-----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, AaHpPmEooLyW7wv0LCw03vvAbdKyKeAyYGVp+jnDGHfUc7+SWwI0Sn9/eXZnALTj jIB5EfCgkBjvD2X42AH8CA== 0000899243-97-002172.txt : 19971113 0000899243-97-002172.hdr.sgml : 19971113 ACCESSION NUMBER: 0000899243-97-002172 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYONDELL PETROCHEMICAL CO CENTRAL INDEX KEY: 0000842635 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 954160558 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10145 FILM NUMBER: 97715333 BUSINESS ADDRESS: STREET 1: 1221 MCKINNEY ST STREET 2: STE 1600 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7136527200 MAIL ADDRESS: STREET 1: 1221 MCKINNEY ST STREET 2: SUITE 1600 CITY: HOUSTON STATE: TX ZIP: 77010 10-Q 1 FORM 10-Q --------------------------------------------------- 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 September 30, 1997. 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 PETROCHEMICAL COMPANY (Exact name of registrant as specified in its charter) ---------- DELAWARE 95-4160558 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1221 MCKINNEY STREET, 77010 SUITE 1600, HOUSTON, TEXAS (ZIP CODE) (Address of principal executive offices) Registrant's telephone number, including area code: (713) 652-7200 ---------- Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING AS OF SEPTEMBER 30, 1997: 79,436,488 --------------------------------------------------- PART I. FINANCIAL INFORMATION LYONDELL PETROCHEMICAL COMPANY CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 --------------------------------- ----------------------------------- PRO PRO FORMA AS FORMA AS 1996 REPORTED 1996 REPORTED MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS 1997 (NOTE 1) 1996 1997 (NOTE 1) 1996 - -------------------------------------------- ------- ------- ------- ------- ------- ------- SALES AND OTHER OPERATING REVENUES: Unrelated parties $ 648 $ 562 $ 1,179 $ 1,874 $ 1,518 $ 3,446 Related parties 151 120 68 469 356 205 ------- ------- ------- ------- ------- ------- 799 682 1,247 2,343 1,874 3,651 ------- ------- ------- ------- ------- ------- OPERATING COSTS AND EXPENSES: Cost of sales Unrelated parties 475 463 1,063 1,447 1,292 3,120 Related parties 120 97 56 370 307 180 Selling, general and administrative expenses 51 42 57 148 127 174 ------- ------- ------- ------- ------- ------- 646 602 1,176 1,965 1,726 3,474 ------- ------- ------- ------- ------- ------- Operating income 153 80 71 378 148 177 Interest expense (19) (18) (18) (60) (60) (61) Interest income 4 1 1 10 3 3 Minority interest (5) - - 1 (13) - - (3) Income (loss) from equity investment 29 (8) - - 56 25 - - ------- ------- ------- ------- ------- ------- Income before income taxes 162 55 55 371 116 116 Provision for income taxes 60 20 20 136 42 42 ------- ------- ------- ------- ------- ------- NET INCOME $ 102 $ 35 $ 35 $ 235 $ 74 $ 74 ======= ======= ======= ======= ======= ======= EARNINGS PER SHARE $ 1.27 $ .43 $ .43 $ 2.94 $ .92 $ .92 ======= ======= ======= ======= ======= =======
See notes to consolidated financial statements. 1 LYONDELL PETROCHEMICAL COMPANY CONSOLIDATED BALANCE SHEETS
PRO FORMA DECEMBER 31 AS REPORTED SEPTEMBER 30 1996 DECEMBER 31 MILLIONS OF DOLLARS 1997 (NOTE 1) 1996 - ------------------- ------------ ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 67 $ 56 $ 68 Accounts receivable: Trade 314 259 394 Related parties 32 96 62 Inventories 258 196 294 Prepaid expenses and other current assets 13 12 13 ------- ------- ------- Total current assets 684 619 831 ------- ------- ------- Property, plant and equipment 2,146 2,109 4,313 Less accumulated depreciation and amortization (1,269) (1,216) (2,043) ------- ------- ------- 877 893 2,270 Investment in affiliate 66 83 - - Receivable from affiliate 230 177 - - Deferred charges and other assets 128 118 175 ------- ------- ------- Total assets $ 1,985 $ 1,890 $ 3,276 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable: Trade $ 197 $ 200 $ 474 Related parties 17 30 1 Notes payable 50 50 60 Current maturities of long-term debt 32 112 112 Other accrued liabilities 114 93 124 ------- ------- ------- Total current liabilities 410 485 771 ------- ------- ------- Long-term debt 712 744 1,194 Other liabilities and deferred credits 84 70 114 Deferred income taxes 176 157 157 Commitments and contingencies Minority interest 5 3 609 Stockholders' equity: Preferred stock, $.01 par value, 80,000,000 shares authorized, none outstanding Common stock, $1 par value, 250,000,000 shares authorized, 80,000,000 issued 80 80 80 Additional paid-in capital 158 158 158 Retained earnings 374 193 193 Treasury stock, at cost, 563,512 shares (14) - - - - ------- ------- ------- Total stockholders' equity 598 431 431 ------- ------- ------- Total liabilities and stockholders' equity $ 1,985 $ 1,890 $ 3,276 ======= ======= =======
See notes to consolidated financial statements. 2 LYONDELL PETROCHEMICAL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30 ---------------------------------------------- PRO FORMA 1996 AS REPORTED MILLIONS OF DOLLARS 1997 (NOTE 1) 1996 - ------------------- ----- ----- ----- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 235 $ 74 $ 74 Adjustments to reconcile net income to net cash provided by operating activities, net of the effects of deconsolidation of affiliate: Depreciation and amortization 66 54 78 Deferred income taxes 12 20 20 Minority interest 13 - - 3 (Increase) decrease in accounts receivable 9 (54) (24) Increase in inventories (62) (20) (3) Increase (decrease) in accounts payable (16) 27 9 Net change in other working capital accounts 26 (13) (19) Other (5) (37) (42) ----- ----- ----- Net cash provided by operating activities 278 51 96 ----- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (39) (61) (488) Proceeds from sales of short-term investments - - 76 76 Purchases of short-term investments - - (76) (76) Contributions and advances to affiliate (54) (121) - - Distributions from affiliate in excess of earnings 18 42 - - Deconsolidation of affiliate (12) (4) - - ----- ----- ----- Net cash used in investing activities (87) (144) (488) ----- ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES: Minority owner contributions (distributions) (12) - - 106 Net change in short-term debt - - 17 30 Borrowings of long-term debt - - 300 482 Repayments of long-term debt (112) (150) (150) Repurchase of common stock (14) - - - - Dividends paid (54) (54) (54) ----- ----- ----- Net cash provided by (used in) financing (192) 113 414 activities ----- ----- ----- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1) 20 22 Cash and cash equivalents at beginning of period 68 10 10 ----- ----- ----- Cash and cash equivalents at end of period $ 67 $ 30 $ 32 ===== ===== =====
