral Plan for Non-Employee Directors, as amended and restated effective October 16, 1998 (the "Plan"), provides that the deferral accounts of participating directors shall be credited with interest compounded annually; and WHEREAS, compounding interest on a monthly basis is a fairer treatment of these deferred amounts and is consistent with the deferral plan for executive officers and other key employees of the Company; and WHEREAS, the Board of Directors, at its meeting on December 2, 1999, approved an amendment to the Plan providing for monthly compounding of interest; NOW, THEREFORE, the Company hereby agrees that: 1. Effective January 1, 2000, the first sentence of Section 3.3 of the Plan be amended to read as follows in its entirety: "Except as provided in Section 4.8, the Accounts shall be credited as of each Valuation Date with interest based on the rates specified below, compounded monthly." 2. Except as otherwise expressly amended hereby, the Plan is ratified and confirmed and all the terms and provisions thereof shall remain in full force and effect. IN WITNESS WHEREOF, LYONDELL CHEMICAL COMPANY, acting by and through its duly authorized officer, has caused this Amendment to be executed on this 3rd day of January, 2000. ATTEST: LYONDELL CHEMICAL COMPANY By: /s/ Katie-Pat Bowman By: /s/ Gerald A. O'Brien -------------------- ------------------------ Assistant Secretary Vice President -17- EX-10.25(B) 8 SECOND AMENDEMENT TO LP AGREEMENT EXHIBIT 10.25(b) Second Amendment to Amended and Restated Limited Partnership Agreement This Second Amendment to the Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP, dated as of February 16, 1999 (this "Second Amendment"), is entered into by and among Lyondell Petrochemical G.P. Inc., Lyondell Petrochemical L.P. Inc., Millennium Petrochemicals GP LLC, Millennium Petrochemicals LP LLC, Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner 2, Inc., and Occidental Petrochem Partner GP, Inc. ("Occidental GP"). Whereas, on May 15, 1998, PDG Chemical Inc. and the parties hereto other than Occidental GP entered into the Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP; Whereas, as of June 30, 1998, PDG Chemical Inc. and the parties hereto entered into the First Amendment to Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP (the "First Amendment"; the Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP, as amended by the First Amendment is herein referred to as the "1998 Partnership Agreement"), whereby, among other things, PDG Chemical Inc. withdrew from Equistar Chemicals, LP, and Occidental GP became a general partner thereof; and Whereas, the parties hereto wish to amend the 1998 Partnership Agreement to, among other things, revise the definition of "Oxy Guaranteed Debt" in the Appendix thereof. Now, Therefore, the parties to this Second Amendment agree as follows: 1. All capitalized terms that are defined in the 1998 Partnership Agreement, but are not defined in this Second Amendment, shall have the same meanings as defined in the 1998 Partnership Agreement. 2. Clause (xxii) of Section 6.7 of the 1998 Partnership Agreement is amended (a) to delete the words "Oxy Guaranteed Debt" the four times they appear in such clause (xxii) and substitute the words "Oxy Reference Debt" in their place and (b) to add in the proviso, after the words "or its successors", the following words: "or the reference for determination of the amount of the obligation of OCC to contribute to the Partnership pursuant to an indemnity by OCC in favor of the Partnership issued pursuant to the Letter Agreement, dated as of February 16, 1999, between OCC and the Partnership,". 3. The definition of "Amended and Restated Indemnity Agreement" in Appendix A of the 1998 Partnership Agreement is deleted and the following definition is substituted in its place" "Amended and Restated Indemnity Agreement. The Second Amended and Restated Indemnity Agreement, dated as of February 16, 1999, among Lyondell GP, -1- Lyondell LP, Millennium GP, Millennium LP, Millennium America, PDG Chemical Inc., Occidental LP1, Occidental LP2, OCC, and Occidental GP, as amended from time to time." 4. The definition of "Oxy Guaranteed Debt" in Appendix A of the 1998 Partnership Agreement is deleted and the following definition is substituted in its place: "Oxy Reference Debt. The $419,700,000 drawdown under the Bank Credit Agreement pursuant to Section 8.6(a) and the portion, if any, of any debt that refinances the $419,700,000 drawdown under the Bank Credit Agreement or any subsequent refinancing thereof (in any case, not to exceed an aggregate of $419,700,000 principal amount), in each case to the extent (a) (i) such debt is guaranteed by OCC or an Affiliate thereof and (ii) and the proceeds thereof have been distributed to Occidental LP2 pursuant to Section 3.1(g) or (b) such debt is the reference for determination of the amount of the obligation of OCC to contribute to the Partnership pursuant to an indemnity by OCC in favor of the Partnership issued pursuant to the Amended and Restated Letter Agreement, dated as of February 16, 1999, between OCC and the Partnership. 