-----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, OHaSd1y6WtaD36gsShjLYrMaNFqdeNq1SB9vkGuD7lslHRRKs+WddwBY31aT/JZ7 i4OEXsQQKgcitrkY3vsZBw== 0000899243-00-001345.txt : 20000516 0000899243-00-001345.hdr.sgml : 20000516 ACCESSION NUMBER: 0000899243-00-001345 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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-Q SEC ACT: SEC FILE NUMBER: 001-10145 FILM NUMBER: 632390 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-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 2000 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from..........to....... Commission file number 1-10145 ------------------ LYONDELL CHEMICAL COMPANY (Exact name of registrant as specified in its charter) ------------------ Delaware 95-4160558 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1221 McKinney Street, 77010 Suite 700, Houston, Texas (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (713) 652-7200 ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x NO __ Number of shares of Common Stock, $1.00 par value, outstanding as of March 31, 2000: 117,555,971 ================================================================================ PART I. FINANCIAL INFORMATION LYONDELL CHEMICAL COMPANY ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, ----------------------------------------------- Millions of dollars, except per share data 2000 1999 - ------------------------------------------ -------------------- ----------------- SALES AND OTHER OPERATING REVENUES $1,136 $ 855 OPERATING COSTS AND EXPENSES: Cost of sales 952 630 Selling, general and administrative expenses 55 57 Research and development expense 14 15 Amortization of goodwill and other intangibles 28 24 ------- ----- 1,049 726 ------- ----- Operating income 87 129 Interest expense (165) (146) Interest income 8 6 Other expense, net (5) (7) Gain on sale of assets 544 - - ------- ----- Income (loss) before equity investments, income taxes and extraordinary item 469 (18) ------- ----- INCOME (LOSS) FROM EQUITY INVESTMENTS: Equistar Chemicals, LP 33 13 LYONDELL-CITGO Refining LP 16 11 Other 1 (3) ------- ----- 50 21 ------- ----- Income before income taxes and extraordinary item 519 3 Provision for income taxes 202 1 ------- ----- Income before extraordinary item 317 2 Extraordinary loss on extinguishment of debt, net of income taxes (11) - - ------- ----- NET INCOME $ 306 $ 2 ======= ===== BASIC AND DILUTED EARNINGS PER SHARE: Income before extraordinary item $2.69 $.02 Extraordinary loss (.09) - - ------- ----- Net income $2.60 $.02 ======= =====
See Notes to Consolidated Financial Statements. 1 LYONDELL CHEMICAL COMPANY CONSOLIDATED BALANCE SHEETS
March 31, December 31, Millions of dollars, except par value data 2000 1999 - ------------------------------------------ ------------- -------------- ASSETS Current assets: Cash and cash equivalents $1,630 $ 307 Accounts receivable, net 426 566 Inventories 374 519 Prepaid expenses and other current assets 117 114 Deferred tax assets 110 380 ------ ------ Total current assets 2,657 1,886 Property, plant and equipment, net 2,499 4,291 Investments and long-term receivables: Investment in PO joint ventures 667 - - Investment in Equistar Chemicals, LP 645 607 Receivable from LYONDELL-CITGO Refining LP 223 219 Investment in LYONDELL-CITGO Refining LP 35 52 Other investments and long-term receivables 122 137 Goodwill, net 1,179 1,545 Deferred charges and other assets 629 761 ------ ------ Total assets $8,656 $9,498 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 379 $ 350 Current maturities of long-term debt 220 225 Other accrued liabilities 762 446 ------ ------ Total current liabilities 1,361 1,021 Long-term debt, less current maturities 5,047 6,046 Other liabilities and deferred credits 383 331 Deferred income taxes 537 891 Commitments and contingencies Minority interest 169 202 Stockholders' equity: Preferred stock, $.01 par value, 80,000,000 shares authorized, none outstanding - - - - Common stock, $1.00 par value, 250,000,000 shares authorized, 120,250,000 issued 120 120 Additional paid-in capital 854 854 Retained earnings 452 172 Accumulated other comprehensive loss (192) (64) Treasury stock, at cost, 2,694,029 and 2,678,976 shares, respectively (75) (75) ------ ------ Total stockholders' equity 1,159 1,007 ------ ------ Total liabilities and stockholders' equity $8,656 $9,498 ====== ======
See Notes to Consolidated Financial Statements. 2 LYONDELL CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, ---------------------------- MILLIONS OF DOLLARS 2000 1999 - ------------------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 306 $ 2 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of assets (544) - - Depreciation and amortization 84 85 Extraordinary item 11 - - Deferred income taxes 2 9 (Increase) decrease in accounts receivable (46) 37 Decrease in inventories 23 25 Increase (decrease) in accounts payable 43 (52) Net change in other working capital accounts 164 (31) Other, net (41) 59 ------- ----- Net cash provided by operating activities 2 134 ------- ----- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets, net of cash sold 2,424 - - Expenditures for property, plant and equipment (19) (32) Contributions and advances to affiliates (4) (4) Distributions from affiliates in excess of earnings - - 25 Other (38) (6) ------- ----- Net cash provided by (used in) investing activities 2,363 (17) ------- ----- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (1,004) (76) Dividends paid (26) (17) Payment of debt-related costs (10) - - ------- ----- Net cash used in financing activities (1,040) (93) ------- ----- Effect of exchange rate changes on cash (2) 3 ------- ----- INCREASE IN CASH AND CASH EQUIVALENTS 1,323 27 Cash and cash equivalents at beginning of period 307 233 ------- ----- Cash and cash equivalents at end of period $ 1,630 $ 260 ======= =====