See notes to consolidated financial statements. 3 LYONDELL PETROCHEMICAL 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, 1996 included in the Lyondell Petrochemical Company ("Company" or "Lyondell") 1996 Annual Report and the Annual Report on Form 10-K and prior quarterly reports on Form 10-Q pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. Certain amounts from prior periods have been reclassified to conform to the current period presentation. Pro Forma Financial Information - The unaudited pro forma financial information in the accompanying financial statements presents the financial position, results of operations and cash flows of the Company as of December 31, 1996 and for the three and nine months ended September 30, 1996 using the equity method of accounting for Lyondell's investment in LYONDELL-CITGO Refining Company Ltd. ("LCR") as if the change in accounting method had been effective January 1, 1996 (see Note 3). This unaudited pro forma information may not be indicative of results that will be obtained in the future. The unaudited pro forma financial information also includes restatements to divide the petrochemicals segment into the petrochemicals and polymers segments. 2. COMPANY OPERATIONS The Company operates in the petrochemicals, polymers and refining segments. In 1996 and prior years, the results of the polymers business were included in the petrochemicals segment. The petrochemicals business, as reported in 1997 and as restated on a pro forma basis in 1996, manufactures a wide variety of petrochemicals including olefins, methanol, methyl tertiary butyl ether ("MTBE") and aromatics produced at the Channelview petrochemical facility. In December 1996, the Company sold an undivided interest in its methanol facility to MCN Investment Corporation ("MCNIC") and created Lyondell Methanol Company L.P. ("Lyondell Methanol"), a limited partnership with the minority owner, to own and operate the methanol facility. The Company's petrochemical products are used primarily in the production of other chemicals and products, including polymers. The polymers business manufactures polyolefins, including high-density polyethylene ("HDPE"), low-density polyethylene and polypropylene, which are used in the production of a wide variety of consumer and industrial products. The Company also operates in the refining segment through the Company's equity interest in LCR, a Texas limited liability company that is owned by subsidiaries of Lyondell and CITGO Petroleum Corporation ("CITGO"), which manufactures refined petroleum products, including gasoline, low sulfur diesel, jet fuel, aromatics and lubricants. 3. EQUITY INTEREST IN LYONDELL-CITGO REFINING COMPANY LTD. In July 1993, LCR was formed to own and operate the Company's refining business, including the full-conversion Houston, Texas refinery ("Refinery"). LCR completed a major upgrade project at the Refinery ("Upgrade Project") during the first quarter of 1997 which enables the facility to process substantial additional volumes of very heavy crude oil. As a result of the completion of the Upgrade Project, effective April 1, 1997, the participation interests changed from approximately 86 percent and 14 percent to approximately 59 percent and 41 percent for Lyondell and CITGO, respectively, to reflect CITGO's equity contribution in the Upgrade Project. CITGO has a one-time option 4 to increase its participation interest in LCR up to 50 percent by making an additional equity contribution. Net income before depreciation expense for the period is allocated to LCR's owners based on participation interests. Depreciation expense is allocated to the owners based on contributed assets. Pursuant to contractual arrangements and concurrent with the completion of the Upgrade Project, the authority and responsibility for certain management decisions previously decided by majority vote, and therefore controlled by Lyondell, changed to unanimous vote resulting in expanded joint control of LCR by Lyondell and CITGO. Consequently, effective January 1, 1997, Lyondell began accounting for its investment in LCR under the equity method of accounting, meaning that the operations of LCR are no longer consolidated line by line with those of Lyondell. In 1997, Lyondell's portion of LCR's net earnings is included in the consolidated statements of income as income (loss) from equity investment and Lyondell's portion of LCR's net assets appears on a single line in the consolidated balance sheets as investment in affiliate. Cash advances to and distributions from LCR in excess of earnings are reflected as individual line items in the consolidated statements of cash flows. Summarized financial information for LCR is as follows (in millions of dollars).
BALANCE SHEETS SEPTEMBER 30 DECEMBER 31 1997 1996 ------------------- ------------------- Total current assets $ 233 $ 273 Property, plant and equipment, net 1,384 1,378 Deferred charges and other assets 48 56 ------------------- ------------------- Total assets $1,665 $1,707 =================== =================== Total current liabilities $ 265 $ 373 Long-term debt 701 627 Other liabilities and deferred credits 50 44 Members' equity 649 663 ------------------- ------------------- Total liabilities and members' equity $1,665 $1,707 =================== ===================
INCOME STATEMENTS FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 --------------------------------- --------------------------------- 1997 1996 1997 1996 -------------- -------------- -------------- -------------- Sales and other operating revenues $ 634 $ 651 $1,974 $2,049 Cost of sales 561 645 1,825 1,976 Selling, general and administrative expenses 17 14 50 45 -------------- -------------- -------------- -------------- Operating income (loss) $ 56 $ (8) $ 99 $ 28 ============== ============== ============== ============== Net income (loss) $ 44 $ (8) $ 73 $ 28 ============== ============== ============== ============== STATEMENTS OF CASH FLOWS Depreciation and amortization $ 24 $ 8 $ 66 $ 24 Net changes in working capital (5) 21 (70) 24 Additions to property, plant and equipment (13) (113) (64) (427)
Included in sales and other operating revenues above are sales to Lyondell of $41 million and $32 million for the three months ended September 30, 1997 and 1996, respectively, and $148 million and $116 million for the nine months ended September 30, 1997 and 1996, respectively. In addition, LCR purchased from the Company $88 million and $53 million, primarily product purchases, for the three months ended September 30, 1997 and 1996, respectively, and $263 million and $155 million for the nine months ended September 30, 1997 and 1996, respectively, which are included in LCR's cost of sales. 5 4. INVENTORIES The categories of inventory and their recorded values at September 30, 1997 and December 31, 1996 were: PRO FORMA AS REPORTED SEPTEMBER 30 DECEMBER 31 DECEMBER 31 MILLIONS OF DOLLARS 1997 1996 1996 - ------------------- ------------ ----------- ----------- Petrochemicals $ 161 $ 98 $ 172 Polymers 74 74 - - Crude oil and refined products - - - - 81 Materials and supplies 23 24 41 ------------ ----------- ----------- Total inventories $ 258 $ 196 $ 294 ============ =========== =========== 5. CAPITALIZED INTEREST The Company's policy is to capitalize interest expense incurred on debt during the construction of major projects that exceed one year. Total interest expense incurred during the three months and the nine months ended September 30, 1997 was approximately $19 million and $60 million, respectively, of which none was capitalized. Total interest expense incurred during the three months and the nine months ended September 30, 1996 was approximately $28 million and $84 million, respectively. Approximately $10 million and $23 million was capitalized, including $8 million and $19 million by LCR, during the three months and nine months ended September 30, 1996, respectively. 