5. Except as amended by this Second Amendment, all the terms and provisions of the 1998 Partnership Agreement shall remain in full force and effect. 6. This Second Amendment may be executed by one or more of the parties hereto in any number of separate counterparts, and all of such counterparts taken together shall be deemed to constitute one and the same instrument. 7. This Second Amendment shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to any conflicts of law principles. -2- In Witness Whereof, the parties hereto have executed and delivered this Second Amendment as of the date first above written. LYONDELL PETROCHEMICAL G.P. INC. By: /s/ Edward W. Rich ---------------------------------- Name: Edward W. Rich Title: Vice President and Treasurer LYONDELL PETROCHEMICAL L.P. INC. By: /s/ Edward W. Rich ---------------------------------- Name: Edward W. Rich Title: Vice President and Treasurer MILLENNIUM PETROCHEMICALS GP LLC By: MILLENNIUM PETROCHEMICALS INC. as manager By: /s/ C. William Carmean ---------------------------------- Name: C. William Carmean Title: Vice President--Legal MILLENNIUM PETROCHEMICALS LP LLC By: MILLENNIUM PETROCHEMICALS INC. as manager By: /s/ C. William Carmean ---------------------------------- Name: C. William Carmean Title: Vice President--Legal OCCIDENTAL PETROCHEM PARTNER 1, INC. By: /s/ J.R. Havert ---------------------------------- Name: J.R. Havert Title: Assistant Treasurer -3- OCCIDENTAL PETROCHEM PARTNER 2, INC. By: /s/ J.R. Havert ---------------------------------- Name: J.R. Havert Title: Vice President and Treasurer OCCIDENTAL PETROCHEM PARTNER GP, INC. By: /s/ J.R. Havert ---------------------------------- Name: J.R. Havert Title: Assistant Treasurer -4- EX-12 9 RATIO OF EARNINGS EXHIBIT 12 STATEMENT SETTING FORTH DETAIL FOR COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (MILLIONS OF DOLLARS)
Year Ended December 31 ----------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Income (loss) from continuing operations before income taxes... A $(104) $ 89 $ 456 $ 196 $ 618 Fixed charges: Interest expense, gross...................................... 717 385 103 81 80 Portion of rentals representative of interest................ 55 35 19 22 20 ----- ----- ----- ----- ----- Total fixed charges before capitalized interest........... B 772 420 122 103 100 Capitalized interest......................................... -- -- 5 33 6 ----- ----- ----- ----- ----- Total fixed charges including capitalized interest........ C 772 420 127 136 106 ----- ----- ----- ----- ----- Earnings (A+B)................................................. D 668 $ 509 $ 578 $ 299 $ 718 Ratio of earnings to fixed charges (D/C)....................... 0.9 1.2 4.6 2.2 6.8 ===== ===== ===== ===== =====
EX-21 10 SUBSIDIARIES EXHIBIT 21 LYONDELL CHEMICAL COMPANY SUBSIDIARIES
NAME TYPE OF ENTITY JURISDICTION - ---- -------------- ------------ Lyondell Centennial Corp. holding corporation Delaware Lyondell Asia Pacific, Ltd. corporation Delaware Lyondell Australia Pty Limited corporation Australia Lyondell Chemical Canada Inc. corporation Canada Lyondell Chemical Central Europe Ges.m.b.H. corporation Austria ARCO Chemical China, Limited corporation Hong Kong Lyondell Chemical Delaware Company holding corporation Delaware Lyondell Chemical (Deutschland) GmbH corporation Germany Lyondell Chemical Espana Co. corporation Delaware Lyondell Chemical Europe, Inc. corporation Delaware Lyondell Chemical Foreign Sales Corporation corporation Virgin Islands Lyondell Chemical Holding Company holding corporation Delaware Lyondell Indonesia, Inc. corporation Delaware Lyondell Chemical International Company holding corporation Delaware Lyondell Japan, Inc. corporation Japan Lyondell Chemical Overseas Services, Inc. corporation Delaware Lyondell Chemical Pan America, Inc. corporation Delaware Lyondell Chemical Products Europe, Inc. corporation Delaware ARCO Chemical Properties, L.P. limited partnership Delaware Lyondell Singapore Pte Ltd. corporation Singapore Lyondell Taiwan Co., Ltd. corporation Taiwan Lyondell Taiwan, Inc. corporation Delaware ARCO Chemical Technology, Inc. holding corporation Delaware ARCO Chemical Technology, L.P. limited partnership Delaware ARCO Chemical Technology Management, Inc. holding corporation Delaware Lyondell Thailand, Ltd. corporation Delaware Lyondell Chemical Wilmington, Inc. corporation Delaware Lyondell Chemie Investment Nederland B.V. corporation Netherlands Lyondell Chemical Nederland, Ltd. corporation Delaware Lyondell Chemie Technologie Nederland B.V. corporation Netherlands Lyondell Chemie Utilities B.V. corporation Netherlands Lyondell Chimie France Corporation corporation Delaware Lyondell Chimie France SNC partnership France Lyondell Chimie TDI SCA corporation France Lyondell France, Inc. corporation