See Notes to Consolidated Financial Statements. 3 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PREPARATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments considered necessary for a fair presentation, have been included. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 1999 included in the Lyondell Chemical Company ("Lyondell") 1999 Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Certain amounts from prior periods have been reclassified to conform to the current period presentation. 2. GAIN ON SALE OF ASSETS On March 31, 2000, Lyondell completed the sale of its polyols business and an ownership interest in its domestic propylene oxide ("PO") manufacturing operations to Bayer AG and Bayer Corporation (collectively "Bayer") for approximately $2.45 billion. Lyondell recorded a pretax gain on the sale of $544 million. Lyondell is using proceeds of the asset sale to retire its outstanding debt (see Note 8). The polyols business had sales of approximately $830 million for the year ended December 31, 1999. The accompanying consolidated statements of income include the operating revenues of the polyols business as a continuing operation through March 31, 2000. As part of the transaction, Lyondell entered into two joint ventures with Bayer, one to manufacture PO and a second to license PO technology to the manufacturing joint venture. Lyondell contributed approximately $1.2 billion of assets, primarily property, plant and equipment, to the joint ventures, and sold a $522 million ownership interest to Bayer. Lyondell's residual interest of $667 million at March 31, 2000 is reported as "Investment in PO joint ventures" in the accompanying consolidated balance sheets. The major components of the net assets divested, were as follows: MILLIONS OF DOLLARS: - ------------------- Working capital, net of cash sold $ 241 Property, plant and equipment 492 Investment in PO joint ventures 522 Goodwill 348 Other intangibles 134 Other liabilities, net (15) ------- Total net assets divested $ 1,722 ======= As part of the asset sale, Lyondell accrued liabilities of $53 million for employee severance, relocation and other employee benefits, covering approximately 850 employees. The affected employees were terminated on March 31 and April 1, 2000. Lyondell expects that severance and related benefits will be paid during the second quarter 2000. 4 3. EQUITY INTEREST IN EQUISTAR CHEMICALS, LP Lyondell has a 41% partnership interest in Equistar Chemicals, LP ("Equistar"), while Millennium Chemicals Inc. ("Millennium") and Occidental Chemical Corporation ("Occidental") each have a 29.5% partnership interest. Because the partners jointly control certain management decisions, Lyondell accounts for its investment in Equistar using the equity method of accounting. Summarized financial information for Equistar follows:
March 31, December 31, Millions of dollars 2000 1999 - ------------------- ------------ ------------- BALANCE SHEETS Total current assets $ 1,389 $ 1,360 Property, plant and equipment, net 3,889 3,926 Goodwill, net 1,111 1,119 Deferred charges and other assets 315 331 ------- ------- Total assets $ 6,704 $ 6,736 ======= ======= Current maturities of long-term debt $ 57 $ 92 Other current liabilities 620 692 Long-term debt, less current maturities 2,169 2,169 Other liabilities and deferred credits 136 121 Partners' capital 3,722 3,662 ------- ------- Total liabilities and partners' capital $ 6,704 $ 6,736 ======= =======
For the three months ended March 31, ---------------------------- 2000 1999 ---------- ----------- STATEMENTS OF INCOME Sales and other operating revenues $ 1,807 $ 1,104 Cost of sales 1,647 979 Other operating costs and expenses 61 79 ------- ------- Operating income 99 46 Interest expense, net (45) (39) Other income, net 2 - - ------- ------- Net income $ 56 $ 7 ======= ======= SELECTED CASH FLOW INFORMATION Depreciation and amortization $ 77 $ 73 Expenditures for property, plant and equipment 20 46
Lyondell's "Income from equity investments" in Equistar as presented in the consolidated statements of income consists of Lyondell's share of Equistar's net income plus the accretion of the difference between Lyondell's investment and its underlying equity in Equistar's net assets. 5 4. EQUITY INTEREST IN LYONDELL-CITGO REFINING LP Lyondell has a 58.75% partnership interest in LYONDELL-CITGO Refining LP ("LCR"), while CITGO Petroleum Corporation ("CITGO") has a 41.25% partnership interest. Net income before depreciation expense for the period is allocated to the partners based upon participation interests. Depreciation expense is allocated to the partners based upon contributed assets. Summarized financial information for LCR follows:
March 31, December 31, Millions of dollars 2000 1999 - ------------------ ---------- -------------- BALANCE SHEETS Total current assets $ 220 $ 219 Property, plant and equipment, net 1,341 1,350 Deferred charges and other assets 65 60 ------- ------- Total assets $ 1,626 $ 1,629 ======= ======= Current maturities of long-term debt $ 450 $ 450 Other current liabilities 297 307 Long-term debt, less current maturities 254 247 Other liabilities and deferred credits 73 69 Partners' capital 552 556 ------- ------- Total liabilities and partners' capital $ 1,626 $ 1,629 ======= =======
For the three months ended March 31, --------------------------------- 2000 1999 ----------- ----------- STATEMENTS OF INCOME Sales and other operating revenues $ 859 $ 432 Cost of sales 811 389 Selling, general and administrative expenses 14 19 ----- ----- Operating income 34 24 Interest expense, net (12) (10) State income tax benefit - - 1 ----- ----- Net income $ 22 $ 15 ===== ===== SELECTED CASH FLOW INFORMATION Depreciation and amortization $ 26 $ 25 Expenditures for property, plant and equipment 17 16
5. EXTRAORDINARY ITEM During the first quarter 2000, Lyondell retired debt in the principal amount of $999 million prior to maturity (see Note 8). Unamortized debt issuance costs and amendment fees of $17 million, less a tax benefit of $6 million, were written off and reported as an extraordinary loss on extinguishment of debt in the first quarter 2000. 6 6. INVENTORIES The components of inventories consisted of the following:
March 31, December 31, MILLIONS OF DOLLARS 2000 1999 - ------------------- ---------- -------------- Finished goods $ 287 $ 405 Work-in-process 22 31 Raw materials 31 44 Materials and supplies 34 39 ----- ----- Total inventories $ 374 $ 519 ===== =====
7. PROPERTY, PLANT AND EQUIPMENT, NET The components of property, plant and equipment, at cost, and the related accumulated depreciation consisted of the following:
March 31, December 31, MILLIONS OF DOLLARS 2000 1999 - ------------------- ---------- -------------- Land $ 10 $ 35 Manufacturing facilities and equipment 2,576 4,406 Construction in progress 93 114 ------- ------- Total property, plant and equipment 2,679 4,555 Less accumulated depreciation 180 264 ------- ------- Property, plant and equipment, net $ 2,499 $ 4,291 ======= =======