6. COMMITMENTS AND CONTINGENCIES The Company has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business. In the aggregate, such commitments are not at prices in excess of current market. At its inception, LCR entered into a long-term crude oil supply contract ("Crude Supply Contract") with Lagoven, S.A. ("LAGOVEN"), an affiliate of CITGO. LCR is required to purchase, and LAGOVEN is required to sell, sufficient crude oil to satisfy LCR's coking capacity, or a minimum of 200,000 barrels per day and up to 230,000 barrels per day of very heavy Venezuelan crude oil. LAGOVEN has the right, but not the obligation, to supply incremental amounts above 230,000 barrels per day. Depending on market conditions, breach or termination of the Crude Supply Contract could adversely affect the Company through its investment in LCR. Although the parties have negotiated alternative arrangements in the event of certain force majeure conditions, including governmental or other actions restricting or otherwise limiting LAGOVEN's ability to perform its obligations, any such alternative arrangements may not be as beneficial as the Crude Supply Contract. There can be no assurance that alternative crude oils with similar margins would be available for purchase by LCR. Furthermore, the breach or termination of the Crude Supply Contract would require LCR to return to the practice of purchasing all of its crude oil feedstocks in the merchant market and would again subject LCR to significant volatility and price fluctuations. In connection with the transfer of assets and liabilities from Atlantic Richfield Company ("ARCO") to the Company, the Company agreed to assume certain liabilities arising out of the operation of the Company's integrated petrochemicals and petroleum processing business prior to July 1, 1988. In connection with the transfer of such liabilities, the Company and ARCO entered into an agreement ("Cross-Indemnity Agreement") whereby the Company agreed to defend and indemnify ARCO against certain uninsured claims and liabilities which ARCO may incur relating to the operation of the business of the Company prior to July 1, 1988, including certain liabilities which may arise out of pending and future lawsuits. ARCO indemnified the Company under the Cross-Indemnity Agreement with respect to other claims or liabilities and other matters of litigation not related to the assets or business included in the consolidated financial statements. ARCO has also indemnified the Company for all federal taxes which might be assessed upon audit of the operations 6 of the Company included in the consolidated financial statements prior to January 12, 1989, and for all state and local taxes for the period prior to July 1, 1988. Effective in September 1997, the Company and ARCO entered into an amendment to the Cross-Indemnity Agreement ("Revised Cross-Indemnity Agreement"). For current and future cases related to Company products and Company operations, ARCO and the Company will bear a proportionate share of judgment and settlement costs according to a formula which allocates responsibility based on years of ownership during the relevant time period. The party with the most significant potential liability exposure will be responsible for case management and associated costs although provisions have been made to allow the non-case managing party to protect its interests. Under the Revised Cross-Indemnity Agreement, both ARCO and the Company waive any claim for reimbursement under the existing Cross-Indemnity Agreement for any prior defense and settlement costs associated with waste site matters, and the Company will assume responsibility for its proportionate share of future costs for waste site matters not covered by ARCO insurance. Subject to the uncertainty inherent in all litigation, management believes the resolution of the matters pursuant to the Revised Cross-Indemnity Agreement will not have a material adverse effect upon the consolidated financial statements or liquidity of the Company. In addition to lawsuits for which the Company has indemnified ARCO, the Company is also subject to various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material adverse effect upon the consolidated financial statements or liquidity of the Company. The Company's policy is to be in compliance with all applicable environmental laws. The Company is subject to extensive environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, the Company cannot accurately predict future developments, such as increasingly strict requirements of environmental laws, inspection and enforcement policies and compliance costs therefrom which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. Subject to the terms of the Cross-Indemnity Agreement, the Company is currently contributing funds to the cleanup of one waste site (Brio, located near Houston, Texas) under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as amended and the Superfund Amendments and Reauthorization Act of 1986. The Company is also subject to certain assessment and remedial actions at the Refinery under the Resource Conservation and Recovery Act ("RCRA"). In addition, the Company has negotiated an order with the Texas Natural Resource Conservation Commission ("TNRCC") for assessment and remediation of groundwater and soil contamination at the Refinery. During July 1994, the Company reported results of an independent investigation conducted by the Audit Committee of the Board of Directors regarding the compliance status of two process waste-water streams under the applicable Benzene National Emissions Standard for Hazardous Air Pollutants ("NESHAPS") regulations and certain issues raised by an employee. Noncompliance with the Benzene NESHAPS regulations and the related reporting requirements can result in civil penalties and, under certain circumstances, substantial civil and, potentially, criminal penalties. The Company received a notice of violation from the TNRCC regarding the two streams and paid a fine of $10,200. In addition, the Company incurred approximately $2 million in capital costs in connection with these waste-water streams to achieve ongoing compliance with the Benzene NESHAPS regulations. Although the Criminal Enforcement Division of the EPA is conducting a formal investigation, the Company does not believe any aspects of the matters described above will subject the Company to criminal liability or have a material adverse effect on the consolidated financial statements or liquidity of the Company. As of September 30, 1997 the Company has accrued $13 million related to future CERCLA, RCRA and TNRCC assessment and remediation costs, of which $3 million is included in current liabilities while the remaining amounts are expected to be incurred over the next two to seven years. In the opinion of management, there is currently no material range of loss in excess of the amount recorded. However, it is possible that new information about the sites for which the reserve has been established, new technology or future developments such as involvement in other 7 CERCLA, RCRA, TNRCC or other comparable state law investigations, could require the Company to reassess its potential exposure related to environmental matters. In the opinion of management, any liability arising from the matters discussed in this Note is not expected to have a material adverse effect on the consolidated financial statements or liquidity of the Company. However, the adverse resolution in any reporting period of one or more of the matters discussed in this Note could have a material impact on the Company's results of operations for that period without giving effect to contribution or indemnification obligations of co-defendants or others, or to the effect of any insurance coverage that may be available to offset the effects of any such award. 