Delaware Lyondell Quimica do Brasil, Ltda. corporation Brazil Eurogen C.V. limited partnership Netherlands Nihon Oxirane Co., Ltd. j/v corporation Japan P.T. Lyondell Indonesia j/v corporation Indonesia POSM Delaware, Inc. holding corporation Delaware POSM II Limited Partnership, L.P. limited partnership Delaware POSM II Properties Partnership, L.P. limited partnership Delaware Steamelec B.V. joint venture Netherlands Lyondell Refining LP, LLC limited liability Delaware Lyondell Refining Company corporation Delaware Lyondell Petrochemical G.P. Inc. corporation Delaware Lyondell Petrochemical L.P. Inc. corporation Delaware Lyondell Limited Methanol Company corporation Delaware Lyondell General Methanol Company corporation Delaware Lyondell Intermediate Holding Company corporation Delaware Lyondell Funding, LLC limited liability Delaware Lyondell Methanol Company, L.P. limited partnership Texas Equistar Chemicals, LP limited partnership Delaware LYONDELL-CITGO Refining LP limited partnership Delaware
EX-23.1 11 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 33-26867, 33-31564, 33-32683, 33-60785 and 333- 05399) and on Form S-3 (No. 333-60429) of Lyondell Chemical Company of the following reports which are included in this Annual Report on Form 10-K. . Our report dated February 18, 2000 on our audits of the consolidated financial statements of Lyondell Chemical Company as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999. . Our report dated February 25, 2000 on our audit of the financial statements of LYONDELL-CITGO Refining LP as of December 31, 1999 and for the year ended December 31, 1999 and the year ended December 31,1997. . Our report dated February 18, 2000 on our audits of the financial statements of Equistar Chemicals, LP as of December 31, 1999 and 1998 and for each of the two years in the period ended December 31, 1999 and the period from December 1, 1997 (inception) to December 31, 1997. PRICEWATERHOUSECOOPERS LLP Houston, Texas March 29, 2000 EX-23.2 12 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33- 26867, 33-31564, 33-32683, 33-60785 and 333-05399 on Form S-8 and No. 333-60429 on Form S-3 of Lyondell Chemical Company of our report on Lyondell CITGO- Refining LP dated February 11, 1999, appearing in this Annual Report on Form 10-K of Lyondell Chemical Company for the year ended December 31, 1999. /s/ Deloitte & Touche LLP - ------------------------------- DELOITTE & TOUCHE LLP Houston, Texas March 28, 2000 EX-24 13 POWER OF ATTORNEY Exhibit 24 LYONDELL CHEMICAL COMPANY POWER OF ATTORNEY ----------------- Each person whose signature appears below hereby constitutes and appoints Dan F. Smith, Jeffrey R. Pendergraft, Robert T. Blakely, Kelvin Collard, and Gerald A. O'Brien 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 Chemical 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), and exhibits thereto and any and all 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 state 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 of America, including any reports or other documents required to be filed subsequent to the issuance of such securities, and (4) to execute and file, or cause to be filed, any application for listing such securities on the New York Stock Exchange, or any other securities exchange in any other jurisdiction where any such securities are proposed to be sold, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act required to be Page 2 of 3 done as he 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 2, 2000 Signature Title --------- ----- DAN F. SMITH President, Chief Executive Officer and Director - --------------------------- Dan F. Smith JEFFREY R. PENDERGRAFT Executive Vice President and - --------------------------- Chief Administrative Officer Jeffrey R. Pendergraft ROBERT T. BLAKELY Executive Vice President and - --------------------------- Chief Financial Officer Robert T. Blakely KELVIN R. COLLARD Vice President and Controller - --------------------------- Kelvin R. Collard GERALD A. O'BRIEN Vice President, Deputy General Counsel and - --------------------------- Secretary Gerald A. O'Brien Page 3 of 3 Signature Title --------- ----- WILLIAM T. BUTLER Chairman and Director - ----------------------------- Dr. William T. Butler CAROL A. ANDERSON Director - ----------------------------- Carol A. Anderson TRAVIS ENGEN Director - ----------------------------- Travis Engen STEPHEN F. HINCHLIFFE, JR. Director - ----------------------------- Stephen F. Hinchliffe, Jr. DUDLEY C. MECUM Director - ----------------------------- Dudley C. Mecum II FRANK SAVAGE Director - ----------------------------- Frank Savage PAUL R. STALEY Director - ----------------------------- Paul R. Staley EX-27 14 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 307 0 575 9 519 1,886 4,555 264 9,498 1,021 6,046 0 0 120 887 9,498 3,693 3,693 2,891 2,891 0 0 616 (104) (24) (80) 0 (35) 0 (115) (1.10) (1.10)
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