8. LONG-TERM DEBT AND SUBSEQUENT EVENTS Lyondell is using the net proceeds of the asset sale to significantly reduce its variable-rate debt. On March 31, 2000, Lyondell repaid $999 million of the principal amount of Term Loan A and on April 7, 2000, it repaid the $96 million remaining principal balance of Term Loan A and the $149 million outstanding balance of Term Loan F. Lyondell intends to reduce the $810 million outstanding balance of Term Loan B by May 31, 2000. In February 2000, Lyondell secured an amendment to certain financial covenants in its credit facility that increased its financial and operating flexibility in the near term. Additionally, the amendment eliminated a cross-default provision in the credit facility that could have been triggered by a default on LCR's $450 million construction facility debt. Lyondell was in compliance with all such covenants as of March 31, 2000. 9. COMMITMENTS AND CONTINGENCIES TDI Agreements--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. The aggregate purchase price is a combination of plant cost and market price. Lyondell is required to purchase a minimum of 216 million pounds of TDI per year, through December 31, 2000, at which time the resale agreement expires. Minimum annual purchases under the resale agreement were approximately 93 million pounds of TDI. During the first quarter 2000, Lyondell paid $39 million as a deposit to reserve additional capacity under the tolling agreement. Crude Supply Agreement--Under the crude supply agreement, PDVSA Petroleo y Gas, S.A. ("PDVSA Oil"), an affiliate of CITGO, is required to sell, and LCR is required to purchase, 230,000 barrels per day of extra heavy crude oil, which constitutes approximately 88% of the Refinery's refining capacity of 260,000 barrels per day of crude oil. In late April 1998, LCR received notification from PDVSA Oil that it would reduce allocations of crude oil on the 7 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. Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company of the Republic of Venezuela, has announced that it intends to renegotiate the crude supply agreements that it has with all third parties, including LCR. However, they have confirmed that they expect to honor their commitments if a mutually acceptable restructuring of the crude supply agreement is not achieved. The breach or termination of the crude supply agreement would require LCR to purchase all or a portion of its crude oil feedstocks in the merchant market, would subject LCR to significant volatility and price fluctuations and could adversely affect LCR and, therefore, Lyondell. LCR Debt--On May 5, 2000, Lyondell and CITGO, as partners of LCR, arranged interim financing for LCR to repay the $450 million outstanding under its construction facility. Cross Indemnity Agreement--In connection with the transfer of assets and liabilities from Atlantic Richfield Company ("ARCO") to Lyondell in 1988, Lyondell agreed to assume certain liabilities arising out of the operation of Lyondell's integrated petrochemicals and refining business prior to July 1, 1988. In connection with the transfer of such liabilities, Lyondell and ARCO entered into an agreement, updated in 1997 ("Revised Cross-Indemnity Agreement"), whereby Lyondell agreed to defend and indemnify ARCO against certain uninsured claims and liabilities which ARCO may incur relating to the operation of Lyondell prior to July 1, 1988, including certain liabilities which may arise out of pending and future lawsuits. For current and future cases related to Lyondell's products and operations, ARCO and Lyondell bear a proportionate share of judgment and settlement costs according to a formula that allocates responsibility based upon years of ownership during the relevant time period. Under the Revised Cross-Indemnity Agreement, Lyondell will assume responsibility for its proportionate share of future costs for waste site matters not covered by ARCO insurance. In connection with the acquisition of ARCO Chemical Company ("ARCO Chemical"), Lyondell succeeded, indirectly, to a cross indemnity agreement with ARCO whereby ARCO Chemical indemnified ARCO against certain claims or liabilities that ARCO may incur relating to ARCO's former ownership and operation of the businesses of ARCO Chemical, including liabilities under laws relating to the protection of the environment and the workplace, and liabilities arising out of certain litigation. As part of the agreement, ARCO indemnified ARCO Chemical with respect to claims or liabilities and other matters of litigation not related to the ARCO Chemical business. 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 March 31, 2000, Equistar had expensed approximately $4 million under the $7 million indemnification basket with respect to the business contributed by Lyondell. Environmental--Lyondell's policy is to be in compliance with all applicable environmental laws. Lyondell is subject to extensive environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, Lyondell cannot accurately predict future developments, such as increasingly strict environmental laws and inspection and enforcement policies, as well as higher compliance costs arising therefrom, which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. Lyondell is currently contributing funds to the clean up of two waste sites located near Houston, Texas under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as amended and the Superfund Amendments and Reauthorization Act of 1986. Lyondell has also been named, along with several other companies, as a potentially responsible party for a third CERCLA site near Houston, Texas. In addition, Lyondell is involved in administrative proceedings or lawsuits relating to a minimal number of other CERCLA sites. Lyondell 8 estimates, based upon currently available information, that potential loss contingencies associated with the latter CERCLA sites, individually and in the aggregate, are not significant. Lyondell is also subject to certain assessment and remedial actions at the LCR refinery under the Resource Conservation and Recovery Act ("RCRA"). In addition, Lyondell has negotiated an order with the Texas Natural Resource Conservation Commission ("TNRCC") for assessment and remediation of groundwater and soil contamination at the LCR refinery. Lyondell also has liabilities under RCRA and various state and foreign government regulations related to six current plant sites and two former plant sites. As of March 31, 2000, Lyondell's environmental liability for future assessment and remediation costs at the above-mentioned sites totaled $39 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 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. 9 10. STOCKHOLDERS' EQUITY Basic and Diluted Earnings Per Share--Basic earnings per share ("EPS") for income 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 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 the three-month periods ended March 31, 2000 and 1999.