7. STOCKHOLDERS' EQUITY Dividends - The Company paid regular quarterly dividends of $.225 per share of common stock during the first three quarters of 1997. Additionally, on October 24, 1997, the Board of Directors declared a regular quarterly dividend of $.225 per share of common stock, payable December 15, 1997 to stockholders of record on November 25, 1997. Earnings per Share - Earnings per share for all periods presented are computed based on the weighted average number of shares outstanding for the periods, which was 79,973,792 shares and 79,991,168 shares for the three and nine months ended September 30, 1997, respectively, and 80,000,000 shares for the 1996 periods. Treasury Stock - Treasury stock is acquired under a resolution the Board of Directors adopted in September 1997 authorizing the Company to purchase from time to time shares of the Company's common stock not to exceed $75 million in the aggregate. The Company purchased 563,512 shares through September 30, 1997 for approximately $14 million. 8. EQUISTAR CHEMICALS, LP On July 28, 1997, the Company and Millennium Chemicals Inc. ("Millennium") announced an agreement to form a new joint venture company named Equistar Chemicals, LP ("Equistar"), which will be operated as a limited partnership. Equistar will be owned 57 percent by the Company and 43 percent by Millennium and will own and operate the existing petrochemicals and polymers businesses to be contributed by the two companies. Not included in Equistar are Lyondell's approximately 59 percent interest in LCR and its 75 percent interest in Lyondell Methanol. Equistar will assume primary responsibility for $745 million of existing Lyondell debt. Lyondell also will remain liable on this debt. In addition, Lyondell will provide a $345 million note payable within three years to Equistar. The transaction, which has been unanimously approved by the Boards of Directors of both companies, is subject to approval by both companies' stockholders and satisfaction of certain other conditions. Stockholder meetings for both parties will be held on November 20, 1997. Equistar is expected to commence operations on December 1, 1997. After closing, Lyondell will begin accounting for its investment in the venture under the equity method of accounting, similar to the accounting for its investment in LCR. Lyondell will record a charge to expense of approximately $35 million in the fourth quarter of 1997 as a result of severance and other costs related to the transfer of its assets to Equistar. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL In 1996, Lyondell Petrochemical Company ("Company" or "Lyondell") operated in two segments: the petrochemicals segment, which included the results of operations of the Company's petrochemicals and polymers business, and the refining segment. Beginning in 1997, the petrochemicals segment was split into the petrochemicals and polymers segments. The petrochemicals segment consists of olefins including ethylene, propylene, butadiene, butylenes and specialty products; aromatics produced at the Channelview, Texas petrochemicals facility ("Channelview Facility") including benzene and toluene; methanol; methyl tertiary butyl ether ("MTBE"); and refinery blending stocks. In December 1996, the Company sold an undivided interest in its methanol facility to MCN Investment Corporation ("MCNIC") and created Lyondell Methanol Company L.P. ("Lyondell Methanol"), a partnership with the minority owner, to own and operate the methanol facility. The polymers segment consists of polyolefins including high-density polyethylene ("HDPE"), low-density polyethylene and polypropylene produced at production facilities in Matagorda ("Matagorda Facility") and Victoria ("Victoria Facility"), Texas and the Bayport facility in Pasadena, Texas ("Bayport Facility"). The Company's operations in the refining segment are conducted through its interest in LYONDELL-CITGO Refining Company Ltd. ("LCR"), a Texas limited liability company owned by subsidiaries of the Company and CITGO Petroleum Corporation ("CITGO"). The refining segment consists of refined petroleum products, including gasoline, low sulfur diesel, and jet fuel; aromatics produced at LCR's Houston, Texas refinery ("Refinery"), including benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial lubricants, motor oils, white oils and process oils; carbon black oil; sulfur; residual oil; petroleum coke fuel; olefins feedstocks; and crude oil resales. LCR completed a major upgrade project at the Refinery ("Upgrade Project") during the first quarter of 1997 to enable the facility to process substantial additional volumes of very heavy crude oil. The following table sets forth sales volumes for the Company's major products for the periods indicated. Sales volumes, including intersegment sales, include production, purchases of products for resale, propylene production from the product flexibility unit, products received on exchange and draws from inventory. Refined products volumes include all activity at LCR.
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 --------------------------------- --------------------------------- 1997 1996 1997 1996 -------------- -------------- -------------- -------------- SELECTED PETROCHEMICAL PRODUCTS (MILLIONS) Ethylene, propylene and other olefins (lbs.) 2,307 1,937 6,567 5,948 Methanol (gallons) 57 54 178 163 Aromatics (gallons) 53 45 143 141 POLYMERS PRODUCTS (MILLIONS) Polyethylene and polypropylene (lbs.) 561 526 1,615 1,609 REFINED PRODUCTS (THOUSAND BARRELS PER DAY) Gasoline 101 100 105 107 Diesel and heating oil 58 48 63 47 Jet fuel 16 23 15 25 Aromatics 12 9 11 9 Other refined products 94 73 88 77 -------------- -------------- -------------- -------------- Total refined products volumes 281 253 282 265 ============== ============== ============== ==============
9 Summarized below is the segment data for the Company. Intersegment sales from the petrochemicals segment to the polymers segment include ethylene and propylene produced at the Channelview Facility. Intersegment sales between the petrochemicals and refining segments in 1996 include olefins feedstocks and benzene produced at the Refinery and gasoline blending stocks and hydrogen produced at the Channelview Facility. Intersegment sales were made at prices based on current market values. Effective January 1, 1997, Lyondell began accounting for its investment in LCR under the equity method of accounting, meaning that the operations of LCR are no longer consolidated line by line with those of Lyondell. In 1997, Lyondell's portion of LCR's net earnings is included in the consolidated statements of income as income (loss) from equity investment and Lyondell's portion of LCR's net assets appears on a single line in the consolidated balance sheets as investment in affiliate. Cash advances to and distributions from LCR in excess of earnings are reflected as individual line items in the consolidated statements of cash flows. Therefore, the results of operations of the refining segment, which consists primarily of the Company's interest in LCR, do not appear line by line in the tables below for 1997. The following unaudited pro forma financial information presents the results of operations of the Company for the periods ended September 30, 1996 using the equity method of accounting for Lyondell's investment in LCR as if the change in accounting method had been effective January 1, 1996. The unaudited pro forma financial information also includes restatements to split the petrochemicals segment into the petrochemicals and polymers segments. This unaudited pro forma information may not be indicative of results that will be obtained in the future. The narrative discussion which follows compares 1997 operating results to the pro forma financial information for the comparable periods in 1996 as comparisons to historical 1996 operating results are not considered meaningful.