For the three months ended March 31, ------------------------------------------------------------------- 2000 1999 ------------------------------- ------------------------------ Thousands of shares Shares EPS SHARES EPS - ------------------- ------------- ------------ ------------- ------------ Basic 117,562 $ 2.69 77,072 $ .02 Dilutive effect of options - - - - - - - - ------- ------ ------ ----- Diluted 117,562 $ 2.69 77,072 $ .02 ======= ====== ====== =====
Comprehensive Income--For the three-months ended March 31, 2000, Lyondell had comprehensive income of $178 million. For the three-months ended March 31, 1999, Lyondell had a comprehensive loss of $44 million. 11. SEGMENT AND RELATED INFORMATION Lyondell has identified four reportable segments in which it operates: (i) intermediate chemicals and derivatives; (ii) petrochemicals; (iii) polymers; and (iv) refining. Lyondell's methanol business is not a reportable segment. Summarized financial information concerning reportable segments is shown in the following table:
Intermediate Chemicals and Millions of dollars Derivatives Petrochemicals Polymers Refining Other Total - ------------------- ------------ -------------- --------- -------- ------ -------- FOR THE THREE MONTHS ENDED MARCH 31, 2000: Sales and other operating revenues $ 1,136 $ - - $ - - $ - - $ - - $ 1,136 Operating income 87 87 Interest expense (165) (165) Interest income 8 8 Other expense, net (5) (5) Gain on sale of assets 544 544 Income (loss) from equity investments 3 71 (12) 16 (28) 50 Income before income taxes and extraordinary item 519 FOR THE THREE MONTHS ENDED MARCH 31, 1999: Sales and other operating revenues $ 855 $ - - $ - - $ - - $ - - $ 855 Operating income 129 129 Interest expense (146) (146) Interest income 6 6 Other expense, net (7) (7) Income (loss) from equity investments - - 37 5 11 (32) 21 Income before income taxes and extraordinary item 3
10 The following table presents the details of "Income from equity investments" as presented above in the "Other" column for the periods indicated:
For the three months ended March 31, --------------------------------------------- Millions of dollars 2000 1999 - ------------------- ------------------- ------------------- Equistar items not allocated to petrochemicals and polymers, principally general and administrative expenses and interest expense, net $ (26) $ (29) Loss from equity investment in LMC (2) (3) ----- ----- Total--Other $ (28) $ (32) ===== =====
12. PURCHASE OF ARCO CHEMICAL COMPANY In connection with the July 28, 1998 acquisition of ARCO Chemical, Lyondell accrued liabilities for costs associated with the delay of construction of the PO-11 plant, vesting of certain key manager benefits pursuant to a change of control provision, severance costs for the involuntary termination of certain headquarters employees and relocation costs for moving personnel to Lyondell's Houston headquarters. The accrued liability for these items totaled approximately $255 million at the date of acquisition. During 1999, Lyondell revised the estimated liabilities for penalties and cancellation charges related to the PO-11 lump-sum construction contract and related commitments. Based on the final negotiated terms, Lyondell reduced the accrued liability by $13 million. Through March 31, 2000, Lyondell had paid and charged approximately $214 million against the accrued liability. 13. SUPPLEMENTAL GUARANTOR INFORMATION ARCO Chemical Technology Inc. ("ACTI"), ARCO Chemical Technology L.P. ("ACTLP") and Lyondell Chemical Nederland, Ltd. ("LCNL") are guarantors (collectively "Guarantors") of the $500 million senior subordinated notes and $1.9 billion senior secured notes issued by Lyondell in May 1999. LCNL, a Delaware corporation, is a wholly owned subsidiary of Lyondell that operates a chemical production facility in Rotterdam, the Netherlands. In April, 2000, pursuant to the terms of Lyondell's Credit Facility, ACTI and ACTLP became "significant subsidiaries" as defined in the Credit Facility, and, as such, guarantors of the above-mentioned debt securities. ACTI is a Delaware corporation, which holds the investment in ACTLP. ACTLP is a Delaware limited partnership, which holds and licenses technology to other Lyondell affiliates and to third parties. Separate financial statements of the Guarantors are not considered to be material to the holders of the senior subordinated notes and senior secured notes. The following condensed consolidating financial information present supplemental information for the Guarantors as of and for the three-month periods ended March 31, 2000 and 1999. 11 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) BALANCE SHEET AS OF MARCH 31, 2000
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- ---------- ------------ ------------- -------------- -------------- Total current assets $ 2,233 $ 413 $ 11 $ - - $ 2,657 Property, plant and equipment, net 1,900 599 - - 2,499 Other investments and long-term receivables 3,466 62 958 (2,794) 1,692 Goodwill, net 423 756 - - 1,179 Deferred charges and other assets 561 68 - - 629 ------- ------- ----- -------- ------- Total assets $ 8,583 $ 1,898 $ 969 $ (2,794) $ 8,656 ======= ======= ===== ======== ======= Current maturities of long-term debt $ 220 $ - - $ - - $ - - $ 220 Other current liabilities 966 175 - - - - 1,141 Long-term debt, less current maturities 5,047 - - - - - - 5,047 Other liabilities and deferred credits 382 1 - - - - 383 Deferred income taxes 400 137 - - - - 537 Intercompany liabilities (assets) 435 (701) 266 - - - - Minority interest 169 - - - - - - 169 Stockholders' equity 964 2,286 703 (2,794) 1,159 ------- ------- ----- -------- ------- Total liabilities and stockholders' equity $ 8,583 $ 1,898 $ 969 $ (2,794) $ 8,656 ======= ======= ===== ======== =======
BALANCE SHEET AS OF DECEMBER 31, 1999
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- ---------- ------------ ------------ -------------- --------------- Total current assets $ 1,567 $ 311 $ 8 $ - - $ 1,886 Property, plant and equipment, net 3,650 641 - - 4,291 Other investments and long-term receivables 2,814 50 936 (2,785) 1,015 Goodwill, net 765 780 - - 1,545 Deferred charges and other assets 573 188 - - 761 ------- ------- ----- -------- ------- Total assets $ 9,369 $ 1,970 $ 944 $ (2,785) $ 9,498 ======= ======= ===== ======== ======= Current maturities of long-term debt $ 225 $ - - $ - - $ - - $ 225 Other current liabilities 614 182 - - - - 796 Long-term debt, less current maturities 6,046 - - - - - - 6,046 Other liabilities and deferred credits 330 1 - - - - 331 Deferred income taxes 746 145 - - - - 891 Intercompany liabilities (assets) 310 (605) 295 - - - - Minority interest 202 - - - - - - 202 Stockholders' equity 896 2,247 649 (2,785) 1,007 ------- ------- ----- -------- ------- Total liabilities and stockholders' equity $ 9,369 $ 1,970 $ 944 $ (2,785) $ 9,498 ======= ======= ===== ======== =======
12 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED) STATEMENTS OF INCOME For the Three Months Ended March 31, 2000
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- ---------- ------------ ------------ -------------- -------------- Sales and other operating revenues $ 996 $ 217 - - $ (77) $ 1,136 Cost of sales 854 175 (77) 952 Selling, general and administrative expenses 51 4 55 Research and development expense 14 - - 14 Amortization of goodwill and other intangibles 20 8 28 ----- ----- ---- ----- ------ Operating income 57 30 - - 87 Interest income (expense), net (161) - - 4 (157) Other income (expense), net 585 (46) - - 539 Income from equity investments 3 - - 47 50 Intercompany income (expense) (134) 119 15 - - Provision (benefit) for income taxes 156 28 18 202 ----- ----- ---- ----- ------ Income before extraordinary item 194 75 48 - - 317 Extraordinary item, net of taxes (11) (11) ----- ----- ---- ----- ------ Net income $ 183 $ 75 $ 48 $ - - $ 306 ===== ===== ==== ===== ======
FOR THE THREE MONTHS ENDED MARCH 31, 1999
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- ---------- ------------ ------------ -------------- -------------- Sales and other operating revenues $ 757 $ 191 $ - - $ (93) $ 855 Cost of sales 594 129 (93) 630 Selling, general and Administrative expenses 52 5 57 Research and development expense 15 - - 15 Amortization of goodwill and other intangibles 23 1 24 ----- ----- ----- ------ ----- Operating income (loss) 73 56 - - 129 Interest income (expense), net (143) - - 3 (140) Other income (expense), net 44 (51) (7) Income from equity investments 21 21 Intercompany income (expense) (81) 75 6 - - Provision (benefit) for income taxes (31) 23 9 1 ----- ----- ----- ------ ----- Net income (loss) $ (76) $ 57 $ 21 $ - - $ 2 ===== ===== ===== ====== =====
13 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED) STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- ---------- ------------ ------------ -------------- -------------- Net income $ 183 $ 75 $ 48 $ - - $ 306 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Gain on sale of assets (553) 9 - - - - (544) Depreciation and amortization 68 16 - - - - 84 Extraordinary item 11 - - - - - - 11 Deferred income taxes 7 (5) - - - - 2 Net changes in working Capital and other 291 (95) (53) - - 143 ------- ----- ----- ----- ------- Net cash provided by (used in) operating activities 7 - - (5) - - 2 ------- ----- ----- ----- ------- Proceeds from sale of assets, net of cash sold 2,260 164 - - - - 2,424 Expenditures for property, plant and equipment (19) - - - - - - (19) Distributions from affiliates in excess of earnings 10 (10) - - - - - - Contributions and advances to affiliates 3 (12) 5 - - (4) Other (38) - - (38) ------- ----- ----- ----- ------- Net cash provided by investing activities 2,216 142 5 - - 2,363 ------- ----- ----- ----- ------- Payment of debt issuance costs (10) - - - - - - (10) Repayments of long-term debt (1,004) - - - - - - (1,004) Dividends paid (26) - - - - - - (26) ------- ----- ----- ----- ------- Net cash used in financing activities (1,040) - - - - - - (1,040) ------- ----- ----- ----- ------- Effect of exchange rate Changes on cash (25) 23 - - - - (2) ------- ----- ----- ----- ------- Increase in cash and cash equivalents $ 1,158 $ 165 $ - - $ - - $ 1,323 ======= ===== ===== ===== =======
14 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED) STATEMENT OF CASH FLOWS--(CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 1999
Non- Consolidated Millions of dollars Lyondell Guarantors Guarantors Eliminations Lyondell - ------------------- ---------- ------------ ------------ -------------- -------------- Net income (loss) $ (76) $ 57 $ 21 $ - - $ 2 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 78 7 - - 85 Deferred income taxes 20 (1) (10) 9 Net changes in working capital and other 96 (41) (17) 38 ---- ---- ---- ----- ---- Net cash provided by (used in) operating activities 118 22 (6) - - 134 ---- ---- ---- ----- ---- Expenditures for property, plant and equipment (32) - - - - (32) Distributions from affiliates in excess of earnings 29 (29) 25 25 Contributions and advances to affiliates 13 (17) - - (4) Other (6) - - - - (6) ---- ---- ---- ----- ---- Net cash provided by (used in) investing activities 4 (46) 25 - - (17) ---- ---- ---- ----- ---- Repayments of long-term debt (76) - - - - (76) Dividends paid (17) - - - - (17) ---- ---- ---- ----- ---- Net cash (used in) financing activities (93) - - - - - - (93) ---- ---- ---- ----- ---- Effect of exchange rate changes on cash (14) 17 - - 3 ---- ---- ---- ----- ---- Increase (decrease) in cash and cash equivalents $ 15 $ (7) $ 19 $ - - $ 27 ==== ==== ==== ===== ====
15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW GENERAL--Raw material costs continued to increase during the first quarter 2000 as evidenced by crude oil prices, which peaked above $32 per barrel in early March. The subsequent OPEC decision to increase production resulted in some relief, however first quarter 2000 benchmark crude oil prices averaged 16% higher than fourth quarter 1999 and 129% higher than first quarter 1999. These increases in crude oil prices put upward pressure on raw material costs of Lyondell and Equistar. While both companies implemented sales price increases, these generally lagged behind the rise in raw material costs, putting pressure on product margins. On March 31, 2000, Lyondell completed the sale of its polyols business and an ownership interest in its domestic PO manufacturing operations to Bayer for $2.45 billion and used $999 million of the net proceeds to retire debt. Lyondell recorded an after-tax gain on the sale of $332 million and an $11 million extraordinary loss on the early extinguishment of debt. Additionally, Lyondell used the net proceeds to retire $245 million of debt on April 7, 2000 and expects to retire an additional $810 million of debt by May 31, 2000. Unless otherwise indicated, the following analysis of operating results compares the first quarter 2000 to the first quarter 1999. An analysis comparing first quarter 2000 to fourth quarter 1999 is also included and is headed as such. NET INCOME--Excluding the $332 million after-tax gain from the asset sale and the $11 million extraordinary charge, the first quarter 2000 net loss of $15 million compared to net income of $2 million in the first quarter 1999. The loss in the 2000 period was primarily due to lower product margins in the intermediate chemicals and derivatives business segment resulting from the rise in feedstock costs noted above. This was partly offset by higher income from equity investments, which increased $29 million, or about $18 million after tax, due to higher earnings at both Equistar and LCR. RESULTS OF OPERATIONS LYONDELL CHEMICAL COMPANY REVENUES, OPERATING COSTS AND EXPENSES--Lyondell's operating results are reviewed below in the discussion of the intermediate chemicals and derivatives segment. GAIN ON SALE OF ASSETS--The sale of Lyondell's worldwide polyols business as well as an ownership interest in its domestic PO manufacturing operations on March 31, 2000 generated a $544 million pretax gain. INCOME FROM EQUITY INVESTMENT IN EQUISTAR--Lyondell's income from its equity investment in Equistar was $33 million in the first quarter 2000 compared to $13 million in the first quarter 1999. The increase of $20 million reflected the benefit of higher margins and volumes in Equistar's petrochemicals segment, which was only partly offset by lower margins in the polymers segment. INCOME FROM EQUITY INVESTMENT IN LCR--Lyondell's income from its equity investment in LCR was $16 million in the first quarter 2000 compared to $11 million in the 1999 period. The increase was primarily due to higher margins partly offset by lower volumes of extra heavy Venezuelan crude oil. INTEREST EXPENSE--Interest expense was $165 million in the first quarter 2000 compared to $146 million in the first quarter 1999. The increase in interest expense was due to comparatively higher interest rates on Lyondell's fixed-rate debt, which resulted from the May 1999 refinancing, and higher LIBOR interest rates, which affected the remaining variable-rate debt. 16 INCOME TAX--The effective tax rate for 2000, including the gain on asset sale, is estimated to be 39%. The full-year 1999 effective tax rate, including the extraordinary item, was a tax benefit of 27%. The 1999 tax benefit rate of 27% reflected a federal income tax benefit from a domestic loss incurred in 1999, which was partly offset by tax provisions in foreign jurisdictions. EXTRAORDINARY ITEM--The first quarter 2000 extraordinary loss on early extinguishment of debt consisted of the write off of unamortized debt issuance costs and amendment fees totaling $17 million, or $11 million after tax. These related to the early extinguishment of $999 million principal amount of debt on March 31, 2000, using proceeds from the asset sale. Lyondell expects to incur an extraordinary charge of $19 million after tax in the second quarter 2000 as a result of the early extinguishment of additional debt, using remaining net proceeds of $1.05 billion from the asset sale. PRO FORMA On March 31, 2000, Lyondell completed the sale of its worldwide polyols business, along with an ownership interest in its domestic PO operations, for approximately $2.45 billion in cash. The following condensed income statements present the unaudited pro forma consolidated operating results for the three months ended March 31, 2000 and 1999 as if the transaction had occurred as of the beginning of 2000 and 1999, respectively. The pro forma income statements assume that net proceeds of $2.05 billion were used to retire debt in accordance with the provisions of Lyondell's credit facility and indentures. The operating results for the three months ended March 31, 2000 exclude the after-tax gain on asset sale of $332 million, or $2.82 per share.