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 ----------------------------------------- ------------------------------------ PRO AS PRO AS FORMA REPORTED FORMA REPORTED MILLIONS OF DOLLARS 1997 1996 1996 1997 1996 1996 - ------------------- ---- ----- -------- ---- ----- -------- SALES AND OTHER OPERATING REVENUES: Petrochemicals segment $ 707 $ 582 $ 681 $2,054 $1,611 $1,873 Polymers segment 216 216 - - 637 570 - - Refining segment - - - - 650 - - - - 2,046 Intersegment sales (124) (116) (84) (348) (307) (268) ----- ----- ------ ------ ------ ------ $ 799 $ 682 $1,247 $2,343 $1,874 $3,651 ===== ===== ====== ====== ====== ====== COST OF SALES: Petrochemicals segment $ 551 $ 519 $ 559 $1,662 $1,463 $1,595 Polymers segment 168 157 - - 503 443 - - Refining segment - - - - 644 - - - - 1,973 Intersegment purchases (124) (116) (84) (348) (307) (268) ----- ----- ------ ------ ------ ------ $ 595 $ 560 $1,119 $1,817 $1,599 $3,300 ===== ===== ====== ====== ====== ====== SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Petrochemicals segment $ 7 $ 9 $ 28 $ 23 $ 25 $ 83 Polymers segment 20 19 - - 60 58 - - Refining segment - - - - 15 - - - - 48 Unallocated 24 14 14 65 44 43 ----- ----- ------ ------ ------ ------ $ 51 $ 42 $ 57 $ 148 $ 127 $ 174 ===== ===== ====== ====== ====== ====== OPERATING INCOME: Petrochemicals segment $ 149 $ 54 $ 94 $ 369 $ 123 $ 195 Polymers segment 28 40 - - 74 69 - - Refining segment - - - - (9) - - - - 25 Unallocated (24) (14) (14) (65) (44) (43) ----- ----- ------ ------ ------ ------ $ 153 $ 80 $ 71 $ 378 $ 148 $ 177 ===== ===== ====== ====== ====== ====== INCOME (LOSS) FROM EQUITY INVESTMENT: Refining segment $ 29 $ (8) $ - - $ 56 $ 25 $ - - ===== ===== ====== ====== ====== ======
10 Summarized below are reported intersegment sales for Lyondell's segments.
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 --------------------------------------- --------------------------------------- PRO AS PRO AS FORMA REPORTED FORMA REPORTED MILLIONS OF DOLLARS 1997 1996 1996 1997 1996 1996 - ------------------- ----------- ----------- ----------- ----------- ----------- ----------- Petrochemicals segment to polymers segment $ 124 $ 116 $ 348 $ 307 Petrochemicals segment to refining segment - - - - $ 53 - - - - $ 154 Refining segment to petrochemicals segment - - - - 31 - - - - 114 ----------- ----------- ----------- ----------- ----------- ----------- $ 124 $ 116 $ 84 $ 348 $ 307 $ 268 =========== =========== =========== =========== =========== ===========
RESULTS OF OPERATIONS OVERVIEW Net income for the third quarter of 1997 was $102 million or $1.27 per share compared to net income of $35 million or $.43 per share for the third quarter of 1996. The $67 million increase was primarily due to improved margins for olefins as a result of lower feedstock costs as well as higher sales volumes. Income from equity investment in LCR substantially improved as higher volumes of very heavy crude oil, which carry higher margins, were processed by LCR in 1997. In addition, the methanol business had improved margins in 1997 due to higher industry sales prices. Net income for the first nine months of 1997 was $235 million or $2.94 per share compared to net income of $74 million or $.92 per share for the first nine months of 1996. The $161 million increase was primarily due to improved margins for olefins and polymers as a result of higher sales prices. Improved performance at LCR as a result of processing higher volumes of very heavy crude oil and higher olefins sales volumes also contributed to the increase. In addition, methanol performance improved as a result of higher sales margins generated by higher industry sales prices, as well as increased sales volumes due to seasonal demand from downstream products in the gasoline and housing end- use markets. Net income was $9 million higher for the third quarter of 1997 compared to the second quarter of 1997. The increase in net income was primarily due to improved margins for LCR from the higher volumes of very heavy crude oil which were processed and higher olefins sales volumes. PETROCHEMICALS SEGMENT SELECTED PRICING INFORMATION The following graphs present industry pricing information for the periods shown below. Chart 1 - Month-end average delivered-contract, monthly low price agreement prices for Ethylene as reported by CMAI Monomers Market Report from January 1996 through September 1997. Chart indicates increasing prices in 1996 with an annual average of the month-end prices of 23.33 cents per pound. In 1997, prices rose slightly in February where they remained steady from February through May before returning to the levels seen in January for June through September. The nine month average of the month-end prices in 1997 was 27.69 cents per pound, up 5 cents per pound from the same period in 1996. Selected month-end average prices are as follows: January 1996 - 19.75 cents per pound, September 1996 - 25.75 cents per pound, January 1997 - 27.25 cents per pound, September 1997 - 27.25 cents per pound. Chart 2 - Month-end average spot price WTS low prices for Crude Oil as reported by Platts Oilgram Price Report from January 1996 through September 1997. Chart indicates increasing prices for 1996 with the chart's peak occurring at $24.32 per barrel in December 1996. Prices decrease in 1997 through April, rise in May, fall again in June, and remain flat through September. Both 1996 and 1997 saw volatile prices. Selected month-end average prices are as follows: January 1996 - $18.39 per barrel, September 1996 - $23.21 per barrel, January 1997 - $23.90 per barrel, September 1997 - $18.95 per barrel. OPERATING INCOME Operating income for the third quarter of 1997 increased $95 million compared to the third quarter of 1996. This increase was primarily due to improved margins for olefins as a result of lower feedstock costs and increased olefins sales volumes. In addition, methanol performance improved as a result of higher sales margins generated by higher industry sales prices and increased sales volumes. 11 Operating income for the first nine months of 1997 was $369 million compared to $123 million for the same period in 1996. This increase in operating income in 1997 was primarily due to improved margins for olefins as a result of increased olefins sales prices resulting from strong demand from the polyolefins markets. Methanol performance improved as a result of higher sales margins generated by higher industry sales prices, as well as increased sales volumes due to seasonal demand from downstream products in the gasoline and housing end-use markets. Operating income for the third quarter of 1997 increased $12 million over the second quarter of 1997 primarily due to higher sales volumes for olefins as demand remained strong through the third quarter of 1997. Lyondell's olefins feedstocks are primarily condensates and other petroleum liquids which tend to follow the cost trends of crude oil. During 1996 the price of crude oil increased steadily which resulted in higher feedstock costs for the petrochemicals business, however, crude oil prices began dropping in 1997 and have remained below 1996 prices through the third quarter of 1997. The sales prices for various olefins products are primarily driven by two factors. The first factor is the demand for ethylene, propylene and other by-products as a result of economic conditions in end-use markets for these commodities such as the auto industry, housing construction and consumer durable and non-durable goods. The second factor driving sales prices is the underlying cost of the feedstock. Strong demand was the primary factor which has driven 1997 prices for these products above 1996 levels. Methanol is a component of products used by the housing and plastic packaging industry, as well as being a primary component of MTBE, a product used to blend low-emission reformulated gasoline. Methanol prices gradually increased throughout 1996 due to strong demand by the end-use markets and supply constraints due to industry operating problems and have remained at a