For the three months ended March 31, ------------------------------------ In millions, except per share data 2000 1999 - ---------------------------------- ------------ ------------- Sales and other operating revenues $ 916 $ 655 Operating income 72 97 Interest expense 116 108 Net income from continuing operations 6 5 Basic and diluted income per share from continuing operations .06 .06
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. FIRST QUARTER 2000 VERSUS FOURTH QUARTER 1999 For the first quarter 2000, Lyondell reported net income of $306 million compared to a fourth quarter 1999 net loss of $58 million. The first quarter 2000 included the after-tax gain on asset sale of $332 million and the $11 million extraordinary charge, while the fourth quarter 1999 loss included unusual after-tax charges of $42 million, primarily related to Lyondell's share of Equistar restructuring and LCR renegotiated labor agreement charges. Excluding these items, Lyondell's first quarter 2000 net loss of $15 million was comparable to its fourth quarter 1999 net loss of $16 million. First quarter 2000 results were essentially level with the fourth quarter 1999 despite a sharp rise in raw material costs for both Lyondell and Equistar. Offsetting the escalation in raw materials costs were benefits from higher volumes for Lyondell's PO derivatives and Equistar's petrochemicals products, generally higher product prices and lower controllable costs as a result of implementing the shared services organization and other cost reduction initiatives. 17 INTERMEDIATE CHEMICALS AND DERIVATIVES SEGMENT The following table sets forth actual volumes for this segment, including SM volumes processed under long-term processing arrangements, which are included in sales and other operating revenues. Co-product tertiary butyl alcohol ("TBA") is principally used to produce the derivative MTBE.
For the three months ended March 31, ------------------------------------ In millions 2000 1999 - ----------- -------------- ------------ PO, PO derivatives, isocyanates (pounds) 1,187 1,080 Co-products: Styrene monomer (pounds) 900 782 TBA and derivatives (gallons) 284 265
REVENUES--Revenues of $1.1 billion in the first quarter 2000 increased 33% compared to revenues of $855 million in the first quarter 1999 due to higher sales prices and volumes. Sales prices increased for most products, primarily co-products MTBE and SM, which increased over 75%, reflecting the effects of higher raw material costs and increased demand. Average sales prices for PO and derivatives declined, primarily in Europe, due to new industry PO capacity and the foreign exchange effects of a stronger U.S. dollar. PO and derivative volumes, which include PO, PO derivatives and isocyanates, increased 10% due to increased demand for PO derivatives. SM volumes increased 15% on higher export demand, primarily from Asia. TBA and derivatives volumes increased 7% due to higher global demand for MTBE and higher contractual offtakes by ARCO. OPERATING INCOME--Operating income was $87 million, or 8% of sales, in the first quarter 2000 compared to $129 million, or 15% of sales, in the first quarter 1999. The decrease was primarily due to higher raw material costs, especially propylene, which nearly doubled compared to the first quarter 1999, reducing product margins for PO and derivatives. This was only partly offset by the benefit from higher sales volumes and higher margins for co-products SM and MTBE. FIRST QUARTER 2000 VERSUS FOURTH QUARTER 1999 Operating income in the first quarter 2000 was $87 million, or essentially flat, compared to $90 million in the fourth quarter 1999, excluding the effect of a $15 million LIFO-related charge in the fourth quarter. Compared to the fourth quarter 1999, the first quarter 2000 benefited from seasonally better results from the aircraft deicers business and improved profitability for SM. This was offset by higher costs for propylene, the primary raw material for PO and derivatives. PO and derivatives sales volumes were flat as higher volumes for deicers, propylene glycol ethers and butanediol were offset by lower PO merchant volumes. 18 EQUISTAR CHEMICALS, LP SEGMENT DATA The following tables reflect selected actual sales volume data and summarized financial information for Equistar's business segments.