steady level above 1996 prices through the third quarter of 1997. The price of natural gas, the principal methanol feedstock, increased throughout 1996 and into January 1997 as a result of the tight supply and demand balance in the fuels market. Natural gas prices were higher in the third quarter of 1997 compared to the second quarter of 1997 due to increased seasonal demand entering the winter months. REVENUES Sales and other operating revenues, including intersegment sales, were $707 million in the third quarter of 1997 compared to $582 million in the third quarter of 1996, an increase of $125 million. This increase is due to higher by-product sales prices. In addition, olefins sales volumes were at record levels, and were improved compared to the third quarter of 1996 which was negatively impacted by the ARCO PipeLine fire at the Channelview Facility that forced a shut down of the olefins units for approximately two weeks and other units for several days. Sales and other operating revenues for the first nine months of 1997 increased $443 million over the first nine months of 1996. This increase was primarily due to increased olefins sales prices, which showed significant improvement over the first nine months of 1996 as strong demand from the polyolefins markets resulted in a tighter balance of supply and demand for olefins, and also as cost increases for olefins feedstocks over the course of 1996 were reflected in olefins product prices in 1997. In addition, olefins sales volumes, primarily for propylene, increased due to strong demand in the downstream markets. Sales prices for methanol increased in 1997 due to a tighter supply and demand situation caused by unscheduled industry downtime. Methanol sales volumes increased in the first nine months of 1997 in response to higher demand generated for downstream products by the gasoline end-use markets and the housing and plastic packaging industries. COST OF SALES Cost of sales was $551 million in the third quarter of 1997 compared to $519 million in the third quarter of 1996, an increase of $32 million. Cost of sales increased $199 million when comparing the first nine months of 1997 to the same period in 1996. These increases were primarily due to increased sales volumes of olefins and methanol. Olefins feedstock costs fluctuated during the two nine month periods, however, crude oil prices on average were slightly lower for the first nine months of 1997 compared to 1996. Olefins feedstock costs dropped significantly from the first quarter of 1997 to the middle of the third quarter of 1997 due to declining prices for crude oil, which impact olefins feedstock costs, but began to increase in the latter part of the third quarter of 1997. Natural gas feedstock costs for methanol were higher due to seasonal winter fuel demand, which was stronger in the first nine months of 1997 compared to the same period in 1996. 12 SELLING EXPENSES Selling expenses were $2 million lower in the third quarter of 1997 compared to the third quarter of 1996 and $2 million lower when comparing the first nine months of 1997 and 1996. Selling expenses for the petrochemicals segment consist primarily of terminal expenses related to storage and distribution of finished goods and rail freight costs of finished product. The decreases were primarily due to increased freight reimbursements on exchanges and lower distribution expense. POLYMERS SEGMENT OPERATING INCOME Operating income for the third quarter of 1997 was $28 million compared to $40 million in the third quarter of 1996. The $12 million decrease was primarily due to lower polymers sales margins due to decreases in polymers sales prices as a result of industry oversupply conditions despite strong demand, especially in polypropylene. Operating income for the first nine months of 1997 compared to the first nine months of 1996 increased $5 million. This increase was primarily due to higher polymers sales margins as a result of increases in polymers sales prices offset by lower sales volumes and higher feedstock costs. Industry sales price increases became effective towards the end of the first quarter of 1997, but dropped in the third quarter of 1997. Sales volumes were lower due to lower production levels at the Matagorda Facility as a result of the planned turnaround completed in March 1997. Feedstock costs were higher during the first nine months of 1997 as compared to the same period in 1996 due to tighter supply and demand in the olefins markets. Operating income for the third quarter of 1997 declined by $2 million over the second quarter of 1997 due to sales price decreases that became effective during the third quarter of 1997 offset by increased sales volumes, particularly of HDPE, and product mix. Lyondell's polymers feedstocks are primarily ethylene and propylene. During 1996 and 1997 the industry sales price of ethylene has increased steadily which resulted in higher feedstock costs for the polymers business. The sales prices for various polymers products are primarily driven by two factors. One is the supply and demand balance for the products as a result of economic conditions in end-use markets such as the auto industry, housing construction and consumer durable and non-durable goods. Secondarily, sales prices are driven by the underlying cost of the feedstock. REVENUES Sales and other operating revenues were $216 million in the third quarter of 1997 as well as the third quarter of 1996. The increased sales volumes as a result of increased production capacity due to the planned turnaround at the Matagorda Facility completed in March 1997 was offset by lower sales prices, particularly polypropylene. Sales and other operating revenues for the first nine months of 1997 compared to the first nine months of 1996 increased $67 million. This increase was primarily due to higher polymers sales prices, which were partially offset by decreased volumes as a result of the planned turnaround at the Matagorda Facility. COST OF SALES Cost of sales was $168 million in the third quarter of 1997 compared to $157 million in the third quarter of 1996, an increase of $11 million. Cost of sales for the first nine months of 1997 compared to the first nine months of 1996 increased $60 million. These increases were primarily due to increased feedstock costs caused by tight supply and demand in the olefins markets. SELLING EXPENSES Selling expenses were relatively flat in the third quarter of 1997 compared to the third quarter of 1996 and when comparing the first nine months of 1997 and 1996. For the polymers business, the cost of transporting finished products to customers by rail, including rail freight costs and rail car lease expense, is classified as selling expense. REFINING SEGMENT GENERAL At its inception, LCR entered into a long-term crude oil supply contract ("Crude Supply Contract") with Lagoven, S.A. ("LAGOVEN"), an affiliate of CITGO. LCR is required to purchase, and LAGOVEN is required to sell, sufficient crude oil to satisfy LCR's coking capacity, or a minimum of 200,000 barrels per day and up to 230,000 13 barrels per day of very heavy Venezuelan crude oil. LAGOVEN has the right, but not the obligation, to supply incremental amounts above 230,000 barrels per day. In addition, under terms of a long-term product sales agreement ("Products Agreement"), CITGO purchases substantially all of the refined products produced at the Refinery. Both LAGOVEN and CITGO are direct or indirect wholly-owned subsidiaries of Petroleos de Venezuela, S.A., the national oil company of Venezuela. The Upgrade Project was completed one month ahead of schedule in the first quarter of 1997. The completion enabled LCR to begin to take full benefit of the Crude Supply Contract in March 1997 and process increasing volumes of very heavy crude oil. The following table sets forth processing rates at the Refinery for the periods indicated. Refinery runs for the 1996 periods presented are primarily heavy crude oil (API 22), whereas the 1997 refinery runs reflect higher volumes of very heavy crude oil (API 17) processed.
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 ----------------------------------- ------------------------------------ 1997 1996 1997 1996 --------------- --------------- --------------- ---------------- REFINERY RUNS (THOUSAND BARRELS PER DAY) Blended crude oil: Crude Supply Contract - coked 213 117 183 119 Other crude oil - coked - - 4 16 4 Other crude oil 4 87 15 104 --------------- --------------- --------------- ---------------- Total blended crude oil 217 208 214 227 Unfinished stock 66 47 66 42 --------------- --------------- --------------- ---------------- Total 283 255 280 269 =============== =============== =============== ================
INCOME FROM EQUITY INVESTMENT IN LYONDELL-CITGO REFINING COMPANY LTD. As a result of the completion of the Upgrade Project, the Company's participation interest changed to approximately 59 percent for the second and third quarters of 1997 from approximately 86 percent for the first quarter of 1997. This compares to approximately 87 percent for the first three quarters of 1996. The income from equity investment in LCR represents the Company's share of the results of LCR's operations for the periods presented. Net income before depreciation expense for the period is allocated to LCR's owners based on participation interests. Depreciation expense is allocated to the owners based on contributed assets. Had the Company followed the equity method of accounting for its investment in LCR during 1996, the Company would have recorded a pro forma equity loss of $8 million and pro forma equity income of $25 million for the three months and nine months ended September 30, 1996, respectively. In comparing the third quarter of 1997 to the third quarter of 1996, the increase in income from equity investment in LCR is due to increased operating income of $64 million offset by higher interest expense and Lyondell's decreased participation percentage. The change in operating income reflects higher margins on increased volumes of very heavy crude oil coked under the Crude Supply Contract, offset by increased production costs. Upon the completion of the Upgrade Project, LCR began processing increased volumes of very heavy crude oil, which is purchased at a lower cost under the Crude Supply Contract resulting in higher margins. Operational problems experienced in late June 1997 with the new crude unit, as well as the fluid catalytic cracking unit, were related in part to the startup of the new units. These problems resulted in reduced crude processing rates for most of July 1997. Crude processing rates returned to normal levels for the remainder of the third quarter of 1997. Processing very heavy crude oil resulted in higher margins for the third quarter of 1997 despite lower revenues and higher production costs. Total revenues for the third quarter of 1997 compared to the third quarter of 1996 were down for LCR as a result of lower refined products pricing. Production costs were higher in the third quarter of 1997 versus the same period in 1996 due to higher depreciation expense associated with the Upgrade Project, higher personnel compensation primarily related to salary increases and incentive compensation, and higher maintenance costs associated with the operating problems experienced near the end of June 1997. LCR incurred $11 million of interest cost in the third quarter of 1997, all of which was expensed. 14 Income from equity investment in LCR for the first nine months of 1997 compared to the same period in 1996 increased $31 million primarily due to LCR's improved operating income offset by higher interest expense as described above. LCR's operating income improved in the first nine months of 1997 compared to 1996 due to improved margins caused primarily by higher volumes of very heavy crude oil coked under the Crude Supply Contract. These improved margins were offset partially by higher production costs, primarily depreciation expense, and lower paraxylene margins. Comparing the third quarter of 1997 to the second quarter of 1997, income from equity investment in LCR increased $14 million, excluding a $6 million non- recurring re-allocation of depreciation expense between the owners recorded in the second quarter of 1997, due to increased operating income of $24 million. The increase in operating income was caused primarily by higher volumes of very heavy crude oil coked in the third quarter of 1997 as compared to the second quarter of 1997 when the new crude unit, as well as the fluid catalytic cracking unit, experienced operational problems. These problems, which were related in part to the startup of the new units, resulted in reduced crude processing rates that continued through most of July 1997. UNALLOCATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $10 million higher comparing the third quarter of 1997 to the third quarter of 1996 and $21 million higher for the first nine months of 1997 compared to the same period for 1996. These increases were primarily due to higher employee compensation costs. Additionally, computer and telecommunications costs and related amortization increased as a result of the implementation of new software and other upgrades in 1997. Expenses for the first nine months of 1997 also increased due to higher non-recurring executive compensation in the first quarter of 1997. INTEREST EXPENSE Interest expense was flat comparing the third quarter and first nine months of 1997 to the same periods in 1996 due to lower levels of long-term debt outstanding offset by less interest capitalized and higher levels of short-term borrowings in 1997. Interest expense in the third quarter of 1997 decreased from the second quarter of 1997 as overall short-term borrowing levels were lower in the third quarter of 1997. INTEREST INCOME Interest income increased in the third quarter and the first nine months of 1997 as compared to the same periods in 1996 as more interest income was earned on loans to LCR. Interest income was $1 million higher comparing the third quarter of 1997 to the second quarter of 1997 due to increased loans to LCR. MINORITY INTEREST Minority interest was $5 million and $13 million for the third quarter and first nine months of 1997, respectively. This represents the allocated share of Lyondell Methanol net income to MCNIC, the minority owner of Lyondell Methanol. Minority interest of $1 million and $(3) million as reported for the third quarter and first nine months of 1996, respectively, represents CITGO's allocated share of LCR's net loss or income for the periods, respectively. INCOME TAXES The effective income tax rates for the third quarter of 1997 and during the first nine months of 1997 were 36.9 percent and 36.6 percent, respectively. The effective income tax rates for the same periods in 1996 were 35.8 percent and 36.1 percent, respectively. State income tax was the primary difference between the effective tax rates and the 35 percent federal statutory rate. FINANCIAL CONDITION Operating Activities - Lyondell's cash provided by operating activities was $278 million for the first nine months of 1997 compared to $51 million for the first nine months of 1996. Net income in the first nine months of 1997 compared to the same period in 1996 increased by $161 million resulting in increased cash flow. Investing Activities - Cash used in investing activities during the first nine months of 1997 included capital expenditures of $39 million for projects at the various petrochemical facilities. In 1997 the Company loaned LCR $53 million for the Upgrade Project and working capital needs and made other equity contributions to LCR totaling 15 $1 million. In 1996 the Company loaned LCR $113 million for the Upgrade Project and environmental and other capital expenditures and made other equity contributions to LCR totaling $8 million for capital expenditures. LCR distributed cash in excess of earnings of $18 million to the Company during the first nine months of 1997 and $42 million during the same period in 1996. Financing Activities - Cash used in financing activities in 1997 consisted primarily of the retirement of $112 million of long-term debt. Distributions to MCNIC, the minority owner of Lyondell Methanol, totaled $12 million for the first nine months of 1997. The Board of Directors authorized a $75 