For the three months ended March 31, IN MILLIONS ------------------------------------- - ----------- 2000 1999 --------------- --------------- SELECTED PETROCHEMICALS PRODUCTS: Olefins (pounds) 4,902 4,527 Aromatics (gallons) 102 85 POLYMERS PRODUCTS (pounds) 1,667 1,652 MILLIONS OF DOLLARS - ------------------- SALES AND OTHER OPERATING REVENUES: Petrochemicals segment $ 1,705 $ 907 Polymers segment 576 455 Intersegment eliminations (474) (258) ------- ------- Total $ 1,807 $ 1,104 ======= ======= COST OF SALES: Petrochemicals segment $ 1,531 $ 813 Polymers segment 590 424 Intersegment eliminations (474) (258) ------- ------- Total $ 1,647 $ 979 ======= ======= OTHER OPERATING EXPENSES: Petrochemicals segment $ 2 $ 3 Polymers segment 17 20 Unallocated 42 56 ------- ------- Total $ 61 $ 79 ======= ======= OPERATING INCOME: Petrochemicals segment $ 172 $ 91 Polymers segment (31) 11 Unallocated (42) (56) ------- ------- Total $ 99 $ 46 ======= =======
PETROCHEMICALS SEGMENT REVENUES--Revenues of $1.7 billion in the first quarter 2000 increased 88% compared to the first quarter 1999, primarily due to higher sales prices and a 5% increase in volumes. The increase in sales prices is primarily in response to the significant increases in raw material costs, which have risen steadily since the first quarter 1999. Benchmark quoted ethylene prices averaged 28.33 cents per pound in the first quarter 2000, a 67% increase over 16.95 cents per pound in the first quarter 1999. Raw material costs increased steadily and peaked in early March 2000. Sales volumes increased due to demand growth, which reflected the ongoing strength of the U.S. economy. COST OF SALES--Cost of sales of $1.5 billion in the first quarter 2000 also increased 88% compared to $813 million for the first quarter 1999. This increase primarily reflected the significant increase in raw material costs and, to a lesser extent, higher volumes. OPERATING INCOME--Operating income of $172 million in the first quarter 2000 increased from $91 million in the first quarter 1999 due to higher product margins, as sales prices increased more than raw material costs, and, to a lesser extent, higher sales volumes. 19 POLYMERS SEGMENT REVENUES--Revenues of $576 million in the first quarter 2000 increased 27% compared to $455 million in the first quarter 1999 primarily as a result of higher sales prices as volumes were relatively flat. The sales price increases reflect pressure from escalating raw material costs. The flat volumes reflect the effect of the previously announced shutdown of HDPE and LDPE capacity during the first quarter 2000, partly offset by new capacity at the Matagorda, Texas facility, which started up in the fourth quarter 1999. COST OF SALES--Cost of sales of $590 million in the first quarter 2000 increased 39% compared to $424 million for the first quarter 1999. This increase primarily reflected the significant increase in raw material costs, primarily ethylene and propylene. OPERATING INCOME--For the first quarter 2000, the polymers segment had an operating loss of $31 million compared to income of $11 million in the first quarter 1999. The decrease was primarily due to decreases in polymers margins as sales price increases lagged behind increases in polymers raw material costs. UNALLOCATED ITEMS The following discusses expenses that were not allocated to the petrochemicals or polymers segments. OTHER OPERATING EXPENSES--This caption includes general and administrative expenses, research and development expense, and amortization of goodwill and other intangibles. Unallocated expenses were $42 million in the first quarter 2000 and $56 million in the first quarter 1999. The decrease was primarily due to previously announced cost reduction measures taken in the fourth quarter 1999. The first quarter 1999 also included nonrecurring transition service costs related to the business contributed by Occidental in May 1998 and system implementation costs. INTEREST EXPENSE, NET--Net interest expense of $45 million in the first quarter 2000 increased from $39 million in the first quarter 1999. Interest expense increased due to higher interest rates as a result of Equistar's debt refinancing in the first quarter 1999. FIRST QUARTER 2000 VERSUS FOURTH QUARTER 1999 Equistar reported net income of $56 million in the first quarter 2000 compared to 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 in the fourth quarter 1999. The $11 million improvement in the first quarter 2000 primarily reflects lower unallocated general and administrative costs partly offset by a decrease in polymers segment operating results. First quarter 2000 unallocated costs benefited from cost reductions announced in the fourth quarter. For the polymers segment, margins decreased as increases in polymer prices lagged cost increases in polymer raw materials, primarily ethylene and propylene. The margin decreases were partly offset by a 5% increase in volumes. Compared to the fourth quarter 1999, the petrochemicals segment operating results were flat as higher raw material costs were offset by higher ethylene and co-product prices and the benefit from higher sales volumes. 20 LYONDELL-CITGO REFINING LP REFINING SEGMENT FIRST QUARTER 2000 VERSUS FIRST QUARTER 1999 The following table sets forth, in thousands of barrels per day, sales volumes for LCR's refined products and processing rates for the periods indicated:
For the three months ended March 31, ------------------------------------ 2000 1999 --------------- --------------- Refined products Gasoline 106 117 Diesel and heating oil 66 65 Jet fuel 15 17 Aromatics 10 9 Other refined products 118 119 ---- --- Total refined products volumes 315 327 ==== === Crude processing rates: Crude supply agreement--coked 180 206 Other heavy crude oil--coked 41 8 Other crude oil 21 41 --- --- Total crude oil 242 255 === ===
REVENUES--Revenues for LCR, including intersegment sales, were $859 million in the first quarter 2000, a 99% increase over first quarter 1999 revenues of $432 million. The increase resulted from higher industry prices for refined products, partly offset by a 4% decrease in refined products volumes. Sales prices increased as a result of significantly higher industry crude oil prices in the first quarter 2000 versus the 1999 period. The volume decrease was due to lower allocations of extra heavy Venezuelan crude oil as a result of the May 1999 OPEC production cutbacks. LCR has not yet benefited from the OPEC production increases announced in March 2000. NET INCOME--LCR's net income was $22 million in the first quarter 2000 compared to $15 million in the first quarter 1999. The increase was primarily due to higher margins partly offset by the lower volumes of Venezuelan crude oil in the first quarter 2000. FIRST QUARTER 2000 VERSUS FOURTH QUARTER 1999 LCR's net income in the first quarter 2000 was $22 million compared to $26 million in the fourth quarter 1999. The fourth quarter 1999 included an insurance recovery of $12 million related to an unplanned production unit outage that occurred earlier in 1999. Excluding the insurance recovery, first quarter 2000 net income increased compared to the fourth quarter, as improved refining margins were only partly offset by turnaround and other operating costs. Crude processing rates averaged 242,000 barrels per day in the first quarter 2000 compared to 259,000 barrels per day in the fourth quarter 1999. Processing rates under the crude supply agreement were unchanged at 180,000 barrels per day. 21 FINANCIAL CONDITION OPERATING ACTIVITIES--Lyondell's cash provided by operating activities totaled $2 million in the first quarter 2000 compared to operating cash flow of $134 million in the first quarter 1999. Cash provided by operating activities in 1999 included customer advances and tax refunds. INVESTING ACTIVITIES--On March 31, 2000, Lyondell completed the sale of its polyols business and an ownership interest in its domestic PO manufacturing operations for approximately $2.45 billion. Lyondell made capital expenditures of $19 million in the first quarter 2000. Capital expenditures by the joint ventures were $20 million by Equistar and $17 million by LCR. Lyondell's pro rata share of the joint ventures' total capital expenditures was $18 million. Lyondell's 2000 capital budget