million stock repurchase program in September 1997. The Company purchased 563,512 shares of common stock for approximately $14 million in September 1997. The Company paid regular quarterly dividends of $.225 per share of common stock during the first three quarters of 1997. Additionally, on October 24, 1997, the Board of Directors declared a regular quarterly dividend of $.225 per share of common stock, payable December 15, 1997 to stockholders of record on November 25, 1997. In August 1994, Atlantic Richfield Company ("ARCO") completed an offering of three-year debt securities ("Exchangeable Notes") which were exchangeable upon maturity on September 15, 1997 into Lyondell common stock or an equivalent cash value, at ARCO's option. On September 15, 1997, ARCO delivered shares of Lyondell common stock to the holders of the Exchangeable Notes. The Company purchased the remaining 383,312 shares of common stock held by ARCO after the conversion at a price of $25.66 per share. As of September 30, 1997, ARCO owns no shares of common stock of Lyondell. CURRENT BUSINESS OUTLOOK On July 28, 1997, the Company and Millennium Chemicals Inc. ("Millennium") announced an agreement to form a new joint venture, which will be operated as a partnership. The partnership, Equistar Chemicals, LP ("Equistar"), will be owned 57 percent by the Company and 43 percent by Millennium and will own and operate the existing petrochemicals and polymers businesses to be contributed by the two companies. The transaction, which has been unanimously approved by the Boards of Directors of both companies, is subject to approval by both companies' stockholders and satisfaction of certain other conditions. Equistar is expected to commence operations on December 1, 1997. Lyondell will record a charge to expense of approximately $35 million in the fourth quarter of 1997 as a result of severance and other costs related to the transfer of its assets to Equistar. During the remainder of 1997, management expects that olefins supply and demand fundamentals will be weakening versus the conditions that prevailed in the first nine months of 1997. Additional industry capacity is anticipated to start up in the fourth quarter of 1997 and fewer industry turnarounds are scheduled, which may negatively impact pricing of olefins near year-end and into 1998. However, unplanned industry outages may offset somewhat increased supply and mitigate the pricing effect. Although olefins profitability would be negatively impacted if feedstock costs increase, these cost levels have been lower during the fourth quarter of 1997 than was experienced earlier in the year. Domestic polymers demand was strong for the first half of 1997, although growth in 1997 has been weak relative to a strong 1996 growth rate due to higher sales prices and export demand that is significantly below levels experienced in the same period in 1996. Additional industry capacity added in the second half of 1997 may negatively impact prices and margins into 1998. More than 90 percent of LCR's crude oil purchases are made pursuant to the Crude Supply Contract which significantly reduces the crude oil volume which is sensitive to market conditions. Following completion of the Upgrade Project, the benefits of the Crude Supply Contract have resulted in increased profitability and cash flow to the Company. Since late July 1997, when temporary fluid catalytic cracking unit operating problems were resolved, throughput rates have been consistent and strong. These good operating results are expected to continue to be strong for the remainder of the year and into 1998. 16 Methanol demand should remain strong through the fourth quarter of 1997. Additionally, supply should remain tight due to industry operating problems and delayed plant startups. New industry capacity expected to be added in the fourth quarter of 1997 is expected to lead to price pressures that could continue into 1998. Natural gas feedstock prices dropped late in the first quarter of 1997 but strengthened again during the second and third quarters of 1997. Margins were reduced beginning late in the third quarter of 1997 and management expects this to continue into 1998. Profitability and cash flows for the petrochemicals, polymers and refining businesses are affected by industry supply and demand, feedstock cost volatility, capital expenditures required to meet more stringent environmental standards, repair and maintenance costs and downtime of production units due to maintenance turnarounds. Turnarounds on major units can have significant financial impacts due to the associated loss of production, resulting in lower profitability. Management believes business conditions will be such that cash balances, cash generated from operating activities and existing lines of credit will be adequate to meet future cash requirements for scheduled debt repayments, necessary capital expenditures and to sustain for the reasonably foreseeable future the regular quarterly dividend. Management anticipates, in general, increased cash flow from its businesses because of the creation of Equistar and the LCR venture, which should provide greater financial flexibility to the Company. Management intends to accelerate cash flow from its investment in LCR as a result of LCR replacing its current construction financing with longer-term financing and distributing excess funds to the owners of LCR. Management intends that cash flow in excess of the amounts needed to fund operations, capital projects, debt repayments (including the $345 million note payable to Equistar), and maintain an appropriate capital structure, would be used for attractive investment opportunities which meet the Company's value creation criteria or to enhance stockholder value through stock repurchases, increased dividends or some combination thereof. FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report, including those regarding the Current Business Outlook, are "forward-looking statements" within the meaning of the federal securities laws. Although Lyondell believes the expectations reflected in such forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and Lyondell can give no assurance that such expectations will prove to have been correct. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the cyclical nature of the refining and petrochemical industries, uncertainties associated with the United States and worldwide economies, current and potential United States governmental regulatory actions, substantial petrochemical capacity additions resulting in oversupply and declining prices and margins, and operating interruptions (including leaks, explosions, fires, mechanical failure, unscheduled downtime, transportation interruptions, and spills and releases and other environmental risks). Many of such factors are beyond Lyondell's 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. In addition, the ultimate benefit from the Equistar transaction will be dependent upon management's ability to close the transaction in a timely manner, integrate the contributed businesses and implement Equistar's business plan. All subsequent written and oral forward-looking statements attributable to the Company and persons acting on its behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report. 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 1. There have been no material developments with respect to the Company's legal proceedings previously reported in the 1996 Annual Report on Form 10-K or subsequent Quarterly Reports on Form 10-Q. 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 September 30, 1997 and through the date hereof. Date of Report Item No. Financial Statements -------------- -------- -------------------- July 28, 1997 5 None August 14, 1997 5, 7 None October 17, 1997 7 None 18 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 Petrochemical Company Dated: November 12, 1997 /s/ JOSEPH M. PUTZ ------------------------------ Joseph M. Putz Vice President and Controller (Duly Authorized Officer and Principal Accounting Officer) 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 67 0 317 3 258 684 2,146 1,269 1,985 410 712 0 0 80 518 1,985 2,343 2,343 1,817 1,817 148 0 60 371 136 235 0 0 0 235 2.94 2.94
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