is $207 million, including its $101 million pro rata share of the joint ventures' capital budgets. In addition, Lyondell made a $39 million deposit to reserve additional capacity under a TDI tolling agreement. Distributions from affiliates of $41 million, including $33 million by LCR and $8 million by Nihon Oxirane, in the first quarter 2000 were less than net affiliate earnings of $50 million. Equistar did not make any distributions. Equistar transferred a $4 million liability related to the shared services organization to Lyondell in the first quarter 2000. FINANCING ACTIVITIES--Lyondell is using the net proceeds of the asset sale to significantly reduce its variable-rate debt. On March 31, 2000, Lyondell repaid $999 million of the principal amount of Term Loan A and on April 7, 2000, Lyondell repaid the $96 million remaining principal balance of Term Loan A and the $149 million outstanding balance of Term Loan F. Lyondell intends to reduce the outstanding balance of Term Loan B by $810 million by May 31, 2000. Lyondell also repaid an additional $5 million of debt from operating cash flow during the first quarter 2000 and paid $10 million in debt amendment fees. Lyondell paid a regular quarterly dividend of $.225 per share of common stock, or $26 million, in the first quarter 2000. LIQUIDITY AND CAPITAL RESOURCES--At March 31, 2000, Lyondell had cash on hand of $1.6 billion, of which Lyondell intends to use $1.3 billion for debt reduction, taxes and other expenses of the sale, leaving available cash of approximately $300 million. Lyondell also had $500 million available under its revolving credit facility that extends until July 2003. Current maturities of long-term debt were $220 million. 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. Given the poor current business environment in the petrochemicals industry, Lyondell secured an amendment to certain financial covenants in February 2000 that increased its financial and operating flexibility in the near term. Lyondell was in compliance with all such covenants as of March 31, 2000. The February 2000 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 was outstanding on March 31, 2000. On May 5, 2000, Lyondell and CITGO, as partners of LCR, arranged interim financing for LCR to repay the $450 million outstanding under the construction facility. Equistar had outstanding debt of $2.2 billion at March 31, 2000. Lyondell remains liable on approximately $553 million of Equistar debt for which Equistar assumed primary responsibility in connection with its formation. At March 31, 2000, Equistar and LCR had combined outstanding debt of $2.7 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. 22 Lyondell believes that conditions will be such that cash balances, cash generated from operating activities, and funds from lines of credit will be adequate to meet anticipated future cash requirements for scheduled debt repayments, necessary capital expenditures, operations and dividends for the foreseeable future. CURRENT BUSINESS OUTLOOK Lyondell's future profitability will be driven by its ability to grow or maintain product margins in an environment of uncertain and volatile feedstock costs. For Lyondell, margins will remain under pressure despite price increases for PO and derivatives, due to significant increases in propylene costs in the U.S. and Europe. 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 also continue to put pressure on prices and margins. Strong demand for products in the petrochemicals and polymers segments continues to benefit Equistar's operations. This will be tempered by the effects of a scheduled turnaround at the Morris, Illinois facility during the second quarter 2000. If crude oil prices stabilize in the targeted price range announced by OPEC, Equistar's results should benefit significantly. Meanwhile, both Lyondell and Equistar are taking aggressive actions to further reduce costs and increase cash flow. These include the implementation of the shared services organization and other cost reduction initiatives, which have helped reduce controllable costs. Ongoing progress with debt reduction will have a continued positive impact on future earnings and cash flow. LCR's second quarter operating results will be depressed by a major turnaround scheduled for that quarter. The increase in OPEC production quotas is expected to benefit ongoing operating results. 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. 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 continue 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. 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 Lyondell'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 ITEM 3. DISCLOSURE OF MARKET RISK. Lyondell's exposure to market risks is described in Item 7a of its Annual Report on Form 10-K for the year ended December 31, 1999. Lyondell's exposure to market risks has not changed materially in the quarter ended March 31, 2000. 23 FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report are "forward-looking statements" within the meaning of the federal securities laws. Although Lyondell believes the expectations reflected in such forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and Lyondell can give no assurance that such expectations will prove to have been correct. Lyondell's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the cyclical nature of the chemical and refining industries, uncertainties associated with the United States and worldwide economies, current and potential governmental regulatory actions in the United States and in other countries, substantial chemical and refinery capacity additions resulting in oversupply and declining prices and margins, raw material costs or supply arrangements, Lyondell's ability to implement cost reductions, and operating interruptions (including leaks, explosions, fires, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, spills and releases and other environmental risks). Many of such factors are beyond Lyondell's or its joint ventures' ability to control or predict. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. All forward-looking statements in this Form 10-Q are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report. 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material developments with respect to Lyondell's legal proceedings previously reported in the 1999 Annual Report on Form 10-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS The Company's annual meeting of stockholders was held May 4, 2000. The stockholders elected all of the Company's seven nominees for director and ratified the appointment of PricewaterhouseCoopers LLP as the Company's independent auditors for 2000. A shareholder proposal regarding a By-Law amendment with respect to the treatment of abstentions in the tabulation of votes did not pass. The votes were as follows: 1. Election of Directors: Nominee For Withheld - ------- --- --------- William T. Butler 103,544,063 1,215,135 Carol A. Anderson 103,598,771 1,160,427 Travis Engen 103,593,129 1,166,069 Stephen F. Hinchliffe, Jr. 103,585,291 1,173,907 Dudley C. Mecum II 103,575,536 1,183,662 Dan F. Smith 103,319,066 1,440,132 Paul R. Staley 103,585,361 1,173,837 2. Appointment of PricewaterhouseCoopers LLP: For: 104,084,090 Against: 502,284 Abstain: 172,824 2. Shareholder Proposal regarding treatment of abstentions in the tabulation of votes: For: 8,916,401 Against: 64,532,897 Abstain: 15,591,212 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule. (b) Reports on Form 8-K The following Current Reports on Form 8-K were filed during the quarter ended March 31, 2000 and through the date hereof: Date of Report Item No. Financial Statements -------------- --------- -------------------- March 31, 2000 2,7 No May 5, 2000 5,7 No 25 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Lyondell Chemical Company Dated: May 12, 2000 /s/ KELVIN R. COLLARD ------------------------------ Kelvin R. Collard Vice President and Controller (Duly Authorized Officer and Principal Accounting Officer) 26 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 1,630 0 440 14 374 2,657 2,679 180 8,656 1,361 5,047 0 0 120 1,039 8,656 1,136 1,136 952 952 0 0 165 519 202 317 0 (11) 0 306 2.60 2.60
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